Legislature(2009 - 2010)BARNES 124

03/15/2010 01:00 PM House RESOURCES

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Continued at 5:30 pm Today --
Heard & Held
<Bill Held Over from 03/12/10>
+ Bills Previously Heard/Scheduled TELECONFERENCED
Moved CSHB 280(RES) Out of Committee
            HB 280-NATURAL GAS: STORAGE/ TAX CREDITS                                                                        
5:40:41 PM                                                                                                                    
CO-CHAIR  JOHNSON announced  that the  next order  of business  is                                                              
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."                                                              
[Before the committee  was the proposed committee  substitute (CS)                                                              
for HB  280, Version  26-LS1185\C, Bullock,  3/9/10, adopted  as a                                                              
work draft on 3/12/10.]                                                                                                         
5:41:06 PM                                                                                                                    
REPRESENTATIVE MIKE  HAWKER, Alaska State Legislature,  sponsor of                                                              
HB 280,  addressed two questions  he was  unable to answer  at the                                                              
3/12/10  committee hearing.   In  regard to  the bill's  provision                                                              
for  recovery  of  tax  credits  when  a  storage  facility  stops                                                              
cycling  gas,  Representative  Guttenberg  had  asked  what  would                                                              
happen if an operator  failed to meet the requirement  to cycle at                                                              
least 100  million cubic feet of  gas per year for  reasons beyond                                                              
the  facility owner's  control.    Representative  Hawker said  he                                                              
thinks  the  bill  provides adequate  protection  in  this  regard                                                              
because the threshold  of cycling 100 million cubic  feet per year                                                              
for maintenance  of commercial  operation is  relatively low.   To                                                              
provide a  reference for just how  small this amount is,  he noted                                                              
that 400  million cubic feet  can be used  on one peak day  in the                                                              
winter.   In regard  to Representative  Tuck's question  about how                                                              
gas  storage  would  inter-relate   with  either  the  closing  or                                                              
continued  operation of  the liquefied  natural  gas (LNG)  export                                                              
facility  in   Nikiski,  Representative   Hawker  explained   that                                                              
storage would  be needed either  way:   if the facility  closed, a                                                              
large amount of  storage would be needed to meet  peak demands; if                                                              
the  facility  continued, a  lesser  amount  of storage  would  be                                                              
5:43:49 PM                                                                                                                    
CO-CHAIR JOHNSON opened public testimony.                                                                                       
STACEY  SCHUBERT,  Intergovernmental   Affairs  Director,  Mayor's                                                              
Office, Municipality  of Anchorage, spoke as follows  on behalf of                                                              
Dan Sullivan, Mayor of Anchorage:                                                                                               
     The  Municipality of  Anchorage is  concerned about  the                                                                   
     declining production  of natural gas in the  Cook Inlet,                                                                   
     specifically as  it relates to decreased  deliverability                                                                   
     through the  gas system.   Exploration in Cook  Inlet is                                                                   
     declining,   which  has  prompted   concern  among   the                                                                   
     administration  and others in  the community.   Railbelt                                                                   
     utilities  have  been  working  with us  on  the  Energy                                                                   
     Watch Program,  the green,  yellow, and red  system that                                                                   
     implores  customers  to  adjust their  behavior  in  the                                                                   
     event  of an impending  energy crisis.   Last winter  we                                                                   
     nearly experienced  a catastrophic event.  This  year we                                                                   
     have been  stable, but we  cannot rely on the  stability                                                                   
     of the past to guide our future.                                                                                           
     The  timeline  for action  is  growing  shorter.   As  a                                                                   
     result,  I am  testifying  in  support of  the  concepts                                                                   
     proposed  in the  [committee substitute]  version of  HB
     280  to encourage  gas storage  and  exploration in  the                                                                   
     Cook  Inlet  and,  therefore,   stability  for  Railbelt                                                                   
     energy consumers.                                                                                                          
     Specific  features of  the bill supported  by the  mayor                                                                   
