Legislature(2009 - 2010)SENATE FINANCE 532
02/16/2010 02:30 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Oil Industry Employment & Resident Hire | |
| Taps History & Tariffs | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
SENATE FINANCE COMMITTEE
February 16, 2010
1:30 p.m.
1:30:01 PM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 1:30 p.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Charlie Huggins, Vice-Chair
Senator Johnny Ellis
Senator Dennis Egan
Senator Donny Olson
Senator Joe Thomas
MEMBERS ABSENT
None
ALSO PRESENT
Jeff Hadland, Economist & Research Program Supervisor,
Department of Labor and Workforce Development; Dona
Keppers, Audit Master, Tax Division, Department of Revenue;
Joyce Lofgren, Petroleum Economist, Department of Revenue
PRESENT VIA TELECONFERENCE
None
SUMMARY
OIL & GAS OVERVIEW
OIL INDUSTRY EMPLOYMENT & RESIDENT HIRE
TAPS HISTORY & TARIFFS
^OIL INDUSTRY EMPLOYMENT & RESIDENT HIRE
1:30:31 PM
Co-Chair Stedman introduced the topic of oil industry
employment and noted that the focus would be on the Arctic
oil and gas industry.
JEFF HADLAND, ECONOMIST & RESEARCH PROGRAM SUPERVISOR,
DEPARTMENT OF LABOR AND WORKFORCE DEVELOPMENT, went over
the data used to develop the numbers on oil and gas
employment. He said the primary source of data is from
quarterly unemployment insurance contribution reports which
contain information on social security numbers, occupation,
place of work, and the wages. In addition, there are weekly
unemployment insurance records. The data is matched with
administrative data files, including the Permanent Fund
Dividend file, which is the primary source of information
for residency. In addition to the data reported by
employers, the department conducts monthly surveys which
provide further data.
1:33:18 PM
Mr. Hadland related that the oil industry had an average
annual employment in 2009 that was slightly higher than in
2008; however, the second half of the year showed a slight
decline, a trend that is continuing.
Mr. Hadland used a handout entitled, "Alaska Department of
Labor and Workforce Development - Oil Industry Employment,
Unemployment and Resident Hire" (copy on file). He turned
to a graph which depicted employment from 1980 to 2010 -
slide 1. Major oil company employment was stable over the
year, but oil field and services employment is declining.
The projection for 2010 is a slight decline. The forecast
is for a .4 percent decline in all jobs statewide and a .3
percent decline in oil industry jobs from 2009 to 2010.
Co-Chair Stedman requested specific information about Point
Thomson and general maintenance.
Senator Thomas wanted more information about the dramatic
increase in employment from 2005-9.
1:35:59 PM
Mr. Hadland reported that the data could not be broken down
by projects. That would require social security numbers of
individual workers on the projects.
Senator Thomas wondered about forecast data from 2003 -
2005 which predicted increases in employment. He inquired
if a particular field was a factor. Mr. Hadland shared a
number of factors which impact employment forecast
projections: revenue estimates, industry sources, and the
history of employment.
1:38:11 PM
Mr. Hadland turned to slide 2, which shows the percent of
resident workers in the oil and gas industry from 1988 to
2008. There has been an increase in non-resident workers
due to an increased reliance on oil field service company
workers.
Co-Chair Stedman returned to slide 1 to point to an
increase in employment from 2004 - 2008, but a drop in
resident employment during the same period, as shown on
slide 2. He requested numbers rather than percentages. Mr.
Hadland offered to provide that information.
1:41:03 PM
Mr. Hadland turned to slide 3 and reported on the total
workers working by quarter in the oil industry, from both
the oil support and the oil extraction sectors. Oil
extraction numbers have remained stable, while oil support
numbers have increased until the third quarter of 2009,
when there was a decline. Co-Chair Stedman requested
information about additional quarters from the beginning of
PPT in 2005. Mr. Hadland agreed to provide that
information.
Co-Chair Stedman wanted to get a feel for how much is due
to employment effort, credits, time, and dollars going into
oil extraction, versus oil support.
