Legislature(1993 - 1994)

05/13/1994 09:00 AM STA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
             HOUSE STATE AFFAIRS STANDING COMMITTEE                            
                          May 13, 1994                                         
                            9:00 a.m.                                          
  MEMBERS PRESENT                                                              
  Representative Al Vezey, Chairman                                            
  Representative Pete Kott, Vice Chairman                                      
  Representative Jerry Sanders                                                 
  Representative Fran Ulmer                                                    
  Representative Gary Davis                                                    
  Representative Bettye Davis                                                  
  Representative Harley Olberg                                                 
  MEMBERS ABSENT                                                               
  OTHER LEGISLATORS PRESENT                                                    
  Representative Gail Phillips                                                 
  Representative Cliff Davidson                                                
  Representative Brian Porter                                                  
  Representative Joe Green                                                     
  Representative John Davies                                                   
  Representative Jim Nordlund                                                  
  Representative Jeannette James                                               
  Representative Bill Hudson                                                   
  Representative Joe Sitton                                                    
  Representative Con Bunde                                                     
  Representative Gene Therriault                                               
  Representative Tom Brice                                                     
  COMMITTEE CALENDAR                                                           
  SB 377:   "An Act relating to state agency fiscal                            
            procedures, including procedure related to the                     
            assessment and collection of certain taxes; and                    
            providing for a effective date."                                   
            HEARD AND HELD                                                     
  WITNESS REGISTER                                                             
  BRUCE BOTELHO, Attorney General                                              
  State of Alaska                                                              
  Department of Law                                                            
  P.O. Box 110300                                                              
  Juneau, Alaska  99811-0300                                                   
  Phone:  465-3600                                                             
  POSITION STATEMENT:  Testified in favor of SB 377                            
  SPENCER HOSIE, Legal Counsel for the                                         
    Department of Law                                                          
  510 L Street                                                                 
  Anchorage, Alaska  99501                                                     
  Phone:  None Given                                                           
  POSITION STATEMENT:  Testified in favor of SB 377                            
  RICHARD BREWER, Assistant Director, Technical                                
  Oil and Gas Audit Division                                                   
  Department of Revenue                                                        
  15021 Longbow                                                                
  Anchorage, Alaska  99516                                                     
  Phone:  276-1363                                                             
  POSITION STATEMENT:  Testified in favor of SB 377                            
  PAUL SULLIVAN, General Tax Counsel                                           
  Exxon Corporation, USA                                                       
  240 Main Street                                                              
  Juneau, Alaska  99801                                                        
  Phone:  463-2577                                                             
  POSITION STATEMENT:  Testified in opposition to SB 377                       
  PREVIOUS ACTION                                                              
  BILL:  SB 377                                                                
  SHORT TITLE: STATE AGENCY FISCAL PROCEDURES                                  
  SPONSOR(S): FINANCE                                                          
  JRN-DATE     JRN-PG               ACTION                                     
  04/13/94      3633    (S)   READ THE FIRST TIME/REFERRAL(S)                  
  04/13/94      3633    (S)   FINANCE                                          
  04/13/94      3650    (S)   FIN WAIVED UNIFORM RULE 23                       
  04/14/94              (S)   FIN AT 09:00 AM SENATE FIN 518                   
  04/20/94              (S)   RLS AT 06:45 PM FAHRENKAMP                       
                              ROOM 203                                         
  04/21/94      3839    (S)   FIN RPT CS 6DP 1DNP SAME TITLE                   
  04/21/94      3839    (S)   FN TO SB & CS PUBLISHED (ADM)                    
  04/21/94      3839    (S)   ZERO FN TO SB & CS PUBLISHED                     
  04/21/94              (S)   FIN AT 10:00 AM SENATE FIN 518                   
  04/21/94              (S)   RLS AT 2:15 PM FAHRENKAMP                        
                              RM 203                                           
  04/22/94      3870    (S)   RLS RPT  3CAL 1NR  4/22/94                       
  04/22/94      3876    (S)   READ THE SECOND TIME                             
  04/22/94      3877    (S)   FIN  CS ADOPTED Y12 N8                           
  04/22/94      3877    (S)   AM NO  1     MOVED BY KERTTULA                   
  04/22/94      3882    (S)   QUESTION: AM NO 1 GERMANE?                       
  04/22/94      3883    (S)   AM NO  1  GERMANE Y17 N3                         
  04/22/94      3883    (S)   AM NO  1     ADOPTED Y14 N6                      
  04/22/94      3883    (S)   AM NO  2     MOVED BY DONLEY                     
  04/22/94      3884    (S)   AM NO  2     FAILED  Y9 N11                      
  04/22/94      3884    (S)   ADVANCED TO THIRD READING UNAN                   
  04/22/94      3884    (S)   READ THE THIRD TIME                              
                              CSSB 377(FIN) AM                                 
  04/22/94      3884    (S)   PASSED Y16 N4                                    
  04/22/94      3885    (S)   EFFECTIVE DATE PASSED Y17 N3                     
  04/22/94      3885    (S)   Pearce  NOTICE OF                                
  04/22/94      3885    (S)   TAKE UP RECON ON SAME DAY                        
  04/22/94      3937    (S)   RECON TAKEN UP SAME DAY  Y18 N2                  
  04/22/94      3937    (S)   PASSED ON RECONSIDERATION                        
                              Y16 N4                                           
  04/22/94      3938    (S)   EFFECTIVE DATE  SAME AS PASSAGE                  
  04/22/94      3941    (S)   TRANSMITTED TO (H)                               
  04/27/94      3746    (H)   READ THE FIRST TIME/REFERRAL(S)                  
  04/27/94      3747    (H)   STA, O&G, JUDICIARY, FINANCE                     
  05/07/94              (H)   STA AT 08:00 PM CAPITOL 102                      
  05/07/94              (H)   MINUTE(STA)                                      
  05/08/94              (H)   MINUTE(STA)                                      
  05/13/94              (H)   STA AT 09:00 AM CAPITOL 519                      
  05/14/94              (H)   STA AT 09:00 AM CAPITOL 519                      
  05/15/94      4412    (H)   STA RPT HCS(STA)  1DP  4NR 2AM                   
  05/15/94      4413    (H)   DP: VEZEY                                        
  05/15/94      4413    (H)   NR:SANDERS,OLBERG,G.DAVIS,ULMER                  
  05/15/94      4413    (H)   AM: B.DAVIS, KOTT                                
  05/15/94      4413    (H)   -PREV SENATE ZERO FN (REV)                       
  05/15/94      4413    (H)   REFERRED TO O&G                                  
  05/15/94      4413    (H)   O&G REFERRAL WAIVED                              
  05/15/94      4414    (H)   JUD REFERRAL WAIVED                              
  05/15/94      4414    (H)   FIN REFERRAL WAIVED                              
  05/15/94      4414    (H)   RULES TO CALENDAR  5/15/94                       
  05/15/94      4415    (H)   READ THE SECOND TIME                             
  05/15/94      4415    (H)   STA HCS ADOPTED UNAN CONSENT                     
  05/15/94      4415    (H)   AMENDMENT NO 1 BY VEZEY                          
  05/15/94      4415    (H)   AMENDMENT NO 1     ADOPTED UNAN                  
  05/15/94      4416    (H)   AMENDMENT NO 1-A BY VEZEY                        
  05/15/94      4416    (H)   AMENDMENT NO 1A    ADOPTED UNAN                  
  05/15/94      4416    (H)   AMENDMENT NO 2 BY B.DAVIS                        
  05/15/94      4416    (H)   AMENDMENT TO AMENDMENT NO 2 BY                   
  05/15/94      4417    (H)   AM TO AM NO 2 ADOPTED UNAN                       
  05/15/94      4417    (H)   AM NO 2 AS AMENDED ADOPTED Y24                   
                              N14 E2                                           
  05/15/94      4418    (H)   AMENDMENT NOS 3-5 NOT OFFERED                    
  05/15/94      4418    (H)   ADVANCED TO THIRD READING UNAN                   
  05/15/94      4418    (H)   READ THE 3RD TIME HCS                            
                              CSSB 377(STA) AM H                               
  05/15/94      4418    (H)   FAILED PASSAGE Y15 N23 E2                        
  05/15/94      4419    (H)   ULMER NOTICE OF RECONSIDERATION                  
  05/16/94      4437    (H)   RECON TAKEN UP/IN THIRD READING                  
  05/16/94      4438    (H)   RECONSIDERATION FAILED Y18 N21                   
  05/16/94      4438    (H)   MOTION TO RESCIND PREV ACTION                    
                              IN FLNG TO                                       
  05/16/94      4438    (H)   ...ADOPT HCS CSSB 377(STA)                       
                              AM H(FLD H)                                      
  05/16/94      4439    (H)   RESCIND PREVIOUS ACTION FLD                      
                              Y15 N24 E1                                       
  05/19/94              (H)   RETURNED TO SENATE                               
  05/19/94              (S)   PERMANENTLY FILED IN THE (S)                     
  ACTION NARRATIVE                                                             
  TAPE 94-60, SIDE A                                                           
  Number 000                                                                   
  SB 377 - STATE AGENCY FISCAL PROCEDURES                                      
  CHAIRMAN AL VEZEY called the meeting to order at 9:00 a.m.                   
  and stated the committee would be taking up SB 377.  He                      
  said, "I realize that everything came together here on very                  
  short notice, and we're trying to make some order out of the                 
  confusion, but the intent here is that we would take                         
  testimony today - perhaps tomorrow - we don't know how long                  
  from agency personnel, and some industry personnel.  The                     
  intent right now is that we will take testimony from four                    
  people from state agencies and four people from the                          
  industry.  Now this schedule is flexible, but it is the                      
  opinion of the Chairman that that is a reasonable amount of                  
  technical and competent testimony on this subject.  There                    
  have been previous hearings and there certainly have been                    
  lots of public input in the form of POMs (public opinion                     
  messages) and letters, et cetera and telephone calls                         
  (indiscernible) of the meeting is primarily to get down to                   
  the subject matter, technical aspects of it, the legal                       
  aspects of it, and just the general public policy.  I see we                 
  have Mr. Bruce Botelho with us, and I'm expecting Mr. Darrel                 
  Rexwinkel.  Mr. Botelho, I don't want to tell the state                      
  really who their four witnesses would be.  I think that you                  
  would probably - would you like to join us at the table here                 
  - I think that you would probably agree that four is a                       
  reasonable number to cover the subject and to avoid - and we                 
  don't need to get into repetitive testimony, but I certainly                 
  want to be flexible as to who those four are and certainly,                  
  I anticipate that you would be one of them."                                 
  "Thank you, Mr. Chairman and if with the Chairman's                          
  indulgence, I know that Commissioner Rexwinkel was called at                 
  the last minute to speak with the Governor.  I expect that                   
  accounts for his delay right now.  We are certainly prepared                 
  to speak, and I believe that your allowing us as many as                     
  four persons to testify will adequately serve the state's                    
  interest here."                                                              
  Number 055                                                                   
  REPRESENTATIVE GAIL PHILLIPS:  "Mr. Chairman, before we                      
  start, are we on listen-only teleconference across the                       
  CHAIRMAN VEZEY:  "We're not on any teleconference, that I'm                  
  aware of."                                                                   
  REPRESENTATIVE CLIFF DAVIDSON: "Also, I'd like to question,                  
  if I may, after the legal and technical input or testimony,                  
  will the general public have any opportunity at all during                   
  these proceedings, today or tomorrow, to..."                                 
  CHAIRMAN VEZEY:  "It's not my intent to take general public                  
  testimony, at this time.  We will be flexible on that - we                   
  can change it, but the intent really is to talk to the                       
  agencies and to the industry and to answer problems that are                 
  more a problematic, technical, legal nature."                                
  REPRESENTATIVE DAVIDSON:  "So, what would change that you                    
  would envision public testimony coming?"                                     
  CHAIRMAN VEZEY:  "If there was great desire on the part of                   
  the legislature, on the part of the committee, to extend                     
  these hearings, we can extend them as long as the                            
  legislature would like.  And with that, Mr. Botelho, would                   
  you care to - and I understand that you have testified                       
  before the State Affairs Committee before.  We have                          
  additional people sitting at the table and I'd just like to                  
  try to assume that we're starting from ground zero again and                 
  not assume that people have heard testimony previously."                     
  MR. BOTELHO:  "Thank you Mr. Chairman, and Chairman Porter,                  
  and Chairman Green.  It is again a pleasure to have this                     
  opportunity to testify once again on Senate Bill 377 and I                   
  want to express, particularly, my appreciation for your                      
  willingness to devote such time to an issue of great                         
  statewide importance and import.  I'd like, with your                        
  permission Chairman Vezey, to ask Spencer Hosie, our chief                   
  attorney, dealing with statutes of limitations, to join me                   
  at the table."                                                               
  CHAIRMAN VEZEY:  "Certainly.  Please state his name and                      
  affiliation for the record."                                                 
  SPENCER HOSIE:  "Good morning, Mr. Chairman.  My name is                     
  Spencer Hosie and I'm counsel for the Department of Law."                    
  Number 096                                                                   
  MR. BOTELHO:  "Mr. Chairman, let me begin by noting that the                 
  May 10 draft that you have before you, is one that is                        
  dramatically different than the bill, Senate Bill 185, that                  
  was originally introduced by Senator Robin Taylor in April                   
  of last year."                                                               
  Number 103                                                                   
  CHAIRMAN VEZEY:  "If I may interrupt, the document that the                  
  attorney general is referring to, is a cover letter of a                     
  sectional analysis, the memorandum is dated May 10 - three                   
  pages of sectional analysis followed by a (indiscernible)                    
  House Committee Substitute for SB 377, Version X, dated May                  
  10, 1994."                                                                   
  Number 111                                                                   
  MR. BOTELHO:  "Thank you Mr. Chairman, for that                              
  clarification for the record.  Let me speak briefly to this                  
  draft and the origins of this draft, because I think it's                    
  important to recognize that it is a substantially different                  
  document than had been debated initially in the Senate and                   
  (indiscernible) transmitted to this body a month ago.  The                   
  version which was transmitted, Committee Substitute for SB
  377 amended on the floor, is one that retains extensive                      
  legislative findings and validated, in essence, the                          
  interpretation of the Departments of Revenue and Law with                    
  respect to both the three-year statute of limitations on                     
  assessments and the six-year statute of limitations on                       
  collections.  But it had one feature which made it                           
  different, and again I'm talking only about the oil and gas                  
  portions of the bill, I'm not addressing the prorata                         
  provisions of SB 377.  It had one other feature that was                     
  different than Senate Bill 185 and that provision was -                      
  again, in recognition of the concern (indiscernible) from                    
  industry about the lack of finality in the assessment                        
  process - that beginning with this tax year, 1994, taxpayers                 
  could rely on the fact that if the Department of Revenue had                 
  not completed its assessment process within those five                       
  years; that is, done an initial assessment, filed any number                 
  of amended assessments within five years, after that five                    
  year period, the Department of Revenue was, at that point,                   
  barred from issuing any amended assessments whose affect was                 
  to raise the amount at issue.  That was the bill that was                    
  presented to this body.  Mr. Chairman, you have conducted, I                 
  believe, two hearings as the Chair of the House State                        
  Affairs Committee, on this bill and there have been                          
  extensive discussions coordinated by the Speaker of this                     
  body, with representatives of industry and the                               
  administration, and as a consequence, the bill, Draft X,                     
  before you today, reflects those discussions.  In addition                   
  to the statute of limitations issues, you'll find divisions                  
  dealing with gas liquids, a methodology for determining oil                  
  valuation prospectively, you will find further references to                 
  royalty settlements as a basis for tax payments in the Cook                  
  Inlet, dealing with urea and ammonia.  Those are the primary                 
  differences that are reflected in this bill.  I now turn to                  
  Mr. Hosie to give a more extensive background on the bill                    
  and what it will do for the state and for the industry.  Mr.                 
  Number 174                                                                   
  MR. HOSIE: "Thank you.  As the attorney general mentioned, I                 
  serve as counsel for the state in connection with the                        
  statute of limitations case, now pending in the Alaska                       
  Supreme Court.  Before I turn to the specifics of this piece                 
  of legislation, Senate Bill 377, I'd like to take a minute                   
  or two to describe the issue pending in that Supreme Court                   
  appeal and the process and (indiscernible) that gave rise to                 
  this piece of legislation.  Now the issue before the Supreme                 
  Court actually can be put in fairly straightforward fashion.                 
  Can a tax assessment that has been issued before the three-                  
  year statute of limitations has expired, be amended after                    
  that three-year statute of limitations has expired?  The                     
  state says yes, the taxpayers say no.  You can amend after                   
  the three year period only if the amendment reduces the                      
  amount of tax claimed; that is, changes are proper, but only                 
  if they cut in the taxpayer's favor.  That is the issue                      
  before the Supreme Court.                                                    
  "Now how does this amendment problem arise?  Well, the                       
  process of assessing and collecting taxes begins with the                    
  tax assessment, itself.  And a tax assessment is a formal                    
  legal document very similar to a complaint that initiates a                  
  civil lawsuit.  A lawsuit for breach of contract, or an                      
  automobile accident, or fraud.  It is a formal document and                  
  it starts a dispute resolution process.  It's an                             
  adjudicatory process that will resolve the differences                       
  between the Department of Revenue on the one hand, and the                   
  taxpayers on the other hand.  That equivalency, the parallel                 
  between a tax assessment on the one hand, and a civil                        
  complaint on the other hand, was one of the principal                        
  reasons the Supreme Court ruled as it did in the recent                      
  Budget Reserve Fund.  Now, after the tax assessment is                       
  issued, the parties continue with the process of discovery.                  
  And the auditors for the Division of Revenue get the                         
  company's documents, and they read them, and they talk to                    
  witnesses, and they think about what they've learned, and                    
  through that process they often develop additional facts and                 
  a more complete understanding of the tax issues and the tax                  
  sums owed.  And occasionally, those additional facts and                     
  that greater understanding prompts the division to amend the                 
  assessment and herein, the problem.  The industry says that                  
  those amendments are not proper after the three year period                  
  has run, even though the assessment was issued for, if they                  
  serve to increase the tax.  Now, if these were just every                    
  day garden variety civil suits, there would not be an issue                  
  and it would be absolutely clear that amendments are proper.                 
  In this state, as in every other state, as in the federal                    
  system, it's proper to amend a complaint after the statute                   
  of limitations has run, so long as the amendment relates                     
  back to the same general issues already in dispute.  It's a                  
  doctrine called the `relation back doctrine,' that is, the                   
  amendments relate back to the initial filing.  And the logic                 
  of the rule is this:  If the parties are already fighting                    
  about something, if the matters are already in dispute, you                  
  shouldn't be surprised by amendments, after all you should                   
  expect them - you're already in a fight.  Let me give an                     
  example from our everyday experience that some of us may                     
  have experienced, to our chagrin.  Assume you were in an                     
  automobile accident, and you took your car in to get                         
  repairs, and you picked it up at the shop and you drove it                   
  for awhile and you realized that the work had been done                      
  badly; that the car really wasn't fixed and you concluded                    
  that the garage owed you some money.  And you went down and                  
  talked to them, and they really  weren't much interested in                  
  hearing you out or giving you back your money.  So                           
  eventually, angry and frustrated, you join the litigation                    
  explosion and you file a lawsuit.  And after you filed the                   
  lawsuit, using a complaint, you got the garage's documents.                  
  And lo and behold, you discover that the parts they put in                   
  the car - parts that you were told were new - were in fact                   
  used.  You're outraged by this, and so you amend your                        
  complaint to seek additional damages.  You amend your                        
  complaint to conform to the new facts discovered.  In                        
  Alaska, as in every other jurisdiction, that amendment is                    
  proper even if it comes after the statute of limitations.                    
  Why?  Because it relates back.  After all, you're already in                 
  a dispute with the garage about the integrity of the repair                  
  work and who owes whom how much money.  No surprise in an                    
  amendment in an ongoing fight.  And that's the issue in the                  
  Supreme Court; should the state in the tax context be denied                 
  the benefits of this relation back doctrine, which apply in                  
  every other garden variety suit in Alaska and elsewhere.                     
  "It's probably a good time now to turn to the specifics of                   
  Senate Bill 377 and explain how the various provisions of                    
  this piece of legislation address the problem that I                         
  outlined very briefly.  And please let me invite questions                   
  at any point.  Section 1..."                                                 
  Number 265                                                                   
  CHAIRMAN VEZEY:  "Mr. Hosie, since you had asked for                         
  questions, most importantly, could you spell your name for                   
  MR. HOSIE apologized for not doing so before, and spelled                    
  his name for the record.                                                     
  Number 275                                                                   
  CHAIRMAN VEZEY:  "You have made several examples of statute                  
  of limitations, but under current Alaska statutes, what is                   
  the statute of limitations on fraud?"                                        
  MR. HOSIE:  "The statute of limitations on fraud would be                    
  three years from the date of discovery.  And so, if you                      
  uncovered a fraud you would have three years from the date                   
  of your discovery to file a lawsuit.  And if you didn't,                     
  you'd lose your right to sue."                                               
  CHAIRMAN VEZEY:  "So, how does this interrelate to the three                 
  years under Alaska Statute 43.05.230?"                                       
  Number 287                                                                   
  MR. HOSIE:  "Well, there are, I guess, two parallels.                        
  First, the principal statute of limitations in the tax area                  
  simply gives you three years to get your assessment out.                     
  There is no statute of limitations in the case of fraud or                   
  an intent to evade tax.  And so, if a taxpayer's discovered                  
  to have committed fraud, or has exhibited an intent to evade                 
  tax, the statute of limitations doesn't apply.  And so                       
  that's the parallel between the fraud statute of limitations                 
  and its application in the taxing context."                                  
  CHAIRMAN VEZEY:  "So if a taxpayer commits, then the three                   
  years that we're talking about is inapplicable - there's no                  
  MR. HOSIE:  "That's exactly right."                                          
  CHAIRMAN VEZEY:  "We're not talking fraud, we're talking                     
  audits and differences of opinion."                                          
  MR. HOSIE: "We're talking normal audits with the normal                      
  discovery process with the unearthing of additional facts                    
  and new information that do not involve fraud, because if it                 
  does, as you pointed out, Mr. Chairman, the statute does not                 
  apply at all."                                                               
  CHAIRMAN VEZEY:  "Thank you."                                                
  Number 292                                                                   
  REPRESENTATIVE DAVIDSON:  "Mr. Hosie, so the nature of the                   
  new information, why (indiscernible) of the types of new                     
  information that would affect the amount of taxes owed or                    
  that would change the assessment and why wouldn't that                       
  information not have been available earlier when the state                   
  made the effort to assess the tax obligation?"                               
  MR. HOSIE:  "I'd be happy to, Representative Davidson.  Let                  
  me cite an example from the now pending Exxon case in the                    
  Supreme Court.  One of the issues in the tax case is the                     
  proper amount of a tanker transportation deduction.  The                     
  oil, as most of you probably know, is not refined in Alaska                  
  for the most part, but is moved to various downstream                        
  markets and destinations where it's there refined.  To                       
  calculate the value of that oil in Alaska for both royalty                   
  and tax purposes, you need to conduct a net back; that is,                   
  subtract the transportation charges from the downstream                      
  market value.  One principal point of contention over the                    
  years has been how you do that.  One of the issues in that                   
  general area has been whether the companies get a return on                  
  investment for the use of their tankers;  that is, should                    
  they be compensated for the investment they've made in their                 
  tankers.  And one of the sub-issues there, is how you take                   
  into account federal tax credits that the taxpayers got in                   
  using their vessels.   That sounds like a complicated                        
  example, but it's typical of the kind of issues that arise                   
  in these audits.  (Indiscernible) complicated issues and                     
  that's one reason these things take as long as they do to                    
  resolve.  And so, there's this federal tax credit issue -                    
  how do you handle the company's federal tax credits.  It                     
  takes a long time to realize that it's an issue, to realize                  
  that there are federal tax credits out there and that they                   
  apply to these vessels and that they might (indiscernible)                   
  to change the return on investment credit of the company's                   
  (indiscernible).  That involves factual issues, how many                     
  federal tax credits can you specifically tie to the vessels,                 
  in which years were they gained, in which years were they                    
  used and legal questions.  Are they properly served, are                     
  they properly used, or is it something that the state of                     
  Alaska really can include in its tax calculations.  If they                  
  are used, do you use them all at once, or do you spread them                 
  over a number of years, do you spread them over the useful                   
  life of the vessel, et cetera.  So that's the kind of thing                  
  that's discovered through this auditing process.  It just                    
  takes a long time to (a) understand the facts and (b)                        
  (indiscernible) apply the tax to the theories and the legal                  
  doctrine.."  (indiscernible due to background noise on                       
  CHAIRMAN VEZEY:  "Please proceed, Mr. Hosie.  Representative                 
  Porter, did you want to ask a question?"                                     
  REPRESENTATIVE PORTER: "Thank you, Mr. Chairman.  In your                    
  discussion of the Exxon case, obviously you're appealing a                   
  ruling  in the Superior Court, was the ruling in the                         
  Superior Court - did it address the, in your opinion, of the                 
  relation back doctrine, as it would apply to this case."                     
  MR. HOSIE:  "It did not, Representative Porter.  That was a                  
  very short opinion and it simply held that the statute, AS                   
  .260, the three-year statute of limitations, on its face,                    
  required that the assessments be, both start within three                    
  years and rendered final within three years.  That was the                   
  impact and the effect of that decision.   Judge Cranston,                    
  the author of the decision, did not specifically address                     
  relation back, nor did he discuss other issues that had been                 
  addressed at the hearing level and were captured in the                      
  hearing officer's decision.   Notwithstanding that, the                      
  parties agree that the applicability of the relation back                    
  doctrine is one of the key things the Supreme Court is going                 
  to have to address and, in fact, it was the state's  first                   
  point for appeal and its first issue in the state's brief."                  
  REPRESENTATIVE PORTER:  "You don't interpret then that the                   
  Superior Court decision rejected this (indiscernible)                        
  situation to apply to the relation back theory."                             
  MR. HOSIE:  "I think that the Superior Court didn't consider                 
  it.  And I think it should have.  And I am quite positive                    
  that the Supreme Court will consider it because, I think,                    
  that is the dispositive issue in this case.  And from the                    
  briefs filed both by the state and Exxon, I think that it's                  
  fair to say that the parties agreed that that's the                          
  dispositive in the case.  Judge Cranston, the author of the                  
  opinion below, simply looked at the statute and said, `It                    
  means what it says, and it says what it means,' and                          
  therefore there's no amendments.  He basically held that the                 
  statute was unambiguous, but the statute doesn't say a thing                 
  about amendments, never even mentions the word, doesn't say                  
  a thing about relation back.  It's absolutely silent on that                 
  point.  And if you look at the legislative history for the                   
  three year statute, you see it described as a housekeeping                   
  bill.  And you see that it was estimated at having zero                      
  fiscal impact, so there's nothing in the legislative record                  
  that would suggest that the legislature  consider this                       
  relation back issue in passing this housekeeping bill.  The                  
  statute is silent, the legislative history is silent, and                    
  it's that silence that gives rise to an ambiguity."                          
  MR. BOTELHO:  "It might be also important, Mr. Chairman, to                  
  point out that if you look at the other statutes of                          
  limitation found in  the Code of Civil Procedure of the                      
  state, which you enacted, you will find no mention of                        
  relation back, and yet that doctrine is one that is                          
  universally accepted.  Of the statutes that deal                             
  particularly with tax matters found in Title 43, which don't                 
  mention it either, are entirely consistent with the other                    
  statutes of limitation, whether they're for contract or for                  
  tort, again make  no reference, and yet it is a universally                  
  accepted doctrine, now reflected in the Rules of Court of                    
  the Supreme Court, Civil Rule  (indiscernible)."                             
  CHAIRMAN VEZEY:  "Thank you.  Representative Green."                         
  Number 387                                                                   
  REPRESENTATIVE GREEN:  "Thank you, Mr. Chairman.  Your                       
  example, I know we've talked about the fraud already, but                    
  your example of the relation back doctrine in this car                       
  repair case, there was fraud included there.  Does relation                  
  back only apply to fraud cases?"                                             
  MR. HOSIE:  "No, it applies to all civil cases.  It's a                      
  general common law doctrine that pre-existed the Rules of                    
  Court in Alaska.  It was captured in Rule 15(c) of the Rules                 
  of Court when they were promulgated, but it's a longstanding                 
  uncontroversial doctrine that applies broadly in all civil                   
  cases; be they fraud-based or tort- based or breach of                       
  contract-based.  It's not at all a novel notion."                            
  Number 397                                                                   
  REPRESENTATIVE GREEN:  "Was that doctrine mentioned at all                   
  in the Superior Court case?"                                                 
  MR. HOSIE:  "It was not, to my recollection, mentioned in                    
  the opinion and it was argued to the Superior Court, but the                 
  Superior Court really didn't reach that issue directly,                      
  including at the threshold point that the statute itself,                    
  260, was unambiguous and barred the relation back doctrine.                  
  And that decision was reached; notwithstanding that the                      
  statute doesn't say anything about relation back or                          
  amendments and notwithstanding that there's nothing in the                   
  history - the legislative history - for that piece  of                       
  legislation addressing either of those points.  And the                      
  threshold issue before the Supreme Court will be, was Judge                  
  Cranston right when he ruled that this statute is                            
  unambiguous, and I feel quite comfortable that the Supreme                   
  Court will conclude, that given that the statute is silent                   
  on this issue, it is ambiguous.  Either way you go, you have                 
  to imply something into the statute, because it doesn't say                  
  it directly and as soon as you're in the business of                         
  implying something into a statute, you must recognize that                   
  it's ambiguous, you're interpreting it."                                     
  Number 412                                                                   
  REPRESENTATIVE GREEN:  "One follow up to that.  You've said                  
  that this is a doctrine of common law and that it's                          
  unambiguous, it's been used - did you say it has been used                   
  or it is implied in several other cases?"                                    
  MR. HOSIE:  "Yes."                                                           
  REPRESENTATIVE GREEN:  "The reason I'm asking this is that                   
  something that seems to be so important, certainly you call                  
  it the key in this case, is not mentioned in statute, is not                 
  mentioned, and is not apparently, and was disallowed in the                  
  Superior Court.  I'm concerned about the implied situation                   
  that doesn't seem to  have been worthy of being put in any                   
  statute or any other reference that you've made."                            
  MR. HOSIE:  "Representative Green, in part, the answer is,                   
  that because it's such a long established common law notion,                 
  there frequently are no statutes that support this relation                  
  back doctrine.  In most states there are no statutes that                    
  say `and amendments were laid back' just because it's a                      
  longstanding common law notion.  And I think that the                        
  taxpayers agree that it is a longstanding common law notion,                 
  but they say it doesn't apply in Alaska in the tax context,                  
  because the statute of limitations, Section 260, doesn't                     
  permit amendments and relation back, even though it's silent                 
  on that point.  They read the statute as precluding this                     
  common law doctrine.  And that was to be fair to the                         
  taxpayers, the way the Superior Court ruled below."                          
  CHAIRMAN VEZEY:  "Thank you, Mr. Hosie.  See what happens                    
  when you ask for questions.  I've interrupted your train of                  
  thought, so before you do get started again, I want to say                   
  we do have a very full crowd here this morning and if some                   
  of the staff people would be so kind as to maybe give up                     
  their seat to some of the public or other agency people,                     
  because I know we have speaker boxes in our offices and we                   
  can listen down there.  So, if we would just try to                          
  cooperate and be as courteous as we can to all the people                    
  that we have here today.  Please continue, Mr. Hosie."                       
  Number 444                                                                   
  MR. HOSIE:  "Thank you, Mr. Chairman.  Turning to the                        
  legislation itself, Senate Bill 377, and starting logically                  
  with Section 1.  Section 1 clarifies a longstanding division                 
  interpretation of the statute of limitations in Alaska.   It                 
  says that amendments are proper, if made after the statute                   
  of limitations has run, so long as the dispute was begun                     
  before the statute of limitations runs.  So this clarifies                   
  and declares that the longstanding division interpretation                   
  of 260 is indeed the right interpretation.  To take a brief                  
  detour.  That division policy was articulated in the early                   
  1980s and was the subject of a 1984 Attorney General's                       
  Opinion and the Opinion addressed the precise question here;                 
  which is, can amendments be made after the statute is run.                   
  And the Opinion concluded that such amendments were proper,                  
  and that was in 1984.  And from that point forward, this                     
  issue has been in the administrative process, working its                    
  way through - through the Superior Court level and now to                    
  the Supreme Court level and it's simply taken this long to                   
  get the case to the Supreme Court and the Supreme Court                      
  hears oral argument next Wednesday, May 18.  And presumably,                 
  we'll get an opinion sometime within a year, perhaps 14                      
  months after hearing oral argument.  And so Section 1 (a)                    
  clarifies that the division's interpretation, a longstanding                 
  interpretation, is the right one and that amendments are                     
  proper so long as the parties were actually in dispute                       
  before the statute ran.                                                      
  "Section 2 sets forth a change in the law and the change is                  
  prospective - it applies (indiscernible) and it says, as Mr.                 
