HOUSE SPECIAL COMMITTEE ON OIL AND GAS February 17, 2000 10:12 a.m. MEMBERS PRESENT Representative Jim Whitaker, Chairman Representative Fred Dyson Representative Gail Phillips Representative Joe Green Representative John Harris Representative Brian Porter Representative Allen Kemplen Representative Tom Brice Representative Hal Smalley MEMBERS ABSENT All members present COMMITTEE CALENDAR HOUSE BILL NO. 290 "An Act relating to stranded gas pipeline carriers and to the intrastate regulation by the Regulatory Commission of Alaska of pipelines and pipeline facilities of stranded gas pipeline carriers." - MOVED CSHB 290(O&G) OUT OF COMMITTEE HOUSE BILL NO. 307 "An Act establishing an oil and gas corporate income tax and making conforming amendments; and amending the tax on corporations levied under the Alaska Net Income Tax Act to eliminate the state corporate income tax on taxable income of less than $10,000; and providing for an effective date." - HEARD AND HELD PREVIOUS ACTION BILL: HB 290 SHORT TITLE: STRANDED GAS PIPELINE CARRIERS Jrn-Date Jrn-Page Action 1/14/00 1924 (H) READ THE FIRST TIME - REFERRALS 1/14/00 1924 (H) O&G, RES, FIN 1/14/00 1924 (H) REFERRED TO O&G 1/27/00 (H) O&G AT 10:00 AM HOUSE FINANCE 519 1/27/00 (H) Heard & Held 1/27/00 (H) MINUTE(O&G) 2/01/00 (H) O&G AT 10:00 AM CAPITOL 17 2/01/00 (H) Heard & Held 2/01/00 (H) MINUTE(O&G) 2/10/00 (H) O&G AT 10:00 AM CAPITOL 17 2/10/00 (H) Heard & Held 2/10/00 (H) MINUTE(O&G) 2/15/00 (H) O&G AT 10:00 AM CAPITOL 17 2/15/00 2/17/00 (H) O&G AT 10:00 AM CAPITOL 17 BILL: HB 307 SHORT TITLE: OIL AND GAS CORPORATE TAX ACCOUNTING Jrn-Date Jrn-Page Action 1/21/00 1972 (H) READ THE FIRST TIME - REFERRALS 1/21/00 1973 (H) O&G, L&C, FIN 1/21/00 1973 (H) REFERRED TO O&G 2/16/00 2225 (H) COSPONSOR(S): AUSTERMAN 2/17/00 (H) O&G AT 10:00 AM CAPITOL 17 WITNESS REGISTER JAMES E. EASON Alaska North Slope Gas Commercialization Sponsor Group 8611 Leeper Circle Anchorage, Alaska 99504-4209 POSITION STATEMENT: Discussed amendments to HB 290. ROGER MARKS, Petroleum Economist Department of Revenue, 550 West Seventh Street Anchorage, Alaska 99501-3555 POSITION STATEMENT: Discussed amendments to HB 290. LORI BACKES, Legislative Aide to Representative Jim Whitaker Alaska State Legislature Capitol Building, Room 13 Juneau, Alaska 99801 POSITION STATEMENT: Provided information on HB 290. MICHAEL HURLEY Alaska North Slope Gas Commercialization Sponsor Group ARCO Alaska, Inc. 700 G Street Anchorage, Alaska 99510-0360 POSITION STATEMENT: Discussed amendments to HB 290. WILLIAM G. BRITT, JR., State Pipeline Coordinator Department of Natural Resources 411 West Fourth Avenue, Suite C Anchorage, Alaska 99501-2343 POSITION STATEMENT: Discussed amendments to HB 290. MIKE BARNHILL, Assistant Attorney General Oil, Gas and Mining Section Department of Law P.O. Box 110300 Juneau, Alaska 99811-0300 POSITION STATEMENT: Discussed amendments to HB 290. REPRESENTATIVE ERIC CROFT Alaska State Legislature Capitol Building, Room 400 Juneau, Alaska 99801 POSITION STATEMENT: Sponsor of HB 307. JOHN R. MESSENGER, Attorney at Law Preston Gates & Ellis Anchorage, Alaska POSITION STATEMENT: Testified regarding legal issues pertaining to HB 307. ACTION NARRATIVE TAPE 00-12, SIDE A Number 0005 CHAIRMAN JIM WHITAKER called the House Special Committee on Oil and Gas meeting to order at 10:12 a.m. Members present at the call to order were Representatives Whitaker, Dyson, Phillips, Green, Harris, Porter, Kemplen and Smalley. Representative Brice arrived as the meeting was in progress. HB 290-STRANDED GAS PIPELINE CARRIERS Number 0177 CHAIRMAN WHITAKER announced the first order of business would be HOUSE BILL NO. 290, "An Act relating to stranded gas pipeline carriers and to the intrastate regulation by the Regulatory Commission of Alaska of pipelines and pipeline facilities of stranded gas pipeline carriers." Chairman Whitaker said HB 290 dealt with intrastate access to a gas pipeline both initially and after its construction. CHAIRMAN WHITAKER noted for the record that Representative Brice had arrived. CHAIRMAN WHITAKER directed attention to a series of draft amendments in members' packets. He introduced Amendment 1 [1- LS1269\A.2, Chenoweth, 2/14/00]. [Please refer to the bill packet for the specific changes incorporated in Amendment 1.] He explained that the only change made by Amendment 1 is this: the phrase "undeveloped natural gas pipeline" is stricken and replaced by "North Slope natural gas pipeline." CHAIRMAN WHITAKER outlined the rationale for the change. He said that HB 290 as originally drafted used the phrase "stranded gas pipeline," which relates to the Stranded Gas Act; the basic premise of that Act is that the state and its subdivisions will lower their taxing regime to a point at which a [stranded gas] project becomes feasible. As originally submitted, HB 290 infers that the state must reduce its taxing regime on a natural gas pipeline regardless of whether a project involves stranded gas. Amendment 1 still offers the opportunity for a tax reduction under the Stranded Gas Act, but it also allows the option of not reducing state and municipal taxes on other pipeline projects. REPRESENTATIVE BRICE asked whether this amendment would preclude either of the two pipeline projects now proposed. CHAIRMAN WHITAKER assured him it would not. REPRESENTATIVE PHILLIPS inquired about an earlier draft of Amendment 1. CHAIRMAN WHITAKER said it was likewise