Legislature(2015 - 2016)BARNES 124

03/08/2016 01:00 PM RESOURCES

Note: the audio and video recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.

Download Mp3. <- Right click and save file as

Audio Topic
01:03:51 PM Start
01:04:41 PM HB247
02:54:11 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Testimony <Invitation Only> --
Dept. of Revenue Oil & Gas Tax Credit Overview
by Ken Alper, Director, Tax Division
+ Bills Previously Heard/Scheduled TELECONFERENCED
           HB 247-TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                        
1:04:41 PM                                                                                                                    
CO-CHAIR NAGEAK announced  that the only order  of business would                                                               
be  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."                                                                    
1:04:49 PM                                                                                                                    
KEN ALPER,  Director, Tax Division, Department  of Revenue (DOR),                                                               
on behalf  of the governor,  continued the sectional  analysis of                                                               
HB  247  that  he  had  begun  on  2/12/16  entitled,  "Sectional                                                               
Analysis, HB 247, Governor's Oil  and Gas Tax Credit Reform Bill,                                                               
January  22, 2016."   [In  that presentation  Mr. Alper  reviewed                                                               
Sections 1-18.]                                                                                                                 
MR. ALPER  brought attention  to Section  18, explaining  that it                                                               
relates  to the  concern where  a producer  is in  production and                                                               
enjoys  a Gross  value reduction  (GVR), but  is in  an operating                                                               
loss and can use that GVR  to increase the size of the producer's                                                               
Net operating loss credit.  He  recalled that DOR, as well as the                                                               
legislature's  consultant, Janak  Mayer of  enalytica, previously                                                               
provided slides  showing how  that calculation  could lead  to an                                                               
operating loss  credit significantly  higher than 35  percent and                                                               
possibly in certain  circumstances in excess of 100  percent.  He                                                               
further recalled  that Mr.  Foley of  Caelus Energy  Alaska, LLC,                                                               
testified  that  this  would  impact his  company.    Caelus,  he                                                               
continued, is the sort of  company that one could imagine getting                                                               
this  sort  of condition  -  a  smaller  producer that  might  be                                                               
operating  at a  loss because  of  a low  price environment,  but                                                               
because it  is producing  new oil that  production would  use the                                                               
gross value reduction,  which could be used to  increase the size                                                               
of  an operating  loss.   He drew  attention to  the language  in                                                               
Section 18 of  the bill that would handle the  problem:  "For the                                                               
purpose of  a credit under  this subsection, any  reduction under                                                               
AS  43.55.160(f)  or   (g)  [the  GVR]  is  added   back  to  the                                                               
calculation  of  production tax  values  for  that calendar  year                                                               
under  AS 43.55.160  for the  determination of  a carried-forward                                                               
annual loss."  In other words,  Mr. Alper explained, the GVR is a                                                               
benefit  if it  is about  reducing a  company's taxes,  but in  a                                                               
circumstance of an operating loss  the GVR effectively gets added                                                               
back and the tax is calculated as  if the GVR did not exist.  The                                                               
intent of  this provision is  to resolve  what DOR and  Mr. Mayer                                                               
believe  is   an  unanticipated   consequence  of  how   the  GVR                                                               
interfaces with an operating loss at low prices.                                                                                
1:07:51 PM                                                                                                                    
CO-CHAIR TALERICO  inquired as  to how  significant of  an impact                                                               
this would be to [a company].                                                                                                   
MR. ALPER  replied that  the smaller  producers with  the smaller                                                               
volumes are the producers who  would generally benefit from this,                                                               
so it is not  a $100 million line item because  there is not that                                                               
much tax in play.  For  example, a company with an operating loss                                                               
of  $10  million  under  normal   circumstances  might  enjoy  an                                                               
operating loss  credit of  $3.5 million.   With the  interplay of                                                               
the GVR that  could be turned into  a loss of $30  million and an                                                               
operating loss credit  of $11 million; so,  in that circumstance,                                                               
the GVR increases  the size of the credit by  $7-$8 million.  The                                                               
high end of the dollar value  attached to this provision could be                                                               
two or three times that.                                                                                                        
1:08:49 PM                                                                                                                    
REPRESENTATIVE SEATON asked  whether this would also  be the case                                                               
for developing a field of 750 million barrels as modeled by DOR.                                                                
MR. ALPER  responded that plausibly,  yes, there could be  a much                                                               
larger  number.   What would  have to  happen is  that the  large                                                               
field would  get developed and then  be operated at loss.   While                                                               
that would be an awkward  circumstance it certainly could happen,                                                               
especially  in  an   individual  year.    A   company  making  an                                                               
investment that size is not  going to be anticipating losses, but                                                               
that size  field would  be 100,000  barrels a  day or  roughly 35                                                               
million  barrels  year.   Those  35  million  barrels with  a  20                                                               
percent gross  value reduction, or a  30 percent GVR in  the case                                                               
of a high royalty field,  could be a fairly substantial increase.                                                               
He therefore concluded that he might  need to revise what he said                                                               
to  Representative  Talerico  in  the  context  of  a  big  field                                                               
operating at a loss.                                                                                                            
1:10:16 PM                                                                                                                    
REPRESENTATIVE TARR, given that a  750 million barrel field would                                                               
take several  years to  get to  production, questioned  whether a                                                               
single year  isolated in  that multi-year  project would  be that                                                               
dramatically different.   Although, she continued,  that has been                                                               
seen  when looking  at the  last few  years.   She requested  Mr.                                                               
Alper to  speak to  how a  company might  adjust its  activity to                                                               
reflect  a scenario  like  today  where there  was  a very  rapid                                                               
decline in price in a very  short amount of time, but the company                                                               
still decided to go forward with that sizeable development.                                                                     
MR. ALPER  answered that he  thinks the more  likely circumstance                                                               
is  that  the price  happens  after  the  field  is done  and  in                                                               
production.    So,  the  investment would  have  been  made,  the                                                               
company is  in production,  and suddenly there  is a  major price                                                               
collapse.   He did  a quick  calculation:   35 million  barrels a                                                               
year  at a  gross value  of $40  per barrel  would equal  a total                                                               
gross value of  $1.5 billion; 20 percent of $1.5  billion is $300                                                               
million.   If that $300 million  is used to increase  the size of                                                               
an operating loss it could  increase the operating loss credit by                                                               
35 percent  of that, or about  another $105 million.   He said he                                                               
will provide  the committee  with a  written calculation  of this                                                               
scenario since this calculation was off the top of his head.                                                                    
REPRESENTATIVE  SEATON requested  Mr. Alper  to also  provide the                                                               
committee with  a calculation  on the  16 percent  royalty, which                                                               
would be the 30 percent GVR.                                                                                                    
MR. ALPER agreed  to do so and said he  will provide the analysis                                                               
in the same  format as was previously presented  to the committee                                                               
that describes the calculation in Section 18.                                                                                   
1:12:52 PM                                                                                                                    
REPRESENTATIVE  JOSEPHSON  noted  Point Thomson  was  constructed                                                               
rapidly, going from  tundra to fully developed field in  a two or                                                               
three years,  and is entitled  to the  GVR.  He  inquired whether                                                               
that would be a situation that might be problematic.                                                                            
MR. ALPER responded yes, in theory.   The owners of Point Thomson                                                               
for the  most part  have other business  operations on  the North                                                               
Slope, he said,  so they have other production.   Any losses from                                                               
Point Thomson would  be offset potentially by  profits from other                                                               
parts of the field.   Their other production is legacy production                                                               
that does not  enjoy the gross value reduction, so  the amount of                                                               
GVR they  would be receiving  is relatively minor in  the context                                                               
of their  overall production profile,  which is different  from a                                                               
company like  Caelus that has  all of  its production in  the GVR                                                               
1:14:00 PM                                                                                                                    
MR. ALPER returned to his  sectional analysis.  He explained that                                                               
Section 19 would  harden the floor - the credits  in AS 43.55.023                                                               
could not  reduce tax  liability below  the minimum  tax.   It is                                                               
primarily the  operating loss credit  that is being  talked about                                                               
here, because other provisions in the  bill look at repeal of the                                                               
capital credit  and the well  lease expenditure credit.   This is                                                               
the circumstance that  would primarily refer to  a major producer                                                               
that is not  eligible to get cash for its  operating loss credits                                                               
and so that credit  is carried forward into the next  year.  In a                                                               
scenario of two consecutive years of  low prices where there is a                                                               
loss after one  year, like what is happening  now, then beginning                                                               
in  January of  the  second  year a  company  would typically  be                                                               
paying 4  percent of its  gross value  as a monthly  tax payment,                                                               
but  that could  be  offset by  an operating  loss  credit.   The                                                               
change  proposed  by  Section  19 would  force  that  company  to                                                               
continue to  carry forward  its operating  loss credit  into some                                                               
future  month   or  some  future   year  where  the   prices  had                                                               
sufficiently recovered to where the  company could use the credit                                                               
to offset taxes  but not go below  the minimum tax.   For as long                                                               
as things  stayed at the  floor level  the company would  have to                                                               
continue to carry forward that  credit.  Section 19 also proposes                                                               
to  put an  expiration on  certain operating  loss credits,  such                                                               
that if this were to happen and  then a company cannot use up its                                                               
credits within  10 years,  the credits  would be  truly foregone.                                                               
The net  operating loss credits would  go away after 10  years if                                                               
the company was not able to use them.                                                                                           
1:15:47 PM                                                                                                                    
REPRESENTATIVE  TARR,  regarding  the  proposed  10-year  sunset,                                                               
asked what would happen if  during that time period other changes                                                               
were made to taxes that  affected that company's operations.  She                                                               
further asked whether those would  be separated and "in the bank"                                                               
for the company regardless of other tax changes.                                                                                
MR. ALPER answered  that it is important to go  back to the issue                                                               
of what is a credit.  When  a company earns a credit, applies for                                                               
the  credit, and  gets awarded  the credit  by the  Department of                                                               
Revenue, it  shows up in the  form of a credit  certificate.  The                                                               
credit  certificate is  an asset,  a thing  that the  company has                                                               
physical possession  of that it  will use  to either turn  in for                                                               
cash or  use against its taxes.   So, the answer  to the question                                                               
is no, the  subsequent changes would not affect  the existence of                                                               
the company's certificate,  the company would hold  it until such                                                               
time as  it had  a tax liability  and use it.   The  other option                                                               
that any company has is to  sell the certificate.  If the company                                                               
does not owe any taxes it  can sell that certificate to a company                                                               
that  does owe  taxes.   While  a company  selling a  certificate                                                               
generally gets less  than 100 cents on the dollar,  it is able to                                                               
get value for its credit certificate.                                                                                           
1:17:32 PM                                                                                                                    
MR. ALPER  resumed his  sectional analysis.   He said  Section 20                                                               
works with Section 19 and  would create the statutory language to                                                               
establish  that there  is a  10-year sunset  on the  existence of                                                               
certain credits.                                                                                                                