  Attorney General, Bruce Botelho, mentioned earlier, that                     
  going forward, the Division of Audit and the Department of                   
  Revenue will have five years to make all amendments.  This                   
  statute unambiguously puts a five year cap on the amendment                  
  process.  So, if the division wants to go through discovery                  
  and uncover new facts, it has to do that within five years                   
  and make all amendments within five years,  and if it waits                  
  too long it loses the right to amend.  Section 2 addresses                   
  the collection problem.  I've been focusing thus far on the                  
  three-year statute of limitations issue which is the issue                   
  before the Supreme Court.   The collection problem is a                      
  slightly different, but related problem, and under Alaska                    
  law, the state, via the Department of Revenue has a limited                  
  number of years to collect on a tax judgment, to collect the                 
  taxes due.  And the question arises, well how many years                     
  from what?  The statute tells you how many years - six - but                 
  there's some ambiguity about from what.  The prior law                       
  suggested that the trigger for the six year period to start                  
  to run was the issuing of the assessment.  This statute                      
  changes that and sets forth a series of triggers - the                       
  latest of which is likely to be the final step in the                        
  adjudicatory process; that is, once the dispute's over and                   
  you know what the actual final tax bill is, at that point                    
  the state's six years start to run.  And so once you know                    
  what you have to collect and once you're no longer fighting                  
  with the taxpayer about what's owed and what's not owed,                     
  you've got six years to go out and get your money."                          
  CHAIRMAN VEZEY:  "It would help if we, and you confused me                   
  just a little bit, because you jumped from Section 1 of the                  
  bill before us to Section 2, could we try to just address                    
  just one section at a time and then maybe take questions on                  
  that, before we go on to the next."                                          
  Number 494                                                                   
  REPRESENTATIVE PHILLIPS:  "Thank you, Mr. Chairman.  Mr.                     
  Hosie, does the state have the ability to be flexible during                 
  that six year time or after that six year time in the                        
  collection process?"                                                         
  MR. HOSIE:  "In the sense of stipulating to a longer or                      
  shorter period?"                                                             
  Number 498                                                                   
  REPRESENTATIVE PHILLIPS:  "I'm thinking primarily to a                       
  longer--would that be an option open to the state?"                          
  MR. HOSIE:  "I think there would be nothing in the law to                    
  preclude the state from approaching a taxpayer and asking                    
  for an agreement to extend the period.  And if such an                       
  agreement were given and it were in writing, it would                        
  probably be valid and extend the six year period.  And so                    
  that could be reached through an accord between the                          
  REPRESENTATIVE PHILLIPS:  "Thank you."                                       
  CHAIRMAN  VEZEY:  "Mr. Hosie, you're confusing me now.  The                  
  six year period is referring to Alaska Statute 43.05.260."                   
  MR. BOTELHO clarified it was 270.                                            
  CHAIRMAN VEZEY:  "I'm sorry, 270 to do with collecting                       
  (indiscernible).  The five year proposal on the audit limits                 
  goes back to 43.05.230, and 230 contains a paragraph (c)                     
  that specifically states that the parties can agree to agree                 
  to extend the time period.  Now are we cross-referencing                     
  those two?"                                                                  
  Number 515                                                                   
  MR. HOSIE:  "Mr. Chairman, to some extent I think we are.                    
  Let me see if I can clarify.  Section 1, subpart 2, that                     
  sets forth the prospective five year rule, addresses the                     
  current three-year statute of limitations and the amendment                  
  to the relation back problem.  This section says, going                      
  forward, you can amend, but only  for five years.  When the                  
  five year period comes and goes, the division loses its                      
  ability to amend."                                                           
  MR. BOTELHO:  "In essence, Mr. Chairman, if this were                        
  enacted, the legislature is making a specific finding to                     
  abandon the relation back doctrine."                                         
  CHAIRMAN VEZEY:  "Representative Davidson."                                  
  REPRESENTATIVE DAVIDSON:   "Thank you, Mr. Chairman.  That                   
  was exactly my question.  So, when the state then agrees to                  
  give up its right to relation back doctrine, doesn't that                    
  have possibly some very incredible loss to the treasury                      
  Number 529                                                                   
  MR. HOSIE:  "In fairness, it could.  It could, but there are                 
  several things that mitigate against that and some of them                   
  are in this legislation - we'll get to them in a minute -                    
  but the legislation will establish a different method of                     
  determining taxable value that's designed to be simple, more                 
  efficient and far more clear, and will make it much easier                   
  for the division to  conclude the process within five years.                 
  And so the structure will  change to make it much more easy                  
  to conclude the process within  five years and that helps.                   
  The other thing that's happened, is that the oil world and                   
  the oil business is fundamentally different today than it                    
  was in the early 1980s.  In the early 1980s, it was a                        
  chaotic market, it was a private, silent market; whereas                     
  now,  oil prices are like normal commodity prices, like gold                 
  prices or (indiscernible) prices; you can open the Wall                      
  Street Journal and you can find out what West Texas                          
  (indiscernible) is selling for today, what it would cost you                 
  to go out and buy that oil today.  And so you have these                     
  public electronic sources for oil prices that simply weren't                 
  around in the kind of detail they are now, back in the                       
  1980s.  And so the evolution of the market - it makes it                     
  much easier today to value oil than was the case back in the                 
  1980s.  And both of those things, I think, will make it                      
  quite possible for the division to conclude the amendment                    
  process within five years.  It's my understanding that this                  
  has been discussed extensively with Commissioner Rexwinkel,                  
  and he's confirmed that with his staff and they feel quite                   
  confident and comfortable that they can live with  the five                  
  year amendment rule."                                                        
  REPRESENTATIVE DAVIDSON:  "But if it's such a longstanding                   
  common law notion, why  would the state -- you said it                       
  applies in all civil actions and now we're going to have a                   
  civil action, by the state, where it no longer applies.                      
  What's the trade-off?  I don't understand why all of this                    
  law, all of a sudden, is not to our benefit as a state to                    
  say `Okay, we'll just wait for five years, then or give you                  
  five years.'"                                                                
  Number 558                                                                   
  MR. HOSIE:  "It is a compromise with the industry and gives                  
  the industry certainty.  The industry wants an absolute                      
  window of time in which it can be audited and the audits                     
  amended.  It says that certainty is important for the                        
  ability to do business and so, Representative Davidson,                      
  you're absolutely right when you say this is a departure                     
  from existing law and a departure from the law in most other                 
  jurisdictions. It is."                                                       
  REPRESENTATIVE DAVIDSON:  "Does it become a precedent then                   
  for the loss of this doctrine to other civil actions?"                       
  Number 564                                                                   
  MR. HOSIE:  "No, particularly not where the state is the                     
  plaintiff and that raises a very good point.  In Alaska, the                 
  law is very clear that a statute can be read in derogation                   
  of the state's rights.  It can be read to limit the                          
  sovereign's right only if it explicitly does that.  The                      
  state has inherent powers of sovereign and legislation that                  
  limits that power has to be explicit.  You can't read a                      
  limitation into the state's authority from an ambiguous                      
  statute.  You can't imply a limitation.  That is the law in                  
  Alaska and that is a critical point in the pending Supreme                   
  Court case because Exxon, of course, looks at Section 260,                   
  which is ambiguous, and says `Oh, since it doesn't                           
  explicitly allow relation back, it's not there.'  Wrong.                     
  Wrong premise.  If it doesn't explicitly disallow relation                   
  back, the state's sovereign powers are preserved."                           
  Number 576                                                                   
  MR. BOTELHO:  "It might be worth adding, Mr. Chairman, those                 
  statutes of limitation or statutes of repose have existed                    
  for many, many years - to the last century - is a relatively                 
  recent innovation that statutes of limitation apply to the                   
  sovereigns, at all.  For the most part, again, common law,                   
  government was never barred.  It's required specific                         
  legislative action in each of the state (indiscernible)                      
  federal government to impose limitations on government in                    
  its ability, particularly in this area, to collect taxes.                    
  And this legislature did so in 1976.  Actually that language                 
  or language similar to it, first appeared, based on my                       
  recollection, in the 1930s in the Territorial legislature.                   
  These have been picked up over the years, but the point is,                  
  that historically, the sovereign wasn't limited at all.  And                 
  therefore, in the interpretation of statutes of limitation,                  
  even today as they apply to government, courts are directed                  
  or obligated to resolve ambiguities in favor of the state,                   
  not against it, whether it pertains to tax statute of                        
  limitations or other limits of actions, and if one looks at                  
  Title 9, you'll find specific references to actions                          
  involving the state, which in some respect embody that                       
  deference.  And, Mr. Chairman, if I might, having launched                   
  onto this treatise, urge the body perhaps to look at other                   
  statutes of limitation found at AS 09 - 10 details with                      
  limitations on actions, and is a follow up to Representative                 
  Green's question, why with an issue as important as relation                 
  back, there's no reference to it.  The statutes don't answer                 
  the question why, but certainly make clear that there is no                  
  reference in any of the statutes of limitation found in                      
  Chapter 10 that mention the doctrine of relation back."                      
  Number 604                                                                   
  REPRESENTATIVE JOHN DAVIES:  "Mr. Attorney General or Mr.                    
  Hosie, either one, I have a question about the rationale for                 
  the statute of limitations on collections.  Usually these                    
  seem to have to do with providing certainty.  What is the                    
  uncertainty in a collection case, where presumably the                       
  amount that's owed is understood and adjudicated to its                      
  MR. HOSIE:  "It is an uncertainty question, but the                          
  uncertainty, is not whether this money is owed, but whether                  
  the creditor collects, goes through the steps to collect.                    
  And limitations on the right to collect are quite common and                 
  are seen in the civil area, generally.  Often they're as                     
  long as ten years, and so if you reduce a civil case to                      
  judgment, you can have up to ten years to collect the  money                 
  that a court has found you are deserving of.  But the policy                 
  call underlying the statute is that if you're going to go                    
  after someone to enforce on a judgment, you should do so                     
  within a certain period of time and that hence, the six year                 
  rule for taxes and the longer rules for other kinds of                       
  actions.  So it addresses the uncertainty of the collection                  
  Number 620                                                                   
  REPRESENTATIVE DAVIES:  "If the state initiates the process                  
  for collections, is there a set of actions that the state                    
  can go through and has completed everything that it can do,                  
  and then does the statute then, toll if they've done all                     
  those steps?"                                                                
  MR. HOSIE:  "I believe that it is tolled, but I'm quite                      
  honestly, not sure.  I've not looked at that precise                         
  question.  But if the state is going through the process and                 
  if something goes wrong, there would be a good argument for                  
  Number 628                                                                   
  MR. BOTELHO:  "Mr. Chairman, the situation arises here and                   
  as I have mentioned before, became implicated in the overall                 
  discussion about the statutes of limitation as a result of a                 
  lawsuit brought by Tesoro.  Tesoro had had an assessment                     
  issued by the Department of Revenue.  There had been a                       
  decision and Tesoro had appealed that  assessment and it was                 
  still being litigated at the time the six-year statute on                    
  collections, in their view, ran out.  You'll  notice the                     
  language today says, it's six years from the date of                         
  assessment.  The assessment is not the final determination                   
  of a tax.  And the Department of Revenue's view on that was,                 
  you can't start collecting until you finally know what the                   
  tax is.  You need to go through - you have to have a final                   
  decision.  Otherwise, you're collecting an unknown.  Tesoro                  
  disagreed and went to Superior Court and said, `Look time                    
  has run out - it's been more than six years since the                        
  assessment was issued; therefore, we don't have to pay.'                     
  The Superior Court heard that argument and rejected it                       
  saying, `that flies in the face of common sense' and the                     
  implicit concept that the time is tolled, it stops running                   
  until, and it doesn't start running until there's been a                     
  final determination (indiscernible).  And that case went to                  
  the Supreme Court.  And last year, the state and Tesoro                      
  settled the case, 13 months after oral argument in the                       
  Supreme Court.  Actually, we began our settlement                            
  negotiations 13 months after oral argument in the Supreme                    
  Court and we ultimately settled 17 months after oral                         
  argument in the Supreme Court, without a decision by the                     
  Supreme Court.  The bill embodies, in essence, the decision                  
  of the Superior Court, but also more importantly and                         
  consistently, our interpretation of how that collection                      
  statute is to work.  The time does not start running on the                  
  six years until there's been a final determination of the                    
  tax owed.  And I would note, as well, that the largest                       
  taxpayer in the state, BP, has made clear, I think, that it                  
  has been willing to waive, and I think, publicly announced                   
  that in fact, in the newspapers this morning that they were                  
  prepared to waive that statute with respect to taxes in                      
  dispute with BP on essentially, the same principle.  Mr.                     
  Chairman, I hope I've answered Representative Green's                        
  CHAIRMAN VEZEY:  "Yes, thank you.   Representative Porter."                  
  Number 663                                                                   
  REPRESENTATIVE PORTER:  "Bruce, we've had briefings along                    
  the last couple of weeks on these issues and some of them                    
  have been with proprietary information and some of them have                 
  not.  So, if I get into that area - I will not ask - but let                 
  me know.  I guess, preliminarily, the Tesoro case was not                    
  appealed so that is the law of the land?"                                    
  Number 668                                                                   
  MR. BOTELHO:  "It was appealed to the State Supreme Court,                   
  it was settled while the Supreme Court was deliberating.                     
  That is, they heard oral argument, which is the last step                    
  preceding the issuance of a decision.  Finally, obviously                    
  both sides, the state and Tesoro, recognized that as time                    
  was running, something was holding up the process.  It might                 
  suggest that there  was a division of opinion within the                     
  Supreme Court, not ultimately resolved.  Accordingly, it was                 
  in the interest of both parties to settle because of that                    
  REPRESENTATIVE PORTER:  "How long of a period of time was                    
  MR. BOTELHO:  "Thirteen months -  we started our                             
  discussions; that is, Tesoro and the state jointly, 13                       
  months after oral argument.  We ultimately settled with                      
  Tesoro 17 months after oral argument, without decision."                     
  REPRESENTATIVE PORTER:  "The $3 billion of claims that                       
  exist, is it proper to ask publicly how those split out?"                    
  MR. BOTELHO:  "Yes, what I cannot identify for the committee                 
  is any taxpayer specific information.  Approximately $1                      
  billion, slightly over that, is tied to the three-year                       
  statute of limitations, and approximately $2 billion is tied                 
  directly to the six-year statute of limitations.  Actually,                  
  those numbers are probably a couple months old, and those                    
  numbers are increasing daily."                                               
  Number 686                                                                   
  REPRESENTATIVE PORTER:  "Would it be fair to say then, that                  
  the Exxon case that will be presented Tuesday, I guess,                      
  addresses one-third then, of those total claims?"                            
  MR. BOTELHO:  "That's correct, Mr. Chairman."                                
  CHAIRMAN VEZEY:  "Thank you.  Representative Davidson."                      
  Number 689                                                                   
  REPRESENTATIVE DAVIDSON:  "Thank you very much, Mr.                          
  Chairman.  Gentlemen, is there any kind, because we're                       
  always talking about the time crunch in these civil matters,                 
  is there any statute that allows for the Supreme Court or                    
  the entire legal process to bring to the floor or place a                    
  higher priority on cases that affect the public treasury,                    
  and if there is not, would it be in our best interest to                     
  consider such a statute?"                                                    
  MR. HOSIE: "Representative Davidson, there is a procedure to                 
  ask for expedited treatment in a case where....(tape ends                    
  TAPE 94-60, SIDE B                                                           
  Number 000                                                                   
  NOTE:  Testimony of first person listed on notes for Side B                  
  is incompletely recorded; side begins abruptly in the midst                  
  of testimony.)                                                               
  MR. HOSIE:  " - for expedited treatment, and that may or may                 
  not be granted."                                                             
  Number 025                                                                   
  MR. BOTELHO:  "The difficulty with putting expedited                         
  consideration on this or any other matter, is the fact that                  
  this body, and, for that matter, the United States Supreme                   
  Court, has also imposed standards in terms of time.  The                     
  right to, under our Constitution, both state and federal,                    
  the right to a speedy trial, controls to a very large extent                 
  the calendars of our courts.  In addition, by court rule,                    
  children's proceedings have precedence over other matters.                   
  When you're dealing with the lives of individuals, our                       
  system has tended to put priority on those matters above                     
  issues of property disputes over money.  And I think that's                  
  been an appropriate priority in our system.  I will note,                    
  however, that some states have developed separate tax courts                 
  that are devoted exclusively to resolution of tax disputes                   
  such as ours as one way of avoiding that kind of conflict in                 
  deciding what the time priorities should be of the courts."                  
  REPRESENTATIVE DAVIDSON:  "Would it be in Alaska's interest                  
  to consider such a provision, a separate tax court, do you                   
  MR. BOTELHO:  "I'm of two minds.  I think the system that we                 
  have in place is generally one that works quite well.                        
  Certainly if one were looking at giving that court                           
  additional responsibilities it might make sense.  I suspect                  
  that we would not find enough business to keep the justices                  
  or judges busy full time, if the focus were exclusively were                 
  on, really, a small number of taxpayers; though, admittedly,                 
  dealing with incredibly large amounts of money.  I guess                     
  that's my view.  I could not justify it as a tax court                       
  Number 056                                                                   
  REPRESENTATIVE NORDLUND:  "Just to clarify the five-year                     
  absolute bar - that was something that was added to the bill                 
  after it was originally introduced, is that correct?"                        
  Number 059                                                                   
  MR. BOTELHO:  "That is correct."                                             
  Number 060                                                                   
  REPRESENTATIVE NORDLUND:  "Is it appropriate to say that                     
  this was a concession on the part of the state?"                             
  Number 061                                                                   
  MR. BOTELHO:  "Yes it was.  A significant one, but also not                  
  an unreasonable one."                                                        
  Number 065                                                                   
  CHAIRMAN VEZEY:  "Thank you Mr. Hosie, and Mr. Botelho.                      
  Before we go on out of Section 1 completely, I guess the one                 
  question that keeps coming to my mind is, that I would                       
  interpret our current statute as being a three-year                          
  limitation on auditing.  I would compare that to Internal                    
  Revenue Service (indiscernible.)   We say that we're going                   
  to grant a five-year statute of limitation on audits in the                  
  future, and the state is going to abandon its relation back                  
  doctrine that it has - and, you touched on that briefly, but                 
  I don't quite understand how we said in 1976 that we're                      
  going to have a three-year statute of limitations, and now                   
  we say five - I mean, if we're not honoring the three, why                   
  would we honor the five?"                                                    
  Number 088                                                                   
  MR. HOSIE:  "Mr. Chairman, the state has honored the three.                  
  Because the statute of limitations simply requires that the                  
  dispute start before the three years has run.  It doesn't                    
  require that the dispute both start and be finished within                   
  the three-year period.  And, in effect, Exxon has argued in                  
  the Supreme Court case, that the process must not only start                 
  within three years, but must conclude within three years.                    
  Because the consequence of not getting it done is that you                   
  lose the right to correct the taxes upward, even if the                      
  evidence suggests that that's right, and the number can only                 
  go down.  Statutes of limitations govern the initiation of                   
  litigation.  They do not govern how long a case should take                  
  once it's begun, or how it should be litigated once begun.                   
  Once the parties are in an active fight, different rules                     
  apply.  There are rules in the civil court that provide                      
  timing deadlines for the process.  There are regulations in                  
  the tax area that permit a taxpayer who feels that the                       
  process is going too slowly to complain directly to the                      
  commissioner.  A taxpayer who feels that the process is                      
  going too slowly can ask for an immediate formal hearing.                    
  They have as much control over the timing as does the                        
  department.  And so, the short answer, Mr. Chairman, is that                 
  the state absolutely has lived with the three-year statute                   
  of limitations.  And there is no dispute between and amongst                 
  the parties that if the state didn't get the initial                         
  assessments out within three years, it would have lost its                   
  right - putting aside fraud - to assess it all."                             
  REPRESENTATIVE SANDERS:  "In changing this limit from three                  
  years to five years, what is to make us believe that next                    
  year we won't change it from five years to seven years?  Or                  
  ten years?  And, if that's true, why not change it to ten                    
  years today?"                                                                
  MR. BOTELHO:  "The legislature always retains the authority                  
  to change the laws based on its evaluation of the                            
  circumstances.  One has to trust that the legislature                        
  exercises restraint in trying to, among other things,                        
  develop a comprehensive tax policy of the state or in any                    
  other area.  I can't give you any assurance, that the next                   
  year the legislature might suggest that seven years would be                 
  right, or ten years; nor would I suggest today that there                    
  might not be circumstances which would lead the legislature                  
  to do so.  One has to assume that there are checks and                       
  balances, not only between the branches, not only between                    
  the houses of the legislature, but simply reflecting the                     
  collectivity of this group and the various views that tend                   
  to put a restraint on change's process.  We have come with                   
  this particular compromise as reflective of looking at a                     
  system that has been operating one way since 1976.  We've                    
  heard the concerns of taxpayers.  You will again hear from                   
  taxpayers.  And I suspect that you will find that those                      
  taxpayers will recognize that whatever the ambiguity about                   
  the current status, that you will be making a finding that                   
  you are abandoning relation back, that it will be a five-                    
  year fixed period.  And that beyond that taxpayers have a                    
  certainty that their assessments will not increase beyond                    
  that period.  It's, as I say, a significant compromise.  I                   
  dare say, however, that it is possible that a future                         
  Commissioner of Revenue might appear before a future                         
  legislature and tell you that five years is not enough.                      
  There's probably doubt that that would be the case, but I                    
  don't foreclose that.  I do not have a crystal ball.  I                      
  think one has to count on the wisdom on the legislature to                   
  make the ultimate determination.  And obviously that wisdom                  
  includes the ability to reject any change from what we have                  
  REPRESENTATIVE DAVIDSON:  "So, if it's a fair evaluation of                  
  our current situation, where it appears there are                            
  disincentives for timely payment, what in your professional                  
  judgment pushes the industry response to forward                             
  proceedings? Now, with the passage of this legislation,                      
  there is an absolute, no more assessment or adjustment of                    
  taxing of (indiscernible.)?  Where are we?"                                  
  MR. BOTELHO: "It strikes me that there are several events                    
  that have influenced the ability of the Department of                        
  Revenue to move quickly in making decisions, issuing audits                  
  and ultimately assessments within the five-year period.  Mr.                 
  Hosie has mentioned the first, and perhaps in many respects                  
  the most significant.  And that is, just the evolution of                    
  the industry itself, so that you do have widely reported                     
  prices, which give us a good shorthand for the value of the                  
  crude oil that comes out.  You have a very sophisticated                     
  revenue staff, one that has grown not only in size but also                  
  in sophistication.  If one compares it to the state of                       
  affairs at the time oil first started flowing from Prudhoe                   
  Bay, when you were dealing with one auditor to do all the                    
  taxes dealing with oil and gas, and a separate auditor to                    
  deal with DNR, and seeing a dramatic increase to three                       
  people the following year, compared to what we have today;                   
  we have a knowledge base which the state has invested in,                    
  and a staff that can get the job done.  The                                  
  third major development has been more specifically                           
  regulatory in nature, and that is the development of                         
  regulations which try to put in proxies for value that would                 
  eliminate the need for detailed auditing.                                    
  "Let me give a couple of examples.  The first, and it's                      
  partly embodied in this bill, is the concept of adopting a                   
  forward-looking methodology for oil valuations, similar to                   
  that which we currently have in place and have been working                  
  under for four years now, on the royalty side.  We have                      
  actually three different methodologies, all of them having                   
  lots in common.  One with ARCO, one with Exxon, and one with                 
  BP, and each of the remaining producers on the North Slope                   
  have elected to report on the basis of one of those three                    
  methodologies.  We have had no conflicts with the industry                   
  since we adopted that methodology.  The Department of                        
  Revenue has been working closely with the industry to                        
  develop exactly the same concept, so that we can shorthand                   
  the kinds of conflicts we've had before.                                     
  "Next, I would point out that we have developed a body of                    
  knowledge which we did not have before.  We've invested tens                 
  of millions in getting that body of knowledge in our royalty                 
  litigation.  The (indiscernible - Amerada-Hess?) case which                  
  first was filed in 1977, and was settled, at least the first                 
  part, dealing with oil valuation in 1992, that was the final                 
  settlement with Exxon, has been one that has provided us                     
  with a way, again, of understanding the industry; a database                 
  which has allowed the Department of Revenue itself to speed                  
  up the auditing process.                                                     
  "The final regulatory change that I would mention that                       
  allows us to keep up, was the adoption in late 1990 of an                    
  interim tax regulation.  That is, the basis for which the                    
  companies now are required to file interim payments.  And                    
  those are based on spot.  The importance of that is several                  
  fold.  First of all, it shows a trend to relying on systemic                 
  measures of value rather than individual auditing to try and                 
  capture the last dollar or the last cent.  The second is                     
  that it reflects the fact that since there is widespread                     
  agreement that spot is a good measure that the difference                    
  between what the department would get on a final payment and                 
  an interim payment is largely minimized.  Spot's the value,                  
  that's what you're reporting on, you're not going to see                     
  $100,000,000 cases arising in the revenue context in terms                   
  of disputes.  For years, I would say, certainly at least                     
  REPRESENTATIVE ULMER:  "Two questions about Section 1.  With                 
  regard to the five-year period, it was suggested to me by                    
  industry that perhaps the one in which that language is                      
  constructed it might not preclude a new assessment from                      
  being issued after the five-year period of time.  The                        
  language says after that five-year period, the department                    
  may not increase an assessment under this subsection.  Yet                   
  the suggestion is here that there may be a loophole in this                  
  language that would allow the Department of Revenue, even                    
  after five years, somehow, to issue a new assessment.  Even                  
  though, not an (indiscernible) assessment.  Is that your                     
  reading of the language?"                                                    
  Number 280                                                                   
  MR. BOTELHO:  "It is not.  It is possible that we might                      
  issue a new assessment which reduces the amount in dispute,                  
  and that happens very regularly now, and we're not                           
  suggesting a departure from it.  New information which the                   
  taxpayer brings forward, which has the consequence of us                     
  deciding that there has been substantiation of the                           
  taxpayer's position, would regularly result in a new                         
  assessment, a new amended, or, refer to it as an amended                     
  assessment, it would have the effect of decreasing.  And                     
  hence, the language is specifically crafted to recognize the                 
  ability of the department to reduce assessments but not to                   
  increase it.  We do not see it as a mechanism, I don't think                 
  there is any suggestion here, nor do I believe it can be                     
  fairly read to suggest, that the department may issue some                   
  new assessments after the five-year period that has the                      
  effect of increasing the amount."                                            
  Number 296                                                                   
  REPRESENTATIVE ULMER:  "My second question relates to the                    
  contrast between how Alaska does it versus how other states                  
  or the IRS does it, in terms of the three-year assessment.                   
  I'd like you to explain to the committee how different this                  
  process is in Alaska from other taxing jurisdictions,                        
  particularly oil tax states, or from the IRS; is the three-                  
  year statute of limitations with regard to assessments being                 
  interpreted differently by the state of Alaska than it is in                 
  other states or by the IRS?"                                                 
  Number 306                                                                   
  MR. HOSIE:  "The answer is no.  That the division's long-                    
  standing interpretation largely accords with the law in                      
  other jurisdictions, both on the state level and the federal                 
  law.  (Coughing, indiscernible.)  The federal law is very                    
  different than the state law.  It doesn't provide, for                       
  example, for an informal conference process.  Deadlines are                  
  different.  And federal law has a specific sentence in it                    
  that says, once the dispute's started, the statute of                        
  limitations is tolled.  There is no parallel explicit                        
  language in Alaska law, and that's one of Exxon's principal                  
  arguments, that the absence of that explicit power to toll                   
  (indiscernible) statute, means that the 1976 legislature                     
  made a policy decision to void the relation back doctrine in                 
  a tax context and make sure that these things had to be                      
  completed in three years.  And so the federal law is                         
  fundamentally different, but provides for the result that                    
  the state advocates here.  On the state level, various state                 
  courts have wrestled with this problem, from the 1930s to as                 
  recently as last year.  And with one exception the courts                    
  have ruled in the states' favor, ruled that relation back is                 
  proper; that once the dispute starts you can amend until the                 
  dispute is over.  The one exception is Montana.  The Montana                 
  Supreme Court ruled, quite explicitly, that no amendments                    
  were proper after the statute of limitations had run.  And                   
  the language in Montana is very much like the statutory                      
  language in Alaska.  Why did the Montana court rule that                     
  way?  Well, the Montana court has a unique rule of statutory                 
  construction and interpretation.  Unlike Alaska, where                       
  ambiguities are always read in favor of the sovereign, in                    
  Montana the opposite rule applies.  And if you have an                       
  ambiguous tax statute, you must read it in favor of the                      
  taxpayer and against the sovereign.  And that was the                        
  driving point for that decision.  They had a statute that                    
  they admitted was `susceptible to two constructions.'  They                  
  then applied the rule of construction, saying that ambiguity                 
  must be read in favor of the taxpayer and against the state,                 
  and accordingly concluded that amendments were not proper.                   
  "Alaska has the other rule of construction, which is far and                 
  away the more common rule, and that the state's inherent                     
  sovereign powers are preserved unless the statute very                       
  explicitly gives up those powers and rights.  And so, this                   
  will be largely the substance of the Supreme Court fight,                    
  but the law weighs far more heavily on the state side."                      
  Number 349                                                                   
  REPRESENTATIVE PHILLIPS:  "Bruce, every year the state                       
  spends millions of dollars in the process of tax litigation.                 
  Would you surmise that the passage of this new methodology                   
  might reduce the amount of money that we are spending in our                 
  litigation battles?"                                                         
  MR. BOTELHO:  "Without doubt."                                               
  REPRESENTATIVE PHILLIPS:  "Thank you."                                       
  Number 356                                                                   
  REPRESENTATIVE JEANNETTE JAMES:  "Referring to Section 1, my                 
  question is, in talking about the referencing back                           
  provision, the language says, in what we're setting for, not                 
  the future, but for the back, so, I am assuming that when we                 
  make language for what's behind us that we have some things                  
  specifically we're covering, and the language says the                       
  department may increase or decrease the amount of tax due by                 
  issuing or amending an assessment.  Now, that doesn't say,                   
  necessarily, to me, that that only relates to the                            
  referencing back provision, it looks like you can do it for                  
  anything.   It looks like that it's even more broad than                     
  that.  Are there to be understood that there are some                        
  convictions and some assessments that may not have totally                   
  fell into the requirement of relating back?"                                 
  Number 370                                                                   
  MR. HOSIE:  "The statute, I believe, is broader, as you                      
  point out, than the relation back doctrine.  The relation                    
  back doctrine has some limits.  And one of the limits is                     
  that the amendment has to involve the same general issues                    
  already in dispute.  And so, if you're suing the garage                      
  about an auto problem, you can't add an amendment that                       
  involves a property dispute you might have about a fence,                    
  with the owner of the garage.  They are two different cases.                 
  This statute, this provision, doesn't address that                           
  limitation.  Although, it shouldn't be an issue in the tax                   
  area, because, by definition, when the Audit Division                        
  reviews taxes and issues and assessment, it puts at issue                    
  the entire tax year.  The entire constellation of issues                     
  involving how much tax is owed.  And the amendments                          
  necessarily relate to those underlying tax issues for that                   
  same tax year."                                                              
  Number 385                                                                   
  REPRESENTATIVE JAMES: "On the follow-up, there are two                       
  specific kinds of taxes that we're talking about.  One is                    
  income taxes, and the other is the severance taxes.  And the                 
  income tax is an annual filing and the severance tax is a                    
  monthly filing.  It appears to me that some of the same                      
  information that you might be questioning or getting into                    
  filing up in an income tax question might be some of the                     
  same information that you would be needing to determine a                    
  taxable amount in the severance taxes.  I guess my question                  
  is, if you find something in one of those cases that applies                 
  back to the other one, does the relation back doctrine fit?                  
  And do we need this broad language to cover all cases?  Why                  
  are we putting the broad language in when it's for things                    
  that have happened in the past?"                                             
  Number 395                                                                   
  MR. BOTELHO:  "I think first it's important to point out as                  
  Representative James has identified that this particular                     
  amendment and indeed this statute of limitations applies to                  
  two taxes.  One of them being the production tax, that is                    
  the reference on line 12 on page one, to AS 43.55, the other                 
  to AS 43.21.  We know that as the separate accounting income                 
  tax.  I think it's important to point out that that tax has                  
  not been in effect for 13, actually 14 years - 13 years in                   
  our state, it covered the period 1978-1981 when it was                       
  changed.  This statute of limitation does not apply to our                   
  current income tax, corporate income tax, which has a                        
  separate statute of limitations based on the federal model,                  
  that is found in Chapter 43.20.  So, there isn't the                         
  implication of playing back and forth that you might be                      
  anticipating if in fact we are talking about a production                    
  tax and our current corporate income tax.  (Coughing and                     
  other noise - indiscernible) so we wouldn't have that kind                   
  of interplay.  That was clearly the case earlier when you                    
  had both the separate accounting tax and the production tax                  
  running concurrently and basically raising some of the same                  
  issues.  I'm not sure if I directly answered the question."                  
