Legislature(2009 - 2010)BARNES 124

04/07/2010 01:00 PM House RESOURCES

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Continued at 6:30 pm Today --
Heard & Held
Moved CSHB 337(RES) Out of Committee
Waived Out of Committee
<Bill Hearing Canceled>
Scheduled But Not Heard
+ Bills Previously Heard/Scheduled TELECONFERENCED
         HB 337-OIL AND GAS PROD. TAX: CREDITS/INTEREST                                                                     
CO-CHAIR JOHNSON announced that the  next order of business would                                                               
be HOUSE  BILL NO. 337, "An  Act relating to interest  on certain                                                               
underpayments  or overpayments  for  the oil  and gas  production                                                               
tax,  to certificates  for  certain oil  and  gas production  tax                                                               
credits for  qualified capital  expenditures, and  to alternative                                                               
tax credits for expenditures for  certain oil and gas development                                                               
and exploration  activities for the  oil and gas  production tax;                                                               
relating  to the  use  of the  oil  and gas  tax  credit fund  to                                                               
purchase certain  tax credit certificates;  and providing  for an                                                               
effective date."                                                                                                                
CO-CHAIR  JOHNSON stated  the document  before  the committee  is                                                               
Version R.  He recalled  that Representative Guttenberg had moved                                                               
Conceptual Amendment 3,  labeled 26-GH2057\A.l, Bullock, 8/24/10,                                                               
at the 3/29/10  meeting; however, the amendment  was withdrawn so                                                               
the meeting could adjourn without any business before it.                                                                       
REPRESENTATIVE GUTTENBERG moved Conceptual Amendment 3, labeled                                                                 
26-GH2057\A.1, Bullock, 8/24/10, which read:                                                                                    
     Page 1, line 2:                                                                                                            
          Delete ","                                                                                                          
          Insert "and"                                                                                                        
     Page 1, lines 3 - 4:                                                                                                       
          Delete ", and to alternative tax credits for                                                                        
      expenditures for certain oil and gas development and                                                                    
     exploration activities for the oil and gas production                                                                    
     Page 3, line 7:                                                                                                            
         Delete "AS 43.55.025(f) [AS 43.55.025(f)(2)]"                                                                      
          Insert "AS 43.55.025(f)(2)"                                                                                           
     Page 3, line 9:                                                                                                            
         Delete "AS 43.55.025(f) [AS 43.55.025(f)(2)]"                                                                      
          Insert "AS 43.55.025(f)(2)"                                                                                           
     Page 4, line 5, through page 9, line 5:                                                                                    
          Delete all material.                                                                                                  
     Renumber the following bill sections accordingly.                                                                          
     Page 9, lines 11 - 25:                                                                                                     
          Delete all material.                                                                                                  
     Renumber the following bill sections accordingly.                                                                          
     Page 10, lines 2 - 6:                                                                                                      
          Delete all material.                                                                                                  
     Renumber the following bill sections accordingly.                                                                          
     Page 10, line 19:                                                                                                          
          Delete "Sections 4 - 12 of this Act take"                                                                             
          Insert "Section 5 of this Act takes"                                                                                  
     Page 10, line 20:                                                                                                          
          Delete "sec. 17"                                                                                                      
          Insert "sec. 9"                                                                                                       
CO-CHAIR JOHNSON objected for the purpose of discussion.                                                                        
REPRESENTATIVE  GUTTENBERG   explained  that  the   amendment  is                                                               
conceptual because it  was written for a different  version of HB
The committee took a brief at-ease.                                                                                             
[FTR audio recording restored.]                                                                                                 
6:42:55 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG, for "practical  purposes at this time"                                                               
withdrew Conceptual Amendment 3.                                                                                                
6:43:10 PM                                                                                                                    
CO-CHAIR NEUMAN informed  the committee Version E  "does not have                                                               
the  [Alaska  Retirement  Management (ARM)]  Board  amendment  in                                                               
there."  He then moved to adopt Version E.                                                                                      
6:43:47 PM                                                                                                                    
CO-CHAIR JOHNSON  announced the motion  to bring back  before the                                                               
committee Version E, the effect of  which allows the ARM Board to                                                               
purchase the credits.                                                                                                           
REPRESENTATIVE P. WILSON objected for the purpose of discussion.                                                                
CO-CHAIR NEUMAN pointed out that  Version E "does not include the                                                               
ARM Board version."                                                                                                             
CO-CHAIR  JOHNSON corrected  his  previous statement.   He  said,                                                               
"That's the  effect of what [Version  E] does, it takes  away the                                                               
ARM Board version."                                                                                                             
6:43:55 PM                                                                                                                    
REPRESENTATIVE P.  WILSON spoke  to her  objection and  asked why                                                               
the ARM Board amendment should be removed from the bill.                                                                        
6:44:30 PM                                                                                                                    
CO-CHAIR NEUMAN  explained that  his request to  remove the   ARM                                                               
Board  is  not  for  the  purpose of  disallowing  the  board  to                                                               
purchase credits,  in fact,  he expressed  his belief  that these                                                               
opportunities   should  be   expanded;  however,   the  committee                                                               
received a legal opinion from  Don Bullock, Attorney, Legislative                                                               
Legal Counsel, Legislative Legal  and Research Services, advising                                                               
that  the  provision  may   violate  the  single-subject  clause.                                                               
Because of this  advice, he stated that his intent  is to provide                                                               
other  opportunities to  use for  purchases of  the credits.   In                                                               