REPRESENTATIVE JOHNSON posed a scenario  in which a company sells                                                               
its  credit certificate  in  year  nine and  eleven  months.   He                                                               
inquired  whether the  person  purchasing  the certificate  would                                                               
have one month  to cash the certificate, or would  have ten years                                                               
from that point to cash it.                                                                                                     
MR.  ALPER  replied  that  10  years is  the  life  span  of  the                                                               
certificate itself.   So, if the certificate is  sold after nine-                                                               
plus years  the buyer would only  have a limited period  of time.                                                               
Ideally  at  that point  the  person  buying the  certificate  is                                                               
someone who has an active tax liability at that moment.                                                                         
REPRESENTATIVE  JOHNSON  said  he  wants to  be  clear  that  the                                                               
certificate expirations could not be stacked.                                                                                   
MR. ALPER responded that the intent  of the proposed change is to                                                               
have that flow with the life of the certificate itself.                                                                         
1:18:35 PM                                                                                                                    
MR. ALPER  continued his sectional  analysis.  He  specified that                                                               
Section 21  is conforming  language related  to Section  40 which                                                               
would repeal  the qualified capital  expenditure (QCE)  credit in                                                               
AS  43.55.023(a).     Due  to  that  proposed   change,  lots  of                                                               
conforming language is  needed where other parts  of existing law                                                               
refer to different sections in  .023, especially (a).  Section 21                                                               
itself does  not really matter; this  section of the bill  has to                                                               
do with conditions under which  credits can be transferred.  [The                                                               
language in AS 43.55.023(e)] states,  "Subject to the limitations                                                               
set out in (a)  - (d) of this section ...."  He  said "(a) - (d)"                                                               
would be  changed to read  "(b) - (d)"  because (a) is  no longer                                                               
going to  exist.  Thus, it  is a conforming change  that reflects                                                               
the repeal of (a) elsewhere in the bill.                                                                                        
MR. ALPER  said Section 22 is  new statute, is important,  and is                                                               
language  that  DOR  developed with  the  Department  of  Natural                                                               
Resources (DNR).   He explained that  existing exploration credit                                                               
statutes  require certain  data  to  be provided  to  [DNR] as  a                                                               
condition of receiving  those credits.  Generally,  this data can                                                               
be made public after 10 years  and most is seismic data, but also                                                               
some downhole  wellbore-type information.  One  of DNR's concerns                                                               
with the  impending sunset  of the  exploration credits,  many of                                                               
which are going away this July  regardless of HB 247, is that DNR                                                               
will not be able to get that  data and make it public any longer.                                                               
That data  is used  by DNR  as a  marketing strategy  for selling                                                               
leases in Alaska's  oil patch.  Section 22 says  that a recipient                                                               
of the  remaining credits  that exist in  law, the  net operating                                                               
loss  credit   primarily,  would  be  required   to  provide  its                                                               
comparable geological  data to DNR so  that the data can  then be                                                               
made public 10 years later.                                                                                                     
1:20:57 PM                                                                                                                    
REPRESENTATIVE  JOSEPHSON asked  whether the  thought is  that if                                                               
the owner  of the data  did not use it  to some benefit  within a                                                               
decade it might as well be made into transparent public data.                                                                   
MR. ALPER  answered that in general  the data was bought  in part                                                               
with  a  state resource,  the  credit  money, and  therefore  the                                                               
thinking was  that the state  gets something tangible  in return.                                                               
The sharing of the data  with DNR for DNR's internal confidential                                                               
purposes  is  part of  general  statute  and  that is  not  going                                                               
anywhere.   What  is  specific  here is  that  that data  becomes                                                               
public  in 10  years  and DNR  can  share  it.   He  said he  was                                                               
previously concerned this might lead  to too much data, such that                                                               
new  computers would  be required  to be  able to  deal with  it.                                                               
However, in  a conversation with DNR  a day or so  ago he learned                                                               
that for  the most part  DNR is already  getting the data.   What                                                               
would  be changed  is the  terms  and conditions  under which  it                                                               
could be shared and made public.                                                                                                
1:22:05 PM                                                                                                                    
MR.  ALPER turned  back to  his sectional  analysis, noting  that                                                               
changes for  the hardening of the  tax floor are made  in various                                                               
places in  the bill  because the floor  is being  hardened versus                                                               
multiple credits.   Section 23 would  make a change to  the small                                                               
producer credit in AS 43.55.024(g).   This credit can be received                                                               
by producers that  make less than a certain volume  of oil or gas                                                               
and  this credit  maxes  out at  $12 million.    This credit  can                                                               
currently  be used  on the  North Slope  to reduce  tax liability                                                               
below the  minimum tax all  the way down  to zero.   The proposed                                                               
change in Section 23 would force  small producers to pay at the 4                                                               
percent level and not be able to use that credit to go below.                                                                   
MR. ALPER  specified that Section  24 is another  floor hardening                                                               
provision that  describes the $5 per-taxable-barrel  credit under                                                               
AS  43.55.024(i),  which  is  the analog  to  the  sliding  scale                                                               
credit.   The sliding scale  credit of  $0-$8 is for  legacy oil,                                                               
the old  fields that are paying  the minimum tax.   The so-called                                                               
new oil  that gets the  $5 per-taxable-barrel credit can  be used                                                               
by  a company  to go  below the  minimum tax.   Section  24 would                                                               
change  that so  new  producers would  also have  to  pay at  the                                                               
minimum tax level regardless of the price of oil.                                                                               
MR.  ALPER  noted that  Section  25  [would amend  AS  43.55.025]                                                               
relating  to  exploration  credits,  to  the  extent  that  these                                                               
credits still remain.  If on  the North Slope those credits could                                                               
not be used to bring the tax  payments below the minimum tax of 4                                                               
percent of the  gross.  Sections 23, 24, and  25 are of identical                                                               
structure  and would  just  specifically  change three  different                                                               
credits to say  that the credits cannot be used  to go below that                                                               
4 percent floor level.                                                                                                          
1:24:31 PM                                                                                                                    
REPRESENTATIVE JOSEPHSON, regarding Section  24, understood it is                                                               
not   DOR's  position   that  this   falls  under   the  arguably                                                               
inadvertent category.   In other words, it was  understood by the                                                               
committees  in 2013  that along  with  the privilege  of the  GVR                                                               
there would  be yet  another privilege attached  to it  where the                                                               
tax could drop beneath the 4 percent floor.                                                                                     
MR.  ALPER replied  yes, absolutely.   He  said he  remembers the                                                               
hearings  before the  House Resources  Standing  Committee.   The                                                               
language  evolved,   but  when  the  sliding   scale  credit  was                                                               
introduced  in   the  final  committee  substitute,   because  AS                                                               
43.55.024(i)  had  also previously  been  a  $5 credit  (i)  very                                                               
explicitly said it could  not be used to go below  zero.  And (j)                                                               
said  it  could  not  be  used   to  go  below  the  minimum  tax                                                               
calculation,  the  reference  to  AS 43.55.011(f)  which  is  the                                                               
minimum tax on North Slope oil.  This was very much intentional.                                                                
1:25:45 PM                                                                                                                    
MR. ALPER  recommenced his sectional  analysis.  He  said Section                                                               
26  proposes  several changes  that  talk  about limitations  and                                                               
being  able  to use  credit  certificates.    This is  not  about                                                               
earning  the credits,  the credits  are going  to be  earned, the                                                               
work is going to be done, and  the company is going to have these                                                               
certificates.  The follow up here  is whether the company can use                                                               
them open-endedly to get cash.   For a company in the category of                                                               
50,000 barrels  or more, the  answer is  currently yes, it  is an                                                               
open-ended  ability.   Section  26  would  add several  different                                                               
limitations to  that.   [Currently], if a  company owes  taxes to                                                               
the state  it cannot  get paid  the credits.   First  the company                                                               
must use the  credits to pay its  taxes or DOR will  pay them for                                                               
the company  by holding  back the credits  sufficient to  pay the                                                               
tax  liability owed  by  the  company.   The  intention here  and                                                               
elsewhere in the bill is to expand  upon that to say if a company                                                               
owes other  obligations to the state  - such as a  royalty, lease                                                               
payment, or a fine - the state would  be able to use a tax credit                                                               
payment to  pay that off.   The first  part of Section  26 [would                                                               
amend  AS 43.55.028(e)(2)]  to conform  to that  intended change.                                                               
The  language,  "the  applicant  does  not  have  an  outstanding                                                               
liability to the state", would  be amended by deleting the words,                                                               
"for unpaid  delinquent taxes under this  title", thus broadening                                                               
it to all unpaid liabilities to  the state.  This change is small                                                               
and conforming, but meaningful.                                                                                                 
1:28:47 PM                                                                                                                    
The committee took a brief at-ease.                                                                                             
1:29:11 PM                                                                                                                    
CORRI FEIGE,  Director, Central  Office, Division  of Oil  & Gas,                                                               
Department of  Natural Resources  (DNR), addressed Section  22 in                                                               
regard to the  addition of the data coming into  DNR and when the                                                               
existing tax credit  programs expire.  She said DNR  did some in-                                                               
house  due diligence  on that  and determined  that it  would not                                                               
create extra volume  of data for the department.   Something that                                                               
DNR  would  like members  to  be  aware  of  because it  will  be                                                               
material,  is that  this  would now  be  taking production  data,                                                               
development  data, and  making that  data public,  as opposed  to                                                               
just  the exploration  data.   That is  one key  difference going                                                               
forward.  However,  in terms of the volume of  data, the division                                                               
currently   does  receive   all  of   the  production   data  and                                                               
development data,  but it is just  not made public at  this time.                                                               
This language  proposes to change  that, and that data  would now                                                               
become public as well as any exploration data.                                                                                  
1:30:37 PM                                                                                                                    
REPRESENTATIVE SEATON  understood Ms.  Feige to  be saying  it is                                                               
not the same data of  well or seismic exploration, but additional                                                               
data for a  company's current operations, as on page  18, line 9,                                                               
of the bill.                                                                                                                    
MS. FEIGE clarified that currently  under the tax credit programs                                                               
the  division  receives  exploration,  well,  and  seismic  data.                                                               
Moving this language into the  new legislation would allow DNR to                                                               
continue to receive the exploration,  seismic, and well data when                                                               
the tax  credit programs expire,  and that data will  continue to                                                               
go public.   What will  be new is that  any seismic data  that is                                                               
acquired within  an existing producing unit,  any production well                                                               
data  acquired within  a producing  unit, would  also now  become                                                               
public.   Under current statute  the unit data that  is collected                                                               
is  considered development  or production  data, not  exploration                                                               
data,  and  that information  as  well  as  the seismic  data  is                                                               
currently  held  confidential  into  perpetuity.    The  division                                                               
receives that  data under other  statute and under the  lease and                                                               
permit requirements.                                                                                                            
