SENATE CS FOR HOUSE BILL NO. 286(RES) "An Act amending the manner of determining the royalty received by the state on gas production by directing the commissioner of natural resources to accept, under certain circumstances, the transfer price of the gas if established by transfer price order of the Regulatory Commission of Alaska; extending and amending the requirements applicable to the credit that may be claimed for certain oil and gas exploration expenses incurred in Cook Inlet against oil and gas properties production (severance) taxes, and amending the credit against those taxes for certain exploration expenditures from leases or properties in the state; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. REPRESENTATIVE RALPH SAMUELS, the bill's sponsor, informed the Committee that one component of this bill would address an issue brought forward by Anchorage Municipal Light and Power (ML&P). That issue involves how the Department of Natural Resources (DNR) would value ML&P gas royalty prices. Currently, DNR would establish the royalty price based upon "the value of a contract that Shell had at the Beluga River Field with Municipal Light and Power. Municipal Light & Power then bought Shell's interest in the field itself. DNR agreed to use the contract price until the contract expired. The contract expires in 2005 and the language in the bill would allow DNR to use the transfer price now since there is no longer a sale going on they own the gas in the field. They are transferring it to themselves. The transfer price is set by" the Regulatory Commission of Alaska (RCA). He noted that RCA has voiced its support for this legislation. Co-Chair Green understood that the bill's sponsor would appreciate testimony being presented by the RCA in regards to Section 1, which is the section that pertains to ML&P. Representative Samuels affirmed. 10:45:28 AM MARY JACKSON, Staff to Senator Tom Wagoner and Aide to the Senate Resources Committee, stated that her comments would address Sections 2 through 9 of the Senate Resources (RES) Committee committee substitute before the Committee. The RES Committee decided to include in this bill the Exploration Incentives Credit program that originated in HB 71. That bill would, at this time, remain "in the possession of the Senate Resources Committee". Ms. Jackson continued that this bill therefore would extend to Bristol Bay and other areas such as the Healy, Red Dog, and Nenana Basin, the incentive credits that were initially developed for the Alaska Peninsula. A different set of incentives, mirroring those specified in SB 163, would apply to Cook Inlet. 10:46:53 AM Co-Chair Green ascertained therefore that the provisions included in this bill are "all recent" events. Ms. Jackson affirmed. Therefore, this bill would establish a new set of exploration credits, modeled after the exploration credit program authorized in the year 2003 in SB 185. She remarked that the Senate Finance Committee at that time was the first to conduct hearings on that credit program too. Ms. Jackson noted that this bill would extend the exploration credits program to all areas of the State "south of the Brooks Range". Specific standards and rules for the exploration credit program would apply to the Cook Inlet Basin because that area "is a more mature basin." The Senate Resources Committee also altered two other provisions that were included in the original version of HB 286: they "eliminated the clause that eliminated" the Arctic National Wildlife Refuge (ANWR). While ANWR had been included in SB 185 in the year 2003, it had been eliminated from the exploration credit program included in the original version of this bill. The RES Committee also addressed "some concern" in regards to the regulation timeline that had been written in regards to SB 185. As a result, a new set of regulations would be implemented after the regulations enacted by SB 185 expire in 2007. Ms. Jackson informed the Committee that there has been a substantial amount of support for all areas of this legislation throughout its development. Co-Chair Green asked whether the Legislature might receive negative feedback and be accused of "giving away the farm" were it to adopt this bill. Ms. Jackson responded that such feedback would be unlikely. The purpose of the legislation would be "to put some oil in the pipeline". Co-Chair Green agreed that an increase in oil production is "absolutely needed" to refill the pipeline. Co-Chair Green asked Kate Giard of the Regulatory Commission of Alaska to comment in regards to the inclusion of the ML&P transfer price specified in Section 1 of the bill. KATE GIARD, Chairman, Regulatory Commission of Alaska, Department of Commerce, Community and Economic Development, shared that due to the fact that ML&P is a regulated utility, RCA had reviewed the issue and via an [unspecified] RCA order had conveyed the methodology that would be acceptable to the RCA in regards to the transfer price. RCA "has fully vetted" the calculation mechanism regarding ML&P's transfer price and is "comfortable with this legislation." 10:50:08 AM Ms. Giard specified that ML&P would file, on an annual basis, the transfer price calculation. RCA would review that information and, were a question or concern to arise, a 30-day comment period would be established in which people could comment in regards to the transfer price. In addition, were the Attorney General "representing the public advocate" concerned about the calculation, he or she would intervene in the process. This would allow the public to have an opportunity to get involved in process involving the calculation of the transfer price. She assured that a process was in place, the transfer price would be calculated, and the Department of Natural Resources should not experience any problems with it. In summary, RCA "fully supports" the legislation. Senator Dyson noted, for the record, that he had been a member of the Municipality of Anchorage Assembly during the time that the original transfer price negotiations had been conducted, and as such had played a significant but strictly public process role in the endeavor. Senator Olson questioned the reason that a specific latitude is identified in Sec. 3, page three line 23 of the bill. The area in question is in his election district. 10:51:57 AM Ms. Jackson responded that the original tax that became effective with the 2003 legislation is in place in regards to this area. The language in questions would allow the existing tax codes to be extended out to the year 2010 for areas south of the identified latitude. Senator Olson asked for confirmation that the tax codes are currently in place. Ms. Jackson affirmed. The 2003 legislation had established a four- year incentive program that would be in effect from 2003 to 2007. ANWR was included in this legislation in order to allow exploration in that area to qualify. She understood there to be one entity that is considering conducting seismic studies there. In response to a question from Co-Chair Green, Ms. Jackson stated that the new credits provided in this bill would apply to areas "south of the Brooks Range". Co-Chair Wilken moved to report the bill from Committee with individual recommendations and accompanying fiscal notes. There being no objection, SCS HB 286(RES), accompanied by Senate Concurrent Resolution #16, was REPORTED from Committee with zero fiscal note #2 dated May 5, 2005 from the Department of Natural Resources; indeterminate fiscal note #3 dated May 5, 2005 from the Department of Revenue; and zero fiscal note #4 dated May 5, 2005 from the Department of Commerce, Community and Economic Development. 10:53:21 AM 10:54:27 AM