addition, Co-Chair  Neuman expressed  his understanding  that the                                                               
commissioner  of the  Department of  Revenue said  the ARM  Board                                                               
would not purchase the tax credits.                                                                                             
6:46:21 PM                                                                                                                    
PATRICK  GALVIN,  Commissioner,   Department  of  Revenue  (DOR),                                                               
advised  that the  inclusion  of  the ARM  Board  as a  potential                                                               
market  for  the   credits  is  no  longer   necessary  as  other                                                               
provisions  of  the  bill  remove   any  barriers  to  a  credit-                                                               
certificate holder getting 100 percent  of his/her cash back from                                                               
the state,  whereas the  ARM Board  would offer  92 cents  on the                                                               
dollar.   Furthermore,  given the  advice from  Legislative Legal                                                               
and  Research that  the  provision raises  the  possibility of  a                                                               
single-subject violation,  he said the department  decided not to                                                               
put something unnecessary  in the bill and risk  creating a legal                                                               
6:47:21 PM                                                                                                                    
CO-CHAIR JOHNSON  expressed his  understanding that the  bill now                                                               
allows  the state  to purchase,  "100 cents  on the  dollar," and                                                               
there is no need for other options.                                                                                             
COMMISSIONER GALVIN said correct.                                                                                               
6:47:34 PM                                                                                                                    
REPRESENTATIVE KAWASAKI recalled previous  debate on this version                                                               
of the bill.  He said,                                                                                                          
     Version R  is the  version that  I've marked  up, we've                                                                    
     passed   two  amendments,   at   least  discussed   two                                                                    
     amendments to this  version, R.  I think  that the idea                                                                    
     would  be that  if  you  don't want  the  ARM Board  in                                                                    
     there, that we could later  amend it out. ... To switch                                                                    
     from  version  to version  I  think  is confusing,  I'd                                                                    
     prefer to stick with this version for now....                                                                              
6:48:20 PM                                                                                                                    
CO-CHAIR JOHNSON observed that the  committee could vote on that,                                                               
as any member can make a motion.                                                                                                
6:48:28 PM                                                                                                                    
REPRESENTATIVE SEATON  observed, "This is actually  rescinding an                                                               
action  we took,  without rescinding  the action."   He  recalled                                                               
that  the committee  had a  choice and  discussed Version  E, but                                                               
Version R  was adopted.   He then  reminded the committee  he had                                                               
provided a legal memo from  2008 quoting the supreme court, which                                                               
held that in matters with such  themes such as taxation, a "broad                                                               
breadth" of interpretation is acceptable.   Further, testimony by                                                               
the  commissioner  pointed  out  that the  bill  deals  with  tax                                                               
credits and  with the ARM  Board's ability to buy  those specific                                                               
tax credits in the bill, thus  "this is probably the closest call                                                               
you  would  ever  had."   Representative  Seaton  opined  that  a                                                               
precedent has  been set on the  floor of the House  that subjects                                                               
as  varied as  scallops,  hair crab,  and  fishing licenses  have                                                               
economic impact,  as do Alaska Regional  Development Organization                                                               
(ARDOR)  boards;  yet these  do  not  violate the  single-subject                                                               
rule.  He  disagreed with legislative counsel in  this regard and                                                               
objected to the adoption of Version E instead of Version R.                                                                     
6:50:50 PM                                                                                                                    
CO-CHAIR  JOHNSON  noted  there  are  two  ways  to  handle  this                                                               
situation,  one way  is to  rescind the  committee's action,  and                                                               
both means are technically appropriate.                                                                                         
6:51:12 PM                                                                                                                    
REPRESENTATIVE OLSON  asked the  commissioner if he  was speaking                                                               
from experience and as a member of the ARM Board.                                                                               
COMMISSIONER GALVIN  said he was a  member of the ARM  Board.  In                                                               
further response, he advised that this  has not been an issue for                                                               
the ARM Board, thus has  no previous experience; however, he said                                                               
the advantages to  the ARM Board that  were previously identified                                                               
are being eliminated by the bill.   Therefore, he said he did not                                                               
see the  value of having  the ARM  Board alternative in  the bill                                                               
from  the perspective  of the  credit-certificate holders.   From                                                               
the perspective of the ARM Board,  it may have the opportunity to                                                               
buy the certificates, but there will be no sellers.                                                                             
6:52:31 PM                                                                                                                    
CO-CHAIR  NEUMAN  observed  that   the  commissioner  finds  this                                                               
provision  unnecessary,   and  expressed  his  belief   that  the                                                               
committee did  not discuss  Version E.   Although there  may have                                                               
been other  pieces of legislation  that have not  been challenged                                                               
by  the single-subject  rule, if  there is  a challenge,  it will                                                               
cost  the  state   money  for  a  defense,   which  would  affect                                                               
legislation "which  is desperately needed."   He pointed  out the                                                               
current  legal  opinion  from  Mr.  Bullock  that  there  is  the                                                               
possibility  of a  violation, and  stated, "Then  let's just  not                                                               
even go there."                                                                                                                 
6:53:52 PM                                                                                                                    
CO-CHAIR JOHNSON  agreed that  the provision  is not  needed, and                                                               
opined  the  single-subject  clause   is  of  less  concern  than                                                               
allowing 100 percent on the dollar from the state.                                                                              
6:54:09 PM                                                                                                                    
REPRESENTATIVE  P.   WILSON  asked  whether  that   is  the  only                                                               