     are:   the  strong requirement  that financial  benefits                                                                   
     flow  through the  utilities  that contract  for gas  to                                                                   
     the  benefit of their  customers; the  provision for  40                                                                   
     percent credit  for exploration  expenses in Cook  Inlet                                                                   
     against  production taxes  that we  hope will result  in                                                                   
     increased   exploration;  and   the  direction  to   the                                                                   
     Department  of Law to consider  the impact to  consumers                                                                   
     in  the  event  the  [Regulatory  Commission  of  Alaska                                                                   
     (RCA)] rejects  the utilities' gas supply contract.   We                                                                   
     concur with  the bill sponsors that this  encourages the                                                                   
     RCA to  take a long-term  view and provides  a long-term                                                                   
     benefit to consumers.                                                                                                      
     The  mayor is  committed to  monitoring the  bill as  it                                                                   
     continues  to  work  its  way  through  the  legislative                                                                   
CO-CHAIR JOHNSON  closed public testimony after  ascertaining that                                                              
no one else wished to testify.                                                                                                  
5:47:28 PM                                                                                                                    
REPRESENTATIVE SEATON  inquired whether HB 280 would  give the RCA                                                              
the appropriate  statutory  authority to  regulate gas storage  in                                                              
the Cook Inlet basin.                                                                                                           
STUART  GOERING,   Assistant  Attorney  General,   Commercial/Fair                                                              
Business Section,  Civil Division (Anchorage), Department  of Law,                                                              
first noted  that he is the representative  for the RCA.   He said                                                              
Version  C  does  contain sufficient  language  to  clarify  RCA's                                                              
jurisdiction  over natural gas  storage to  the extent  that would                                                              
be  necessary at  this  time.   Version  C  addresses  all of  the                                                              
concerns  raised by the  RCA in  its recent  decision.   Version C                                                              
clarifies  the RCA's  jurisdiction  over third  party natural  gas                                                              
storage  and  also   clarifies  its  lack  of   jurisdiction  over                                                              
proprietary storage,  which is existing storage that  is owned and                                                              
operated by  natural gas  producers for their  own benefit  and to                                                              
assure  that they  can meet  their  contractual obligations  under                                                              
their gas supply agreements with the utilities.                                                                                 
5:49:45 PM                                                                                                                    
REPRESENTATIVE   SEATON  asked   whether   the  provision   giving                                                              
direction to  the RCA  to consider failure  to approve  a contract                                                              
is adequate.                                                                                                                    
REPRESENTATIVE HAWKER  pointed out that this guidance  is provided                                                              
to Regulatory  Affairs & Public  Advocacy (RAPA) under  Section 20                                                              
and to the Regulatory Commission of Alaska under Section 5.                                                                     
MR. GOERING replied  that this provision would require  the RCA to                                                              
consider certain  things which, based  upon an assessment  of past                                                              
RCA  orders,   have  already   been  at   the  forefront   of  the                                                              
commission's  consideration.   However,  it would  help the  RCA's                                                              
consideration  in  that it  would  allow parties  to  specifically                                                              
address   those  criteria   when  making   presentations  to   the                                                              
commission  either in favor  of or  in opposition  to a  gas sales                                                              
agreement.   The  provision would  not  really result  in the  RCA                                                              
considering  anything  new, but  it  would  draw to  the  parties'                                                              
attention the need  to address that in their  presentations to the                                                              
5:52:18 PM                                                                                                                    
REPRESENTATIVE SEATON  requested Ms. Robynn Wilson  to address the                                                              
interactions that  would result from the language  in [Section 16,                                                              
paragraph (1)] on page 14, lines 20-27.                                                                                         
ROBYNN  WILSON, Income  Audit Manager,  Tax Division-Income  Audit                                                              