1:42:29 PM
Mr. Hadland spoke of monthly oil industry employment from
2005 to 2009 - slide 4. In January of 2005 average monthly
employment was slightly over 8,000 workers; currently,
there are about 13,000. In recent months there has been a
decline.
1:43:26 PM
Mr. Hadland described slide 5 which shows the percent of
oil industry nonresident workers in Alaska between 1995 and
2008. The information is broken down by oilfield services,
oil and gas extraction, and total workers.
Mr. Hadland discussed slide 6 - unemployment insurance (UI)
claimants by industry from 2003 to 2009; oil and gas
related employment, as well as all industry employment.
There was a significant increase of UI claimants in 2009
over 2008 in the oil industry. For all industries, claims
increased by about 50 percent.
1:44:48 PM
Co-Chair Hoffman asked if the rise shown in slide 6 is due
to hiring more out-of-state workers. Mr. Hadland related
that the increase in UI claims can be caused by many
different factors. Co-Chair Hoffman said it looks as though
it is caused by more non-resident workers. Since 2002, the
number of non-resident oil industry workers has increased.
Mr. Hadland reported that the UI claims are from all
workers. There is not a disproportionate share of non-
resident workers who are receiving UI benefits. Co-Chair
Hoffman maintained that in-state claimants doubled. Mr.
Hadland explained that the inter-state claims are not
necessarily from out-of-state residents.
1:47:29 PM
Senator Ellis referred to slide 5 and asked if the
percentages shown are average numbers of nonresident
oilfield services workers per year. He wondered if some
companies have a much higher number. Mr. Hadland agreed
that the rate varies between employers. He noted that
resident hire rates are published annually and that
information is available.
Senator Ellis said he had heard that the nonresident
workforce at one company was between 50 and 55 percent. He
opined that there were a number of companies with higher
than 32 percent non-resident workers.
Co-Chair Stedman asked for additional information about
individual company employment percentages. Mr. Hadland said
he could provide that information. Senator Ellis voiced
appreciation. He suggested the information may create
pressure to hire in-state workers.
1:50:38 PM
Mr. Hadland turned to the subject of Alaska unemployment
insurance weeks paid by month - slide 7. He reported an
increase in the number of 'weeks paid" the last several
months.
Mr. Hadland provided a copy of the most recent press
release from the Department of Labor and Workforce
Development - slide 8. It provides an overview of
unemployment in Alaska and the U.S. on a monthly basis.
Mr. Hadland turned to a graph which shows the monthly oil
industry employment for the U.S. Co-Chair Stedman wondered
if that same information was available for Alaska. Mr.
Hedland referred to slide 4, but noted there was a slight
difference.
1:53:30 PM
Co-Chair Stedman suggested it would be helpful for the
committee to see the national and state charts match up.
Mr. Hadland agreed to provide that information.
Senator Thomas turned back to slide 1, Alaska Oil and Gas
Employment 1980-2010. He pointed out that employment was up
from 2003 to 2009 and then flattened out. Slide 2 shows a
downtrend in resident workers. Slide 6 shows an increase in
UI claimants. He concluded that if the employment is up,
but the UI claims are also up, then the people being
employed are not Alaskan residents.
Mr. Hadland said that the employment decline occurred in
the last half of 2009 and that resulted in the spike in UI
claims. Although the average for the year is trending up,
employment is going down. He speculated that other factors
could cause UI claims to increase. The largest numbers of
UI claims are from electricians, plumbers, and pipefitters.
The data is not necessarily in conflict.
Co-Chair Stedman review requests for further information on
regression similarities between the national oil industry
and Alaska's oil industry.
1:58:26 PM
^TAPS HISTORY & TARIFFS
1:58:45 PM
DONA KEPPERS, AUDIT MASTER, TAX DIVISION, DEPARTMENT OF
REVENUE, listed her credentials and introduced Ms. Lofgren.
She outlined her presentation as covering netback
calculations, tariff history, and going forward.
