Legislature(2015 - 2016)BARNES 124

02/03/2016 01:00 PM RESOURCES

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01:01:32 PM Start
01:02:38 PM HB247
02:55:30 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
- Tax Division, Dept. of Revenue
- Division of Oil & Gas, Dept. of Natural
-- Testimony <Invitation Only> --
           HB 247-TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                        
1:02:38 PM                                                                                                                    
CO-CHAIR  NAGEAK announced  that the  only order  of business  is                                                               
HOUSE BILL NO. 247, "An  Act relating to confidential information                                                               
status and public record status  of information in the possession                                                               
of the Department of Revenue;  relating to interest applicable to                                                               
delinquent tax; relating to disclosure  of oil and gas production                                                               
tax credit information;  relating to refunds for  the gas storage                                                               
facility tax  credit, the liquefied natural  gas storage facility                                                               
tax   credit,   and   the   qualified   in-state   oil   refinery                                                               
infrastructure expenditures  tax credit; relating to  the minimum                                                               
tax for certain  oil and gas production; relating  to the minimum                                                               
tax  calculation for  monthly installment  payments of  estimated                                                               
tax;  relating to  interest on  monthly  installment payments  of                                                               
estimated  tax; relating  to limitations  for the  application of                                                               
tax credits; relating  to oil and gas production  tax credits for                                                               
certain  losses and  expenditures;  relating  to limitations  for                                                               
nontransferable oil and  gas production tax credits  based on oil                                                               
production  and  the  alternative  tax credit  for  oil  and  gas                                                               
exploration;  relating to  purchase  of  tax credit  certificates                                                               
from the oil  and gas tax credit fund; relating  to a minimum for                                                               
gross  value  at  the  point of  production;  relating  to  lease                                                               
expenditures  and tax  credits for  municipal entities;  adding a                                                               
definition   for  "qualified   capital  expenditure";   adding  a                                                               
definition for  "outstanding liability  to the  state"; repealing                                                               
oil  and   gas  exploration  incentive  credits;   repealing  the                                                               
limitation on  the application of  credits against  tax liability                                                               
for  lease   expenditures  incurred   before  January   1,  2011;                                                               
repealing provisions related to  the monthly installment payments                                                               
for  estimated tax  for oil  and gas  produced before  January 1,                                                               
2014;  repealing  the  oil  and gas  production  tax  credit  for                                                               
qualified  capital expenditures  and  certain well  expenditures;                                                               
repealing   the  calculation   for  certain   lease  expenditures                                                               
applicable before January 1,  2011; making conforming amendments;                                                               
and providing for an effective date."                                                                                           
1:03:12 PM                                                                                                                    
RANDALL HOFFBECK,  Commissioner, Department of Revenue  (DOR), on                                                               
behalf  of the  governor,  explained that  Governor Walker's  New                                                               
Sustainable Alaska  Plan has  three major components  to it:   1)                                                               
earnings  - the  use of  the state's  existing wealth,  which are                                                               
primarily earnings  from the permanent  fund but also  from other                                                               
investments as well; 2) reductions  in spending; and 3) increases                                                               
in revenues, the  majority of them being an increase  in rates to                                                               
existing taxes, as well as a  personal income tax.  The bill hits                                                               
in two places:   1) it reduces the sizes of  the credits that the                                                               
state pays  out, so  it is  a cut in  expenditures of  about $400                                                               
million, and  2) it has a  component that raises the  minimum tax                                                               
on  producing  properties from  4  percent  to  5 percent.    The                                                               
increase in  minimum tax, as  well as hardening the  floor, would                                                               
result in about $100 million in new revenue.                                                                                    
COMMISSIONER  HOFFBECK   walked  the  committee   through  events                                                               
between when the  budget was signed last year to  today.  He said                                                               
the  governor's  line-item  veto  of  a  portion  of  the  budget                                                               
actually limited the  amount of credits that the  state could pay                                                               
in fiscal  year (FY)  2016 to  $500 million  instead of  the more                                                               
open-ended language that was in the  original budget.  That had a                                                               
bit  of  a  ripple  effect  through the  oil  and  gas  industry,                                                               
particularly as  it related  to the  smaller companies  that were                                                               
exploring  and developing  the fields.    Essentially, the  folks                                                               
that  had  loaned money  against  the  credits refused  to  loan,                                                               
saying they were uncertain that  these credits would now be paid.                                                               
They  pulled back  and  this created  a  liquidity crisis  within                                                               
these  smaller developers.   So,  [the administration]  spent the                                                               
first  few months  putting that  package back  together, assuring                                                               
those that  were loaning the money  that in fact the  state would                                                               
pay the  credits; that  there would be  some timing  changes, but                                                               
the credits would still all be paid.                                                                                            
1:06:20 PM                                                                                                                    
COMMISSIONER  HOFFBECK explained  that it  then set  off a  whole                                                               
series  of meetings  with the  industry representatives  and with                                                               
folks  in the  financial community  to  get their  feel for  what                                                               
would be  a package that  would work going  forward.  It  was the                                                               
opinion of the  administration, which he thought  was very valid,                                                               
that the state just couldn't afford  the level of credits that it                                                               
was paying.   That was  not a critique on  whether it was  a good                                                               
idea to  have credits in  the first  place, but just  simply that                                                               
the size of  the credit program didn't match  the state's ability                                                               
to pay  the credits any more.   "We worked diligently  with these                                                               
companies and with  the financial community," he  said, "and came                                                               
up with a plan that we  thought would resolve the majority of the                                                               
issues."    Senator  Giessel  also held  a  series  of  workshops                                                               
throughout  the  summer  and [the  administration]  testified  at                                                               
three of them  and [Senator Giessel's work group] came  up with a                                                               
plan.  Today  Mr. Alper will present  [the administration's] idea                                                               
of  what  the comparison  is  between  the plans.    Commissioner                                                               
Hoffbeck said he thinks the  results are fairly similar, although                                                               
[the administration]  feels a bit  more urgency in the  timing of                                                               
what needs  to be done and  when.  It was  a collaborative effort                                                               
and as many  issues as possible were addressed.   There are still                                                               
going to be  areas where certain companies have  a different idea                                                               
of what the  best solution is, he continued, and  he expects that                                                               
those  companies will  be happy  to express  that.   Commissioner                                                               
Hoffbeck  offered  his appreciation  for  the  openness that  the                                                               
companies had  in meeting with  [the administration]  and walking                                                               
[the  administration] through  the  significant  pinch points  in                                                               
this issue.   It was good government, it  was very participatory,                                                               
and the discussions  were open book rather  than people posturing                                                               
for positions.                                                                                                                  
1:08:24 PM                                                                                                                    
REPRESENTATIVE HAWKER stated  it all began with  the $200 million                                                               
veto of  last year.  He  inquired whether he is  correct that the                                                               
governor  has  made absolute  assurance  to  industry that  those                                                               
credits that were vetoed will be honored.                                                                                       
COMMISSIONER HOFFBECK replied correct.                                                                                          
REPRESENTATIVE HAWKER  inquired whether  he has  missed something                                                               
because he has  not seen an appropriation request  in the budgets                                                               
that were submitted by the  governor.  Yesterday was the deadline                                                               
to produce the supplemental appropriation  for FY 2016 and he has                                                               
not seen a request for that funding.                                                                                            
KEN ALPER,  Director, Tax Division, Department  of Revenue (DOR),                                                               
on  behalf of  the governor,  responded  that HB  247 contains  a                                                               
fiscal note  [Identifier: HB247-DOR-OGTCF-1-27-16]  that includes                                                               
an  appropriation to  the  Oil and  Gas Tax  Credit  Fund in  the                                                               
amount  of about  $926  million.   Of  that,  it supplements  the                                                               
approximately  $73 million  that is  in the  governor's operating                                                               
budget  for  FY  2017  to  make  the  $1  billion  of  what  [the                                                               
administration] is calling "transition  appropriation" to kind of                                                               
carry the  existing program,  including any  overhanging credits,                                                               
through to the effective date of the proposed legislation.                                                                      
REPRESENTATIVE HAWKER asked which fiscal note that might be.                                                                    
MR. ALPER  answered that two fiscal  notes were written.   One of                                                               
them is Tax Division which  talks about the implementation of the                                                               
bill.    The  other  one  is called  "fund  caps"  in  its  title                                                               
[Identifier: HB247-DOR-OGTCF-1-27-16]  and it shows  a relatively                                                               
large  upfront cost  and that  is the  one that  incorporates the                                                               
reductions in expenditures in the out years.                                                                                    
REPRESENTATIVE HAWKER  said the  fiscal notes  that he  has taken                                                               
off the internet have apparently been superseded.                                                                               
MR. ALPER replied  he noticed on BASIS this  morning when looking                                                               
over  this bill  the documents  in question  are in  the document                                                               
area but not in the fiscal notes section.                                                                                       
REPRESENTATIVE  HAWKER maintained  it is  not a  fiscal note  and                                                               
presumed there is a new fiscal note then.                                                                                       
1:11:23 PM                                                                                                                    
MR. ALPER began  his PowerPoint introduction of HB  247, "Oil and                                                               
Gas Tax Credit Reform HB247."   Turning to slide 2, "Bill Title,"                                                               
he apologized for the title containing  273 words, but said a lot                                                               
of different pieces  of statute are touched upon in  the bill and                                                               
it does a  lot of things within the broader  tax credit universe.                                                               
Moving to slide  3, "Suggested Informal Short Title,"  he said he                                                               
hopes to  informally refer to the  bill as "An Act  reforming oil                                                               
and gas  tax credits  and strengthening the  minimum oil  and gas                                                               
production tax."                                                                                                                
MR.  ALPER drew  attention  to  slide 4,  "Work  Done Since  Last                                                               
Session."   Reiterating  some  of the  recent  history stated  by                                                               
Commissioner  Hoffbeck, he  said  the  governor's line-item  veto                                                               
capped FY 2016  spending at $500 million.  That  $500 million has                                                               
not yet  been spent.  The  total credits claimed and  refunded to                                                               
date  in FY  2016  is about  $472-$475 million  and  a number  of                                                               
credits  are in  process.   "There isn't  going to  be that  much                                                               
actual delay in  the actual buying back of tax  credits before we                                                               
get to what  happens in the current budget  cycle," he continued.                                                               
Hopefully  the  liquidity  crisis  has  been  resolved  and  will                                                               
continue to  stay resolved.   The  three presentations  that [the                                                               
administration] made  to Senator Giessel's working  group as well                                                               
as a  presentation that many  committee members were at  in Kenai                                                               
in June are  all on BASIS.  The legislation  before the committee                                                               
has been developed gradually over the last six to seven months.                                                                 
1:13:21 PM                                                                                                                    
REPRESENTATIVE  SEATON recalled  that when  the estimate  of $700                                                               
million was  being considered last  year there was  discussion of                                                               
statutory requirement that 10 percent  of production tax be paid,                                                               
which was  about $91  million.   However, the  governor obviously                                                               
arrived  at $500  million.   He asked  what amount  the statutory                                                               
requirement is anticipated to be for this coming fiscal year.                                                                   
MR. ALPER responded  that the formula in AS  43.55.028(c) is tied                                                               
to the price of oil.  It  would be 15 percent of production taxes                                                               
before the  application of any credits.   If the price  of oil is                                                               
expected to be  below $60, which it is, then  the answer is $73.4                                                               
million.    That comports  with  what  the  governor put  in  the                                                               
operating budget for FY 2017.                                                                                                   
1:14:29 PM                                                                                                                    
MR. ALPER  resumed his  presentation, turning  to slides  5-11 to                                                               
review  the  history  of  oil and  gas  production  tax  credits.                                                               
Addressing slide 5 he said the  "modern" world of oil and gas tax                                                               
credits   began  in   2003  with   the  Alternative   Credit  for                                                               
Exploration [AS  43.55.025], which was a  percentage of qualified                                                               
expenditures  and it  could  be  taken against  what  was then  a                                                               
gross-based tax  known as the  Economic Limit Factor (ELF).   The                                                               
bulk of  the credit system  was put  in place with  the Petroleum                                                               
Production Tax  (PPT).  The  PPT bill was  the switch to  the net                                                               
profits-based tax  and that is  where credits were started  to be                                                               
seen for operating losses, credits  for capital expenditures, and                                                               
so forth.   The PPT bill  also included the Cook  Inlet tax caps,                                                               
the maximum taxes that Cook  Inlet producers currently enjoy.  It                                                               
also  added the  possibility of  the state  repurchasing credits.                                                               
Prior to  that the credits  had to be  held and used  against the                                                               
tax liability.   The  PPT system was  modified and  expanded upon                                                               
with the  passage of  Alaska's Clear  and Equitable  Share (ACES)                                                               
bill  in a  fall 2007  special session.   Credit  wise, the  most                                                               
interesting point in  ACES was that the  repurchase provision was                                                               
made open ended -  there were no more caps on it -  and it set up                                                               
a  specific  fund to  which  the  legislature appropriates  money                                                               
every  year  and  from  which the  Department  of  Revenue  (DOR)                                                               
repurchases tax credits.  Many  of the credits were expanded upon                                                               
or  added in  2010 with  Representative Hawker's  bill, the  Cook                                                               
Inlet  Recovery   Act,  House   Bill  280,  and   some  companion                                                               
legislation  in   the  other  body.     To  encourage  additional                                                               
exploration and development in Cook  Inlet, House Bill 280 added,                                                               
among  other  things,  the  40  percent  Well  Lease  Expenditure                                                               
Credit, as  well as a  bunch of  other more subtle  and technical                                                               
treatment issues  as to how  credits were calculated.   That bill                                                               
has  led certainly  to a  lot of  activity and  in many  ways the                                                               
pushing  back of  the  concerns about  supply  anxiety that  were                                                               
driving the conversation at that moment  in history.  In 2012 the                                                               
legislature passed the Frontier Basin  bill, which added a lot of                                                               
new benefits, new credits in  the previously underdeveloped areas                                                               
of  the state  in  the Interior.    This bill  was  in some  ways                                                               
modeled after  the Cook Inlet Recovery  Act.  Senate Bill  21 was                                                               
passed in  2013.  Primarily an  oil tax overhaul, Senate  Bill 21                                                               
on  the North  Slope eliminated  the "spending  credits," the  20                                                               
percent capital  credit, and replaced  it with what is  now known                                                               
as the  Per-Taxable-Barrel Credit, the sliding-scale  credit tied                                                               
to production.                                                                                                                  
1:16:54 PM                                                                                                                    
REPRESENTATIVE HAWKER returned to  his earlier question about the                                                               
fiscal note [Identifier:  HB247-DOR-OGTCF-1-27-16].  He expressed                                                               
his concern about living up to  the promises made to producers to                                                               