difference in the two bills.                                                                                                    
CO-CHAIR JOHNSON said yes.                                                                                                      
6:54:22 PM                                                                                                                    
REPRESENTATIVE KAWASAKI advised it  is easier and cleaner working                                                               
on Version R and "amending out  the portions of ARM Board for the                                                               
folks that object to the  ARM Board addition," rather than trying                                                               
to add amendments into Version E.                                                                                               
6:54:48 PM                                                                                                                    
CO-CHAIR JOHNSON  stated his intention  "to vote to  have Version                                                               
R, and offer that amendment later."                                                                                             
6:55:17 PM                                                                                                                    
A roll call  vote was taken.  Representatives  Edgmon, P. Wilson,                                                               
Olson,  and  Neuman  voted  in   favor  of  adopting  Version  E.                                                               
Representatives Guttenberg,  Kawasaki, Tuck, Seaton,  and Johnson                                                               
voted against it.  Therefore, Version E failed by a vote of 4-5.                                                                
6:56:37 PM                                                                                                                    
CO-CHAIR  JOHNSON said,  "I'm going  to vote  no, but  I want  to                                                               
qualify that with the amendments  coming.  And only because we've                                                               
got amendments  made to  this, I would  hope that  everyone would                                                               
remember this vote."                                                                                                            
6:56:39 PM                                                                                                                    
CO-CHAIR NEUMAN moved Conceptual Amendment 4 which read:                                                                        
     Page 7                                                                                                                     
       Delete lines 24-31                                                                                                       
     Page 8                                                                                                                     
       Delete lines 1-2                                                                                                         
     Title change                                                                                                               
       Delete reference to ARM Board                                                                                            
CO-CHAIR  JOHNSON restated  the  conceptual  amendment and  added                                                               
that conforming language would also be appropriate.                                                                             
6:57:29 PM                                                                                                                    
REPRESENTATIVE KAWASAKI objected for purpose of discussion.                                                                     
6:58:08 PM                                                                                                                    
COMMISSIONER GALVIN pointed  out a reference to the  ARM Board in                                                               
Sec. 3 on page 2.                                                                                                               
6:58:32 PM                                                                                                                    
CO-CHAIR JOHNSON clarified the conceptual  amendment is to remove                                                               
the ARM  Board from the title,  and the bill, and  for conforming                                                               
language where appropriate.                                                                                                     
6:58:38 PM                                                                                                                    
A roll  call vote  was taken.   Representatives Tuck,  P. Wilson,                                                               
Olson, Edgmon, Neuman,  and Johnson voted in  favor of Conceptual                                                               
Amendment 4.   Representatives  Guttenberg, Kawasaki,  and Seaton                                                               
voted against it.  Therefore,  Conceptual Amendment 4 was adopted                                                               
by a vote of 6-3.                                                                                                               
6:59:33 PM                                                                                                                    
REPRESENTATIVE  SEATON   offered  Amendment  5  to   rescind  the                                                               
committee's action on  3/29/10, in failing to  adopt Amendment 2,                                                               
labeled R.1,  Bullock, 2/29/10, which  was drafted to  Version R,                                                               
and which read:                                                                                                                 
       Page 7, line 2:                                                                                                          
          Delete "that expenditure"                                                                                             
          Insert "the expenditures during a calendar year                                                                       
    that   exceed    the   average    annual   well-related                                                                     
     expenditures  for the  calendar years  2008, 2009,  and                                                                    
     2010; the producer or explorer  shall submit the amount                                                                    
     of  well-related expenditures  for  each  of the  years                                                                    
     2008, 2009,  and 2010 at  the time an election  is made                                                                    
     to apply the credit authorized by this subsection"                                                                         
[Amendment 2 was  amended on 3/29/10 to delete  all references to                                                               
REPRESENTATIVE  SEATON reminded  the committee  that Amendment  2                                                               
relates expenditures to the average  expenditures during 2008 and                                                               
2009, thus the  credits are extended to  expenditures that exceed                                                               
that  average  amount.    The  purpose of  the  amendment  is  to                                                               
accomplish the goal of the  bill which is to stimulate additional                                                               
investment  and  production.     In  fact,  the  amendment  would                                                               
encourage  companies to  increase their  investment and  in-field                                                               
exploration  because  they would  get  a  higher credit  if  they                                                               
exceeded the amount of their current annual expenditures.                                                                       
7:02:00 PM                                                                                                                    
CO-CHAIR  NEUMAN objected  for  the purpose  of  discussion.   He                                                               
asked  the  commissioner  how  much  work it  would  be  for  the                                                               
department to average all well-related  expenditures for 2008 and                                                               
7:03:21 PM                                                                                                                    
COMMISSIONER GALVIN explained  that it would not  be possible for                                                               
the   department  to   determine  this   average  based   on  the                                                               
information received  thus far from taxpayers  regarding 2008 and                                                               
2009.    The department  would  have  to request  that  taxpayers                                                               
provide  supplemental  tax  returns, including  documentation  of                                                               
their well-related  expenditures.   Currently, the  tax reporting                                                               
system does not break out expenditures in that way.                                                                             
7:04:12 PM                                                                                                                    
