Legislature(2009 - 2010)HOUSE FINANCE 519

03/18/2010 09:00 AM House FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Meeting Delayed to 9:15 --
+ Bills Previously Heard/Scheduled TELECONFERENCED
Moved CSHB 273(FIN) Out of Committee
Heard & Held
HOUSE BILL NO. 280                                                                                                            
     "An  Act relating  to natural  gas; relating  to a  gas                                                                    
     storage   facility;   relating    to   the   Regulatory                                                                    
     Commission of Alaska; relating  to the participation by                                                                    
     the  attorney   general  in  a  matter   involving  the                                                                    
     approval of a  rate or a gas  supply contract; relating                                                                    
     to an  income tax  credit for  a gas  storage facility;                                                                    
     relating  to  oil  and   gas  production  tax  credits;                                                                    
     relating to  the powers  and duties  of the  Alaska Oil                                                                    
     and   Gas   Conservation    Commission;   relating   to                                                                    
     production   tax  credits   for   certain  losses   and                                                                    
     expenditures,   including   exploration   expenditures;                                                                    
     relating to  the powers and  duties of the  director of                                                                    
     the  division  of  lands  and to  lease  fees  for  the                                                                    
     storage  of gas  on state  land; and  providing for  an                                                                    
     effective date."                                                                                                           
10:48:19 AM                                                                                                                   
Co-Chair  Hawker introduced  Conceptual  Amendment 4,  which                                                                    
clarifies that the benefit of  the use of last-in, first-out                                                                    
(LIFO) inventory management would  apply only to open-access                                                                    
storage   facilities   that   qualify  for   the   financial                                                                    
incentives  in   HB  280.  He   emphasized  that   the  LIFO                                                                    
preferential  accounting   treatment  would  not   apply  to                                                                    
privately-owned  or  proprietary  storage,  defined  as  the                                                                    
warehouses in which  a producer stores their  own gas before                                                                    
Co-Chair Hawker MOVED to ADOPT Conceptual Amendment 4:                                                                          
     Page 6, line 17, following "facility"                                                                                      
         INSERT "regulated under AS 42.05.990(4)"                                                                               
     Page 12, line 12, following "facility"                                                                                     
         INSERT "regulated under AS 42.05.990(4)"                                                                               
Co-Chair Stoltze OBJECTED for discussion.                                                                                       
MARCIA  DAVIS, DEPUTY  COMMISSIONER,  DEPARTMENT OF  REVENUE                                                                    
testified that the department supported the amendment.                                                                          
Co-Chair Stoltze  WITHDREW his  objection to  the amendment.                                                                    
There  being NO  further OBJECTION,  Conceptual Amendment  4                                                                    
was ADOPTED.                                                                                                                    
10:52:07 AM                                                                                                                   
Representative  Gara queried  the administration's  position                                                                    
on HB  280. Ms.  Davis noted  that the  department supported                                                                    
improving   and  encouraging   a  broader   scope  of   well                                                                    
expenditures, a concept applied  statewide by the governor's                                                                    
bill as  well as  to Cook  Inlet. She  pointed out  that the                                                                    
governor's bill  differed in that  it had a core  concept of                                                                    
exploration credits,  whereas HB 280 had  capital credits at                                                                    
its  core.   She  acknowledged  that  the   issue  could  be                                                                    
approached from  both sides;  each has  different structural                                                                    
changes that must be made.                                                                                                      
Ms. Davis  pointed out  that the  only other  difference was                                                                    
that the governor's  bill has a 30 percent  credit, while HB
280 has  a 40 percent  credit. She thought the  change might                                                                    
be justified  as the  40 percent  credit is  targeted solely                                                                    
for Cook Inlet.                                                                                                                 
Ms. Davis reported that  the administration's first question                                                                    
relates to  HB 280's  definition of  the class  of allowable                                                                    
costs  as  Cook  Inlet  well   lease  expenditures  for  the                                                                    
exploration   and  development   phase.   She  thought   the                                                                    
definition   was   simplified   as   essentially   a   lease                                                                    
expenditure that  meets the Internal Revenue  Code (IRC) 263                                                                    
(intangible   drilling  cost   rules).  The   department  is                                                                    
concerned because  of two pending  U.S. Congress  bills that                                                                    
would  repeal the  IRC provision,  SB 1087  and SB  888. The                                                                    
intangible  drilling   cost  definition  is  close   to  the                                                                    
department's  qualified lease  expenditure definition  under                                                                    
AS  43.55.023 [Alaska's  Clear and  Equitable Share  (ACES),                                                                    
Alaska  oil  and gas  production  tax  credits, here  called                                                                    
"023"]. Since  the definition of capital  lease expenditures                                                                    