whom  the  State  of  Alaska  owes $200  million.    That  is  an                                                               
unconditional   obligation  at   this  point,   he  said.     The                                                               
legislature could  retroactively repeal that  if it chooses.   He                                                               
inquired   whether  this   is  really   the  intention   of  [the                                                               
administration].   He  observed  from the  fiscal  note that  the                                                               
appropriation  that  Mr.  Alper   said  contains  that  money  is                                                               
contingent upon passage  of a version of this bill.   He inquired                                                               
whether this  a "hostage provision"  and that those  producer tax                                                               
credits  will not  be paid  if the  legislature does  not pass  a                                                               
version of the bill for [the administration].                                                                                   
COMMISSIONER HOFFBECK answered "no,  those are liabilities of the                                                               
state that will be honored."   If this particular package doesn't                                                               
pass, then some modification will be  needed in order to have the                                                               
appropriation to pay the credits.                                                                                               
MR. ALPER added that the tax  credit is a two-step process.  When                                                               
a company does the desired  activity and submits the application,                                                               
the  company  earns a  credit  certification,  which is  a  paper                                                               
asset.  That asset is subject  to the statute and does not change                                                               
regardless of  what's in any  budget.  The repurchasing  of those                                                               
certificates  is the  fact that's  limited by  the appropriation.                                                               
Should nothing happen other than  last year's veto, there will be                                                               
about $200 million of outstanding  certificates that are owned by                                                               
companies  and that  have not  yet been  purchased by  the state.                                                               
"And what we're looking at," he  said, "is providing the means to                                                               
repurchase those certificates."                                                                                                 
1:19:01 PM                                                                                                                    
MR. ALPER  resumed his discussion of  the history of oil  and gas                                                               
production tax credits.  Moving to  slide 6 he noted that credits                                                               
were done  to encourage or  incentivize a desired behavior.   The                                                               
state wanted companies to come  in and make investments that they                                                               
weren't  otherwise making.   There  was  anxiety about  declining                                                               
production, desire to diversify the  oil field, and in Cook Inlet                                                               
to  create some  supply certainty.    Later on  the credits  were                                                               
built in  to the net profits  tax system.  What  does that really                                                               
mean?   A certain minimum  amount of credits is  anticipated just                                                               
because  it is  known that  a certain  amount of  money, say,  is                                                               
going to  be spent  or certain  number of oil  is produced,  so a                                                               
relatively high  tax rate  was established that  was offset  by a                                                               
robust  credit system  and that  all got  built into  an expected                                                               
revenue.   However,  as credits  got  added over  time they  were                                                               
layered with each other.   "We" started getting the same behavior                                                               
receiving multiple credits  and some unanticipated circumstances,                                                               
and very  high levels of state  support at times.   He reiterated                                                               
that credits  can either be  used against tax  liability, meaning                                                               
subtracted from  a company's tax  bill if  it owes taxes,  and if                                                               
not, then  the credits can be  cashed out and repurchased  by the                                                               
state subject to appropriation.   A provision in current law says                                                               
that large producers, those producing  more than 50,000 barrels a                                                               
day, are  not eligible  to get  cash for  their credits,  to have                                                               
their credits repurchased.   In those cases, a  company without a                                                               
tax  liability would  have to  carry its  credits forward  into a                                                               
future tax year and then use them against the company's taxes.                                                                  
1:20:28 PM                                                                                                                    
REPRESENTATIVE  HERRON  asked  what  the current  balance  is  in                                                               
regard  to the  original  $700 million  credit  balance that  the                                                               
governor reduced to $500 million.                                                                                               
MR. ALPER  replied that  currently the amount  in the  tax credit                                                               
fund is  $25 or $28  million.   The $500 million  was transferred                                                               
into  the fund  early in  the fiscal  year and  the last  time he                                                               
checked  the state  had repurchased  approximately $472  million,                                                               
leaving around  $28 million left in  the fund for the  rest of FY                                                               
2016.  He  added that there is an  inherent "front-loadedness" in                                                               
the fiscal  year for repurchasing  tax credits.  This  is because                                                               
most of the  applications come with the tax filings  of the major                                                               
oil producers  and the smaller oil  companies.  The due  date for                                                               
the  production  tax is  the  end  of  March [for]  the  previous                                                               
calendar year.   The  state has a  statutory obligation  to issue                                                               
certificates  in 120  days.   So, for  the most  part the  credit                                                               
certificates  are given  in  July  and many  of  them get  turned                                                               
around the next  day to request repurchase.  It  may take several                                                               
weeks  to get  the  bank  accounts worked  out  and transfer  the                                                               
money, but  by the end of  August or into September  usually two-                                                               
thirds of the year's credit money has already been spent.                                                                       
REPRESENTATIVE HERRON surmised the  tax credit situation would be                                                               
self-correcting  given  the  current   oil  price  situation;  he                                                               
therefore inquired why this legislation is needed.                                                                              
COMMISSIONER HOFFBECK  responded that a transition  is being seen                                                               
within the credit  package.  When oil prices are  low, capital is                                                               
constrained  and less  actual  work  is being  done  that can  be                                                               
claimed, but  more losses are seen  in companies and so  a growth                                                               
is seen in the Net Operating Loss  Credits.  The hope was that it                                                               
would self-correct,  but it didn't; essentially  the credits have                                                               
moved more towards the net operating loss side of the ledger.                                                                   
1:23:15 PM                                                                                                                    
MR. ALPER  continued with addressing  the history of oil  and gas                                                               
production tax  credits.   Displaying slide  7 he  delineated the                                                               
major credits  on the  books right  now.   He explained  that the                                                               
focus is  on the first  three credits  listed on slide  7 because                                                               
the fourth  and fifth credits  will at least partially  sunset in                                                               
the  near  future.   Under  the  Net  Operating Loss  Credit  [AS                                                               
43.55.023(b)], the state pays companies  back for a percentage of                                                               
their losses;  it varies by  time period  and area of  the state.                                                               
That  credit is  notably stackable,  meaning that  credit can  be                                                               
earned as  well as one  of the other  credits, and that  is where                                                               
some of these  very large rates of state  participation have come                                                               
in.   The Per-Taxable Barrel Credit  [AS 43.55.024(i & j)  is the                                                               
North  Slope Production  Credit added  by Senate  Bill 21.   This                                                               
credit ranges between $0  and $8 for legacy oil and  is a flat $5                                                               
for new oil.   It can only  be used against tax  liability, so is                                                               
one of  the so-called "use-it-or-lose-it"  credits.   The Capital                                                               
or Well Lease  Expenditure Credit [AS 43.55.023(a)  and (l)], the                                                               
20-40 percent  credit, does  not exist  on the  North Slope.   In                                                               
other  areas of  the state  these  are credits  based on  company                                                               
qualified expenditures.   They are generally refunded  and can be                                                               
stacked  with the  Net Operating  Loss Credit.   The  Exploration                                                               
Credit [AS  43.55.025(var)] can be  used in place of  the Capital                                                               
Credit if  a company qualifies.   These credits are a  little bit                                                               
larger, have  a little  bit different rules,  and they  have data                                                               
submission requirements for the  Department of Natural Resources.                                                               
Most of  these credits are  expiring this July,  although certain                                                               
ones have been  extended in the Interior areas that  are known as                                                               
the Frontier or Middle Earth areas.                                                                                             
1:24:41 PM                                                                                                                    
REPRESENTATIVE HAWKER questioned  Mr. Alper's characterization of                                                               
AS 43.55.024(i)  and (j) as  a credit.   He maintained  that that                                                               
element  operates as  a component  of establishing  the base  tax                                                               
rate.  The result  of that element is not a  credit that is taken                                                               
against the  payment of  a tax,  but is part  of the  calculus of                                                               
developing the tax  rate at which a company pays.   That item was                                                               
put  into the  legislation specifically  to create  a progressive                                                               
effective tax  rate.  He said  he is therefore curious  as to why                                                               
it  is being  characterized as  a credit  along with  these other                                                               
elements which have a completely different economic operation.                                                                  
MR.   ALPER  answered,   "We  agree   wholeheartedly  with   your                                                               
characterization  of the  Per-Barrel Credit,  it is  very much  a                                                               
component of the tax system."   Had that not existed it is likely                                                               
the legislature would have come around  to a lower tax rate.  The                                                               
same can also be said about  the 20 percent Capital Credit in the                                                               
ACES era,  which was  primarily a major  offset that  lowered the                                                               
tax rate and was built in.  He continued:                                                                                       
     For  accounting purposes,  for  reporting purposes,  we                                                                    
     consider it a  credit, it is described in  statute as a                                                                    
     credit.   But, in all of  our reporting we refer  to it                                                                    
     clearly as  a credit used against  liability, which has                                                                    
     a  different  character  and  ...  really  a  different                                                                    
     series  of policy  decisions that  we're looking  at as                                                                    
     opposed  to  those credits  that  are  refunded by  the                                                                    
1:26:16 PM                                                                                                                    
REPRESENTATIVE HAWKER  said his  question was  not answered.   He                                                               
asked why it is being characterized  in this document and in this                                                               
public  report   and  before  this   legislature  as   a  credit,                                                               
comparable with the same economic character as the others.                                                                      
MR. ALPER replied:                                                                                                              
     We  are listing  comprehensively in  this slide  all of                                                                    
     the  different credits.    As we  get  deeper into  the                                                                    
     proposal and  the bill itself  you will see  that we're                                                                    
     not intending  to do  anything to  that credit.   We're                                                                    
     aware of  it ... it is  called a credit in  statute and                                                                    
     we  are  trying  to comprehensively  describe  all  the                                                                    
     credits that are in statute.                                                                                               
REPRESENTATIVE HAWKER said his recall is that it is                                                                             
characterized as a gross value reduction.                                                                                       
MR. ALPER responded  that the statutes can be looked  at later on                                                               
to define it at the appropriate time.                                                                                           
REPRESENTATIVE  HAWKER  maintained  that [AS  43.55.024(i  &  j)]                                                               
operates completely different than every  one of these other true                                                               
credits being considered.   He said it is  critical to understand                                                               
that difference.                                                                                                                
MR. ALPER replied:                                                                                                              
     That credit in a very  low price environment is unusual                                                                    
     in  that  it is  truly  a  use-it-or-lose-it credit  or                                                                    
     deduction, whatever  we choose to  call it.   In fiscal                                                                    
     year 16, where  prices are expected to be  very low for                                                                    
     the entirety  of the  year, only  $28 million  worth of                                                                    
     that credit  are going  to be  used.   Basically that's                                                                    
     the  amount  of  subtraction  the  companies  can  take                                                                    
     before they  bump up against  the minimum tax  and then                                                                    
     they lose  the rest of it.   In a year  with higher oil                                                                    
     prices we  could see five,  six, seven, over  a billion                                                                    
     dollars in that  offset.  But ... that  offset tends to                                                                    
     decrease to zero in a  low price environment, it is not                                                                    
     a major component  of the credit cost to  the state ...                                                                    
     in this low price era.                                                                                                     
1:28:03 PM                                                                                                                    
MR. ALPER  returned to slide  7, stating that the  Small Producer                                                               
Credit [AS 43.55.024(c)],  a component of the  PPT bill, provides                                                               
up to  $12 million off of  a company's taxes if  it meets certain                                                               
small  production  criteria.   Per  statute,  applicants will  no                                                               
longer  be accepted  after  May 2016.   However,  it  is what  is                                                               
called  a slow  sunset  -  once a  company  is  inside the  small                                                               
producer credit  regime, it  could receive the  credit for  up to                                                               
nine years.  Consequently the state  will be paying at least some                                                               
Small Producer Credits until about 2024.                                                                                        
MR. ALPER displayed  slide 8 noting that  through 2015, depending                                                               
on what  is counted, $7.4  billion has  been spent on  credits or                                                               
taken  in   credits  against  liability,   which  gets   to  what                                                               
Representative  Hawker  said  earlier.    Of  that  number,  $4.3                                                               
billion were credits against liability  on the North Slope which,                                                               
for the  most part, are  offsets to the  tax regime -  either the                                                               
Per-Taxable Barrel  Credit in  Senate Bill 21  or the  20 percent                                                               
Capital Credit in  ACES - and [DOR] does  characterize those very                                                               
differently than the  other roughly $3 billion  worth of refunded                                                               
credits.   On  the  North  Slope, $2.1  billion  was refunded  in                                                               
credits; these  were from  the new  producers and  explorers that                                                               
were developing  new fields.   Outside the North Slope  there was                                                               
about $1  billion in credits.   Of that, only about  $100 million                                                               
was used  against liability; that's  largely because  there isn't                                                               
very much  tax liability in  Cook Inlet  because of the  tax caps                                                               
that  were put  in place  in the  PPT bill.   He  said [DOR]  has                                                               
attempted  to  calculate  that  through  the  end  of  2013,  and                                                               
somewhere between  $500 and  $800 million is  the value  of those                                                               
tax caps, the tax reductions in  statute.  In addition, there has                                                               
been $900 million in refunded credits  through end of FY 2015 and                                                               
the great bulk of that has been  in the last three or four years,                                                               
since the Cook  Inlet credit regime was opened up  and a lot more                                                               
activity was drawn into the inlet.                                                                                              
1:29:56 PM                                                                                                                    
REPRESENTATIVE  HAWKER observed  on slide  8 the  subheading, "FY                                                               
2007 thru  2015, $7.4 Billion  in Credits."  He  said legislation                                                               
passed by  the legislature  has resulted in  $7.4 billion  in tax                                                               
credits.  He asked how much  the state has collected from the oil                                                               
and gas industry during this same time period of 2007 to 2015.                                                                  
MR. ALPER answered he thinks the  production tax number is a year                                                               
old  through 2014  and  the number  he  has in  his  head is  $27                                                               
billion.  Corporate  income tax and the royalty would  need to be                                                               
added to that, so it is  probably a number in the neighborhood of                                                               
$40 billion.                                                                                                                    
1:30:44 PM                                                                                                                    
MR. ALPER resumed his presentation,  drawing attention to slide 9                                                               
and explaining  that the  graph shows  the regional  breakdown of                                                               
