Legislature(2009 - 2010)

04/16/2010 10:47 AM House FIN


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CS FOR SENATE BILL NO. 305(FIN)(title am)                                                                                     
                                                                                                                                
     "An Act providing  that the tax rate  applicable to the                                                                    
     production of  oil as the average  production tax value                                                                    
     of  oil, gas  produced  in the  Cook Inlet  sedimentary                                                                    
     basin,  and  gas produced  outside  of  the Cook  Inlet                                                                    
     sedimentary  basin  and  used in  the  state  increases                                                                    
     above  $30  shall  be 0.4  percent  multiplied  by  the                                                                    
     number  that  represents  the difference  between  that                                                                    
     average monthly  production tax value  and $30,  or the                                                                    
     sum  of  25 percent  and  the  product of  0.1  percent                                                                    
     multiplied   by   the   number  that   represents   the                                                                    
     difference between that  average monthly production tax                                                                    
     value   and  $92.50,   except  that   the  total   rate                                                                    
     determined  in  the  calculation   may  not  exceed  50                                                                    
     percent; providing for  an increase in the  rate of tax                                                                    
     on the production of gas  as the average production tax                                                                    
     value on a BTU equivalent  barrel basis of gas produced                                                                    
     outside  of the  Cook Inlet  sedimentary basin  and not                                                                    
     used  in the  state  increases above  $30; relating  to                                                                    
     payments of  the oil and  gas production  tax; relating                                                                    
     to  availability of  a portion  of  the money  received                                                                    
     from   the  tax   on  oil   and   gas  production   for                                                                    
     appropriation  to the  community revenue  sharing fund;                                                                    
     relating to  the allocation  of lease  expenditures and                                                                    
     adjustments  to lease  expenditures; and  providing for                                                                    
     an effective date."                                                                                                        
                                                                                                                                
2:09:30 PM                                                                                                                    
                                                                                                                                
Co-Chair Hawker related that an accord had been set with                                                                        
the Department of Revenue concerning the technical                                                                              
competency of the legislation.                                                                                                  
                                                                                                                                
Vice-Chair Thomas MOVED to ADOPT the work draft for HCS for                                                                     
CSSB 305 26-LS-1577\U, Bullock, 4/15/10 as a working                                                                            
document.                                                                                                                       
                                                                                                                                
Co-Chair Hawker OBJECTED for discussion.                                                                                        
                                                                                                                                
ROGER  MARKS, PETROLEUM  ECONOMIST,  LEGISLATIVE BUDGET  AND                                                                    
AUDIT COMMITTEE, detailed that  the changes from Version "K"                                                                    
to  Version  "U"  were  the  result  of  requests  from  the                                                                    
administration.  He cited  the technical  amendments adopted                                                                    
in Version "U" (copy on file).                                                                                                  
                                                                                                                                
PAT GALVIN,  COMMISSIONER, DEPARTMENT OF  REVENUE, clarified                                                                    
that technical  problems had been identified  in Version "K"                                                                    
and  subsequently  amended  in  Version  "U".  He  expressed                                                                    
interest in examining the current  version for any necessary                                                                    
technical changes.                                                                                                              
                                                                                                                                
2:17:33 PM                                                                                                                    
                                                                                                                                
Mr.  Marks stated  that he  would be  comparing Version  "K"                                                                    
with  Version  "U",  while   highlighting  the  changes.  He                                                                    
referred to, "List of Technical  Amendments to HCS CS SB 305                                                                    
Adopted   in  Version   "U"",  Prepared   by  Representative                                                                    
Hawkers' Office (copy on file).                                                                                                 
                                                                                                                                
2:20:02 PM                                                                                                                    
                                                                                                                                
Representative  Kelly queried  the removal  of the  language                                                                    
"from  each  lease or  property",  from  Page 15,  line  10.                                                                    
Commissioner  Galvin  replied  that   the  phrase  had  been                                                                    
removed to for clarity.                                                                                                         
                                                                                                                                
Mr. Marks relayed  that next change was in  Section 8, which                                                                    
stated   that   lease   expenditures  occurring   prior   to                                                                    
commercial production, or during  exploration, could be off-                                                                    
set against income within specific areas.                                                                                       
                                                                                                                                
Representative  Doogan requested  clarification as  to which                                                                    
version of the  bill was being discussed.  Mr. Marks replied                                                                    
that the  latest version  of the bill  was the  "U" Version,                                                                    
and that  the discussion concerned the  changes form Version                                                                    
"K" to  Version "U".  Co-Chair Hawker  added that  Section 8                                                                    
was  physically  located  in  the  same  place  in  the  "U"                                                                    
version,  but the  language had  been  changed from  Version                                                                    
"K".                                                                                                                            
                                                                                                                                