is in place after a  long regulatory process, she encouraged                                                                    
the committee  to consider using the  same definition, which                                                                    
includes  the IRC  263 definition;  this  would enable  Cook                                                                    
Inlet  explorers  and  developers  to  understand  the  rule                                                                    
without waiting for further regulations.                                                                                        
Co-Chair Stoltze asked whether  Congress would deal with the                                                                    
IRC issue  within the next  30 days. Ms. Davis  replied that                                                                    
regulations  already  in  place that  incorporate  the  same                                                                    
concept and scope of cost might make the process easier.                                                                        
Ms. Davis  turned to  the administration's  second question;                                                                    
on the  production phase of  the credit,  HB 280 has  done a                                                                    
good job of restricting the  costs allowed to those that are                                                                    
wellhead and  below. She  cautioned that  theoretically, the                                                                    
costs associated with abandoning,  plugging, or suspending a                                                                    
well  could  directly relate  to  processes  of operating  a                                                                    
well. She  questioned whether the committee  wanted a credit                                                                    
for  stopping  production, when  the  intent  is to  add  or                                                                    
increase production.                                                                                                            
10:57:40 AM                                                                                                                   
Representative  Gara   questioned  whether  the   credit  as                                                                    
written in HB  280 would go to existing work  that is not an                                                                    
enhancement. Ms.  David replied  that the credit  is broader                                                                    
(although  limited  to Cook  Inlet)  and  designed to  cover                                                                    
costs  that are  related to  the  operation of  a well.  The                                                                    
credit  is restricted  to lease  expenditure costs  from the                                                                    
wellhead down, including  day-to-day operations. She pointed                                                                    
out  that lease  expenditure is  a broader  concept than  an                                                                    
intangible drilling  cost and not designed  to encourage the                                                                    
continued status  quo operation  of Cook  Inlet wells  as in                                                                    
addition to the life-cycle of the production phase.                                                                             
Representative Gara  asked whether  the credit  as currently                                                                    
written  differentiates  between   capital  costs  that  are                                                                    
expended  for  enhancements  and   capital  costs  that  are                                                                    
expended for  continuing operations. Ms. David  replied that                                                                    
he was correct.                                                                                                                 
10:59:52 AM                                                                                                                   
Co-Chair   Hawker   disagreed.   He   clarified   that   the                                                                    
administration's concern related  to Amendment 2 (previously                                                                    
adopted by  the committee).  He stressed that  the amendment                                                                    
was intended  to address  intangible drilling  costs related                                                                    
to exploration  and development  and not  the demobilization                                                                    
period. He  thought the department could  clarify the intent                                                                    
through regulation or  the issue could be dealt  with in the                                                                    
legislative  process. Ms.  Davis agreed  with Representative                                                                    
Hawker's  remarks  about  the  exploration  and  development                                                                    
phase. She  was focusing  on the on-going  production phase.                                                                    
She was  referencing processes related to  operating a well,                                                                    
one of the categories. Another  category is moving fluids to                                                                    
assembly. She thought HB 280's  definition of the cut-off at                                                                    
the wellhouse was good.                                                                                                         
Co-Chair Hawker  noted that  the well  maintenance processes                                                                    
facilitate   and   enhance   recovery   and   lengthen   the                                                                    
productivity of an individual well  site. He agreed that the                                                                    
intent is to  grant the benefit of the  costs in calculating                                                                    
lease operating expenses.                                                                                                       
Representative Gara  asked whether Co-Chair Hawker  would be                                                                    
open   to  language   targeting  the   credit  to   enhanced                                                                    
production,  whether  for  a   new  well  or  a  substantial                                                                    
expansion of an existing  production effort. Co-Chair Hawker                                                                    
believed such  language would be  overly restrictive  as the                                                                    
bill is  attempting to give  the greatest  possible latitude                                                                    
to  encourage production.  He pointed  out that  the biggest                                                                    
issue is  wells at the  end of production. He  stressed that                                                                    
maintaining production  is a challenge;  he did not  want to                                                                    
create  anything that  would  require extensive  regulation,                                                                    
but wanted to promote production in Cook Inlet.                                                                                 
11:03:36 AM                                                                                                                   