the  refunded  tax  credits,  the  approximately  $3  billion  in                                                               
historic refunded  credits between the  North Slope and  the non-                                                               
North Slope area.   Tax credits have been claimed  for the Middle                                                               
Earth, or Interior,  areas of the state.   However, because these                                                               
are so few,  [DOR] is not able to discuss  them without violating                                                               
taxpayer  confidentiality.   So, [DOR]  has commingled  them with                                                               
the Cook Inlet  and called it non-North Slope, but  the figure is                                                               
almost entirely  Cook Inlet with  a small amount of  the Interior                                                               
exploration  work that  has been  ongoing.   An  increase in  the                                                               
relative share  of Cook Inlet  credits can  be seen, with  it now                                                               
being greater than 50 percent over the last couple of years.                                                                    
1:31:35 PM                                                                                                                    
REPRESENTATIVE  SEATON  said   [the  legislature]  established  a                                                               
system   to   stimulate,   which  has   successfully   stimulated                                                               
exploration.   He expressed his  concern on what the  Net Present                                                               
Value  is to  the  state and  whether over  the  lifespan of  the                                                               
fields  it is  projected  that  the state  is  going  to have  to                                                               
institute an  income tax or  a sales  tax to generate  revenue to                                                               
pay more  because there  will be  a Net  Present Value  loss from                                                               
some of  these very  big tax  credits that have  been given.   He                                                               
requested  that when  tax credits,  and  the value  of those  tax                                                               
credits, are  being talked  about that it  be in  relationship to                                                               
the Net Present Value to the  state of the entire 30-year life of                                                               
a field.  When  the state invests the money and  when it gets the                                                               
payback and whether  at the end of a  30-year lifespan, depending                                                               
on different prices, whether in  the future the state is actually                                                               
having  to tax  citizens individually  to pay  for some  of these                                                               
investments  that are  being encouraged.    He said  he wants  to                                                               
ensure that the legislature looks at this holistically.                                                                         
MR. ALPER responded  that over the last several  years more field                                                               
lifecycle  modeling  is  being  seen,  such  as  that  from  [the                                                               
consulting  firm]  enalytica.     Professor  Goldsmith  did  some                                                               
lifecycle  modeling in  some  of  his analysis  and  the DOR  Tax                                                               
Division has  been trying to  replicate that and would  like very                                                               
much  to bring  some sort  of  field examples.   Some  of it  was                                                               
discussed  before  this  committee  last  spring  when  potential                                                               
development  of the  Arctic National  Wildlife Refuge  (ANWR) was                                                               
talked about.   There  was a  lot of credit  cost in  the upfront                                                               
part and then the revenue comes  later.  It's important to have a                                                               
conversation about the time value  of money and whether the state                                                               
actually sees its  money back at the backend when  it is spending                                                               
a lot of  money in the upfront.  It  is an important conversation                                                               
and [the administration]  looks forward to talking  about it more                                                               
later on in the session.                                                                                                        
1:34:00 PM                                                                                                                    
MR. ALPER moved to slide  10 and continued discussing the history                                                               
of oil  and gas production  tax credits.   He said  that, setting                                                               
aside the large  credits used against liability that  were a core                                                               
component  of the  tax system,  the state  has paid  and refunded                                                               
about  $3 billion  in credits  through the  end of  FY 2015.   In                                                               
looking  at  that  number,  so much  of  the  line-item  specific                                                               
information  is   confidential  that  [DOR]  cannot   talk  about                                                               
specific products.   [The department]  has tried its best  to put                                                               
it in  a format where  order of magnitude  can be discussed.   Of                                                               
that $3  billion a bit less  than $1.5 billion went  to six North                                                               
Slope  projects that  are currently  in  production, fields  that                                                               
were in  development and are  now producing.  About  $650 million                                                               
went  to 13  other  [North  Slope] projects,  some  of which  are                                                               
expected to  be produced  and some of  which were  exploration or                                                               
pre-development projects  that never  came to  fruition.   On the                                                               
non-North  Slope or  Cook  Inlet  plus area,  it  has been  about                                                               
50:50.   There  are  six  projects that  are  in production  that                                                               
received about $450  million in credits and  eight other projects                                                               
that  do not  yet have  any production,  although it  is expected                                                               
that the bulk of those will eventually produce oil or gas.                                                                      
1:35:07 PM                                                                                                                    
REPRESENTATIVE HAWKER noted  that when the $650  and $450 million                                                               
are added together, the state  under current statutes has given a                                                               
little over $1 billion to  companies that have had no production,                                                               
no contribution  to the state  apparently.  He asked  whether Mr.                                                               
Alper thinks that was a good idea.                                                                                              
MR. ALPER replied he doesn't know  that he wants to answer a flat                                                               
yes  or no  to  that question,  it  was part  of  a large  policy                                                               
direction.    [The  state] is  paying  companies  essentially  on                                                               
activity and  without necessarily  a guarantee;  the bulk  of the                                                               
money  is  turning into  production.    He  said he  thinks  this                                                               
analysis might  be easier  to do in  a few years  when it  can be                                                               
seen what really does lead  to production; for example, analyzing                                                               
how  many dollars  per  barrel in  increased  production did  the                                                               
state spend.   [The department]  has struggled with trying  to do                                                               
that analysis and has been unable  to come up with any meaningful                                                               
results to  say how  much the  state is  really spending  and how                                                               
much new activity has it led to.   It's a big question mark; it's                                                               
hard to  know exactly what  would have happened if  these credits                                                               
didn't exist.                                                                                                                   
1:36:14 PM                                                                                                                    
REPRESENTATIVE HAWKER  said these credits resulted  from a policy                                                               
call  in the  legislature,  a contentions  policy call  actually,                                                               
from folks  who said that  the State  of Alaska really  needed to                                                               
provide substantial  funding and  put explorers on  equal footing                                                               
with   the  larger   companies  that   were  having   significant                                                               
production.  That  was an argument made on the  floor and made in                                                               
this committee.   Some legislators  agreed with it,  some didn't.                                                               
He said  he is "wondering if  we are really starting  to question                                                               
whether the  state aught be supporting  non-producing entities or                                                               
whether we  should only  be supporting  producing entities."   He                                                               
requested that  the answer to his  question be in the  context of                                                               
the bill  that [DOR]  indicates in its  fiscal is  contingent and                                                               
wrapped  up  in   this,  which  is  the   new  Alaska  Industrial                                                               
Development and  Export Authority  (AIDEA) bill  that says  a big                                                               
part of getting  rid of all these credits is  replacing them with                                                               
a loan  system that only  companies with proven reserves  will be                                                               
receiving.    He asked  whether  the  administration has  made  a                                                               
policy call that the state  is not going to support non-producers                                                               
and will  only be  supporting those that  have already  proven up                                                               
their reserves in the future.                                                                                                   
COMMISSIONER HOFFBECK answered:                                                                                                 
     No, it isn't.   Because we left the  Net Operating Loss                                                                    
     Credit  in place  we are  still supporting  exploration                                                                    
     activities and  pre-development activities. ...  Not at                                                                    
     the level that we have in  the past, but we would still                                                                    
     be supporting  at a 25  or 35 percent  level, depending                                                                    
     whether you're in Cook Inlet or on the North Slope.                                                                        
REPRESENTATIVE HAWKER concluded it is adjusting the levels.                                                                     
COMMISSIONER HOFFBECK replied right.  He continued:                                                                             
     That  Net Operating  Loss  Credit is  one  of the  more                                                                    
     difficult ones  for us  to control as  far as  ... what                                                                    
     the value of that credit is.   But it's one that became                                                                    
     very clear  in our  discussions ... with  the companies                                                                    
     over the summer  that that was the  critical credit ...                                                                    
     in the picnic basket of credits.                                                                                           
1:38:31 PM                                                                                                                    
REPRESENTATIVE JOSEPHSON  assumed that part  of the reason  it is                                                               
hard to  gauge the efficacy of  the credits now is  because there                                                               
are  all these  variables  that  are difficult  to  fit into  any                                                               
calculus, such as finding more oil  or gas than was thought might                                                               
be, or price that is out of one's control.                                                                                      
MR. ALPER responded:                                                                                                            
     Yes,  absolutely.   We  simply can't  know  what would  have                                                               
     happened in the negative, if  we weren't doing these things.                                                               
     Frankly, some of  the larger projects that  are currently in                                                               
     production on  the North Slope  were in  the pre-development                                                               
     or development process prior to  the passage of the PPT bill                                                               
     in  2006,  yet  were,  by  the  nature  of  their  projects,                                                               
     eligible for a  certain amount of credits.  So  it's hard to                                                               
     say  what  maintained them,  what  stopped  them from  being                                                               
     stopped,  what encouraged  them  to develop  more.   It's  a                                                               
     very, very  difficult analysis to  do.   And if I  could say                                                               
     one more word  on Operating Loss Credits ...  to follow what                                                               
     Commissioner Hoffbeck  said.  The  Operating Loss  Credit is                                                               
     in  many ways,  especially  on the  North  Slope, a  playing                                                               
     field  leveler.   It's a  net  profits tax,  which means  if                                                               
     you're an incumbent  producer, if you have  a tax liability,                                                               
     and you spend  one more dollar, you've  reduced your taxable                                                               
     net profits  by that  dollar and you're  saving 35  cents on                                                               
     your  taxes.    The  Net Operating  Loss  Credit  creates  a                                                               
     mechanism for the  state to let a newcomer,  a new producer,                                                               
     someone  exploring or  developing a  field that  doesn't yet                                                               
     have any  income, to get  that same 35-cent  benefit without                                                               
     having  a  tax liability.    So,  in  some ways  it's  about                                                               
     equity,  it's about  making our  resources available  to not                                                               
     just  the major  incumbent  producers but  to the  newcomers                                                               
     that are trying to enter ... into the oil field.                                                                           
1:40:19 PM                                                                                                                    
REPRESENTATIVE HERRON requested  an explanation as to  why HB 247                                                               
would not  actually discourage explorers  when what is  wanted is                                                               
to gain explorers.                                                                                                              
MR. ALPER answered:                                                                                                             
     We're not  encouraging or discouraging explorers  - the                                                                    
     exploration  credits  are   scheduled  to  sunset  this                                                                    
     summer.    We're  simply  not  addressing  that,  we're                                                                    
     allowing that  to happen.  But,  the Exploration Credit                                                                    
     numbers pre-date  the passage of [Senate  Bill] 21, and                                                                    
     it  actually created  unusual  circumstances where  the                                                                    
     state  has been  paying  up to  45  percent of  certain                                                                    
     costs  on the  North Slope.    That's in  many ways  an                                                                    
     unsustainable number.   With those credits  going away,                                                                    
     the  North Slope  exploration credit  support would  be                                                                    
     through  the Operating  Loss Credit  at the  35 percent                                                                    
1:41:23 PM                                                                                                                    
REPRESENTATIVE  TARR, in  regard to  the aforementioned  credits,                                                               
surmised  the  Mustang Project  would  be  in the  $1.45  billion                                                               
category of  a project that has  come online, and then  there are                                                               
the  other companies  that  went out  of  business. She  inquired                                                               
whether the state has learned  from this experience to evaluate a                                                               
tipping point  for whether a company  is too small or  too under-                                                               
resourced and  therefore unlikely to  have success.   She further                                                               
inquired  whether more  specificity should  be delineated  on the                                                               
Net  Operating  Loss  Credits  or  whether,  as  currently  being                                                               
broadly applied, it is working in the way that it should.                                                                       
MR. ALPER replied:                                                                                                              
     One of the things we  contemplated as we developed this                                                                    
     legislation was  some sort of pre-approval  or a filter                                                                    
     process.  Industry  didn't like it very much.   We were                                                                    
     uncomfortable   with  it   ourselves   that  we   don't                                                                    
     necessarily want  to be picking winners  and losers....                                                                    
     It ended up not surviving  to the final version of this                                                                    
     legislation.   In the absence  of that it's  very hard.                                                                    
     These are laws of general  applicability, if you do the                                                                    
     desired activity,  you earn the thing.   Regarding your                                                                    
     point  on  Mustang,  I can't  comment  obviously  on  a                                                                    
     specific company.   But what  we are trying to  do with                                                                    
     the changes proposed  in this bill to  a certain extent                                                                    
     is  help   control  who's  getting  cash   versus  what                                                                    
     company's we  feel are  more able to  hold on  to their                                                                    
     credit certificates until that  future point where they                                                                    
     might have tax liability they could use them against.                                                                      
COMMISSIONER HOFFBECK added:                                                                                                    
     The  fact that  we're actually  removing some  of these                                                                    
     credits  that  can  be stacked,  which  could  actually                                                                    
     result  in sometimes  75-80 percent  of the  cost being                                                                    
     borne  by the  state,  is  now going  to  be  25 or  35                                                                    
     percent.  I think that  will self-correct some of those                                                                    
     issues as well  because, if somebody has  75 percent of                                                                    
     their own money  in the game, I think  ... they're more                                                                    
     likely to be better capitalized before they come in.                                                                       
1:43:33 PM                                                                                                                    
REPRESENTATIVE HAWKER  noted that Mr.  Alper brought up  a really                                                               
important distinction:   the  pre- and post-  Senate Bill  21 tax                                                               
regimes.   The pre-Senate  Bill 21 tax  regime had  very generous                                                               
Qualified Capital Expenditure  (QCE) Credits.  That  went away in                                                               
2013 and the cumulative numbers  on the slides do not distinguish                                                               
between pre- and post-Senate Bill 21.  He continued:                                                                            
     I  don't know  that  it  is appropriate  for  us to  be                                                                    
     making a  judgement call or  pass judgement on  our tax                                                                    
     regime system  when we're looking  at a blended  set of                                                                    
     numbers here.   I don't  know that you  can accurately,                                                                    
     truly say ...  how the current system  is working based                                                                    
     on  a   blend  of  two  very   different  tax  systems.                                                                    
     Something  you might  want to  think about  ... as  you                                                                    