Mr. Marks reiterated that the  new Section 8 language stated                                                                    
that  expenditures incurred  within an  area, could  only be                                                                    
used  in  that  area.  The  department  preferred  the  word                                                                    
"commercial"    over   "sustained",    because   "commercial                                                                    
production" was a defined term.                                                                                                 
                                                                                                                                
2:23:38 PM                                                                                                                    
                                                                                                                                
Co-Chair Hawker asked Mr. Marks and Commissioner Galvin if                                                                      
they supported the version changes. Both replied in the                                                                         
affirmative.                                                                                                                    
                                                                                                                                
Co-Chair Hawker WITHDREW his OBJECTION.                                                                                         
                                                                                                                                
The work draft for HCS for CSSB 305 26-LS-1577\U, Bullock,                                                                      
4/15/10 was ADOPTED as a working document.                                                                                      
                                                                                                                                
Co-Chair Hawker WITHDREW Amendment 1 (Hawker).(copy on                                                                          
file).                                                                                                                          
                                                                                                                                
Co-Chair Hawker MOVED to ADOPT Amendment 2 (Hawker):                                                                            
                                                                                                                                
     Page 8, line 20                                                                                                            
                                                                                                                                
          Delete "land , lease,"                                                                                                
                                                                                                                                
          Insert "land or lease or"                                                                                             
                                                                                                                                
     Page 9, line 19 following "property"                                                                                       
                                                                                                                                
          Insert "in the state"                                                                                                 
                                                                                                                                
     Page 11, line 25                                                                                                           
                                                                                                                                
          Delete "land, lease,"                                                                                                 
                                                                                                                                
          Insert "land or lease or"                                                                                             
                                                                                                                                
     Page 12, line 9                                                                                                            
                                                                                                                                
          Delete "land, lease,"                                                                                                 
                                                                                                                                
          Insert "land or lease or"                                                                                             
                                                                                                                                
     Page 12, line 21                                                                                                           
                                                                                                                                
          Delete "land, lease,"                                                                                                 
                                                                                                                                
          Insert "land or lease or"                                                                                             
                                                                                                                                
     Page 13, line 2                                                                                                            
                                                                                                                                
          Delete "land, lease,"                                                                                                 
                                                                                                                                
          Insert "land or lease or"                                                                                             
                                                                                                                                
     Page 16, line 13                                                                                                           
                                                                                                                                
          Delete "Sections 2 - 4"                                                                                               
                                                                                                                                
          Insert "Sections 2 - 5"                                                                                               
                                                                                                                                
                                                                                                                                
Co-Chair Stoltze OBJECTED for discussion.                                                                                       
                                                                                                                                
Commissioner  Galvin  pointed  out   to  the  committee  the                                                                    
language changes in the bill.  The word "lease or "property"                                                                    
were defined terms.  The purpose of the  language change was                                                                    
to distinguish the land from the lease or property.                                                                             
                                                                                                                                
Co-Chair  Hawker   clarified  that  the   language  included                                                                    
everything in the amendment, except  Lines 5 and 6, and Line                                                                    
24 through 26.                                                                                                                  
                                                                                                                                
Commissioner Galvin stated that  the amendment would provide                                                                    
consistency  between bill  sections. The  last lines  of the                                                                    
amendment ensured  that the department's directive  to adopt                                                                    
regulation was made retroactive.                                                                                                
                                                                                                                                
Co-Chair Hawker  asked if the  sponsor was  comfortable with                                                                    
Amendment 2. Mr. Marks replied yes.                                                                                             
                                                                                                                                
Commissioner Galvin  said that  the amendment  fulfilled the                                                                    
technical concerns raised by the department.                                                                                    
                                                                                                                                
Co-Chair Stoltze WITHDREW his OBJECTION to Amendment 2.                                                                         
                                                                                                                                
There being no further OBJECTION, Amendment 2 was ADOPTED.                                                                      
                                                                                                                                
Co-Chair Hawker  asked if the amendments  were sufficient to                                                                    
the  department. Commissioner  Galvin replied  yes, for  the                                                                    
moment.                                                                                                                         
                                                                                                                                
2:29:27 PM                                                                                                                    
                                                                                                                                
Representative    Gara    attempted   to    summarize    his                                                                    
understanding of the bill. Until  gas was exported, Alaska's                                                                    
Clear and  Equitable Share (ACES)  remained unchanged,  a 25                                                                    
percent production  tax on oil,  and the equivalent of  a 25                                                                    
percent  production tax  on gas,  with progressivity,  under                                                                    
the agreed upon terms. Producers  received a benefit if they                                                                    
turned gas  fields for production  into a pipeline,  and gas                                                                    
costs could  be deducted from  the oil taxes.  He understood                                                                    
that the  policy conversation about decoupling  would happen                                                                    
at a future date. Mr. Marks concurred.                                                                                          
                                                                                                                                