Representative  Gara  also  wanted to  expand  and  continue                                                                    
production and  questioned how to make  the distinction. Ms.                                                                    
Davis responded  that the governor's  goal has  clearly been                                                                    
to provide  tax relief or  tax credits only where  the state                                                                    
receives  some  benefit in  return.  The  question would  be                                                                    
whether the costs  could be considered for wells  at the end                                                                    
of production.  She claimed that language  in the governor's                                                                    
bill stipulated  that well cost  should increase  or enhance                                                                    
production  from a  known pool.  She thought  the definition                                                                    
could establish that the well  could be upgraded through the                                                                    
Co-Chair Stoltze  noted that  the governor  was historically                                                                    
sensitive to Southcentral issues.                                                                                               
Co-Chair  Hawker wanted  to  err on  the  side of  promoting                                                                    
investment in the Cook Inlet  rather than erring on the side                                                                    
of  having  the  loss  of credit  compromise  an  investment                                                                    
decision by an investor.                                                                                                        
11:06:36 AM                                                                                                                   
Representative  Gara hoped  to work  on language  that would                                                                    
not deprive  someone of  a credit if  the credit  would keep                                                                    
them from closing a well; he  also did not want to grant the                                                                    
credit where it was not appropriate.                                                                                            
Ms.  Davis turned  to the  administration's third  question,                                                                    
which related  to Amendment 2.  The department  is concerned                                                                    
about including  an indirect cost  element in a  credit that                                                                    
is  supposed  to be  about  direct  costs. She  stated  that                                                                    
subsection   (o)(3)   in   the   amendment   represented   a                                                                    
substantial  departure  from  other  credits;  a  credit  is                                                                    
described  in the  subsection as  being allowed  based on  a                                                                    
cost  associated with  overhead  expenditure. Under  current                                                                    
regulations  describing  lease expenditures  (Section  165),                                                                    
credits are supposed to be  direct costs. A direct cost used                                                                    
to  include overhead,  but 165(b)  was amended  to remove  a                                                                    
reference to  overhead. Overhead  is considered  an indirect                                                                    
cost. Current  regulation tries  to bypass  the "nitpicking"                                                                    
approach  of trying  to detail  how  overhead is  calculated                                                                    
under all  the various  agreements. Instead,  calculation is                                                                    
made  by  taking a  flat  percentage  of direct  costs;  4.5                                                                    
percent of  the taxpayer's total  direct cost is  allowed as                                                                    
an indirect cost.                                                                                                               
11:09:17 AM                                                                                                                   
CODY RICE, PETROLEUM ECONOMIST,  TAX DIVISION, DEPARTMENT OF                                                                    
REVENUE  (via  teleconference),  reported  that  preliminary                                                                    
information  had  been  prepared  and shared  with  the  co-                                                                    
Ms. Davis added  that the data regarding  Cook Inlet credits                                                                    
has been made available to the committee in written form.                                                                       
11:11:01 AM                                                                                                                   
Co-Chair  Hawker  responded   regarding  subsection  (o)(3),                                                                    
stating that  the degree to  which the legislature  wants to                                                                    
allow  credits  for the  lease  operating  expenses in  Cook                                                                    
Inlet is a  policy call. He added that the  intent of HB 280                                                                    
was  to maximize  the attractiveness  of investments  in the                                                                    
inlet for  new drilling, expanded drilling,  and maintenance                                                                    
Representative   Gara   questioned  whether   the   overhead                                                                    
allowance  would default  to existing  regulation if  (o)(3)                                                                    
were not in Amendment 2.  Ms. Davis replied that there would                                                                    
be  the basic  underlying  lease  expenditure allowance  for                                                                    
overhead,  or 4.5  percent of  the  taxpayer's total  direct                                                                    
cost.  The  taxpayer  would  then  take  the  dollar  amount                                                                    
identified  and be  able to  deduct that  overhead from  the                                                                    
gross profits. In  this manner, the amount would  be used as                                                                    
a  lease expenditure  deduction against  the sales  price to                                                                    
arrive  at  a   production  tax  value  and   would  not  be                                                                    
incorporated  into any  of the  other  credit provisions  to                                                                    
obtain   an   additional   benefit   associated   with   the                                                                    
expenditure. She  agreed that it  was a policy  call whether                                                                    
to  apply the  4.5 percent  charge against  the expenditures                                                                    
identified  as   the  Cook  Inlet  well   lease  expenditure                                                                    
