Legislature(2015 - 2016)BELTZ 105 (TSBldg)

04/14/2015 03:30 PM Senate COMMUNITY & REGIONAL AFFAIRS

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Moved SCS CSHB 75(CRA) Out of Committee
Heard & Held
        SB 100-NORTH SLOPE GAS PROJ PROP TAX; ASSESSMENT                                                                    
3:40:38 PM                                                                                                                    
CHAIR BISHOP  called the  committee back  to order  and announced                                                               
the consideration of SB 100.                                                                                                    
3:40:55 PM                                                                                                                    
RANDALL  HOFFBECK,  Commissioner,  Department of  Revenue  (DOR),                                                               
Juneau,  Alaska,  explained  that  three components  need  to  be                                                               
considered to  establish a property  tax structure or  Payment in                                                               
Lieu  of  Taxes  (PILT)  for the  Alaska  Liquefied  Natural  Gas                                                               
(AKLNG) Project as follows:                                                                                                     
   1. Impact payments during construction.                                                                                      
   2. Durable and predictable property  tax structure  that would                                                               
     last through the duration of the fiscal commercial                                                                         
     contracts on the pipeline.                                                                                                 
   3. How the total take  that would come  from the  property tax                                                               
     structure would be distributed between various government                                                                  
     entities between the state and local jurisdictions.                                                                        
COMMISSIONER HOFFBECK specified that  SB 100 primarily focuses on                                                               
the  second   point,  the  property  tax   structure  during  the                                                               
operation of the pipeline project.                                                                                              
3:42:17 PM                                                                                                                    
He revealed that before the  new administration came onboard, the                                                               
past  administration had  established  a  Municipal Advisory  Gas                                                               
Project Review Board  (MAGP Board) to make  recommendations for a                                                               
property tax  structure on  the AKLNG Project.  He said  the MAGP                                                               
Board  had met  multiple times  and  produced a  report that  was                                                               
submitted to the governor at  the end of the last administration.                                                               
He disclosed that several property  tax structure components were                                                               
presented from the  report that would be important  in creating a                                                               
lasting program as follows:                                                                                                     
   · Fair and equitable to  all stakeholders, municipalities, the                                                               
     state, and the producers.                                                                                                  
   · Clarity  in order  to avoid  litigation that  surrounded the                                                               
     Trans-Alaska Pipeline System (TAPS).                                                                                       
   · Robust and  durable, something that  would last  through the                                                               
     initial commercial agreements' life.                                                                                       
   · Unambiguous so that the property  tax structure would not be                                                               
     subject to judgement and interpretation.                                                                                   
   · Commercially sound so  that the pipeline can  compete in the                                                               
     global market.                                                                                                             
3:44:20 PM                                                                                                                    
He  stated that  the  producers' feedback  was  that simpler  was                                                               
better  regarding  a  property tax  structure.  He  detailed  the                                                               
producers' property tax preferences as follows:                                                                                 
   · Fewest barriers as possible within the tax calculation.                                                                    
   · Tax law  that had  more general  application, but  still met                                                               
     their project expectations and was acceptable to the                                                                       
   · Taxes tied  directly to  the amount  of gas  flowing through                                                               
     the pipeline, something that was measurable and simple,                                                                    
     either in cents per Million Cubic Feet (MCF) or cents per                                                                  
     Million British Thermal Units (MMBTU).                                                                                     
COMMISSIONER  HOFFBECK  said  input   from  MAGP  Board  and  the                                                               
producers was  used by  the department to  create a  formula that                                                               
could meet the objectives that were presented as follows:                                                                       
     Actual cost  times a  throughput adjustment,  which was                                                                    
     actual flow divided by the  design flow, it did have an                                                                    
     exponential   adjustment   due    to   the   non-linear                                                                    
     relationship between the cost  of building the pipeline                                                                    
     versus the  amount that the  pipeline can  carry, times                                                                    
     the indexed inflation rate, times  20 mills, then times                                                                    
     an adjustment  factor that  could be  used to  turn the                                                                    
     value  up  or  down  in  order  to  meet  the  economic                                                                    
     conditions  of  the  pipeline   to  make  the  pipeline                                                                    
3:46:17 PM                                                                                                                    
He  noted   that  the  feedback   from  the   producers  included                                                               
commentary  on  the mill  rate  and  capital  cost. He  said  the                                                               
producers pointed  out that the  proposed gas  liquefaction plant                                                               
in  Nikiski is  statutorily excluded  from the  20 mill  rate and                                                               