Co-Chair Hawker  asked about the intent  of the legislation.                                                                    
Commissioner  Galvin  concurred with  Representative  Gara's                                                                    
assessment  of  the  bill.   Co-Chair  Hawker  reminded  the                                                                    
committee  that  the  mission  was   to  take  a  bill  that                                                                    
accomplished  the  tasks  recommended to  the  House  Floor,                                                                    
where the policy  call would be made by the  entire body. He                                                                    
added that  it was  the sponsor's  belief that  the dilutive                                                                    
effect  of the  current statutory  construct would  cause an                                                                    
immediate  decrease  in  tax revenues  the  minute  gas  was                                                                    
produced.    The  sponsor  predicated  that  the  issue  was                                                                    
urgent. He requested an evaluation  and policy discussion by                                                                    
the Department of Revenue concerning the issue.                                                                                 
                                                                                                                                
2:33:18 PM                                                                                                                    
                                                                                                                                
Commissioner Galvin introduced  the PowerPoint presentation,                                                                    
"Comments  On HCS  CSSB  305 (FIN)  Ver.U"  (copy on  file).                                                                    
Slide 2 details  the three major concerns  to the department                                                                    
regarding the bill:                                                                                                             
                                                                                                                                
   · Decoupling is not necessary at this time.                                                                                  
        ƒSB 305 could be passed at anytime in the next 10                                                                      
               years, and the result would be the same.                                                                         
                                                                                                                                
   · SB 305 "locks-in" a lower gas production tax                                                                               
     obligation                                                                                                                 
        ƒWould reduce the state's negotiating flexibility                                                                      
          in the coming years                                                                                                   
             o We could always lower the gas tax after                                                                          
               "lock-in", but we might not be able to raise                                                                     
               it                                                                                                               
                                                                                                                                
   · SB 305 is a significant overall tax increase                                                                               
        ƒIt sends the Producers and the rest of the world                                                                      
          the  wrong message about Alaska's interest in                                                                         
          promoting a gasline project                                                                                           
                                                                                                                                
Representative  Gara understood  that the  legislation would                                                                    
lower the  gas tax.  Commissioner Galvin responded  that the                                                                    
under the  current law,  the entire  tax obligation  for oil                                                                    
and gas was  divided equally between the  two resources. The                                                                    
legislation would  separate the tax systems  between oil and                                                                    
gas  to determine  the tax  obligation. Commissioner  Galvin                                                                    
stressed  that  the current  formula  resulted  in a  larger                                                                    
obligation    than   when    calculated   under    SB   305.                                                                    
Representative Gara  asked if the  breadth of the  term "gas                                                                    
tax"  had   been  defined   in  the   original  regulations.                                                                    
Commissioner  Galvin responded  that  defining  the gas  tax                                                                    
obligation had  been a priority. The  department believed it                                                                    
would  not be  in the  state's  interest to  imply that  the                                                                    
impact  on the  oil tax  was caused  by the  introduction of                                                                    
natural gas into the conversation.  The department chose the                                                                    
point of  production formula, which  reflected the  value of                                                                    
the two commodities when combined.                                                                                              
                                                                                                                                
2:41:18 PM                                                                                                                    
                                                                                                                                
Representative Gara stated that when  the bill passed in the                                                                    
other  body  the  gas  tax was  calculated  on  the  British                                                                    
Thermal  Unit  (BTU)  equivalent.  He  pointed  out  to  the                                                                    
committee that  under the  current Version  "U", a  point of                                                                    
production approach was being used  to calculate the tax. He                                                                    
asked if  the language  change expanded  the breadth  of the                                                                    
gas tax.  Commissioner Galvin  replied that the version that                                                                    
had passed out  of the senate indicated  that the department                                                                    
would   develop  regulations   on  cost   allocations  while                                                                    
considering the barrel of oil  equivalent (BOE). The current                                                                    
version placed  an expectation that the  point of production                                                                    
formula  would be  used when  possible. Representative  Gara                                                                    
requested an  estimate of  how much lower  the tax  would be                                                                    
using  the  department's   preferred  formula.  Commissioner                                                                    
Galvin referred  to the presentation, "Comments  on HCS CSSB
305 (FIN) VER. U" (copy on  file), Page 21, which charts the                                                                    
gas tax with prices ranging from  $40 per barrel to $200 per                                                                    
barrel. The  slide compares  the status  quo with  the other                                                                    
possible formulas.                                                                                                              
                                                                                                                                