Co-Chair Stedman asked for a definition of a netback.
JOYCE LOFGREN, PETROLEUM ECONOMIST, DEPARTMENT OF REVENUE,
referred to a handout entitled, "TAPS Tariff History &
Going Forward" (copy on file). She shared information on
slide 3. She said that in Alaska, state oil and gas leases
and production tax statutes calculate royalty and tax based
on wellhead value. Oil is primarily sold at West Coast
refineries. Wellhead value is calculated through a netback
process that allows for deduction of transportation costs
to point of sale.
Ms. Lofgren turned to slide 4 to describe two primary
transportation cost components, pipeline tariffs and marine
(tanker) costs. Pipeline tariffs are set by state and
federal regulators. Intrastate rates are set by the
Regulatory Commission of Alaska (RCA). Interstate rates are
set by the Federal Energy Regulatory Commission (FERC).
Ms. Lofgren showed a simple calculation of the netback
process - slide 5. It was estimated with February 2010
data. She listed deductions taken to arrive at the ANS
wellhead price. Co-Chair Stedman defined ANS as Alaska
North Slope.
Ms. Lofgren showed slide 6, a graph that depicts the TAPS
tariff relative to the price of crude oil. She stressed
that this relationship was extremely significant to the
Department of Revenue because of the millions of dollars
affected. There were times when the TAPS tariff was half of
what the price of crude was.
2:03:17 PM
Ms. Lofgren spoke of the initial TAPS tariff - slide 7. She
related that TAPS began shipping oil in 1977. The initial
tariffs filed by TAPS carriers charged over $6 per barrel.
The filed rates go into effect subject to refund until
litigation is completed.
Ms. Lofgren reported that the TAPS tariff has been
controversial since the beginning. She discussed the
initial TAPS tariff litigation which began in 1977 - slide
8. The state protested the initial tariffs at the FERC and
the APUC (RCA predecessor). In 1985, with no end in sight
to the litigation, the state and the TAPS carriers
negotiated a settlement.
Co-Chair Stedman asked, for the benefit of those listening,
who owns the tariff when it gets paid to TAPS. Ms. Lofgren
explained that TAPS has five owners: Conoco, ExxonMobil,
BP, Unical, and Koch. There are two tariffs, intrastate and
interstate. Co-Chair Stedman commented that the owners of
TAPS are the same participants as in Prudhoe Bay and
Kuparuk. Ms. Lofgren said that was correct.
2:05:26 PM
Ms. Lofgren turned to slide 9 - TAPS Settlement Agreement
(TSA). She explained the TSM methodology. A formulaic
method to calculate annual rates was created. It involved
five tariffs due to the joint ownership arrangement. The
agreement also provided for an annual true-up based on
actual costs. The settlement formula set a ceiling on the
filings. It was agreed that the state would not protest the
charged rate unless it was higher than those derived from
the TSM methodology, there were imprudent costs, or it was
inconsistent with the law.
2:06:32 PM
Ms. Lofgren explained slide 10 - other TSA provisions. The
agreement binds only the state and TAPS carriers. It left
open that third party shippers are free to challenge
settlement rates any time. The state could audit annual
filings. The agreement could be terminated by any of the
parties by January 1, 2009; otherwise it was set to expire
at the end of 2011.
Ms. Lofgren shared information on slide 11 - TAPS
intrastate rate protest. In December 1996 Tesoro Alaska
filed a protest of the 1997 TAPS intrastate rates. In 2002,
RCA issued Order 151 which stipulated that the rates
charged during 1997 to 2000 were not just and reasonable. A
lower intrastate rate was established and refunds were
ordered.
2:07:52 PM
Ms. Lofgren discussed interstate rate protests - slide 12.
In 2005, the state protested carriers' interstate rates for
unlawful discrimination. The state argued that the
difference between the interstate and intrastate rates
violated TSA and Interstate Commerce Act prohibitions.
Anadarko then protested 2005 rates as not being just and
reasonable. The state and Anadarko protested 2006, 2007,
and 2008 TSA-based annual rates.