should be assessed at whatever the local mill rate is.                                                                          
He  added that  the producers  addressed the  capital cost  where                                                               
originally  the  structure  was  looking   at  the  cost  at  the                                                               
completion of  the construction;  however, the  producers thought                                                               
it would be more beneficial if  the project's cost could be based                                                               
on the  estimated costs at  the Final Investment  Decision (FID).                                                               
He detailed that using the estimated  cost at FID would allow for                                                               
the  economics of  the property  tax  to be  predicted while  the                                                               
economics of  the pipeline  itself was  being computed,  that way                                                               
the project  did not have to  be complete in order  to figure out                                                               
what the total take from the property tax would be.                                                                             
3:48:17 PM                                                                                                                    
He  said the  producers addressed  depreciation and  obsolescence                                                               
and  looked   more  at  the   idea  of  a  fixed   component  for                                                               
depreciation  as  well  as  inflation.   He  explained  that  the                                                               
producers preferred to have an  adjustment agreement on inflation                                                               
and  depreciation that  is negotiated  within the  fiscal package                                                               
rather than having calculated components.                                                                                       
He  added  that  producers  remarked about  the  flow  adjustment                                                               
calculation that  used an exponent  that made the  formula overly                                                               
complicated. He said the producers  felt that the exponent was an                                                               
unnecessarily  arbitrary  variable  and the  formula  was  robust                                                               
enough  to deal  with  the  economics without  having  to add  an                                                               
adjustment factor at the end.                                                                                                   
COMMISSIONER  HOFFBECK   disclosed  that   the  input   from  the                                                               
producers  was  shared  with  MAGP  Board  and  the  formula  was                                                               
adjusted as follows:                                                                                                            
     Capital  cost times  an inflation  component, which  is                                                                    
     just one times whatever the  inflation rate would be to                                                                    
     the  number of  years, times  the depreciation  factor,                                                                    
     times   the   actual   throughput   over   the   design                                                                    
     throughput, times the mill rate.                                                                                           
He noted that  the exponent would be left in  with the throughput                                                               
calculation,  but the  MAGP Board  set  the exponent  at one.  He                                                               
detailed  that   setting  the  exponent   at  one   rendered  the                                                               
calculation meaningless, but MAGP  Board thought the exponent was                                                               
important  to  leave.  He  added  that the  mill  rate  would  be                                                               
whatever the  statutory rate  was for  the various  components of                                                               
the pipeline.                                                                                                                   
He disclosed  that MAGP Board agreed  to use the FID  for capital                                                               
costs, but asked  that a 10 percent uplift be  applied due to the                                                               
uncertainty  of   cost  overruns.   He  added  that   MAGP  Board                                                               
recommended  using a  4  percent  inflation rate  and  a 50  year                                                               
floating-life  for  the depreciation  factor  in  order that  the                                                               
depreciation would never take the value  of the pipeline to 0. He                                                               
detailed that the throughputs would  be done on a 5-year floating                                                               
average in  order to take away  any large swings that  might come                                                               
from unanticipated disruptions that are not reservoir related.                                                                  
CHAIR BISHOP asked  to confirm that the  producers' concerns were                                                               
presented to MAGP Board and the  board wanted to uplift FID by 10                                                               
COMMISSIONER HOFFBECK answered yes.                                                                                             
3:50:36 PM                                                                                                                    
He detailed that the feedback from  the producers was that the 20                                                               
mill rate could be accommodated  through other adjustments in the                                                               
formula,  but  their preference  was  that  the gas  liquefaction                                                               
plant be treated  as a locally assessed asset at  the lower local                                                               
mill rate.  He detailed  that the producers  felt that  having an                                                               
uplift on  the capital costs  would just exasperate  any economic                                                               
issues that would  be associated with cost overruns.  He said the                                                               
producers  asserted that  cost  overruns  where already  creating                                                               
economic  difficulties   for  the  project  and   increasing  the                                                               
property  taxes based  on  the  overrun would  make  it worse  by                                                               
introducing  uncertainty.   He  reiterated  that   the  producers                                                               
preferred  a fixed  depreciation and  obsolescence component  and                                                               
asked that  an inflation  escalation slope  be considered  with a                                                               
lower initial  property tax to  provide economic benefits  on the                                                               
front end.                                                                                                                      
COMMISSIONER  HOFFBECK pointed  out  that  using impact  payments                                                               
during construction  lowers the burden from  property taxes going                                                               