2:43:41 PM                                                                                                                    
                                                                                                                                
Co-Chair Hawker noted  that the chart detailed  the tax that                                                                    
was attributable to gas.                                                                                                        
                                                                                                                                
Commissioner Galvin  said that  SB 305  would be  an overall                                                                    
tax increase.  The tax  burden on  the gas  pipeline project                                                                    
would be  significantly raised. He stressed  that decoupling                                                                    
now would send a negative message to producers.                                                                                 
                                                                                                                                
Commissioner  Galvin directed  committee  attention back  to                                                                    
Slide  3. If  SB 305  were  enacted in  2020, the  resulting                                                                    
state revenue  would be the  same as  if it were  enacted in                                                                    
2010. Slide  4 indicated that  in all of the  modeling cases                                                                    
run by  the department,  the "locked-in" gas  production tax                                                                    
obligation  was  larger under  the  current  system than  it                                                                    
would  be under  SB  305. Commissioner  Galvin continued  to                                                                    
Slide  5,   "Sample  Cases:  Comparing  SB   305,  Petroleum                                                                    
Production  Tax  (PPT),  and the  Status  Quo".  At  current                                                                    
prices,  SB  305  would  be   a  larger  tax  increase  than                                                                    
adjustment  from  PPT to  ACES.  The  Status Quo  brings  in                                                                    
nearly the same  tax revenue that would be  generated if the                                                                    
PPT  system had  been  decoupled (Slide  6).  Slide 7  shows                                                                    
another example  of a  comparison of  the total  tax revenue                                                                    
under a  PPT/Stranded Gas  Development Act  (SGDA) scenario.                                                                    
When compared  with the Status  Quo, there was  no perceived                                                                    
significant  loss. He  said that  the projected  tax numbers                                                                    
under SB  305 could  be misleading,  and would  color public                                                                    
discussion  about  an  appropriate  fiscal  system  for  the                                                                    
gasline far into the future. He  cited the charts on Slide 8                                                                    
and  9  of  the  presentation,  which  illustrate  different                                                                    
comparisons of the  overall tax-take between oil  and gas in                                                                    
different  combinations.  He  questioned the  problem  being                                                                    
solved by SB 305, Slide 10.                                                                                                     
                                                                                                                                
2:53:47 PM                                                                                                                    
                                                                                                                                
Commissioner Galvin  pointed out  to the committee  that the                                                                    
trepidation of becoming locked in  to an obligation for fear                                                                    
of  economic  loss was  unwarranted.  Slide  10 refuted  the                                                                    
claim  of  a  potential  $2   billion  dollar  loss  in  the                                                                    
Department of Law analysis, which states:                                                                                       
                                                                                                                                
   · Only the gas production tax obligation (not the rate)                                                                      
     is "locked-in" at the open season;                                                                                         
                                                                                                                                
   · The legislature can change the oil tax system anytime                                                                      
     before or after the open season;                                                                                           
   · The so-called "$2 billion loss" will only occur if                                                                         
     three things happen:                                                                                                       
                                                                                                                                
          o We are successful in achieving a large capacity                                                                     
             gas pipeline;                                                                                                      
          o The price of oil and gas remain far apart                                                                           
             (defying fundamental economic principles); AND                                                                     
          o The next 5 Legislatures decide that it is                                                                           
             appropriate to leave the current tax system as                                                                     
             is.                                                                                                                
                                                                                                                                
Commissioner Galvin continued to Slide 11, which states:                                                                        
                                                                                                                                
"What is the "Problem Being Solved by SB305?"                                                                                   
                                                                                                                                
   · Is  It?: That  any "dilution"  of oil  taxes caused  by                                                                
     mixing in a lower value hydrocarbon is an unacceptable                                                                     
     "loss" of oil tax revenue?                                                                                                 
                                                                                                                                
   · Response: Should  the Legislature react  similarly when                                                                  
     a large volume heavy oil project is proposed?                                                                              
                                                                                                                                
   · Will it have the  same dynamic; highly profitable sweet                                                                    
     crude will be diluted, thus reducing its profitability                                                                     
     and it progressivity tax rate                                                                                              
                                                                                                                                
   · State  will   "lose"  oil  tax   revenue  due   to  the                                                                    
     introduction of heavy oil                                                                                                  
                                                                                                                                
2:57:26 PM                                                                                                                    
                                                                                                                                
Commissioner Galvin addressed the question proposed on                                                                          
Slide 12:                                                                                                                       
                                                                                                                                
"What is the "Problem Being Solved by SB305?"                                                                                   
                                                                                                                                
   · Is  It?: That  under the  status quo,  at high  oil/gas                                                                  
     price parity, the state is at risk of seeing a                                                                             
     reduction of overall production tax revenue when they                                                                      
     "flip the gas switch"?                                                                                                     
                                                                                                                                