REPRESENTATIVE  SEATON  asked Mr.  Alper  whether  the intent  of                                                               
Section 22 is to make it  be all future production data, not just                                                               
the seismic or well data that was the basis of the credits.                                                                     
MR. ALPER responded  that his understanding of the  intent was to                                                               
replicate the data that the  division is currently receiving that                                                               
it would not be able  to receive simply because those exploration                                                               
credits are  sunsetting.  He said  he is not personally  aware of                                                               
the net  being broadened  into additional data.   He  deferred to                                                               
the Department of Law to provide clarification.                                                                                 
MARY  HUNTER   GRAMLING,  Assistant  Attorney   General,  Natural                                                               
Resources  Section, Civil  Division (Juneau),  Department of  Law                                                               
(DOL), drew attention to page 18  of the bill, lines [3-4], which                                                               
state, "A producer  or explorer shall comply with  the notice and                                                               
information  provision requirements  in AS  43.55.025(f)(2) ...."                                                               
She  explained that  (f)(2) currently  applies only  to explorers                                                               
seeking  credit  under  that  section.   This  would  move  those                                                               
requirements to  explorers or producers  seeking a  net operating                                                               
loss credit,  in effect,  so it  would potentially  broaden that.                                                               
She offered her  belief that the administration  would be willing                                                               
to work to narrow that if that is the intent of the committee.                                                                  
1:34:17 PM                                                                                                                    
REPRESENTATIVE JOHNSON  understood that this is  an existing unit                                                               
and the  state would  get additional information.   He  asked why                                                               
that would need to be made  public unless the state was trying to                                                               
sell a unit out from under someone.                                                                                             
MR. ALPER  answered he is  not personally familiar with  what DNR                                                               
has previously received  in exploration credits.   He offered his                                                               
understanding that  what Ms.  Gramling said  is that  because the                                                               
language  is being  moved from  the exploration  credits section,                                                               
which is quite  explicit to only being new areas  at the fringes,                                                               
and attaching the  requirement to the data to  the operating loss                                                               
credit, it  is in effect  putting those requirements  on anything                                                               
that earns  the operating loss  credit, which would  then include                                                               
the stuff inside  the units.  He  said he does not  know what the                                                               
public purpose in  making those things public in 10  years is and                                                               
suggested that it might be  an inadvertent byproduct of trying to                                                               
make  this  change  of  trying   to  protect  DNR's  interest  of                                                               
continuing  to get  the exploration  and seismic  data for  DNR's                                                               
planning purposes.  The expectation  is those activities with the                                                               
sunset of the exploration credit  will still be seeking operating                                                               
loss credits, so the hook to  continue to get that data for those                                                               
expenses  has  to  be  somehow attached  to  the  operating  loss                                                               
credit.  It  is not the administration's desire to  get that data                                                               
from  these other  things, it  sounds like  it is  an inadvertent                                                               
byproduct of the way the bill was written.                                                                                      
REPRESENTATIVE JOHNSON said his concern  is the part about making                                                               
it public  and what purpose  it serves  unless it is  to remarket                                                               
the  unit to  someone else.   His  concern is  about the  kind of                                                               
confidence  that  would be  instilled  in  people trying  to  buy                                                               
leases from the state, so he would like to revisit this.                                                                        
MR.  ALPER   agreed  and   reiterated  that   that  is   not  the                                                               
administration's intent.   A lot of the seismic  data received by                                                               
DNR is not necessarily shot  inside someone's unit boundaries, he                                                               
continued.  The department has  an excellent network of data that                                                               
goes all over  the North Slope; DNR uses that  data to market the                                                               
unleased areas of  the state.  Obviously no one  is in a position                                                               
to  lease something  that is  already  leased.   However, if  the                                                               
state has  information that  is inside  somebody's line  it might                                                               
help lure someone to buy a lease on the other side of the line.                                                                 
REPRESENTATIVE JOHNSON  remarked that if  he is feeling  a little                                                               
paranoid then  he cannot  imagine what  the industry  is feeling.                                                               
He stated for the record that it  is not the intention to do this                                                               
as  part  of the  public  record,  but  is  more than  likely  an                                                               
oversight in the drafting of this legislation.                                                                                  
MR.  ALPER  agreed and  said  the  intent  of  Section 22  is  to                                                               
preserve the  information that DNR currently  gets from explorers                                                               
and find a mechanism for DNR  to obtain data with the expectation                                                               
the  exploration credits  themselves  are  sunsetting.   Anything                                                               
beyond that is an inadvertent byproduct of the drafting.                                                                        
1:38:09 PM                                                                                                                    
REPRESENTATIVE TARR  observed that page  18, line 8, of  the bill                                                               
states  that the  Department of  Natural Resources  "may" publish                                                               
this  information.   She surmised  this leaves  it up  to DNR  to                                                               
describe whether that information would  be made public after the                                                               
10-year period.                                                                                                                 
MR. ALPER replied  that that is his  understanding, but requested                                                               
that Ms. Feige be able to answer the question.                                                                                  
MS. FEIGE responded that up to  this point the department and the                                                               
division  have exercised  the ability  to  make that  exploration                                                               
data public.   Whether there is potential for  commercial harm is                                                               
always considered.   For example, if a company has  well data and                                                               
there  is unleased  lake acreage  on one  side or  adjacent to  a                                                               
block,   the  company   can  request   an   extended  period   of                                                               
confidentiality  on   exploration  well  data  to   preserve  its                                                               
commercial  interest.   In many  cases the  division has  granted                                                               
those  extensions.   However,  there  is  no ability  to  request                                                               
extended  confidentiality for  seismic  data  acquired under  the                                                               
credit programs.  Typically seen  are very broad surveys run over                                                               
very large regional  areas.  Also, brokers could  have much older                                                               
vintages of  data in  areas and those  areas will  often overlap.                                                               
She said she does not know  of a situation where the seismic data                                                               
has  been set  aside and  not considered  for being  made public,                                                               
unless it is  on private lands or some other  aspect that removes                                                               
it from the  division's ability to make it public.   The division                                                               
is only now in the process  of publishing and making available to                                                               
the public  the very first  releases of seismic data  under those                                                               
credit programs.  That data was collected in 2004 and 2005.                                                                     
REPRESENTATIVE TARR  understood that because the  credits go away                                                               
this provision would provide a  mechanism to get the information.                                                               
The division,  however, would  have the  ability to  control what                                                               
information is released.                                                                                                        
MS.  FEIGE answered  correct.   The division  would have  to work                                                               
with DOR  in making sure  that DNR could  put together a  list of                                                               
projects that will have data  that comes available.  That becomes                                                               
more problematic when talking about  development data and the in-                                                               
unit  data because  of the  confidentiality associated  with even                                                               
claiming  a tax  credit.   So,  as mentioned  by  Mr. Alper,  the                                                               
division  would have  to work  together with  DOR to  ensure that                                                               
only the exploration  data is captured and meeting  the intent of                                                               
the  data release  as it  is defined  in the  current exploration                                                               
credit programs.                                                                                                                
1:42:20 PM                                                                                                                    
REPRESENTATIVE  JOSEPHSON noted  that Section  22 is  an entirely                                                               
new  section.   He understood  Ms. Feige  to be  saying that  DNR                                                               
currently  has some  discretion,  it writes  the regulations  and                                                               
reaches some sort  of agreement with the producers.   He recalled                                                               
Ms.  Feige stating  that the  division works  with the  producers                                                               
wanting  an extension  of confidentiality.   He  inquired whether                                                               
this is how Ms. Feige sees this provision working as well.                                                                      
MS. FEIGE replied no.   She explained that presently the division                                                               
would  receive  a  request  from an  explorer;  for  example,  an                                                               
explorer that drilled an exploration  well.  Only the exploration                                                               
well  data  qualifies for  an  extension  of the  confidentiality                                                               
period.  At present, well data  is held confidential for a period                                                               
of two  years.  If  the explorer  feels there would  be potential                                                               
commercial  harm  to  itself  or  some  other  factor  where  the                                                               
explorer would be harmed by  the release of that exploration well                                                               
data, the explorer  can, under statute, apply to  the division to                                                               
have an  additional 24 months  of confidentiality placed  on that                                                               
well data.  The division  sees that fairly routinely, for example                                                               
a lot  of the Native corporations  would like their well  data on                                                               
their lands  held confidential.   Where exploration  seismic data                                                               
is  concerned, that  data  cannot be  extended  under the  credit                                                               
programs and it is released at the end of the 10-year period.                                                                   
1:44:12 PM                                                                                                                    
REPRESENTATIVE  SEATON  requested that  DNR,  DOR,  and DOL  work                                                               
together to develop  and submit a narrowed version  of Section 22                                                               
to just simply extend the current data and disclosures.                                                                         
CO-CHAIR NAGEAK asked Mr. Alper whether this can be done.                                                                       
MR. ALPER requested an at-ease so he could check with DOL.                                                                      
1:44:47 PM                                                                                                                    
The committee took a brief at-ease.                                                                                             
1:45:14 PM                                                                                                                    
MR.  ALPER responded  that a  narrowed version  can be  done, but                                                               
confirmation  with  the governor's  office  is  needed before  an                                                               
amendment can be  proposed, which is the nature  of the amendment                                                               
process.  He said he presumes the ability would be given.                                                                       
REPRESENTATIVE TARR,  in regard  to what the  state gets  for the                                                               
credits, said  this changes the value  in her mind and  she would                                                               
like to  better understand that piece  of it.  She  surmised that                                                               
this information can  be used for further  development or leasing                                                               
work, so a monetary value could be assigned to that.                                                                            
MS. FEIGE  answered that  the division  has done  a "back  of the                                                               
envelope" estimation of  what it would cost the  state to acquire                                                               
the seismic data that up to  this point has been received through                                                               
credit  programs.   She  elaborated  that  it  was a  high  level                                                               
planning number  and was presented during  Senator Giessel's 2015                                                               
tax credit  working group presentations.   She agreed  to provide                                                               
the committee  with the numbers  calculated for  that acquisition                                                               
value for both the North Slope and the Cook Inlet.                                                                              
1:46:58 PM                                                                                                                    
CO-CHAIR  NAGEAK  asked that  members  submit  their requests  in                                                               
writing  to the  committee co-chairs  so that  the co-chairs  can                                                               
then share the information with every committee member.                                                                         
1:47:16 PM                                                                                                                    
MR. ALPER  returned to his  sectional analysis and  continued his                                                               
review of  Section 26.   He  specified that  this section  is the                                                               
limitations   on   the   state  purchasing   credits   under   AS                                                               