  REPRESENTATIVE JAMES:  "Just another question, then, I have                  
  here on some of the things we've been discussing.  You                       
  mentioned the $3 billion taxes that are outstanding that you                 
  feel are at risk if we don't pass this legislation.  Do you                  
  have a ballpark figure of how much of that $3 billion - is                   
  it all taxes?  Or is some of it penalties and interest?  Or                  
  is there any kind of a relationship (clearing of throat in                   
  background, difficult to hear)?"                                             
  Number 425                                                                   
  MR. BOTELHO:  "I think it's a very appropriate question.                     
  The $3 billion is largely taxes and interest.  The                           
  relationship is, for each dollar of tax, approximately $1.60                 
  in interest.  That's the ratio right now.  Obviously, as                     
  time progresses, the ratio becomes greater.  That is to say,                 
  the interest is accumulating daily, obviously, and that                      
  number for each additional period of time that we're talking                 
  about will tend to diminish the basic tax vis-a-vis the                      
  interest accumulated."                                                       
  Number 435                                                                   
  CHAIRMAN VEZEY:  "And the interest rate is 12 percent?"                      
  MR. BOTELHO:  "The interest rate right now is 11 percent                     
  compounded.  And we've actually, earlier, until that                         
  legislative change was made, I believe during the 1990                       
  session, the rate was eight percent simple.  There was an                    
  earlier period when it was actually six percent simple."                     
  Number 440                                                                   
  CHAIRMAN VEZEY:  "And I believe there's a 25 percent                         
  penalty?  Where does that (throat clearing in background -                   
  Number 441                                                                   
  MR. BOTELHO:  "There is a 25 -- There are penalties involved                 
  in the number.  I think it would probably be inappropriate                   
  to mention those numbers, only to say that they are rather a                 
  small amount, insignificant amount of the total, and also                    
  interest does not accrue on penalties."                                      
  Number 445                                                                   
  REPRESENTATIVE DAVIDSON:  "Mr. Attorney General, what is                     
  magical about the two dates included in Section 1?  What                     
  were the specific reasons or considerations both from the                    
  state's perspective and rationale for choosing these two                     
  dates?  If you could, please, give us your opinion, or why                   
  you think that was convenient also for the industry?"                        
  MR. BOTELHO:  "Actually, in our proposal to the Senate Labor                 
  & Commerce Committee, we had proposed tax periods ending                     
  before January 1, 1995, in Section 1, a(1), and in Section 1                 
  a(2), for tax periods beginning December 31, 1994, that was                  
  our proposal.  During the course of the committee hearing,                   
  however, industry representatives had urged the committee to                 
  move it back starting this year.  And, in consultation with                  
  the Commissioner of Revenue, it was his view that that was                   
  an accommodation that could be made given what I described                   
  earlier are the enhanced ability of the department within a                  
  five-year period to make the collections, it is his view,                    
  and I think is clearly one that I share, that the department                 
  has the capacity to make sure that in this tax year, with                    
  the returns being filed, that we can complete the audit                      
  cycle within five years.  And hence the willingness to allow                 
  that date to be moved up to this year as opposed to                          
  beginning in tax year 1995."                                                 
  REPRESENTATIVE DAVIDSON:  "So there was no loss or gain for                  
  either party as regards to those specific dates?"                            
  Number 461                                                                   
  MR. BOTELHO:  "I believe that there was a gain to industry                   
  in the sense that they know that certainty will come a                       
  little faster.  Obviously, if it's a five-year bar on                        
  assessments, that is to say, no increased assessments after                  
  the five-year period, they have that guarantee starting with                 
  this tax year that in five years they will have that                         
  certainty.  The benefit is simply that it's been extended to                 
  this tax year as opposed to beginning next year."                            
  Number 483                                                                   
  REPRESENTATIVE HUDSON:  "Mr. Attorney General, I'm trying to                 
  understand this relationship between the three-year statute                  
  of limitation and the six-year for collection statute of                     
  limitation, and relate that to the $3 billion that's been                    
  stated at risk.  Are any of the assessments that were issued                 
  by the state prior to the third year at risk because of the                  
  sixth year?  What I'm trying to figure out is, does the $3                   
  billion include assessments that were made during the three-                 
  year period of time, which both sides seem to agree, at                      
  least that's there, that you have that period of time, is                    
  the $3 billion assessments made after the third year in                      
  these various cases on, that you're claiming, during the                     
  other types of settlement?"                                                  
  Number 496                                                                   
  MR. HOSIE:  "I believe the answer to be that some of the                     
  dollars encompassed in the $3 billion relate to assessments                  
  that the parties would agree were timely; that is, made                      
  within the initial three-year period.  A larger portion of                   
  the money relates to amendments, to assessments, that were                   
  made after the period.  So I think there is a little of                      
  Number 501                                                                   
  REPRESENTATIVE HUDSON:  "So of the $3 billion,                               
  approximately, how much was made before - or, you know,                      
  timely - and how much would you say is at risk because it                    
  was made through the contentious period, after three years?"                 
  Number 504                                                                   
  MR. BOTELHO:  "Slicing the pie, Mr. Chairman, first of all,                  
  as we indicated before, you have $1 billion that are                         
  directly related to the three-year statute; that is, amended                 
  assessments made after initial assessments and $2 billion                    
  that are affected by the six-year collections period.  I                     
  think you've asked us to slice the pie further and to                        
  identify of the $2 billion how much of that also is                          
  implicated by assessments that were made after the three-                    
  year period - is that the correct question?  Let me turn to                  
  Dick Brewer who is at Legal Audit Services, who may have                     
  that answer right now."                                                      
  Number 513                                                                   
  RICHARD BREWER, Assistant Director, Oil & Gas Audit                          
  Division, Anchorage, testified regarding SB 377.  "There is                  
  some overlap, Representative Hudson, but for the most part                   
  the $2 billion, $1 billion stands."                                          
  REPRESENTATIVE HUDSON:  "Is the six-year collection - we've                  
  got the dispute, three companies say, that's it, no more                     
  assessments; the state says, no, as long as you're                           
  appealing, we can increase the assessments, and we've done                   
  that, apparently.  And now I understand, at any rate, that                   
  maybe the six-year bar is what's potentially jeopardizing                    
  those that were made timely within three years.  Is that                     
  Number 525                                                                   
  MR. BREWER:  "Yes.  Exactly.  They were made timely, they                    
  were made in a timely fashion as far as we're concerned.                     
  However, they are subject to a six-year statute problem,                     
  REPRESENTATIVE HUDSON:  "And there is a value to that, but                   
  we don't know what it is yet?"                                               
  MR. BREWER:  "That is correct."                                              
  REPRESENTATIVE HUDSON:  "Thank you.  Please continue, Mr.                    
  MR. HOSIE:  "Turning back to the specifics of SB 377, and                    
  moving on to Section 3, bottom of page two, this relates to                  
  several topics that the attorney general has touched on a                    
  few moments ago, and it's a section authorizing the                          
  department to promulgate new regulations addressing the                      
  question of how one values oil and downstream destination                    
  markets, and the section specifically authorizes the use of                  
  the methodology that employs spot prices.  Those are the                     
  prices, those are current market prices, those are the                       
  prices that you see in the electronic databases, such as                     
  Reuters and Telerate, and they're the prices that the                        
  industry tracks, relies on, uses, in valuing oil for their                   
  own purposes.  The purpose of the section is to simplify and                 
  clarify the process with the hope that there will not be a                   
  continuation of these long-standing expensive tax disputes.                  
  The regulations are designed to explicitly set forth how the                 
  oil is to be valued, using terms and mechanisms well known                   
  to the industry, and prices that are easily tracked by all                   
  concerned.  This system is designed to roughly parallel, as                  
  the attorney general mentioned, the market basket system                     
  that was arrived at through the negotiated settlements of                    
  the royalty dispute, the (indiscernible - Amerada Hess?)                     
  case, most recently in April of 1992.  That royalty market                   
  basket approach which applied effectively from 1992, uses                    
  spot prices in the downstream destination markets, which is                  
  precisely the approach that this section authorizes.  And                    
  so, with going forward, there would be roughly parallel                      
  systems between royalty and tax for valuing the same oil at                  
  the same place downstream.                                                   
  "Now, that raises a question, and perhaps a problem, that                    
  has been articulated with this bill, and that is, if royalty                 
  numbers are sensible going forward, why not for the past?                    
  And let me take a minute and speak to that.  There are two                   
  reasons why the royalty numbers for the past are not                         
  appropriate for tax.  There is one very specific and one                     
  more general.  The specific reason relates to a contract                     
  entered into in 1979 by the Department of Natural Resources.                 
  Under that contract, the state was limited, for royalty                      
  purposes, to the federal ceiling price for ANS crude oil.                    
  It didn't matter if the producers got more than the federal                  
  ceiling price; for royalty purposes, the state was capped at                 
  the ceiling price.  With the benefit of full hindsight, that                 
  was not a great deal for the state.  The state did not share                 
  in the upside when the producers got something above the                     
  ceiling price, and the state believes that they did.  The                    
  state, in the tax side, never made that deal.  There's no                    
  such contract in the tax side, and, to the contrary, there                   
  are specific tax statutes and regulations that give the                      
  state the right to participate in the upside.  That is, if                   
  the producers in fact realize more than the federal ceiling                  
  price, the state is entitled to its proportionate share of                   
  that above ceiling price realization.  And so, in asking, or                 
  in suggesting that royalty values for the past are                           
  appropriate for tax, the industry is in essence saying, you                  
  made that mistake in the royalty context, why not live with                  
  it in the tax context?  There's no need to, and it wouldn't                  
  make good policy.                                                            
  "Second, and more generally, the royalty case turned on a                    
  1959 contract drafted by an oil industry lawyer.  The                        
  state's rights came from that contract and that contract                     
  alone.  And the contract had two brief very ambiguous                        
  provisions about how royalties were to be calculated and                     
  paid.  And, as I say, that was the source of the state's                     
  rights in that litigation.  A 1959 ambiguous contract                        
  drafted by an oil industry lawyer.  In fact, in 1980, Judge                  
  Allen Compton, now Justice Allen Compton, looked at that                     
  contract and said, having an oil company lawyer draft it was                 
  just like having the fox watch the henhouse.  And so that                    
  was a problem in the royalty case.  And it had the effect of                 
  depressing the royalty values because it created risk.  It                   
  created risk.                                                                
  "The other thing that depressed the royalty values is, that                  
  was a jury trial case.  And as a consequence, things had to                  
  be simplified, all decisions had to be cut in the producer's                 
  favor.  You had to sell the result to a jury.  And so the                    
  overall effect was a lowering of the royalty values.  And so                 
  in saying that royalty values were appropriately taxed,                      
  industry is saying that you have to live with those                          
  (indiscernible - infirmities?) that were unique to the                       
  royalty contracts.  And for those reasons, the use of                        
  royalty values for the task really aren't appropriate, in                    
  any sense, for a tax."                                                       
  Number 589                                                                   
  CHAIRMAN VEZEY:  "Would you apply that prospectively?"                       
  MR. HOSIE:  "We would not, for this reason.  Prospectively,                  
  in the royalty case, the parties negotiated a different                      
  valuation system that used actual spot prices in the actual                  
  downstream market values.  That was different than the                       
  system set forth in the 1959 lease contract.  And so,                        
  prospectively the royalty system uses something that is very                 
  much like that set forth in this piece of legislation, SB
  377.  So it is possible to have parallel systems going                       
  forward, but that parallelism for the past comes at very                     
  great cost to the state.  Because there were problems within                 
  the royalty case that simply aren't there in the tax side."                  
  CHAIRMAN VEZEY:  "But, in the future, it would be possible                   
  to have a royalty assessment value, and a tax assessment                     
  value, that were parallel?"                                                  
  MR. HOSIE:  "Roughly parallel.  Yes, Mr. Chairman, that is                   
  exactly right.  They should be roughly parallel."                            
  Number 601                                                                   
  CHAIRMAN VEZEY:  "You solve one problem you've automatically                 
  solved the other."                                                           
  MR. HOSIE:  "Mr. Chairman, that's largely right.  There may                  
  be small differences between the systems, in part because                    
  there isn't just one royalty methodology now, as the                         
  attorney general mentioned, there are three, with some                       
  variance, but their similarities far outweigh their                          
  differences.  And so the tax regulations may be slightly                     
  different, but they will share the same conceptual approach                  
  using downstream spot prices.  They start at the same place,                 
  and they should arrive at very near the same place."                         
  Number 607                                                                   
  REPRESENTATIVE GREEN:  "You refer to spot prices.  Is there                  
  another posting of prices with crude oil?"                                   
  Number 609:                                                                  
  MR. HOSIE:  "There is, generally referred to as posted                       
  prices for Lower `48 domestic crude oil.  There were no                      
  posted prices for ANS until Shell posted on the North Slope                  
  in January of 1984.  The reason for that is, there's really                  
  no market for ANS oil on the North Slope.  That crude oil                    
  goes elsewhere, to be refined and consumed.  And so the                      
  Alaska system has always been fairly unique, quite                           
  different, just given that it's a unique situation, to have                  
  such a large field in such a remote location."                               
  Number 615                                                                   
  MR. BOTELHO:  "It might be important to mention, for some:                   
  the posted price is simply, and the experience that I know                   
  Representative Green is well familiar with from his                          
  background, but, the posted price was simply a refiner going                 
  into the field, an oil field, and saying, this is the price                  
  I'm willing to pay for this volume of oil on the field.  It                  
  literally, historically was the posting of a sign,                           
  announcing what the refiner, separate from the producer, was                 
  willing to pay to get a quantity of oil.  And, as Mr. Hosie                  
  has pointed out, that posted price experience largely has                    
  been absent in the North Slope.  Different than anywhere                     
  else in the country.  Shell did it only briefly, and                         
  obviously also Shell was only posting for a very limited                     
  amount of oil."                                                              
  Number 628                                                                   
  REPRESENTATIVE GREEN:  "Is it historical that the spot value                 
  and the posted price are the same, or is there a variance?"                  
  MR. HOSIE:  "They now are pretty much the same.  That has                    
  not always been true.  That started to become true in 1985,                  
  and it happened sooner on the Gulf Coast than it did on the                  
  West Coast.  In the early 1980s, posted prices often were                    
  static for months on end.  They didn't change with changes                   
  in market conditions, whereas the spot price was the daily                   
  market price.  It goes up and goes down.  So if there is a                   
  refinery fire, or a fire in a field in west Texas, you will                  
  see that reflected in the spot price immediately.  A spot                    
  price moves just as a gold quote would move.  Whereas the                    
  posted prices were long-term administered prices announced                   
  by the would-be buyers, as the prices they were willing to                   
  pay.  And those prices, in the early 80s, did not move with                  
  market conditions.  They were not, as most people think                      
  about the notion `market prices' at all.  The posted prices                  
  are most analogous to the government prices announced by the                 
  Saudi government in the early 80s.  The so-called official                   
  sales prices, OSPs, or government sales prices, GSPs, and                    
  those were prices simply announced by the Saudi royal family                 
  as the price for its oil.  But those prices were typically                   
  not market prices.  Sometimes much higher, sometimes much                    
  lower, for various political reasons.  And so, a posted                      
  price is not a market price, was not a market price in the                   
  early 80s, but slowly became a market price as the markets                   
  evolved, until, I would say, 1985, everybody involved in the                 
  industry - tax collectors, states, oil companies and                         
  refiners - accepted spot prices as market prices and as the                  
  way to measure the worth of the crude oil.  And in fact when                 
  an oil producer or a refiner goes out into the market today                  
  to buy oil, almost without exception, they pay a spot price.                 
  It's a market price."                                                        
  Number 652                                                                   
  REPRESENTATIVE GREEN:  "So, you're saying that the                           
  reference, the bench mark crudes are not necessarily                         
  utilized anymore, it's just the spot market price for                        
  whatever crude might be available?"                                          
  Number 662                                                                   
  MR. HOSIE:  "Well, the legislation gives the department the                  
  discretion to select the crude oils to be used as the bench                  
  mark crudes for this process.  That they may pick one or two                 
  crudes for the West Coast market and a different crude or                    
  crudes for the Gulf Coast markets, because the two are                       
  different.  That would be an exercise of agency discretion.                  
  To look at the various crudes out there and pick the best                    
  bench mark.  For instance, in the royalty settlements, if                    
  memory serves, up to five crudes are used and charted in                     
  various degrees to come up with an aggregate number that is                  
  believed to be most represented of ANS market value                          
  Number 665                                                                   
  CHAIRMAN VEZEY:  "I tell you what, this is going to be quite                 
  a bit of discussion, I foresee.  It is 10:30.  Why don't we                  
  take a 15 minute at-ease and come back at a quarter to                       
  The State Affairs Standing Committee recessed at 10:30 a.m.                  
  with the hearing to be continued to 10:45 a.m. that day.                     
  TAPE 94-61, SIDE A                                                           
  Number 000                                                                   
  The House State Affairs Standing Committee returned to order                 
  at 10:49 a.m.                                                                
  CHAIRMAN VEZEY:  "I call the meeting back to order.  It's                    
  nine minutes until 11:00 on May 13.  I would remind                          
  everybody that this is Friday, May the 13th.  The next                       
  person on our list was Representative Phillips and she                       
  hasn't returned yet, so, Representative Porter, you had a                    
  REPRESENTATIVE PORTER:  "Yes, thank you, Mr. Chairman.  On                   
  Section 3, a couple of questions.  But let me first see if I                 
  have an overall understanding.  The totality of the section                  
  basically says that we will establish a value for oil                        
  through this methodology every year, and that that will                      
  remain constant for a year; it will be revalued shortly                      
  before October 30, and that will be then established as the                  
  value for, prospectively, for a year.  That will be done by                  
  a standard regulation development process?"                                  
  Number 035                                                                   
  MR. BOTELHO:  "That is correct, Mr. Chairman."                               
  Number 038                                                                   
  REPRESENTATIVE PORTER:  "How long a period of time do you                    
  think that that process - would you envision that that                       
  process would be?"                                                           
  Number 039                                                                   
  MR. BOTELHO:  "First of all, Mr. Chairman, I think it's                      
  important to note that it may well be that the department                    
  will not -- again, the language, specifically, found on page                 
  two, at the beginning at line 29, is that `before each                       
  October 30 the department shall annually review and                          
  determine if any of the adjustments are necessary;' it does                  
  not require that annually the department change the                          
  regulation.  This is probably a good entree really to                        
  discuss in somewhat more detail the royalty methodologies.                   
  This is an attempt, basically, to parallel what we have                      
  called the openers to allow for adjustments on the royalty                   
  side.  Mr. Chairman, with your indulgence, I'd ask Mr. Hosie                 
  to spend just maybe two or three minutes explaining in more                  
  detail, how the royalty side works, and how this parallels                   
  that provision currently."                                                   
  Number 060                                                                   
  MR. HOSIE:  "Mr. Chairman, the royalty market basket                         
  approach uses various bench mark crudes.  There is a                         
  selection of crudes for the West Coast, and a slightly                       
  different selection for the Gulf Coast.  To illustrate the                   
  West Coast basket involves a crude called (indiscernible),                   
  West Texas Sour, a crude called (indiscernible) in line 63,                  
  which is indigenous California crude, and (indiscernible)                    
  crude, which is produced offshore in California.  Those are                  
  the crudes that make up the market basket.  The spot prices                  
  are assessed for those crudes and that market basket spot                    
  price is then used as the downstream destination value.                      
  There are slight differences or there can be slight                          
  differences in the precise makeup and weighting of the                       
  various crudes in the market basket in each of the three                     
  royalty settlements.  Each of the big three producers has a                  
  slightly different settlement, given that they were                          
  negotiated deals.  Then, that downstream spot-driven market                  
  basket number is netted back to Pump Station #1, the place                   
  at which both the tax and the royalty obligation adhere.  As                 
  a consequence, one needs to deduct tanker transportation                     
  charges from the downstream value.  Those tanker                             
  transportation charges are also calculated somewhat                          
  differently under the three royalty settlement                               
  methodologies.  And so, this tax system would be similar in                  
  its use of a downstream market basket approach.  It would be                 
  similar in its use of spot prices, as reported in the public                 
  and the electronic trade press, and it would differ, I                       
  believe, in attempting to achieve some sort of uniform                       
  transportation deduction.  But there would be small                          
  differences between the royalty baskets and the tax baskets.                 
  But those differences are the subject now of regulations                     
  being promulgated and discussed with the industry                            
  Number 104                                                                   
  MR. BOTELHO:  "Spencer, if you could comment about re-                       
  openers in the - specifically, re-openers - what do we mean                  
  by the term?  How does it work?"                                             
  Number 105                                                                   
  MR. HOSIE:  "Certainly.  Given that oil markets change, and                  
  the world changes, it was viewed as important in the royalty                 
  case not to lock the state into an inflexible, never-                        
  changing system.  Some flexibility is important, because you                 
  want to track what actually happens in the marketplace.  And                 
  you might have picked a crude which came out of step with                    
  market prices, for whatever reason.  Perhaps if it was a                     
  foreign crude the government which controls the pricing for                  
  the crude could announce an artificial price, or someone                     
  might keep the crude off the market, if it were a foreign                    
  crude.  And so, there needed to be flexibility to adapt to                   
  changes in the marketplace.  And for that reason, the                        
  royalty settlements explicitly gave the parties the right to                 
  reopen in certain events and, in effect, renegotiate the                     
  deals to make sure that the market basket did what it was                    
  designed to do, which was, arrive at a reasonable proxy for                  
  ANS spot prices.  That's the market price for ANS oil, which                 
  I think everybody agrees should be the basis for both tax                    
  and royalty now."                                                            
  Number 127                                                                   
  MR. BOTELHO:  "In particular, Mr. Chairman, each of the                      
  settlement agreements provides for a periodic re-opener.  My                 
  recollection is, all of them have a three-year periodic re-                  
  opener regardless.  And the first re-opener period occurred                  
  with ARCO some months ago.  Actually, the overall, re-opener                 
  provision, (indiscernible) provide for a very limited period                 
  to try and reach resolution informally; that doesn't work,                   
  we'd ultimately go to baseball arbitration, that is, both                    
  parties make their best offer and a panel, chosen from a                     
  particular list of specialists in arbitration would be                       
  required to elect which of the two positions is more                         
  correct.  We did have the re-opener with ARCO and in a                       
  matter, I think, of less than two weeks we were able to                      
  reach agreement on a slight change to the formula to reflect                 
  activities on Pipeline 63 crudes, as I recall.  There is                     
  another provision which provides for what we call government                 
  action re-openers.  And this contemplated event could have                   
  happened in the past, and may be anticipated in the future.                  
  Examples would be the dramatic impact that perhaps price                     
  control reimposition might have on the market, or the                        
  requirement that there be double-hull tankers, was another                   
  one discussed extensively.  Again, we can't, in the                          
  interests of uniformity in our tax system, negotiate such                    
  agreements with individual taxpayers.  What we have done                     
  instead is make clear that there be this annual review to                    
  make sure that the market basket is working as it should,                    
  and basically have a parallel for re-openers  by requiring                   
  the department not only review, but make adjustments, as                     
  Number 171                                                                   
  REPRESENTATIVE PORTER:  "Mr. Chairman, if I may follow up,                   
  then.  In (c) of the section, it says the department may                     
  average or assign different weights to the oil selected                      
  under (b) and the department may adjust the amounts                          
  calculated under (b), to account for differences of oil                      
  types and different destination areas.  It seems like those                  
  two things are fair and equitable things to do.   When you                   
  say `may' you imply may, or may not.  Why shouldn't that be                  
  Number 181                                                                   
  MR. HOSIE:  "Mr. Chairman, for instance, if ANS is one of                    
  the crudes selected in the market basket, there would be no                  
  need for quality adjustment.  Similarly, some of the crudes                  
  picked may be very close, and so there may be no need for                    
  quality adjustment.  For other crudes picked, say, a                         
  foreign, very light, very sweet crude, there would have to                   
  be a quality adjustment.  And I think that the parties all                   
  understand that the object is to arrive at a market basket                   
  that very closely approximates ANS crude oil in terms of all                 
  its physical characteristics.  The object is not to pick a                   
  crude oil, or mixed crude oils, that are dissimilar to ANS                   
  Number 193                                                                   
  REPRESENTATIVE PORTER:  "Well, if I may, under (b), you have                 
  that option, to select within the state, or outside of the                   
  state, or a combination thereof.  So, if you have only                       
  selected ANS oil, then the first line would seem to be moot.                 
  Because you don't have different oils to weight."                            
  MR. HOSIE:  "That's exactly right."                                          
  REPRESENTATIVE PORTER:  "But if you do, then why shouldn't                   
  those be the ways that you equalize those selections?"                       
  Number 202                                                                   
  MR. BOTELHO:  "Mr. Chairman, first of all, when we talk                      
  about weighting the oils, what we're talking about is a                      
  conscious parallel, again, to the royalty settlements, where                 
  the basket that Mr. Hosie referred to, that would include                    
  (indiscernible), include the (indiscernible), Pipeline 63,                   
  Abu Dhabi, and such - they're not weighted equally.  That is                 
  to say, they are not all each given 20 percent weighting.                    
  We try to reflect and be able to change the actual activity                  
  in the market and be able to drop out a particular crude, if                 
  in fact it's no longer being traded.  To require averaging                   
  or assigning different weights, you almost have to say Shell                 
  average, or assign different weights, is somewhat                            
  inconsistent.  If you have to average all three, you're in                   
  essence, it could be argued at least, assigning..."                          
  Number 226                                                                   
  REPRESENTATIVE PORTER:  "Well, I think that it assigns the                   
  option, to  average or to assign weights, so..."                             
  Number 228                                                                   
  MR. BOTELHO:  "Yes.  If your understanding of the word `may'                 
  and `shall' is the same, which is what, I, maybe we're not                   
  Number 235                                                                   
  REPRESENTATIVE PORTER:  "I read this to say, you may do                      
  these equitable things to your calculations, or you may not.                 
  And I don't know if that's what the legislature wants to                     
  MR. BOTELHO:  "As long as it is understood, Mr. Chairman,                    
  that the department is free to select only one crude?"                       
  Number 245                                                                   
  REPRESENTATIVE PORTER:  "That's the way I read it."                          
  MR. BOTELHO:  "I suspect that that is not a major issue for                  
  us.  Similarly, with regard to providing for differences in                  
  oil types and destination areas.  The difficulty obviously                   
  is to avoid the ability of a taxpayer to generate an                         
  argument next over whether the state has provided the proper                 
  weight to be given each crude, or whether it has provided                    
  for the proper differential..."                                              
  REPRESENTATIVE PORTER:  "...that discussion seems implicit                   
  in the whole process.  While we're on a roll, just one more                  
  question if I may, Mr. Chairman.  The last line:  For the                    
  purposes of this section, current value includes spot or                     
  current prices or assessments publicly reported?                             
  Considering the dispute we have over assessments, wouldn't                   
  market transactions be a better...?"                                         
  MR. BOTELHO:  "Mr. Chairman, the word assessment here is in                  
  an entirely different context.  It isn't referring to tax                    
  CHAIRMAN VEZEY:  "I'm sorry, I didn't hear that statement."                  
  Number 254                                                                   
  MR. HOSIE:  "If I might add something, Mr. Chairman, if the                  
  question went to the point, is an assessment something other                 
  and different than a spot price, there is a small                            
  difference.  A spot price is usually a transaction driven                    
  price.  Somebody goes out and buys oil, and that transaction                 
  results in a price.  Frequently, those transactions are                      
  reported in the spot price (indiscernible) those deals are                   
  reported.  Other services don't report on a transaction-                     
  specific basis, but simply look at the market overall, and                   
  arrive at an assessment of spot prices given their survey of                 
  transactions.  And so, it's just a distinction that tracks                   
  the way the information is reported in the trade press,                      
  REPRESENTATIVE PORTER:  "Is there a better (persons talking                  
  over one another, exchange is indiscernible) word for that                   
  than assessments?"                                                           
  MR. BOTELHO:  "Market assessments."                                          
  MR. HOSIE:  "Market assessments.  And they're largely                        
  Number 269                                                                   
  CHAIRMAN VEZEY:  "Though, it (indiscernible) say or market                   
  assessments, I mean, that's what your intent is."                            
  MR. BOTELHO:  "Yes, Mr. Chairman."                                           
  MR. HOSIE:  "Precisely."                                                     
  REPRESENTATIVE PHILLIPS:  "Mr. Chairman."                                    
  CHAIRMAN VEZEY:  "Are you through, Mr. Porter?"                              
  REPRESENTATIVE PORTER:  "Yes, thank you."                                    
  CHAIRMAN VEZEY:  "Representative Phillips."                                  
  Number 271                                                                   
  REPRESENTATIVE PHILLIPS:  "Thank you, Mr. Chairman.  I would                 
  recommend that the committee make that an amendment, so that                 
  there is no ambiguity whatsoever about the meaning there.  I                 
  do have a question for Bruce.  And that is, this is such a                   
  common sense approach of changing the methodology that we're                 
  using.  It seems to me to be a very good idea.  Why did it                   
  take us so long to get to this point?"                                       
  MR. BOTELHO:  "Mr. Chairman, I think a variety of reasons.                   
  I know, even when I served as Deputy Commissioner of                         
  Revenue, in between 1984 and 1986, we had been working on                    
  regulations not entirely unlike this.  I think a variety of                  
  factors:  the on-going litigation at that time over royalty                  
  values, and the concern on both sides, the tax side and                      
  royalty side, that anything done by the state to firm up a                   
  particular approach, given the instability of the market,                    
  and the lack of understanding of the market, could result in                 
  the state getting lower than, use the term, correct value,                   
  or good value.  And also you had major differences of                        
  opinion within industry itself about how one should value                    
  oil.  And so, it wasn't the industry operating as a                          
  monolith.  Even today, you have widely varying values as a                   
  consequence of widely varying costs and transportation, as                   
  an example.  And even that, today, remains somewhat of a                     
  concern.  I think at this point people are comfortable with                  
  the market, they have confidence in the use of spot price,                   
  both within industry and the state, they have experience now                 
  with the royalty settlement that has been used in this                       
  approach for the last four years, and believe it to work.                    
  That level of confidence and comfort, I think, has persuaded                 
  the department and industry to be engaged in a discussion                    
  over the last several months, to try and reach this point.                   
  It's not to say this could not have happened a couple of                     
  years ago.  I think before that time it would be highly, it                  
  would have been very difficult to do so."                                    
  MR. HOSIE:  "To add that slightly, when the Amerada-Hess                     
  case was being litigated, when the royalty case                              
  (indiscernible), it would have been difficult to work with                   
  the industry in approaching the problem collectively, given                  
  that there was the lawsuit about how the thing should work.                  
  And so, until that lawsuit had been resolved, it was hard to                 
  work with the industry on a collaborative basis.  And that                   
  lawsuit wasn't resolved until April 1992 as to the oil                       
  valuation issues.                                                            
  "One other point to make on spot prices.  I don't mean to                    
  suggest by the testimony here today that there is something                  
  wrong with spot prices in periods earlier than the 1980s.                    
  There was a spot market through the late 1970s.  In fact, in                 
  1979, ARCO and Union, two very significant West Coast                        
  refiners, collectively bought 70 million barrels of foreign                  
  crude oil on the spot market in calendar year 1979.  There                   
  has been a spot market since the 70s, with large volumes of                  
  crude oil traded in it.  What's happened, over the time, is                  
  that the electronic data services have gotten better at                      
  coalescing the information and tracking the information.                     
  And so now, everybody has the same sheet of music.  And that                 
  wasn't true in 1979, 1980, and it became true over the                       
  passage of time.  But conceptually, spot prices were no less                 
  market prices in 1979 than they were in 1985, than they are                  
  today.  They have always been a market price.  Whereas the                   
  posted price or a government selling price may or may not                    
  have been a market price.  It just depended where the market                 
  was relative to the posted price or the GSP price.  And so                   
  the notion that's common to both the pending tax regulations                 
  and the past royalty settlements, is use market values, use                  
  actual market prices as your basis.  It's a common sense                     
  notion.  If you were to go out and buy ANS oil today, in                     
  Long Beach Harbor, what would it cost you?  And that number                  
  tells you what that stuff is worth."                                         
  CHAIRMAN VEZEY:  "Thank you.  Representative Davies."                        
  REPRESENTATIVE DAVIES:  "Thank you, Mr. Chair.  To the point                 
  of the question of the weight calculation, subsection (c),                   
  it seems to me that if we were to change the word to `shall'                 
  that we would have to get rid of the word `different',                       
  because we may want to assign two or more the same weight,                   
  to those oils.  So I would suggest a language something like                 
  `shall determine a weighted average of the prices for the                    
  oil selected,' or something similar, and get rid of that                     
  word `different'.  But the question I wanted to ask earlier                  
  was, in this whole section where we're simplifying the                       
  evaluation, do we also have provisions in here that simplify                 
  the problem of the transportation costs?  The net back to                    
  the point where it's metered.  Is, generally, the point                      
  where it's metered, is that pump station #1 - is that where                  
  we take...?  And do we take care of the federal tax credit                   
  problems?  These other transportation issues?"                               