   · Response:  Legislature has  10  years to  decide if  it                                                                  
     wants to take on that risk in exchange for a gasline;                                                                      
                                                                                                                                
   · If  it is  not an  acceptable  risk, then  there are  a                                                                    
     number of alternative options (including decoupling)                                                                       
     that could be carefully considered.                                                                                        
                                                                                                                                
One  alternative approach  to address  the possible  revenue                                                                    
loss  would be  to establish  in  the current  tax system  a                                                                    
minimum tax equal  to a separate oil tax  (i.e. the combined                                                                    
tax cannot  be lower  than what the  separate oil  tax would                                                                    
be). This  would preserve the  economic incentive  nature of                                                                    
the current  system, while  protecting the  state's downside                                                                    
risk  in  the case  of  high  parity,  and did  not  require                                                                    
significant structural  changes to the current  system, such                                                                    
as  cost  allocation.  Commissioner Galvin  offered  closing                                                                    
observations.  He  relayed that  passing  such  a large  tax                                                                    
increase just  before the two  upcoming open seasons  sent a                                                                    
confusing message  about the state's  desire for  a gasline,                                                                    
SB  305 locked  in a  lower gas  production tax  obligation,                                                                    
thus reducing  the state's  negotiating flexibility,  and SB
305  could be  passed after  the open  season without  legal                                                                    
restriction or  economic limitation.  He felt that  the bill                                                                    
failed  to  meet   the  best  interest  of   the  state  and                                                                    
maintained strong opposition to the legislation.                                                                                
                                                                                                                                
3:03:05 PM                                                                                                                    
                                                                                                                                
Co-Chair  Hawker  revealed  that   were  the  bill  to  pass                                                                    
committee, he  would be attaching  a "no  recommendation" to                                                                    
his  signature  on  the  committee   report.  He  urged  the                                                                    
committee to  compare and  contrast the  arguments presented                                                                    
by the bill  sponsor with that of  Commissioner Galvin, when                                                                    
weighing the legislation.                                                                                                       
                                                                                                                                
Representative  Austerman questioned  the  use  of the  word                                                                    
"might" on Slide 2 of  the presentation. Commissioner Galvin                                                                    
replied  that the  language  hedged the  legal  risk in  the                                                                    
event  that the  state failed  to honor  the Alaska  Gasline                                                                    
Inducement Act (AGIA) tax inducement exemption.                                                                                 
                                                                                                                                
Representative  Austerman believed  that  the  bill was  too                                                                    
complicated.                                                                                                                    
                                                                                                                                
Commissioner  Galvin attempted  to clarify.  He assured  the                                                                    
committee that  the gas tax  obligation was on the  gas that                                                                    
was shipped through the AGIA acquired facility.                                                                                 
                                                                                                                                
Representative Austerman  requested that the bill  be broken                                                                    
down into layman's terms to facilitate further discussion.                                                                      
Commissioner Galvin endeavored to simplify:                                                                                     
                                                                                                                                
"You have  $8 gas  and your  all-on cost  for transportation                                                                    
and so forth  is $4, just to  make it easy. So  you have $4,                                                                    
what  is  called  "point  of  production"  value.  Then  the                                                                    
question  at that  point  is, "What  is  the production  tax                                                                    
that's gonna  be ascribed  to that?"  And under  the current                                                                    
system you would  tax that gas with whatever  oil, and you'd                                                                    
end up  splitting it based  upon the relative values  at the                                                                    
point of  production, and you  might end  up with a  gas tax                                                                    
obligation  of $1.50,  say. With  SB 305  you're gonna  take                                                                    
that $4 dollar  point of production, you're  gonna take some                                                                    
of the costs  for production and subtract it  from that, and                                                                    
you are going to have a tax  rate that you are going to then                                                                    
charge, and  you're going  to end up  with a  tax obligation                                                                    
somewhere less  than $1.50. It's  going to be,  maybe, $1.25                                                                    
or $1.00. And that's the difference,  is that, at the end of                                                                    
the  day, the  tax obligation  on that  gas is  going to  be                                                                    
lower with  SB 305 than  ostensibly what you have  under the                                                                    
status quo."                                                                                                                    
                                                                                                                                