43.55.028(e).  He drew attention to  page 19, lines 15-17, of the                                                               
bill which state:  "(4)  the applicant's average daily production                                                               
of oil and gas taxable  under AS 43.55.011(e) during the calendar                                                               
year  preceding the  calendar year  in which  the application  is                                                               
made was not  more than 50,000 BTU equivalent barrels".   He said                                                               
this  is the  large producer  exception [in  current law],  under                                                               
which a  producer of this  size cannot  get cash for  its credits                                                               
and must  instead roll its  credits forward and use  them against                                                               
future liability.                                                                                                               
MR. ALPER said  Section 26 would add two  other restrictions, the                                                               
first proposed restriction being  in paragraph (5) which provides                                                               
that  if  a  company's  revenue  from its  overall  oil  and  gas                                                               
business worldwide during the previous  calendar year was greater                                                               
than $10 billion,  the company would not be eligible  to get cash                                                               
for  its credits.   The  company would  have to  hold its  credit                                                               
certificates on  its books until  the future  date when it  has a                                                               
tax liability and then use  the certificates to offset its taxes.                                                               
He noted  that companies of this  size are comparable in  size to                                                               
Alaska's major  producers that are  unable to get cash  for their                                                               
credits  anymore  and  must  save  them until  they  have  a  tax                                                               
liability.  The  second proposed restriction is  in paragraph (6)                                                               
which establishes  a limit on  credit repurchases of  $25 million                                                               
per company  per year.   That would be the  cap on how  much cash                                                               
money the state would pay  every year to each company, regardless                                                               
of how  much the company  had in possession in  tax certificates;                                                               
the rest the company would either  sell to a third party or carry                                                               
forward  and use  in the  next  year.   Mr. Alper  noted that  in                                                               
regard  to the  10-year  sunset  there is  a  first in/first  out                                                               
provision so that  the older credits would be able  to be used up                                                               
first so as not  to get sunset, and the new  ones coming in later                                                               
would keep the clock rolling further into the future.                                                                           
1:49:47 PM                                                                                                                    
REPRESENTATIVE TARR recalled that  discussion has occurred on the                                                               
idea  of  additional restrictions  on  who  is eligible  for  the                                                               
credits  and  perhaps  making  it   phased  to  final  investment                                                               
decision, or something  like that.  She asked  whether Section 26                                                               
is the appropriate place for fitting in something like this.                                                                    
MR. ALPER replied  that to a certain extent it  is the other half                                                               
of  the equation  of  possible  restrictions on  who  can earn  a                                                               
credit tied to current status of  having a plan of development or                                                               
some   sort  of   pre-approval  process   (which  was   discussed                                                               
internally but did not get into  the bill) that the Department of                                                               
Revenue  would apply  for a  company getting  a project  approved                                                               
before it  could earn  a credit.   That would be  on the  half of                                                               
earning  the  certificate,  he  advised.   The  changes  made  by                                                               
Section 26  are relatively silent  on who is earning  the credit;                                                               
they are relevant to when the  company has the credit and how the                                                               
company would  get cash for  it.  He said  he thinks the  two are                                                               
important  factors in  a broader  reform effort  potentially, but                                                               
they are opposite sides of the same coin.                                                                                       
1:51:12 PM                                                                                                                    
REPRESENTATIVE JOSEPHSON observed  that page 19, line  11, of the                                                               
bill  would  delete the  language  "for  unpaid delinquent  taxes                                                               
under this  title".  He  inquired whether  this is a  solution in                                                               
search of  a problem  and whether  this is happening  a lot.   He                                                               
said he assumes that  if royalty is due on January  1 or March 31                                                               
it gets paid, so he wonders what is being dealt with here.                                                                      
MR.  ALPER responded  that  this  is not  something  that was  an                                                               
historic problem.   It is  being witnessed in the  environment of                                                               
bankruptcies  in  the industry,  where  if  a company  is  having                                                               
severe  cash  flow  problems   and  potentially  heading  towards                                                               
bankruptcy it might not make  that royalty payment or that annual                                                               
lease payment,  or the company might  have a fine that  it is not                                                               
paying.   But  yet  the company  might just  from  the timing  of                                                               
things have  the expectation  of receiving  a tax  credit payment                                                               
from state.  Should the company  receive that payment in whole it                                                               
is  up to  the  company's discretion,  or if  the  company is  in                                                               
bankruptcy it is  the court's discretion, as to  where that money                                                               
might  go and  it  might  never make  it  back  to the  company's                                                               
obligations  to the  state.   Generally there  will be  a secured                                                               
creditor or someone  in position in front of the  state.  Several                                                               
interlinked  provisions  in  HB  247 speak  to  this  outstanding                                                               
liability to  the state.   The intent is  to ensure the  state is                                                               
made whole before the credit leaves  the state system and is paid                                                               
to  the  company.    Mr.  Alper recounted  that  there  has  been                                                               
pushback  that this  could be  interpreted too  broadly, that  it                                                               
could be used  to hold back a credit certificate  for someone who                                                               
is  a legitimate  protestor or  in a  legitimate appeals  process                                                               
against a tax assessment.  He  said DOR is prepared to talk about                                                               
and  consider that  point, but  that  is not  why the  department                                                               
wrote  this.   The department  wrote this  not for  the reputable                                                               
companies  that are  continuing to  go about  their business  and                                                               
paying everything  that they owe, but  for those who are  more at                                                               
the margins to protect the state's interest.                                                                                    
REPRESENTATIVE  JOSEPHSON  asked  whether  there  is  some  quick                                                               
appeasement  that could  be offered  where there  is a  statutory                                                               
section that talks about legitimately disputed royalty or tax.                                                                  
MR. ALPER answered  that the language that  is amended throughout                                                               
the bill  takes the sections  that say "outstanding  liability to                                                               
the  state  for  unpaid  delinquent  taxes",  a  well  understood                                                               
concept, and  gets rid of the  words "for unpaid taxes".   So, it                                                               
leaves the  words "outstanding liability  to the state"  and then                                                               
Section 39  adds a  new definition  of "outstanding  liability to                                                               
the  state"  after  the definition  section  inside  the  broader                                                               
revenue statutes.   What Representative Josephson  is speaking to                                                               
would  require some  sort  of tightening  or  limitation on  that                                                               
definition and that is where the fix  would be if there is a need                                                               
for  a fix  or a  need for  some additional  certainty that  this                                                               
provision would not be overused.                                                                                                
1:54:39 PM                                                                                                                    
MR. ALPER, responding to Representative  Johnson, read Section 39                                                               
aloud:  "'outstanding liability to  the state' means an amount of                                                               
tax,  interest, penalty,  fee, rental,  royalty, or  other charge                                                               
for which the state has issued  a demand for payment that has not                                                               
been  paid when  due  and,  if contested,  has  not been  finally                                                               
resolved  against the  state."   He  allowed that  this could  be                                                               
interpreted to  include a regular  tax assessment that may  be in                                                               
the appeals process.  He said  that if the committee's intent was                                                               
to not  include that sort of  thing, then in his  opinion that is                                                               
the portion of the sentence the committee would look to amend.                                                                  
1:55:26 PM                                                                                                                    
REPRESENTATIVE   TARR  inquired   whether   DOR  would   consider                                                               
something  that is  in  an  appeals process  as  being an  unpaid                                                               
liability rather than in appeals status.                                                                                        
MR. ALPER replied that the decision  would be made by the appeals                                                               
group that looks  to these things.  To him,  a demand for payment                                                               
that has  not been paid  and is being contested  almost perfectly                                                               
defines what  DOR's tax  assessment process looks  like.   At the                                                               
end  of an  audit, DOR  will say  to Company  X that  it owes  $5                                                               
million and Company X  will say it does not, and  then it goes to                                                               
appeals.   That is a demand  for payment which has  not been paid                                                               
and is  being contested.  So,  as he reads this  definition, that                                                               
appeals process would fall under this expanded definition.                                                                      
1:56:20 PM                                                                                                                    
REPRESENTATIVE HERRON asked whether  this new proposed definition                                                               
is only for Title 43 or is broader than that.                                                                                   
MR. ALPER  responded that  under current law  any tax  owed under                                                               
Title 43 can already be used  to offset the credit.  The language                                                               
proposed to be  deleted, "for unpaid delinquent  taxes under this                                                               
title", refers to all of Title  43.  Getting rid of this language                                                               
would broaden it to all chapters.   The main chapter is 38, which                                                               
is where the royalty and DNR-type payments come in.                                                                             
1:57:09 PM                                                                                                                    
MR. ALPER  returned to  his sectional analysis.   Section  27, he                                                               
said, would add another restriction  on the ability to repurchase                                                               
credits, so  it would  be AS  43.55.028(j).   It would  scale the                                                               
buyback  of a  credit certificate  to Alaska  hire such  that the                                                               
percentage of  the certificate purchased by  the department could                                                               
not exceed  the percentage  of the  applicant's workforce  in the                                                               
state.   The  workforce  would include  resident  workers by  the                                                               
company as  well as its contractors.   The portion not  paid back                                                               
would  be carried  forward  and used  against  the company's  tax                                                               
liability.   For example, a  company with 70 percent  Alaska hire                                                               
and a  certificate of $10  million would  be given $7  million by                                                               
DOR and  the other $3 million  would be carried forward  and used                                                               
against future taxes.                                                                                                           
1:58:12 PM                                                                                                                    
REPRESENTATIVE TARR noted  her support for the  concept of Alaska                                                               
hire.  She posed a  circumstance where the technical expertise of                                                               
a  skilled  worker is  needed,  but  such  an individual  is  not                                                               
available  in the  Alaska workforce.    She asked  how a  company                                                               
would be able to address that.                                                                                                  
MR. ALPER answered that there is  no such waiver provision in the                                                               
bill as written.   It would likely be  technically complicated to                                                               
do, but  it certainly could be  written.  In practical  terms the                                                               
company  being described  by Representative  Tarr  might have  95                                                               
percent Alaska  hire or  less if  it had  to bring  up a  team of                                                               
special project experts  from Outside.  That  is a consideration,                                                               
he allowed, but the reality  is that hopefully those numbers will                                                               
not  get  to the  number  where  it is  a  severe  burden on  the                                                               
payback.   If people limited their  out of state hiring  to where                                                               
they  absolutely have  to,  hopefully they  would  be getting  90                                                               
percent or more  on their money.   He pointed out that  it is not                                                               
taking  the  money  from  anyone,   that  money  remains  in  the                                                               
certificate  and  gets  rolled   forward  and  used  against  tax                                                               
liability.  When the  inevitable constitutional challenge occurs,                                                               
DOR is hoping  that it is not taking cash  from anybody's pocket,                                                               
it is just changing the way in which it is being given to them.                                                                 
REPRESENTATIVE  TARR  commented  she wanted  to  understand  this                                                               