  MR. HOSIE:  "Mr. Chairman, no.  This legislation does not                    
  speak to the transportation element, that part of the net                    
  back puzzle.  It speaks only to the downstream destination                   
  value aspect of the valuation exercise.  The department has                  
  promulgated regulations that do address the transportation                   
  elements, and those are now being discussed with various                     
  industry groups, and particular producers and taxpayers.                     
  But this legislation does not speak to the transportation                    
  aspects.  In answer to the second question, the general                      
  point evaluation is the least automatic (indiscernible.)                     
  That's the point at where -- and there's been years of                       
  dispute over that as well.  But, generally speaking, that's                  
  where the royalty and the tax obligation attach, for general                 
  purposes.  But, as I say, that's been disputed before."                      
  CHAIRMAN VEZEY:  "Representative Green."                                     
  REPRESENTATIVE GREEN:  "Thank you, Mr. Chairman.  When we                    
  broke, we were talking on the spot vs. posted prices and I                   
  agree that if a person is going to go buy a cupful or a                      
  tankful on the market, it would be a spot price transaction.                 
  But isn't it also a fact that on volumes, that just as you                   
  are doing here, on an annual adjustment, when you're talking                 
  about large volumes, that you want to come to some sort of                   
  an agreement that doesn't fluctuate as a small quantity                      
  might?  And isn't it also a fact that spot prices because of                 
  their nature, dealing with small quantities on a quick -                     
  come in, buy, and get out - generally, if not always, are                    
  higher than posted prices?"                                                  
  MR. HOSIE:  "Mr. Chairman, the relationship between the two                  
  varies over time.  For example, there have been times when                   
  spot prices are significantly below posted prices.  To use a                 
  foreign crude example, spot prices for foreign crudes were                   
  very much higher than foreign posted prices, GSPs in 1979                    
  and 1980 and most of 1981, but then in October of 1981, the                  
  relationship flipped.  And suddenly the foreign posted                       
  prices were much higher than spot prices.  And that                          
  continued to be the relationship for some years.  And so the                 
  relationship does change, both for domestic crude and                        
  foreign crude.  Over the period 1980 to about 1984,                          
  generally speaking, spot prices for domestic oils have been                  
  slightly higher than posted prices.  The industry, in                        
  looking at that problem in years past, concluded that the                    
  bias - the downward bias on posted prices -reflected the                     
  impact of the federal windfall profits tax.  That was a 70                   
  percent tax effective on the value of oil, and as a                          
  consequence, integrated oil companies, that being companies                  
  that both produced and refined the oil, had a very dramatic                  
  incentive to keep their production oil prices a little                       
  lower.  Because if they could move a dollar of profit                        
  downstream to the refining operation or the transportation                   
  operation, they didn't pay the 70 percent windfall profits                   
  tax.  And so, in looking at that problem in years past, the                  
  industry itself in its documents, which we've now read, and                  
  the experts, concluded that the downward bias on posted                      
  prices relative to spot, was in large part a function of the                 
  windfall profits tax applying to crude oil production                        
  profits, and not refinery profits, and not transportation                    
  profits.  The windfall profits tax, in effect, became                        
  ineffective in about 1984, when crude oil prices dropped,                    
  and is no longer a factor, and in part, that's when the two                  
  spot prices and posted prices, came together."                               
  REPRESENTATIVE GREEN:  "If I might."                                         
  CHAIRMAN VEZEY:  "Please, continue."                                         
  REPRESENTATIVE GREEN:  "Thank you, Mr. Chairman.  Then, I am                 
  sorry that I am slow, but if that's the case, and if that's                  
  the fair way to evaluate what the true price of ANS is, on                   
  some sort of a market basket approach from spot crude, then                  
  why would it not be equivalent for the taxes as it is for                    
  royalty.  Because if there's a change, that if the spot                      
  price may be actually sometimes higher than the sales over a                 
  long period, such as is coming from the North Slope, that                    
  would behoove the state just as much if it's higher than if                  
  it's the actual price, because they're going to get it                       
  through the royalty.  There may not be that same incentive                   
  if we're doing it on a tax basis, and so would you please                    
  explain to me one more time why whatever is established for                  
  royalty, wouldn't also be established for tax?"                              
  Number 435                                                                   
  MR. HOSIE:  "Certainly, Mr. Chairman.  We're speaking                        
  prospectively, now?  Not for past periods?  For two reasons.                 
  One, there are three different royalty numbers, given that                   
  there are three slightly different royalty settlements with                  
  the big three producers.  And so, you have three different                   
  numbers, and that doesn't work for tax because there is a                    
  requirement of uniformity.  You have to come up with one                     
  number.  So it's going to be at little different than at                     
  least two of the royalty settlements by definition.  Two,                    
  through the process of drafting the regulations and                          
  discussing the regulations with the industry, the agency may                 
  decide to use a slightly different basket.  And I think the                  
  issue would be, isn't that within its just discretion?  Or                   
  should it be ordered to be in lockstep with the royalty                      
  market basket?  So, I think there is a desire to preserve                    
  some flexibility to work with the industry to come up with a                 
  basket that is suitable as viewed by both parties.  And in                   
  fact, the regulations as promulgated as they've been                         
  discussed, would involve six crudes, if memory serves, for                   
  their tax basket, on the West Coast, not just five.  And                     
  they weight a little differently.  It's just a way of                        
  tweaking the problem to get a result that is as close to ANS                 
  spot prices as you can, and work through the process with                    
  the industry so that everybody is comfortable that the thing                 
  is going to work the way it's anticipated to work.  But they                 
  will be different than royalty, in part, because the royalty                 
  numbers themselves are different.  There are three different                 
  Number 450                                                                   
  CHAIRMAN VEZEY:  "Mr. Hosie, I don't mean to interrupt, but,                 
  I mean, we all agree that, I mean, the spot prices is going                  
  to be the most volatile of the markets that we follow.  It                   
  doesn't have to be, but that would generally be - or are we                  
  not thinking along those lines?"                                             
  MR. BOTELHO:  "Perhaps, Mr. Chairman, you would substitute                   
  the word most `representative', not necessarily the most                     
  `volatile'; it will reflect the value in the market.  Again,                 
  a principle which industry and the state both agree should                   
  be the determinative basis, at least for royalty purposes.                   
  So there's nothing radical in the sense of what we're                        
  talking about here, is exactly the basis we have settled on                  
  the royalty side as a measure -- Let me see a little more                    
  about it.  We agree on a base dollar number, a base royalty                  
  number with each of the taxpayers, what the market basket is                 
  tracking is not to tell you directly what ANS is to be                       
  reported for royalty purposes.  What we're going to measure                  
  with the basket is the degree of change in the market.                       
  Taking that composite basket so that no one basket that goes                 
  askew is going to not be reflective generally of movement of                 
  oil in the marketplace over a period of time.  So the                        
  basket's purpose is, for indexing purposes, to track a                       
  separate dollar amount that we have agreed with each                         
  company, each producer, should be the base number.   And                     
  that, again, the - I can't remember the specific month that                  
  is our beginning month, but the basket isn't itself what                     
  tells us they will pay.  It is the movement of the basket                    
  that serves as the index for the base dollar value.  And my                  
  recollection with the ARCO settlement, which was the first                   
  one, was sometime in early 1990, I believe March, 1990, a                    
  fixed dollar per barrel which set the market basket, then                    
  tracks the movement, the fluctuation in the market,                          
  something that both in ARCO's case they and we could simply                  
  look daily to see what the average was, and know that day                    
  what was to be owed; simply taking that number times the                     
  number of barrels produced.  And that is essentially how it                  
  works with Exxon and BP settlements and, as I mentioned                      
  before, all the other producers are able to elect one of                     
  those three.  And that's precisely how the basket is                         
  intended to work on the tax side.  It'll be a slightly                       
  different basket.                                                            
  "Now, having said that, I think that Rep. Davies may have                    
  raised the issue, or you, Rep. Green, and that is, there are                 
  three components to calculating - getting back to this value                 
  at the well head, which is in tax statute terms, value at                    
  the point of production - if you're net backing.  You first                  
  of all have to solve the problem, what was the received at                   
  the destination point.  So that's one component, the distant                 
  problem.  The intermediate problem is, how much did it cost                  
  to transport that oil from Valdez, in essence?  And under                    
  current tax statutes, producers are entitled to deduct                       
  reasonable costs of transportation.  And the third element,                  
  netting back, are the pipeline tariffs costs.  Now, we have                  
  settled the problem with the pipeline tariff major dispute,                  
  as you may recall, but that resulted in a settlement in                      
  1985.  So that component is fixed.  There are seven                          
  different pipelines running through, maybe only six now, but                 
  there were seven pipelines running through taps.  I mean,                    
  they weren't separate holes, but in fact seven different                     
  tariffs, and today, there are at least six, as I recall.                     
  Each of them report a tariff and each producer elects,                       
  negotiates a contract with the pipeline carrier, based on                    
  that tariff. That problem is taken care of. The second                       
  problem, the far end problem, is what this prevailing value                  
  regulation attempts to do, and that is, identify a price on                  
  that end.  What we have not yet completely grappled with,                    
  and the Department of Revenue is currently working on, is                    
  how do we get at the reasonable cost of transportation?  The                 
  industry, as a whole, has widely varying approaches to                       
  transportation.  And, on a per barrel basis, I think the                     
  dollar amount between the lowest and highest could be as                     
  much as two and a half, three dollars a barrel.  What the                    
  department is trying to grapple with is how you deal with,                   
  if you obviously simply average those differences, there's                   
  going to one company that's going to end up having to pay                    
  still a lot more than another, and another that's going to                   
  get a windfall, from the average.  And so it has been a                      
  difficult question to wrestle with.  It's one that we're                     
  trying to do in order to satisfy this complete                               
  methodological approach to taxation, so that we can avoid                    
  the need to audit company specific in the kind of detail                     
  we've had to do before.  But we haven't cracked the nut yet.                 
  We're working on it.  And I would say again that the royalty                 
  methodology approaches, does incorporate transportation, but                 
  it also varies from producer to producer.  And is another                    
  reason why it would be difficult simply to say, just use the                 
  royalty methodology.  There are three different                              
  methodologies.  They treat this question differently.  And                   
  in the interest of uniformity, the Department of Revenue has                 
  to approach it in a way that would equally, not necessarily                  
  equally impact taxpayers, but treat them equally in the tax                  
  CHAIRMAN VEZEY:  "That enough, Representative Green.  More?"                 
  REPRESENTATIVE GREEN:  "No, I'll...Thank you."                               
  CHAIRMAN VEZEY:  "Representative Nordlund."                                  
  Number 541                                                                   
  REPRESENTATIVE NORDLUND:  "Thank you, Mr. Chairman.  Just to                 
  clarify for the record.  It's my understanding that the                      
  industry is in support of Section 3 of the bill?"                            
  MR. BOTELHO:  "Mr. Chairman,  I think that's probably a                      
  question most appropriately directed to industry.  My                        
  understanding is this is something that industry would like                  
  to see, and I think, again, certainly this administration                    
  would like to see as a way of working towards much more                      
  harmonious environment between industry and the state."                      
  CHAIRMAN VEZEY:  "Representative Davidson."                                  
  Number 548                                                                   
  REPRESENTATIVE DAVIDSON:  "Thank you, Mr. Chairman.  Mr.                     
  Hosie, Attorney General, if in fact we've only cracked the                   
  transportation nut, and we're not really sure what all - I                   
  guess we know what all is in there, but we don't know how to                 
  establish the true value of oil then, because we don't have                  
  a handle on this, as far as Section 3 is concerned.  Would                   
  you please, first of all, tell us to what extent past                        
  assessment appeals have dealt with transportation                            
  disagreements between the state and industry; why we should,                 
  at this point, pass this Section 3 if, in fact, that large                   
  transportation nut is only cracked and not fully established                 
  as far as how it affects the value of oil?  And secondly, up                 
  to this point, what about the transport of natural gas                       
  liquids?  Have we gotten anything for the transport of that                  
  through the pipeline at this point?  If it's all part of the                 
  milkshake as we heard before that comes out and goes down                    
  through the transportation process including in the tankers                  
  and goes downstream where it's beyond Alaska's reach to                      
  extract value, then why are we in a hurry to do this if in                   
  fact we're absolutely putting a cap on when we can go back                   
  and extract the value that was due the state treasury?"                      
  Number 572                                                                   
  MR. HOSIE:  "Mr. Chairman, to answer the first of those                      
  questions first, looking at the past disputes, the various                   
  assessments and amendments to those assessments, there are                   
  transportation dollars involved.  Those transportation                       
  component ranges, I would say, from somewhere between ten to                 
  30 percent.  It's not an insignificant portion, it's a                       
  fairly significant portion, but it's less important than the                 
  basic valuation issues.  The principal dispute turns                         
  typically on how one calculates a return on investment, on                   
  ROI, for the vessels employed in the trade, in calculating                   
  the cost of the tanker services to move the crude from                       
  Valdez to the Lower `48 destinations.  So there are                          
  transportation disputes with significant dollars turning on                  
  the outcome of those decisions.  Second, as the attorney                     
  general mentioned, we have yet to crack the nut of how we                    
  come up with a uniform method for assessing these                            
  transportation charges.  But, at this point, the division                    
  understands precisely what it is that various producers have                 
  done.  They know which vessels are used, what it costs to                    
  operate the vessels, what it costs to bunker the vessels,                    
  where they go, what the trans-shipment charges are, what the                 
  docking charges are; that information is available and the                   
  division, as an institution, understands how the puzzle fits                 
  together now.  That understanding did not come easily.  And                  
  it did not come quickly, but it's the benefit of many, many                  
  years of work.  But it now is something that the division                    
  understands.  And as a consequence, can approach the                         
  transportation issue more quickly and more efficiently.  We                  
  now know how the clock is put together.  And it's simply a                   
  matter of calibrating how quickly the hands move around the                  
  dial.  A third point:  There is an ongoing dispute about                     
  natural gas liquids, the NGLs, which are part of the frothy                  
  milkshake, as the hydrocarbons come bubbling up the ground                   
  in the North Slope.  To the extent that those liquids, those                 
  hydrocarbons are in the oil stream and go through the LACT                   
  meter, and downstream, they're counted in the overall                        
  volume, and taxes and royalties are assessed.  The dispute                   
  now is whether those hydrocarbons are properly characterized                 
  as gas or as oil.  And that distinction has significant tax                  
  consequences.  If it's gas, there's a different tax rate,                    
  there's a different ELF, and there are certain processing                    
  upstream deduction charges that become an issue.  And so the                 
  real issue there is, whether these particular hydrocarbons                   
  are properly characterized as being gaseous in nature or                     
  being oil.  And that's something that's now being litigated,                 
  and it's something that this bill actually speaks to, in                     
  Sections 6 and 7.  Is that responsive, Mr. Chairman?"                        
  Number 607                                                                   
  REPRESENTATIVE DAVIDSON:  "I think it is.  If I may have a                   
  follow-up there.  In an integrated organization, where we go                 
  from exploration all the way down to oil spill containment,                  
  within almost the same corporate structure, in this                          
  transportation mechanism or element or component, how does                   
  one evaluate the cost of an internal construction effort of                  
  a tanker calculated into what the state loses as well as                     
  what monies are borrowed to construct that tanker?  Do you                   
  see what I'm trying -- the financial servicing of a vessel,                  
  does that also go in?  In other words, is the state losing a                 
  dollar on a dollar on a dollar because of all this                           
  compounded and compacted cost to industry that is easily                     
  transferred internally within an integrated corporation?"                    
  MR. HOSIE:  "Mr. Chairman, I think there are two questions                   
  there, the first of which is, how do you go about                            
  determining the actual costs?  How do you determine the                      
  actual deduction?  After all, it's a vertically integrated                   
  company, Exxon builds and owns and operates its own boats,                   
  and Exxon can control the financing of those vessels and it                  
  obviously controls the operation of those vessels.  So how                   
  do you crack that nut, and figure out what an appropriate                    
  deduction charge is?  Well, there are two general                            
  approaches.  One is to use actual costs, and the other is to                 
  use some sort of industry average.  Thus far, the tax law                    
  has said you must use reasonable costs, and then the law                     
  goes on to define reasonable costs for the most part as                      
  being actual costs.  So the exercise to date has largely                     
  involved looking at what it actually costs to build a boat.                  
  And looking at what it actually costs to operate the boat.                   
  And then from those actual costs numbers calculating your                    
  "The second question turned on how do you handle the                         
  financing charges?  The cost of money charges that are                       
  inherent in any kind of capital intense business and                         
  products, such as building and operating a tanker?  And some                 
  of the tankers we now see moving in and out of Valdez were                   
  built in the 1980s, and they cost about $80-$100 million                     
  (indiscernible.)  To some extent, the money to construct                     
  those vessels was borrowed, there were interest charges, and                 
  those charges are part of the cost base in the vessel, so                    
  they do increase somewhat the deduction allowable.  So, for                  
  instance, if Exxon sinks $80 million of its capital in                       
  building a vessel, that's a cost that's incurred.  It's a                    
  cost of time, value and money and so it deserves to be                       
  compensated for that cost, so that's the return on                           
  investment component of the  marine calculation process.  It                 
  is a very complicated process.  And again, that's why these                  
  audits have been so complicated and taken so long.  And                      
  that's of course we have the amendment problem that we                       
  REPRESENTATIVE DAVIDSON:  "So, the state, your shop, is                      
  comfortable with the fact that with Section 3, and then                      
  going back and relating the loss of the opportunity to go                    
  back and assess, we even have the expertise to deal with                     
  this in a way that does not shortchange the public                           
  MR. BOTELHO:  "Mr. Chairman, the answer is yes."                             
  REPRESENTATIVE DAVIDSON:  "Thank you, Mr. Chairman."                         
  CHAIRMAN VEZEY:  "Thank you.  Representative Porter."                        
  REPRESENTATIVE PORTER:  "Always looking for simple answers.                  
  Is it a reasonable assumption then that the goal of this                     
  section, setting transportation costs aside, is that all                     
  taxpayers will have the same value?"                                         
  MR. BOTELHO:  "Same day production, I think that is the most                 
  likely consequence (indiscernible)."                                         
  CHAIRMAN VEZEY:  "Did that (indiscernible) your question?"                   
  REPRESENTATIVE PORTER:  "Sure did."                                          
  CHAIRMAN VEZEY:  "Representative Davies."                                    
  REPRESENTATIVE DAVIES:  "Following up on that question, you                  
  said on the same day of production..."                                       
  Number 670                                                                   
  MR. BOTELHO:  "Yes, and I should also add, it will also be                   
  affected by, there are other modifiers that should reflect                   
  the market in which the oil is placed.  Obviously barrels                    
  going to the West Coast, quite apart from transportation,                    
  will have a different value than barrels on the Gulf market,                 
  as an example."                                                              
  Number 671                                                                   
  REPRESENTATIVE DAVIES:  "All right.  That was the question I                 
  was going to get to.  You may have barrels produced on the                   
  same date that will go to different markets, and hence,                      
  they'll be sold on different dates as well as in different                   
  markets.  And so, do we track all of that information?  Each                 
  barrel as to which market goes to which date it's actually                   
  sold on?"                                                                    
  MR. BOTELHO:  "We do."                                                       
  REPRESENTATIVE DAVIES:  "Which boat it went on, and all                      
  MR. BOTELHO:  "Yes, we do.  It's determined barrel by                        
  barrel, day by day, drop by drop."                                           
  REPRESENTATIVE DAVIES:  "If I might follow up on this, then,                 
  it would seem to me then it does make sense if we know each                  
  barrel by barrel, the actual date on which it's sold, that                   
  it makes sense to value that on the spot market.  That is,                   
  the market that most closely reflects the value of that oil                  
  on the date that it was actually sold."                                      
  MR. BOTELHO:  "Mr. Chairman, that is correct. And in fact                    
  that is the experience or the experience of putting together                 
  the Amerada Hess case where the parties really had to come                   
  up with common nomenclature, common tracking elements, that                  
  is, the tankers, the destination location, being able to                     
  account for litering and other interim transportation costs.                 
  By contract, I think the experience from the royalty                         
  litigation has created a database that has become common                     
  between the industry and the state that allows for the kind                  
  tracking we're talking about, easily.  And again, one that                   
  also makes it quite easy to use this methodological approach                 
  to setting a value over which there will be no dispute."                     
  TAPE 94-61, SIDE B                                                           
  Number 000                                                                   
  REPRESENTATIVE GREEN:  "...it will be given for a royalty                    
  position and also there is a change now, you say, that that                  
  wouldn't affect what the value would be prior to any other                   
  ramifications of the company.  But this barrel came from                     
  company A and went to a location and a value was assigned to                 
  it.  Why wouldn't it be the same for the tax or the                          
  Number 013                                                                   
  MR. HOSIE:  "It will be very close.  The only difference                     
  will be, if the tax market basket differs either in                          
  composition of crude oils or in weighting from the pre-                      
  existing negotiated royalty market baskets.  But across                      
  taxpayers, the same barrel at the same time in the same                      
  place will have the same value, so that similarly situated                   
  taxpayers will be treated similarly."                                        
  Number 024                                                                   
  REPRESENTATIVE GREEN:  "Okay, so, for a taxpayer, for that                   
  barrel, it would be the same."                                               
  MR. BOTELHO:  "In the same market?"                                          
  REPRESENTATIVE GREEN:  "Yes.  It's the same barrel that gets                 
  MR. BOTELHO:  "I'm sorry.  Mr. Chairman, just a                              
  clarification.  You want to make sure that the same company                  
  delivering one barrel to one destination is going to pay                     
  exactly the same thing in taxes as well."                                    
  REPRESENTATIVE GREEN:  "Well, at least it would be subject                   
  to the same value on that barrel subject to tax to that                      
  company as was given for the amount for royalty in payment                   
  rather than in kind."                                                        
  MR. HOSIE:  "Mr. Chairman, the short answer is, no, not                      
  precisely.  Because the royalty market basket, there is not                  
  one royalty market basket.  There are three, and they differ                 
  between and amongst themselves.  And the tax basket                          
  ultimately adopted may use different bench mark crude oils,                  
  and may assign different weights to the crude oil, so there                  
  may be a difference, maybe it's cents, maybe it's a nickel,                  
  between the royalty destination value on the same day at the                 
  same time, and the tax destination value for the same barrel                 
  at the same place and the same time. So there may be a small                 
  difference in downstream values that's a product of slightly                 
  different weighting, on the tax side, or using a slightly                    
  different mix of crude oils in the market basket.  So that                   
  we can't promise identical values downstream.  But they're                   
  going to be very close."                                                     
  REPRESENTATIVE GREEN:  "Then the question still remains.  If                 
  we're talking about how long it takes to come up with a                      
  value so we need to extend the statute five years because                    
  it's a complex situation, are we making it more complex by                   
  doing this?  Why isn't there a value that can be traced, as                  
  we've said, and that value used.  Now, granted, the tax                      
  situation -but it's the same barrel, from the same company,                  
  and how that tracks his transportation costs back to the                     
  pipeline is going to be different - all those aspects are                    
  going to be different.  I understand that.  I just don't                     
  understand why there would be a difference on day one for                    
  barrel one from company A that it would be different for tax                 
  or for royalty."                                                             
  MR. BOTELHO:  "Again, Mr. Chairman, let me try a cut on it.                  
  If we're talking about oil delivered to Long Beach -- Right                  
  now, if Exxon, ARCO and BP were all placing oil under their                  
  respective royalty methodologies at Long Beach, they'd come                  
  up with different values, because each one of them has a                     
  separate market basket, slightly different. And tax                          
  methodology will have a basket.  And that basket may or may                  
  not reflect a royalty basket for any one of them.  The                       
  answer will be whether that ARCO, Exxon and BP in the Long                   
  Beach market delivering oil in the same day will have the                    
  same, those same barrels, delivered that day, for all three                  
  taxpayers, to have the same destination.  For tax, under a                   
  common methodology, applicable equally to all three.  I may                  
  not be getting through."                                                     
  CHAIRMAN VEZEY:  "Did you conclude your question,                            
  Representative Green?"                                                       
  REPRESENTATIVE GREEN:  "Yes."                                                
  CHAIRMAN VEZEY:  "Representative Davidson."                                  
  Number 101                                                                   
  REPRESENTATIVE DAVIDSON:  "Thank you, Mr. Chairman.  I                       
  still, there's something that I'm not getting here that I                    
  feel is important.  It relates to natural gas liquids and                    
  the cap on the time, so I want to ask the question like                      
  this:  Are there NGL volumes that have gone through the                      
  pipeline, for which the state has not received                               
  consideration?  As far as, being part of the transportation                  
  cost?  In other words, were those natural gas liquids                        
  transported as part of the volume and not computed - I mean,                 
  did they get a free ride?  Up to this point, do you have any                 
  idea of the amount of that natural gas liquid that has gone                  
  through for which the state has not received consideration?"                 
  MR. HOSIE:  "Mr. Chairman, it is my understanding that all                   
  volumes that go through the LACT meter and go through taps                   
  are counted.  So taxes and royalties are paid on those                       
  volumes as oil.  And so, the state has received the tax                      
  payment and a royalty payment for that volume of NGLs that's                 
  an indistinguishable part of the overall crude stream.  So,                  
  there have been no barrels free-riding south without the                     
  state getting its share of royalties and taxes.  There is a                  
  dispute, however, as to whether those NGLs, when they're                     
  part of the overall milkshake stream, are viewed as gas or                   
  as oil, and because that initial characterization changes                    
  the tax rate and other things, it really matters which they                  
  are.  And so the characterization dispute - is it gas, or is                 
  it oil? is ongoing.  But no barrels have had a free ride                     
  thus far. Some may pay an additional tariff in years to                      
  come, but they've paid something thus far."                                  
  REPRESENTATIVE DAVIDSON:  "Thank you."                                       
  CHAIRMAN VEZEY:  "Representative John Davies."                               
  Number 144                                                                   
  REPRESENTATIVE DAVIES:  "It seems to me that in order to                     
  answer the questions being asked, that we need to know more                  
  explicitly why it is that - to go back to your Long Beach                    
  case - why it is that the royalty value is different for the                 
  three different companies for a barrel produced on the same                  
  day and transported and sold on the same day at Long Beach.                  
  Why are there three different valuations for the oil at Long                 
  Beach on the royalty side?"                                                  
  MR. HOSIE:  "Mr. Chairman, because each was negotiated                       
  separately in the context of litigation with each of the                     
  three (indiscernible) producers. And so, there was a                         
  separate negotiation with Exxon, a separate negotiation for                  
  BP and a separate negotiation for ARCO.  And because they                    
  were separate negotiations, and because it was in the                        
  context of litigation, there are differences between the                     
  various approaches.  The similarities far outweigh the                       
  differences, but there are differences, and it was purely a                  
  function of the fact that they were negotiated resolutions                   
  of an ongoing piece of litigation."                                          
  Number 172                                                                   
  MR. BOTELHO:  "Mr. Chairman, to expand, the market baskets                   
  in each case are different.  There may be different                          
  weightings.  They result in, obviously, in each bilateral                    
  negotiation, you have the input of the company.  We're                       
  trying to reach agreement about how much weight should be                    
  given to which crudes, and again, while there are a lot of,                  
  again, overlaps about what should be in the basket, there                    
  are not, they don't entirely overlap, and there certainly                    
  were differences of views with each of the companies about                   
  how much weight should be given each.  Consequently, and of                  
  necessity, the outcomes would be different at each place.                    
  Having said that, my guess is, and I think Mr. Hosie is                      
  correct, you will find, while there will be a difference                     
  individually between using the hypothetical Long Beach                       
  situation between the tax value and the royalty value with                   
  any given company, the difference is going to be minuscule."                 
  Number 200                                                                   
  REPRESENTATIVE DAVIES:  "Mr. Chair, one last follow-up on                    
  that.  Would it be fair to say that the reason why companies                 
  would be willing to negotiate a slightly different number,                   
  could be that the companies are differently situated at Long                 
  Beach, with respect to their transportation issues, their                    
  litering issues, their production issues, their internal                     
  integration issues, all those things would be different for                  
  the different companies."                                                    
  Number 202                                                                   
  MR. BOTELHO:  "Mr. Chairman, that is certainly correct.                      
  Obviously, you also have the differences in timing.  Each of                 
  the companies is very sophisticated in its own evaluation of                 
  what is taking place in the marketplace, and they do                         
  business differently, and as a consequence also their                        
  corporate view of what is happening in the market would lead                 
  them to negotiate differently what the basket should look                    
  like, and what the base number should be, how one deals with                 
  transportation, and the like.  I think Representative Davies                 
  is correct when he indicates that it really has to do with                   
  each company being uniquely situated?"                                       
  CHAIRMAN VEZEY:  "Mr. Botelho, if I may, are we treating the                 
  oil company like a utility, in that we're not pricing our                    
  oil at the, say, at the spigot, at Valdez terminal?  We're                   
  pricing it at the final destination?  We're treating how                     
  they get it from A to B, treating it as utility?"                            
  Number 218                                                                   
  MR. BOTELHO:  "Mr. Chairman, that analogy would be partially                 
  correct.  Certainly with regard to TAPS pipeline tariffs,                    
  because those are set just like a utility.  There is a                       
  Federal Energy Regulatory Commission which determines what                   
  rates may be charged; they must be reasonable rates; they                    
  also provide for a return.  And so, the analogy is quite                     
  correct (indiscernible.)  There are actually rate hearings.                  
  The tariffs are set each year.  They are subject to                          
  challenge by persons using the individual carriers, or who                   
  have a substantial interest in it, and in fact there are                     
  ongoing proceedings even today, regarding certain issues                     
  related to the TAPS pipelines.  The remaining features I                     
  think would be a little more difficult to directly                           
  analogize, to rate making proceedings, because, I think it                   
  would be fair to say, that most utility commissions are not                  
  looking to the markets to determine a value, as it were, and                 
  that it really is what the tax scheme requires us to do.                     
  We're trying to find a proxy for value while we're in the                    
  market, and one that would apply across the board.  Utility                  
  rates also are generally directed at individual companies                    
  and we are looking at something that would be industry                       
  (indiscernible.)  But I think the general concept obviously,                 
  is trying to categorize, trying to eliminate the need for                    
  in-depth, intensive, individual company by company review of                 
  every transaction in favor of something that is a close                      
  proxy to these basic values is certainly (indiscernible.)                    
  Mr. Hosie may want to expand on that - and, Mr. Chairman,                    
  you may not want any expansion on that."                                     
  CHAIRMAN VEZEY:  "Representative Hudson."                                    
  Number 260                                                                   
  REPRESENTATIVE HUDSON:  "Thank you, Mr. Chairman.  It                        
  strikes me that this whole question of transportation costs,                 
  Bruce, is one of the major things that could fail to reach                   
  concurrence as to the price and the taxes that are owed.                     
  I'm beginning to suspect that that may be the major thing                    
  that elongates this whole process, which makes it difficult                  
  to settle it.  And I'm assuming, at any rate, that the                       
  production costs are fairly easy to assess and come to                       
  conclusion; the TAPS costs are fairly easy to understand,                    
  you said that's almost regulated; and so then, it comes down                 
  to the question of, you know, what the costs or values of,                   
  say, tankers and rehabs and crewing and all of those types                   
  of things -- Are there any other aspects on the downside of                  
  this thing?  Why wouldn't we, for example, have taxed this                   
  back at Valdez?  That is, stop everything at Valdez, and not                 
  take into consideration any transportation costs; just                       
  simply said, we'll assess our taxes at the Valdez point of                   
  Number 279                                                                   
  MR. BOTELHO:  "Mr. Chairman, I think that's a very good                      
  question.  You need one element.  You need to know market.                   
  You need to know what the value is in the marketplace.  And                  
  the marketplace, by and large, is not at Valdez.  So you                     
  need, either, by proxy, that is, you come up with some way                   
  to account for transportation on a generalized basis, an                     
  average, weighted average, or whatever, to each market, as                   
  part of this net back, or you can take the historic approach                 
  of the Department of Revenue, and that is to go company by                   
  company, and actually determine what the reasonable cost of                  
  transportation is with respect to that company, taking into                  
  account the return on investments, the capital costs                         
  involved with the shipping itself, the crew charges, the                     
  bunker charges, and the like.  The reason we haven't bitten                  
  that off is that, in this process, we're not far enough                      
  along in solving that problem to present it to you as the                    
  legislature to solve yourselves.  I think our view is that                   
  is certainly where our focus of attention will go once we                    
  have gotten, having solved the pipeline portion of it, and                   
  now trying to deal with the end destination portion of it,                   
  obviously, our focus of attention will be on what we can do                  
  to either standardize transportation costs or, at the very                   
  least, figure out how we can streamline the taxpayer by                      
  taxpayer approach to transportation.  All that is something                  
  we can see happening easily within a five-year period."                      