CO-CHAIR  NEUMAN   asked  whether  the  amendment   would  set  a                                                               
precedent for  the DOR to  average well-related  expenditures for                                                               
prior years; and if so, would  this affect any changes in the tax                                                               
7:04:57 PM                                                                                                                    
COMMISSIONER GALVIN  explained that  it would establish  for each                                                               
taxpayer  a fixed  number for  their 2008-2009  expenditures, and                                                               
that  number  would  determine  whether  the  30  percent  credit                                                               
created by the bill is available, or not.                                                                                       
7:05:33 PM                                                                                                                    
CO-CHAIR NEUMAN  restated his question  about whether  there were                                                               
any changes in  the tax code, regulations, or  statute since 2008                                                               
that affect well-related expenditures.                                                                                          
7:05:53 PM                                                                                                                    
COMMISSIONER  GALVIN related  that  the  regulations that  define                                                               
lease  expenditures,  as  well as  those  that  define  qualified                                                               
capital expenditures,  have been  put in  place recently  and are                                                               
7:06:32 PM                                                                                                                    
CO-CHAIR NEUMAN assumed  that if there have  been changes dealing                                                               
with  well-related expenditures  since  2008, additional  changes                                                               
may have negative  impacts on companies that  have made financial                                                               
7:07:18 PM                                                                                                                    
COMMISSIONER GALVIN  clarified that the information  submitted to                                                               
the   department  for   2008-2009   would   not  have   specified                                                               
expenditures that  were, or  were not,  well-related.   Thus, new                                                               
information  from 2008-2009  would have  to be  provided so  that                                                               
taxpayers could  seek a  credit from 2010  forward.   He recalled                                                               
his  previous  testimony on  this  amendment,  pointing out  that                                                               
taxpayers  would  be  motivated to  minimize  their  well-related                                                               
expenditures  for  2008-2009,  perhaps   with  controversy.    He                                                               
concluded, "It's  doable, as long as  you take what they  say for                                                               
face value."                                                                                                                    
7:09:35 PM                                                                                                                    
CO-CHAIR  NEUMAN   observed  that  for  the   governor's  bill  a                                                               
determination  was  made  about  penalties for  taxes  that  were                                                               
underpaid.   If the  state changes  the rules,  it may  create an                                                               
"inverse"  situation that  taxpayers would  not be  able to  take                                                               
advantage  of.   He  also  cautioned  about  the amount  of  work                                                               
changes would require of the department and the producers.                                                                      
7:11:14 PM                                                                                                                    
COMMISSIONER GALVIN advised that  this amendment and the in-field                                                               
drilling  credit in  the bill  would not  affect a  tax liability                                                               
from 2008-2009; however,  when taxpayers submit a  request for an                                                               
in-field drilling credit, they must  show that their well-related                                                               
expenditures  are consistent.    The amendment  will create  some                                                               
additional accounting  issues, but  it will  not impact  the past                                                               
tax liability.                                                                                                                  
7:12:41 PM                                                                                                                    
CO-CHAIR  NEUMAN  noted that  it  would  impact  the value  of  a                                                               
taxpayer's money.                                                                                                               
7:13:19 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG clarified that  new information will be                                                               
needed  whether the  amendment is  adopted or  not; in  fact, the                                                               
department  will  be looking  at  new  reporting forms  for  well                                                               
credits because  well credits for  capital and operating  are all                                                               
"new  ground."   He surmised  that if  the bill  passes, auditors                                                               
will be  evaluating numbers  from one  year to  the next  to deal                                                               
with well rework.                                                                                                               
7:14:50 PM                                                                                                                    
COMMISSIONER GALVIN agreed  that the nature of  the credit itself                                                               
requires  a   different  accounting  methodology  than   what  is                                                               
currently required for  a taxpayer, but noted  that the amendment                                                               
does  create  a requirement  for  the  taxpayer to  retroactively                                                               
resubmit information for 2008-2009.                                                                                             
7:15:20 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG  confirmed it does not  change the past                                                               
tax liability in any way.                                                                                                       
7:15:34 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI  asked how  a  company  would view  this                                                               
aspect  of the  bill.   For example,  a company  may decline  the                                                               
credit to avoid submitting additional information.                                                                              
7:16:01 PM                                                                                                                    
CO-CHAIR  JOHNSON  reminded  the  commissioner  that  he  is  not                                                               
required to answer for oil companies.                                                                                           
7:16:06 PM                                                                                                                    
COMMISSIONER  GALVIN  opined that  if  taxpayers  are offered  an                                                               
opportunity to save money, they will.                                                                                           
7:16:26 PM                                                                                                                    
REPRESENTATIVE KAWASAKI further asked  whether there is reason to                                                               
believe   that   the   companies  may   not   disclose   accurate                                                               
7:17:06 PM                                                                                                                    
COMMISSIONER GALVIN related that  the amendment is something that                                                               
the department  could implement, but it  will create complexities                                                               
for DOR  and for  the taxpayer.   He acknowledged  that taxpayers                                                               
may  "low ball"  their expenditures  and added  that, from  a tax                                                               
administration standpoint, the amendment imposes a burden.                                                                      