     present  this bill  [is]  finding  ways to  distinguish                                                                    
     those for us....   Let's talk about  our current regime                                                                    
     and let's not blend it with  an old regime that we have                                                                    
     substantially  modified  and already  made  substantial                                                                    
     reductions in credits.                                                                                                     
MR. ALPER responded "yes, we would  like to try to parse that out                                                               
by time  period and we've  tried in some  preliminary documents."                                                               
He clarified  that during the  ACES era  prior to the  passage of                                                               
Senate Bill  21, the state's  general level of support  for North                                                               
Slope  activity was  around 45  percent.   That was  the then  25                                                               
percent  Operating  Loss  Credit  stacked  with  the  20  percent                                                               
Qualified  Capital  Expenditure  Credit.   With  the  passage  of                                                               
Senate  Bill 21  the number  was reduced  from 45  percent to  35                                                               
percent, which  is the new  increased Operating Loss  Credit with                                                               
the elimination  of the  QCE.   However, an  asterisk on  that is                                                               
that  there was  a  temporary measure  where  the Operating  Loss                                                               
Credit  was bumped  to 45  percent  for calendar  years 2014  and                                                               
2015,  the  first  two  years after  the  implementation  of  the                                                               
effective  date of  [Senate Bill]  21.   So, really,  the state's                                                               
level  of  support  for  North   Slope  activities  has  remained                                                               
constant  through  the ACES  era  and  to  today, and  it's  only                                                               
beginning  in January  2016 where  a drop-off  in those  relative                                                               
numbers will be seen.                                                                                                           
REPRESENTATIVE  HAWKER remarked  that Mr.  Alper's response  made                                                               
his point.                                                                                                                      
1:45:45 PM                                                                                                                    
REPRESENTATIVE SEATON said:                                                                                                     
     I am somewhat  troubled by the idea of  a net operating                                                                    
     loss  being considered  as  being  equity between  non-                                                                    
     producers and producers when a  net operating loss used                                                                    
     to be  25 percent based  on the  base rate and  then we                                                                    
     introduced a  35 percent rate  with a gross  dollar per                                                                    
     barrel  reduction; but  when you  go  to net  operating                                                                    
     loss,  that  doesn't  count, so  ...  expenditures  get                                                                    
     offset at 35 percent.  So  now we have a 35 percent and                                                                    
     ... my concern  is that when we first did  PPT and ACES                                                                    
     and Pedro van Meurs was  helping us design this ... the                                                                    
     statement  was generally  very adamant  that we  didn't                                                                    
     want to  have over  20 percent  tax credit  because our                                                                    
     liability would be  huge if we were in  a downturn like                                                                    
     we are  now and  we are committing  to huge  amounts of                                                                    
     tax credits  based on  investment totally  unrelated to                                                                    
     our income.   And so  now we find ourselves  in exactly                                                                    
     that situation of having large  amounts of credits that                                                                    
     are  based on  investment supporting  big international                                                                    
     oil   companies  ...   to  over   a   third  of   their                                                                    
     expenditures  and having  very  little revenue.   I  am                                                                    
     trying  to figure  out ...  other  than just  testimony                                                                    
     from  industry saying  they like  35  percent of  their                                                                    
     expenses being written off or  carried forward at state                                                                    
     expense,  how   are  we   justifying  35   percent  net                                                                    
     operating loss credit.                                                                                                     
MR. ALPER  answered that this  bill, and Governor  Walker's wish,                                                               
is  to not  address the  core  components of  the underlying  tax                                                               
system  - the  tax  rate,  the operating  loss,  the gross  value                                                               
reduction,  for example.    Allowing  that Representative  Seaton                                                               
raises an  interesting point, he noted  that in the PPT  and ACES                                                               
era the Operating Loss Credit was  tied to the base tax rate, but                                                               
yet the  base tax  rate often increased  because of  the additive                                                               
feature of  progressivity.   So, in  effect, the  state's support                                                               
for the  non-producers tended to be  less than, or equal  to, the                                                               
support for  the majors  because now  the Per-Barrel-Credit  is a                                                               
subtractive feature.   Really,  the state  is providing  a higher                                                               
level of  support for the  non-producers, the newcomers,  than it                                                               
is  for  the major  base  producers,  so Representative  Seaton's                                                               
observation is correct.                                                                                                         
1:48:34 PM                                                                                                                    
MR. ALPER drew  attention to slide 11 to  conclude his discussion                                                               
of the history of oil and  gas production tax credits.  Regarding                                                               
this year's  money, he reiterated  that of the $500  million that                                                               
was authorized [for  credit repurchases for FY  2016], about $472                                                               
million has already  been paid.  Of that, about  $200 million was                                                               
for the  North Slope and  $272 million  for the Cook  Inlet area.                                                               
That  is a  little less  than 60  percent non-North  Slope, which                                                               
comports with the 2015  data so a trend is now  had.  The numbers                                                               
that  have  gone  out  the  door are  almost  entirely  2014  Net                                                               
Operating Loss Credits.  He  clarified that "Cook Inlet drilling"                                                               
means the  QCE and the Well  Lease Expenditure credits.   In some                                                               
cases, he noted,  the companies apply for  those quarterly rather                                                               
than waiting  until the end  of the year.   It is  still expected                                                               
that there will be $700 million  in total demand with the rest of                                                               
it being  partial 2015 credits  and other things that  don't need                                                               
to be  officially spent on  or authorized until next  July, until                                                               
120 days after the next tax payment year.                                                                                       
1:49:39 PM                                                                                                                    
MR.  ALPER  next  addressed slides  12-13,  "History  of  Minimum                                                               
Production  Tax 'Floor,'"  explaining that  during the  gross tax                                                               
era there was  a minimum "cents per barrel" tax.   In 2005, which                                                               
was  the last  full  year of  ELF,  it was  60-80  cents with  an                                                               
adjustment  tied  to  the   American  Petroleum  Institute  (API)                                                               
specific  gravity  measurement.     The  more  valuable  oil  was                                                               
essentially taxed  at the higher  level.   With the PPT  bill the                                                               
legislature  introduced  a  Gross  Minimum  Tax  as  a  potential                                                               
security blanket against  the Net Profits Tax.  It  was 4 percent                                                               
of the  Gross Value with a  sliding scale down tied  to the price                                                               
of oil  that's an annual average  price of oil, and  if the price                                                               
is over $25 it's  a 4 percent gross tax.   However, under the PPT                                                               
and  ACES  era, that  floor  could  be  pierced  by many  of  the                                                               
credits, including  the 20 percent QCE  Credit.  So, if  ACES was                                                               
the  law today,  the state  would be  receiving zero  rather than                                                               
some version of the minimum tax that it is getting today.                                                                       
MR.  ALPER turned  to slide  13, pointing  out that  under Senate                                                               
Bill 21 the  floor was strengthened because  it specifically says                                                               
the  [North Slope]  Per-Taxable-Barrel Credit  cannot reduce  the                                                               
tax liability below the floor.   The legacy fields, the older oil                                                               
fields, specifically  are paying  at the  floor level.   However,                                                               
several other  credits could reduce  payments below that.   These                                                               
credits are  the Net  Operating Loss  Credit, the  Small Producer                                                               
Credit, various  exploration credits, and  the Per-Taxable-Barrel                                                               
Credit for  so-called "new"  oil, which is  oil eligible  for the                                                               
Gross Value  Reduction (GVR)  and that $5  a barrel  credit could                                                               
reduce payments all the way to  zero.  The minimum tax was really                                                               
never broadly  triggered or  used until late  in 2014  when [DOR]                                                               
started seeing monthly  payment estimates coming in  at the floor                                                               
level.   Throughout 2015 nearly  all the production  tax receipts                                                               
have been based on the minimum tax, the 4 percent gross.                                                                        
1:51:44 PM                                                                                                                    
MR. ALPER moved to slide 14,  "Major Bill Themes," to outline the                                                               
six broad  themes in the  bill, with  the first theme  being that                                                               
the state's  annual cash  outlay needs  to be reduced.   It  is a                                                               
sheer necessity,  he said,  because the state  does not  have the                                                               
money or the budget to be  able to support half a billion dollars                                                               
in spending.  He pointed out  that $500 million in tax credits is                                                               
10 percent of the $5 billion  general fund (GF), and when looking                                                               
to broadly cut  the budget and make a sustainable  Alaska the tax                                                               
credits need to be cut as part  of a broader package.  Theme two,                                                               
the Net Operating Loss Credit needs  to be protected in some form                                                               
because  it is  something  of  a playing  field  leveler.   Theme                                                               
three, repurchases need  to be limited.  Some new  rules would be                                                               
put  in place  as to  who gets  repurchased versus  who might  be                                                               
required to  hold their credits  until they had a  tax liability.                                                               
Theme four, the  minimum tax would be strengthened  to ensure the                                                               
state  truly is  getting the  4 percent.   Theme  five, the  bill                                                               
would  allow more  transparency and  ability to  talk about  some                                                               
specifics in  public without violating  taxpayer confidentiality.                                                               
Theme six,  credits that  have been earned  to date,  and through                                                               
any transition period,  would be honored and paid.   Whatever the                                                               
effective  date of  the final  legislation, it  would be  ensured                                                               
that there is enough money to pay off all those credits.                                                                        
1:53:02 PM                                                                                                                    
REPRESENTATIVE  JOSEPHSON,  in  regard to  limiting  repurchases,                                                               
offered  his understanding  that the  principle feature  is "this                                                               
question of  local hire."   He asked  whether there will  also be                                                               
"pre-screening of the rocks in the  ground and ... the quality of                                                               
the investment."                                                                                                                
MR. ALPER  confirmed that  local hire is  one of  the provisions.                                                               
Another, he continued,  is an annual cap under  which [the state]                                                               
would not  purchase more than  $25 million per company  per year.                                                               
Possibly more  important is  a cap  on the  size of  the company.                                                               
The  bill includes  language that  says a  multi-national company                                                               
with global revenue in excess of  $10 billion per year would hold                                                               
its credits  on its own books  and then use those  credits in the                                                               
future to offset taxes when its field comes into production.                                                                    
1:53:59 PM                                                                                                                    
REPRESENTATIVE HAWKER  commented that  the themes are  really the                                                               
intent behind  the bill.  He  asked whether an analysis  has been                                                               
done   of   projected   consequences   to   the   industry   from                                                               
substantially raising the taxes and  the effect of that on future                                                               
investment, production, and revenue to  the state should the bill                                                               
pass unchanged.                                                                                                                 
MR. ALPER replied  that there is no specific  analysis because it                                                               
is  very hard  to  predict.   The  legislation  would touch  many                                                               
different sectors  in many  different ways.   The  expectation is                                                               
that  most of  the projects  that are  ongoing would  continue to                                                               
happen.  A  couple of future projects that might  be a little bit                                                               
marginal might not  happen if they suddenly go  from getting two-                                                               
thirds state  money to  25 percent  money.  But  it is  felt that                                                               
enough is  going to  continue to  happen that  supply won't  be a                                                               
problem and  that there will be  a level of oil  and gas activity                                                               
that is  commensurate with  [the state's]  ability to  afford it.                                                               
If something requires  two-thirds state money to  happen, he said                                                               
it is  appropriate at  some point to  have the  conversation that                                                               
maybe that  shouldn't happen, that  perhaps that  activity should                                                               
be able to stand on its own merits a little bit more.                                                                           
1:55:49 PM                                                                                                                    
REPRESENTATIVE HERRON asked what the  state's take will be if the                                                               
bill passes.                                                                                                                    
MR. ALPER responded the state has  gotten into a system of paying                                                               
several  hundred  million  dollars   per  year  in  refunded  tax                                                               
credits.  No  one really contemplated that  until fairly recently                                                               
because  the  state  was  receiving $3,  $4,  sometimes  over  $6                                                               
billion  a  year in  the  production  tax.   The  production  tax                                                               
revenue has now reached $100 million  or $200 million a year; yet                                                               
the  credit  liability  is  roughly   the  same,  maybe  slightly                                                               
smaller,  and  suddenly it  is  said  that  something is  out  of                                                               
balance.  So,  the first thing [the state] would  get is one step                                                               
closer to a balanced budget.   The governor proposed $500 million                                                               
in cuts in his  FY 2017 budget; $400 million of  them are in this                                                               
bill.   [The state] would get  perhaps a bit more  certainty that                                                               
the  projects that  are going  forward are  on a  sound financial                                                               
footing  that  are more  likely  to  be resulting  in  meaningful                                                               
production.   [The state] would also  get a bit of  production of                                                               
its minimum tax.  "We put in  a 4 percent minimum tax," Mr. Alper                                                               
said,  "but I  don't think  there was  full understanding  at all                                                               
levels of  government as  to what did  and didn't  penetrate that                                                               
tax."   The senate committee  recommended that things be  done to                                                               
ensure  [the state]  really  does  get 4  percent  of the  gross.                                                               
"Right now, because of some  unusual factors, we are not actually                                                               
getting a  full 4 percent of  the gross and we're  trying to bump                                                               
that up, and in a second  conversation increase it to 5 percent,"                                                               
he said.  "So guaranteeing ourselves  at least a minimum level of                                                               
annual revenue even in times of a shortfall in the industry."                                                                   
1:57:50 PM                                                                                                                    
REPRESENTATIVE HERRON requested  he be given some  insight on the                                                               
administration's   policy  discussion   that   led   up  to   the                                                               
introduction and who participated.                                                                                              
COMMISSIONER  HOFFBECK answered  that  it was  various people  at                                                               
various times.   Explaining that the policy decision  that led up                                                               
to this was two-fold, he said:                                                                                                  
     One is  the fact that,  quite frankly, the size  of the                                                                    
     pie  that we  have to  support all  of the  things that                                                                    
     we're  spending  money  on  was  not  large  enough  to                                                                    
     support everything anymore.  And  so ... we had to pull                                                                    
     back and  we're pulling back on  essentially everything                                                                    
     ... or most  things.  This was ... one  of the outflows                                                                    
     that  quite frankly  is not  a core  government service                                                                    
     ...  it had  to  be balanced  against education,  life,                                                                    
     health,  safety, roads,  those kind  of things.  ... It                                                                    
     was considered  an area  where ...  it was  prudent for                                                                    
     the  state to  pull back  on in  this particular  area.                                                                    