in. He added that using a 5-year  average could take as much as 8                                                               
years before the  property would be at its  full value, depending                                                               
on  how quickly  all  of the  throughput is  brought  up to  full                                                               
capacity, but  the lower burden  formula eventually  crosses over                                                               
the  standard property  tax regime's  projection where  inflation                                                               
would increase  the value. He  asserted that there would  be some                                                               
opportunities on the out-years for  the municipalities to benefit                                                               
and using  the time-value  of money  at different  discount rates                                                               
between industry,  local, and state would  provide an opportunity                                                               
for both parties.                                                                                                               
3:53:36 PM                                                                                                                    
He set forth  that the final formula that is  embedded within the                                                               
draft language as follows:                                                                                                      
     Original  cost,  times  an inflation  factor,  times  a                                                                    
     depreciation  factor,  times   the  actual  throughput,                                                                    
     divided by  design throughput  with no  exponent, times                                                                    
     20 mills.                                                                                                                  
He asserted that  the formula's beauty is that  the original cost                                                               
would  be fixed  by the  project, either  by estimates  or actual                                                               
cost.  He  detailed that  the  inflation  factor would  be  fixed                                                               
within  the  fiscal  agreements  as  would  be  the  depreciation                                                               
factor.  He  added   that  the  actual  throughput   would  be  a                                                               
measurable  annual number  and would  not  be subjective,  design                                                               
throughput would be fixed by  project specific data, and the mill                                                               
rate  would be  fixed by  statute. He  summarized that  the final                                                               
formula's  simple and  straight forward  approach gets  away from                                                               
all of the variables that have plagued the TAPS value.                                                                          
SENATOR STEDMAN  asked to confirm  that the inflation  rate would                                                               
be set at 4 percent.                                                                                                            
COMMISSIONER  HOFFBECK  replied  that  MAGP Board  decided  on  4                                                               
percent, but the number is certainly  not locked down and will be                                                               
negotiated as part of the  commercial agreement. He noted that he                                                               
had asked  MAGP Board to  review inflation over the  past decades                                                               
and the actual inflation rate was a little less than 3 percent.                                                                 
CHAIR BISHOP asked that Commissioner Hoffbeck walk through the                                                                  
3:56:00 PM                                                                                                                    
COMMISSIONER HOFFBECK addressed the bill's sections as follows:                                                                 
   · Section 1, simply breaks out the gas line as a                                                                             
     separate asset within the AS 43.56 tax statutes.                                                                           
   · Section 2, amends AS 43.56.060(e) in the pipeline                                                                          
     section  to  add  the conforming  reference  to  exempt                                                                    
     property exclusively  used for North Slope  natural gas                                                                    
     project and move it to subsection (h).                                                                                     
   · Section 3, is the actual subsection (h). There are two                                                                     
     parts,   the  first   sentence  is   more  or   less  a                                                                    
     placeholder  for impact  payments. When  first drafted,                                                                    
     there  was  no statement  as  to  what happened  during                                                                    
     construction  and  we  felt   that  could  create  some                                                                    
     confusion that  the language exempted the  project from                                                                    
     any kind  of tax  payments during construction,  so the                                                                    
     sentence was  added that says  the full and  true value                                                                    
     will be calculated each January  1 with the intent that                                                                    
     the  language  will  eventually   be  replaced  with  a                                                                    
     schedule   of  impact   payments  versus   the  generic                                                                    
     statement.   The  second   sentence   is  a   narrative                                                                    
     description  of   the  formula  which  is   simply  the                                                                    
     original  cost adjusted  for inflation,  reduced by  an                                                                    
     annual  allowance for  depreciation, and  the remaining                                                                    
     is subject to a throughput factor.                                                                                         
3:58:05 PM                                                                                                                    
He addressed Section 4 as follows:                                                                                              
   · Section 4 amends the statutory language for a taxable                                                                      
     property. The "bolded" and underlined portion brings the                                                                   
     gas liquefaction plant itself under AS 43.56 statutes                                                                      
     rather than leaving it under the local assessment statutes.                                                                
He explained AS 43.56 as follows:                                                                                               
     The way  AS 43.56 works is  it is a flat  20-mill levy,                                                                    
     2-percent  levy,  against  the  value of  oil  and  gas                                                                    
     property within  the State  of Alaska,  that's assessed                                                                    