application  and  then add  it  to  the credit  amount.  The                                                                    
department would  have to make  a regulation  describing the                                                                    
Representative Gara  asked whether the number  would default                                                                    
to  4.5 percent  without subsection  (o)(3) in  Amendment 2.                                                                    
Ms.  Davis  noted that  the  4.5  percent operating  expense                                                                    
deduction would be there regardless  of what happens with HB
Representative Gara asked whether HB  280 would add a credit                                                                    
on  top of  the 4.5  percent. Ms.  Davis responded  that the                                                                    
amount would be  in addition; like other  credits, the lease                                                                    
expenditures are the  base amount of all the  costs that get                                                                    
deducted from  the proceeds  to arrive  at a  production tax                                                                    
value.  In   addition,  different   subsets  of   costs  are                                                                    
considered to  calculate a credit; a  specific expense might                                                                    
get used  as a deduction to  create the net tax  and also be                                                                    
part of a credit.                                                                                                               
11:15:51 AM                                                                                                                   
Representative  Doogan  queried   the  sponsor,  related  to                                                                    
Amendment  2,  subsection  (o)(1), about  possible  problems                                                                    
with "intangible  drilling and development costs"  under the                                                                    
Internal  Revenue Code.  Co-Chair Hawker  responded that  he                                                                    
did not  know. He  noted other  concerns about  Alaska codes                                                                    
that are changing.                                                                                                              
ROGER MARKS, CONSULTANT,  HOUSE FINANCE COMMITTEE, explained                                                                    
that  there is  precedent in  statute for  citing other  tax                                                                    
codes as they  exist on certain dates. He  suggested that it                                                                    
would be very straightforward to  say: "Cite the tax code as                                                                    
it existed on the effective date of the bill."                                                                                  
Representative  Doogan asked  for  clarification. Ms.  Davis                                                                    
responded that  the challenge when a  particular federal law                                                                    
is  repealed  is  finding  out  what it  used  to  say.  The                                                                    
reference would be to the code  not as an applicable law but                                                                    
as a law that embodies  acceptably descriptive language. The                                                                    
department  might have  to embody  the new  language through                                                                    
regulation  if the  code was  repealed and  became difficult                                                                    
for taxpayers to find.                                                                                                          
Representative  Doogan   wanted  to   make  sure   that  the                                                                    
legislature was not  making a law that would  "blow up." Co-                                                                    
Chair Hawker discussed differences in the approaches.                                                                           
Representative  Doogan   asked  whether  the   language  was                                                                    
flexible enough  to take into  account the  possibility that                                                                    
the statute cited might go away.                                                                                                
11:19:56 AM                                                                                                                   
Ms. Davis offered  to check with the Department  of Law. She                                                                    
assured the  committee that language  would be  checked with                                                                    
Legislative Legal  Services to  make sure the  state statute                                                                    
is viable.                                                                                                                      
Representative  Gara  asked  how   the  provision  could  be                                                                    
written  to include  the governor's  proposal  to apply  the                                                                    
credit  to  enhanced  production or  operations.  Ms.  Davis                                                                    
explained  that currently  the bill  has  the underlying  AS                                                                    
43.55.023 (ACES)  20 percent capital credit,  which would be                                                                    
unaffected.  The underlying  AS  43.55.023(a)  could not  be                                                                    
used to the  extent that a taxpayer would  prefer to utilize                                                                    
subsection (m) [Section  11] as a credit. Instead  of the 20                                                                    
percent credit, the taxpayer would  be electing a 40 percent                                                                    
credit for  a narrower  subset of allowable  expenses called                                                                    
Cooked  Inlet well  lease expenditures.  The option  for the                                                                    
taxpayer would be an AS  43.55.023 20 percent credit; to the                                                                    
extent  that  the  credit  is  related  to  exploration  and                                                                    
development, there  is the AS  43.55.025 25  percent credit.                                                                    
Cook Inlet would be a 40  percent credit. One of the options                                                                    
has to be chosen.                                                                                                               
Co-Chair Hawker  noted that the enhanced  investment credits                                                                    
were originally  applied to the North  Slope. The difference                                                                    
acknowledged higher risk with  entitlement to higher credit.                                                                    
He added that the perimeters did not apply to Cook Inlet.                                                                       
Mr.  Marks  informed  the  committee  how  Amendment  2  was                                                                    