7:18:20 PM                                                                                                                    
REPRESENTATIVE KAWASAKI  guessed that  the companies  "are pretty                                                               
honest when they do their taxes, right?"                                                                                        
7:19:01 PM                                                                                                                    
COMMISSIONER GALVIN  advised that   taxpayers will  interpret the                                                               
tax code to their maximum  advantage, not to violate the statute,                                                               
but to take  advantage of accounting principles.   This amendment                                                               
will motivate taxpayers to lower  their 2008-2009 expenditures in                                                               
order to maximize their ability to obtain credits.                                                                              
7:20:24 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI suggested  the  assessment of  penalties                                                               
for false claims of tax liability.                                                                                              
COMMISSIONER  GALVIN   assumed  the  normal  tax   penalties  for                                                               
misreporting tax return data would apply.                                                                                       
7:21:28 PM                                                                                                                    
CO-CHAIR JOHNSON  opined that the  amendment sets a policy  for a                                                               
number  that only  above  which an  oil company  can  take a  tax                                                               
credit.   This will create  a disincentive and affect  a decision                                                               
to  complete rework  or not.    He questioned  whether the  state                                                               
wants to encourage in-field work,  or create a barrier by setting                                                               
an arbitrary  number.  The  policy call  is to either  "raise the                                                               
bar of  disincentive," or  to encourage companies  to do  all the                                                               
work they  can.   It is  basically whether  the state  wants more                                                               
incentive or less incentive.                                                                                                    
7:23:25 PM                                                                                                                    
REPRESENTATIVE KAWASAKI  expressed his belief that  the policy is                                                               
to try to create an incentive  for more investment and more jobs.                                                               
The baseline set by the  amendment identifies a company's present                                                               
investment, and  shows that it  can put  in more money  and apply                                                               
for a credit.   He recalled testimony that  companies might spend                                                               
more in Alaska,  but decisions to invest are  "made in boardrooms                                                               
in Houston and London, and they're  not made here in the State of                                                               
Alaska."   Thus the  amendment goes  to the heart  of why  we are                                                               
trying to  push for  credits for  better investments  and without                                                               
it, the money goes to other states or countries.                                                                                
7:24:26 PM                                                                                                                    
CO-CHAIR JOHNSON disagreed.                                                                                                     
7:24:35 PM                                                                                                                    
CO-CHAIR NEUMAN  read from  Amendment 2,  26-GH2057\R.1, Bullock,                                                               
8/26/10,  [amended and  not adopted  on 3/29/10]  paraphrasing as                                                               
     Expenditures  during a  calendar year  that exceed  the                                                                    
     average wellhead-related  expenditures for '08  and '09                                                                    
     ... the  producer or explorer  shall submit  the amount                                                                    
     of  well-head,  well-related   expenditures  for  those                                                                    
     years at the time an  election is made, applied, by the                                                                    
     credit authorized by this subsection.                                                                                      
REPRESENTATIVE  NEUMAN   pointed  out  that   the  aforementioned                                                               
subsection [found  on page 6, line  25, of HB 337,  Version R] in                                                               
the  bill deals  with  credits  taken after  June  30, 2010,  and                                                               
before July  1, 2016.  He  surmised the department would  go back                                                               
and average  2008-2009 and apply  that information to  the credit                                                               
authorization   in  the   subsection.     Representative   Neuman                                                               
questioned  whether the  time, issues,  and dates  "all falls  in                                                               
7:26:28 PM                                                                                                                    
COMMISSIONER GALVIN responded that  the elimination of 2010 makes                                                               
it  mathematically   possible  to   arrive  at  an   average  for                                                               
comparison.   However,  the concern  for the  department is  what                                                               
happens when an attempt is  made to isolate individual taxpayers,                                                               
thus creating anomalies and unintended  situations.  For example,                                                               
a taxpayer  may have well-related  expenditures in 2008,  but not                                                               
in  2009.   The other  issue of  concern is  that when  taxpayers                                                               
apply  for tax  credits, they  are also  members of  partnerships                                                               
with  varied interests  dependent  upon  lease relationships  and                                                               
other considerations.   This problem is exacerbated  if the state                                                               
sets up  a situation in  which one partner  is allowed to  take a                                                               
disproportionate  advantage of  a  tax credit,  even though  "the                                                               
concept is,  you know,  pure, the application  ends up  not being                                                               
so."   He warned that  the situation would lead  to manipulation,                                                               
frustrating the underlying purpose.                                                                                             
7:30:14 PM                                                                                                                    
CO-CHAIR   NEUMAN    observed   the   problem    would   compound                                                               
exponentially when multiple companies are involved.                                                                             
7:30:50 PM                                                                                                                    
REPRESENTATIVE  SEATON reminded  the committee  that the  present                                                               
structure allows  for a  20 percent  capital credit  of 2008-2009                                                               
expenditures -  expenditures and credits that  were determined by                                                               
the companies  to be adequate  incentives for the amount  of work                                                               
that they did.   This bill not only allows  30 percent on capital                                                               
credits,  but expands  the credits  into additional  well-related                                                               
expenditures, which are of a  greater proportion than the capital                                                               
credits.  Therefore, the bill allows  for a very large credit "on                                                               
a much broader  sweep of expenditures, under this  bill, than the                                                               
20 percent capital credit which  was sufficient to get the amount                                                               