  Number 309                                                                   
  REPRESENTATIVE HUDSON:  "Do you feel you have the resources                  
  -if I might, Mr. Chairman - do you feel you have the                         
  resources to adequately assess the state's position on the                   
  downstream side?  Particularly the transportation costs of                   
  the vessels, and all that type of stuff?"                                    
  MR. BOTELHO:  "Mr. Chairman, we do.  And let me make clear,                  
  we do not rely exclusively on in-house expertise for a large                 
  part of the oil and gas litigation budget has been dedicated                 
  to finding some of the leading experts in the country on                     
  this issue to assist us in evaluating.  And they have been                   
  key personnel also in trying to devise ways to streamline                    
  the system overall.  They've not simply been there to                        
  further aid us in our litigation, but also to try and see                    
  how we can prospectively solve problems."                                    
  CHAIRMAN VEZEY:  "Please proceed."                                           
  MR. HOSIE:  "Thank you, Mr. Chairman.  Turning to Section 4                  
  on page 3, we find the amendments actually appearing on page                 
  4.  These amendments speak to an issue that we haven't                       
  really touched on today yet, which is, what is the correct                   
  processing cost for a barrel of gas liquids?  There are gas                  
  processing facilities on the North Slope.  They were very                    
  expensive to build.  And the costs of those facilities is to                 
  be spread over these barrels of gas liquids produced.  And                   
  the question is, how much should the proper deduction for                    
  each barrel be as assessed against the state?  That's being                  
  litigated now, on the royalty side.  The state takes the                     
  position that the proper deduction is something in the                       
  vicinity of 56 to 60 cents a barrel.  The industry argues                    
  for a much higher deduction, ranging from three to perhaps                   
  as high as four dollars and fifty cents a barrel.  This                      
  simply works a compromise.  At a dollar per barrel plant                     
  liquid produced, as the proper gas processing charge.  It is                 
  a compromise.  It's a little higher than the state would                     
  like, and significantly lower than the industry would like."                 
  CHAIRMAN VEZEY:  "Mr. Hosie, Mr. Botelho, I think it's                       
  probably a good time that we break for lunch at this time                    
  and we'll start up on this subject when we get back.  It's                   
  about five minutes until twelve; why don't we all be back                    
  here by 1:30."                                                               
  The House Standing Committee was at ease until 1:32 p.m. of                  
  that day and returned to order at that time.                                 
  CHAIRMAN VEZEY:  "Mr. Hosie, you had just got through going                  
  briefly through Section 4.  I think you finished your                        
  remarks.  Are you ready for questions or would you like to                   
  make some more remarks?"                                                     
  Number 373                                                                   
  MR. HOSIE: "I had finished with the remarks, Mr. Chairman,                   
  so we're ready for questions on Section 4."                                  
  Number 375                                                                   
  CHAIRMAN VEZEY:  "Are there questions from the committee on                  
  Section 4?  My question is, this seems a little odd,                         
  compared to some of the other things that we're doing, in                    
  calculating values.  On the transportation aspect, and the                   
  pipeline, we have a regular tariff.  On the shipping, from                   
  the terminal of the pipeline, to the destination point, we                   
  are calculating something similar to a tariff.  We're doing                  
  it on a cost basis, and we argue over auditing what costs                    
  are legitimate.  Here we're just setting a flat rate per                     
  barrel.  Now, if we could do that at the well head, or at                    
  Pump Station 1, we could eliminate an awful lot of auditing                  
  requirements.  Why are we taking this approach here all of a                 
  sudden, as opposed to our cost evaluations that we do in                     
  virtually all the other aspects that you've talked to us                     
  Number 389                                                                   
  MR. BOTELHO:  "Mr. Chairman, the provision here is                           
  reflective of specific industry dialogue as a consequence of                 
  this bill going through the public process in the                            
  legislature.  And, in particular, in the last three weeks,                   
  industry representatives, recognizing that the governor was                  
  intent on having a bill be acted upon by both the House and                  
  the Senate, seeing the bill as a vehicle to resolve other                    
  outstanding issues that have been in contention, we were not                 
  adverse to considering those kinds of issues because if we                   
  could deal with them now it would avoid us having to                         
  litigate over it or having to invest substantial auditing                    
  time.  And as a consequence this particular provision was                    
  one presented to us which we reviewed and we're satisfied                    
  made the right tax choice.  I would also want to say, I                      
  think, I need to be guarded in what I say because obviously                  
  this is an issue that arises both in the royalty side and                    
  the tax side, and the royalty one is in litigation, and                      
  obviously remarks made here can be used as evidence in the                   
  other proceeding.  Hence, my reticence about being overly                    
  direct with you.  But our view is that the language                          
  presented here, and, specifically, the dollar charge, has to                 
  be read in tandem with the provisions dealing with the                       
  condensate distillate and gas processing plant definitions                   
  (indiscernible) sections which have the consequence of                       
  treating for tax purposes these gas liquids as gas rather                    
  than oil.  As I say, the issue arises on the royalty side as                 
  well.  We're litigating specifically over that issue.  It's                  
  quite clear that if you enact this bill, it could have some                  
  bearing on it, but I would like not to make much more in the                 
  way of specific remarks, at least in open session, because                   
  of the potential consequences to our litigation posture on                   
  the royalty side."                                                           
  CHAIRMAN VEZEY:  "I'm not quite sure if that answered my                     
  question, because, I guess more simply put, why do we try to                 
  set a price for work being formed in this instance, when in                  
  every other instance that I'm aware of, we go through and                    
  evaluate costs, and argue over what costs are legitimate?"                   
  Number 432                                                                   
  MR. HOSIE:  "Mr. Chairman, I think the answer is that this                   
  gas processing cost relates to a fixed number.  It's a fixed                 
  investment.  (Indiscernible) cost, what it costs to                          
  construct and that number is now known.  The question is,                    
  how should that cost be spread over the barrels of liquid                    
  produced?  And so, we have a known number, and so the                        
  question becomes, how much of that cost should be borne by                   
  the state?  And so it's not a situation where the numbers                    
  are fluctuating as prices in markets (indiscernible), or as                  
  tanker transportation charges will fluctuate as bunker                       
  prices go up and down.  And so this one narrow element seems                 
  suitable for this kind of fixed number approach."                            
  Number 444                                                                   
  CHAIRMAN VEZEY:  "Well, that is an answer, but...you implied                 
  that this is a fixed expense, not subject to fluctuation to                  
  the producers, to the operator of the plants.  You implied                   
  that, say, tankerage is not a fixed expense.  And granted,                   
  it is not set in concrete, but - I'm still not sure that I                   
  understand why it is equitable just to arbitrarily set a                     
  ceiling.  Obviously, it can be lower.  It cannot exceed one                  
  dollar.  So there has to be a basis for determining if it's                  
  going to be lower."                                                          
  Number 454                                                                   
  MR. BOTELHO:  "If you're willing to recess into executive                    
  session, I will be glad to discuss this matter fully.  As I                  
  indicated to you, to do so in open session makes the                         
  information available to people we are litigating against                    
  right now on this very issue.  And to do so in open session                  
  would have the consequence of immediately adversely                          
  impacting the financial status of the state."                                
  Number 460                                                                   
  CHAIRMAN VEZEY:  "I'm not interested in any special                          
  knowledge you have, or any proprietary knowledge you have,                   
  it's just the philosophy of why are we trying in this                        
  particular instance -if we're going to do this here, why                     
  don't we try to negotiate a price for our oil at the spigot                  
  at Valdez, or at Pump Station 1, instead of backing out all                  
  the transportation costs?"                                                   
  Number 467                                                                   
  MR. HOSIE:  "Mr. Chairman, I think there were two reasons.                   
  One, the value at the point of production will depend in                     
  large part on where the barrel of oil goes.  The barrel of                   
  oil that goes to the Gulf Coast..."                                          
  Number 470                                                                   
  CHAIRMAN VEZEY interjected, "That's a very poor assumption                   
  to make.  I mean, a commodity is - you don't control the                     
  price of a commodity, except for transportation cost.  To                    
  say that a barrel of oil at Prudhoe Bay is worth less just                   
  because you can get another barrel of oil cheaper somewhere                  
  else, isn't really true.  The difference is, the market that                 
  is where it is consumed.  You have transportation, handling,                 
  and storage charges between the point of production and the                  
  point where it's consumed.  But if we can assign a value to                  
  processing gas liquids out of gas, so that the gas -- the                    
  gas is being used.  It's a useful product at Prudhoe Bay.                    
  The gas liquids have to be removed in order to use the gas.                  
  If we can do this here, why can't we just back out                           
  transportation costs and just say that Prudhoe Bay oil has                   
  got a value at the North Slope?"                                             
  MR. BOTELHO:  "Mr. Chairman, if the assumption is that this                  
  dollar reflects the value of these gas liquids, I think                      
  there's a misunderstanding..."                                               
  Number 487                                                                   
  CHAIRMAN VEZEY interjected, "I interpret it as reflecting                    
  the value of the cost of getting it out of the gas stream."                  
  Number 488                                                                   
  MR. BOTELHO:  "It is the processing cost, exactly, that is                   
  the ceiling (indiscernible.)  There is nothing that you                      
  could preclude or would preclude the legislature from                        
  deciding that it wanted to fix a value at Valdez.  You could                 
  decide that it is a fixed cents per barrel coming out of the                 
  pipeline at Valdez.  You could do so at the well head, as we                 
  would say.  At North Slope as well.  That is, those are                      
  permissible decisions which this body could choose to do.                    
  Right now, however, the tax structure you have, is one that                  
  looks at value at the point of production.  And in order to                  
  arrive at that, because there are no sales at that point of                  
  production, is to look at the downstream market, or markets,                 
  where those sales take place.  That automatically forces you                 
  into this net back scenario.  For the most part, there are                   
  few sales, at Valdez, that would be a proxy for this value                   
  at the point of production, where you could run through.                     
  The legislature could depart from that and simply say, any                   
  of a number of schemes, and decide that Valdez should be the                 
  point where you measure the value.  You could do so.  I                      
  think it would be difficult to do so, unless you were                        
  looking at something like a fixed cent per barrel approach,                  
  because you don't have transactions that are taking place                    
  there that would give you a sense of what the market is                      
  doing.  Obviously, another approach would be, simply to do a                 
  proxy on transportation to these various markets.  And                       
  that's obviously one of the things that is implicit, both in                 
  the royalty settlements and is something again that the                      
  Department of Revenue is looking at in trying to satisfy                     
  this transportation component of the net back.  So, if we've                 
  suggested that you couldn't do something at Valdez, you                      
  could.  There's no doubt about it.  You have the authority.                  
  It would require I think a significant departure from the                    
  underlying tax structure.  There's nothing wrong with that                   
  at all.  There are some advantages, frankly, for being able                  
  to have a set number.  But to the extent that you're trying                  
  to capture the concept of value, you need to do it in                        
  relation to the market."                                                     
  CHAIRMAN VEZEY:  "The concept that I am having trouble                       
  grasping is that when it comes to backing out transportation                 
  charges or trying to determine the value of the commodity                    
  that we're selling, or taxing, as the case might normally                    
  be, and we're talking taxes here, we are very flexible as to                 
  how we determine what those costs between final marketing                    
  and production are.  And we are not consistent from one                      
  taxpayer to the other.  According to your testimony, we have                 
  different things that we've agreed upon that make the                        
  (indiscernible) come out to a different answer.  But here                    
  we're saying that we're not going to allow anything above a                  
  ceiling of one dollar.  It doesn't say you're going to allow                 
  a dollar.  You may allow a number that's less based on, I                    
  would assume, a cost evaluation, a cost audit."                              
  MR. BOTELHO:  "That is correct."                                             
  CHAIRMAN VEZEY:  "Why are we putting a ceiling of one dollar                 
  -if their costs are two dollars, why don't we treat it like                  
  transportation instead of treating it like some sort of a                    
  production penalty, or something?"                                           
  Number 532                                                                   
  MR. BOTELHO:  "Mr. Chairman, I think there are several                       
  answers, and certainly Mr. Hosie may have his own views on                   
  this.  First of all, it has to be seen in the totality what                  
  the state has indicated in this package, is it's willingness                 
  to give up its litigation position that these gas liquids                    
  are oil; that, instead, they be treated as gas.  The                         
  consequence of it is, first, generally speaking, well,                       
  there's a different and lower tax rate for gas than there is                 
  oil.  The next concession is there's also a different                        
  economic limit factor, which is a further benefit.  The quid                 
  pro quo in making this determination is to put a ceiling,                    
  based again on our own evaluation of the fixed costs, of a                   
  dollar, so that we do not have to litigate with producers,                   
  processing costs.  Just as we have reached agreements,                       
  again, on the processing costs related to oil on Prudhoe                     
  Bay.  Not reflected in what we're doing in this bill, but in                 
  fact we have such agreements as to the maximum amount which                  
  a producer may deduct for the cleaning costs, making the oil                 
  marketable at Prudhoe Bay.  (Indiscernible) this is a                        
  parallel to that."                                                           
  Number 552                                                                   
  CHAIRMAN VEZEY:  "Your answer is, it's just an arbitrary                     
  MR. BOTELHO:  "My answer is, it is a compromise.  I do not                   
  believe it was arbitrary."                                                   
  CHAIRMAN VEZEY:  "Well, by arbitrary, I mean, that's where                   
  the number fell.  It was not..."                                             
  Number 555                                                                   
  MR. BOTELHO:  "The state would have preferred, Mr. Chairman,                 
  a lower number, I think you will find other members of                       
  industry that would like to see a higher number.  My                         
  suspicion is that you would hear testimony by people who                     
  would like to say that there should be no ceiling at all, it                 
  should reflect whatever a producer might suggest it should                   
  CHAIRMAN VEZEY:  "I think one more question, if I may.  We                   
  write statutes, we like to think that there won't be a                       
  change every three or four years, and maybe they'd stay in                   
  place for 10 or 20 years.  Some of our Title 43 statutes                     
  have been in place since 1949."                                              
  MR. BOTELHO:  "That's correct."                                              
  CHAIRMAN VEZEY:  "Don't you think we should address this so                  
  that that number will slide as inflation ebbs or wanes?"                     
  Number 565                                                                   
  MR. BOTELHO:  "Mr. Chairman, I think that is something that,                 
  again, falls within the realm of reasonableness.  I would                    
  note on the other hand, however, we are dealing here with a                  
  fixed cost and known cost.  You would index, normally, when                  
  you are expecting fluctuation.  But the question here is                     
  being able to - to put that processing cost in part to allow                 
  producers to recover their investment in the facility used                   
  to clean the liquids; that is, to clean the gas, for                         
  marketing.  Mr. Hosie, do you have anything to add?"                         
  MR. HOSIE:  "Nothing to that."                                               
  CHAIRMAN VEZEY:  "Thank you.  Representative Green."                         
  Number 573                                                                   
  REPRESENTATIVE GREEN:  "Thank you, Mr. Chairman.  You                        
  indicated earlier that you would be willing to go into                       
  Executive Session because if there were statements made                      
  publicly it might influence litigation.  What is your                        
  feeling toward the fact that this piece of legislation is                    
  being rushed through the process -- I dare say it's been                     
  very enlightening to the people that were here, but there                    
  are a lot of the legislature isn't here -- and that, by                      
  doing something as important as this on a fast track, is                     
  there any possibility that the outcome of this legislation                   
  would also have an impact on the court's decision?"                          
  Number 584                                                                   
  MR. BOTELHO:  "Mr. Chairman, to the extent that the                          
  committee is uncomfortable or the three committees sitting                   
  here in concert is uncomfortable with these additional                       
  provisions, obviously it's free to delete.  We have used the                 
  bill as a vehicle to resolve disputes that we have with the                  
  industry.  And to the extent that the committee is                           
  uncomfortable with its level of knowledge about                              
  (indiscernible) reflected in the bill, these issues clearly                  
  are important enough that if the committee believes it most                  
  desirable to hold off, then those provisions should be                       
  deleted.  I say this with some reservation, obviously,                       
  because I think the industry has worked with us in good                      
  faith to arrive at some improvements in our overall                          
  relationship.  Our goal here isn't simply to have good                       
  relations; obviously, we have a duty first and foremost to                   
  make sure that the taxes are collected as they become due.                   
  And that is our primary purpose here.  At the same time, to                  
  the extent that we can accomplish it in a way that minimizes                 
  conflict over issues arising out of our current scheme, we                   
  should do so.  That's what is reflected in the bill.  And                    
  what is reflected here.  Obviously, I think it would be                      
  helpful, and I trust that the committee will be hearing from                 
  certain members of industry, I think it would be important                   
  to hear from all members of industry.  Again, the benefits                   
  don't directly impact every company in each of these                         
  provisions, but I think collectively reflect our efforts to                  
  try and solve problems that have come to our attention as a                  
  result of the focus publicly on this bill, and their view                    
  that this bill could be a vehicle to resolve additional                      
  CHAIRMAN VEZEY:  "Thank you.  Further questions?  Further                    
  questions on Section 4?  Representative Sitton?  I'm sorry,                  
  I had Representative Davidson down, I'm sorry                                
  Representative.  Representative Davidson."                                   
  Number 611                                                                   
  REPRESENTATIVE DAVIDSON:   "Thank you, Mr. Chairman.  So,                    
  you made the statement that the state's position was that                    
  you would look to see that dollar figure lower.  So I'm                      
  assuming, then, that there was loss and not gain as far as                   
  the state was concerned.  So, I would like to ask, how is it                 
  that you have quantified what those losses are?  And how is                  
  it that the industry has quantified what those gains were?                   
  I'll start with that."                                                       
  Number 619                                                                   
  MR. BOTELHO:  "Mr. Chairman, one can look at the current tax                 
  rate, making the assumption that these liquids are oil, one                  
  knows the volume that has flowed since the injection of                      
  these liquids into the pipeline in the mid-80s, and thus can                 
  know with some degree of certainty what that dollar amount                   
  is.  And one can also calculate the, taking the similar                      
  volume, the identical volume, and taking it at the lower gas                 
  rate, and you have that differential, and you can factor                     
  again the dollar ceiling, or using the dollar amount, as the                 
  ceiling for deductions for processing costs, and know the                    
  gap.  And then the next issue you look at is your litigation                 
  risk, your position vs. that of the industry.  What are the                  
  practices in other states?  And what do the experts have to                  
  say about the treatment of those gas liquids?  And make a                    
  decision about whether this is a reasonable settlement or                    
  not, and whether and how much the state is giving up to                      
  reach that reasonable settlement.   We can also make the                     
  projection forward looking in terms of the anticipated                       
  amounts of gas liquid expected to be produced.  Those                        
  projections are modified regularly to reach similar                          
  Number 642                                                                   
  REPRESENTATIVE DAVIDSON:  "Mr. Chairman, if I may follow.  I                 
  know that the industry can do what they wish with their                      
  natural gas liquids, but does that mean that we've given up                  
  some opportunity for value-added product by allowing a                       
  situation here -- are all of these natural gas liquids then                  
  after processing, how they will be transported, if they are                  
  processed on the North Slope?"                                               
  Number 647                                                                   
  MR. HOSIE:  "Mr. Chairman, the natural gas liquids will be                   
  transported as an indistinguishable portion of the TAPS                      
  common stream.  And it's just a question of figuring out                     
  what portion of that common stream consists of these                         
  recovered natural gas liquids.  So they will pay freight as                  
  they go down the TAPS system, but they're just part of the                   
  overall oil stream."                                                         
  REPRESENTATIVE DAVIDSON:  "And the freight that they pay on                  
  that - would that make the tariff that the state pays on its                 
  royalty oil, does it make it a cheaper rate?  Or because                     
  there's a greater volume of things that benefit the other                    
  party, and not the state, or how does that work?"                            
  MR. HOSIE:  "Mr. Chairman, if your question is, does                         
  including the NGLs into the common stream going through TAPS                 
  have a tariff consequence, I believe the answer is, that                     
  largely it does not.  It may have a quality (indiscernible)                  
  consequence for the people who take the crude out of the                     
  pipeline at North Pole refinery near Fairbanks because of                    
  the overall gravity of the stream.  But in terms of the base                 
  (indiscernible) tariff, I don't think there is any                           
  significant consequence by including the NGLs in the common                  
  oil stream.  It does lighten the stream some, however.  The                  
  specific gravity goes up."                                                   
  REPRESENTATIVE DAVIDSON:  "Thank you."                                       
  CHAIRMAN VEZEY:  "Thank you.  Representative Sitton."                        
  REPRESENTATIVE SITTON:  "Thank you, Mr. Chairman.  I want to                 
  make sure, Mr. Chairman, that with all these questions I                     
  don't get lost.  Am I correct in understanding that the                      
  industry supports Section 4, right?"                                         
  MR. BOTELHO:  "Mr. Chairman, I think it is fair to say that                  
  for the most part the answer would be yes.  I think you will                 
  find that there will be companies who will disagree with the                 
  dollar ceiling.  I think you will have others who will say                   
  that it is an appropriate trade-off for the state's                          
  willingness to recognize these gas liquids as gas rather                     
  than oil."                                                                   
  CHAIRMAN VEZEY:  "Further questions on Section 4?                            
  Representative Bettye Davis."                                                
  Number 673                                                                   
  REPRESENTATIVE BETTYE DAVIS:  "Thank you, Mr. Chairman.  I                   
  would just like to follow through on the question that was                   
  asked by Mr. Sitton.  On Section 4, what we were doing with                  
  the gas liquids, our stand that we are taking is that this                   
  has already been done by other states already?  Are we the                   
  only one that treat it different?"                                           
  MR. BOTELHO:  "Mr. Chairman, my recollection is that Alaska                  
  has been unique in its position on this.  Is that correct?"                  
  MR. HOSIE:  "I think that's fair."                                           
  REPRESENTATIVE B. DAVIS:  "Thank you."                                       
  CHAIRMAN VEZEY:  "Further questions on Section 4?  Could we                  
  move on to Section 5?"                                                       
  MR. HOSIE:  "Certainly, Mr. Chairman.  With that, let's turn                 
  to Section 5, which begins, or at least the amended portion                  
  begins on page 5 of your draft legislation.  Subsection (d).                 
  This reflects a particular problem unique to the Cook Inlet                  
  region, where a certain company takes gas and uses it as a                   
  feedstock in the production of urea and ammonia, principally                 
  for fertilizers.  Section (d) provides that the gross value                  
  at the point of production for that ammonia and urea                         
  feedstock set equal to an amount negotiated in a pre-                        
  existing royalty settlement agreement, to which the state                    
  and that producer are a party.  Essentially, that's what it                  
  REPRESENTATIVE PHILLIPS:  "Mr. Chairman."                                    
  CHAIRMAN VEZEY:  "Representative Phillips."                                  
  Number 689                                                                   
  REPRESENTATIVE PHILLIPS:  "On page 5, line 29, the first                     
  word on the line, `Paragraph'.  It seems to me this would be                 
  better if that word were `Section.'"                                         
  Number 692                                                                   
  MR. BOTELHO:  "That's correct."                                              
  TAPE 94-62, SIDE A                                                           
  Number 000                                                                   
  CHAIRMAN VEZEY: "You mentioned in your testimony that we do                  
  have a viable market for Arctic Slope crude and we really                    
  don't need, I took your testimony to say we don't need to                    
  look at the world market crude (indiscernible) for the                       
  Arctic Slope crude."                                                         
  Number 029                                                                   
  UNIDENTIFIED SPEAKER:  "Basically that's correct.  You don't                 
  have to look elsewhere.  There was enough cash sales in the                  
  market place back in the early periods and there is enough                   
  knowledge of the spot market today to look at ANS.  We'll                    
  agree with the attorney general and with Mr. Hosie on one                    
  point, and this was the question about whether you could                     
  value it at the well head, and really, the value has to be                   
  worked back from the marketplace.  It has to be worked back                  
  from the Gulf Coast, East Coast, West Coast, or wherever the                 
  crude goes because that affects the value.  You can only                     
  place so many barrels of ANS on the West Coast before the                    
  market is full.  And the next viable market for ANS is                       
  probably the Gulf Coast, and the net back value from the                     
  Gulf Coast is going to be lower than the West Coast.  Now,                   
  I'll draw an analogy.  Mr. Hosie has talked about the spot                   
  market and tried to value, in the late 70s and early 80s, a                  
  hundred percent of the ANS crude had a very thin spot                        
  market.  The point is, the more crude that could have come                   
  onto that spot market would have driven the spot market                      
  price down because it was a thin market.  So you can't take                  
  and look and find that there was 20 million barrels that                     
  sold at $20 a barrel, and a thousand barrels that sold at                    
  $30, and then value all of the ANS crude based upon this                     
  other crude, the thousand barrels that sold at $30.  Because                 
  that was not the market price at that period.  It was the                    
  market price for maybe some guy who had a refinery who had a                 
  crude outage.  He needed crude that day and there was                        
  somebody with a ship that day in the vicinity.  What's he                    
  gonna do?  Shut down the refinery or buy that crude.  That's                 
  not an arms-length transaction, first of all, you got                        
  somebody with a lot of power; the guy with the crude.  And,                  
  somebody in a pretty bad position; a refinery with no crude.                 
  These things will help.  Am I willing to pay for them by                     
  Section 1?  Absolutely not.  Do I think they're the right                    
  thing to do anyway?  Absolutely yes.  But not in Section..."                 
  Number 068                                                                   
  CHAIRMAN VEZEY:  "You are confusing me there because I                       
  thought I heard you say that we don't need to look at                        
  foreign crude to evaluate Arctic North Slope crude."                         
  Number 069                                                                   
  SAME UNIDENTIFIED SPEAKER:  "You don't have to but if you go                 
  back, and I'll go back to the royalty settlements, and a                     
  statement was made by the attorney general that those who                    
  entered into in the past several years and they seemed to be                 
  working well, and what I hear from the folks on our side is                  
  that they are working well.  And what that basically does                    
  is, it's a formulary approach that puts different types of                   
  crudes in with different percentage of the total hundred                     
  percent allocated each of those, adds them up, and you come                  
  out with a value.  And it's a close approximation as to what                 
  is happening directly in the market with respect to ANS                      
  sales.  So, it's a substitute that seems to track well."                     
  Number 082                                                                   
  CHAIRMAN VEZEY:  "So, I would interpret your testimony                       
  meaning that you would not advocate repealing Section 3 on                   
  this bill."                                                                  
  SAME UNIDENTIFIED SPEAKER:  "I am opposed to 377 as long as                  
  Section 1 is in there."                                                      
  (short break on the tape)                                                    
  Number 084                                                                   
  REPRESENTATIVE DAVIES:  "...that portion of liquid                           
  hydrocarbons extracted (indiscernible) that could have been                  
  extracted through mechanical separation by a prudent                         
  operator (indiscernible).  How do you know what that is?"                    
  MR. BOTELHO:  "Mr. Chairman, good question.  And the process                 
  engineers, the production engineers have to look at that,                    
  look at the stream and decide.  And, in all candor, I am not                 
  sure how difficult a question that is.  I am not sure how                    
  illusive a question that is.  I am not sure how great the                    
  room for differences is.  I am told, and it's my                             
  understanding that it's a fairly easily applied objective                    
  standard that's been around for a long time.  But I can't                    
  say that I know that as my personal knowledge."                              
  Number 109                                                                   
  CHAIRMAN VEZEY:  "Are we on Section 7?"                                      
  Number 110                                                                   
  MR. BOTELHO:  "Mr. Chairman, I believe that this section                     
  takes up a subject that we are not prepared to talk about.                   
  That is, you may be, but I am not.  I think that brings us,                  
  presumably, to Section 16, Mr. Chairman."                                    
  Number 119                                                                   
  MR. HOSIE:  "With that, let's move to Section 16, which                      
  starts on page 10.  Section 16 simply clarifies that Section                 
  1 of this legislation is declaratory of existing law.  To                    
  put that plainly, that the division's longstanding                           
  interpretation of the statute of limitations; that is, that                  
  amendments relate back, is the proper interpretation and                     
  that legislation, Section 260, wasn't designed to create a                   
  new and harsher rule for the state of Alaska in tax                          
  proceedings.  This is a clarification of a prior piece of                    
  legislation and a recognition of a longstanding departmental                 
  division policy."                                                            
  Number 136                                                                   
  MR. BOTELHO:  "Mr. Chairman, you will recall that this was                   
  in an earlier version, expanded into some two and a half                     
  pages of findings which no longer accompany this bill."                      
  CHAIRMAN VEZEY:  "Representative Bettye Davis."                              
  Number 142                                                                   
  REPRESENTATIVE B. DAVIS:  "Actually he answered my question.                 
  I was going to say, did this take the place of the findings                  
  that was in the original bill?  Would this imply that this                   
  is the same?"                                                                
  MR. BOTELHO:  "Mr. Chairman, that is correct."                               
  REPRESENTATIVE B. DAVIS:  "Because I thought that was one of                 
  the compromises that you made with the industry was to                       
  remove the findings."                                                        
  Number 148                                                                   
  MR. BOTELHO:  "Mr. Chairman, and the compromise was to leave                 
  this language.  We had both this language and the findings.                  
  The compromise was to delete the findings."                                  
  Number 152                                                                   
  REPRESENTATIVE B. DAVIS:  "Could you clarify to me then,                     
  what is the difference because I see it as the same.  You                    
  just don't have the two pages but you're referring back to                   
  it anyway."                                                                  
  MR. BOTELHO:  "Mr. Chairman, once again, the compromise was                  
  simply the insistence that the findings be deleted.  I am                    
  not in a position to speak for why, from the other                           
  negotiator's standpoint, the deletion was satisfactory and                   
  this remained.  We obviously felt very strongly that both                    
  the findings and this section be retained.  The compromise                   
  was to have the findings deleted and I agreed to do so."                     
  CHAIRMAN VEZEY:  "Representative Davidson."                                  
  Number 168                                                                   
  REPRESENTATIVE DAVIDSON:  "Thank you, Mr. Chairman.  Mr.                     
  Attorney General, what is the effect of the deletion of the                  
  MR. BOTELHO:  "Mr. Chairman, courts look to findings to have                 
  some sense, maybe broader sense of the purpose the                           
  legislature had in mind when it enacted law.  So you find                    
  them not employed with great regularity, but over issues                     
  that are particularly complex, they provide some framework                   
  much as you use letters of intent.  The Mental Health Lands                  
  dispute against something very complex, had extensive                        
  findings.  To recite the history, how did we get to where we                 
  are right now?  Why is it necessary for this legislation to                  
  be enacted?  And basically that is the purpose of findings.                  
  We obviously sought to have that explanation available to                    
  the court and with its deletion our one safeguard again, in                  
  terms of giving guidance into the courts and having to                       
  resolve not only the three-year but the six-year statute is,                 
  of course, not in litigation any further, but might very                     
  well be soon.  Section 16, I guess, is the final safeguard                   
  we see to making sure the courts understand                                  
  CHAIRMAN VEZEY:  "Representative Davidson, please continue."                 
  Number 196                                                                   
  REPRESENTATIVE DAVIDSON:  "So is it a fair statement to say                  
  that absence section of findings, we are giving less                         
  guidance to the court, this would probably tend to encourage                 
  and prolong litigation rather than resolve it more quickly.                  
  And the reason I ask the question is, we remember back in                    
  Section 1, we said now after five years, it's over as far as                 
  assessments are concerned.  So I don't see how, by deleting                  
  the findings and thinking about that five years back there,                  
  and now here we have come down to a situation where we've                    
  encouraged more uncertainty as far as giving the court some                  
  kind of guidance."                                                           
  Number 212                                                                   
  MR. BOTELHO:  "Mr. Chairman, I suspect that, or I shouldn't                  
  say I suspect, the court could look at the act and simply                    
  say that given the expressed departure from prior practice                   
  in Section 1, that that already sheds some light on the                      
  legislature's view of what the existing law is.  Mr.                         
  Chairman, I am not entirely certain that I can, that I have                  
  the entire gist of Representative Davidson's question, but I                 
  consider this feature an essential feature of the                            
  legislation which the administration was willing to                          
  compromise on, that it is an essential element."                             
  Number 225                                                                   
  REPRESENTATIVE DAVIDSON:  "Well Mr. Chairman, excuse me.                     
  This seems to be very crucial to what we're doing here                       
  because it seems that we're restricting the court's ability                  
  to get to the bottom of quantifiable value or how we reach                   
  finality in these matters of what is owed the treasury.  I                   
  think that it is, I don't know, that we should pursue this                   
  MR. BOTELHO:  "Mr. Chairman, if I might speak to that.  The                  
  deletion of the findings has not rendered this legislation                   
  ambiguous or unclear.  Section 1 is explicit.  The five year                 
  rule is explicit.  The rule that you can (indiscernible) for                 
  pre-existing cases is likewise explicit.  This Section 16                    
  makes it even more explicit that this act is designed to                     
  create (indiscernible) prospectively and endorse an existing                 
  division policy (indiscernible).  And so the findings are                    
  not likely to encourage litigation or weaken the state's                     
  position in litigation.  This bill, unlike the pre-existing                  
  Section 260, is not ambiguous."                                              
  CHAIRMAN VEZEY:  "Representative Phillips."                                  