related to the concern about precluding projects that did not need the tax break adherent to the Stranded Gas Act. Number 0702 REPRESENTATIVE PORTER made a motion to adopt Amendment 1. He then asked why the current version of the amendment specifies North Slope gas rather than being geographically neutral. CHAIRMAN WHITAKER said there had been some concern that Cook Inlet would be adversely affected by HB 290, and that to deal with that concern, those drafting Amendment 1 were geographically specific. REPRESENTATIVE PHILLIPS requested input from James E. Eason. JAMES E. EASON, Alaska North Slope Gas Commercialization Sponsor Group, spoke from Anchorage by teleconference. He said the sponsor group does not have a problem with the amendment as it is now drafted, but he thought the earlier version could have opened up a universe of concerns. Number 0893 REPRESENTATIVE PHILLIPS asked for some clarification, then made a motion to adopt the amendment to the amendment. CHAIRMAN WHITAKER declared that the amended version of Amendment 1 had been moved. Hearing no objections, he invited further questions. REPRESENTATIVE KEMPLEN asked if someone from the Department of Revenue was available to comment. CHAIRMAN WHITAKER confirmed that Roger Marks was on the teleconference line. REPRESENTATIVE KEMPLEN asked Mr. Marks if from the Administration's perspective he could see any difficulties regarding the language of the proposed amendment. ROGER MARKS, Petroleum Economist, Department of Revenue, testified from Anchorage by teleconference. He said the Administration thinks that the proposed language is fine. He added that the Administration had foreseen potential regulatory confusion with earlier wording. Number 1000 REPRESENTATIVE PORTER AND CHAIRMAN WHITAKER briefly discussed and clarified that the amendment to Amendment 1 replaces the words "undeveloped natural gas" with "North Slope natural gas" throughout HB 290. [The bill as originally drafted used the words "stranded natural gas." The first draft of Amendment 1 replaced that phrase with "undeveloped natural gas." The amendment to Amendment 1 replaced "undeveloped natural gas" with North Slope natural gas."] CHAIRMAN WHITAKER, hearing no objection, declared that Amendment 1 [in its final version, as amended] was adopted. Number 1049 CHAIRMAN WHITAKER then turned to Amendments 2 and 2B. REPRESENTATIVE GREEN made a motion to adopt Amendment 2. [Please refer to the bill packet for the specific changes incorporated in Amendment 2.] CHAIRMAN WHITAKER explained that Amendment 2 deals with intrastate access, removing the requirement for a take-or-pay contract. It also allows public utilities with fairly small- volume individual customers to submit a written commitment with a "best current estimate" of needs. It further requires public utility shippers and non-public utility shippers with large- volume individual customers to submit a take-or-pay contract with their application. Thus Amendment 2 allows a bit more flexibility in initial entry. REPRESENTATIVE KEMPLEN asked if a representative from the Regulatory Commission of Alaska (RCA) was available. CHAIRMAN WHITAKER said no, unfortunately. REPRESENTATIVE HARRIS objected for purposes of discussion. REPRESENTATIVE KEMPLEN expressed a desire to know if the RCA considered the solution to be a workable one. MR. MARKS said he thought the concern the Administration had voiced the previous week would not disappear with Amendment 2. That concern was related to the possibility of building for a capacity that is not used, thereby creating additional risks for the project. CHAIRMAN WHITAKER asked his aide, Lori Backes, to testify, saying she had been in close contact with Nan Thompson, Commissioner/Chair of the RCA. LORI BACKES, Legislative Aide for Representative Jim Whitaker, Alaska State Legislature, confirmed that she had been in contact with Nan Thompson regarding her concerns and the manner in which Amendment 2 would resolve those concerns. Ms. Backes said that with regard to initial capacity and Amendment 2, Ms. Thompson is satisfied that the determination of what constitutes a commitment would fall under the RCA and that there would be a period for public comment. MS. BACKES added that she and Ms. Thompson also had discussed Amendment 3, and that the same comments apply to it. REPRESENTATIVE HARRIS withdrew his objection. Number 1382 CHAIRMAN WHITAKER, hearing no further objections, declared that Amendment 2 would be incorporated into an eventual committee substitute (CS). REPRESENTATIVE PORTER made a motion to adopt Amendment 2B. [Please refer to the bill packet for the specific changes incorporated in Amendment 2B.] CHAIRMAN WHITAKER addressed Amendment 2B, saying it simply restates what is in existing law but restates emphatically that the commissioner of [the Department of] Natural Resources is required to consider in-state, in-kind usage as a very high priority, and that there will be legislative review and approval of the commissioner's decision. The concern being addressed was that there be intrastate access to gas after pipeline construction. In response to a question from Representative Phillips, Chairman Whitaker provided clarification that it was not necessary to make the language in Amendment 2B match that in Amendment 1. CHAIRMAN WHITAKER advised the committee that concern had been expressed by legislative counsel in the Legal and Research Services Division that