     We're not pulling  all the way out, but  we just simply                                                                    
     can't afford the level of  support ... that we're doing                                                                    
     right now. ... The second  component ... was just that.                                                                    
     We do  recognize, however, that  some level  of support                                                                    
     was necessary  and so ...  we tried to balance  that by                                                                    
     leaving  ...  a  fairly substantial  level  of  support                                                                    
     still in the  bill, but just ... quite a  bit less than                                                                    
     it was  before.   And so  ... it  was a  recognition we                                                                    
     couldn't afford  it and secondly  that we've  needed to                                                                    
     continue  some level  of  support but  ...  at a  lower                                                                    
REPRESENTATIVE HERRON  requested the  commissioner to  name names                                                               
as to  who participated  in the  discussions that  led up  to the                                                               
bill's introduction.                                                                                                            
COMMISSIONER HOFFBECK replied it  would have been largely revenue                                                               
staff.  Mr. Alper, himself, the  governor, and the chief of staff                                                               
were probably the four that had  the most input into it, but that                                                               
was  all based  on information  that  the four  of them  received                                                               
through   extensive  meetings   with  industry,   the  investment                                                               
community,  and  the  work  that Senator  Giessel  did  with  her                                                               
2:00:32 PM                                                                                                                    
REPRESENTATIVE  HAWKER said  there  is a  difference between  the                                                               
question that  Representative Herron asked and  the question that                                                               
he had asked.  Representative  Herron's question was, "What's the                                                               
state's revenue  side of  this?"  The  answer was  largely "we're                                                               
doing what  we need to do  to balance our budget  and that's what                                                               
our priority in  doing this is."  Representative  Hawker said his                                                               
question was the  other side, "What is the  consequence of making                                                               
this  decision  and literally  at  this  point in  time  arguably                                                               
taking another  half billion  dollars a  year or  more out  of an                                                               
industry in  this state that  is not  making money today  in this                                                               
state at these prices?"  He  related that in a meeting today with                                                               
a senior person from one of  the major producers he was told that                                                               
the company is  losing $3 million a day continuing  to operate in                                                               
Alaska.   He asked whether  he is  correct in recalling  that Mr.                                                               
Hoffbeck or  Mr. Alper earlier stated  that no one has  worked on                                                               
modeling identifying the consequences  of this legislation on the                                                               
individual players and that members are  to take it on faith that                                                               
major tax increases  can be assessed on entities  that are losing                                                               
money  in  this state  today  and  there is  not  going  to be  a                                                               
negative consequence.                                                                                                           
COMMISSIONER HOFFBECK  responded that  the Institute of  Social &                                                               
Economic  Research (ISER)  has  been contracted  to  look at  the                                                               
impacts of all of the decisions being  made here.  There is not a                                                               
single lever  in this entire  budget, he said, that  doesn't have                                                               
consequences.  An analysis is  being done, but the recognition is                                                               
that  there just  simply  isn't a  way to  balance  a $4  billion                                                               
budget  deficit  without  some  collateral  consequences  in  the                                                               
economy.   Regarding Representative Hawker's earlier  point about                                                               
the  difference between  credits  that are  embedded  in the  tax                                                               
system, which is a tax issue,  and the credits that are really in                                                               
place  to try  to  incentivize  certain activities,  Commissioner                                                               
Hoffbeck said that  taking away money that [the  state] is giving                                                               
somebody  is  a little  different  than  taxing somebody,  taking                                                               
money out that  [the state] did not first provide  to them in the                                                               
first place.   "And  so I do  see a little  bit of  a distinction                                                               
between  this  $400 million  ...  being  characterized as  a  tax                                                               
increase," he said.  "I really do see it as a credit reduction."                                                                
2:03:07 PM                                                                                                                    
REPRESENTATIVE HAWKER  charged that the  people who will  be most                                                               
profoundly affected  by taking away  these credits are  the small                                                               
companies that  don't have revenue  in Alaska.  The  questions he                                                               
is  asking are:   "What  will be  the consequences?   Will  we be                                                               
driving those small companies out of  state?  Will we make Alaska                                                               
a state that  is not attractive?"  He said  an article in today's                                                               
Alaska Public Media reports the  head of BlueCrest Energy Inc. as                                                             
stating that the  company probably won't develop  the natural gas                                                               
in the Cosmopolitan  prospect [in Cook Inlet]  if the legislature                                                               
makes big  changes to Alaska's tax  credit program.  That  is the                                                               
kind  of  consequence he  would  like  to  know about,  he  said.                                                               
Taking away credits is going to  affect one cohort of the state's                                                               
investors in  one way;  the tax  rate itself  is going  to affect                                                               
those   larger  players,   those   larger   producers  that   are                                                               
contributing   all   the   money   that   is   ultimately   being                                                               
redistributed here today.  Representative  Hawker agreed there is                                                               
definitely a difference  between the two, but argued  that at the                                                               
end of  the day the consequences  on the relevant cohort  must be                                                               
looked at.   It cannot  be said that  taking away this  credit is                                                               
not  going to  affect the  big producers.   Maybe  it won't;  but                                                               
likewise, jacking up  the tax rate on production is  not going to                                                               
have any effect on a non-producing  entity; however, it has to be                                                               
asked  whether  that entity  will  ever  be  willing to  go  into                                                               
production if the tax rate is raised.                                                                                           
2:04:56 PM                                                                                                                    
REPRESENTATIVE TARR related that  ConocoPhillips had $393 million                                                               
in  profit for  its Alaska  operation for  third quarter  [2015].                                                               
So,  she continued,  at least  one company  is still  making some                                                               
money.  She  shared that in talks she's had  with producers about                                                               
changing the  credits in  Cook Inlet,  even these  producers said                                                               
that the credits have met  their intended purpose of spurring gas                                                               
development  in the  inlet to  prevent the  possibility of  a gas                                                               
shortage.    That  has  now largely  been  accomplished  and  the                                                               
producers know it is time  for change, although there is interest                                                               
in keeping some  in place.  She asked how  that experience can be                                                               
used to better assess whether  credits had their intended purpose                                                               
for development in the way that was wanted.                                                                                     
COMMISSIONER  HOFFBECK replied  that  he thinks  this  is a  good                                                               
point.  When  the credits really grew  in the 2010 era,  it was a                                                               
market looking for  gas and there was a real  need to incentivize                                                               
activity.  Currently in the Cook  Inlet, however, there is gas in                                                               
search of a market.  So,  that dynamic has changed, and that begs                                                               
the question,  then, of whether  that level of support  is needed                                                               
at this  point in time.   That level  of support had  some impact                                                               
when  it was  needed.   Does  that level  of support  need to  be                                                               
continued?   The  question now  is whether  there is  a different                                                               
level of  credit support  that allows a  more steady  state going                                                               
forward.  A lot of it will  be something that only time will tell                                                               
whether in  fact this is  the right rate as  well.  "We've  had a                                                               
tremendous number  of discussions  with these  particular players                                                               
in Cook  Inlet to get  their impact ...  on the credit  before we                                                               
proposed the credit reforms," he said.                                                                                          
2:07:23 PM                                                                                                                    
CO-CHAIR TALERICO asked when the ISER report will be available.                                                                 
COMMISSIONER HOFFBECK  responded it was supposed  to have already                                                               
been receive,  and he has been  told that it should  be available                                                               
in a couple of weeks.                                                                                                           
2:07:49 PM                                                                                                                    
REPRESENTATIVE  SEATON noted  that  oftentimes individual  things                                                               
are looked  at and  given credit for  the outcomes;  for example,                                                               
pre-production on the North Slope  that was already going forward                                                               
before the  tax system there was  changed.  It is  being assumed,                                                               
he continued, that  credits were what drove the  financial or the                                                               
exploration  in Cook  Inlet.    However, at  this  same time  the                                                               
Regulatory Commission  of Alaska (RCA) changed  its position from                                                               
a barely breakeven amount of  $2.50-$3.00 per thousand cubic feet                                                               
(MCF) gas to $6-$8 per MCF,  now allowing people to make money on                                                               
the gas  they were selling.   It is hard to  incentivize somebody                                                               
with credits if their product isn't  going to be profitable.  So,                                                               
which of  the two - the  credits or a profitable  product - drove                                                               
the investment?   A balance  needs to be  looked at.   Alaska has                                                               
some of the  highest priced gas in the nation  right now at about                                                               
$7.50 where it is sold in the  Cook Inlet Basin.  People can make                                                               
money on  it.  The  Henry Hub is  about $2.80.   There is  a huge                                                               
difference in the  profitability of the gas and no  one is giving                                                               
any relationship to the profitability  of the gas and saying that                                                               
all the exploration  was done not because a company  could make a                                                               
profit on its  product, but because the state gave  the company a                                                               
subsidy.    "I'm  very concerned,"  Representative  Seaton  said,                                                               
"that as  we go forward with  these credits we ought  to say what                                                               
they  really are.   They  are  subsidies to  these companies  and                                                               
subsidies to the  product ... so it's not just  credits, and so I                                                               
think that we should consider that  term as well as we talk about                                                               
these things."                                                                                                                  
REPRESENTATIVE SEATON  turned to  slide 14 and  added that  he is                                                               
very  concerned about  the second  theme, "Protect  Net Operating                                                               
Loss credits as a playing  field leveler between legacy producers                                                               
and newcomers".  He stated:                                                                                                     
     I'm very concerned  that if we say "oh we  got to go to                                                                    
     35  percent of  everybody's expenditures  to level  the                                                                    
     playing  field even  if we're  losing money  on all  of                                                                    
     those  credits  that  are  being paid."    We  need  to                                                                    
     actually look at the amount  of the credit we're paying                                                                    
     and see  if it makes  sense in  the full term  for what                                                                    
     we're getting, not for just  saying "oh, we're going to                                                                    
     be  a   referee  between   legacy  producers   and  new                                                                    
     producers  and  we're going  to  give  everybody a  big                                                                    
     subsidy  or a  big write-off  against their  expenses."                                                                    
     And so I hope that as  we go through this we also think                                                                    
     of what's the state's liability in here as well.                                                                           
2:11:11 PM                                                                                                                    
REPRESENTATIVE  HAWKER returned  [Representative Tarr's]  earlier                                                               
statement   that  ConocoPhillips'   year-to-date  third   quarter                                                               
earnings show the company as having earned money in Alaska.                                                                     
REPRESENTATIVE SEATON  clarified it  was third quarter  2015; the                                                               
fourth quarter report is not yet out.                                                                                           
REPRESENTATIVE  HAWKER stated  ConocoPhillips  will be  reporting                                                               
its earnings tomorrow, not today.                                                                                               
MR.  ALPER  said  his  expectation is  that  the  fourth  quarter                                                               
results will be weaker given the  price of oil was in the fifties                                                               
throughout  the bulk  of  the third  quarter and  is  now in  the                                                               
thirties and  has hit  the twenties.   He added  he is  sure that                                                               
that has had an impact on ConocoPhillips.                                                                                       
REPRESENTATIVE HAWKER stated that is  his point.  It is important                                                               
to  be talking  accurately and  about the  right time  frame, and                                                               
looking at the  right statistics as these analyses are  made.  To                                                               
say that an  entity is making a profit today  may not be accurate                                                               
and he won't know until they report tomorrow.                                                                                   
MR.  ALPER  added  that  the  administration  does  not  want  to                                                               
eliminate the tax  credit program.  Rather,  the conversation the                                                               
administration is  trying to  have before  this committee  and as                                                               
the  session progresses  is, "What  is the  appropriate level  of                                                               
support that  we should continue to  give to the industry  - both                                                               
the  mature  and  the  new-coming industry  -  given  our  fiscal                                                               
realities?  Are  there adjustments that deserve to  be made based                                                               
upon lessons learned in the last  10 years and the changes in the                                                               
price of oil?"  He noted  he "would not want to characterize this                                                               
... as  an upheaval or  as an elimination  of a program,  it's an                                                               
evolution of a program."                                                                                                        
2:13:03 PM                                                                                                                    
MR.  ALPER  reviewed  slides 15-16,  "Recommendations  of  Senate                                                               
Working Group,"  relating that after last  year's session Senator                                                               
Giessel put  together a working  group of several members  of the                                                               
other body, as well as  some industry and local government input.                                                               
The  group put  together a  comprehensive and  impressive report.                                                               
In addition  to highlighting the work  done by the eight  or nine                                                               
hearings  and characterizing  the needs  of the  various sectors,                                                               
the [December  2015] report makes  six recommendations.   He said                                                               
the administration's bill  is trying to meet, for  the most part,                                                               
the recommendations made by that working group.                                                                                 
2:13:41 PM                                                                                                                    
REPRESENTATIVE JOSEPHSON  recounted that when he  asked Mr. Alper                                                               
about the  limited repurchases  on slide  14 and  mentioned local                                                               
hire, that  Mr. Alper had  answered there  would be limit  of $25                                                               
million per company.  He  further recounted that Mr. Alper talked                                                               
about  treating  the  big  companies  less  like  small  domestic                                                               
companies and more  like what they are.  He  asked whether HB 247                                                               
has some  sort of pre-screening  element to it because  in regard                                                               
to the  imposition of  new revenue  it would  be wonderful  if he                                                               
could explain to a constituent  that "the state's geologists have                                                               
looked at  this and this  thing is  a great prospect,  it's worth                                                               
investing 35 cents in."                                                                                                         
MR.  ALPER recognized  that Representative  Josephson  sat in  on                                                               
several  of the  fall working  group meetings  and that  in these                                                               
meetings there was talk about  the possibility of a pre-screening                                                               
process.   However,  he continued,  that did  not survive  to the                                                               
final  version  of  the  bill  and so  there  is  no  application                                                               
process.  The  earning of the credits remains  open-ended.  Right                                                               
now  the only  restriction  on  getting cash  from  the state  is                                                               
whether  a company  produces 50,000  barrels or  more in  Alaska.                                                               
Every company, whether the world's  fourth largest oil company or                                                               
a mom and pop working out of  their truck, can get cash for their                                                               