intended to  be structured and  operate: in the  universe of                                                                    
lease expenditures,  there are  capital costs  and operating                                                                    
or non-capital  costs. Under the statute,  the capital costs                                                                    
get a 20  percent credit under AS  43.55.023(a). Amendment 2                                                                    
describes  non-capital costs,  which  currently  do not  get                                                                    
credits under the tax. The  costs are a sub-set of operating                                                                    
costs and do  not include all operating  costs. For example,                                                                    
(o)(s) says  "does not include  the processes  of gathering,                                                                    
separating, and processing well  fluids downstream from that                                                                    
assembly."  He  pointed  out  that   those  would  still  be                                                                    
considered  lease expenditures  under the  statute, but  the                                                                    
costs  being addressed  in subsections  (o)(1), (o)(2),  and                                                                    
(o)(3) are subsets of the  costs that are not capital costs;                                                                    
they do  not include  all operating costs  but are  a subset                                                                    
that  are involved  with operating  a well  as described  in                                                                    
11:24:58 AM                                                                                                                   
Representative Gara  summarized that  HB 280 was  written to                                                                    
take advantage of the "m"  credit, which has been amended by                                                                    
Amendment 2. He asked whether the  "m" credit is in place of                                                                    
the existing  credits, whether 20  or 25 percent.  Ms. Davis                                                                    
answered  that the  credit  was  an additional,  alternative                                                                    
Representative  Gara asked  for more  information about  the                                                                    
"Cook  Inlet  penalty."  Co-Chair Hawker  replied  that  the                                                                    
issue was  addressed in Section  11. He explained  that when                                                                    
the Petroleum  Production Tax  (PPT)/ACES tax  structure was                                                                    
adopted,  the  Cook   Inlet  basin  was  set   aside  as  an                                                                    
exception;  the Economic  Limit Factor  (ELF) tax  mechanism                                                                    
was  grandfathered for  the  basin. The  rest  of state  had                                                                    
significant  increases  in  production taxes  that  did  not                                                                    
apply to Cook Inlet.                                                                                                            
Co-Chair   Hawker  continued   that   the  PPT/ACES   system                                                                    
introduced  the concept  of credits  that  could be  applied                                                                    
against  tax liability  for certain  expenditures. He  noted                                                                    
that it had been pointed out  that spending a dollar in Cook                                                                    
Inlet would result  in less tax liability to apply  it to by                                                                    
special rule than if the  dollar were invested elsewhere. He                                                                    
explained that a  credit derived from an  investment in Cook                                                                    
Inlet could  be applied  against a  dollar of  tax liability                                                                    
anywhere in the state.                                                                                                          
Co-Chair  Hawker asserted  that the  biggest problem  in the                                                                    
state  currently was  production decline  and that  the only                                                                    
way  to address  the  problem was  increasing investment  in                                                                    
exploration   and    development.   He   thought    it   was                                                                    
inappropriate to disadvantage Cook  Inlet in the competition                                                                    
for the capital.                                                                                                                
Representative  Gara  summarized  his understanding  of  the                                                                    
situation  and  asked  for  more  clarification.  Ms.  Davis                                                                    
explained that  in Cook  Inlet, a  producer must  first sell                                                                    
production  then go  through the  ACES process  of deducting                                                                    
Cook Inlet  costs against  that production  to come  up with                                                                    
the production tax  value. The production tax  value is then                                                                    
compared to a  cap or ceiling on the tax  (the ELF tax: zero                                                                    
for oil, and $0.17 per Mcf).  If the ACES tax is higher, the                                                                    
producer  only pays  taxes  to  the cap.  All  of the  lease                                                                    
expenditures applied  to get to  the cap comparison  stay in                                                                    
Cook Inlet. Any  other lease expenditures not  needed to get                                                                    
to the  cap are now free  to be exported by  the taxpayer to                                                                    
other regions (usually the North Slope).                                                                                        
Ms.  Davis  added  that  the   reason  for  the  de-coupling                                                                    
legislation  moving through  the  Senate  was the  discovery                                                                    
that several  Cook Inlet producers have  Cook Inlet expenses                                                                    
that they are  able to utilize under the  current system and                                                                    
apply to  reduce tax  liability caused  by North  Slope oil.                                                                    
She emphasized  that credits resulting  from an  expense can                                                                    
be used  anywhere regardless of  where the expense  was. The                                                                    
credit  gets applied  at the  bottom line  of the  final tax                                                                    
11:31:53 AM                                                                                                                   