Amendment 2B may be entering a gray area of legislative power as opposed to the power of the administration. Chairman Whitaker said he thinks this question will be addressed in another committee of purview. CHAIRMAN WHITAKER, hearing no objections, declared that Amendment 2B would be incorporated into an eventual CS for HB 290. Number 1512 REPRESENTATIVE GREEN made a motion to adopt Amendment 3. [Please refer to the bill packet for the specific changes incorporated in Amendment 3.] CHAIRMAN WHITAKER explained Amendment 3, saying that if expansion, extension or enlargement of the pipeline is necessary, HB 290 sets forth the criteria upon which the RCA must make its determination, stating that "the requirement must not impose undue financial burden on the carrier or its customers." Amendment 3 also sets into law the requirement that the cost of expansion be borne by the person making the request, considering any benefits to customers of the carrier. The amendment simply rewords the criteria in a less ambiguous fashion and removes any mention of who must bear the costs. Amendment 3 allows the RCA to use a utility methodology rather than a common carrier methodology to determine who will bear the cost. The ultimate criterion used for making a decision under utility methodology is public interest, as opposed to a simple pro-rata basis. CHAIRMAN WHITAKER, in response to Representative Brice, provided clarification that language in Amendment 3 would conform to that of Amendment 1. REPRESENTATIVE DYSON asked to hear any comments from Jim Eason. CHAIRMAN WHITAKER, at the request of Mr. Eason, clarified that the Amendment 3 before the committee was the same as a draft he had previously seen. MR. EASON said the sponsor group had worked very closely with Ms. Thompson to draft it. He said Amendment 3 was designed to resolve the hybrid issue, which the sponsor group believes it does. Number 1707 CHAIRMAN WHITAKER, hearing no further questions or objections, declared that Amendment 3 would be incorporated into an eventual CS for HB 290. CHAIRMAN WHITAKER then pointed out that Amendment 5 dealt further with the difference between methodologies, that is, utility as opposed to common carrier. Number 1741 CHAIRMAN WHITAKER clarified that Amendment 4B had replaced Amendment 4. REPRESENTATIVE GREEN moved to adopt Amendment 4B, which read as follows: Page 8, lines 15 and 16: Delete ",but excluding" Insert "; the term includes" CHAIRMAN WHITAKER stated that this issue has become somewhat contentious. Some parties have said that if Amendment 4B is included, it is a "deal killer." Other interested parties have said that if it is not included, it is a deal killer. He said that, quite frankly, he was confused and had not been able to discern one way or another. He pointed out that this is not the last committee of purview. He said the reason for making Amendment 4B at this time is that the exclusion of the marine facilities from the definition also excludes the marine terminal from oversight by the Joint Pipeline Office, Department of Revenue. If the Joint Pipeline Office does not have regulatory oversight, who does? The best he had been able to determine was that the Alaska Departments of Natural Resources, Commerce [and Economic Development] and Labor [and Workforce Development, and so forth, as well as a host of federal regulatory agencies, will have oversight; the effect might be to take a step backward into anarchy. It was the purpose of the Joint Pipeline Office in the first place to do away with that anarchy. CHAIRMAN WHITAKER expressed a second concern, that the marine terminal's exclusion from the definition of a North Slope natural gas pipeline also by extension excludes the marine terminal from the Right of Way Leasing [Act], eliminating that oversight. He said he wanted not to "regulate this thing to death" but to look for the pitfalls. Exclusion from the Right of Way Leasing Act could have a negative effect on another project, and those associated with another project have voiced that very concern. However, he said he was prepared to pass HB 290 from the committee that day with Amendment 4B as proposed, and then, if there are concerns about the terminal being excluded or included, other committees of purview can deal with them. REPRESENTATIVE PHILLIPS said she was opposed to Amendment 4B; it would be a mistake to exclude the terminal facilities from the oversight of the Joint Pipeline Authority, leaving operators subject to all of the state and federal agencies that could be applicable. CHAIRMAN WHITAKER said he agreed with Representative Phillips but thought that passage of Amendment 4B would have that effect. [After brief discussion, Representative Phillips and Chairman Whitaker reached a mutual understanding that if the committee does not amend HB 290, there will not be Joint Pipeline Office purview, but will be a host of regulatory agencies that the Joint Pipeline Office has replaced. Chairman Whitaker then invited either Michael Hurley or Jim Eason to express a differing position.] Number 1956 MICHAEL HURLEY, Alaska North Slope Gas Commercialization Sponsor Group, ARCO Alaska, Inc., said the Alaska North Slope Pipeline Sponsor Group's original intent, in putting the language in place, was not to in any way change the Joint Pipeline Office's current statutory authority. The Joint Pipeline Office has authority now over pipelines, and that is understood and