credits.  [The bill proposes  that] large companies with revenues                                                               
in  excess of  $10 billion  would earn  credit certificates,  but                                                               
would hold them  and use them against future tax  liability.  The                                                               
$25 million  is the  fork in that  road, the  alternative program                                                               
put  in place  for  the smaller  companies who  can  cash in  $25                                                               
million per year with the idea  that if their projects are larger                                                               
it might take several years to work through the credits.                                                                        
2:15:41 PM                                                                                                                    
MR. ALPER,  resuming his presentation, clarified  that slides 15-                                                               
16  are a  paraphrasing  of the  six  recommendations in  Senator                                                               
Giessel's  report, not  a literal  interpretation,  and are  [the                                                               
administration's] sense of what was  in the working group's final                                                               
report.    In  regard  to the  first  recommendation  of  gradual                                                               
implementation and not forcing this  on the industry too quickly,                                                               
he  said $1  billion  would be  put into  a  transition fund  for                                                               
existing and  future liability; there  would be no attempt  to go                                                               
backwards with these changes.                                                                                                   
2:16:15 PM                                                                                                                    
REPRESENTATIVE HAWKER  charged that Mr. Alper  was very selective                                                               
about  what he  had chosen  from Senator  Giessel's report.   For                                                               
example, the  report says  to protect the  stability of  the Cook                                                               
Inlet supply and that encouraging  North Slope production to come                                                               
online will be  critical for the fiscal health of  the state.  In                                                               
regard to "gradual  implementation," he argued that  the words in                                                               
Senator  Giessel's report  state  "a  deliberate, methodical  and                                                               
graduated approach that still  honors commitments currently being                                                               
made under existing  law would be a reasoned strategy."   He said                                                               
he  doesn't think  that "a  deliberate, methodical  and graduated                                                               
approach"  translates  to  a "'gradual  implementation'  of  your                                                               
concepts here."                                                                                                                 
MR. ALPER replied:                                                                                                              
     PowerPoints  are inherently  a  little bit  compressed;                                                                    
     there was no attempt  to mischaracterize any point that                                                                    
     was  in there.   The  idea that  I believe  the senator                                                                    
     made, and her staff and  her team and what we're trying                                                                    
     to honor here,  is that we want to honor  what has been                                                                    
     earned to  date, what is  earned through  the effective                                                                    
     date of  this bill,  and make sure  that ...  we're not                                                                    
     pulling  the rug  out from  anybody who's  mid-process.                                                                    
     The rules  are going to  change at a future  date after                                                                    
     the end  of this  session at which  point the  way, and                                                                    
     the  rate,  and  the  rules under  which  we're  paying                                                                    
     people  back  will  hopefully  change.    Likewise,  in                                                                    
     considering the impacts on  different sectors ... there                                                                    
     were six  recommendations in the  report and  you could                                                                    
     certainly  deconstruct what  was actually  said in  the                                                                    
     six recommendations.                                                                                                       
2:17:56 PM                                                                                                                    
MR. ALPER resumed his discussion  of the recommendations on slide                                                               
15, stating  that [the administration]  feels it is  honoring the                                                               
second  recommendation  to  maintain   future  cash  support  for                                                               
Operating  Loss  Credits.    All the  different  sectors  of  the                                                               
economy  benefit  from  that  Operating   Loss  Credit  and  [the                                                               
administration]   wants  to   ensure  that   the  state   doesn't                                                               
completely  back away  from providing  cash support  for industry                                                               
activities.  Mr. Alper noted that  the third issue on slide 15 is                                                               
not in  the bill, but  said it is  an important idea  given there                                                               
have been  some high profile bankruptcies.   Unfortunately, there                                                               
may be  others, he continued,  and if that occurs  oftentimes the                                                               
secured lenders  in the big banks  in the East Coast  tend to get                                                               
paid  before  the  local  vendors  providing  local  procurement.                                                               
Although  not in  the bill,  [the administration]  would like  to                                                               
find a mechanism  to better protect Alaska's folks  because it is                                                               
2:18:48 PM                                                                                                                    
MR. ALPER  reviewed the  fourth recommendation  on slide  16 that                                                               
the minimum  [production] tax  "floor" be  protected, reiterating                                                               
that  Operating Loss  Credits have  been able  to penetrate  that                                                               
[floor]  and reduce  payments.   He said  that a  newly precisely                                                               
worded section in  the bill would do exactly  what is recommended                                                               
to protect that  flow.  The bill would also  increase the rate to                                                               
5 percent,  which is  not in the  senator's recommendations.   He                                                               
addressed the  fifth recommendation  in regard to  protecting the                                                               
Frontier  Basin  tax  breaks.   He  noted  that  exploration  tax                                                               
credits  for  the Interior  parts  of  the  state for  the  newly                                                               
developing areas have  already been extended in current  law to a                                                               
sunset of  2022.  He  said [the administration] intends  to honor                                                               
that and  keep that going,  which means that exploration  work in                                                               
the developing  areas in  the Interior  will continue  to receive                                                               
state  support  up  to  65  percent  of  their  cost.    That  is                                                               
important, these are  areas that have no  current production, but                                                               
[the  administration] believes  there's tremendous  potential and                                                               
wants to continue on some of  these projects that are in the very                                                               
early stages of their development.                                                                                              
2:19:48 PM                                                                                                                    
MR.  ALPER  addressed  the sixth  recommendation  that  reporting                                                               
requirements  be  enhanced, noting  that  it  is awkward  to  sit                                                               
before the committee  and be unable to name names  and talk about                                                               
specific projects and specific dollar amounts.  He continued:                                                                   
     It would  be easier to  have these conversations  if we                                                                    
     could  explain  who's  done what  and  how  much  money                                                                    
     they've got.   We don't want to talk about  how much of                                                                    
     taxes someone  pays or how  much they're  spending, how                                                                    
     much  money  they make.    But  if someone's  receiving                                                                    
     state cash benefit, we feel  just as we report how much                                                                    
     we pay  on chairs  or people's  salaries, we  should be                                                                    
       able to talk about specific companies and how much                                                                       
     money they earn in state refundable tax credits.                                                                           
2:20:57 PM                                                                                                                    
MR.  ALPER  turned  to  slides  17-22,  "Summary  of  Major  Bill                                                               
Provisions."   He advised  that a  printed sectional  analysis is                                                               
available  [on the  table] outside  the committee  room.   Rather                                                               
than going through the analysis by  order of the sections as they                                                               
occur in the bill, he said  he will present a "thematic" analysis                                                               
by type of issue and type  of proposed change that would be made.                                                               
He  began  with  the  bill's  proposed changes  in  the  area  of                                                               
exploration  credits [slide  17],  explaining that  the "Jack  up                                                               
Rig" credits  expire July 2016,  as do  most of the  AS 43.55.025                                                               
credits for  the North Slope and  for Cook Inlet.   However, they                                                               
have been extended for the  Middle Earth area, the Interior area,                                                               
until 2022.   The administration's policy  is to do nothing  - to                                                               
let these  things expire,  but to keep  the Middle  Earth credits                                                               
and let the North Slope and Cook Inlet credits go away.                                                                         
MR. ALPER  noted there  are a couple  of other  older exploration                                                               
credit statutes  on the  books that  have not  been used  in many                                                               
years [AS 38.05.180(i)  and AS 41.90].  Out of  concern that they                                                               
might be resurrected with the  loss of the alternative credit for                                                               
exploration, the  bill would preemptively repeal  them to prevent                                                               
any unforeseen credits that are  not currently being used to come                                                               
up  out of  the  woodwork.   He said  the  Department of  Natural                                                               
Resources (DNR) has  also been involved in the  development of HB
247,  having  made  several presentations  to  Senator  Giessel's                                                               
working group  last fall.  One  of DNR's concerns is  the loss of                                                               
information.  Through the exploration  credit program, DNR gets a                                                               
lot of  specific data, such as  seismic data and down  hole data,                                                               
and  DNR is  able  to use  that  data for  its  own planning  and                                                               
strategizing  and deciding  what areas  to lease  in the  future.                                                               
Some of that data becomes public  after a certain number of years                                                               
and can be  used by other companies.   [The administration] would                                                               
like to  respect and  protect that benefit  and attach  those DNR                                                               
data  reporting   requirements  [in  AS  43.55.025]   to  the  AS                                                               
43.55.023(b) credit, the Net Operating  Loss Credit, which is the                                                               
largest credit that will remain after the change.                                                                               
2:23:19 PM                                                                                                                    
MR. ALPER moved  to slide 18 to discuss the  bill's provisions in                                                               
the area of  Cook Inlet Drilling Credits.   Recognizing that this                                                               
might be the  most controversial provision, he  explained that it                                                               
would  repeal   AS  43.55.023(a)   [and  AS   43.55.023(l)],  the                                                               
Qualified  Capital Expenditure"  and the  Well Lease  Expenditure                                                               
Credit for Cook Inlet.  He said:                                                                                                
     Those are  the credits that are  typically stacked with                                                                    
     an  Operating  Loss Credit,  which  leads  to the  very                                                                    
     large numbers  - the  50, 60  percent state  support on                                                                    
     the spending  based credits.   Senate Bill  21 repealed                                                                    
     the comparable credits  on the North Slope,  so in some                                                                    
     ways we're  extending [Senate Bill] 21's  tax treatment                                                                    
     to  other  areas of  the  state.   Another  interesting                                                                    
     feature  of  current  law, and  it's  awkward  to  talk                                                                    
     about,  but  because  we   have  these  spending  based                                                                    
     credits commingled with a tax  cap for the hard maximum                                                                    
     tax, you have circumstances  where a profitable company                                                                    
     producing oil  and gas  in Cook  Inlet could  be paying                                                                    
     zero taxes  but still receiving relatively  large state                                                                    
     tax credit payments based  upon their activity drilling                                                                    
     wells, what  effectively becomes a large  negative tax.                                                                    
     By  repealing these  credits  we  would be  eliminating                                                                    
     that  and saying  ... through  2022 you'll  continue to                                                                    
     ...  pay  zero but  we're  not  paying you  credits  if                                                                    
     you're  not paying  taxes.   There is  an understanding                                                                    
     that before the Cook Inlet  tax caps repeal in 2022 the                                                                    
     legislature is going to need  to address the underlying                                                                    
     Cook Inlet tax regime.   It's something of a hybrid, it                                                                    
     draws  together pieces  of ACES  and [Senate  Bill] 21.                                                                    
     It's  probably not  stable, but  it doesn't  matter for                                                                    
     the next five or six  years because of the existence of                                                                    
     those tax caps.                                                                                                            
2:24:42 PM                                                                                                                    
REPRESENTATIVE  HAWKER pointed  out  that he  is  "the father  of                                                               
those tax  credits" and added  that brownout and  blackout drills                                                               
in Southcentral  Alaska were stopped because  "we were successful                                                               
in achieving what  we wanted to accomplish."   This committee saw                                                               
that  it accomplished  something good  and there  is always  that                                                               
need for a feedback loop to  evaluate it.  That's why Senate Bill                                                               
138   [passed  in   2014  by   the  Twenty-Eighth   Alaska  State                                                               
Legislature] included  a requirement that a  comprehensive review                                                               
be  performed in,  he believed,  January 2017  of the  Cook Inlet                                                               
Basin tax system to provide  a deliberate, rational, and analyzed                                                               
basis for  making changes.   However, HB  247 would  repeal those                                                               
credits  and would  repeal them  this year.   He  asked what  the                                                               
consequence will be  on his community and what will  be done when                                                               
there is  no heat  and no  lights in  his town  in the  middle of                                                               
winter.   Maintaining that  HB 247 would  repeal what  solved his                                                               
community's  problem,   he  further   asked  what   analysis  and                                                               
evaluation has  been done  to show  that repealing  these credits                                                               
will not hurt his community.                                                                                                    
COMMISSIONER  HOFFBECK  replied  that in  [the  administration's]                                                               
discussions with  industry right  now there  really is  a dynamic                                                               
within Cook  Inlet of gas  looking for a  market.  The  work that                                                               
was done  was successful.   So, it  begs the question  of whether                                                               
this level  of credits needs  to be  maintained at this  point in                                                               
time in  the life of  those fields.   The goal  was accomplished,                                                               
there is a reliable supply of gas  in Cook Inlet right now.  That                                                               
will last for  a while.  It may  be the case that in  four to ten                                                               
years from  now there might  be a  need to re-incentivize.   But,                                                               
given  the  budget  restrictions  that are  had  right  now,  the                                                               
question is whether it is  prudent to maintain those credits when                                                               
there is currently a gas supply available.                                                                                      
2:27:16 PM                                                                                                                    
REPRESENTATIVE  HAWKER  stated   that  Commissioner  Hoffbeck  is                                                               
answering his question with a  question.  He said the legislature                                                               
saw this coming  and agrees that it is time  to re-evaluate this.                                                               
Under the  previous administration,  he recalled, DOR  asked that                                                               
it be  given until January 1,  2017, to do a  true evaluation and                                                               
analysis  so  a  fact-based  decision   could  be  made.    While                                                               
anecdotally in talks with industry it  is being said there is gas                                                               
out  there,  one  of  the   major  players  in  the  Cosmopolitan                                                               
development said  on February 1  that it likely will  not develop                                                               
the natural gas in Cosmopolitan  if the legislature makes changes                                                               
to the  tax credit program.   He asked who else  will not develop                                                               
and reiterated his  question about what DOR has  done to evaluate                                                               
COMMISSIONER HOFFBECK responded that this  kind of runs into that                                                               
wall about who he can talk  about specifically.  However, what he                                                               
can  say is  that [DOR]  is still  in ongoing  conversations with                                                               
these companies  about what it  is going to  take to get  them to                                                               
the finish line.                                                                                                                
REPRESENTATIVE HAWKER remarked,  "But you'd like us  to pass this                                                               
bill and pull the rug out from  under them before they get to the                                                               
finish line."                                                                                                                   
COMMISSIONER  HOFFBECK  answered "I  expect  that  ... they  will                                                               
provide  you with  information and  we  can engage  in a  further                                                               
conversation as that information is provided."                                                                                  
2:29:04 PM                                                                                                                    