Group, Department  of Revenue, answered  that AS 43.20.043  is the                                                              
gas development  credit.  She said  her reading of  this paragraph                                                              
is that  the taxpayer  can take  a credit under  AS 43.55  but not                                                              
under  AS 43.20.043.   She asked  Mr. Larry  Ostrovsky whether  he                                                              
has a different reading than hers.                                                                                              
LARRY OSTROVSKY,  Petroleum Land Manager,  Division of Oil  & Gas,                                                              
Department of Natural Resources, said he did not.                                                                               
5:54:47 PM                                                                                                                    
REPRESENTATIVE HAWKER  said he believes  Ms. Robynn Wilson  is 100                                                              
percent  correct in  her  answer.   He  requested  that his  staff                                                              
member,   Mr.  Larry   Persily,   be  able   to  further   address                                                              
Representative Seaton's question.                                                                                               
LARRY  PERSILY, Staff,  Representative Mike  Hawker, Alaska  State                                                              
Legislature,  explained  that  Section  16  takes  the  30  or  40                                                              
percent  exploration  credit,  depending   on  distance  from  the                                                              
existing  hole in the  ground, that  is currently  in statute  and                                                              
makes  it 40 percent  for Cook  Inlet.   Additionally, it  expands                                                              
the definition  of allowable expenses  for that credit  to include                                                              
all well-related lease expenditures.                                                                                            
5:55:59 PM                                                                                                                    
REPRESENTATIVE SEATON  noted that provisions under  paragraph (1),                                                              
page  14, would  allow a  producer or  explorer to  also elect  to                                                              
apply a tax credit  against AS 43.55.011(e).   He inquired whether                                                              
this provision would  allow lease expenditure to  count as credits                                                              
in multiple sections of the law.                                                                                                
MR.  PERSILY replied  a  taxpayer  can only  take  a credit  once,                                                              
depending  upon  where there  is  a  tax  liability.   In  further                                                              
response, he  explained that  AS 43.55.011(e)  is the oil  and gas                                                              
production tax.                                                                                                                 
MS. ROBYNN  WILSON recalled that  under revisions of  that statute                                                              
in  2006 and  2007, the  credit  could be  given  even though  the                                                              
expenditure  was  deductible  in calculating  the  production  tax                                                              
5:58:26 PM                                                                                                                    
REPRESENTATIVE   HAWKER   interpreted    Representative   Seaton's                                                              
question as  asking whether  double dipping  would be  allowed for                                                              
the  credit by  applying  the same  credit  against two  different                                                              
taxes.  He said  the answer is no and pointed out  that line 22 in                                                              
paragraph (1)  contains the prefacing  language, "unless  a credit                                                              
for  that expenditure  is  taken  under"  someplace else,  then  a                                                              
producer  or explorer  "may also  elect to apply"  it against  the                                                              
production tax.                                                                                                                 
REPRESENTATIVE SEATON  stated he will  be fine if the  state's tax                                                              
lawyers agree with Representative Hawker's answer.                                                                              
MS.  ROBYNN  WILSON  said  a  person  cannot  take  two  different                                                              
credits  for  the same  expenditure;  they  can, however,  take  a                                                              
deduction  for the  expenditure  in  addition to  a  credit.   The                                                              
value of a deduction  generally is a lot less than  the value of a                                                              
credit.  So, although  this section says a deduction  and a credit                                                              
may be taken,  it also says  that two different credits  cannot be                                                              
received for the same expenditure.                                                                                              
6:00:23 PM                                                                                                                    
REPRESENTATIVE  HAWKER  expressed  his willingness  for  the  word                                                              
"also" to be deleted if it would make members more comfortable.                                                                 
REPRESENTATIVE  SEATON said  this  would help  his comfort  level.                                                              
He moved to adopt Conceptual Amendment 1 as follows:                                                                            