accepted. The question that came up was whether the marine terminal and the LNG plant itself were going to be covered. Traditionally, the Joint Pipeline Office has regulated all the pipelines in the state but not the plants at the end of pipelines, regardless of whether those plants are producing fertilizer or LNG. MR. HURLEY said the sponsor group wondered what other kinds of plants there might be at the ends of pipelines, and whether it was desirable to have the Joint Pipeline Office regulating all of those plants. The sponsor group was not trying to do things one way or the other, but, in the exclusion the sponsors had made, the sponsors also took the LNG plant and marine terminal facilities out of the rate base upon which intrastate users' tariff is calculated. Including a terminal in the system raises the cost of all intrastate movements because the system thereby becomes larger. CHAIRMAN WHITAKER acknowledged that Mr. Hurley's point was valid. REPRESENTATIVE BRICE asked if it would be acceptable to the sponsor group to deal with a plethora of regulatory agencies. MR. HURLEY replied that it would be, and that sponsors had planned for that as normal operation. He said there are certain laws and regulations one needs to follow, and the sponsors are prepared to follow those. REPRESENTATIVE PHILLIPS observed that as the late Representative Ron Larson used to say, "Some of my friends think I should vote this way, and some of my friends think I should vote that way, and I'm going to vote with my friends." Number 2113 REPRESENTATIVE KEMPLEN expressed interest in hearing the Administration's perspective on Amendment 4B. WILLIAM G. BRITT, JR., State Pipeline Coordinator, Department of Natural Resources, said oversight and common carriage are two separate issues. Neither the State Pipeline Coordinator's Office nor its parent agency, the Department of Natural Resources, has an opinion on the common carriage issues associated with the terminal. They do have an opinion, however, on the systems approach to oversight of the facilities that they oversee, an opinion in favor of a coordinated approach as opposed to a fractured one. MR. BRITT explained that the Joint Pipeline Office neither adds nor subtracts oversight to any facility. The various agencies within the Joint Pipeline Office have the same missions within that office that they would have otherwise. For an LNG facility, the Department of Environmental Conservation would still have authority over air emissions and water emissions, and the Department of Labor [and Workforce Development] would still do electrical and safety work; that would be true whether they were co-located in the single office or in different locations. It is just an exercise in efficiency to have the agencies working together in a single location. CHAIRMAN WHITAKER asked if that efficiency would adhere not only to the governmental agencies but also to the facility itself. MR. BRITT said he believed so, but suggested that it might be appropriate to ask those who would be operating that facility. REPRESENTATIVE KEMPLEN asked Mr. Britt if he thought making Amendment 4B would be a prudent thing to do. MR. BRITT replied that he thought it would be. There are existing definitions of "pipeline" and "pipeline facilities" within the Right of Way Leasing Act, and that definition has been perfectly serviceable for every facility dealt with, both new and historic. Amendment 4B would bring the definition in HB 290 into line with that existing statutory definition. REPRESENTATIVE GREEN noted that the mission statement for the Joint Pipeline Office does not mention facilities. He asked Mr. Britt if that was an omission that needs to be corrected. MR. BRITT said the Joint Pipeline Office considers pipelines to include facilities, as that is the definition included in the Right of Way Leasing Act. At present, out of the plethora of pipelines that are overseen, the only pipeline that has a facility is the Trans-Alaska Pipeline System (TAPS), and the Joint Pipeline Office oversees that marine terminal at Valdez. REPRESENTATIVE GREEN said he was just wondering why the mission statement was fairly detailed about pipelines, with no mention at all about facilities; it seemed a little incongruous. Number 2303 MR. BRITT reiterated that in the Right of Way Leasing Act, the term "pipeline" is defined to include facilities. REPRESENTATIVE BRICE requested clarification from the Department of Revenue of a point Mr. Hurley had made about the impact Amendment 4B would have on the tariff paid by in-state users. ROGER MARKS responded, saying it was his understanding that it would be possible to include the marine terminal facilities in the definition of the pipeline for the Right of Way Leasing Act but exclude those facilities from the definition for purposes of RCA jurisdiction or rate making; therefore, he thought including the marine terminals in the Right of Way Leasing Act would not necessarily mean that the cost of those terminals would have to be included in the tariff for intrastate use. MR. HURLEY asked if the effect of the amendment would be to bring the terminal facilities back under the common carriage rubric for the entire system. CHAIRMAN WHITAKER said he did not know the answer to that question. That is not the intent, he said, indicating the committee would try to take action that would preclude that. He again acknowledged that there are pros and cons and, as