MR.  ALPER offered  his belief  that  the field  in question  has                                                               
several years'  worth of  gas supply  for Cook  Inlet potentially                                                               
that has been discovered, that is known.  He continued:                                                                         
     Should we  find ourselves  in a crisis  situation years                                                                    
     down the  road, it is  not as terrifying to  bring that                                                                    
     on because  we know  that it's  there.   The provisions                                                                    
     and  the benefits  in the  bill that  you carried  five                                                                    
     years ago have done  great things towards giving supply                                                                    
     certainty to  your constituents, no question....   That                                                                    
     supply is known and now it  is just a matter of getting                                                                    
     it ... "behind pipe,"  getting the wells drilled, which                                                                    
     is a lot different than going out and finding it.                                                                          
REPRESENTATIVE  HAWKER said  every  petroleum  engineer he  knows                                                               
says that nothing  actually counts until it's on  the surface and                                                               
pumping.  Once trying to develop  it, all kinds of challenges and                                                               
complications in getting it out  of the ground can be discovered.                                                               
For  example, the  Badami  Oil  Field has  some  of the  greatest                                                               
potential in  the state but  it's one  of the hardest  to develop                                                               
because of  being unable  to get anything  out of  the structure.                                                               
He  said  he  is  not  willing to  risk  his  community's  energy                                                               
security on comments here to just  "'trust us, we're going to get                                                               
there,'" and reiterated that he  doesn't like the idea of pulling                                                               
the rug out from under them now.   He said he is only asking that                                                               
he be  given a  competent, quality analysis  that shows  that his                                                               
community's  security  will be  retained,  rather  than just  the                                                               
"trust me" in this bill.                                                                                                        
COMMISSIONER  HOFFBECK  replied, "Some  of  that  we just  simply                                                               
can't provide the committee."                                                                                                   
REPRESENTATIVE HAWKER said he understands.                                                                                      
2:30:56 PM                                                                                                                    
REPRESENTATIVE TARR  commented that she feels  uncomfortable with                                                               
the idea that  her responsibility is to a company  rather than to                                                               
the people  she represents.  She  said that based on  some of the                                                               
comments that have been made she  needs to say on the record that                                                               
she hopes  those individual [companies] will  come testify before                                                               
the committee to  give a full picture of  their development plans                                                               
and  their reaction  as  to how  those plans  may  be changed  or                                                               
altered going  forward.  She  reiterated that  her responsibility                                                               
is  to the  people  she  represents and  their  many needs  going                                                               
forward,  not the  individual companies,  and the  committee must                                                               
balance all of those needs.                                                                                                     
2:31:48 PM                                                                                                                    
REPRESENTATIVE   SEATON,  regarding   the  Cook   Inlet  drilling                                                               
credits, noted  that one of the  fields being talked about  is in                                                               
his  district.   He  stated that  subsidizing  an operation  with                                                               
money from state coffers for gas  that has no market unless it is                                                               
exported  may  be of  value  to  the  company,  but seems  to  be                                                               
something  that  [the committee]  needs  to  consider.   That  is                                                               
another part  of this mixture of  things of what [the  state] can                                                               
afford to  subsidize, give credits  for, when there are  no taxes                                                               
being paid on that for an  export market.  While he is interested                                                               
in listening to  the arguments on this side, he  said he wants to                                                               
put it on the marketability of that gas.                                                                                        
MR. ALPER,  following up  on Representative  Seaton's statements,                                                               
stated that the  credits in question in Cook  Inlet were intended                                                               
for issues  of gas security,  but they  were not limited  to just                                                               
gas development  and exploration work.   A lot of that  money has                                                               
been spent on companies that were  looking for an increase in oil                                                               
production from  Cook Inlet, which  is great because there  is no                                                               
problem with more oil - it is  jobs, revenue, and export - but it                                                               
is  not quite  the matter  of life  and death  for the  people of                                                               
Southcentral as gas  supply issues are.  A large  amount of these                                                               
Cook Inlet credits  have, frankly, been spent  on oil development                                                               
2:33:37 PM                                                                                                                    
MR. ALPER turned to slide 19  to discuss the bill's provisions in                                                               
the  area  of repurchase  limits.    He  noted that  the  current                                                               
restriction [AS  43.55.028(e)(4)] says  companies with  more than                                                               
50,000  barrels a  day must  hold their  certificates until  they                                                               
have  future production.   Those  limitations  would be  expanded                                                               
under HB 247 to say a  company with global annual revenue greater                                                               
than $10 billion per year will hold  its note.  In other words, a                                                               
company with an  economy that is larger than the  State of Alaska                                                               
probably doesn't  need the state's  cash money and can  support a                                                               
project  on  its  own  balance   sheet.    The  bill  would  also                                                               
reinstitute the  2006/2007 PPT-era repurchase cap  of $25 million                                                               
per company  per year.   An Alaska  hire provision would  also be                                                               
included, an  idea that the governor  himself came up with.   The                                                               
idea,  for example,  is  that if  a company  has  $10 million  in                                                               
credit repurchase  coming to it  and has 70 percent  Alaska hire,                                                               
the state  would give the company  $7 million, 70 percent  of its                                                               
credit  based on  its  Alaska hire  percentage,  and the  company                                                               
would carry  forward the rest  of the credit  until it had  a tax                                                               
2:34:39 PM                                                                                                                    
REPRESENTATIVE  HERRON inquired  as to  where else  in the  world                                                               
this is done.                                                                                                                   
MR. ALPER  responded he does not  have an answer, but  that he is                                                               
not so  sure there is  that many places  in the world  where they                                                               
are giving refundable  cash credits for oil  and gas development;                                                               
so it is a fairly narrow universe to compare to.                                                                                
2:35:07 PM                                                                                                                    
REPRESENTATIVE   HAWKER  asked   what   the  purpose   is  of   a                                                               
government's tax revenue system.                                                                                                
COMMISSIONER  HOFFBECK  answered  it  is  to  collect  taxes  for                                                               
revenue for state operations.                                                                                                   
REPRESENTATIVE  HAWKER inquired  whether the  purpose of  the tax                                                               
system is to enact social policy.                                                                                               
COMMISSIONER HOFFBECK replied that, in his opinion, no.                                                                         
2:35:40 PM                                                                                                                    
MR. ALPER  returned to slide  19 and addressed the  last proposed                                                               
change in  regard to  repurchase limits,  stating that  a company                                                               
would have 10 years to use  its carried-forward loss credits.  If                                                               
a company  does not  come into production  and have  a meaningful                                                               
tax liability within 10 years,  then those credits would start to                                                               
MR. ALPER moved  to slide 20 to address the  bill's provisions in                                                               
the  area  related to  removing  exceptions  and loopholes.    He                                                               
explained that as [DOR] started  processing credits it found that                                                               
there are a  couple of features in existing law  that can inflate                                                               
a  Net Operating  Loss Credit  to larger  than what  it might  be                                                               
intended to  be.  For example,  it was found that  a company with                                                               
an operating loss  that is a new producer eligible  for the Gross                                                               
Value  Reduction  is  able  to  use  the  GVR  as  a  subtraction                                                               
mechanism from its taxable profits  intended to reduce taxes, but                                                               
a company at a loss is able to  use that GVR to increase the size                                                               
of  its operating  loss  on  paper and  then  the Operating  Loss                                                               
Credit  is  tied  to  that  adjusted number,  which  has  led  to                                                               
situations where [the  state] is literally paying  a company more                                                               
than 100  percent of its  loss through refundable credits.   That                                                               
was a surprise  that DOR took through the legal  system and found                                                               
that  in  fact that  is  a  literal  interpretation of  what  the                                                               
statute says and  the hope is to fix that.   Another exception or                                                               
loophole has  to do  with a  municipal utility.   When  a utility                                                               
owns gas  production and is burning  the gas in its  own turbines                                                               
and  supplying its  own customers,  it  is not  a taxable  event.                                                               
However, if  the utility has  a little bit of  surplus production                                                               
that it sells  to a third party, a literal  interpretation of the                                                               
law says  the utility can take  that tiny amount of  revenue that                                                               
comes from  selling 1 or 2  percent of its production  and offset                                                               
all  of the  utility's expenses  against  it for  the purpose  of                                                               
calculating certain  credits and certain  benefits.  That  is one                                                               
of those things where the lawyers  say that is what [the statute]                                                               
says, but [DOR] doesn't think that  is what it is supposed to say                                                               
and would like to get that cleaned up.                                                                                          
2:37:39 PM                                                                                                                    
REPRESENTATIVE SEATON  requested Mr.  Alper to explain  the Gross                                                               
Value  Reduction (GVR),  noting  that sometimes  it  is called  a                                                               
credit or  it becomes a  credit.  He  asked whether it  is really                                                               
just a credit and being applied in different ways.                                                                              
MR. ALPER replied he does  not consider the Gross Value Reduction                                                               
a credit per  se because it is a subtraction  from taxable value.                                                               
It is an awkward calculation.   He explained that during hearings                                                               
in 2013  on Senate  Bill 21  the assumption was  an oil  price of                                                               
$100 per barrel.  At $100  the oil in question results in roughly                                                               
$50  a barrel  in  taxable profits.    It was  then  said that  a                                                               
benefit would  be given  to companies  for any  oil that  met the                                                               
criteria for being  new oil.  So  a mechanism was set  up to turn                                                               
that $50 into $30 - that for  the purposes of the tax system only                                                               
$30 of that  profit would be taxed and the  state would therefore                                                               
effectively collect  less taxes.   Mr. Alper posed a  scenario in                                                               
which a company loses $10  [per barrel] because it's drilling new                                                               
wells and spending  more than it's earning, or  it's losing money                                                               
because the  price of oil  has collapsed  and now the  company no                                                               
longer has  profits.  Under  normal circumstances,  he explained,                                                               
that $10  loss would result  in an  Operating Loss Credit.   Last                                                               
year that was 45 percent,  so in the aforementioned scenario [the                                                               
state] would pay that company  $4.50 for every barrel produced in                                                               
which it  had a $10 loss.   However, implementation of  the Gross                                                               
Value Reduction  turns that negative  $10 into a negative  $30 on                                                               
paper -  the company  gets to  subtract what  should be  a profit                                                               
reducer  for tax  purposes to  become a  loss increaser.   So  45                                                               
percent of  a $30 loss  is $13.50 and  now [the state]  is paying                                                               
that  company $13.50  a barrel  on that  barrel that  the company                                                               
actually lost $10  producing.  So, no, [DOR]  doesn't consider it                                                               
a credit; the term would be a value offset.                                                                                     
2:39:53 PM                                                                                                                    
REPRESENTATIVE  SEATON  inquired  whether   there  would  be  any                                                               
distinction if  it was said  that the state  is going to  give 20                                                               
percent credit on the value of the oil produced.                                                                                
MR.  ALPER  responded that  during  the  several years  prior  to                                                               
Senate Bill 21 different variations  of oil tax reform bills were                                                               
working  their way  through  the legislature,  and  there was  an                                                               
attempt to find a mechanism to give  benefits to new oil.  It's a                                                               
technically  complicated conversation  because expenditures  tend                                                               
to be  commingled and there  are de-coupling issues, so  tying it                                                               
to  a  percentage  of  gross  value  was  sort  of  the  cleanest                                                               
mathematical means of doing it.   He said he supposed it could be                                                               
a  credit, but  the credit  would have  to be  tied to  the gross                                                               
value  of the  production,  not  the net,  because  it's hard  to                                                               
separate out net value from field  to field.  There are different                                                               
ways  to  do  it,  he  continued.    The  governor  supports  the                                                               
existence of  a specific benefit for  new oil.  If  the committee                                                               
wished to try  to re-address that and find a  different way to do                                                               
it, he would be happy to put together some ideas.                                                                               
2:41:08 PM                                                                                                                    
REPRESENTATIVE SEATON  commented that  it seems like  it is  a 20                                                               
percent credit on the gross value  of the oil and it's applied as                                                               
a credit  since it  is taken  off through  the calculations.   He                                                               
could be  misunderstanding this, he  allowed, and that is  why he                                                               
is  trying to  find  out  why this  isn't  just  considered a  20                                                               
percent credit on the gross value.                                                                                              
MR. ALPER  answered that  in a  loss situation,  in many  ways it                                                               
could be.  But how to characterize  it as a credit in a situation                                                               
where the producer in question is profitable?  He continued:                                                                    
     By subtracting a  percentage of gross value  from a net                                                                    
     profit  number, there's  a multiplier  in place  ... it                                                                    
     depends on  the ratio  of their costs  to the  value of                                                                    
     the  oil.   Colloquially,  we say  a  20 percent  gross                                                                    
     value reduction  is roughly equivalent to  a 40 percent                                                                    
     reduction  in  net value.    That's  not actually  true                                                                    
     today, that was  true a few years ago  when prices were                                                                    
     higher.   But, it was  intended to, round  numbers, cut                                                                    
     the company's  taxes in  half.   In today's  world it's                                                                    
     greater than  that because the  new oil is able  to pay                                                                    
     at the  zero level  and the  old oil  is paying  at the                                                                    
     minimum tax  level, so  it's an  infinite cut  of their                                                                    
     taxes - it cuts all of their taxes.                                                                                        
2:42:43 PM                                                                                                                    
MR. ALPER moved  to slide 21 to address the  bill's provisions in                                                               
the area  related to  strengthening the  minimum tax,  the floor.                                                               
Under HB  247, a company would  actually have to pay  the minimum                                                               
tax, he  said, which in current  statute is 4 percent  at current                                                               
prices.   A  company  would not  be able  use  an Operating  Loss                                                               
Credit or  a Small  Producer Credit or  an Exploration  Credit to                                                               
offset the minimum  tax.  The minimum tax would  be a minimum and                                                               
if a  company has credits  that it has  earned in excess  of that                                                               
and they  can be  carried forward, then  the company  would carry                                                               
them into  the next year.   He qualified  that the next  point he                                                               
will  address  is  awkward  and hard  to  say  without  violating                                                               
confidentiality.   In DOR's two-page credit  estimate report from                                                               
the Revenue Sources  Book, he said that one or  more of the major                                                             
producers will  show a net  operating loss  for 2015.   What does                                                               