     Page 14, line 24:                                                                                                          
          Delete "also"                                                                                                         
There being no objection, Conceptual Amendment 1 was passed.                                                                    
6:02:10 PM                                                                                                                    
REPRESENTATIVE  P. WILSON understood  that [paragraph  (1)], lines                                                              
20-27,  page 14, would  provide  that an expense  may be  deducted                                                              
and also applied  as a tax credit  in the amount of  40 percent of                                                              
that expenditure.                                                                                                               
REPRESENTATIVE  HAWKER  replied  yes.    He  said  this  provision                                                              
parrots the language  and methodology that was  established in the                                                              
petroleum production  tax (PPT)  and Alaska's Clear  and Equitable                                                              
Share (ACES)  debates in  the legislature  previously.   By adding                                                              
new subsections, no  new concepts and no new  credits are created;                                                              
it sets aside  a separate section of statute  for specifically the                                                              
activities within the Cook Inlet.                                                                                               
REPRESENTATIVE  P. WILSON  posed a  scenario in  which a  taxpayer                                                              
has a  cost of $10,000  that can be  deducted.  She  surmised that                                                              
under HB  280, Version C,  the taxpayer  could also receive  a tax                                                              
credit of 40 percent for this $10,000 expenditure.                                                                              
MS. ROBYNN WILSON answered correct.                                                                                             
6:04:04 PM                                                                                                                    
REPRESENTATIVE  SEATON asked  whether AS  43.20.043 also  allows a                                                              
10 percent deduction or credit on the corporate income tax.                                                                     
MS. ROBYNN  WILSON responded no,  that would not be  a duplicative                                                              
credit.   She  cited  AS  43.20.043(g),  the gas  exploration  and                                                              
development tax  credit that is  creditable against  the corporate                                                              
income tax, which reads as follows:                                                                                             
     A taxpayer who obtains a credit under this section may                                                                     
         not claim a tax credit or royalty modification                                                                         
     provided for under any other title.                                                                                        
MS. ROBYNN  WILSON said the  department's reading of  this statute                                                              
is that  the same expenses  that would  generate the  credit under                                                              
AS 43.20.043  cannot  then be used  for another  credit under  the                                                              
production tax or any other chapter within the title.                                                                           
6:05:35 PM                                                                                                                    
REPRESENTATIVE  SEATON inquired whether  a taxpayer  could receive                                                              
the 40 percent credit and royalty modification as well.                                                                         
MS. ROBYNN WILSON  said her reading of 43.20.043(g)  is that there                                                              
would not  be a  credit against  royalties; however, she  deferred                                                              
to the Department  of Natural Resources because  royalties are not                                                              
her area.                                                                                                                       
MR.  OSTROVSKY allowed  he  is not  an expert  in  regard to  this                                                              
particular  question,  but noted  that  AS 43.20.043(g)  says,  "A                                                              
taxpayer who obtains  a credit under this section may  not claim a                                                              
tax credit  or royalty modification  provided for under  any other                                                              
6:06:44 PM                                                                                                                    
REPRESENTATIVE  SEATON  asked whether  the  provision  in HB  280,                                                              
Version C,  would allow a taxpayer  to receive the 40  percent tax                                                              
credit under 43.55.011(e) as well as a royalty modification.                                                                    
MR. OSTROVSKY replied he will have to get back with that answer.                                                                
6:07:48 PM                                                                                                                    
REPRESENTATIVE  HAWKER understood  the  question to  be whether  a                                                              
taxpayer  receiving   the  credits  under  Section   16  would  be                                                              
prevented  from  pursuing  and receiving  a  royalty  modification                                                              
under the  royalty modification  statutes.  He  noted that  it was                                                              
the other reference  that says if a deduction is  taken under this                                                              