yet, no answer with regard to them. His suggestion was that the House Special Committee on Oil and Gas [adopt] Amendment 4B and leave the issue to a committee of later purview. He said he did not like to do that, but that it was necessary to be realistic with regard to the time constraints. he added that everyone wants a good piece of legislation on this to pass. REPRESENTATIVE PHILLIPS maintained her opposition to Amendment 4B, saying there were still too many questions. She pointed out that the committee had the alternative of simply removing the amendment from the table, leaving clarification for a later time. Number 2433 CHAIRMAN WHITAKER asked Mr. Britt a question regarding possible negative effects on another project, such as a terminal facility that has been substantially permitted in Valdez. Would the inclusion of Amendment 4B negatively affect the status of that proposed project? MR. BRITT said he was not sure. TAPE 00-12, SIDE B Number 2742 MR. BRITT continued, saying that he was not certain that the amendment would have any effect on the proposed facility at Valdez, considering the authorizations it already has in hand. REPRESENTATIVE GREEN moved to amend the amendment [4B] by deleting lines 15 through 20. There was discussion concerning confusion over drafts of the Amendments 4 and 4B, after which Representative Green withdrew his motion. CHAIRMAN WHITAKER stated that the committee is dealing with 4B, not 4. He then declared that 4B has not been proposed, nor will it be. CHAIRMAN WHITAKER then asked Mike Barnhill to address some of the issues and questions that had been put forward. Number 2125 MIKE BARNHILL Assistant Attorney General, Oil, Gas and Mining Section, Department of Law, said the Right of Way Leasing Act has governed pipelines in Alaska since 1972, and the definition of pipelines [always] has included marine terminal facilities. Amendment 4B changes that for the first time in 25 years by removing marine terminal facilities from the definition of "pipeline." MR. BARNHILL said, with all due respect to Mr. Hurley, that he categorically disagreed with his contention that inclusion of marine terminal facilities in the Right of Way Leasing Act for purposes of DNR oversight means that marine terminal facilities will be included in the rate base for the purposes of the Pipeline Act. That is absolutely incorrect, he stated. All it does is provide for oversight by the land management agency of the state. If it is excluded from the definition of pipeline in the Pipeline Act, it will be excluded from the rate base. MR. BARNHILL expressed concern about changing a definition that has been in the Pipeline Act since 1972. He thought it might be more appropriate for Mr. Britt to address the issue, but volunteered that land management oversight of marine terminal facilities in this state is of critical importance. The Valdez marine terminal has been regulated under the Right of Way Leasing Act for 25 years, and the sponsor group is proposing to change that. He thought the legislature would be well advised to consider that suggestion very cautiously. Upon a roll call vote, Representatives Porter, Kemplen, Brice and Whitaker voted in favor of Amendment 4B. Representatives Dyson, Phillips, Green, Harris and Smalley voted against it. Therefore, Amendment 4B failed by a vote of 4-5. REPRESENTATIVE GREEN moved to adopt Amendment 5, which read: Page 4, line 24: Delete "The" Insert "Except as provided by AS 42.06.370(c), the" Page 7, following line 21: Insert a new bill section to read: "*Sec. 7. AS 42.06.370 is amended by adding a new subsection to read: (c) Rates demanded, observed, charged, or collected by a stranded gas pipeline carrier for intrastate service shall be designed as if that portion of the stranded gas pipeline were a public utility regulated under the provisions of AS 42.05." Renumber the following bill section accordingly. CHAIRMAN WHITAKER explained that HB 290 acknowledges that the RCA will set the rate of tariff on the intrastate portion of the pipeline. However, there had been some question about which rate method would apply, common carrier or utility. Amendment 5 sets out very clearly that the utility rate methodology would apply, the concern being that public interest be the highest priority with regard to determining the rate and usage. He invited comments. REPRESENTATIVE PHILLIPS said she did not support the utility rate methodology for this and so was going to vote no. CHAIRMAN WHITAKER asked whether there is a higher priority than public interest. REPRESENTATIVE PHILLIPS replied that she thought the common carrier rate methodology would benefit intrastate usage. She emphasized that the issue was, in her mind, a matter of structure. CHAIRMAN WHITAKER asked if a pro-rata basis, which is the determinant for prioritization on a common carriage line, takes priority over public interest. REPRESENTATIVE PHILLIPS explained that she was not saying that. Rather, she was saying that she does not look at the proposed pipeline as a utility and therefore does not think the utility rate structure is applicable. CHAIRMAN WHITAKER said that while he appreciated her comments and took them with all due respect, he disagreed with her logic. Number 2162 REPRESENTATIVE BRICE questioned whether the committee might be creating a hybrid, as addressed in discussion of Amendment 3, blurring the line between utility and common carrier. CHAIRMAN WHITAKER