provision better given there is  concern over whether there would                                                               
be a challenge.                                                                                                                 
1:59:59 PM                                                                                                                    
REPRESENTATIVE  SEATON, regarding  Section 27,  surmised that  it                                                               
would  still be  a  transferable  credit that  could  be sold  to                                                               
another company for that company to apply to its tax liability.                                                                 
MR. ALPER replied  he expects it would be sellable  and the buyer                                                               
would be  able to  cash it in.   He deferred  to Ms.  Gramling to                                                               
further answer the question.                                                                                                    
MS.  GRAMLING  offered  her understanding  that  the  credit  not                                                               
purchased  by the  state under  this provision  would still  be a                                                               
transferrable  tax credit  certificate.   By  not purchasing  100                                                               
percent of  the credit, the  state might be actually  helping the                                                               
market for these  certificates.  A distinguishing  factor of this                                                               
provision compared to other tax  credit limitations that may have                                                               
tried  local hire  in the  past is  that here  the repurchase  of                                                               
credits  is not  integral  to  the calculation  of  the tax,  the                                                               
company earns the credit amount.   So, this provision is limiting                                                               
how the state  invests its money.  An  important distinction here                                                               
is that the credit certificate  is still available for future use                                                               
if the  company had  a tax  liability, and  if the  company could                                                               
sell  the remaining  portion to  another company  that had  a tax                                                               
liability then that other company  could apply it against its tax                                                               
liability.   Transferable tax credits  if they are sold  can only                                                               
be used against  tax liability, the person buying  it cannot then                                                               
ask the state to purchase it.                                                                                                   
2:02:21 PM                                                                                                                    
REPRESENTATIVE  JOSEPHSON inquired  whether  it is  true for  all                                                               
transferrable credits  that they  must be used  against liability                                                               
in every instance in Alaska statutes.                                                                                           
MS.  GRAMLING responded  she  is unsure  about  film tax  credits                                                               
which were purchasable  by the state, but  production tax credits                                                               
that are  transferable can either  be used against  tax liability                                                               
by a company  that buys them or by the  company that earned them.                                                               
If  the  company that  earned  them  does  not transfer  them  to                                                               
another producer  and does not  have tax liability, then  that is                                                               
when the company is applying to the state for repurchase.                                                                       
REPRESENTATIVE JOSEPHSON  asked whether the purchaser  of the tax                                                               
credit [certificate] would be obligated to do local hiring.                                                                     
MS. GRAMLING answered no, under  existing law a person purchasing                                                               
a credit from another producer cannot  then apply to the state to                                                               
repurchase  that credit;  it would  have to  be used  against the                                                               
person's tax liability.  That would remain unchanged.                                                                           
REPRESENTATIVE  JOSEPHSON understood  that a  company could  sell                                                               
off part of the credit.                                                                                                         
MS. GRAMLING replied correct.                                                                                                   
REPRESENTATIVE  JOSEPHSON  surmised  that  this  entire  endeavor                                                               
could be undermined by a company  saying, "Well, all we can do is                                                               
85 percent,  we'll just sell the  other 15 and we'll  collect ...                                                               
90 cents on the dollar and we don't have to do this local hire."                                                                
MS.  GRAMLING  responded  that basically  the  credit  still  has                                                               
value, it is just whether or  not the state would be repurchasing                                                               
it.   The  local  hire provision  would kick  in  when the  state                                                               
repurchases a credit.                                                                                                           
2:04:31 PM                                                                                                                    
REPRESENTATIVE SEATON remarked that  trying to promote local hire                                                               
has  always  been  problematic.    While  a  little  complex,  he                                                               
continued, it  seems like  this is probably  the first  legal way                                                               
for  the  state to  take  out  of the  treasury  and  pay on  the                                                               
percentage  of  local  hire  but  still not  take  away  the  tax                                                               
credits.  The credits would still  be available to the company to                                                               
sell to someone  else that does have  a tax liability.    He said                                                               
he is interested in hearing  more comments from industry and that                                                               
it could be off the record.                                                                                                     
2:06:13 PM                                                                                                                    
CO-CHAIR  TALERICO commented  that the  state got  wrapped around                                                               
axle  in  the  1970's  when building  the  Trans-Alaska  Pipeline                                                               
System.   He said he  sees these  tax credits being  connected to                                                               
just doing  the business of the  oil industry, which is  the same                                                               
thing being  done when  building the pipeline.   He  recalled the                                                               
state  knowing it  was as  "right as  rain" until  it got  to the                                                               
[U.S. Supreme Court]  and the court disagreed.   Therefore he has                                                               
huge questions about  putting any type of  Alaska hire preference                                                               
in the  bill because of the  legal challenges, and added  that it                                                               
is an obviously glaring issue to him.                                                                                           
MR. ALPER agreed with Co-Chair  Talerico that it would inevitably                                                               
be challenged.   However, he  said, the decision before  the body                                                               
is whether  the state wants  to fight that  fight right now.   In                                                               
regard  to  Ms.  Gramling's  statements, he  clarified  that  any                                                               
company can  get cash for  the credits  it earns, except  for the                                                               
three  major producers  or  the new  restrictions  that would  be                                                               
added.   A  tax credit  that  is purchased  can only  be used  to                                                               
offset tax liability - a bought credit cannot be cashed in.                                                                     
2:07:54 PM                                                                                                                    
MR. ALPER  resumed his sectional  analysis.  He pointed  out that                                                               
Sections 28,  29, and 30  are all  conforming.  By  repealing the                                                               
qualified capital  expenditure credit in AS  43.55.023(a), and in                                                               
some   places   the  well   lease   expenditure   credit  in   AS                                                               
43.55.023(l),  conforming language  is  needed.   Other  sections                                                               
that  refer to  those credits  or to  those sections  need to  be                                                               
modified slightly  to get rid of  the (a) and (l)  subsections so                                                               
there is  not stray language  in statute.   Section 28  refers to                                                               
the provisions for  being able to assign a tax  credit to a third                                                               
party, a  power that was added  to statute about three  years ago                                                               
that  enables DOR  to pay  the money  directly back  to banks  in                                                               
certain  circumstances.     Section  29  refers   to  the  annual                                                               
statement,  the tax  return that  everyone  has to  pay in  March                                                               
based on the  previous calendar year.  Clarifying  language is in                                                               
there to say  there is no longer going to  be a qualified capital                                                               
expenditure credit.   As is being seen in  other legislation this                                                               
session, attorneys do  not want to embed the  definition inside a                                                               
substantive piece of legislation.  If  a term needs to be defined                                                               
it should  be sitting  out in  a definition  section.   Right now                                                               
within AS 43.55.023(a), within  the qualified capital expenditure                                                               
credit section  of statute, there  is an existing  definition for                                                               
what  a qualified  capital expenditure  is.   So, when  repealing                                                               
.023(a), when  repealing the credit,  also being repealed  is the                                                               
definition of what is a  qualified capital expenditure.  However,                                                               
there  is  value to  having  a  definition of  qualified  capital                                                               
expenditure,  a  definition is  needed  for  other purposes,  and                                                               
therefore Section 38 would add  a definition of qualified capital                                                               
expenditure.    It is  not  a  new  definition,  it is  the  same                                                               
definition syntactically as  what is currently in  .023(a), it is                                                               
just being moved  into the general definition  section inside the                                                               
production  tax  statutes.    Section   29  repoints  this  term,                                                               
"qualified capital  expenditures," to  the new  definition rather                                                               
than to the old definition that is being repealed.                                                                              
2:10:25 PM                                                                                                                    
MR. ALPER  noted that Section  31 is substantive and  was defined                                                               
and  modeled in  his  previous presentation.    Section 31  would                                                               
provide that  the gross value  at the point of  production cannot                                                               
be less than zero.   That is in the section  that is really about                                                               
tariffs  and allows  deductions for  transportation to  allude to                                                               
this thing called  gross value at the point  of production, which                                                               
is really  wellhead value.   It is  the value of  the oil  or gas                                                               
minus the cost  of getting it to the point  of sale, therefore it                                                               
is the value  at the point at  which it was produced.   The point                                                               
of production for oil is defined  as basically Pump Station 1, at                                                               
the  input  to the  Trans-Alaska  Pipeline  System in  the  North                                                               
Slope.  Mr.  Alper reminded members that DOR  provided a specific                                                               
example of  a very high tariff  field, or remote field,  or field                                                               
that for  whatever reason has a  higher tariff than the  value of                                                               
the oil itself.   The department considered  the possibility that                                                               
in a period of extended  low prices Point Thomson could plausibly                                                               
have a  wellhead value of  less than  zero, and Section  31 would                                                               
say that  it must  be rounded up  to zero at  the field  level so                                                               
that negative  number cannot  be used  to offset  positive values                                                               
elsewhere on the North Slope for taxation purposes.                                                                             
2:11:46 PM                                                                                                                    
MR. ALPER moved  to Section 32 and recalled that  during the 2007                                                               
debates on Alaska's Clear and  Equitable Share (ACES) [House Bill                                                               
2001,  Twenty-Fifth   Alaska  State  Legislature]  there   was  a                                                               
provision of  the ACES  tax called the  standard deduction.   The                                                               
standard  deduction   was  a  limitation  on   lease  expenditure                                                               
inflation.   More or less,  a cap was put  on how much  a company                                                               
could  charge for  operating expenditures  based on  what it  had                                                               
charged  the  previous  year.    This created  a  little  bit  of                                                               
certainty because of  some anxiety within a critical  mass of the                                                               
legislative  body  at the  time  that  there would  be  unchecked                                                               
inflation  and deductible  lease  expenditures  that might  erode                                                               
whatever benefits  the state was getting  from a switch to  a net                                                               
profits  tax.   This  standard deduction  provision  passed by  a                                                               
single vote  as an amendment in  both bodies.  As  a provision of                                                               
law  it  did  create  certain restrictions  on  deductible  lease                                                               
expenditures with  a built-in three-year sunset.   Beginning with                                                               
2010 that old law was no longer  in effect and there have been no                                                               
limitations on  deductibility, but  those sections  still survive                                                               
in statute.   The repealer section  of HB 247 repeals  a bunch of                                                               
old statute that  is no longer needed and Section  32 conforms to                                                               
that.   It  would get  rid of  a sentence  that says,  "Except as                                                               
provided in (j)  and (k) of this section," and  then continues on                                                               
with  the rest  of  the substantive  language.   Since  allowable                                                               
lease  expenditures   are  what  is  being   talked  about,  this                                                               
correction  for  the  old standard  deduction  limitation  is  no                                                               
longer needed  and the limitation  can now be ignored  and safely                                                               
deleted.  So Section 32 is conforming to that change.                                                                           
2:13:30 PM                                                                                                                    
MR. ALPER noted  that Sections 33-36 are much the  same as 28-30.                                                               