  Number 248                                                                   
  REPRESENTATIVE PHILLIPS:  "Thank you, Mr. Chairman.  Bruce,                  
  between Section 16 and Section 17, one of them stating                       
  specifically identifying declaratory existing law, and then                  
  Section 17 having the two new effective dates in.  There is                  
  no conflict between those two, is there?"                                    
  Number 255                                                                   
  MR. BOTELHO:  "We do not see any, that's correct."                           
  Number 256                                                                   
  CHAIRMAN VEZEY:  "Representative Bunde, do you have your                     
  hand up?"                                                                    
  Number 257                                                                   
  REPRESENTATIVE BUNDE:  "No, sir.  Thank you"                                 
  Number 258                                                                   
  CHAIRMAN VEZEY:  "Okay.  Moving on to 17."                                   
  Number 259                                                                   
  MR. BOTELHO:  "Mr. Chairman, Section 17 simply makes clear                   
  that this bill will apply to currently pending actions; that                 
  is, litigation with taxpayers.  That is the long and short                   
  of that section."                                                            
  Number 265                                                                   
  CHAIRMAN VEZEY:  "Questions?"                                                
  Number 266                                                                   
  MR. BOTELHO:  "Mr. Chairman, Section 18 is the one                           
  retroactive provision of the bill and that retroactivity                     
  provision applies to the, in essence, the gas liquids                        
  question, and is the section which would provide the                         
  economic benefit to taxpayers as a result of our willingness                 
  to treat these gas liquids as gas rather than oil."                          
  CHAIRMAN VEZEY:  "Section 19."                                               
  Number 288                                                                   
  MR. BOTELHO:  "Mr. Chairman, again, it provides for the                      
  immediate effective date of all those sections pertaining to                 
  oil and gas taxation.  The remaining sections are affected                   
  by Section 20 which provides for an effective date of July                   
  1, 1994.  My recollection is that when it says, `Take effect                 
  immediately under AS O1.10.070(c)' that it makes it                          
  effective 90 days after the Governor's signature                             
  (indiscernible) I believe it is two thirds of the vote and                   
  it becomes effective at the time of signature."                              
  Number 289                                                                   
  CHAIRMAN VEZEY:  "Well, we have gone through the bill.  Do                   
  you have any other general or specific comments that you                     
  would like to make?"                                                         
  MR. HOSIE:  "With the Chairman's indulgence, two points that                 
  have not been touched on in any detail this morning, and                     
  I'll keep it brief.  First, this bill does not mean that the                 
  taxpayers necessarily will pay the assessed amounts.  It is                  
  not about the merits of the assessed taxes, whether in fact                  
  they are owed or not owed.  What this bill does is give the                  
  department and the state its day in court.  That's all.  If                  
  the taxes are not proper, a court will so rule and they will                 
  not be paid.  Second, if the taxpayers are right and if                      
  adjustments can only come in their favor after three years,                  
  that creates a tremendous incentive to delay.  Because if                    
  the taxpayers can drag it out past three years, the music                    
  stops and the number can only go down, regardless of what                    
  the new evidence shows.  Regardless.  And so there's a                       
  tremendous incentive to delay and that perverts the process                  
  to some extent.  The process should be and is about                          
  determining the correct tax due, the proper tax.  After                      
  three years, under the taxpayer's view, the process is no                    
  longer about determining the correct tax.  Instead it's                      
  about how successfully the taxpayers can chip away at a pre-                 
  existing assessment.  And that's not how it is designed to                   
  work.  I have nothing further.  Thank you Mr. Chairman."                     
  MR. BOTELHO:  "Mr. Chairman, thank you for the time you have                 
  devoted to this issue already.  I am certain you will have                   
  (indiscernible) very enlightening information to come from                   
  various taxpayers or taxpayer organizations.  I would only                   
  ask that if there are additional amendments proposed during                  
  the course of the testimony that you take today, that we be                  
  given an opportunity to comment on the impact that that                      
  proposed modification or modifications might have.  Other                    
  than that, Mr. Chairman, we are certainly prepared to answer                 
  any additional questions and to allow others to appear                       
  before you now."                                                             
  CHAIRMAN VEZEY:  "Okay.  Earlier there was a question asked,                 
  if I understood it correctly, to the effect of, if the state                 
  loses in the case that's going to court next week, at the                    
  Supreme Court level, what would that do to its claim that it                 
  has so many billion dollars outstanding in back taxes.  I                    
  believe the answer that you didn't know those numbers, you                   
  couldn't answer it.  But more specifically, of all the, I                    
  believe, 42 cases that are pending, how many of those have                   
  the taxpayers not signed an agreement in accordance with                     
  43.05.260, paragraph (c) (3), extending the tax liability                    
  MR. BOTELHO:  "Mr. Chairman, I think that would be a                         
  question best put to the Department of Revenue.  I do not                    
  know the answer to that question."                                           
  CHAIRMAN VEZEY:  "Any questions of the attorney general?                     
  Representative Therriault."                                                  
  Number 339                                                                   
  REPRESENTATIVE THERRIAULT:  "Yes.  That last comment by Mr.                  
  Hosie.  Your comment that industry would be encouraged just                  
  to drag things out past the three years, but now giving them                 
  the five years, it's the same thing.  I mean all we're                       
  talking about is a different timing and I don't know if it                   
  is just that the two years extra gives the administration                    
  that much of a greater feel of comfort, but the argument you                 
  just made is to never have an absolute cut off date but yet,                 
  being proposed in this bill, by the administration, is a cut                 
  off date.  So you can't have it both ways."                                  
  Number 348                                                                   
  MR. HOSIE:  "Mr. Chairman, that is exactly right.  The five                  
  year cut off is a five year cut off and the division will                    
  have to conclude the audit and assessment process in five                    
  years.  If it doesn't, it will lose the right to assess and                  
  collect the correct tax, regardless of the evidence                          
  discovered after the five years.  And yes, there is an                       
  incentive to delay.  But five years is not three years and                   
  1994 is not 1979 or 1980, for all of the structural reasons                  
  that we have discussed earlier.  But this five year rule                     
  comes with cost and consequence.  They have to get it done                   
  in five years.  And without question, the industry will                      
  understand that it's a five year rule and that if the                        
  process goes beyond five years, suddenly changes can only go                 
  one way, and that's in their favor."                                         
  Number 361                                                                   
  REPRESENTATIVE THERRIAULT:  "So the way the industry is                      
  interpreting the three year is that you have to make that                    
  assessment before the three year cut off and all cases have,                 
  some assessment has been made within that three year window.                 
  So, if the state should lose in court, what you're losing is                 
  only those increased assessments past the three year date.                   
  Is that correct?"                                                            
  MR. HOSIE:  "That's correct."                                                
  REPRESENTATIVE THERRIAULT:  "So, when we start talking about                 
  the total outstanding tax obligation, six billion but this                   
  only potentially impacts three billion, of that only one                     
  billion is actual tax, but of that actual tax, what                          
  percentage now was after the three year period?  Because it                  
  seems like what's being portrayed to the public is, that                     
  should the state lose in court, it's zero, we get zero.  And                 
  basically, what we do is we just drop back to the assessment                 
  that was in the three year period of time which is clearly                   
  not zero."                                                                   
  MR. BOTELHO:  "Mr. Chairman, as I indicated early on, there                  
  are a billion dollars specifically at stake with the                         
  assessments in addition to those issued timely in the                        
  taxpayer's perspective; that is, within the three year                       
  period,  we are talking about an additional billion dollars                  
  outside the three year period that's at risk."                               
  CHAIRMAN VEZEY:  "Is that a billion dollars in taxes, or a                   
  billion dollars in taxes, penalty and interest?"                             
  Number 383                                                                   
  MR. BOTELHO:  "That's taxes and interest.  So what you're                    
  talking, again, is an indicated ratio of about one to one                    
  six, something in the neighborhood of $400 million in basic                  
  tax, and then an additional $600 million or so in interest                   
  on that."                                                                    
  Number 387                                                                   
  CHAIRMAN VEZEY:  "So that brings up a question in my mind,                   
  just trying to keep things in perspective.  The amount of                    
  tax that we are disputing is in the range of one percent,                    
  five percent of the total taxes paid?"                                       
  Number 392                                                                   
  MR. BOTELHO:  "The amount in dispute in terms of tax is                      
  probably is in that range, five percent, and I think this is                 
  a very important point that you have raised, Mr. Chairman,                   
  and that is, taxpayers have made billions of dollars in tax                  
  payments to the state and while a billion dollars or three                   
  billion in tax and interest seems like a staggering amount,                  
  it is a relatively small percentage of the overall taxes                     
  paid by taxpayers, these corporate taxpayers, to the state.                  
  And your estimate, Mr. Chairman, of say five percent, I                      
  suspect is certainly within the range of what this is really                 
  about in dispute."                                                           
  CHAIRMAN VEZEY:  "Any other questions of the -                               
  Representative Nordlund."                                                    
  Number 404                                                                   
  REPRESENTATIVE NORDLUND:  "Thank you.  Yes, I'm just                         
  wondering Mr. Chairman if once we hear from industry                         
  representatives if we might be able to have the attorney                     
  general and Mr. Hosie back up here to answer any further                     
  questions that we might have, or respond to industry's                       
  Number 408                                                                   
  CHAIRMAN VEZEY:  "We could probably arrange that.  We'll                     
  also be hearing from the Commissioner of the Department of                   
  Revenue, too."                                                               
  MR. BOTELHO:  "Thank you, Mr. Chairman."                                     
  CHAIRMAN VEZEY:  "Further questions?"  Representative Kott."                 
  Number 411                                                                   
  REPRESENTATIVE KOTT:  "Thank you, Mr. Chairman.  I want to                   
  get back to, digress a little bit, to the very beginning of                  
  our conversation here in the debate on this bill.  We were                   
  talking about the relate back doctrine.  Can you tell me                     
  when that doctrine was first implemented by the courts?"                     
  MR. HOSIE:  "Mr. Chairman, that is a common law doctrine.                    
  It's been in existence in the common law for probably                        
  hundreds of years.  It's a longstanding traditional                          
  doctrine, like the doctrine of equitable estoppel or                         
  tolling.  It was recognized in this state, explicitly in the                 
  rules, in Rule 15(c) when the Alaska Supreme Court first                     
  promulgated the Rules of Court.  But it pre-dates the Rules                  
  of Court as a longstanding common law doctrine and rule.                     
  And that's not unique to Alaska, that was true in the law of                 
  every state that I have examined."                                           
  Number 426                                                                   
  MR. BOTELHO:  "Mr. Chairman, just to follow up.  The first                   
  time that the doctrine was explicitly articulated as a court                 
  rule really was in the process of developing the Federal                     
  Rules of Civil Procedure which took place in the mid-                        
  thirties.  Initially in the mid-thirties is my recollection,                 
  maybe as late as the forties.  That was the procedure also                   
  used by the territorial courts obviously of the territory of                 
  Alaska.  Most states, although not all, have adopted some                    
  modification of the Federal Rules of Civil Procedure to                      
  guide them, and Alaska was no exception."                                    
  Number 434                                                                   
  MR. HOSIE:  "And, if I might add, we have cases on that                      
  point should you wish them provided."                                        
  Number 436                                                                   
  REPRESENTATIVE KOTT:  "Mr. Chairman, a follow-up.                            
  CHAIRMAN VEZEY:  "Please."                                                   
  REPRESENTATIVE KOTT:  "SB 511, I believe, was the original                   
  bill that was transmitted back in codifying the law back in                  
  1976.  And that bill, which is of the bill that we are                       
  changing today or least looking at the change, allowed for                   
  three exceptions.  Why, perhaps, was this particular                         
  doctrine not included as one of those exceptions given the                   
  fact that it is a key component?"                                            
  Number 442                                                                   
  MR. BOTELHO:  "Mr. Chairman, my own view is that, again, the                 
  doctrine was so universally accepted that it didn't need                     
  articulation.  Just as I pointed out earlier, you cannot                     
  find anything in Chapter 09.10 which outlines every other                    
  statute of limitation that the state has today governing any                 
  kind of conduct.  You'll see no reference at all to the                      
  doctrine of relation back.  Yet the courts have universally                  
  applied that doctrine to those other areas."                                 
  Number 450                                                                   
  MR. HOSIE:  "And if I might add, Mr. Chairman, it's not                      
  really an exception to the statute of limitations.  That's                   
  an argument that Exxon has advanced consistently in the case                 
  now pending before the Supreme Court.  They say the statute                  
  has three explicit exceptions.  It doesn't have four and                     
  relation back is a fourth exception.  It is not an                           
  exception.  The exceptions are situations where the statute                  
  doesn't apply.  For example, if a taxpayer commits fraud, or                 
  for example, if the taxpayer enters into a written agreement                 
  to suspend the statute of limitations.  Those are exceptions                 
  to the statute.  The relation back doctrine addresses a                      
  different question which is, what happens if you file your                   
  case or serve your tax assessment in a timely basis but                      
  amend it later?  It's a different issue, it's not an                         
  exception issue.  And to the extent that taxpayers have                      
  characterized this as an exception issue, they have                          
  mischaracterized it."                                                        
  CHAIRMAN VEZEY:  "Representative James and then Green."                      
  Number 462                                                                   
  REPRESENTATIVE JAMES:  "Thank you Mr. Chairman.  Just a                      
  couple of things.  One of the problems that I'm having is                    
  the description of what you call an assessment.  And what is                 
  the audit portion of the procedure and what is the                           
  assessment portion of the procedure?  And in reading some of                 
  the things that I have in my files here about the numbers of                 
  additional assessments that were issued, and whether or not                  
  you are in an audit process or whether you're in an                          
  assessment process.  And it would seem to me that, yes, when                 
  you go from filing an assessment and you go through an audit                 
  process that maybe there might be some things that you might                 
  find that would be changing.  But what I see as troublesome                  
  is that there are these continual new assessments, not part                  
  of an audit, not working towards an end result, but                          
  continually doing an additional assessment.  And every time                  
  you do an additional assessment it amounts to more                           
  preparation by the taxpayer to contest the assessment as                     
  opposed to going through just the normal audit process and                   
  finding new and more material.  And then proceeding even                     
  further than that, because I did find in the statutes                        
  someplace an Attorney General's Opinion which defined an                     
  assessment as a final billing for taxes.  And that would be                  
  what I would consider a final billing.  But there is also,                   
  if the (indiscernible) statute of limitations is about to                    
  run out, and you have the opportunity to do a jeopardy                       
  assessment, so that you've got it high enough, which is a                    
  typical IRS trick.  If they can't get it done in time they                   
  just give you a big one and then you've got to fight this                    
  big one all the way to the end.  And so I guess that I'd                     
  like to have you define for me, what is the difference of an                 
  ongoing audit and finding additional information, and                        
  periodically giving new assessments."                                        
  MR. HOSIE:  "Mr. Chairman, the processes overlap.  You have                  
  an ongoing audit and you have an initial assessment at some                  
  point in that process.  But as soon as the first assessment                  
  goes out, the discovery process doesn't stop.  The division                  
  continues to look for evidence, continues to look for                        
  documents, continues to talk to witnesses.  That's an                        
  ongoing process.  It's the basic preparation of the case for                 
  resolution.  And during that process, the amendment may be                   
  assessed as new facts are learned and as the auditors                        
  develop a greater understanding of what, in fact, happened.                  
  And so it - the process - it all goes together as a whole.                   
  There is not a separate audit period that is the only time                   
  when the auditors get to look at the company's documents and                 
  ask questions.  That's ended with an assessment that then                    
  goes directly to court.  It's more that the assessment marks                 
  the initial bill to the taxpayer, that then starts the                       
  adjudicatory process.  The taxpayer, receiving an                            
  assessment, can either pay it, which ends the process,                       
  that's it, you pay it, it's over.  Or you can not pay it,                    
  hold onto the money and say `I am not going to pay it,                       
  you're wrong.'  And that's the dispute resolution process.                   
  But during that dispute resolution process the Audit                         
  Division continues to get information to bolster its                         
  position, to test the correctness of its own assertions.                     
  And that continues with the formal hearing.  The statute AS                  
  43.05.240 (b) & (c) provides that the formal hearing officer                 
  may subpoena witnesses, take new evidence all to determine                   
  the open, quote `correct tax due' closed quote.  So the                      
  process, even at that point, is about getting to the right                   
  tax amount."                                                                 
  MR. BOTELHO:  "Mr. Chairman, I think it's also important                     
  when Mr. Hosie says the taxpayer can simply pay the tax                      
  assessed at whatever stage of the amended assessment.  That                  
  is not to necessarily imply that the taxpayer has conceded.                  
  The taxpayer can stop the clock and the amount by filing                     
  with the initial assessment, paying that amount and filing a                 
  request for refund.  The taxpayer is entitled to a hearing                   
  and the maximum which the state may hold the taxpayer to is                  
  the amount already paid.  Taxpayers have always had that                     
  opportunity, that is to stop the clock, to stop the interest                 
  running, by simply paying the assessment and filing a                        
  request for refund.  Why haven't they done it?  Well, in                     
  fact some taxpayers have done exactly that.  Most, however,                  
  and again I think the question is best placed to industry                    
  representatives, but our view is that most have not done so,                 
  historically, because the interest that they could earn on                   
  keeping money in dispute as opposed to turning it over to                    
  the state for the state to manage that money, was really                     
  losing value.  Our interest rate, beginning 1991, was a                      
  disincentive for the industry to have to make available.                     
  That changed with the 11 percent compounding.  And I think                   
  it also coincides with a lot more energetic efforts both on                  
  the part of the state and the industry to resolve these tax                  
  disputes.  But the underlying point I'd like to make is that                 
  the clock could have stopped running on these longstanding                   
  tax disputes a long time ago, the taxpayers simply had to                    
  pay and make a request for refund and the maximum the state                  
  would be allowed to collect was the amount already paid in,                  
  that it was really a ceiling from which the taxpayer could                   
  work downward.  I think the other concern, and it's                          
  certainly a legitimate one, about seeing amended assessments                 
  time after time.  It's a reflection, obviously, that the                     
  process is ongoing and new information is constantly coming                  
  to light, but I should also point out, again, that taxpayers                 
  and the structure have a right to go immediately to formal                   
  hearing and get the matter over with immediately.  There is                  
  one taxpayer that has consistently done that and that                        
  taxpayer, and it is a large taxpayer, has by and large                       
  managed to resolve most of its outstanding disputes with the                 
  state.  Other taxpayers have elected not to use that process                 
  and instead have preferred to use the informal conference                    
  process which has no fixed time limit and has the                            
  consequence of dragging out over a long periods of time.                     
  But there again, a taxpayer has the right, at any time, to                   
  go to the commissioner and say, `At this stage, I'd like to                  
  forego my informal conference proceedings and move directly                  
  to formal conference.  Please appoint an administrative law                  
  judge to hear the case.'"                                                    
  CHAIRMAN VEZEY:  "Thank you."                                                
  REPRESENTATIVE JAMES:  "I'd like to follow up, Mr. Chairman,                 
  if I might.  The troublesome part for me is that the                         
  language in 260 is very explicit, it says that the                           
  assessment must be made within the three year time frame.                    
  But even more complicated to me then, is the issue that in                   
  270, it says the six year clock starts ticking when the                      
  assessment is made or the three years, whichever is the                      
  latter of the two, you know, at that time, that starts the                   
  six year.  So I guess the biggest problem I have is the term                 
  `assessment.'  What does an assessment really mean?  Because                 
  that seems to be a critical thing that is listed in both of                  
  those statutes as to what sets off the clock."                               
  MR. BOTELHO:  "Mr. Chairman, I need to defer to Mr. Hosie."                  
  Number 567                                                                   
  MR. HOSIE:  "Mr. Chairman, the assessment is simply the                      
  initial bill to the taxpayer.  There are different kinds of                  
  assessments under the different kinds of taxes.  To                          
  illustrate under now repealed 43.21, the separate accounting                 
  tax regime, the first assessment was known as a desk                         
  assessment and it was an assessment based only on the                        
  documents given to the state by the taxpayer.  But that's                    
  still called an assessment in the code.  Most generally it's                 
  just the initial and preliminary bill to the taxpayer and                    
  it's the legal document that starts the process.  It's                       
  really the trigger - it starts the process just the way a                    
  complaint in a civil action starts the civil case going.                     
  It's not to say that it's the last word or the final                         
  expression of the assessed amount, it simply starts the                      
  process.  That was something the Supreme Court explicitly                    
  recognized in the recent Budget Reserve Fund Case, the                       
  Hickel v. Halford case.  They said an assessment starts a                    
  quasi-adjudicatory process, it is just like a civil                          
  complaint.  It is the trigger for all of these things and                    
  there is some room for ambiguity."                                           
  Number 583                                                                   
  MR. BOTELHO:  "Mr. Chairman, would it be helpful to the                      
  committee to actually see what an assessment looks like?  I                  
  would be glad to give you a copy so you had some idea what                   
  it looks like.  Some of you may have seen one from the IRS,                  
  I'm not sure." (some laughter.)                                              
  Number 589                                                                   
  CHAIRMAN VEZEY:  "It certainly, you know, if you would like                  
  to present one to us, we'll certainly distribute it to the                   
  committee.  I personally don't have any desire to see any                    
  more of them, but that's alright.  Representative Green."                    
  MR. BOTELHO:  "Thank you very much for your time."                           
  CHAIRMAN VEZEY:  "We have another question, if you have a                    
  few moments."                                                                
  MR. BOTELHO:  "I do, Mr. Chairman.  I have all day."                         
  Number 591                                                                   
  REPRESENTATIVE GREEN:  "Thank you, Mr. Chairman.  I'm sorry                  
  to go back on this common law (indiscernible due to static).                 
  It seemed to me early on, Mr. Hosie referred to the fact                     
  that a lot relies on the common law relation back doctrine                   
  and you mentioned that common law is commonly used, such as                  
  estoppel.  Can you explain to us what may or may not carry                   
  forward as acceptance of common law?  I'm thinking of a man                  
  and a wife live together for a while, common law said they                   
  were married after a certain length of time.  Or adverse                     
  possession.  Are those automatic that they are incorporated                  
  in state law or do they have to be established by some other                 
  method than state law?"                                                      
  Number 601                                                                   
  MR. HOSIE:  "Mr. Chairman, they have to be recognized by, in                 
  the first instance a court, a judge has to look at it and                    
  say, `Alright, in this state we recognize common law                         
  marriages.'  And that establishes the common law marriage.                   
  And that common law marriage doctrine exists until a statute                 
  is passed that says, in this state we will no longer                         
  recognize common law marriages.  And so the common law co-                   
  exists with statutory law.  Of course the statutory law                      
  always governs.  But there are many common law doctrines                     
  that serve to fill in the gaps of statutory law.  There                      
  certainly isn't a statute that addresses every possible                      
  issue or claim that could arise and courts commonly refer to                 
  common law to fill those gaps.  And relation back is one                     
  example.  Equitable estoppel is another example.  This is                    
  particularly true in the tax area where the courts have                      
  always recognized that the power to tax is one of the most                   
  important powers of the sovereign, and that you can't see a                  
  limitation in that power unless it's explicit.  And so, the                  
  common law doctrine there would be sure to survive unless                    
  the legislature explicitly said no, we want a different                      
  rule; we'll live with the limitation."                                       
  Number 616                                                                   
  REPRESENTATIVE GREEN:  "If I might follow-up on that.  I'm                   
  confused and I'm sorry about this.  But I thought you said                   
  earlier that it was an implied law here that judged no                       
  court, or that no case law has been established to imply                     
  that to the state of Alaska."                                                
  Number 620                                                                   
  MR. HOSIE:  "Mr. Chairman, I can't remember if there is a                    
  specific Alaska case that recognizes the common law relation                 
  back doctrine.  There are many cases from many other                         
  jurisdictions including the federal jurisdiction that do.                    
  That's just the rule.  I've seen nothing that suggests that                  
  Alaska would have a contrary rule.  And the doctrine did                     
  exist in the state prior to the formulation of the Alaska                    
  Rules of Court, specifically 15(c), that made it explicit                    
  and a court rule.  I mean, it didn't arise for the first                     
  time in this state with the passage of Alaska Court Rule                     
  15(c).  That simply recognized what had long been present                    
  and I am sure that I could find either a treatise or a case                  
  that says that."                                                             
  Number 635                                                                   
  MR. BOTELHO:  "Mr. Chairman, in fact the Civil Rule 15(c) as                 
  published, has a long list of Alaska cases that deal with                    
  the applicability of that doctrine on statute of                             
  limitations, so there is extensive Alaska case law on it as                  
  well, not in the tax arena.  Not dealing with this specific                  
  statute, but a variety of those that arise in the civil                      
  REPRESENTATIVE GREEN:  "Thank you, Mr. Chair."                               
  CHAIRMAN VEZEY:  "Thank you.  Representative John Davies."                   
  Number 636                                                                   
  REPRESENTATIVE DAVIES:  "Thank you Mr. Chair.  You had                       
  mentioned the possibility of paying and then requesting a                    
  refund.  I had two questions that relate to that.  One was,                  
  if a taxpayer does that and then requests a refund and is                    
  subsequently is granted a refund, what is the interest rate                  
  on the money?"                                                               
  Number 642                                                                   
  MR. BOTELHO:  "My recollection right now is the state is                     
  required to pay back on a rate equal to that being charged,                  
  that is 11 percent compounded."                                              
  Number 644                                                                   
  REPRESENTATIVE DAVIES:  "So at the present time it would be                  
  11 percent compounded, and in the past it would have been                    
  Number 645                                                                   
  MR. BOTELHO interjected:  "It would be for whatever rates                    
  were in effect at those applicable times, that's correct."                   
  Number 646                                                                   
  REPRESENTATIVE DAVIES:  "If this situation -- I guess I                      
  could make a question -- why is this situation not                           
  symmetrical in the sense that, if the taxpayer requests a                    
  refund, isn't that also establishing a state of conflict                     
  over what was due and so why wouldn't discovery continue                     
  during that state?"                                                          
  Number 649                                                                   
  MR. BOTELHO:  "Mr. Chairman, it would.  The state is                         
  obviously able to use whatever evidence becomes available to                 
  show that the amount paid are amounts of money which would                   
  be retained by the treasury.  The general principle, and not                 
  unique to Alaska, in terms of being able to ask for a                        
  refund, is that making payment on the assessment sets the                    
  ceiling of the government's entitlement to the money."                       
  Number 656                                                                   
  MR. HOSIE:  "I could add one point to that, Mr. Chairman.                    
  There is a United States Supreme Court case dealing with the                 
  federal tax area and the refund context that is precisely on                 
  point to the pending Supreme Court case here.  And the                       
  federal supreme court case, a corporation filed a claim for                  
  refund.  And there is a federal statute that says if you                     
  want to file a claim for refund, do so within two years or                   
  you'll lose your right.  They filed within two years but the                 
  claim they filed was defective, it was fatally defective,                    
  and their claim was going to be denied.  So they amended it                  
  after the two year statute had expired.  The issue faced by                  
  the court was whether that amendment related back to cure,                   
  if you will, their first filing.  Supreme Court ruled that                   
  it did, under the relation back doctrine, analogizing to                     
  civil process and civil procedures.  The significant thing                   
  about that case is that there's no explicit federal law that                 
  says in the refund context, relation back is okay.  It was                   
  recognized as a common law doctrine.  That is still good law                 
  today on the federal level.  And that is precisely the                       
  situation we find ourselves in here.  And to illustrate that                 
  further, what if the shoe were on the other foot?  What if                   
  the taxpayer filed a claim for a refund in a timely fashion                  
  and then after the statute had expired, discovered that in                   
  fact, it had a larger claim for refund?  Would it not want                   
  to amend to get the correct amount back?  And if it did                      
  amend, would it not argue that the amendment related back?                   
  After all, the basic taxes were already in dispute."                         
  CHAIRMAN VEZEY:  "Representative Gary Davis, did you have                    
  Number 676                                                                   
  REPRESENTATIVE G. DAVIS:  "Yes, Mr. Chairman, thank you.                     
  Mr. Attorney General, you mentioned that after the initial                   
  assessment, if the bill is paid, it's over with.  Does that                  
  mean paid cash-in-hand or does that mean accepted and the                    
  six year payment starts?"                                                    
  Number 678                                                                   
  MR. BOTELHO:  "Mr. Chairman, the concept behind the filing                   
  is that the taxpayer disputes the assessment, but chooses                    
  because it wants to stop interest from running or wants to                   
  stop the department from being able to issue additional                      
  assessments, either before or after the three year period.                   
  It simply pays the assessment, whatever that amount is.  It                  
  stops, what it does, it simply stops the department from                     
  being able to get anything more."                                            
  Number 679                                                                   
  REPRESENTATIVE G. DAVIS:  "So it is cash paid?"                              
  Number 680                                                                   
  MR. BOTELHO:  "Yes, it is."                                                  
  CHAIRMAN VEZEY:  "Representative James."                                     
  Number 689                                                                   
  REPRESENTATIVE JAMES:  "Thank you, Mr. Chairman and Mr.                      
  Hosie,  your example that you gave of the federal case in                    
  the tax court of where the taxpayer was allowed to amend the                 
  request for refund.  And earlier you said that in this                       
  state, the court, when there is not implicit instructions,                   
  they lean towards the sovereign.  In the federal courts for                  
  taxes, do they lean towards the sovereign or towards the                     
  Number 691                                                                   
  MR. HOSIE:  "They would lean toward the sovereign as well                    
  and not withstanding...."                                                    
  TAPE 94-62, SIDE B                                                           
  Number 000                                                                   
  CHAIRMAN VEZEY:  "If there are no further questions, I want                  
  to thank both of you gentlemen very much for your time and                   
  your input.  You've been very helpful.  The time is 2:44,                    
  and we will take an at ease until 3:00."                                     
  Number 008                                                                   
  CHAIRMAN VEZEY:  "I call the meeting back to order.  The                     
  time is 3:05, May 13, 1994.  Continuing in our testimony on                  
  SB 377.  I would like to go next -- we've heard about four                   
  and a half hours of testimony from the Attorney General's                    
  Office, I'd like to kinda change the testimony a little bit                  
  and go to somebody from industry.  The first person on our                   
  sign-in list is Mr. Paul Sullivan.  Mr. Sullivan, if you                     
  would care to join us up here."                                              
  Number 028                                                                   
  "Mr. Chairman and the members of the State Affairs Committee                 
  and Judiciary, and Oil & Gas, my name is Paul E. Sullivan                    
  and I am the general tax counsel for Exxon Company, U.S.A.                   
  I want to thank you for allowing me this time to be heard on                 
  this very important subject.  We had a very interesting                      
  thing happen here this morning.  We had Mr. Hosie, when he                   
  started out, present the state Supreme Court argument to                     
  you.  The only response I have is that this legislature                      
  should allow the state the opportunity to make its arguments                 
  before the Supreme Court.  That's the right place for this                   
  to be decided.  The attorney general this morning  talked                    
  about checks and balances.  I would point you to Sections 16                 
  and 17 of this bill and tell you that the bottom line of                     
  those two sections is to take away from Exxon Corporation                    
  its right, its day in court, the ability to be heard before                  
  the Alaska Supreme Court, and to have that court decide what                 
  this statute means, what it meant back in '76 and what it                    
  means today, before any action on SB 377.  There's been a                    
  lot of talk about amendments and I've only got one; delete                   
  Section 1.  Mr. Hosie has spent a lot of time talking to you                 
  about relation back theory.  He has pointed out to you that                  
  this is the heart of the state's appeal to the Supreme                       
  Court.  He has said that it was not addressed by the                         
  Superior Court.  Those of you who have been to law school                    
  may have heard the example that's used, what happens when a                  
  Number 032                                                                   
  CHAIRMAN VEZEY interjected:  "There's none of us that have                   
  been to law school, so thank you." (laughter)                                
  Number 033                                                                   
  MR. SULLIVAN:  "Well, it's a simple little example.  One                     
  neighbor sues another and claims that the neighbor borrowed                  
  his lawn mower.  When he returned the lawn mower, it was                     
  broken.  The response of the other neighbor to the suit is,                  
  1) I didn't borrow your lawn mower, 2) if I borrowed your                    
  lawn mower, it was broken when I borrowed it, and 3) when I                  
  returned it, it wasn't broken.  Now the court decides what                   
  it's gonna do with that.  And if it decides that the                         
  neighbor never borrowed the lawn mower, then it never has to                 
  address the other issues.  Basically, what happened in the                   
  Superior Court was that that court held that there was a                     
  statute which was plain on its face, which was unambiguous                   
  and which allowed for three stated exceptions.  Those                        
  exceptions were:  If the taxpayer failed to file a return,                   
  the statute did not run; the second exception was if it was                  
  taxpayer fraud; and the third exception, and one that has                    
  received little notice today, is where the taxpayer and the                  
  Department of Revenue enter into a written agreement to                      
  extend the statute of limitations.  Three years has been                     
  talked about as a cut off date.  I can tell you that in                      
  every instance where Exxon Corporation has been requested by                 
  the state, the Department of Revenue, to provide an                          
  extension, we have done so.  I can tell you that on average,                 
  the state has had five to six years to audit.  From 1978                     
  through the last audit period they have done, 1987 -- 1989,                  
  I'm sorry.  And remember, this is 1994.  Why isn't there a                   
  problem with the 1990 return?  It's because we've given                      
  extensions.  In some years we have given extensions of up to                 
  six years which says that the department has had the three                   
  years under the statute plus another six years by agreement                  
  with the taxpayer, for a total of nine years to do the                       
  audit.  Every assessment that came during that nine year                     
  period is a valid assessment.  There is no issue as to the                   
  validity of those assessments.  What we are talking about is                 
  any assessment received after the three years plus any                       
  period agreed with the taxpayer for extensions.  That's one                  
  point I want to make.  Another point:  The attorney general                  
  talked about, somebody asked a question about changing the                   
  statute again in the future, and the attorney general's                      
  response was, that was a possibility but we could count on                   
  the wisdom of the legislature to make that decision on                       
  changing the laws.  Prospectively that's okay.                               