said he thought the committee was doing the opposite, providing further clarification. MR. MARKS reiterated the concern that the Administration had expressed the previous week that the thrust of HB 290 places the proposed pipeline under the Pipeline Act, and that specifying utility rate making under the Pipeline Act is opening the door to a great deal of ambiguity that could increase rather than decrease risks for the proposed project. Mr. Marks confirmed that he had the same concerns as those expressed by Representative Brice. REPRESENTATIVE PHILLIPS asked to hear from Mr. Eason. Number 2083 MR. EASON said the sponsor group believes that the amendment is inappropriate at this time. It is important to try to maintain options and keep open the possibility of looking at the facts that are going to develop with any project as it works toward viability. It is important to leave open the discussions for what kind of methodology will be used. Sponsors believe that the RCA has the authority, under existing law and under case law, to [create a rate] structure, that they will have a public process to do so, and that it is premature at this time to specify that the RCA must use a utility rate making methodology. MR. EASON further stated that the sponsors share the same concerns that Representative Phillips has expressed. The sponsors have tried very hard to resolve the ambiguities and the hybrid appearance of what the sponsor group originally had proposed. Sponsors certainly did not intend to create a hybrid or to create any confusion around a hybrid, but when the hybrid issue was brought to their attention and suggestions were made for resolving it, they thought it was important to do that, so that everyone was comfortable that jurisdiction was under either the Pipeline Act or the Utilities Act. Amendment 5 seemed, to the sponsors, a step back toward potential conflict and confusion as to how the proposed pipeline would be regulated. Number 2011 REPRESENTATIVE DYSON asked Mr. Eason how Amendment 5 further confuses the hybrid issue. MR. EASON said that under existing state law, a pipeline can operate either under the utility statutes or under the Pipeline Act. The RCA has a long history of rate making under each. With Amendment 5, the proposed pipeline would be the first pipeline operating under the Pipeline Act that would come under a tariff- setting methodology that was never applied before to a pipeline under that Act. MR. EASON said he thought there would also be a risk of creating ambiguities for future administrators of the RCA, or for future administrators of the Department of Law or future legislators, as to what the real intent was and whether or not one could infer that there would be some obligation for the pipeline project - this one or another - to operate as a utility. The sponsors of this project do not want to operate as a utility. They want to provide [gas] for in-state use, and for utilities to serve as utilities. He said the sponsor group does not want it to become muddied or unclear as to whether their pipeline project would have the obligation, at some point in the future, to serve as a utility. REPRESENTATIVE DYSON stated that, in his mind, the discussion was getting at the heart of the issue. From the position of the owners of the gas, getting it to market in the most advantageous terms makes sense. It also makes sense to individual citizens that it is not the sponsor group's responsibility to look out for them. That is the legislature's job, so legislators have an additional concern that Mr. Eason and the sponsor group do not have. It was his sense that having something like a utility structure that takes into account a public good that might slightly adversely affect the bottom line is something that the legislators need to consider. Legislators very clearly have an interest that is not just a profit and a bottom line. Number 1847 MR. EASON said he thought the most productive part of the discussion since introduction of the bill had been the discussion around how to make gas available under reasonable terms and conditions, without creating unusual barriers or impediments for small utilities, large utilities, individual homeowners and landowners along the proposed pipeline. Virtually all the discussion the RCA brought to the table was directed toward that, and subsequent discussion produced Amendments 2 and 3. MR. EASON said the sponsor group had done its best to try to remove any barrier to those parties needing instate gas from the beginning of the project and in the future beyond that. Sponsors lowered the barriers originally in the bill: the take-or-pay contract, a reservation fee, and other provisions. All that a small utility, or a customer served by a small utility, needs to do now is to provide the RCA with a best estimate of what that applicant is going to need in the way of gas, and the RCA has full authority, representing all Alaskans, to make sure that there is enough capacity built in the gas pipeline, and that it is available with rates the RCA approves. That will ensure that the public's interest is preserved. REPRESENTATIVE DYSON asked Mr. Eason if he meant that would be possible under the common carrier model. MR. EASON affirmed that. REPRESENTATIVE DYSON said that if there was a respectful and informed contrary opinion to what Mr. Eason had said, he would like to hear it. MR. BARNHILL asked for an opportunity to look