Mr.  Marks  provided  an  example  of  how  Section  11  was                                                                    
intended to operate:  If under ACES, the Cook  Inlet tax was                                                                    
$100 and under ELF the tax  was $50, and a taxpayer had $200                                                                    
in credits, the  credits are reduced by  the $50 difference.                                                                    
The  resulting $150  credits could  then be  used to  offset                                                                    
North Slope tax.                                                                                                                
Representative  Gara  requested further  clarification.  His                                                                    
understanding  was that  a producer  who pays  a lower  Cook                                                                    
Inlet tax  does not  have that  much to  write off  from; he                                                                    
believed the  amendment would help  a producer who  also has                                                                    
North Slope operations to write off the expenses.                                                                               
11:33:17 AM                                                                                                                   
Co-Chair Hawker pointed out that  the provision was not new,                                                                    
but  the  producer had  to  discount  the amount  of  credit                                                                    
available to write off Cook Inlet tax liabilities.                                                                              
Ms. Davis added  that Section 11, subsection  (m) related to                                                                    
lease  expenditures. She  asserted  that lease  expenditures                                                                    
are the larger expenses, and  are the ones being emphasized:                                                                    
specifically,  Cook  Inlet  lease  expenditures  up  to  the                                                                    
amount  of the  tax ceiling.  The  ones above  the line  can                                                                    
currently  get applied  elsewhere; the  ones below  the line                                                                    
cannot.  She   believed  the  provision  would   change  the                                                                    
situation  and allow  the ones  below  the line  to also  be                                                                    
moved elsewhere.                                                                                                                
Co-Chair Hawker  interjected that  the tax  credit generated                                                                    
in  Cook Inlet  is allowed  to be  used at  full face  value                                                                    
anywhere in the state.                                                                                                          
Representative Gara  questioned whether the  amendment would                                                                    
change the current  ability of a producer to  write off more                                                                    
lease expenditures than they are  paying in taxes. Ms. Davis                                                                    
replied that  under current law,  a producer  cannot utilize                                                                    
lease expenditures  that were  used to get  to the  cap. The                                                                    
new provision  would change  that and  let the  producer add                                                                    
the  additional batch  of lease  expenditures to  those that                                                                    
can be used elsewhere.                                                                                                          
Representative Gara queried  the administration's opinion on                                                                    
the  provision. Ms.  Davis replied  that the  administration                                                                    
has  not proposed  a change  in  the current  "ring-fencing"                                                                    
laws  as  part  the  governor's bill.  She  noted  that  the                                                                    
governor wanted to know what  the trade-off would be for the                                                                    
state for  reducing the  tax burden  or providing  a credit;                                                                    
when  credits  are given,  there  should  be a  return.  She                                                                    
thought  it was  a policy  question whether  additional Cook                                                                    
Inlet incentives would provide return for the state.                                                                            
11:37:06 AM                                                                                                                   
Co-Chair Hawker  asserted that there  would be  "full value"                                                                    
and  not  doubling  for  investment.   He  stated  that  the                                                                    
provision was intended  to level the playing  field in order                                                                    
to  encourage a  developer/investor  operating  in both  the                                                                    
North Slope region  and in Cook Inlet to put  money into the                                                                    
Cook   Inlet.   He  emphasized   the   need   for  fuel   in                                                                    
Co-Chair  Stoltze noted  that  representatives from  Chugiak                                                                    
Electric Association were present and  that they had about a                                                                    
quarter of a million people with concerns about the issue.                                                                      
Ms. Davis stated that the  administration agreed that trying                                                                    
to  level  the  playing  field is  important;  however,  the                                                                    
starting point is a bill that  does not have a level playing                                                                    
field  with  respect to  tax  rates  because of  substantial                                                                    
incentives for the inlet. She  stressed that the policy call                                                                    
related  to how  much additional  incentive the  legislature                                                                    
feels Cook Inlet producers need.                                                                                                
Co-Chair Hawker  acknowledged that  there is  an inequitable                                                                    
tax  base.  He  argued  that  investor  risk  needed  to  be                                                                    
recognized;   attracting   investment  is   currently   very                                                                    
difficult. The gas in Cook  Inlet is expensive to access and                                                                    
has  disadvantages  that  offset   much  of  the  tax  value                                                                    
differentials. He  agreed that a  policy call is  needed. He                                                                    