They are conforming  to the elimination of  the qualified capital                                                               
expenditure credit  or, in most cases  more precisely, conforming                                                               
to the moving of the  definition of qualified capital expenditure                                                               
from where  it used to live  inside the credit itself  and to the                                                               
new definition section  that is being added in Section  38 of the                                                               
bill.  Drawing  attention paragraph (18) on page 24,  line 11, of                                                               
the bill  he explained that  these are the  existing restrictions                                                               
on  deductions,   things  that   are  not   considered  allowable                                                               
deductions for purposes of taxation.   Paragraph (18) talks about                                                               
what is known in the  industry as the "30-cent haircut provision"                                                               
that says the  first 30 cents per barrel  of capital expenditures                                                               
cannot be counted because it in  some ways is a proxy for routine                                                               
maintenance.   The words "as  defined in AS 43.55.023"  are being                                                               
deleted  from  paragraph (18)  because  the  definition has  been                                                               
moved and  is no longer  in that location.   This is the  sort of                                                               
conforming changes seen in Sections 33-36  that do not in any way                                                               
change the  substance of the  purpose of the underlying  bill and                                                               
the law  as it is being  implemented; it just re-corrects  to the                                                               
idea  that qualified  capital expenditures  themselves are  being                                                               
defined in a different part of law.                                                                                             
2:15:24 PM                                                                                                                    
MR. ALPER pointed out that Section  37 is the one he modeled when                                                               
talking  about the  municipal utility  that has  its own  gas and                                                               
what happens if the municipal  utility is selling a small portion                                                               
of that gas  to a third party.   It in some ways  is an advertent                                                               
language in existing  law that says if a utility  sells 1 percent                                                               
of its  gas and  has a  relatively small  amount of  revenue from                                                               
that, the utility could, as  interpreted, offset all of its costs                                                               
against the  small amount  of the revenue  and create  what could                                                               
potentially be  very large  operating losses  for a  utility that                                                               
operates as  a break-even  nonprofit.   Section 37  would correct                                                               
that.  Current law [AS  43.55.895(b)] states, "A municipal entity                                                               
subject to taxation  because of this section is  eligible for all                                                               
tax credits  under this chapter to  the same extent as  any other                                                               
producer."  Section  37 would change this language to  make it be                                                               
proportionate to the  utility's production that is  taxable.  For                                                               
example, if only 2 percent  of a utility's production is taxable,                                                               
the  utility would  get 2  percent of  its credits.   This  would                                                               
ensure that the  municipal utility does not get  credits that are                                                               
out of  scale with the amount  of production that the  utility is                                                               
actually  selling,  given  that  only  the  production  that  the                                                               
utility sells is subject to the  tax.  The production that is not                                                               
sold and burned in the utility's turbines is not taxable.                                                                       
MR. ALPER reminded members that  Section 38 is the new definition                                                               
of  qualified  capital  expenditure.    He  explained  that  this                                                               
lengthy definition  refers back  to the Internal  Revenue Service                                                               
(IRS) code because when talking  about capital in the federal tax                                                               
code  it is  depreciable  that  is being  talked  about.   It  is                                                               
treated  for tax  purposes different  than  an operating  expense                                                               
because its  cost is  taken over  multiple years.   The  State of                                                               
Alaska does  not use that type  of tax treatment, the  state does                                                               
not  depreciate  inside  the  production tax.    The  state  does                                                               
however piggyback on  those IRS definitions to be  able to define                                                               
capital expenditure,  and that is what  this language is.   It is                                                               
not new  language, it looks new  because it is in  a new section,                                                               
but  it is  actually copied  almost  word for  word from  another                                                               
definition that  is in another portion  of the law that  is being                                                               
repealed because of another change made by this bill.                                                                           
MR. ALPER  said Section  39 is a  new definition  of "outstanding                                                               
liability to  the state."   This  is relevant  to the  ability to                                                               
hold back credits if the company  owes a royalty or other payment                                                               
to the  state.  Those  conforming changes being made  in multiple                                                               
other portions of  the bill are conformed with  here through this                                                               
new definition  of what  exactly is  an outstanding  liability to                                                               
the state.   As discussed  earlier by the committee,  there might                                                               
be a  desire to  narrow that  somewhat so  that a  legitimate in-                                                               
process appeal would not fall within the definition.                                                                            
2:18:39 PM                                                                                                                    
REPRESENTATIVE  TARR, because  the qualified  capital expenditure                                                               
(QCE)  credit is  going  away, asked  whether  the definition  in                                                               
Section 38 would limit what a  company could claim as its capital                                                               
expenditures  for   purposes  of  transportation   cost,  capital                                                               
expenses, and operating  expenses.  She further  asked where that                                                               
definition would be applied.                                                                                                    
MR. ALPER  answered that multiple  other places in  statute refer                                                               
to  qualified   capital  expenditures   for  other   than  credit                                                               
purposes.    Generally those  are  referenced  in the  conforming                                                               
statute  where it  says operating  and  capital expenditures  and                                                               
those definitions must be referred to.   Because there will be no                                                               
qualified capital expenditure credit there  will not be much of a                                                               
substantive  cash  definition  between  the  two  anymore.    One                                                               
exception would be the "30-cent  haircut" provision on page 24 of                                                               
the  bill that  says the  first 30  cents per  barrel of  capital                                                               
expenditures is not  deductible under current law;  that was part                                                               
of the production profits tax (PPT) negotiations in 2006.                                                                       
REPRESENTATIVE  TARR understood  that  this  particular QCE  goes                                                               
away but  this particular  definition for  purposes of  this bill                                                               
would be  applied to  that section  and would  limit what  can be                                                               
considered for the cost that that 30 cents is applied to.                                                                       
MR. ALPER replied  correct.  Any place in statute  where the term                                                               
qualified capital  expenditures is used  would now be  defined by                                                               
this  new  definition  in  Section  38.   The  definition  is  no                                                               
different, just  the location.   The only  place it would  have a                                                               
dollar value  impact with the repeal  of the QCE credit  would be                                                               
this 30-cent haircut section.  There  may be others, he said, but                                                               
he cannot think of them off the top of his head.                                                                                
2:20:28 PM                                                                                                                    
MR. ALPER continued  his sectional analysis.  He  said Section 40                                                               
is  a long  repealer section,  some being  cleanup language.   He                                                               
recalled  referring in  his other  testimony to  some of  the old                                                               
applicability language that comes from  Senate Bill 21 [passed in                                                               
2013, Twenty-Eighth  Alaska State Legislature] that  said "part A                                                               
refers  to oil  produced before  2014 and  part B  refers to  oil                                                               
produced after."   Since it  is now  after 2014 the  old language                                                               
referring  to  the  before  is  no longer  needed.    He  brought                                                               
attention to  the actual  language in Section  40 that  begins on                                                               
page 27 of the bill:   "AS 38.05.180(i); AS 41.09.010, 41.09.020,                                                               
41.09.030,  41.09.090;   AS  43.20.053(j)(4);   AS  43.55.011(m),                                                               
43.55.020(a)(1),  43.55.020(a)(2),   43.55.023(a),  43.55.023(l),                                                               
43.55.023(n),  AS   43.55.023(o), 43.55.028(i),  43.55.075(d)(1),                                                               
43.55.165(j), and 43.55.165(k) are  repealed."  He explained that                                                               
the statutes  in Title  38 and  Title 41 refer  to the  older DNR                                                               
exploration credit  that has not  been used in many  decades that                                                               
[the administration]  is looking to repeal  proactively while now                                                               
allowing DOR's  exploration credits  to sunset.   They  no longer                                                               
have any value and are not being used.                                                                                          
MS.  GRAMLING, at  Mr. Alper's  request, discussed  the next  two                                                               
statutes that would be repealed  under Section 40.  She explained                                                               
that AS  43.20.053(j)(4) is the  definition of  unpaid delinquent                                                               
tax.  This statute would no  longer be necessary because the bill                                                               
broadens that requirement to outstanding  liability to the state.                                                               
She offered her belief that  AS 43.55.011(m) is a now-out-of-date                                                               
tax treatment for  Cook Inlet that has not  been applicable since                                                               
2011 or 2010.                                                                                                                   
MR.  ALPER stated  that AS  43.55.020 in  general is  the monthly                                                               
installment payment section for how  to do that calculation prior                                                               
to 2014 before the changes in Senate  Bill 21 took effect.  So it                                                               
would be repealing language that  refers to older production that                                                               
is no longer relevant.  He  explained that AS 43.55.023(a) is the                                                               
qualified capital  expenditure credit and AS  43.55.023(l) is the                                                               
well  lease  expenditure credit  south  of  68 degrees  latitude.                                                               
Since these  statutes are  the credits  themselves, they  are the                                                               
most essential repealers to the bill itself.                                                                                    
MS. GRAMLING related that AS  43.55.023(n) is a conforming repeal                                                               
to the repeal  in (l) of the well lease  expenditure credit.  She                                                               
said  AS  43.55.023(o)  is the  actual  definition  of  qualified                                                               
capital expenditure,  but explained that the  definition is still                                                               
needed in  existing law.   Instead of leaving (o)  when qualified                                                               
capital  expenditure is  not referenced  in .023  anymore, it  is                                                               
being moved to  the definition section in  the chapter generally.                                                               
The  actual  language  in  that   definition  is  unchanged;  the                                                               
subsections have  changed a little due  to drafting requirements,                                                               
but the  substance of the  definition is unchanged.   She offered                                                               
her  belief that  the AS  43.55.028(i) repealer  is a  definition                                                               
related to the  repeal of the QCE credit.   This section says the                                                               
qualified  capital  expenditure  has  the  meaning  given  in  AS                                                               
43.55.023, but  that definition is  no longer needed since  it is                                                               
being  taken out  of .023  and moved  to the  general definitions                                                               
section.    She  offered  her   belief  that  the  repeal  in  AS                                                               
43.55.075(d)(1) is  also just  a definition  change.   She lastly                                                               
noted  that repeal  of AS  4.55.165(j)  and (k)  is the  standard                                                               
deduction, which is language that is no longer applicable.                                                                      
2:26:20 PM                                                                                                                    
MR. ALPER stated that Section  [41] is the applicability section.                                                               
As these changes are made, he  explained, it must be ensured that                                                               
regardless of the  effective date the things that  are already in                                                               
existence  can continue  to be  in existence.   For  example, the                                                               
bill is  only making the  changes applicable to  production after                                                               
the effective  date.  So, if  a company does the  work before the                                                               
effective date, even if the  company applies for the credit after                                                               
the effective  date, the company  still earns the  credit because                                                               
the  work  was  done  before  the effective  date.    Section  41                                                               
clarifies that  the effective date has  to do with the  work, not                                                               
with the application.  Also, in  the event of the 10-year sunset,                                                               
10 years  from what?   For  the purpose  of determining  the last                                                               
calendar  year  that a  credit  can  be  used, it  provides  that                                                               
existing  credit  certificates would  start  their  clock at  the                                                               
effective date of  the bill, whereas new  credit certificates get                                                               