that  mean?    The  way  the law  is  written,  that  company  or                                                               
companies  will be  able to  turn their  loss into  a 45  percent                                                               
Operating Loss  Credit and beginning  in January use  that credit                                                               
to offset  their minimum tax  payments all  the way down  to zero                                                               
until such time, presuming prices  stay low in 2016, that they're                                                               
able to work  through their operating loss credit and  use it all                                                               
up.  This  will be seen on  the credit forecast as  a North Slope                                                               
credits used against tax liability  in the AS.43.55.023 category.                                                               
"We  feel  that the  major  producers  should  be paying  at  the                                                               
minimum tax," he  said, "that that's what the minimum  tax is for                                                               
and by  implementing this we're going  to say 'no, in  fact the 4                                                               
percent is true and you carry  it forward into the next year when                                                               
there are higher  profits and therefore higher  tax liability and                                                               
you  could  use it.'"    He  pointed out  that  this  is the  one                                                               
provision of the bill that  [the administration] is requesting be                                                               
made  retroactive to  January 1,  2016, because  of the  specific                                                               
situation just outlined.                                                                                                        
MR.  ALPER  addressed the  second  bill  provision on  slide  21,                                                               
explaining that the other expansion  of the floor is to so-called                                                               
"new" oil.   The  GVR-eligible new  oil can go  to zero  and [the                                                               
administration]  wants to  make that  oil  pay at  the 4  percent                                                               
level  as  well.    Moving  to the  third  provision  related  to                                                               
strengthening  the minimum  tax, he  said the  Per-Taxable-Barrel                                                               
Credits can  sort of  migrate from month  to month  under current                                                               
law.  There are  months in which the credits get  cut off and are                                                               
unused because  the minimum tax  gets in  the way, they  can only                                                               
subtract  so much.   What  [DOR] found  specifically in  calendar                                                               
year 2014  where there was  a lot of  volatility in the  price of                                                               
oil - from over $100 in  January and down into much lower numbers                                                               
at the end of the year - companies were able to move their per-                                                                 
barrel credits  around when  the true-up happened  at the  end of                                                               
the year and  large refunds to certain companies  were written at                                                               
the end of  calendar year 2014 that were not  expected.  The bill                                                               
makes  a change  that  would turn  the Per-Taxable-Barrel  Credit                                                               
into more of  a true monthly calculation.  Turning  to the fourth                                                               
provision, Mr.  Alper said  the bill  would increase  the minimum                                                               
tax  rate itself  from  4  percent [at  prices  above  $25] to  5                                                               
2:45:42 PM                                                                                                                    
REPRESENTATIVE JOSEPHSON, regarding the migrating Per-Taxable-                                                                  
Barrel Credit,  inquired whether  migrating means, in  effect, it                                                               
can be carried  forward to a different month but  within the same                                                               
year and the industry could wait for a more profitable month.                                                                   
MR. ALPER  replied the  production tax  is an  annual tax,  not a                                                               
monthly tax.  It is a  very long, precise, and convoluted section                                                               
of law  that talks  about how a  company makes  monthly estimated                                                               
tax payments.   Then there  is what  is called true-up  where the                                                               
company pays its  taxes at the end of the  year and commingles it                                                               
all.   It is  not so much  carrying it forward.   When  a company                                                               
does  the combined  calculation  as opposed  to  the 12  separate                                                               
calculations, it  ends up being  able to  use more of  those per-                                                               
barrel credits  that it  wasn't able to  use in  a month-by-month                                                               
2:46:44 PM                                                                                                                    
REPRESENTATIVE HAWKER requested  Mr. Alper to clarify  what he is                                                               
talking about when talking about Per-Taxable-Barrel Credits.                                                                    
MR. ALPER responded:                                                                                                            
     Per-Taxable-Barrel    Credit    ...   is    ...    what                                                                    
     [Representative   Hawker]    said   earlier    in   the                                                                    
     presentation was not really a  credit but an offset but                                                                    
     a  component  of the  tax.    This is  the  subtraction                                                                    
     mechanism  in   [Senate  Bill]   21  for   North  Slope                                                                    
     production  that says  here's this  35 percent  tax and                                                                    
     then you get a reduction in  that tax of between $0 and                                                                    
     $8  per barrel,  which is  tied  to the  price of  oil.                                                                    
     That per-barrel credit is based  on the price of oil in                                                                    
     that  month so  that  it varies  from  month to  month.                                                                    
     However,  in  those months  were  it  might be  at  the                                                                    
     highest level, $8  a barrel, those are  the months when                                                                    
     the  prices are  very low  and  if the  prices are  low                                                                    
     enough  the companies  don't  get to  use  the full  $8                                                                    
     because the minimum tax payment  gets in the way.  They                                                                    
     can  only   use  them  until   it  gets  cut   off  and                                                                    
     essentially foregone at the minimum  tax.  What happens                                                                    
     though  at annual  true-up if  there is  volatility and                                                                    
     higher value  in earlier  months, the  foregone credits                                                                    
     from  one   month  could  be   used  to   offset  taxes                                                                    
     effectively from another month.                                                                                            
2:47:53 PM                                                                                                                    
REPRESENTATIVE HAWKER responded:                                                                                                
     You  hit  exactly  my  point here  and  thank  you  for                                                                    
     clarifying  that these  ... Per-Taxable-Barrel  Credits                                                                    
     are  really the  GVR,  the Gross  Value Reduction  that                                                                    
     we're talking about here.                                                                                                  
MR. ALPER answered:                                                                                                             
     No,  Representative Hawker,  the  GVR  is the  new-oil-                                                                    
     specific   subtraction   mechanism    to   reduce   the                                                                    
     production tax  value for what's called  new oil fields                                                                    
     that they pay the 35 percent  on a smaller number.  The                                                                    
     Per-Barrel Credit  is calculated  after the  35 percent                                                                    
     tax and  it's subtracted  from tax liability;  it's the                                                                    
     production-based tax.                                                                                                      
2:48:26 PM                                                                                                                    
REPRESENTATIVE HAWKER  offered his appreciation for  the clarity.                                                               
He recalled that the House  Resources Standing Committee had days                                                               
of testimony  on this  exact issue  and it was  a policy  call of                                                               
this  committee  and  the  legislature that  the  desire  was  to                                                               
average these things  because when "you try to isolate  them on a                                                               
monthly basis  you do get  anomalous results that are  really not                                                               
intended in that we want to  look at business on its annual cycle                                                               
rather than  saying 'okay this month  you made a bunch  and we're                                                               
going to take every  bit of it, next month you  get a loss, we're                                                               
not going  to give you  much value for  that, and we're  going to                                                               
effectively increase our  government take by taxing  you on these                                                               
spikes.'"   It  was  a  policy call  of  this  committee and  the                                                               
legislature not to do that.   [The administration] is asking [the                                                               
committee and legislature] to take  a complete reversal in policy                                                               
MR. ALPER offered  two observations.  First, when  the tax reform                                                               
effort  of 2013  took  place the  conversation  before the  House                                                               
Resources Standing Committee and every  committee were on a range                                                               
of oil prices between $80 and roughly $120.  He continued:                                                                      
     I don't personally  believe that adequate consideration                                                                    
     was given to what happens  outside that range and we're                                                                    
     finding realities that were unanticipated.   We did not                                                                    
     know what  would happen; technical features  of the law                                                                    
     that are  acting in unpredictable and  unknown ways and                                                                    
     we're trying to react to  those.  Secondly, I would say                                                                    
     ...  when we  got to  the end  of 2014  we thought  the                                                                    
     taxes were collected.   We projected at  the time about                                                                    
     $525 million  in production tax revenue;  a combination                                                                    
     of a few months of high  prices and a few months of low                                                                    
     prices.   We  were frankly  surprised at  when the  tax                                                                    
     returns came  in at the end  of March to learn  that we                                                                    
     owed  close to  $150 million  in refunds  based on  the                                                                    
     feature  that we're  talking  about  in this  provision                                                                    
     right  here, the  ability to  move some  credits around                                                                    
     within  the  year.   And  in  a  time of  great  fiscal                                                                    
     shortfall that  was $150 million  that we  didn't think                                                                    
     we wanted  to spend but we  had to per the  law the way                                                                    
     it was written.                                                                                                            
REPRESENTATIVE HAWKER responded:                                                                                                
     I  agree.   You're looking  to make  a new  policy call                                                                    
     here that is going to  take some selling to convince us                                                                    
     that  the decisions  we made  - at  least to  me -  the                                                                    
     decisions  we made  previously  which  I will  disagree                                                                    
     with  you  that  I  do   believe  we  did  an  adequate                                                                    
     diligence in our  process in this committee  and in the                                                                    
     legislature....   If  that is  your allegation  that we                                                                    
     had  an inadequate  process here,  I think  we need  to                                                                    
     have a conversation in the public about that.                                                                              
2:51:10 PM                                                                                                                    
MR. ALPER resumed his presentation,  moving to slide 22 to review                                                               
the other provisions  in HB 247.  Regarding  the bill's provision                                                               
for interest  rate reform, he  noted that all versions  of Senate                                                               
Bill  21 had  an interest  rate reform  section and  all previous                                                               
versions  had  compound  interest.   However,  a  late  technical                                                               
amendment  to that  section  in the  final  committee, the  House                                                               
Finance  Committee, led  to the  scenario where  [the state]  now                                                               
only collects  simple interest  on underpayments  and assessments                                                               
when [DOR] audits  and says a company owes more  money.  That's a                                                               
technical  correction that  needs to  be made,  he said,  as [the                                                               
administration] believes  it was the  intent of the body  to have                                                               
compound interest because every version of  the bill had it.  The                                                               
late technical  amendment in the  House Finance  Committee didn't                                                               
discuss  that change,  so  the  bill would  clean  that  up.   He                                                               
     More importantly  and more  material, we're  looking to                                                                    
     increase  the interest  rate.   Right now  the interest                                                                    
     rate on underpaid taxes is  3 percent above the federal                                                                    
     discount rate.   This quarter  it's 4 percent.   It was                                                                    
     11  percent  under  the previous  law;  that  was  most                                                                    
     likely  too high.    The thinking  we  have inside  the                                                                    
     administration  is  presuming  that   we  are  soon  or                                                                    
     eventually going to  be in one way  or another spending                                                                    
     the  state's   savings,  spending  earnings   from  the                                                                    
     permanent  fund, partially,  to  help fund  government,                                                                    
     every  dollar  that  we  don't  get  in  taxes  because                                                                    
     someone didn't  pay them  is a dollar  we have  to take                                                                    
     out  of savings.   And  when  we finally  do get  paid,                                                                    
     because  we've audited  that taxpayer,  we  want to  be                                                                    
     paid  back  for  our  opportunity costs,  for  what  we                                                                    
     would've  earned  on  that  dollar  had  it  stayed  in                                                                    
     savings over  the intervening  years.   So we  want the                                                                    
     interest rate  for tax delinquency tied  roughly to the                                                                    
     expected rate  of return for the  permanent fund, which                                                                    
     is around 7 percent.                                                                                                       
2:52:48 PM                                                                                                                    
MR. ALPER  continued on slide  22, saying the  bill proposes                                                                    
another  major change  - the  confidentiality  waiver.   "We                                                                    
just want  to name  the companies," he  said, "and  how much                                                                    
they've received in state repurchased credits."                                                                                 
MR. ALPER addressed the bill's proposed technical change                                                                        
related to transportation costs.  He said:                                                                                      
     Suddenly in  an era of  very low prices we  are seeing,                                                                    
     especially  in  those  more  remote  fields  that  have                                                                    
     higher tariffs, we have transportation  costs that in a                                                                    
     moment  in time  might  exceed the  market  value.   We                                                                    
     could have  gross value at  the point of  production of                                                                    
     less  than zero.    That's unprecedented  circumstance.                                                                    
     We don't know how that  will be implemented, so we just                                                                    
     want to clean that up and  want to specify in the gross                                                                    
     value  at  the point  of  production  statutes that  it                                                                    
     can't be brought below zero.                                                                                               
MR. ALPER discussed the last provision on slide 22 in                                                                           
regard to credit certificates.  He said:                                                                                        
     And, finally,  right now  if you  have earned  a credit                                                                    
     and you owe ... any state tax  - it could be a fish tax                                                                    
     or a  tobacco tax  - we could  offset that  tax against                                                                    
     your credit.   However,  if you have  other obligations                                                                    
     to the state, for example  a royalty or a lease payment                                                                    
     or some other judgement,  we can't necessarily do that.                                                                    
     We want  to loosen that up  and say before we  give you                                                                    
     cash for your credits we  want to offset any obligation                                                                    
     that  you  might have  to  the  state.   And  that's  a                                                                    
     technical  change that's  made and  there's a  bunch of                                                                    
     conforming  language  throughout  the bill  that  makes                                                                    
     that change.                                                                                                               
2:54:10 PM                                                                                                                    
CO-CHAIR NAGEAK stated that the  administration will continue its                                                               
presentation  on  HB 247  at  the  next  meeting.   He  said  the                                                               
committee needs to  be deliberate and ask questions  in regard to                                                               
addressing  these  challenges.   The  administration,  committee,                                                               
industry,  and others  need to  work  together to  make sure  the                                                               
future  is clear  during these  times of  harsh finance  and find                                                               
something that will work.                                                                                                       
[HB 247 was held over.]                                                                                                         

Document Name Date/Time Subjects
HB247 ver A.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HB247 Sponsor Statement.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HB 247
HB247 Sectional Analysis.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HB247 Fiscal Note - FUNDCAP-OIL & GAS TAX CREDIT FUND-2-1-16.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HB247 Fiscal Note - DOR-TAX-2-1-16.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HB 247 Production Tax Credits FY07-FY25 Excel Table_Figure 8-4_Fall 15 RSB.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HB 247 Oil Credit Bill - Key Features 2-2-16.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HB247 Fiscal Note #1-DNR-DOG-01-11-16.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HB 247
HB 247 - HSE RES DOR 1st Presentation- OG Credit Reform Bill 2-2-16.pdf HRES 2/3/2016 1:00:00 PM
HB 247