section, then  royalty modifications cannot  be pursued.   But, he                                                              
pointed out,  there is nothing in  Section 16 that  would preclude                                                              
a taxpayer  from pursuing royalty  modification under  the royalty                                                              
modification statutes.                                                                                                          
6:08:42 PM                                                                                                                    
REPRESENTATIVE  SEATON  inquired   whether  it  is  the  sponsor's                                                              
intent to  allow the  taking of  a 40  percent tax credit  against                                                              
production tax as well as royalty modification.                                                                                 
REPRESENTATIVE   HAWKER  answered   an  application  for   royalty                                                              
modification would  still be available to a taxpayer  that availed                                                              
itself  of deductions  and  credits under  Section  16.   However,                                                              
royalty  modification  requirements  have a  very  high  bar.   In                                                              
making its  decision the state  would consider the  deductions and                                                              
credits available to that same taxpayer under Section 16.                                                                       
6:10:26 PM                                                                                                                    
REPRESENTATIVE SEATON  asked if this  40 percent tax  credit would                                                              
be  one  of  the  things  available  for  consideration  when  the                                                              
Department  of  Natural  Resources  was  making  its  decision  on                                                              
whether to grant the royalty modification.                                                                                      
MR.  OSTROVSKY responded  yes, he  believes  the department  takes                                                              
all  the  tax  credits  into  account   when  considering  royalty                                                              
6:11:08 PM                                                                                                                    
REPRESENTATIVE SEATON  said he would like to have  a discussion on                                                              
the record  regarding how  Section 11 would  allow the  tax credit                                                              
generated from activity  in Cook Inlet, which is ring  fenced at a                                                              
very  low  tax  rate,  to be  applied  without  the  deduction  of                                                              
considering  that  very  low  tax  rate to  the  higher  tax  rate                                                              
production taxes across the state.                                                                                              
REPRESENTATIVE   HAWKER  said  he   appreciates  this   discussion                                                              
because  it is  potentially  the most  significant  change in  tax                                                              
regime  components  as  they relate  to  maximizing  Cook  Inlet's                                                              
attractiveness  for capital investment  in the exploration  arena.                                                              
He explained  that when the PPT/ACES  structure was passed  it was                                                              
focused  primarily on  North Slope  activities.   It was  realized                                                              
late in the debate  that if the PPT/ACES structure  was applied on                                                              
a statewide basis  it would result in a very  significant increase                                                              
in taxes  in the Cook Inlet,  just as it  did on the  North Slope.                                                              
If those tax increases  were applied to the Cook  Inlet, the taxes                                                              
would be  recognized as  legitimate expenses  and would  therefore                                                              
be  paid by  Southcentral  consumers  through the  energy  pricing                                                              
process.   Because a  massive increase  in consumer energy  prices                                                              
was  an undesirable  outcome, the  Cook Inlet  was ring-fenced  to                                                              
remain  at  the economic  limit  factor  (ELF)  tax rate.    Other                                                              
legislation  has extended  this same treatment  to other  in-state                                                              
locations where gas is produced and consumed in-state.                                                                          
6:14:59 PM                                                                                                                    
REPRESENTATIVE  HAWKER explained  that the  PPT/ACES debates  were                                                              
truly  focused  on  the  North   Slope.    At  the  time,  it  was                                                              
recognized  that some  producers worked  in both  the North  Slope                                                              
and  the  Cook Inlet,  and  a  policy  call  was made  that  those                                                              
producers would  not be allowed to  use a credit generated  in the                                                              
Cook  Inlet on  the North  Slope or  anywhere else  in the  state.                                                              
While  working on  HB  280, he  realized that  the  Cook Inlet  is                                                              
effectively  being   disadvantaged  by   this  policy;   a  dollar                                                              
invested  in the Cook  Inlet results  in a  lesser benefit  to the                                                              