Ms. Lofgren reported on the FERC Decision and Opinion 502 -
slide 13. In May 2007 the FERC Administrative Law Judge
(ALJ) Cintron issued an initial decision finding the TAPS
2005 and 2006 interstate rates not just and reasonable. In
June 2008 FERC issued Opinion 502 affirming the ALJ on all
issues. They ordered carriers to file new 2005 and 2006
rates based on current FERC regulatory formula (154-B
methodology). They also ordered refunds based on re-filed
rates. The refunds for 2005-2006 resulted in an additional
$600 million to the state for adjusted production tax and
royalty liabilities.
2:09:38 PM
Ms. Lofgren discussed 2007-2008 TAPS rate protests - slide
14. The result was that FERC ordered TAPS carriers to
recalculate and re-file 2007 and 2008 annual rates based on
Opinion 502 methodology. The refunds for 2007-2008 resulted
in an additional $200 million to the state for adjusted
production tax and royalty liabilities.
Co-Chair Stedman asked for the total TAPS tariffs per year
for marine transportation. Ms. Lofgren did not have those
numbers, but offered to provide them. Co-Chair Stedman said
there was about $1 billion total in shipping TAPS tariffs.
Ms. Lofgren gave an example: 250 million barrels at ten
cents equals $25 million a year.
2:11:21 PM
Ms. Lofgren shared information about the TAPS settlement,
which terminated effective January 1, 2009 - slide 15. The
state terminated the settlement. She discussed the post-
settlement rate protests - slide 16. The TAPS carriers
filed new intrastate rates at the end of 2008 - early 2009,
and the new interstate rates in the second half of 2009.
The state and Anadarko protested those rate filings and a
new rate hearing is set at the FERC for October 2010.
Ms. Lofgren showed a graph which depicts the components of
the TAPS Tariff over time - slide 17. It is not to be
confused with total operating expenses; it is dollars per
barrel. The components have changed over time. It depicts
the effect of the settlement agreement.
Co-Chair Stedman asked what year the change from the
settlement agreement took place. Ms. Lofgren said the drop
happened in 2005. Co-Chair Stedman noted it was a
substantial change. Ms. Lofgren agreed. The major component
of the TAPS tariff is now operating expense. Early on, the
major component was depreciation. After-tax margin is no
longer a part of the rate calculation.
2:14:29 PM
Ms. Lofgren turned to slide 18 - cost of service
components. She listed the components added to operating
expenses: return of rate base, return on rate base,
allowance for funds used during construction (AFUDC), and
income tax allowance. Co-Chair Stedman asked if AFUDC
included all capital expenditures. Ms. Lofgren explained
that it takes a period of time before AFUDC are inserted
into the carrier's property in service. Cost of service or
total revenue requirement is the sum of the components.
2:16:03 PM
Ms. Lofgren explained slide 19 - TAPS throughput and
tariff. The left side shows millions of barrels per year
(production) and the right side shows dollars per barrel.
She stressed the significant impact production has when
calculating a tariff. She emphasized how important the
throughput or deliveries are.
Co-Chair Stedman returned to slide 18 to ask for more
information on the TAPS settlement methodology, opinion
502, and the "shift down". He asked if the state was
currently operating under 502. Ms. Lofgren said that was
correct. She reviewed the components of the tariff again -
slide 17. She discussed an after-tax margin that was part
of the total revenue requirement. It started out at 35
cents per barrel back when the settlement agreement was
entered into. It was to increase at the rate of inflation.
It also had to be figured into the income tax allowance.
The after-tax margin and the income tax allowance disappear
after the settlement agreement and the change to Opinion
501, which is strictly a cost-based tariff.
2:18:18 PM
Co-Chair Stedman referred to slide 19 and asked if the
spread between Opinion 502 and the TSA was around $650
million on 240 million barrels a year. Ms. Lofgren agreed.