10 years from when they are issued.                                                                                             
2:27:45 PM                                                                                                                    
REPRESENTATIVE JOSEPHSON  recalled that Senator  Giessel's [2015]                                                               
working group  recommended there be  some sort  of a lag  time so                                                               
the rug  would not be  pulled out.   In regard to  getting credit                                                               
for the work,  he asked what "work" means and  further asked what                                                               
would happen if a company is half-way done with a project.                                                                      
MR. ALPER  explained by  using an  example of  the repeal  of the                                                               
qualified capital  expenditure credit,  which HB 247  proposes to                                                               
sunset on  July 1, 2016.   A company might  be in the midst  of a                                                               
project and  would be  able to  define and say  that this  is the                                                               
money it  spent and  the work it  did before July  1 and  it will                                                               
qualify, but  the other  work might  not.   What is  protected by                                                               
Section 41 is  that many producers do not actually  apply for the                                                               
credit  immediately.   They might  keep all  their paperwork  and                                                               
wait until their  year's books are finished and come  in in March                                                               
2017 to pay and claim a  net operating loss credit and file their                                                               
taxes  in general  for  that  year.   Even  though  they are  not                                                               
applying  for  that credit,  so  long  as  they are  showing  the                                                               
activities  earning  the  capital  credit were  done  before  the                                                               
effective date, they would still qualify.                                                                                       
2:29:36 PM                                                                                                                    
MR. ALPER recommenced his sectional  analysis.  He specified that                                                               
Sections 42  and 43  are transition  language, something  that is                                                               
seen  in a  lot  of bills.   These  sections  provide that  while                                                               
working toward  getting the bill  implemented, DOR and  DNR would                                                               
be empowered  to draft regulations  to clarify and  implement the                                                               
changes made by  the bill.  Oftentimes the  regulation process on                                                               
a  complicated  piece of  legislation  can  take  up to  a  year.                                                               
Should those regulations  come into being some  months later they                                                               
could be  made retroactive to the  effective date of the  bill so                                                               
that there are no  gaps in coverage and no lack  of clarity as to                                                               
what the law is during the period of transition.                                                                                
MR. ALPER  said Sections 44 and  45 are the effective  dates.  He                                                               
recalled  that industry  testimony brought  substantial attention                                                               
to Section 44, which is  the retroactive applicability of Section                                                               
17 of the  bill, the only retroactive section.   Section 17 would                                                               
limit the ability  to use certain credits to go  below the floor.                                                               
The main change  is that the companies would pay  the minimum tax                                                               
for all  of calendar year 2016.   The other change  in Section 17                                                               
(c) has to  do with the migrating of credits  from month to month                                                               
that was modeled  and explained during an earlier  hearing.  That                                                               
provision would likely not be  relevant for this current calendar                                                               
year because the price of oil is  not expected to go above $80 to                                                               
where there would  be months at the minimum tax  and months above                                                               
the minimum  tax.  Should that  happen during this year  then the                                                               
retroactive application of Section 17  would limit the ability of                                                               
those credits  to be migrated.   In January and February  of this                                                               
year some companies  earned, but were unable to use,  the $8 per-                                                               
taxable-barrel credit.   Should  the price of  oil spike  to $120                                                               
this fall, those unused credits  from now, per current law, would                                                               
be  used  to  offset  taxes  on  oil  produced  in  November  and                                                               
December.  However, that would not  be the case if Section 17 (c)                                                               
is made retroactive.                                                                                                            
2:32:13 PM                                                                                                                    
REPRESENTATIVE HERRON  inquired whether it  would not be  just as                                                               
well to have Sections 44 and 46 and January 1, 2017.                                                                            
MR. ALPER  answered that that is  a choice of the  committee.  To                                                               
delay  the effective  date of  the bill  would affect  the dollar                                                               
value; additional  dollars' worth  of credits  would be  spent by                                                               
the state in the intervening period.   There are pros and cons to                                                               
that.   A  case could  be made  that it  would provide  a certain                                                               
amount of certainty or at  least transitional certainty for works                                                               
in progress from  the industry.  Section 44 is  a tax section; it                                                               
is the  calculation that  is being  talked about.   The  one push                                                               
back he  has received from his  own staff is to  avoid making tax                                                               
sections effective  in the  middle of the  year because  it makes                                                               
for very  complicated calculations.   The rest  of the  bill that                                                               
talks  about the  ability to  use  credits and  when an  activity                                                               
might get  cut off  does not  matter quite so  much and  can take                                                               
effect  in  the middle  of  the  year because  it  is  tied to  a                                                               
specific activity, to  a receipt.  Thus, if  the retroactivity in                                                               
Section 44  is unpalatable, [DOR] would  ask that it be  moved to                                                               
January 1 of a different year.                                                                                                  
2:33:49 PM                                                                                                                    
MR. ALPER  returned to his  sectional analysis.  He  said certain                                                               
of the  sections that  are more  transitional language  and about                                                               
doing the  paperwork related  to implementing  the bill  would be                                                               
effective immediately.   It is the transitional  language and the                                                               
one  retroactive effective  date that  is being  talked about  in                                                               
Section 44.                                                                                                                     
MR. ALPER concluded  his sectional analysis by  pointing out that                                                               
Section 46  is the main  effective date.   The great bulk  of the                                                               
provisions  and changes  made in  the bill  would take  effect on                                                               
July 1,  2016, which is the  beginning of fiscal year  (FY) 2017.                                                               
This way,  all credits earned  in the  next fiscal year  would be                                                               
under the new regime.                                                                                                           
2:34:30 PM                                                                                                                    
REPRESENTATIVE JOSEPHSON  asked whether  Mr. Alper  was referring                                                               
to Section  44 when he  stated that  if the legislature  and this                                                               
committee did  not adopt  the retroactivity,  DOR would  prefer a                                                               
January 1 date.                                                                                                                 
MR.  ALPER  replied  that  Section 44  is  the  retroactivity  of                                                               
Section 17.   Section 17  would sort of  codify all of  the floor                                                               
hardening  provisions  in  general.   It  discusses  how  certain                                                               
things  would  not be  able  to  be  used  below the  floor,  the                                                               
physical  mechanics of  that calculation  below the  floor.   The                                                               
floor  calculation, the  tax calculation,  is inherently  annual,                                                               
and therefore  it would make for  a very complex tax  form if the                                                               
changes were  to be done mid-year.   So, if January  1, 2016, was                                                               
not  desirable, he  would ask  that  it be  made January  1 of  a                                                               
different year.                                                                                                                 
REPRESENTATIVE  JOSEPHSON  commented  that as  cumbersome  as  it                                                               
would be there are tens of millions of dollars at issue.                                                                        
MR. ALPER responded  yes, if talking about the ability  to use an                                                               
operating loss credit  to go below the minimum tax.   He said his                                                               
fear is that  it would take a lot of  conforming language because                                                               
it is currently  written and described as  an annual calculation.                                                               
For example, if the hardening of  the floor were to occur on July                                                               
1, the so-called minimum tax  would have to be somehow calculated                                                               
for the first six months of the  year, allow it to be offset down                                                               
to zero, but separate it  somehow from the minimum tax obligation                                                               
for the second six months of  the year.  While it could certainly                                                               
be done,  2007 being an example  of it happening before,  it is a                                                               
heavy lift.   He  agreed there  probably are  dollars in  it, but                                                               
said it would put something of a burden on the staff.                                                                           
2:36:45 PM                                                                                                                    
MR. ALPER  turned to the two  fiscal notes for HB  247, one being                                                               
identified as  DOR-TAX, Department of  Revenue, and the  other as                                                               
DOR-OGTCF,  Fund Capitalization.   He  explained that  the fiscal                                                               
notes are in many ways complimentary  to each other, adding up to                                                               
the value  of the bill as  far as the state's  bottom-line fiscal                                                               
picture.  The  DOR-TAX fiscal note estimates that  the bill would                                                               
bring  in approximately  $100 million  in additional  revenue for                                                               
the first  two years,  declining to $50  million beginning  in FY                                                               
2019.   The reason for  that is that  the bill has  two different                                                               
components for  raising revenue.   One component is  the increase                                                               
of the  minimum tax from  4 percent to 5  percent.  The  other is                                                               
the hardening of the floor, the  restriction on being able to use                                                               
credits to  go below the  minimum tax.   The main  beneficiary of                                                               
that second $50  million in the hardening of the  floor really is                                                               
in the operating loss credit.   Certain major producers, at least                                                               
one, had an operating loss in  2015 and may have operating losses                                                               
in 2016.  Those companies will  be able to use their loss credits                                                               
to reduce  their payments below  the minimum  tax all the  way to                                                               
zero in  the year after they  earn those credits.   For the first                                                               
two years  DOR sees this as  being a condition.   After those two                                                               
years, DOR projects the price of  oil to be high enough, although                                                               
not  rosy, that  the major  producers will  at least  be breaking                                                               
even or making money.  Therefore  DOR does not see any cash value                                                               
to  the  state  in  that particular  floor  hardening  provision.                                                               
However,  DOR  does  foresee being  underneath  the  minimum  tax                                                               
paradigm for the  next four or five years throughout  the term of                                                               
this fiscal note.   That is why the $50  million revenue goes out                                                               
to  the end  of the  fiscal  note in  FY  2022.   The second  $50                                                               
million,  the floor  hardening, would  only be  of value  for the                                                               
first two years  and so that is  the drop-off in the  value.  The                                                               
other  important provision  in  the DOR-TAX  fiscal  note is  the                                                               
cost.   The department  is anticipating a  cost to  implement the                                                               
changes in the  bill - a relatively  substantial reprogramming of                                                               
a lot of  different formulas in a lot of  different provisions in                                                               
DOR's revenue online  and tax revenue management system.   A firm                                                               
estimate from the  contractor is not yet in hand,  but the number                                                               
of $1.5 million was put as  something of a placeholder.  The hope                                                               
is that should this bill move, and  before it makes it to the end                                                               
of its process, DOR will be able  to put a more precise number in                                                               
there for the cost of implementing.                                                                                             
2:40:11 PM                                                                                                                    
REPRESENTATIVE HERRON  observed that  the first line  of analysis                                                               
on page 2 of the DOR-TAX  fiscal note states that the legislation                                                               
is an attempt to "reduce the  cost of Alaska's current program of                                                               
providing direct tax  credit rebates and other  advantages to oil                                                               
and gas companies."   He asked what "other advantages  to oil and                                                               
gas companies" means.                                                                                                           
MR. ALPER  answered that  that is  a broad term.   It  is talking                                                               
about things that  could be used to reduce a  tax liability.  The                                                               
first half of  the sentence is talking about tax  rebates and the                                                               
second half is  talking about lower taxes.  Because  HB 247 would                                                               