  Retroactively, is questioning the wisdom of a prior                          
  legislative decision.  One which is under review by the                      
  Supreme Court on Wednesday.  The attorney general also                       
  talked about a knowledge and data base that the state has                    
  invested in but refuses to use in the tax cases.  He says                    
  there's no conflicts with industry under royalty.  I think                   
  he is pretty much correct on that.  The question is, why not                 
  use these royalty values for tax purposes?  The                              
  administration refuses to do that.  The attorney general                     
  indicated that the taxpayers want to use it for this                         
  contentious period that existed the later half of 79 and the                 
  first half of 80 on the ceiling price issue on federal price                 
  controls.  I can tell you that Exxon has never suggested                     
  that royalty values be used for that period.  I can tell you                 
  that nowhere in any negotiations with the state on revisions                 
  to how you determine value, have we said that.  I can tell                   
  you that we have specifically talked about excluding that                    
  period and using royalty values for other periods.  The                      
  attorney general talked about other states and the IRS and                   
  the department's longstanding interpretation being                           
  consistent with these other state laws.  The first point I                   
  want you to remember - none of these states, and the federal                 
  government change their law retroactively.  That may be                      
  their law, but they adopted it prospectively.  The attorney                  
  general, in response to a question said that litigation will                 
  be -- the question was, will it be less or more with this                    
  bill, and he said, without a doubt, less.  At the same time,                 
  the attorney general says that future value may be the same                  
  as royalty but may not.  The word `may' whenever I see it,                   
  `may' equals litigation.  If nothing else, there will be                     
  litigation about Section 1 and its retroactivity and whether                 
  that retroactivity is constitutional.                                        
  "Mr. Hosie talked about spot prices.  Before the break he                    
  talked about 1984 forward and a developed spot market.  When                 
  we came back from break he said he did not mean to indicate                  
  that there wasn't a spot market in the late 70s and early                    
  80s.  In the late 70s, two to five percent of crude oil                      
  traded on the world markets, and I'm not talking ANS, crude                  
  oil on the world market, two to five percent was traded in                   
  the spot market.  The rest was under long term contracts.                    
  Now let's look at ANS crude in that period.  Twenty percent                  
  of the ANS crude that was sold, and not transferred                          
  internally to a producer's own refinery, but sold, was sold                  
  for cash.  And I'd ask you the question:  Which is the more                  
  valid valuation for ANS?  Which of those two is the more                     
  valid valuation?                                                             
  "We had some discussion about NGLs.  I'm talking about this                  
  before I get to my testimony.  The attorney general made a                   
  very telling comment.  He made two.  First, he said that                     
  this was a trade off in this bill; give me Section 1 and                     
  I'll give up NGLs.  But later on he told you that the state                  
  of Alaska's position on NGLs being oil, is unique.  Let me                   
  tell you the flip side.  Every producing state, except                       
  Alaska, treats NGLs as gas.  What is the value to a producer                 
  of having to defend against a position that is unique to the                 
  state of Alaska?  I submit the only thing that is going to                   
  be saved by that section is litigation, period.  So yes,                     
  there is one instance in this bill where litigation will be                  
  reduced.  And that's NGLs.  But all it's giving the                          
  producers is exactly what every other state already says;                    
  natural gas liquids are gas.                                                 
  "The attorney general said that Section 16, when we got into                 
  a discussion of the findings that used to be in SB 185                       
  versus the declaration in Section 16 of this bill, he said                   
  it was a compromise with industry.  Exxon is part of the                     
  industry up here.  Exxon is not part of that compromise.                     
  Mr. Hosie says what they're asking you to do in this bill in                 
  the prevailing value section just gives the state its day in                 
  court.  I submit that Section 1 takes away Exxon's day in                    
  court.  I have a case which has progressed through the                       
  state's system.  Assessment, protest, informal conference,                   
  formal conference, Superior Court, and is days away from the                 
  Supreme Court.  And this bill will, if passed, allow the                     
  attorney general to fly up to Anchorage, hand the court this                 
  legislation and say, the case has been mooted because the                    
  law that you're being asked to review no longer exists.                      
  That is unfair.  That is not right.                                          
  "A question was asked about what is an assessment.  An                       
  assessment is any bill the taxpayer receives while the                       
  statute of limitations is open.  If I have extended the                      
  period an additional six years for a total of nine years,                    
  the Department of Revenue can issue me 200 assessments if                    
  they please during that period, each and every one them is a                 
  valid assessment.  And I have never said otherwise.  But                     
  once the statute of limitations, including any mutually                      
  agreed extensions to it has run, something I receive on a                    
  piece of paper is not an assessment.  It is null and void                    
  and the statute says so and the superior court says so.  Mr.                 
  Hosie near the end said, `What if the shoe was on the other                  
  foot?  Wouldn't the taxpayer want to amend?'  Without going                  
  into detail, the shoe was on the other foot, with Exxon.                     
  The attorney general and the Commissioner of Revenue said,                   
  `Sorry folks, the three year statute has run.'                               
  "I'd like to turn to my prepared comments.  There are three                  
  things that I'd like to accomplish here today.  I'm going to                 
  give you some concrete information to refute the section of                  
  the bill which states that this is declaratory of existing                   
  law.  The declaratory of existing law is no different than                   
  the two pages of findings that were in the prior bill; they                  
  are the same.  I want you to apply your own judgment and                     
  common sense to decide whether, what those former findings                   
  now incorporated into declaratory formal law, are true.                      
  Next I'm going to tell you what's actually happened in real                  
  cases and finally I'm gonna tell you about the negative                      
  effects that this piece of legislation could have for the                    
  state and for its taxpayers.  Legislative bills with                         
  retroactive application affecting tax liabilities are very,                  
  very rare.  They should not be adopted unless there are                      
  compelling reasons.  And even then, retroactivity is                         
  normally quite limited.  There is an example in states where                 
  the legislature meets every two years, where when they meet,                 
  they can make the law retroactive to two years ago on the                    
  basis that this is the first chance they've had to do it.                    
  That makes sense.  This bill is merely an after the fact                     
  revision and a revised interpretation of the current                         
  assessment deadline statute.  Interpretation is an issue                     
  that the Department of Revenue has flip-flopped on since                     
  1978.  They told you that their position has been                            
  longstanding and there has been a firm policy since 1984.                    
  I'm going to tell you and show you different.  The                           
  Department of Revenue's 1989 interpretation of the three-                    
  year assessment (indiscernible statute issue, and that was                   
  issued in an Exxon formal conference decision, is not                        
  correct.  And the Alaska Superior Court has told the                         
  department so, but that 1989 formal conference decision is                   
  the very first time where this interpretation was exposed to                 
  the world by the Department of Revenue.  The department's                    
  ability to audit tax returns, you're being told, has been                    
  constrained by its audit resources.  That's not true.  The                   
  taxpayers have not contributed to the delays in the period                   
  required to issue tax assessments.  I'm going to talk in                     
  detail about that.  Arguments that substantial public                        
  revenues, this is the $3 billion that are at risk in pending                 
  litigation, in my opinion, cannot be substantiated.                          
  Statements being made by the administration that the                         
  decisions reached by the Superior Court in the Exxon and the                 
  Tesoro case, the Exxon case is on the three-year assessment                  
  statute and the Tesoro case is on the six-year collection                    
  statute -- there are statements that those are inconsistent.                 
  That's not supportable.  In fact, the cases are not even                     
  related.  Three years is enough time to analyze a taxpayer's                 
  return and determine the taxes due the state.  The fact that                 
  the statute of limitations allows for further written                        
  extensions if necessary, does exist.  And Exxon has always                   
  granted those requests so I don't see what the problem is.                   
  Someone earlier mentioned jeopardy assessments.  That's the                  
  option.  Go to the taxpayer, ask for an extension, failure                   
  to give an extension, deny all his deductions.  Okay.                        
  You're protected.  Put the burden of proof on him at that                    
  point.  Let me document these points.  As I said, you're                     
  being told to find that this bill is merely a clarification                  
  of a longstanding administrative interpretation that under                   
  the statute for years back to 1976, the Oil & Gas Audit                      
  Division of the Department of Revenue can issue new                          
  assessments or increase existing assessments at any time                     
  while an administrative appeal or judicial appeal, for that                  
  matter, is underway.  We believe the division cannot do that                 
  under the existing statute.  And we're not alone in our                      
  belief.  The Alaska Superior Court has also decided that the                 
  division cannot do that.  The state has appealed that                        
  decision.  The final decision is expected in the next six                    
  months.  The case will be heard next Wednesday and I am                      
  advised that the normal time period is four to eight months                  
  for a decision to be rendered by the Supreme Court.  The                     
  court has also advised the parties that it was willing to                    
  take the case on the briefs and waive oral arguments.  But                   
  that has not occurred.  This is not a clarification of the                   
  law for you to affirm an administrative interpretation an                    
  Alaska court has already found to be inconsistent with the                   
  existing statute.  The court has found that the statute is                   
  clear on its face and does not require clarification.                        
  "Furthermore, while the Department of Revenue says their                     
  position is a longstanding interpretation of the statute, I                  
  submit that no such longstanding interpretation or practice                  
  ever existed.  Let's look for a minute at the history                        
  surrounding the Department of Revenue's statement on the                     
  statute.  The division's original 1978 assessment against                    
  both Standard Oil and Exxon, both of which are dated August                  
  15, 1979, the division stated that the assessments quote                     
  `may change as the result of any audit findings within three                 
  years of the date of this notice of assessment' unquote.                     
  While Exxon and the Alaska Superior Court disagree with even                 
  that statement, that the three years starts from the                         
  assessment date, you should note that those notices did not                  
  say that the assessments may change as the result of any                     
  audit findings at any time during the administrative or                      
  judicial consideration of a taxpayer's grievance.  Yet, that                 
  is what is proposed in Section 1 of SB 377.  This is a                       
  fundamental abrogation of due process and is not in the                      
  state's best interest.                                                       
  "The next statement that I am aware of, is one on October                    
  16, 1984, and was referred to by Mr. Hosie, earlier today.                   
  Attorney General Gorsuch issued a formal opinion, addressing                 
  the interpretation of the assessment deadline statute.  The                  
  attorney general advised that once the three-year assessment                 
  deadline had expired, an assessment should not be amended                    
  unless the audit staff can show good cause, including an                     
  explanation of why the issue was not addressed by the audit                  
  staff on the original assessment.  The Department of Revenue                 
  never accepted that opinion as the definitive and binding                    
  statement of the law; and it said as much in almost those                    
  very words to the Alaska Supreme Court in a 1989 case.  The                  
  department's refusal to accept the interpretation of the                     
  Attorney General's Opinion is also shown by the fact that                    
  the interpretation that the department now advocates is at                   
  variance with the 1984 Attorney General's Opinion.                           
  "Let's look at that 89 case.  The case I just referred to is                 
  Standard Alaska Production Company and it sued the                           
  Department of Revenue, challenging the department's attempt                  
  to assess additional taxes after the three year period had                   
  expired.  The Department of Revenue had also done the same                   
  thing with Exxon and with other taxpayers.  Standard asked                   
  the court to declare that the department's interpretation of                 
  the law was illegal.  The department told the court, and I                   
  quote `No official department view as to Standard's                          
  limitation claims has yet been formulated.'  This is 1989.                   
  Despite the fact that an Attorney General's Opinion had been                 
  rendered on the matter in 84, the department emphatically                    
  argued to the Supreme Court in the 89 case that it had not                   
  yet made up its mind about the correct interpretation of the                 
  statute.  And you know, the court relied on that statement                   
  and it sent the question back to the department for                          
  administrative review.  It said the case was not right to be                 
  heard by the court until the taxpayer had been through their                 
  administrative procedures within the Department of Revenue.                  
  "Now let's look at what happened in Exxon's 1978 income tax                  
  case because that was cooking along at the same time as the                  
  Standard case.  We thought Standard was ahead of us when                     
  they got into the court, it turned out they got thrown out                   
  of the court and now we were ahead of them in the                            
  administrative procedures.  In our case, the Department of                   
  Revenue went to the unusual effort of inviting other                         
  taxpayers to submit friends of the court briefs on the                       
  three-year assessment deadline question to help the                          
  department formulate its position as to the proper                           
  interpretation of the statute.  If I can hand this out to                    
  folks -- here is a copy of the letter that the Department of                 
  Revenue sent out in 1989.  It was sent out on March 25,                      
  excuse me, 1988.  On March 25, 1988.  And the letter states,                 
  and if you read the bottom paragraph on the first page,                      
  `Your participation is invited in order to assist the                        
  commissioner in focusing on the broader implications of                      
  various possible rulings on the statute of limitations.'                     
  And now we know, in 88, a letter goes out, they weren't                      
  quite sure what ruling they were going to give, and in 1989                  
  they tell the Supreme Court they've not formulated an                        
  opinion.  Mr. Hosie says that is a longstanding policy from                  
  at least 1984.                                                               
  "Finally, on May 26, 1989, the department issued its formal                  
  hearing decision in Exxon's 1978 case, addressing the                        
  assessment deadline issue.  This decision in May of 89, is                   
  the department's first solid expression of its current                       
  interpretation of the law, bringing to a close the                           
  uncertainty that it itself had maintained in the Standard                    
  Oil declaratory judgment action.  In summary, the department                 
  did not arrive at its longstanding interpretation of the law                 
  until May 26, 1989.  And any suggestion the department had                   
  some earlier longstanding interpretation simply cannot be                    
  reconciled with the above facts and those facts are                          
  indisputable.  There should be no doubt that this                            
  legislative proposal attempts to completely change the                       
  statute under which taxpayers have conducted their business                  
  for the last 17 years.  If anyone has had a longstanding                     
  interpretation and practice with respect to the existing                     
  statute, it is Exxon.  The difference between our                            
  interpretation of the statute and the state's is that ours                   
  has been reviewed by the Alaska Superior Court and accepted                  
  while the state's interpretation, first revealed in May of                   
  1989 was reviewed and has been rejected by the court.  Judge                 
  Cranston stated in his opinion and I quote, `The court also                  
  finds that in the absence of an exception, the plain and                     
  unambiguous language of both the statute and the regulation                  
  clearly limit the division from issuing initial or amended                   
  tax assessments, later than three years after the return has                 
  been filed by the taxpayer' unquote.  There are three                        
  statutory exceptions:  1) Taxpayer fraud, 2) failure to                      
  file, and 3) where both the taxpayer and the department have                 
  signed a written extension.  This is not ambiguous.  There                   
  are three explicit exceptions.  If Mr. Hosie feels there is                  
  a fourth on relation back, let him take that argument to the                 
  Supreme Court next Wednesday.  That is the right forum for                   
  this to be decided.                                                          
  "I told you before and I'll tell you again.  Exxon has                       
  granted extensions whenever asked to by the Department of                    
  Revenue.  And in several audit years, they were for periods                  
  of up an additional five or six years, giving the department                 
  eight or nine years to complete the audit.  All of those                     
  assessments are valid.  I am not arguing about those                         
  assessments.  Judge Cranston said, `None of these exceptions                 
  apply or exist in the facts of this case.'  Next you are                     
  being told that the division's ability to audit returns was                  
  constrained by audit resources throughout the 70s and early                  
  80s and there is just no evidence that that is true.  The                    
  public record will show that in every session of the                         
  legislature since North Slope production began, the Oil &                    
  Gas Audit Division, formerly the Division of Petroleum                       
  Revenue, has received virtually every dollar requested in                    
  the Governor's budget request.  Adequacy of staffing has                     
  never been an issue.  What accounts for the division's                       
  untimely tax assessments is the zeal of its audit staff.                     
  They want to up the assessments, up the ante, on taxpayers                   
  who exercise their rights to appeal assessments.  Former                     
  division director, William Floerchinger admitted in a                        
  published interview, four years ago, that the Audit Division                 
  has made a practice to issue highball assessments.  One of                   
  the department's own hearing officers told the legislature                   
  in 1986 that the common practice of the auditors is to make                  
  assessments that are very high as compared to the amounts to                 
  which the department later settles with the taxpayers.                       
  Let's face it, the division's standard operating procedure                   
  is to issue amended assessments based on new and ultimately                  
  discredited legal theories to gain leverage for negotiation.                 
  The inadequate staffing levels argument is not valid.                        
  "I think you have been told this week that taxpayers                         
  contributed to the delays in issuing tax assessments because                 
  they requested suspension of actions on assessments.  During                 
  the litigation by another taxpayer who challenged the                        
  separate accounting income tax, Exxon did suggest delays                     
  while the court decided the legality of that statute.  I                     
  won't lie to you.  We did request delays.  To me that made a                 
  lot of sense.  Why spend money, time, and effort addressing                  
  issues that might be null and void if the underlying                         
  statute, the underlying law, was declared unconstitutional.                  
  Our letters said, we protest the assessment, let's see what                  
  happens on this case, and then let's move forward.  If the                   
  law is found unconstitutional, why address assessments under                 
  that law?  But even that did not impact the division's                       
  ability to conduct its audits and to make assessments in our                 
  case.  I might have asked for a delay, I didn't get it.                      
  Prior to and during the time that the constitutionality of                   
  the separate accounting income tax statute was contested,                    
  the division conducted an extensive audit of Exxon 78                        
  records.  In other words, our request for delay was denied.                  
  The 79-81 separate accounting income tax years, the division                 
  also requested and Exxon provided written waivers extending                  
  the assessment deadline.  This is an important point, again.                 
  The division had more than six years on average with Exxon                   
  to do the audits because we always gave the extensions.  And                 
  for some years, the extensions were up to an additional five                 
  or six years.  Additionally, during the pendency of that                     
  lawsuit about the constitutionality of the separate                          
  accounting method, the division issued several amended                       
  assessments, conducted the informal conference with Exxon                    
  under its appeals regulations, and issued its informal                       
  conference decision.  So they weren't delayed.  The case was                 
  very active while the constitutional litigation was pending.                 
  "Now in the 78 case, Exxon also asked for a delay one other                  
  time, and I'll hope you'll appreciate this one.  That one                    
  occurred on the evening before a formal conference was                       
  scheduled, when the Department of Revenue handed Exxon, at                   
  about 4:00 in the afternoon, another revised assessment and                  
  over 200 pages of supporting arguments.  This revised                        
  assessment changed the whole theory of their assessment of                   
  the crude value issue for that year.  We were scheduled for                  
  formal conference at 9:00 a.m. the next morning.  We asked                   
  for a delay in the hearing the next morning to let us read                   
  the material and it was not granted.  The hearing went on                    
  the next morning.  So, if they are telling you that I've                     
  asked for delays, they're right.  Some were very reasonable,                 
  all of them were very reasonable requests.  None of them                     
  were complied with.                                                          
  "You are being told to find that there is substantial public                 
  revenue at risk in pending litigation, which if the state                    
  loses its appeal in the Exxon case, will be contrary to the                  
  public interest since such revenues would be uncollectible.                  
  All I can tell you is that any estimates of dire                             
  consequences to the Alaska treasury, if you vote down this                   
  bill (as I hope you do) are pure speculation.  If you don't                  
  vote it down, at least take out Section 1.                                   
  "First of all, because of the confidential nature of the                     
  interactions with the department and the taxpayer, I cannot                  
  speak to other taxpayer's assessments that might be impacted                 
  by this bill; I don't know.  The fact, though, the division                  
  might try to issue another highball assessment to Exxon or                   
  some other taxpayer today and then tell you tomorrow that                    
  there's even more at stake.  In fact, there was an affidavit                 
  submitted one or two years ago by a member of the Department                 
  of Revenue who said there was $600 million dollars at stake.                 
  That $600 million is now $3 billion, and I can't account for                 
  the difference.  Neither you nor I can tell if the                           
  assessments would be sustained on their merits, without                      
  knowing the merits of the state's late assessments.  No one                  
  can know or even estimate what revenue, if any, might be                     
  lost if the current limitations statutes remained unchanged.                 
  And any estimates are rank speculation.                                      
  "Next, you are being told that you need to pass SB 377 to                    
  resolve the alleged inconsistency between decisions reached                  
  by the Superior Courts in the Exxon and Tesoro cases.  Now                   
  to suggest that legislation is needed to resolve these                       
  decisions in these two cases is clearly wrong and very                       
  misleading.  The two cases involve two entirely different                    
  questions under two different statutes addressing two                        
  different subjects.  One is the three-year assessment                        
  statute and the other is the six- year collection statute.                   
  Neither the attorney general nor the department view the                     
  questions addressed in these two cases as related, much less                 
  identical, and the best evidence of that is that although                    
  the state won the Tesoro case in the Superior Court, they                    
  did not even cite it in their briefs in the Exxon case.  In                  
  fact, I'd ask you, why are we here?  What are we doing here?                 
  The courts have already spoken on both of these statutes.                    
  The state prevailed on its interpretation of the six-year                    
  collection statute and Exxon prevailed on its interpretation                 
  of the three-year assessment statute.  The attorney general                  
  has told you that two of every three dollars at stake under                  
  this bill apply to the six-year collection statute.  Those                   
  dollars are not at risk.  The court has said so.  I guess                    
  the real issue is that the attorney general does not want to                 
  let Exxon have its day in court on the three-year statute.                   
  That's what I conclude.  The proper forum for this issue is                  
  to be decided in the court.  The Alaska Supreme Court will                   
  be hearing the Exxon case next Wednesday.  Let them do their                 
  job.  Don't change the law to usurp the power of the                         
  judiciary.  This controversy over the three-year assessment                  
  statute has been going on for over ten years.  We're about                   
  six months from having it finalized.  We don't need SB 377,                  
  Section 1.                                                                   
  "Finally, you're being told that three years is not enough                   
  time to analyze a taxpayer's return and determine the tax                    
  due to the state.  Proponents of amending the assessment                     
  deadline statute claim that three years is not enough time,                  
  given the allegedly obscure and complex issues involved in                   
  determining the true value of a taxpayer's oil.  That                        
  assumption is not substantiated.  In fact, it is                             
  contradicted in Exxon's 1978 income tax case, which is to                    
  our knowledge, one of only two cases that the department has                 
  actually adjudicated to a final conclusion on the issue of                   
  crude value.  Let's talk a little bit about that case.                       
  "Exxon's 1978 case has been the subject of two formal                        
  conference decisions addressing the value of North Slope Oil                 
  transferred to our own refineries.  The second one was                       
  issued over a year ago, on April 9, 1993, and it established                 
  that if the Audit Division complies with the law in doing                    
  its job, the determination of value is not that difficult.                   
  The reason that it's taken nearly 15 years to get to the                     
  bottom of this in Exxon's case is quite simple.  The                         
  division tried to ignore the law and Exxon properly and                      
  successfully objected.  Let me explain.  From the beginning,                 
  Exxon has consistently taken the position that the best way                  
  to value the oil that went to our own refineries was to use                  
  the values that we used when producers sold for cash to                      
  third parties.  That was a good bench mark for the oil you                   
  kept.  The division refused to accept that approach and                      
  insisted upon substituting hypothetical values for the oil,                  
  based upon its so-called market basket of imported oils.                     
  Most of the time consuming legal skirmishes in Exxon's 1978                  
  income tax case involved the complicated problems                            
  encountered with this approach.  Now, after all is said and                  
  done, Commissioner Rexwinkel signed, a year ago, a formal                    
  conference decision saying that the value that Exxon used in                 
  its returns as filed were, in fact, a proper basis for                       
  valuing the oil that Exxon kept for its refineries.  What is                 
  more, and this is the supreme irony of the fourteen year                     
  legal battle on the 1978 case, is that when the department's                 
  methodology is properly applied, as the commissioner ruled,                  
  Exxon actually overvalued its oil.  That's right.  We paid                   
  more taxes on the crude value issue with our 78 return as                    
  originally filed, than the commissioner said we should have.                 
  Commissioner Rexwinkel's April 9, 1993, decision in Exxon's                  
  tax case further confirmed that Exxon had a right to rely                    
  upon the department's published formal hearing decision in                   
  the 1983 Amerada-Hess case regarding the use of North                        
  Slope's sales data in determining the imputed value of the                   
  oil that Exxon kept for its own refinery.  In the opinion,                   
  the commissioner criticized the Oil & Gas Audit Division for                 
  refusing to comply with that decision.  He said that he                      
  found it `disconcerting' that the division would attempt to                  
  ignore the Amerada-Hess methodology which Exxon dutifully                    
  used.  He also criticized the division's expert witness for                  
  refusing to follow the analysis of the Alaska Supreme Court                  
  by repudiating the market value concept that is the core                     
  principle of the tax law.                                                    
  "In short, there is one simple explanation for why the 78                    
  tax case has taken so long to resolve.  The Oil & Gas Audit                  
  Division simply ignored the law in the Amerada-Hess case.                    
  If it had done what Commissioner Rexwinkel said it should                    
  have done and followed its own regulations as it was                         
  interpreted in the 83 case, the 14-year battle would never                   
  have occurred.  Taxpayers should not be punished for the                     
  division's having ignored the rulings and regulations of its                 
  own commission.  Yet to this day, that formal conference                     
  decision which was remanded to the Oil & Gas Audit Division                  
  for a final tax computation consistent with the opinion, has                 
  not been seen or heard from again.  Ask the commissioner                     
  where it is.  Who is delaying here?                                          
  "In closing let me spend a few minutes talking about some of                 
  the effects of this bill on the state and its taxpayers.                     
  Even if Exxon did not have existing disputes with the state                  
  of Alaska, I would still be here telling you that passing                    
  this bill would be bad law.  Bad for the administration of                   
  the tax laws of the state of Alaska and bad for taxpayers.                   
  It would be bad because it's likely going to increase an                     
  already overburdensome litigation situation on tax issues                    
  here in Alaska, since taxpayers will be required to defend                   
  against some entirely new and perhaps misdirected                            
  interpretation embodied in an assessment that today could be                 
  received fifteen or twenty or more years after the fact.                     
  That's wrong.  We urge you to pass laws that will seek to                    
  resolve tax conflicts for both Alaska and the taxpayers.  SB
  377 does what no other state has ever  done.  It changes the                 
  rules 18 years after the fact.  This bill calls for                          
  retroactive changes to 1976.  That's wrong.  That's                          
  offensive.  And that's interfering with the decision of an                   
  Alaska court.  That court said what the plain legal meaning                  
  of the current legislative language is.  That decision does                  
  not square with what the division would like it to say, so                   
  now you have this bill to undermine that decision.  That's                   
  wrong.  That's interference with a valid court decision                      
  applying the laws adopted in previous sessions of the Alaska                 
  Legislature and signed by the then governor.  Retroactive                    
  changes to a state's laws sends a bad signal to all business                 
  in general about the stability and the certainty of the                      
  business climate in the state.  It will impact on business                   
  decisions in the future.  This administration has held                       
  discussions with producers concerning what's needed for a                    
  commercially viable gas line.  What you do with this bill                    
  will certainly be a factor in at least one company's                         
  internal valuation of such a project. A taxpayer is entitled                 
  to a final resolution of his or her tax liabilities in a                     
  reasonable period of time.  That is not happening under the                  
  current law.  But the gridlock is not caused by the current                  
  law.  It is caused by the Oil & Gas Audit Division and the                   
  Department of Revenue, issuing assessments that are totally                  
  inconsistent with the plain meaning of the tax law.  Don't                   
  change the law, change the practice.  As the hearing                         
  examiner said in his opinion on our 78 case, which was                       
  adopted by the commissioner on April 9th of last year, quote                 
  `The division's position of not using available market data                  
  whether for ANS or other transactions which are evidence of                  
  the value of ANS in the market is disconcerting.'  I agree.                  
  If this bill becomes law, we will have more issues like                      
  this, not fewer.  We will have longer periods before                         
  resolution, not shorter.  We will both have to utilize more                  
  of our manpower and financial resources resolving these                      
  assessments, not less.  As I've said before, and I'll say it                 
  again, that is not right.  Don't promote tax gridlock in                     
  this state.  Take a step to end it.  Reject Section 1 of SB
  377.  Thank you for the time you have taken with me.  I'm                    
  prepared to respond to any questions that you might have."                   
  CHAIRMAN VEZEY:  "Thank you Mr. Sullivan.  I would like to                   
  ask you to elaborate just briefly if you would.  You have                    
  expressed your opposition to the whole bill, to Section 1                    
  specifically.  I didn't hear you comment on Section 1,                       
  paragraph (a) (2)."                                                          
  MR. SULLIVAN:  "Section 1, paragraph (a) (2) - that's the                    
  CHAIRMAN VEZEY:  "Yes."                                                      
  MR. SULLIVAN:  "Well, I guess I'd have a couple of comments                  
  there.  One was mentioned this morning, I believe, on page                   
  2, line 4, it talks about the department may not increase an                 
  assessment under this subsection.  I believe it's left open                  
  the question about issuing a new assessment.  And that's                     
  something that should be clarified prospectively.  Let me                    
  also point out, as I have in my testimony, that conceptually                 
  nothing has changed about the ability of the taxpayer and                    
  the state to enter into written agreements to extend the                     
  five year statute.  You could extend the three.  The                         
  extension is still in the law, even with this change.  So                    
  the five years is not five years certain.  It means at the                   
  end of five years you either give the Department of Revenue                  
  an extension or get a jeopardy assessment.  If they're not                   
  Number 688                                                                   
  CHAIRMAN VEZEY:  "Thank you.  You didn't specifically                        
  comment on Section 3, the prevailing value for oil.  I guess                 
  you did."                                                                    
  MR. SULLIVAN:  "Well let me comment on it this way.  You                     
  can't sugarcoat a bad bill and make it a good bill.  Section                 
  1 is a bad bill.  Any bill that includes ...." (tape ends)                   
  TAPE 94-63, SIDE A                                                           
  Number 000                                                                   
  MR. SULLIVAN:  "...whether any change needs to be made.                      
  That's the way it is in royalty.  That there's an agreement,                 
  there's a reopener, a sit down session, agreement or                         
  baseball arbitration, and prospective application of any                     
  change.  This one looks like it's retroactive.  And I'm                      
  already opposed to retroactivity."                                           
  CHAIRMAN VEZEY:  "Thank you.  Are there further questions                    
  from the committee?  Representative Brice."                                  
  Number 016                                                                   
  REPRESENTATIVE BRICE:  "Thank you, Mr. Chair.  Quick                         
  question.  Why haven't (indiscernible) forced the issue and                  
  gone ahead and asked for the formal conference up-front,                     
  just to get the thing out of the way?"                                       
  MR. SULLIVAN:  "Very good question.   Let me give you a                      
  hypothetical in response, and see if you'll agree with  me.                  
  Let's say you go to your house tonight and there's a letter                  
  from the IRS  and it says `We just looked at your tax return                 
  and you owe $100,000 of additional taxes beyond what you                     
  paid.'  You've got a couple of choices, there's a phone                      
  number to call or now that you've got this, you've got the                   
  right to run right to court.  I think you'd pick up the                      
  phone, you'd call and try to find out what it's about and                    
  then you'd try to meet with an IRS agent, and try to settle                  
  it out - maybe it's just a big mistake.  The system in                       
  Alaska, that maybe the commissioner will explain to you                      
  later, but it starts out with the return and the audit and                   
  the assessment.  And then you're right - the taxpayer has a                  
  choice - he can go informal conference or formal conference.                 