Co-Chair Stedman asked if it adds value to the wellhead and
increases the state's share. Ms. Lofgren said that was
correct under 502, as opposed to being at the higher tariff
resulting in a lower wellhead. If the tariff is lowered,
there will be a higher wellhead. Co-Chair Stedman
emphasized the "magnitude of the dollars we're working in".
Ms. Lofgren agreed it made a huge impact.
2:19:51 PM
Ms. Keppers discussed the importance of the other essential
component piece for calculating the tariff, the throughput
- slide 20. She pointed out that the tariff increases if
the costs increase, the throughput declines, or a
combination of both.
Ms. Keppers described the throughput required to maintain
the 2010 tariff level - slide 21. She spoke of methods to
address the throughput issue. For example, Alyeska Pipeline
has been undergoing low flow studies to understand the
impacts of reduced throughput. They believe that TAPS will
continue to operate in a safe and efficient manner for the
plan period with additional investment. They also believe
the physical life of TAPS will last as long as the
integrity of the pipeline and facilities are maintained
adequately to allow continued safe and environmentally
sound transport of crude.
Ms. Lofgren discussed another way Alyeska is working on
throughput issues - working on strategic reconfiguration of
new pumps.
Co-Chair Stedman requested information about slide 21. Ms.
Lofgren explained how calculations were done to determine
the throughput level needed to maintain the 2010 tariff
level. The point of the table is to show that "you don't
necessarily have to have increased tariffs just because the
cost of service is going up".
2:23:30 PM
Co-Chair Stedman referred to a statute change that allowed
the state to put forth a "fair and reasonable tariff". Ms.
Lofgren said there is a regulation that addresses the
reasonableness test of cost of transportation. Regulations
will be calculated using a cost-based methodology and
implemented by the Department of Revenue. Co-Chair Stedman
asked when those regulations would be in place. Ms. Lofgren
reported that the regulations were out for comment now. Co-
Chair Stedman stated that regulations' impact on the tariff
will have to be addressed.
2:25:03 PM
Ms. Lofgren pointed out that regulations would not affect
the tariff so much as determine what the Department of
Revenue would allow for taxes.
Ms. Lofgren spoke of the tariff going forward - slide 22.
She said there would be a uniform rate on TAPS, a filed
rate of $4.10. There is currently no settlement agreement
between the TAPS carriers and the state. There will be no
access to data other than FERC filings and protests. There
are stacked rate filings and protests. There is a FERC
hearing scheduled for October 2010.
2:26:41 PM
Senator Egan asked how often operating expenses are
audited. Ms. Lofgren said that it has been some time since
TAPS has been audited. Senator Egan referred to a previous
slide regarding the FERC ruling. Ms. Lofgren explained that
the tariff is not audited.
Ms. Lofgren talked about the complications of having
stacked rate filings and protests. She reported that there
is a FERC hearing on October 2010 to discuss unresolved
issues. She noted that FERC does audit the TAPS tariff,
even if the state does not.
2:28:45 PM
Senator Thomas noted that the second greatest component of
the TAPS tariff, about 12 percent, is "other". He requested
a definition of "other". Ms. Lofgren explained that it was
the rate of return, which entails the return on equity on
the rate base and the deferred return. Co-Chair Stedman
asked for figures on the rate of return. Ms. Lofgren
thought it was about 12 to 14 percent. She reported that in
2008 or early 2009 the FERC put out a policy which now
allows a proxy group to determine the rate of return. The
rate of return on the rate base was significantly higher
than in previous years.
ADJOURNMENT
The meeting was adjourned at 2:30 PM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 021610 DOLWF Oil Industry Employment Resident HIre.pdf |
SFIN 2/16/2010 2:30:00 PM |
|
| 2010 02 16 GCA Alaska-Investment Comparison Memo.pdf |
SFIN 2/16/2010 2:30:00 PM |
Oil and Gas Production Tax Review |
| 2010 02 18 DOL O&G Employment Response SFC.pdf |
SFIN 2/16/2010 2:30:00 PM |
|
| 2010 02 18 DOL O&G Employment Attachments SFC.pdf |
SFIN 2/16/2010 2:30:00 PM |