of  work that  was done  in 2008  and 2009;  it's obvious  it was                                                               
enough  incentive because  they did  the work  with a  20 percent                                                               
capital  credit."     Addressing   the  complexity   involved  to                                                               
implement the  amendment, he pointed  out that the  companies all                                                               
have joint  operating agreements  and are  sophisticated partners                                                               
with clear  financial arrangements.   He acknowledged  that since                                                               
this  is  a  new  category   of  well-related  expenditures,  the                                                               
companies will  have to  develop new  computer models,  but these                                                               
will be  based on  standard accounting  principles; in  fact, the                                                               
biggest   question   is  the   fiscal   impact   to  the   state.                                                               
Representative  Seaton  referred  to the  analysis  contained  in                                                               
Fiscal Note  #3 **Corrected**, dated 2/08/10,  from Tax Division,                                                               
DOR,  and stated  that revenues  are estimated  to be  reduced by                                                               
$325 million  in 2011  for doing  the same  work that  is already                                                               
sanctioned, and  that will  garner a  20 percent  capital credit.                                                               
The fiscal note further indicates  that revenues are estimated to                                                               
be reduced by $350 million from  2013 to 2016.  He concluded that                                                               
the amendment would  likely reduce that loss by  $200 million per                                                               
7:34:33 PM                                                                                                                    
CO-CHAIR JOHNSON  interjected that  predicting a loss  of revenue                                                               
to   the   state   is   speculation,   and   questioned   whether                                                               
Representative Seaton could "extrapolate  the numbers the way you                                                               
are doing it."                                                                                                                  
7:35:05 PM                                                                                                                    
REPRESENTATIVE SEATON  called attention to the  Alaska Department                                                               
of   Revenue  presentation   dated  3/29/10,   slide  2   titled,                                                               
"Production  Tax  Revenue  with  Additional  Well-Related  Credit                                                               
Under  HB  337,"  found  in  the committee  packet.    The  chart                                                               
illustrated projected  FY 08 expenditures  in the amount  of $245                                                               
million, FY  09 expenditures in  the amount of $255  million, and                                                               
FY 10 expenditures  in the amount of $297 million.   This program                                                               
will  put all  well-related  expenses  in these  years  in a  new                                                               
category that enjoys  a 30 percent tax credit -  not only raising                                                               
the capital credit  by 10 percent - but giving  30 percent on the                                                               
new  category of  "intangible  drilling  and development  costs."                                                               
Although the numbers may be  speculative, they have been provided                                                               
by  the department  and  indicate the  reduction  of the  revenue                                                               
stream,  even though  the companies  are  basically operating  at                                                               
exactly the same level as they have operated in the last year.                                                                  
7:36:36 PM                                                                                                                    
CO-CHAIR  JOHNSON  acknowledged  Representative  Seaton's  point;                                                               
however,  the  facts  are  unknown and  whether  the  bill  spurs                                                               
development will be known very quickly.                                                                                         
7:36:47 PM                                                                                                                    
REPRESENTATIVE  SEATON speculated  that the  amendment will  save                                                               
the state about  $200 million per year, and  asked the department                                                               
whether the additional tax evaluations  would be an unsustainable                                                               
7:37:43 PM                                                                                                                    
COMMISSIONER  GALVIN  appreciated   the  committee's  attempt  to                                                               
simplify  the   issue  before  it;  however,   he  described  the                                                               
challenges faced  by the department as  it was trying to  write a                                                               
bill for  a credit that  will spur the development  of additional                                                               
wells.   He  cautioned against  assuming that  there will  be the                                                               
same number  of well-related  expenditure opportunities  from one                                                               
year to the  next.  As a  matter of fact, companies  operate on a                                                               
basis  of opportunity,  development,  schedules  for fields,  and                                                               
sophisticated investment  methods, including  the economics  of a                                                               
specific well.  The state does  not have a methodology to discern                                                               
whether  certain costs  are for  work  a company  would be  doing                                                               
anyway,  and  other  if  costs   are  "additional  stuff."    The                                                               
governor's bill  attempts to give an  across-the-board credit for                                                               
well-related work because drilling wells is good for the state.                                                                 
7:40:25 PM                                                                                                                    
REPRESENTATIVE TUCK acknowledged that the  purpose of the bill is                                                               
to change behavior, create jobs, and  increase the flow of oil in                                                               
the Trans-Alaska  Pipeline System (TAPS).   He stressed  that the                                                               
hope  is to  have production  above  and beyond  what is  already                                                               
taking place,  but the bill  gives tax  credits for work  that is                                                               
already  being done.   On  the other  hand, the  amendment offers                                                               
credit  to  those companies  that  are  going above  and  beyond,                                                               
thereby  producing more  jobs, more  revenue for  the state,  and                                                               
more  oil  for  TAPS.     Representative  Tuck  acknowledged  the                                                               
difficulties  created  by  the amendment,  and  related  that  he                                                               
supported the  new capital and  exploration credits, but  said he                                                               
had concerns about  the operating portion.  Spending  more on its                                                               
operating budget to  produce more oil is beneficial  to a company                                                               
and  to  the  state,  but  testimony  before  the  committee  has                                                               
indicated that doing that may  be hindered because of the current                                                               
tax regime.   Without the amendment,  he said he was  hesitant to                                                               
include operating  expenses, although  he supported  the original                                                               
proposals  that  gave  capital   credits  "where  we  know  we're                                                               
successful, and give a little bit more for that."                                                                               
7:42:53 PM                                                                                                                    