  The formal conference is very, very much like a trial.  The                  
  state hires counsels, outside counsels, and experts.  The                    
  company hires outside counsels and experts.  There's                         
  discovery, there are depositions that are taken, and it is                   
  that record from the formal conference, that goes up to the                  
  Superior Court on appeal.  You don't get a new trial on the                  
  facts.  What we try to do when we get the assessment, is go                  
  to informal conference and point out there's a math error;                   
  we think you've misunderstood the documents that we gave you                 
  that led you to issue this portion of the assessment.  We                    
  might provide - we figure out that they don't understand                     
  something, and you put the same information you've given                     
  them, you explain it to them again.  Many of these issues go                 
  away at the informal conference.  Having finished resolving                  
  everything that you can, and a lot of time, that's a lot of                  
  it,  you then focus on the issues where there's a true legal                 
  conflict between you and the state on the interpretation of                  
  the statute.  That's what you take to formal conference.  It                 
  makes sense.  That's what we do."                                            
  Number 067                                                                   
  CHAIRMAN VEZEY:  "And the tribunal or the adjudicating                       
  counsel at the formal conference is?"                                        
  Number 069                                                                   
  MR. SULLIVAN:  "The hearing officer appointed by the                         
  Commissioner of Revenue, who happens to work for the                         
  Commissioner of Revenue, and then the taxpayer and the state                 
  -the DOR's counsel, which would be the Attorney General's                    
  Office, those lawyers present their cases to the hearing                     
  officer.  He renders a formal conference decision, and if                    
  the formal conference decision is in favor of the taxpayer,                  
  it is fixed and final - not appealable by the state.                         
  Because basically, the Department of Revenue is saying that                  
  the Department of Revenue was wrong.  But the taxpayer may                   
  appeal it if it's adverse to the taxpayer.  But the record                   
  from the formal conference is what is brought up to the                      
  Superior Court."                                                             
  CHAIRMAN VEZEY:  "So this formal appeal process is not in                    
  accordance with the Uniform Arbitration Act or the rules of                  
  the American Arbitration Association?"                                       
  (The response was inaudible).                                                
  CHAIRMAN VEZEY:  "Further questions from the committee?                      
  Representative Porter."                                                      
  Number 092                                                                   
  REPRESENTATIVE PORTER:  "Thank you, Mr. Chairman.  Would you                 
  agree, generally disagree or something in between on the                     
  quid pro quo between the dollar cap on processing for gas                    
  and the definition of (indiscernible.)"                                      
  Number 098                                                                   
  MR. SULLIVAN:  "Let's look at that.  Mr. Hosie made a                        
  comment.  His comment was, as I recall, that this was a                      
  compromise, that the dollar a barrel - the state says that                   
  the number is more like 56 cents, the companies say it's                     
  three to four dollars.  And then we have language that says                  
  that it may not exceed a dollar.  Now I read that as saying                  
  it might be 56 cents.  But it can't be three or four                         
  dollars, so I don't see this compromise here.  May not                       
  exceed a dollar includes 56 cents, but it doesn't include                    
  two, three, four dollars.  I see absolutely no compromise                    
  and absolutely no value."                                                    
  Number 116                                                                   
  CHAIRMAN VEZEY:  "Representative Brice."                                     
  Number 117                                                                   
  REPRESENTATIVE BRICE:  "Thank you, Mr. Chair.   At the start                 
  of your testimony, we'd had a brief discussion about the                     
  idea of the relation back theory.  Could you explain again                   
  why you don't think that it's an applicable doctrine in this                 
  Number 123                                                                   
  MR. SULLIVAN:  "You're asking me to give Exxon's side of the                 
  Supreme Court case that's going to be heard next Wednesday.                  
  I will provide you with the briefs, if you would like them.                  
  We have outside counsel handling that.  We disagree with the                 
  state's interpretation of the relation back theory.  The                     
  Superior Court disagreed with the state's relation back                      
  theory.   But I think it's about the only thing that the                     
  attorney general has to argue before the Supreme Court.  Mr.                 
  Hosie said they are very confident about their position.  I                  
  would submit that it would very appropriate for you to allow                 
  them to bring their position before the court.  If you pass                  
  this bill, that will not happen because this bill takes away                 
  all of my rights to be heard in the Supreme Court.  I have                   
  no rights, once you pass Sections 16 and 17, declaring that                  
  Section 1 - stating that Section 1, is declaratory of what                   
  the law was, and Section 17 saying that it is applicable to                  
  cases pending before the courts.  I'm out of there.  The                     
  attorney general will go up and hand them SB 377 and say                     
  that there is nothing for you to decide and that is not                      
  CHAIRMAN VEZEY:  "Is that all, Representative Porter?                        
  REPRESENTATIVE PORTER:  "Yes, thank you."                                    
  CHAIRMAN VEZEY:  "Representative Ulmer."                                     
  Number 154                                                                   
  REPRESENTATIVE ULMER:  "Thank you, Mr. Chairman.  Well, on                   
  that point, you said earlier that the day in court                           
  controversy, it's kind of an interesting way to frame the                    
  question.  I mean you're saying that you're being deprived                   
  of your day in court by this legislation because it, in                      
  essence, says that the state may continue to have its day in                 
  court on the merits of the assessments and the collection                    
  issues.  So, one's a process point, the other is a substance                 
  point.  And I think it's something we ought to clarify for                   
  the committee.  If the statute is not adopted, a timing                      
  question, a process issue, precludes the state from having                   
  its day in court in terms of the merits or the substance or                  
  the validity of the assessments.  And your day in court is                   
  limited strictly to an interpretation of a procedural limit                  
  on the ability to actually get at the merits of the case.                    
  So, they're not exactly equal and I think that that's what                   
  we're trying to struggle with here as we strike a fair                       
  balance between the industry and the state.  You know, I                     
  don't think anyone sitting around this table, likes the idea                 
  of retroactivity; although, I think in fairness to you, you                  
  should know that this legislature as already adopted a                       
  statute this session  that retroactivity precludes private                   
  nuisance lawsuits, for example.  I mean, we're quite willing                 
  to do that, unfortunately.  But, I think the question here                   
  is a procedural point.  We're not changing the rules, so to                  
  speak, in terms  of what taxes are owed.  We're changing the                 
  rules just in terms of how much time you get to debate over                  
  what the taxes are owed.  So, I don't know, I'd appreciate                   
  your comment on that, but you can't blame the state for                      
  trying to bring some certainty and guarantee that it will                    
  have an opportunity in court to collect the taxes."                          
  Number 192                                                                   
  MR. SULLIVAN:  "Mr. Chairman, let me give three points in                    
  response to that.  The first is, if I'm not incorrect, the                   
  private nuisance lawsuit issue - the attorney general came                   
  before a committee reviewing that bill and argued that                       
  because of the retroactivity, it was not the correct thing                   
  to do because it was probably unconstitutional.  I think I'm                 
  right -we may have to check.  Second,  I will agree that a                   
  procedural change within the year, is just that.  But a                      
  change which goes retroactive 18 years is the equivalent of                  
  changing the underlying law, because 18 years after the                      
  fact, many of the people who worked on issues that might be                  
  raised tomorrow if you pass this bill today, are no longer                   
  with Exxon Corporation.  Many have retired, some may have                    
  passed away.  Records on issues, that I haven't got the                      
  foggiest idea what they might be, have been moved several                    
  times in relocations, et cetera.  So, it's not procedural.                   
  It is going to the heart of the matter.  I think those are                   
  the points I'd like to make."                                                
  Number 218                                                                   
  REPRESENTATIVE ULMER:  "It may go to the heart of the matter                 
  in the sense of the evidence and the freshness of the                        
  material that needs to be presented in deciding it, but it                   
  doesn't go to the question of whether or not a fundamental                   
  right to sue, a cause of action, is being altered.  And I                    
  guess that's the distinction, isn't it, between the private                  
  nuisance example and this example.  It goes to the question                  
  of whether or not the right that an individual has to sue,                   
  based on the merits of that case versus the rights simply on                 
  the timeliness or the freshness or the staleness of the                      
  Number 228                                                                   
  MR. SULLIVAN:  "There is a fundamental right which is being                  
  abrogated by this legislation.  That is the right to rely on                 
  the laws.  The law is what the law is, and the Superior                      
  Court has stated what the law meant.  And we had a right to                  
  rely on that law.  Passing this legislation, if it were done                 
  today, I might get another assessment tomorrow.  I did get                   
  assessments that came eight or ten years after the year to                   
  which they related.  I was in trouble to begin with on                       
  those, because of the books and records, and corporate                       
  memory, and people who had retired and didn't remember the                   
  transaction and it was not fresh - it was stale.  That's why                 
  you have statute of limitations, so that I know where there                  
  may be differences of opinion between Exxon Corporation and                  
  any state or federal or foreign government, and I can gather                 
  the records while they're still fresh, I can gather the                      
  people while they're still fresh, and I can defend myself.                   
  This doesn't allow me to do that.  This type of legislation                  
  does not allow that."                                                        
  Number 248                                                                   
  REPRESENTATIVE ULMER:  "Back to Representative Brice's point                 
  though, if that was a real concern to Exxon, it seems to me                  
  that you would have gone to the formal hearing process, the                  
  formal adjudication, to bring closure when you had a higher                  
  degree of certainty about what the evidence would be.  And,                  
  I'm not sure whether in your response, you were suggesting                   
  that you don't feel as though there's due process                            
  associating with the hearing officer procedure in the                        
  Department of Revenue.  I don't know whether you're                          
  suggesting that or not."                                                     
  Number 257                                                                   
  MR. SULLIVAN:  "There are some concerns in that area.  They                  
  are unrelated to this bill and what's before us today.  We                   
  received a total of, if I remember correctly, eight                          
  assessments with respect to our 1978 year.  We started out                   
  with timely assessments, where we would analyze them,                        
  protest them, analyze, and then get another one, analyze it,                 
  protest it, analyze it, protest it.  And then we got ones                    
  that were untimely, where we analyzed and protested and                      
  included in the protest that this was not a valid assessment                 
  because the statute of limitations had run.  In the                          
  administrative process within the Department of Revenue, we                  
  agreed to accelerate the question on the statute of                          
  limitations by what's called bifurcating the case.  It was                   
  timely assessments issued with respect to ROI that you've                    
  heard about in ANS crude value, and we said, `Okay, we're                    
  going to put these over here and work them, but we're going                  
  to accelerate this question on the statute of limitations,                   
  because it is at the heart of getting the year closed.'  So                  
  that was taken through informal and formal on an accelerated                 
  basis.  We did try to accelerate the issue.  That still                      
  meant we didn't get an answer out of the formal conference                   
  until May of 1989.  We immediately went to the Superior                      
  Court.  There was about a two year period before a decision                  
  in, I think, in 1992.  And then the state appealed it."                      
  REPRESENTATIVE ULMER:  "Were due process issues raised in                    
  that litigation?"                                                            
  MR. SULLIVAN:  "I believe they may have been."                               
  REPRESENTATIVE ULMER:  "Okay, because I know in some                         
  proceeding, I wasn't sure whether it was yours, that the due                 
  process claim had been raised and that the court had ruled                   
  that there were no violations of due process in the hearing                  
  officer procedure.  And that, as a matter of fact, a number                  
  of them had been decided against the state which re-enforced                 
  the state's determination (indiscernible) that there wasn't                  
  a due process problem.  Thank you, Mr. Chairman."                            
  CHAIRMAN VEZEY:  "Thank you.  Representative Davies."                        
  REPRESENTATIVE DAVIES:  "Thank you.  The attorney general,                   
  also indicated the third method - second method, I guess,                    
  for stopping the clock which was to pay the assessment and                   
  then file a claim for a refund.   Would you comment on your                  
  view of that process."                                                       
  MR. SULLIVAN:  "...assessments were any where near the                       
  taxpayer's internal analysis of the ultimate liability, that                 
  would probably occur.  However, where they are significantly                 
  inflated, I don't know about other corporations, but we                      
  don't have the money to put on deposit with a lot of states,                 
  awaiting the process to get it back.  I'll give you an                       
  example in the federal arena.  Exxon was presented with an                   
  assessment from the federal government that incorporated an                  
  issue involving the value of Saudi crude.  Many of you may                   
  have heard of the Saudi Pricing case.  In any event, the                     
  assessment was multiple billions of dollars.  We chose, in                   
  that instance, to go to the tax court - to get to the tax                    
  court all you do is file a petition - if you want to go to                   
  the court of claims, you have to pay the tax and sue for a                   
  refund.  You have an alternative system, of going to the tax                 
  court.  We went to the tax court because we did not owe                      
  those dollars, and they were so substantial that we weren't                  
  going to pay them.  We had a recent decision in our favor on                 
  the Saudi Pricing case.  That was a multi-billion dollar                     
  case.  In the state arena, same thing.  If the tax is                        
  somewhere near the liability, then you'll seriously look at                  
  the opinion of paying and going for refunds.  Where there                    
  are huge differences between your analysis (indiscernible)                   
  and assessment, it's going (indiscernible)."                                 
  REPRESENTATIVE DAVIES:  "A follow-up on that specific point.                 
  When a company in its financial (indiscernible) claims that                  
  it has sufficient reserves to meet its potential liabilities                 
  in these court cases, when you make those statements, do you                 
  take into account your assessment of the risk of you losing                  
  those assessments?"                                                          
  Number 328                                                                   
  MR. SULLIVAN:   "Many, many companies do them many, many                     
  different ways.  A lot of companies, who have been around                    
  for a long time, might just have a (indiscernible)                           
  statistical average of what's happened over time                             
  (indiscernible).  I can't speak for industry or for business                 
  in general."                                                                 
  Number 333                                                                   
  REPRESENTATIVE DAVIES:  "So, I guess what you're saying then                 
  -you said there's a cash flow problem with doing that, so it                 
  must mean that there isn't actually a bank account somewhere                 
  that has the amount in it (indiscernible) the total                          
  liability that you might be exposed to.  Is that correct?"                   
  Number 337                                                                   
  MR. SULLIVAN:  "That is a correct statement.  There is not."                 
  Number 338                                                                   
  REPRESENTATIVE DAVIES:  "Thank you.  And then the last                       
  question I had has to do with Section 18 and I wondered if,                  
  apart from the fact that there is a Section 1 in this bill,                  
  could you comment on Section 18."                                            
  Number 341                                                                   
  MR. SULLIVAN:  "That's the NGL's.  And as I think I told you                 
  and we've had prior testimony from the attorney general that                 
  said that the state's position on NGL's is quote `unique'                    
  unquote.  Every other state treats them as gas, so whatever                  
  effective date you want in there.  All this does is, it                      
  gives certainty, I will agree with that, it gives certainty.                 
  It certainly says that the state of Alaska is no longer                      
  unique.  It's like the rest of the states.  It's treating                    
  natural gas liquids as gas, but if that's a compromise, the                  
  only thing it's doing is removing litigation, wherein we                     
  would show that natural gas liquids are gas."                                
  CHAIRMAN VEZEY:  "Thank you.  Representative Nordlund."                      
  REPRESENTATIVE NORDLUND:  "Thank you, Mr. Chairman.  Mr.                     
  Sullivan, you mentioned that there, or admitted basically,                   
  that there are certain sections of this bill that would help                 
  lead to lessen the amount of litigation in the future, but                   
  you said that Section 1 was going to lead to additional                      
  MR. SULLIVAN:  "I suspect."                                                  
  REPRESENTATIVE NORDLUND:  "And I know of at least one case                   
  that you won't need to litigate if that section passes, but                  
  what further litigation are you talking about.  I didn't                     
  follow that.  I wonder if you could comment on that."                        
  MR. SULLIVAN:  "Well, I suspect that serious consideration                   
  would be given by one or more companies, to challenge the                    
  constitutionality of SB 377, if passed (indiscernible)                       
  Section 1, to the constitutionality of a retroactive change                  
  in the law for 18 years."                                                    
  CHAIRMAN VEZEY:  "Representative Hudson."                                    
  MR. SULLIVAN:  "There may also, excuse me, Mr. Chairman, may                 
  be litigation in terms of a particular 78 case as to whether                 
  we have a property right in a decision of the Superior                       
  Court, in support of the constitutional challenge."                          
  Number 371                                                                   
  CHAIRMAN  VEZEY:  "Representative Hudson."                                   
  REPRESENTATIVE HUDSON:  "Thank you.  Mr. Sullivan, in                        
  layman's language, what is, as simply stated, the principal                  
  question before the court.  You've indicated that if this                    
  bill passes, it takes away your rights to proceed in the                     
  courts.  Maybe you could just help, me at any rate, if you                   
  could tell me, what is that question."                                       
  Number 376                                                                   
  MR. SULLIVAN:  "The question before the court is                             
  essentially, did the Superior Court - is the decision of the                 
  Superior Court correct?  And the decision of the Superior                    
  Court was that this statute - the assessment statute - was                   
  plain and unambiguous on its face, and not subject to any                    
  other interpretation.  That it specifically, the statute and                 
  the regs, had three enumerated exceptions:  Fraud, failure                   
  to file, or a joint agreement between the taxpayer and the                   
  Department of Revenue to extend the statute.  And that under                 
  those circumstances, three years means what it means.  That                  
  there is three years from the date the return is filed for                   
  the Department of Revenue to audit and issue an assessment.                  
  And that any assessment that came after that period, is                      
  invalid.  So, it's an appeal by the attorney general from a                  
  decision, which he disagrees with, to see if the Supreme                     
  Court will agree with him."                                                  
  CHAIRMAN VEZEY:  "Mr. Sullivan, do you have an idea of how                   
  many - what the total number of assessments that the state                   
  of Alaska has against Exxon right now, in terms of oil                       
  property tax or severance tax?"                                              
  MR. SULLIVAN:  "The number of outstanding assessments?"                      
  CHAIRMAN VEZEY:  "Yes."                                                      
  MR. SULLIVAN:  "We have received assessments for the 78 to                   
  81 income tax, we closed through 78 production, assessments                  
  for 79 through 89, and for the modified apportionment income                 
  tax 82 through 87, but that does not mean that there is one                  
  assessment per year.  I use the example of 1978, wherein we                  
  received eight separate assessments with respect to that one                 
  income tax year.  Four or five of those were timely and                      
  three or four, I can't remember, were after the statute had                  
  run, according to Exxon and according to the Superior Court.                 
  Let's go back again and make the point.   There are two                      
  Superior Court decisions.  One of them is on the six-year                    
  collection statute and it holds that the state's                             
  interpretation that the statute stops for the period of the                  
  administrative appeals in terms of final determination of                    
  liability, that the state is right.  There is another one                    
  that says that three years means what it says and you can                    
  assess within the three years or any extension thereof                       
  mutually agreed in writing.  And after that, any subsequent                  
  assessment is untimely.  Both of these statutes that you're                  
  being asked to change have been to the court and decisions                   
  have been rendered.  And based on the attorney general's                     
  split that two-thirds of the dollars are in the collection                   
  statute and one-third is in the assessment statute, I guess                  
  another way of looking at it is, the state won two-thirds                    
  and the taxpayer won one-third, right?"                                      
  CHAIRMAN VEZEY:  "Representative Ulmer."                                     
  REPRESENTATIVE ULMER:  "Thank you, Mr. Chairman.  Just one                   
  last question.  When you first began, you mentioned that                     
  this provision may not be different from other states, but                   
  what is different is that in other states, the legislature                   
  did not go back later and declare it to be the law.  That                    
  that is the way it's been in other states and there just                     
  wasn't an issue about how it was to be applied.  Now, in                     
  this case, the industry is representing this as                              
  retroactively changing the rules of the game.  The state is                  
  representing it as, in essence, blessing past practices.                     
  Basically, a statement on the part of the legislature that                   
  the legislation means what the state says it means, as                       
  opposed to what the industry says it means.  The state is                    
  basically - the attorney general has come to us and said,                    
  this is what we think it means.  You have indicated that if                  
  this was a longstanding policy, there is some evidence of                    
  the record, why it was not a longstanding policy, in terms                   
  of the Department of Revenue saying that they haven't made                   
  up their mind what their official policy is, but that's                      
  different than saying that that's what the attorney                          
  general's ruling is that that's what the law has always been                 
  in Alaska until the Superior Court came along and said that                  
  isn't what the three-year assessment statute means.  The                     
  Superior Court all of a sudden says it means something else.                 
  The attorney general says the Superior Court is wrong - it's                 
  always meant this, not that, and they're going to court,                     
  you're going to court, to get the Supreme Court to say, it                   
  means what the attorney general says, it doesn't mean what                   
  the Superior Court judge said it means.  That's where we                     
  really are.  And, I guess, what's very confusing to                          
  legislators, when the framing of the issue is retroactively                  
  changing the rules of the game.  It's that just somehow that                 
  the tax laws are being changed, which, of course, they're                    
  CHAIRMAN VEZEY:  "Representative Ulmer, could you please                     
  lead into a question somewhere?"                                             
  REPRESENTATIVE ULMER:  "Thank you, Mr. Chairman, I'm trying                  
  -I'm trying, honestly.  The framing of the issue as                          
  retroactively changing the rules of the tax law; that's what                 
  I'd like you to speak to at this point, if you would,                        
  because I see it as declaration of the law in a way that you                 
  do not like and the attorney general does like.  How is that                 
  consistent with your describing it as changing the rules by                  
  which the taxes are calculated in the state of Alaska?"                      
  MR. SULLIVAN:  "Well, let's take an example.  I got my first                 
  assessment on 78 and in that assessment it says `this                        
  assessment may change within a period of three years from                    
  the date of this assessment.'  Let's suppose that three                      
  years and one day later, now knowing the issues in the                       
  assessment for which I have to keep corporate records                        
  because they're in the assessment and these are issues that                  
  are going to be talked about, and throw everything else                      
  away.  Now in 1984, lo and behold, there's an Attorney                       
  General's Opinion that says, `With the showing of good                       
  cause, an assessment may be changed, but the Department of                   
  Revenue must show the reasons why they didn't originally put                 
  it in an earlier assessment.'  Now I'm out in the garbage                    
  can and I'm trying to find those records.  And then I get a                  
  letter in 19880 - well, then I see, Standard says the                        
  Department of Revenue says in the Standard Case that we have                 
  no position - now I'm looking for all the darn records.  And                 
  then I get a letter from the Department of Revenue that                      
  says, `We want you and others to file friends of the court                   
  briefs.'  And that letter, by the way, went to 30 or more                    
  companies.  Remember the first thing I did in my                             
  hypothetical - I threw out the records, because I had an                     
  indication that the Department of Revenue knew what the rule                 
  was.  I didn't even agree with that rule, that said three                    
  years from the date of the assessment, because I read the                    
  law and it said, `three years from the date the return was                   
  filed.'  That's the difference.  Now you go a year back and                  
  it's okay, as far as I'm concerned, to differentiate                         
  between, for example, changing the tax rate in 1978 from                     
  whatever it was then to something higher.  We all agree                      
  (indiscernible).  Change in administrative procedures                        
  surrounding a law back to the first of the year, maybe back                  
  to the year before, it's not going to be too big of a                        
  problem.  But when you go back 18 years, I have difficulty                   
  differentiating between the heart of the law and the rules                   
  around the law.  Boom - they are the same, because you're                    
  going back so far.  Each affects the other and they're                       
  indistinguishable.  That's my position."                                     
  CHAIRMAN VEZEY:  "Representative John Davies."                               
  Number 491                                                                   
  REPRESENTATIVE DAVIES:  "Thank you.  On that point, it seems                 
  to me that in every one of these cases, the state has filed                  
  an assessment within the three year period.  Isn't that                      
  MR. SULLIVAN:  "Yes."                                                        
  REPRESENTATIVE DAVIES:  "And in the case that you're talking                 
  about, of say three years and one day after that assessment                  
  was filed, you throw away your records.  But at that point                   
  in time, aren't you still in dispute with the state."                        
  MR. SULLIVAN:  "On an identified portfolio of issues.  Those                 
  included in the assessment that I received."                                 
  Number 500                                                                   
  REPRESENTATIVE DAVIES:  "But I mean the - you're still in                    
  dispute on those back taxes."                                                
  MR. SULLIVAN:  "On the issues in the assessment that I have                  
  received.  That is correct."                                                 
  REPRESENTATIVE DAVIES:  "I guess that I'm having trouble                     
  understanding why if there is still a dispute going on, why                  
  you would throw any records away."                                           
  MR. SULLIVAN:  "Because I've narrowed down the area of                       
  dispute between the state or federal government or whatever,                 
  and myself.  I know what records I have to keep because I                    
  have been told what issues exist when they gave me the                       
  assessment.  By giving me the assessment, they also told me                  
  what issues didn't exist.  And those are the ones that                       
  weren't in the assessment.  But, lo and behold 10 years                      
  later, the issues that didn't exist, pop up in an                            
  assessment, which I say is untimely."                                        
  Number 511                                                                   
  REPRESENTATIVE DAVIES:  "I guess if the IRS sent me an audit                 
  of my 1985 tax records, I wouldn't throw anything away that                  
  said 1985 on it."                                                            
  MR. SULLIVAN:  "If they didn't say they were going to audit                  
  your 85, the IRS sent you a notice saying, `In your 1985                     
  return, we want you to provide additional information with                   
  respect to interest deductions.  You provide information.                    
  And then you get an assessment, and then the federal statute                 
  runs, and you throw out all of your documentation on                         
  charitable contributions, because you know the issue you                     
  have with the IRS is on interest expense deductions.  And                    
  now, five years later, they come back and issue you another                  
  assessment and ask about your charitable contributions, and                  
  you say `Wait a minute, I threw all my records out.'  That's                 
  what we're talking about.  Known and unknown."                               
  Number 523                                                                   
  REPRESENTATIVE DAVIES:  "How long does Exxon usually keep                    
  these kind of records around?  Is there a general rule of                    
  thumb or is it just whatever?"                                               
  Number 527                                                                   
  MR. SULLIVAN:  "There is a records retention and review                      
  procedures, and I'm using a hypothetical here in terms of                    
  just trying to show how 18 years retroactive is impacted by                  
  many, many things.  It's impacted by records, it's impacted                  
  by corporate memory, I mean, people who were there when the                  
  transactions - even sometimes, you can find the people and                   
  they go `Ya, I remember that.'  If I had an assessment in                    
  three years, they'd say `I remember that!'"                                  
  REPRESENTATIVE DAVIES:  "But there isn't any general policy                  
  about how long you keep stuff, is there?  It just depends on                 
  what kind of a document it is."                                              
  MR. SULLIVAN:  "Don't throw things out before the statute of                 
  limitations runs."                                                           
  REPRESENTATIVE DAVIES:  "Or agreement (indiscernible.)"                      
  MR. SULLIVAN:  "Probably you don't throw things out before a                 
  statute of limitations that has been looked at by a court                    
  CHAIRMAN VEZEY:  "Mr. Sullivan, on that point, I mean, would                 
  you just kind of - could you give us an idea of the volume                   
  of records that Exxon Corporation stores or how many square                  
  feet of warehouse that you store your records in."                           
  MR. SULLIVAN:  "I wouldn't have the foggiest idea."                          
  CHAIRMAN VEZEY:  "We're talking entire warehouse fulls."                     
  MR. SULLIVAN:  "A lot, and that's about as close as I could                  
  CHAIRMAN VEZEY:  "I'm sorry, Representative Davidson, I                      
  believe was (indiscernible)."                                                
  Number 542                                                                   
  REPRESENTATIVE DAVIDSON:  "Well, thank you, Mr. Chairman.                    
  Mr. Sullivan, you've given us a very tightly crafted                         
  statement here, it seems, but and it was a little too fast                   
  for a slow person like me, but it seems, you have indicated                  
  that - let me pass for a moment, Mr. Chairman.  Well, let me                 
  ask you this.  Given the limitations factor, is it not in                    
  your interest to grant all of the requests by the state to                   
  extend your dispute?"                                                        
  Number 554                                                                   
  MR. SULLIVAN:  "Mr. Chairman, I indicated earlier that on                    
  every occasion that Exxon has been requested by the state to                 
  grant an extension, we have done so.  Now let me mention                     
  there's one where it didn't work.  Year-end 1993, the                        
  Department of Revenue - it was about mid-December, the                       
  statute of limitations for the production tax years 87, 88                   
  and 89 were going to expire at year-end 93, and I got a                      
  call, it was in December, and was advised by the state - or                  
  Exxon got a call, I don't think I got it directly - that                     
  they needed a little more time to properly complete the                      
  transportation portion of the assessment.  And they asked if                 
  Exxon would extend the statute of limitations another time;                  
  we had already extended  it once or twice before.  And when                  
  the fellow in my department who got the call asked me I                      
  said, `Well, the problem that the division has is with                       
  respect to the transportation portion of the assessment and                  
  I will agree to give them an extension limited to the                        
  transportation portion of the assessment, that I'm going to                  
  receive.'  Now they said that's where their problem was, I                   
  do want to speed up the process, they told me everything                     
  else was ready, I said, `Then I'll give you a limited                        
  extension for the area that you tell me you need it for.'                    
  They said, `No' and issued the assessment on December 31.  I                 
  guess that's the only time I've played hardball with them,                   
  which was simply saying, `I'll extend  for the reason you                    
  told me you need the extension.'  Every other time, it's                     
  just been a blanket extension."                                              
  REPRESENTATIVE DAVIDSON:  "Mr. Chairman, I have just one                     
  other question, if I may.  You've characterized this piece                   
  of legislation as something that you just cannot live with.                  
  But it is my understanding that it was your company that was                 
  involved in crafting negotiated law to go forward with this                  
  MR. SULLIVAN:  "That is not so.  I believe I came up here a                  
  week ago Wednesday, when I was advised that there was going                  
  to be a meeting between industry and Department of Revenue                   
  and Department of Law to work on a potential bill on some of                 
  these issues that are outside of Section 1.  And I came here                 
  to do that, and the landscape quickly changed.  I saw these                  
  bills, and I've been consistent in my opposition to this                     
  since then."                                                                 
  REPRESENTATIVE DAVIDSON:  "So if this bill goes forward, did                 
  I understand you correctly to say that, you still have to go                 
  forward with the case before the Supreme Court, right?"                      
  MR. SULLIVAN:  "No, if this bill is passed, what the                         
  legislature has done is pulled the rug out from any                          
  opportunity for me to have my day in court.  Section 16 in                   
  this bill says that it is declaratory of existing law as                     
  originally enacted and Section 17 says that it applies to an                 
  action or appeal pending before a court on the effective                     
  date.  The import of those two sections if this bill passes,                 
  is to take away my right - my day in court - to defend the                   
  Superior Court decision that was rendered in my favor.                       
  Because the law that is before the court is the three-year                   
  statute and this changes that statute.  So I have nothing to                 
  argue, because the legislature will have taken away what I                   
  am in the Supreme  Court attempting to finalize.  Something                  
  that we have been consistent in our interpretation of the                    
  statute from the very first assessment that came three years                 
  after a return was filed.  And we've been consistent in that                 
  position for over 10 years and we are now six months - well,                 
  we're five days from an oral argument and probably four to                   
  eight months from a decision.  This legislative body may                     
  take the opportunity for a final resolution of that question                 
  away.  That's what happens when you pass this bill."                         
  CHAIRMAN VEZEY:  "Further questions from the committee?                      
  Representative Hudson."                                                      
  REPRESENTATIVE HUDSON:  "One more.  Mr. Sullivan, if the                     
  court case that's in process right now, proceeded as                         
  scheduled and the lower court's position is upheld, does the                 
  state risk the loss of all assessments made within the three                 
  year limit or are only the increased assessments that were                   
  introduced after the three year limit at risk?"                              
  MR. SULLIVAN:  "I can only speak to Exxon's case and I will                  
  remind you that on average, the state has had five or six                    
  years for each tax period, to audit Exxon because we have                    
  entered into a voluntary written agreement with the state to                 
  extend the statute.  I assure you, any assessment that was                   
  issued during the first three years or any extension to the                  
  three years that Exxon has received, is not at risk at all.                  
  Those are valid assessments.  I also am telling you that in                  
  Exxon's opinion, the Superior Court decision in the Tesoro                   
  case - in the Tesoro case, on the six-year collection                        
  statute is the law and says that the $2 billion that the                     
  attorney general told you is quote `at risk under the                        
  assessment statute' is not at risk.  Because there is a                      
  court decision that says the attorney general is correct.                    
  If it's taxpayer to taxpayer on what the valid assessments                   
  are, I've got years worth of valid assessment                                
  (indiscernible) eight years after I filed the return and                     
  that's because I agreed with the Department of Revenue to                    
  REPRESENTATIVE HUDSON:  "Without figures, Mr. Sullivan, what                 
  percentage of the total difference between the state's claim                 
  and the company's view is protected within the three years                   
  or the agreed upon extensions.  What percentage is outside                   
  of that?   Just a percentage, roughly speaking."                             
  Number 642                                                                   
  MR. SULLIVAN:  "You're talking Exxon, specific?"                             
  REPRESENTATIVE HUDSON:  "Yes, sir."                                          
  MR. SULLIVAN:  "I'm not going to be specific simply because                  
  of the audience, but I will tell you that as a percentage of                 
  the total assessment, it's not (inaudible)."                                 
  REPRESENTATIVE HUDSON:  "But the total, the percentage that                  
  is within the fair game..."                                                  
  MR. SULLIVAN:  "Oh, the fair game portion.  I'm sorry                        
  (indiscernible.)   The percentage of timely assessments is                   
  very large."                                                                 
  REPRESENTATIVE HUDSON:  "So then, at risk is the smaller of                  
  the percentage."                                                             
  MR. SULLIVAN:  "That's right.  I'm sorry, I confused                         
  CHAIRMAN VEZEY:  "Further questions from the committee?                      
  Seeing none, we'll stand adjourned until 9:00 a.m. tomorrow                  

Document Name Date/Time Subjects