asked whether  the state  wanted to make  an effort  to make                                                                    
exploration and  drilling in Cook  Inlet more  attractive to                                                                    
either new,  independent, well-capitalized producers,  or to                                                                    
existing  explorer/producers. He  argued that  there was  no                                                                    
cost  to  the  state  to  attempt  the  enhanced  access  to                                                                    
existing tax credits offered in the bill.                                                                                       
11:41:32 AM                                                                                                                   
Representative  Gara stated  that  he  was more  comfortable                                                                    
with the governor's  method of spending money  for new work.                                                                    
He thought that without  enhancements, the bill could reduce                                                                    
the tax  payments the state  would receive and  increase the                                                                    
credits  it pays  out. He  opined that  with the  governor's                                                                    
credit,  the  money  would  come   only  if  production  was                                                                    
enhanced or  extra action was  taken to prevent the  loss of                                                                    
Representative Fairclough  queried the  current tax  rate on                                                                    
gas outside the Cook Inlet.  Ms. Davis replied that there is                                                                    
not much  gas. She  conjectured that for  a taxpayer  on the                                                                    
North Slope producing gas only,  the tax would be 25 percent                                                                    
of  the  production  tax  value  (profit  at  the  point  of                                                                    
production  minus lease  expenditures).  She cautioned  that                                                                    
every taxpayer  is different because  of varied  mixtures of                                                                    
oil and  gas. She  calculated that given  gas at  $4.50 with                                                                    
cost of  $2.50, the rough  estimate would be $0.50  to $0.70                                                                    
per Mcf.                                                                                                                        
Co-Chair Hawker added  that the cost depends  on the market.                                                                    
In  addition, due  to other  legislation,  gas produced  and                                                                    
consumed in-state pays  ELF rates just like  the Cook Inlet.                                                                    
Ms. Davis agreed.                                                                                                               
11:45:03 AM                                                                                                                   
Representative  Gara was  concerned that  he had  no way  to                                                                    
assess  the tax  credit  being  granted in  HB  280 for  gas                                                                    
storage.  He queried  the administration's  position on  the                                                                    
issue. Ms.  Davis replied  that there  have been  many other                                                                    
bills relating  to corporate income tax  credits. She stated                                                                    
that the administration regarded the  issue as a policy call                                                                    
with  respect to  what extent  particular conduct  should be                                                                    
incentivized. She noted  that in HB 280, the  state would be                                                                    
getting  gas storage  in exchange  for granting  a corporate                                                                    
income  tax  credit,  which would  be  consistent  with  the                                                                    
administration's  policy of  providing  credits in  exchange                                                                    
for an agreed-upon action.                                                                                                      
Representative  Gara requested  more  information about  the                                                                    
gas  storage credit.  He thought  there would  be a  maximum                                                                    
credit of  $15 million based  on an allowable cost  of $1.50                                                                    
per  thousand cubic  feet of  storage capacity.  He did  not                                                                    
know how to analyze whether  the allowable cost was the fair                                                                    
ROBYNN   WILSON,  INCOME   AUDIT   MANAGER,  TAX   DIVISION,                                                                    
DEPARTMENT  OF  REVENUE  (via teleconference),  thought  the                                                                    
issue was  a policy  call. She believed  the issue  had been                                                                    
addressed in the fiscal note.                                                                                                   
11:48:35 AM                                                                                                                   
Mr. Rice pointed  to page two of fiscal note  4 (attached to                                                                    
CSHB 280(RES), a prior version of the bill) and quoted:                                                                         
     In  2004,  the  Federal  Energy  Regulatory  Commission                                                                    
     (FERC)  estimated the  median cost-of-service  rate for                                                                    
     [gas]  storage  at  $0.64/Decatherm. One  Decatherm  is                                                                    
     equal  to one  Mcf of  natural gas  if the  natural gas                                                                    
     contains  1,000 Btu/cubic  foot.  Escalating this  cost                                                                    
     for inflation  produces a 2009 cost-of-service  rate of                                                                    
     approximately $0.72/Mcf of [gas] storage service.                                                                          
Mr. Rice clarified that the  calculation is not adjusted for                                                                    
potentially higher costs in Alaska.  However, he thought the                                                                    
estimate was close.                                                                                                             
Representative Gara asked whether  the state would pay $1.50                                                                    
when the  cost of creating  the storage would be  $0.72. Mr.                                                                    
Rice replied  that he  could not  definitively say  what the                                                                    
cost of  gas storage would be  in Alaska. He could  say that                                                                    