REPRESENTATIVE EDGMON  said a  clear picture  is not  evident; in                                                               
fact, there remains an element  of false economy and speculation.                                                               
Hearing the  debate leads  him to support  the amendment,  and he                                                               
recalled that previous testimony on  oil and gas topics failed to                                                               
reveal  the financial  aspects of  the industry.   He  cautioned,                                                               
however, that the bill  may not do what it intends  to do, and it                                                               
could  cost  the state  money  in  the process.    Representative                                                               
Edgmon then called the question.                                                                                                
7:43:56 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG  restated the estimated  production tax                                                               
revenue credits from  aforementioned slide 2: $297  million in FY                                                               
10; $327  million in FY 11;  $336 million in FY  12; $390 million                                                               
in FY  13.  He  suggested that the  companies will be  happy with                                                               
this bill  in any form,  even if  they have to  hire accountants,                                                               
because they will  receive unexpected credits for  work that they                                                               
were going to do anyway.                                                                                                        
7:45:02 PM                                                                                                                    
CO-CHAIR JOHNSON  observed that  the bill may  not work,  and the                                                               
amount of  money involved is  unknown; however, what is  known is                                                               
that employment on the slope  continues to decline, and the state                                                               
is losing  $100 million per  year in revenue.   The focus  of the                                                               
committee  is on  the  loss  of revenue  to  the  state, but  the                                                               
committee  did not  even discuss  the number  of jobs  that these                                                               
credits create.                                                                                                                 
7:45:50 PM                                                                                                                    
REPRESENTATIVE NEUMAN maintained his objection to the motion.                                                                   
CO-CHAIR  JOHNSON clarified  that  a yes  vote  [on Amendment  5]                                                               
would put Amendment 2 before the committee.                                                                                     
7:47:16 PM                                                                                                                    
A roll call  vote was taken.  Representatives  Kawasaki, Tuck, P.                                                               
Wilson,  Seaton,  Edgmon,  and  Guttenberg,  voted  in  favor  of                                                               
[Amendment  5]  rescinding  the previous  vote  on  Amendment  2.                                                               
Representatives  Olson, Neuman,  and  Johnson  voted against  it.                                                               
Therefore, Amendment 5 was adopted by a vote of 6-3.                                                                            
7:47:19 PM                                                                                                                    
CO-CHAIR  JOHNSON  announced  that  Amendment 2  was  before  the                                                               
7:47:26 PM                                                                                                                    
REPRESENTATIVE SEATON moved to adopt Amendment 2.                                                                               
CO-CHAIR JOHNSON objected.                                                                                                      
COMMISSIONER  GALVIN  pointed  out that  Amendment  2  originally                                                               
affected 2008, 2009, and 2010, but  there was an amendment to the                                                               
CO-CHAIR JOHNSON,  in response to Commissioner  Galvin, clarified                                                               
that Amendment  2, as amended,  removes 2010 from the  years that                                                               
are averaged.                                                                                                                   
7:48:39 PM                                                                                                                    
A  roll call  vote was  taken.   Representatives Kawasaki,  Tuck,                                                               
Seaton, Edgmon, and Guttenberg voted  in favor of Amendment 2, as                                                               
amended.   Representatives P. Wilson, Olson,  Neuman, and Johnson                                                               
voted  against  it.   Therefore,  Amendment  2, as  amended,  was                                                               
adopted by a vote of 5-4.                                                                                                       
7:48:41 PM                                                                                                                    
CO-CHAIR JOHNSON announced that HB 337 was before the committee.                                                                
7:48:47 PM                                                                                                                    
CO-CHAIR NEUMAN moved  to report CSHB 337, out  of committee with                                                               
individual  recommendations and  the  accompanying fiscal  notes.                                                               
He then withdrew his motion.                                                                                                    
7:49:24 PM                                                                                                                    
CO-CHAIR JOHNSON, hearing  no objection to the  withdrawal of the                                                               
motion, announced that the bill was before the committee.                                                                       
7:49:35 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI offered  Conceptual  Amendment 6,  which                                                               
read as follows:                                                                                                                
     On page 3, line 1                                                                                                          
       Delete the word "three"                                                                                                  
       Insert the word "five"                                                                                                   
7:50:06 PM                                                                                                                    
REPRESENTATIVE TUCK  said that was  an error that  was previously                                                               
7:50:24 PM                                                                                                                    
CO-CHAIR   JOHNSON,   hearing   no  objection,   announced   that                                                               
Conceptual Amendment 6 was adopted.                                                                                             
7:50:36 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI offered  Conceptual  Amendment 7,  which                                                               
read as follows:                                                                                                                
     On page 6, line 26,                                                                                                        
       After the word "expenditure"                                                                                             
       Insert "incurred"                                                                                                        
7:51:00 PM                                                                                                                    
There being no objection, Conceptual Amendment 7 was adopted.                                                                   
7:51:47 PM                                                                                                                    
REPRESENTATIVE NEUMAN  moved to report CSHB  337, 26-GH2057\R, as                                                               
amended,  out of  committee with  individual recommendations  and                                                               
the accompanying fiscal notes.                                                                                                  
REPRESENTATIVE   GUTTENBERG   objected   for   the   purpose   of                                                               
discussion.   He spoke  to his objection  by first  reminding the                                                               