over materials for a few minutes and then speak to the question. REPRESENTATIVE PHILLIPS commented that if the committee were to put something like Amendment 5 in statute, mandating the way the rates are going to be structured, there could be a problem in the future when the regulatory commission went through its job and the whole public process, and might come up with a different opinion than what is in the statute. CHAIRMAN WHITAKER said he did not think that was what the committee was considering. It is determining the criteria by which rates are determined and including the notion that public interest is a higher priority than a common carrier determinant, which is pro rata. REPRESENTATIVE PHILLIPS replied that by putting the utility rate into statute, the committee would be making a predetermination for the RCA. MR. BARNHILL commented that there is no legal impediment to Amendment 5. Whether this [specifying a rate-making methodology] is a wise idea as a policy matter is a question best addressed to the chair of the RCA, Nan Thompson. Mr. Barnhill said he was having difficulty understanding how Amendment 5 would create ambiguity, because it says that only for rate-making purposes is this entity to be treated as a public utility. He said he thought there were more policy issues than legal issues at stake. Number 1650 REPRESENTATIVE DYSON asked Mr. Barnhill if he shared Mr. Eason's opinion that the RCA has the authority to look after consumers' and utilities' interests, and that authority is not impeded in the absence of Amendment 5. MR. BARNHILL asked Representative Dyson if he was asking whether the RCA can accomplish public interest objectives at the moment under the Pipeline Act. REPRESENTATIVE DYSON affirmed that. MR. BARNHILL said he thought the origin of the differences folks have been addressing between the Utilities Act and the Pipeline Act have to do with how property is valued for rate-making purposes under the Utility Act and how property is valued under the Pipeline Act. They are different. Beyond that, there are public interest provisions in the Public Utilities Act which do not appear in the Pipeline Act, but whether that means that one cannot consider public interest in the Pipeline Act, he did not know. Mr. Barnhill said he would prefer to defer to Ms. Thompson on that. CHAIRMAN WHITAKER explained that Ms. Thompson was not available that day. He said he was sure Amendment 5 would receive further discussion in other committees. He asked for a roll call vote on Amendment 5. Number 1517 Upon a roll call vote, Representatives Dyson, Harris, Kemplen, Brice, and Whitaker voted in favor of Amendment 5. Representatives Phillips, Green, Porter, and Smalley voted against Amendment 5. Therefore, Amendment 5 was adopted by a vote of 5-4. REPRESENTATIVE PHILLIPS asked about previous drafts of two amendments. CHAIRMAN WHITAKER explained that one of them had become Amendment 2 and one had become Amendment 3, so both had been addressed. REPRESENTATIVE PORTER made a motion to move HB 290, as amended, out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, CSHB 290(O&G) was moved out of the House Special Committee on Oil and Gas. HB 307-OIL AND GAS CORPORATE TAX ACCOUNTING Number 1397 CHAIRMAN WHITAKER announced that the next order of business would be HOUSE BILL NO. 307, "An Act establishing an oil and gas corporate income tax and making conforming amendments; and amending the tax on corporations levied under the Alaska Net Income Tax Act to eliminate the state corporate income tax on taxable income of less than $10,000; and providing for an effective date." [The committee took a five minute at-ease; the meeting was called back to order at 11:30 a.m.] Number 1273 REPRESENTATIVE ERIC CROFT, Alaska State Legislature, sponsor of HB 307, explained that the basic question addressed in the bill is whether Alaska's corporate income tax structure is fair and accurate for all. The bill presumes that the answer is no. It proposes two changes: taking to zero some of the taxes on the smallest corporations, to encourage small business development; and closing a loophole that allows the largest oil and gas corporations to pay less than the established rate of 9.4 percent. The loophole was related to separate accounting, which has to do with taxing businesses that operate in many states and how to apportion the part of the total profit that comes to any one state [in this case, Alaska]. REPRESENTATIVE CROFT described another accounting method - known as formula apportionment - which says that one estimates profit by considering three factors: property, sales and payroll. One can estimate from that basis the taxable income for one state, a percentage of the corporation's nationwide or worldwide profit. Formula apportionment works fairly well for retail industries, and it is the way Alaska began taxing oil development in the late 1970s. It later became clear, however, that the formula was not going to work very accurately for the oil industry. The result of using the formula was a dramatic underestimate of the profit made. Number 0923 REPRESENTATIVE CROFT explained that the alternative to formula apportionment is to treat Alaska like a separate corporate entity, with separate accounting; that is the model adopted in the late 1970s and applied in Alaska for three years, from 1978 to 1981. It is also the method used in other oil-producing states, and it is the way