3:09:10 PM                                                                                                                    
                                                                                                                                
Representative Kelly asked Commissioner  Galvin how he would                                                                    
have  constructed the  tax from  the beginning;  for Alaska,                                                                    
and  then for  the rest  of the  world. Commissioner  Galvin                                                                    
responded  comparing the  state's options  with the  rest of                                                                    
world presents  two thoughts.  One, Alaska  was in  a unique                                                                    
situation  in the  world going  from a  full oil  providence                                                                    
with a long-term existing fiscal  system, into a world class                                                                    
oil  and  gas  province.  Most   provinces  do  not  have  a                                                                    
transition; they  enter into the  production of oil  and gas                                                                    
simultaneously. He  queried the  opportunity to  "start from                                                                    
scratch". He  said that if the  state were to take  tax cues                                                                    
from other areas  of the world, it would  be discovered that                                                                    
most places  had a tax  combination of oil and  gas. However                                                                    
there  were places  that kept  them separate.  He felt  that                                                                    
separating the profitability  streams of oil and  gas was an                                                                    
arbitrary accounting exercise.                                                                                                  
                                                                                                                                
Representative  Kelly cited  Page 15,  Line 6.  He commented                                                                    
that  "the  department  shall"  could  be  changed  to  "the                                                                    
department  may".  Commissioner  Galvin responded  that  the                                                                    
amount  of  discretion  that was  appropriate  to  give  the                                                                    
department in  establishing the cost  allocation methodology                                                                    
had  been under  discussion. The  issue was  a policy  call,                                                                    
without  empirical arguments  to weigh  when establishing  a                                                                    
right or  wrong answer. The department  preferred to receive                                                                    
direction from  the legislature as  to which  methodology to                                                                    
use.                                                                                                                            
                                                                                                                                
3:16:18 PM                                                                                                                    
                                                                                                                                
Representative   Doogan   asked    about   the   3   closing                                                                    
observations  found  on Slide  14  of  the presentation.  He                                                                    
requested   reconciliation   between   points   1   and   2.                                                                    
Commissioner Galvin responded that,  as illustrated on Slide                                                                    
18,  using  the   status  quo  method  to   derive  the  gas                                                                    
production  tax  obligation,  although the  overall  tax  is                                                                    
lower, the proportion  of tax attributed to  gas is greater.                                                                    
The relationship  holds true throughout the  different price                                                                    
scenarios.  Decoupling  would  cause  the oil  tax  to  rise                                                                    
faster than the gas tax  decreased. As the costs between oil                                                                    
and  gas were  moved,  oil was  moved  up the  progressivity                                                                    
line. Gas  was not at  the progressivity line,  and remained                                                                    
flat. This resulted in a lesser gas tax under SB 305.                                                                           
                                                                                                                                
Representative  Doogan  understood  that under  the  current                                                                    
system, gas production diluted the  effect of the higher oil                                                                    
price,  but  the  lower  gas tax  did  provide  a  favorable                                                                    
position.  Commissioner Galvin  agreed.  He  added that  the                                                                    
passing  of  the  bill would  be  off-putting  to  producers                                                                    
because  it would  insinuate that  the state  should receive                                                                    
considerably more tax revenue when gas was being produced.                                                                      
                                                                                                                                
3:22:19 PM                                                                                                                    
                                                                                                                                
Representative Gara  expressed concern that without  SB 305,                                                                    
the "lock-in"  gas tax rate  defined by regulation  could be                                                                    
successfully challenged  in court. Commissioner  Galvin said                                                                    
that a  challenge to the  department's regulations  would be                                                                    
unprecedented.  He pointed  out  to the  committee that  the                                                                    
regulations  had  been  reviewed  during  a  public  comment                                                                    
period,  and had  been accepted  by  producers. He  believed                                                                    
that the state  should be confident with  the system already                                                                    
in place.                                                                                                                       
                                                                                                                                
Representative Fairclough asserted that  the gasline and gas                                                                    
revenues  were not  a  "silver bullet"  for  the state.  She                                                                    
pointed  out to  the committee  that  all of  the models  in                                                                    
question had been  modeled out to 10 years.  She wondered if                                                                    
modeling to  20 years would  be more beneficial, as  a point                                                                    
would eventually  be reached where  production was  going to                                                                    
adversely, in  an inverse way,  affect the value of  oil and                                                                    
the taxes the  state collected. She asked  if the department                                                                    
had modeled out further than ten  years in order to know the                                                                    
ramifications  on  projections of  oil  going  down and  gas                                                                    
coming   online.    Commissioner   Galvin    answered   yes.                                                                    
Representative Fairclough  probed how  much the  state could                                                                    
receive  if oil  were provided  for under  a different  rate                                                                    
through  decoupling, specifically,  in  the  second 10  year                                                                    
section. Commissioner  Galvin replied  that if there  were a                                                                    
disincentive  for  a  gas pipeline,  then  the  state  could                                                                    
expect to continue  to see a decline of  oil production, and                                                                    
overall  state revenue.  Representative Fairclough  wondered                                                                    
if the benefit to the state  for not collecting taxes in the                                                                    
first  10   years  of   production  would   be  significant.                                                                    
Commissioner  Galvin replied  that  in order  to answer  the                                                                    
question, the legislature would need  to decide on the price                                                                    
relationship between oil and gas  for the years 2020 through                                                                    
2030.                                                                                                                           
                                                                                                                                