committee the  purpose of the  bill is to encourage  a heightened                                                               
level  of  jobs  for  Alaskans  and an  increased  level  of  oil                                                               
production  through TAPS;  however, no  analysis to  support this                                                               
result has  been offered.   Although passage of the  bill implies                                                               
that more  jobs will be  available after the industry  is granted                                                               
these credits, there  is no guarantee, but only  speculation.  He                                                               
read from  written testimony  given by an  oil and  gas attorney,                                                               
Spencer Hosie, Hosie McArthur, San  Francisco, California, to the                                                               
Regulatory  Commission  of  Alaska  (RCA) [date  and  source  not                                                               
     Under the  duty to  develop, a royalty  owner's project                                                                    
     need not  be the  most economic development  project on                                                                    
     the  producers' platter.   After  the lease  is signed,                                                                    
     the  royalty owner  is not  in  competition with  other                                                                    
     potential projects  in this country and  abroad for the                                                                    
     producers'  development  dollars.     Under  the  lease                                                                    
     agreements,  the producers'  obligation is  to continue                                                                    
     to  produce  from and  develop  a  field if  reasonably                                                                    
     economic,  despite  individual   preferences  to  defer                                                                    
     development or invest capital dollars elsewhere.                                                                           
7:58:10 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG explained  that  Mr.  Hosie is  saying                                                               
that a company that signs an oil  and gas lease with the state is                                                               
obligated to  put the state on  equal footing; in fact,  the duty                                                               
to develop the leases means they  must.  The only way the company                                                               
is not  obligated to do all  the things the state  grants credits                                                               
for, is for  the state to "let them off  the hook."  Furthermore,                                                               
there  is a  duty to  develop in  the development  clause of  the                                                               
resources section of the state  constitution, thus when the state                                                               
signs a  lease agreement it  expects development for the  good of                                                               
all  Alaskans.    Routinely, leaseholders  ask  for  and  receive                                                               
credits  for development;  however,  Mr. Hosie  advises that  the                                                               
leaseholders  alone have  the duty  to  develop.   Representative                                                               
Guttenberg  gave  the  example  of  former  Governor  Murkowski's                                                               
statement  that  the  leaseholders   at  Point  Thomson  have  an                                                               
obligation  to develop.   He  concluded that  well drilling,  in-                                                               
field drilling, and  processes to enhance production  are part of                                                               
the schedule that  every oil field has and now,  20-30 years into                                                               
production,  the obligation  to enhance  production remains  with                                                               
the leaseholder.   He  restated his  objection to  giving credits                                                               
for actions that  the leaseholders "knew that they  were going to                                                               
do."   On  the other  hand,  the standing  of the  bill would  be                                                               
improved  if the  sponsors provided  definitive answers  on jobs,                                                               
the  flow of  oil, and  revenue  for the  state.   Representative                                                               
Guttenberg said he could not support the bill.                                                                                  
7:58:26 PM                                                                                                                    
CO-CHAIR  NEUMAN  questioned  the objectivity  of  the  testimony                                                               
quoted  by Representative  Guttenberg because  the testimony  was                                                               
solicited by the  state.  He agreed that leases  call for the due                                                               
regard for  the interests of  the landowner, which is  the state,                                                               
and to  that regard,  he said the  governor and  the commissioner                                                               
recognized  the recent  large increases  in oil  production along                                                               
with a  decrease in new  investment.   He said he  disagreed with                                                               
some earlier testimony about, "how  we're giving this money away,                                                               
well, it's  just money  that we're  not taking."   Representative                                                               
Neuman  opined that  the "trade-out"  is  the sweet  spot of  the                                                               
policy call  that must be made  by the legislature.   He recalled                                                               
that at  the introduction  of the bill,  he assumed  the governor                                                               
and the  commissioner believed the  bill provides  incentives for                                                               
further exploration.   Although there is less money  coming in as                                                               
revenue  due to  the  credits,  there is  also  less oil  flowing                                                               
through  TAPS, and  the solution  is more  exploration, more  oil                                                               
flowing through  TAPS, more jobs, more  economic diversification,                                                               
and more  benefits to the  state and  the economy.   He expressed                                                               
his support for the bill.                                                                                                       
REPRESENTATIVE GUTTENBERG maintained his objection.                                                                             
8:01:14 PM                                                                                                                    
A roll  call vote  was taken.   Representatives Tuck,  P. Wilson,                                                               
Olson, Seaton, Edgmon,  Neuman, and Johnson voted in  favor of HB
337,  Version  R, as  amended.    Representatives Guttenberg  and                                                               
Kawasaki  voted  against  it.     Therefore,  CSHB  337(RES)  was                                                               
reported out of the House  Resources Standing Committee by a vote                                                               
of 7-2.                                                                                                                         
8:02:26 PM                                                                                                                    
REPRESENTATIVE SEATON  asked Co-Chair Johnson to  ensure that the                                                               
committee receives copies of the revised fiscal note.                                                                           
8:02:37 PM                                                                                                                    
CO-CHAIR JOHNSON agreed.                                                                                                        

Document Name Date/Time Subjects
SB 305 versionW.A.pdf HRES 4/7/2010 1:00:00 PM
SB 305
SB 305 sponsor statement.pdf HRES 4/7/2010 1:00:00 PM
SB 305
SB 305 W.A.sec.analysis.pdf HRES 4/7/2010 1:00:00 PM
SB 305
SB 305 40710 LogsdonAssocHouseRes.pdf HRES 4/7/2010 1:00:00 PM
SB 305
SB 305 1-2-033110-FIN-Y.pdf HRES 4/7/2010 1:00:00 PM
SB 305
HB 411A.pdf HRES 4/7/2010 1:00:00 PM
HB 411
SB 305 Amend WA.2 Rep. Seaton.pdf HRES 4/7/2010 1:00:00 PM
SB 305
2-17-2010_MOU_AIDEA_AEA.pdf HRES 4/7/2010 1:00:00 PM
HB 411-1-2-030810-CED-N.pdf HRES 4/7/2010 1:00:00 PM
HB 411
HB 411-2-1-022610-REV-N.pdf HRES 4/7/2010 1:00:00 PM
HB 411
HB 411-3-1-022610-DOT-N.pdf HRES 4/7/2010 1:00:00 PM
HB 411
HB 411-4-2-030810-CED-Y.pdf HRES 4/7/2010 1:00:00 PM
HB 411
SB 305 AOGA Testimony 4.7.10.pdf HRES 4/7/2010 1:00:00 PM
SB 305
SB305 Dept of Rev 4-7-10 final.pdf HRES 4/7/2010 1:00:00 PM
SB 305