investor than  investing the same  dollar elsewhere in  the state,                                                              
particularly on  the North Slope.   This provision in HB  280 says                                                              
that investment  in Alaska  is good  and that  the state  does not                                                              
want to  disadvantage the Cook  Inlet as an attractive  investment                                                              
climate.  This  change allows investors the ability  to take those                                                              
credits/deductions  anywhere they may  be operating in  the state,                                                              
even if those  credits/deductions were incurred in  the Cook Inlet                                                              
with a lesser  tax structure.   The outcome of this  change should                                                              
be  to maximize  the  attractiveness  and competitiveness  of  the                                                              
Cook Inlet  within the borders of  Alaska to develop the  gas that                                                              
everyone  hopes is there.   He  said HB  280 takes a  multi-tiered                                                              
approach  to  meeting Southcentral  Alaska's  energy  security  by                                                              
providing  storage capacity  as  well as  improving production  in                                                              
the Cook Inlet.                                                                                                                 
6:17:54 PM                                                                                                                    
REPRESENTATIVE  SEATON stated  that both  the legislature  and the                                                              
public  need to  realize  that areas  are  being ring-fenced  with                                                              
zero tax or tax  rates that are so low they  are effectively zero.                                                              
This essentially  gives 100  percent tax  credit because  whatever                                                              
is done,  it does not  have to be  offset against the  tax because                                                              
there is  no tax being charged.   When those expenses  are allowed                                                              
to  offset   the  areas   with  a   high  tax,  additional   state                                                              
participation  is received  with that  reduction.   Neither a  low                                                              
gross tax, nor an  interaction of gross and net  tax through ring-                                                              
fencing, has yielded  the exploration incentive that  was desired.                                                              
Now  a 40  percent  tax  credit on  investments  on  top of  these                                                              
extremely  low  tax  rates  is  being  proposed  to  provide  that                                                              
incentive.   He said he  is bringing this  up because there  are a                                                              
number of  other initiatives proposing  to give big tax  breaks to                                                              
gas or  oil if  it takes  place in  a certain  place.  Every  time                                                              
this is done,  the legislature gets  in the situation where  it is                                                              
changing  the entire  theory of  unified tax  on profits that  are                                                              
made across the entire  state.  He said he thinks  that if this is                                                              
done, some  companies will be  significantly advantaged  that have                                                              
operations in both  the low tax Cook Inlet and the  high tax North                                                              
Slope; whereas,  those companies concentrating  in a low  tax area                                                              
will  not gain  the  benefit  of being  able  to write  these  tax                                                              
credits  off  against the  high  tax  rates  of elsewhere.    When                                                              
making these  special rules  for specific  areas, the  legislature                                                              
may not be fully recognizing the impacts.                                                                                       
6:22:00 PM                                                                                                                    
REPRESENTATIVE HAWKER  responded that when coming  forward with HB
280,  the  challenge  identified   by  Representative  Seaton  was                                                              
recognized.    It is  not  the  sponsors'  desire  to have  a  tax                                                              
structure that  is prejudiced against  any individual  explorer or                                                              
investor in  a region.   In the aggregate,  that is  resolved here                                                              
by making the credits refundable for small producers.                                                                           
REPRESENTATIVE  OLSON   moved  to  report  HB  280,   Version  26-                                                              
LS1185\C,  Bullock,  3/9/10,  as   amended,  from  committee  with                                                              
individual  recommendations  and  attached  fiscal notes.    There                                                              
being  no objection,  CSHB 280(RES)  was reported  from the  House                                                              
Resources Standing Committee.                                                                                                   

Document Name Date/Time Subjects
CS HB 229 v. E.pdf HRES 3/15/2010 1:00:00 PM
HB 229
CS HB 229 v. E Sectional.pdf HRES 3/15/2010 1:00:00 PM
HB 229
HB 229 Additional Information.pdf HRES 3/15/2010 1:00:00 PM
HB 229
HB 229 Fiscal Note.pdf HRES 3/15/2010 1:00:00 PM
HB 229
HB 229 Report from DOR 3.15.10.pdf HRES 3/15/2010 1:00:00 PM
HB 229
HB229 Testimony 3.15.10.pdf HRES 3/15/2010 1:00:00 PM
HB 229