3:29:06 PM                                                                                                                    
                                                                                                                                
Commissioner Galvin  stated that  he could not  fully answer                                                                    
the question with the information  available. He stated that                                                                    
if the tax system for the  next 20 years were put into place                                                                    
under  the  legislation,  the state  would  not  succeed  in                                                                    
building   a   gas   pipeline.   Representative   Fairclough                                                                    
clarified  that the  Commissioner had  presented a  scenario                                                                    
explaining the problems  with SB 305. She  requested that he                                                                    
provide  the committee  with  an  alternative scenario,  for                                                                    
2020  through  2030,  that explains  what  the  state  would                                                                    
receive in the second 10 years of production.                                                                                   
                                                                                                                                
Commissioner Galvin  argued that if  SB 305 failed,  and the                                                                    
state were  to move  forward in the  development of  the gas                                                                    
pipeline, when the  time arrived for the  state to "lock-in"                                                                    
the  oil tax,  the price  relationship would  remain $120/$8                                                                    
gas. He predicted that the  current system would be replaced                                                                    
by  an  alternative minimum  tax  in  order to  capture  the                                                                    
value. He  contended that  Alaska was not  in a  position to                                                                    
make  the decision  right now.  He stressed  that the  state                                                                    
should leave  its options open  in order to create  a system                                                                    
that provides for a pipeline,  and the ability to change the                                                                    
system if necessary.                                                                                                            
                                                                                                                                
Representative  Fairclough voiced  discomfort with  the risk                                                                    
that  not  decoupling  could "lock-in"  tax  rates  for  the                                                                    
state.                                                                                                                          
                                                                                                                                
Co-Chair Hawker  requested that someone from  the department                                                                    
schedule a sit down with Representative Fairclough.                                                                             
                                                                                                                                
3:34:14 PM                                                                                                                    
                                                                                                                                
Representative  Salmon queried  the  urgency of  the May  1,                                                                    
2010  passage  of  the legislation  suggested  by  the  bill                                                                    
sponsor.                                                                                                                        
                                                                                                                                
Commissioner  Galvin felt  that the  difference between  the                                                                    
priority   of  the   sponsor,   and   what  the   department                                                                    
recommended  was  moot,  as  only the  gas  portion  of  the                                                                    
obligation was relevant going into the open season.                                                                             
                                                                                                                                
3:36:53 PM                                                                                                                    
                                                                                                                                
MICHAEL     HURLEY,     DIRECTOR,    GOVERNMENT     AFFAIRS,                                                                    
CONOCOPHILLIPS,  stated  that the  bill  did  not solve  the                                                                    
problem  of  gas  taxation.   He  said  that  ConocoPhillips                                                                    
understood the sponsor's intent,  but feared that the public                                                                    
would misinterpret what the bill  would do. He remarked that                                                                    
the bill was a reflection of  one of the many flaws in AGIA.                                                                    
The fundamental  issue of how  gas would end up  being taxed                                                                    
was not  addressed. The lack  of clarity concerning  how the                                                                    
gas would be  taxed added to the  uncertainty that producers                                                                    
faced when  considering proposing  gas into the  pipeline in                                                                    
the 2, upcoming open seasons.  He thought that fiscal issues                                                                    
would  eventually  need  to be  addressed.  He  shared  that                                                                    
ConocoPhillips   appreciated   the   sponsor's   intent   in                                                                    
designing the  bill to speak to  the flaws in AGIA.  He felt                                                                    
that  the bill  added to  the  complexity of  the issue.  He                                                                    
reported  that ConocoPhillips  would continue  to work  with                                                                    
the  state  to  create   a  tax  structure  that  encouraged                                                                    
investment, production, and jobs for Alaskans.                                                                                  
                                                                                                                                
Representative Gara stated that there  was an anomaly in the                                                                    
existing tax. He asserted that it  was not the desire of the                                                                    
legislature to  put into place  a system that  produced less                                                                    
revenue  for the  state  with gas  and  oil pipelines,  than                                                                    
would be  received with solely  an oil pipeline.  He thought                                                                    
that the issue would need discussed further.                                                                                    
                                                                                                                                
3:42:21 PM                                                                                                                    
                                                                                                                                
Representative Kelly  asked Mr.  Hurley if he  preferred the                                                                    
House  Resources version  of the  bill (Version  N), or  the                                                                    
current  Version  "U".  Mr. Hurley  replied  that  he  would                                                                    
suggest "no recommendation" for Version "U".                                                                                    
                                                                                                                                