harden the floor and because in  some cases it would increase the                                                               
taxes that  certain companies would  pay, the advantage  that the                                                               
bill  would cut  back on  is the  advantage of  being able  to go                                                               
below the  minimum tax to  zero.   The companies would  no longer                                                               
receive that  advantage because the  floor would be  hardened and                                                               
the companies would be forced to pay at a higher rate.                                                                          
REPRESENTATIVE HERRON observed that page  2 of the DOR-TAX fiscal                                                               
note outlines several  goals of the legislation, one  of which is                                                               
to strengthen the  minimum tax and prevent abuses  to the system.                                                               
He requested Mr. Alper to identify those abuses.                                                                                
MR. ALPER  replied that the  term was used  to refer to  what DOR                                                               
perceives as  inadvertent mechanisms  where operating  losses can                                                               
be larger than  the actual loss to where a  credit can be claimed                                                               
for a very high percentage of  a loss because of the interplay of                                                               
the  gross  value reduction  (GVR)  and  the net  operating  loss                                                               
credit.     Another  inadvertent  loophole  in   statute  is  the                                                               
municipal  utility section  where a  company is  selling a  small                                                               
amount of  gas and getting  a very large  credit based on  all of                                                               
the utility's expenditures.   There is no  pejorative intended in                                                               
abuse, it is simply  that people are able to use  the system in a                                                               
way beyond which was originally intended.                                                                                       
REPRESENTATIVE HERRON asked whether  the last word "loopholes" on                                                               
page  2 of  the DOR-TAX  fiscal note  is the  loopholes that  Mr.                                                               
Alper is referring to.                                                                                                          
MR. ALPER responded, "Yes, absolutely."                                                                                         
2:42:57 PM                                                                                                                    
REPRESENTATIVE JOSEPHSON  said it strikes  him that there  is one                                                               
enormous carrot in  HB 247, which is that the  governor under law                                                               
is  within his  right to  pay 10  percent per  year indefinitely,                                                               
albeit at  some point retiring  the credits.   The administration                                                               
is signaling that it wants  to capitalize these credits at almost                                                               
$1 billion,  thereby providing  stability and  predictability for                                                               
both sides.   In effect  it signals a  weighing of this  right to                                                               
veto  any more  than, for  example, $73  million this  year.   He                                                               
asked whether he is reading this right.                                                                                         
MR. ALPER  answered that Representative  Josephson is right.   He                                                               
pointed  out  that  the  fiscal  note for  the  $900  million  in                                                               
capitalization  is labeled  DOR-OGTCF, Fund  Capitalization.   He                                                               
explained  that  the statutory  obligation,  which  is 10  or  15                                                               
percent  at  very low  prices,  is  actually  15 percent  of  the                                                               
revenue  collected under  the production  tax  system, which  per                                                               
DOR's current forecast is about $73  million.  This is the number                                                               
the governor  put in his operating  budget and is what  the state                                                               
is  more or  less  obligated to  buy.   Although  the tax  credit                                                               
system is  somewhat open-ended, people could  earn $1-$10 billion                                                               
worth of  credits potentially.   Last year DOR showed  a scenario                                                               
where  one  project  could  earn  $3  billion  in  credits  in  a                                                               
relatively  short  period of  time.    The actual  limitation  on                                                               
buying them is  tied to this language in AS  43.55.028(b) and (c)                                                               
that  says 15  percent of  the revenue  collected -  $73 million.                                                               
The governor's intent is to reduce  the state's annual spend by a                                                               
substantial amount, to  a number that is  thought sustainable and                                                               
affordable.  However, it  is not wanted to do this  in such a way                                                               
that  would pull  the  rug  out from  anybody,  that  all of  the                                                               
credits that are  earned from last year up  through the effective                                                               
date are made whole.  The  intent of the DOR-OGTCF fiscal note is                                                               
to provide that  number.  Although $926.575 million  looks like a                                                               
particularly precise number, it  is simply the difference between                                                               
the 15  percent figure  in the operating  budget and  $1 billion.                                                               
The intent is to put $1 billion into credit repurchase.                                                                         
2:45:31 PM                                                                                                                    
MR.  ALPER addressed  the fiscal  note  identified as  DOR-OGTCF,                                                               
Fund  Capitalization.   He  noted that  originally  all of  these                                                               
numbers were  in a single  fiscal note.   But, per the  advice of                                                               
the  Office of  Management &  Budget,  they were  split into  two                                                               
fiscal  notes  because  the  fund   capitalization  is  really  a                                                               
separate  appropriation that  would be  somehow attached  to this                                                               
bill that would  move almost $1 billion into the  oil and gas tax                                                               
credit fund.   Included  in the governor's  [FY 2017]  request is                                                               
the $73.425 million,  and the columns for later  years depict the                                                               
expected reduction in  tax credit spend that are tied  up in this                                                               
bill, meaning  how much less  it is  thought the state  would pay                                                               
should HB 247 pass.  That  number is somewhat fungible because as                                                               
the future gets  closer a lot more is known  about what companies                                                               
are spending  and DOR is  basing these numbers on  its forecasted                                                               
credit spending  in these future  years minus about  $50 million.                                                               
It is  assumed that the state  is still going to  be paying about                                                               
$50 million  in refunded credits.   The department  will continue                                                               
to refine these numbers each year.                                                                                              
2:46:55 PM                                                                                                                    
REPRESENTATIVE HERRON drew  attention to the paragraph  on page 2                                                               
of the  Fund Capitalization  fiscal note  regarding FY  2016 that                                                               
talks about  the $200  million credit  liability expected  at the                                                               
end  of the  fiscal year.   Observing  that the  fiscal note  was                                                               
written on February  1, 2016, he asked whether  that $200 million                                                               
is real,  given it  was heard in  testimony before  the committee                                                               
that it is unlikely that $200 million would be called upon.                                                                     
MR. ALPER replied  there are credit applications that  DOR has in                                                               
hand  that could  bring the  state closer  to $700  million.   To                                                               
date, DOR has  issued about $475 million in  credits.  Everything                                                               
that  has  been  asked  for   has  been  bought  back,  which  is                                                               
essentially all  of them, although there  might be one or  two in                                                               
process right  now.   There is a  tremendous frontloading  in the                                                               
fiscal  year, he  explained, with  the great  bulk of  the credit                                                               
applications coming  in in  March when  the companies  file their                                                               
taxes  because the  great bulk  are for  operating loss  credits.                                                               
The  department tends  to  issue the  credits  about four  months                                                               
later in  July and  then they  are paid out  early in  the fiscal                                                               
year.  The  exception to that is some of  the drilling credits in                                                               
Cook Inlet,  the specific  credits that HB  247 looks  to repeal.                                                               
Because  those do  not require  an  operating loss,  they do  not                                                               
require  an end  of year  tax  true-up to  apply for  them.   So,                                                               
certain companies based on their own  cash flow needs or on their                                                               
own  housekeeping   might  apply  for  their   qualified  capital                                                               
expenditure credit  or well lease expenditure  credits quarterly.                                                               
The department has not been  issuing those credits simply because                                                               
it was  known that those were  the ones there would  not be money                                                               
for; DOR is  choosing to hold them until  receiving the operating                                                               
loss  credits at  the  end of  the  year.   So,  through its  own                                                               
activity, DOR is forcing that  $200 million to get rolled forward                                                               
into FY 2017.                                                                                                                   
2:49:24 PM                                                                                                                    
MR. ALPER concluded his discussion of  the two fiscal notes.  One                                                               
reduces  spending and  capitalizes the  fund, he  noted, and  the                                                               
other raises  a bit  of extra  revenue through  strengthening and                                                               
increasing  the minimum  tax.   Should a  revised version  of the                                                               
bill move to  the next committee, DOR would like  to take a fine-                                                               
tooth comb  to the fiscal not  as per the committee's  request at                                                               
an earlier  hearing.  The bill  would benefit from having  a full                                                               
page  spreadsheet of  all the  bill's provisions  lined out  with                                                               
each one having its own cost  parsed out.  He said the department                                                               
is prepared to  do that level of analysis for  the 15-18 separate                                                               
provisions  in  the  bill  when  it is  in  the  next  committee.                                                               
However,  he added,  DOR is  comfortable with  the numbers  it is                                                               
presenting to  this committee -  the bill would raise  about $100                                                               
million in  the short  term and  save $400  million in  the short                                                               
term, although FY 2017 is a  hard one because of the structure of                                                               
the fiscal note.  Fiscal year 2018 would save $325 million.                                                                     
2:51:01 PM                                                                                                                    
REPRESENTATIVE TARR  observed the DOR-OGTCF fiscal  note includes                                                               
$200  million for  the Alaska  Industrial Development  and Export                                                               
Authority (AIDEA).   She asked  how DOR sees that  as functioning                                                               
within HB  247.  She offered  her understanding that [HB  246] is                                                               
separate  from the  credit program  and  would provide  a pot  of                                                               
money  that is  available  for  loans to  do  work  that has  not                                                               
previously been part of a company's portfolio.                                                                                  
MR. ALPER  confirmed that this  is correct, and advised  that the                                                               
reference to  [HB 246] and  the $200  million was in  this fiscal                                                               
note for informational purposes.   He said the fiscal note before                                                               
the committee  was written by  DOR at the  same time as  the fund                                                               
capitalization fiscal  note for  HB 246,  although AIDEA  will be                                                               
the primary  testifier on HB 246.   When HB 246  comes before the                                                               
committee, members  will see  another fund  capitalization fiscal                                                               
note containing $200 million.                                                                                                   
2:52:14 PM                                                                                                                    
REPRESENTATIVE  SEATON  noted  that DOR  has  circulated  several                                                               
other documents  to committee members,  one document  being Pedro                                                               
van Meurs' update.  He drew  attention to the speculation in that                                                               
update for  an oil  price of $60  for the next  two decades.   He                                                               
offered his hope that as the  committee goes forward it will look                                                               
at different analyses of the potential price.                                                                                   
MR. ALPER  drew attention to  a spreadsheet that DOR  provided to                                                               
members yesterday ["Production  Tax Credits Detail FY  2007 to FY                                                               
2025, Table  8-4:   Detail on  Historical Production  Tax Credits                                                               
and  Forecast].   He  explained  that  this spreadsheet  was  put                                                               
together per the  request of the co-chairs'  staff and summarizes                                                               
all  of the  oil  and gas  tax credits  that  currently exist  in                                                               
statute, how they  work, what statute they come  from, what their                                                               
history  is, whether  they have  any built-in  sunsets, and  what                                                               
parts of  the state  they are  used for.   At  the bottom  of the                                                               
spreadsheet  is  a section  saying  how  [the administration]  is                                                               
proposing to change the different provisions.                                                                                   
[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 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 - 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
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
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
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
HSE RES HB247 DOR Fiscal Details and Scenario Modeling (Part 2a) 2-26-16.pdf HRES 2/27/2016 10:00:00 AM
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
HSE RES - 2.24.16 HB 247 2nd Presentation- fiscal details part 1a.pdf HRES 2/25/2016 8:30:00 AM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HSE RES 3.8.16 Dept. of Revenue - Summary of State Royalty, Tax and Credits throughout Alaska Lands.xlsx HRES 3/8/2016 1:00:00 PM
HB 247
HSE RES 3.8.16 AS 43 55 Credits Table with HB 247 changes.xlsx HRES 3/8/2016 1:00:00 PM
HB 247