in which the federal government assesses federal income tax on multi-national corporations. REPRESENTATIVE CROFT recalled that after passage of separate accounting in 1978, the oil companies sued, challenging separate accounting on constitutional grounds. If the oil companies had won that suit, there would have been a very large tax refund due them from the state, and this was part of reason that separate accounting was repealed. In 1982, the state and the oil companies agreed to use a modified apportionment. That agreement was part of a potential settlement of the lawsuit. In place of separate accounting, the state and the oil companies tweaked some of the factors in formula apportionment. The suit continued. In 1985, Alaska's Supreme Court said there was nothing wrong with separate accounting. An appeal to the United States Supreme Court was rejected; so that, in legal terms, is the end of the road. Separate accounting was approved as an appropriate method. Number 0741 REPRESENTATIVE CROFT referred to a sheet of figures prepared by Dan Dickinson of the Department of Revenue, which detailed the difference between the amount of money the state would have received under separate accounting and the actual amount received under the modified apportionment. In every year since separate accounting was repealed, he noted, the state would have received more from separate accounting than it actually received from modified apportionment. The total for those years, 1982-1997, was $4.6 billion of lost revenue to the state. REPRESENTATIVE CROFT stressed that separate accounting was instituted in the first place because it makes sense, and because it is appropriate to use as an accuracy measure. Proponents of HB 307 want an accurate statement of the actual profit made and an appropriate tax on what actually was made in Alaska. Number 0412 JOHN R. MESSENGER, Attorney at Law, Preston Gates & Ellis, testified from Anchorage by teleconference. He began by summarizing his experience with separate accounting and related issues, which began when he was deputy commissioner of the Department of Revenue during the time the legislature considered separate accounting, in the late 1970s. He was a member of the legal team that defended the state's separate accounting tax bill. Since that time, he has been working with Department of Revenue and Department of Law with respect to defending audit assessments, including those with related to separate accounting. He recently gave testimony at the request of the Joint Special Committee on Mergers with respect to separate accounting. Representative Croft had asked him to testify on HB 307, he explained, and to give his perspective on the legal issues. MR. MESSENGER said the legislature is not starting from scratch on this issue. Voluminous legislative history has been compiled and indexed regarding separate accounting. TAPE 00-13, SIDE A Number 0013 MR. MESSENGER explained that when separate accounting was first enacted in 1978, there had been no experience with the tax, and there were some misgivings. Today, however, there is a track record with respect to this tax. In addition, those reviewing it have the results of litigation regarding its constitutionality. In summation, this tax is a known quantity that has been examined and tested in minute detail over the years. MR. MESSENGER reminded members that separate accounting was enacted because the legislature determined that the formula apportionment method did not accurately represent the level of business activity in the state by the oil companies; separate accounting was a more accurate way of measuring the oil companies' income in the state. The change to separate accounting was to correct that inequity, to put the oil industry on an equal footing with other corporations doing business in the state, so that all corporations would pay something close to the 9.4 effective tax rate. MR. MESSENGER said the [separate accounting] tax was not repealed in 1981 because the state was dissatisfied with the tax or felt it was flawed or inaccurately reflected the industry activities or profits in the state. Rather, it was repealed because the litigation that was pending at that time put a cloud over the tax; the potential contingent liability of $2 billion was so large that any chance that the tax might be struck down was intolerable. That litigation was ultimately resolved in the state's favor. MR. MESSENGER pointed out that with respect to the legal issues, this legislature is in a unique position, different from that of the legislatures in 1978 and 1981. Legislators now are considering a tax that already has been declared constitutional. Every court - the Alaska Superior Court, the Alaska Supreme Court and the United States Supreme Court - has ruled in the State of Alaska's favor. Those decisions have not been overruled, and no doubt has been cast on their validity. Court cases since then have reaffirmed the grounds on which separate accounting was upheld. The safest course, from a legal standpoint, would be to adopt a tax as close as possible to the one that was reviewed [by the courts]. CHAIRMAN WHITAKER and REPRESENTATIVE CROFT agreed to defer additional testimony until later because of the limited time available. [HB 307 was held over.] Number 0721 ADJOURNMENT There being no further business before the committee, the House Special Committee on Oil and Gas meeting was adjourned at 11:59 a.m.