escalating  the median  cost of  service  for providing  gas                                                                    
storage,  according   to  FERC,   results  in  a   price  of                                                                    
approximately $0.72  per Mcf; the  credit is $1.50  per Mcf,                                                                    
or roughly double the median cost of service.                                                                                   
Representative Gara  asked whether HB 280  would grant $1.50                                                                    
per Mcf or up to $1.50  of the actual costs. Co-Chair Hawker                                                                    
responded that the credit is  calculated at $1.50 per Mcf of                                                                    
new gas  storage capacity opened within  a certain timeframe                                                                    
(before 2015).                                                                                                                  
Representative Gara  asked whether  an entity could  be paid                                                                    
more  to create  gas storage  than it  costs them.  Co-Chair                                                                    
Hawker responded absolutely not;  the credit was benchmarked                                                                    
based  on  available  information (which  is  imprecise)  to                                                                    
approximate at 10 percent on cost.                                                                                              
Representative  Gara questioned  how  the  state could  know                                                                    
what  the  storage  would  cost.  He  pointed  to  differing                                                                    
11:52:51 AM                                                                                                                   
Co-Chair  Hawker  reported  that  proprietary  conversations                                                                    
were held with entities  interested in investing and putting                                                                    
together  a major  open-access gas  storage facility  in the                                                                    
Cook Inlet.                                                                                                                     
Representative Gara stated  that he had no  way of analyzing                                                                    
how much  of the cost  the state should be  paying. Co-Chair                                                                    
Hawker called attention to other  information in fiscal note                                                                    
4:  an  expectation that  the  amount  of the  credit  would                                                                    
approximate the  corporate income tax from  operating such a                                                                    
facility for about 16 years. He  stated that the goal was to                                                                    
allow the investor  to recover their costs.  The costs would                                                                    
ultimately be passed to the  consumer, but the intent was to                                                                    
not  have the  additional  costs be  burdened by  additional                                                                    
state taxes. He stressed that the  bill was intended to be a                                                                    
private sector  bill and not  a major government  subsidy of                                                                    
gas storage.                                                                                                                    
Mr. Marks pointed out that looking  at the credit as being a                                                                    
high percentage  of the corporate income  tax liability says                                                                    
more  about   the  liability  than  about   the  credit.  He                                                                    
maintained that in  a gas storage facility,  the only income                                                                    
the facility would have is its  return on equity; in the big                                                                    
picture,  that  would be  fairly  small,  depending on  debt                                                                    
equity and  the length of the  life of the asset.  He stated                                                                    
that  for regulated  facilities, the  income piece  would be                                                                    
small, and the credit could dwarf the income tax liability.                                                                     
Representative Gara did  not care how the  credit related to                                                                    
how much someone would pay in  taxes. He wanted to make sure                                                                    
that the  state would  not pay  more in  the credit  than an                                                                    
entity paid to build  the facility. Co-Chair Hawker stressed                                                                    
that the credit was calculated  to approximate 10 percent of                                                                    
the cost of building the storage facility.                                                                                      
Representative Gara  suggested adding that the  credit could                                                                    
not exceed ten percent of  the costs. Co-Chair Hawker stated                                                                    
that [exceeding ten  percent of the costs]  would be "highly                                                                    
unlikely."  He  maintained  that  the point  of  the  volume                                                                    
metric   approach  to   determining   the   credit  was   to                                                                    
specifically avoid  having to go  through a  huge regulatory                                                                    
process in determining eligible  and non-eligible costs. The                                                                    
question  was the  cost of  the facility  and what  would be                                                                    
included.  He emphasized  that the  intent was  to determine                                                                    
and easily  calculate the credit available  using a credible                                                                    
third party as  the benchmark, using the Alaska  Oil and Gas                                                                    
Conservation  Commission  (AOGCC)  to  certify  the  working                                                                    
volume capacity of a facility.                                                                                                  
HB  280  was  HEARD  and   HELD  in  Committee  for  further                                                                    
11:57:54 AM                                                                                                                   
Co-Chair Hawker referred to potential amendments.                                                                               

Document Name Date/Time Subjects
HB 280 Amendment #3.pdf HFIN 3/18/2010 9:00:00 AM
HB 280
HB 280 Amendment #4 Hawker.pdf HFIN 3/18/2010 9:00:00 AM
HB 280
HB 273 Amendments #1&2.pdf HFIN 3/18/2010 9:00:00 AM
HB 273
HB 273 Haines Map Backup to Amendment #2.pdf HFIN 3/18/2010 9:00:00 AM
HB 273
HB 273 Support Letter.pdf HFIN 3/18/2010 9:00:00 AM
HB 273
HB 280 DNR Map & exploration Incentives.pdf HFIN 3/18/2010 9:00:00 AM
HB 280