Representative Fairclough asked if  there was a version that                                                                    
worked best  for the industry.  Mr. Hurley replied  that, in                                                                    
the  end, both  versions accomplish  same thing.  He thought                                                                    
that Version "N" had been  cleaner than Version "U". The "U"                                                                    
version required the commissioner  to write additional pages                                                                    
of  regulations,  ConocoPhillips would  need  restructuring,                                                                    
and  cost allocations  would need  review.  Overall the  "U"                                                                    
version was messier for the  company. However, both versions                                                                    
keep current  businesses operating at the  status quo, until                                                                    
the big gas flows in the big gasline.                                                                                           
                                                                                                                                
Representative  Fairclough  wondered   if  the  state  would                                                                    
retain the flexibility  to change the tax  rate for Alaskans                                                                    
in  the future.  She requested  the industry  perspective on                                                                    
whether  there was  a "drop-dead"  date  that would  benefit                                                                    
Alaskans.  Mr.  Hurley opined  that  what  was designed  and                                                                    
promoted in AGIA  as an inducement, was  now being described                                                                    
as  something that  could change  on a  whim. Representative                                                                    
Fairclough added that the understanding  had been that there                                                                    
was a  date certain  that AGIA anticipated,  and now  it was                                                                    
understood  that the  date still  had flexibility  to either                                                                    
raise or lower the gas tax.                                                                                                     
                                                                                                                                
3:46:28 PM                                                                                                                    
                                                                                                                                
Representative  Kelly asked  if locking  in a  tax rate  now                                                                    
would be enough for producers  to go forward with a gasline.                                                                    
Mr. Hurley  replied no. Representative Kelly  perceived that                                                                    
Alaskans were  being told that  locking in a rate  now would                                                                    
be ineffective.                                                                                                                 
                                                                                                                                
3:48:35 PM                                                                                                                    
                                                                                                                                
Commissioner  Galvin clarified  why the  state might  not be                                                                    
able  to  raise  the  tax   in  the  future.  He  cited  the                                                                    
discussions  during the  special  session on  AGIA. At  that                                                                    
time, the  administrations recommendation was that  the AGIA                                                                    
tax inducement be made a  contractual commitment between the                                                                    
state  and the  producers.  The  recommendation was  removed                                                                    
because  the legislature  wanted  to retain  the ability  to                                                                    
change the tax  system and disregard what  was being offered                                                                    
during  the  open  season.  The   Department  of  Law  (DOL)                                                                    
believed that there  may still be an  obligation inherent in                                                                    
the AGIA  language. The enactment  of AGIA had  never stated                                                                    
that  the  tax inducement  was  an  absolute "lock-in".  The                                                                    
administration acknowledged  that the agreement  should have                                                                    
been contractual.                                                                                                               
                                                                                                                                
Co-Chair Hawker  requested that Commissioner  Galvin explain                                                                    
the revised fiscal note.                                                                                                        
                                                                                                                                
                                                                                                                                
3:51:13 PM                                                                                                                    
                                                                                                                                
Commissioner Galvin  stated that the  necessary expenditures                                                                    
as  a  result   of  Version  "U"  would   mandate  that  the                                                                    
department develop 2 sets of  regulations; one handling cost                                                                    
allocation,  and the  other dealing  with the  allocation of                                                                    
adjustments  to the  cost. Based  upon information  from DOL                                                                    
and   the  department's   experience  with   the  regulatory                                                                    
process, the cost estimate generated was $330,000.                                                                              
                                                                                                                                
Vice-Chair Thomas MOVED to report  HCS CS SB 305(FIN) out of                                                                    
Committee   with   individual    recommendations   and   the                                                                    
accompanying new fiscal note.                                                                                                   
                                                                                                                                
Representative   Joule   OBJECTED   for   the   purpose   of                                                                    
discussion.                                                                                                                     
                                                                                                                                
Representative Joule WITHDREW his OBJECTION.                                                                                    
                                                                                                                                
Co-Chair Hawker OBJECTED for the purpose of discussion.                                                                         
                                                                                                                                
Co-Chair Hawker closed public testimony.                                                                                        
                                                                                                                                
Co-Chair Hawker WITHDREW his OBJECTION.                                                                                         
                                                                                                                                
There being NO further OBJECTION, it was so ordered.                                                                            
                                                                                                                                
HCS CSSB  305(FIN) was  REPORTED out  of Committee  with "no                                                                    
recommendation"  and   attached  new  fiscal  note   by  the                                                                    
Department of Revenue.                                                                                                          
                                                                                                                                
3:56:07 PM          AT EASE                                                                                                   
4:22:16 PM          RECONVENED                                                                                                
                                                                                                                                

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