     by the  state. Local  jurisdictions can assess  oil and                                                                    
     gas  property as  well using  whatever  mill rate  they                                                                    
     charge every other  property within their jurisdiction.                                                                    
     What  the   oil  and  gas   companies  pay   the  local                                                                    
     jurisdictions is then  used as a credit  against the 20                                                                    
     mill levy that they pay the state.                                                                                         
COMMISSIONER HOFFBECK  summarized that the language  in Section 4                                                               
takes  the  gas  liquefaction  plant  out  of  the  lower  taxing                                                               
structure of the  local assessment and moves it into  the 20 mill                                                               
levy  in  the oil  and  gas  assessment.  He disclosed  that  the                                                               
producers saw the  20-mill levy on the gas  liquefaction plant as                                                               
an extra  burden that the project  has to carry because  the levy                                                               
raises their tax  burden. He said the  department recognizes that                                                               
the levy  will have to be  compensated for within other  parts of                                                               
the formula or within other  economics of the project because the                                                               
intent  is not  to  raise the  tax burden  on  the producers.  He                                                               
asserted that at some point  the distribution of revenues between                                                               
local jurisdictions and the state must be determined.                                                                           
4:00:35 PM                                                                                                                    
He  offered  an  example   of  government  revenues  distribution                                                               
between entities as follows:                                                                                                    
     Let's  just say  that the  state chose  to say  that 50                                                                    
     percent of  all revenues off  of the property  tax will                                                                    
     flow to  the state before  there is any  allocations to                                                                    
     the  municipalities. If  everybody  is  under the  same                                                                    
     taxing  authority,  everybody  is under  that  same  20                                                                    
     mills.  That's  a  relatively easy  process  where  the                                                                    
     state takes the  10 mills off of the  top and everybody                                                                    
     calculates the  remainder below; but, if  Kenai is only                                                                    
     locally assessed  and there is  no state levy,  now you                                                                    
     get into the  position of how does the state  go in and                                                                    
     dictate to Kenai that their  local assessment has to be                                                                    
     reduced  by x-number  because we  are taking  a certain                                                                    
     percentage  of  the value  of  the  AKLNG property,  it                                                                    
     really  would  require  putting  constraints  on  local                                                                    
     taxing  authority which  has multiple  effects not  the                                                                    
     least of  which is how they  can bond, so by  moving it                                                                    
     over, everything is under the  20 mill, we can get away                                                                    
     with having to constrain local taxing authorities.                                                                         
SENATOR EGAN asked  if the state gets anything  if a municipality                                                               
taxes at 20 mills.                                                                                                              
COMMISSIONER HOFFBECK  answered that  under the  current property                                                               
tax regime,  the state  would get nothing.  He noted  that Valdez                                                               
had taxed TAPS for years at 20 mills.                                                                                           
SENATOR EGAN asked to verify  that the same situation would occur                                                               
under the new proposal.                                                                                                         
COMMISSIONER HOFFBECK answered  that there is nothing  in the new                                                               
proposal that  changes the scenario that  Senator Egan described.                                                               
He admitted  that the department  is contemplating going  back to                                                               
the municipalities to have a  difficult discussion on determining                                                               
how much property  tax revenue will flow locally and  how much is                                                               
going  to flow  to the  state. He  pointed out  that the  revenue                                                               
distribution is  not a  project issue,  the project  is concerned                                                               
with the  total amount.  He said in  negotiating the  fiscals for                                                               
the  project, the  producers  just  need to  know  the total  tax                                                               
amount and  they do  not care  how the revenues  are going  to be                                                               
distributed around  the state. He remarked  that the distribution                                                               
of  revenues really  is a  discussion between  the state  and the                                                               
local jurisdictions.  He summarized  that intent in  crafting the                                                               
language  was  to  make  sure  that process  was  not  made  more                                                               
difficult and  that is why  it was  all moved under  one standard                                                               
taxing authority.                                                                                                               
4:03:07 PM                                                                                                                    
SENATOR STEDMAN asked for a rough  estimation on the cost for the                                                               
gas liquefaction plant.                                                                                                         
COMMISSIONER HOFFBECK answered approximately $25 billion.                                                                       
SENATOR STEDMAN asked what the property  tax would be for the $25                                                               
billion plant.                                                                                                                  
COMMISSIONER HOFFBECK answered $500 million.                                                                                    
SENATOR  STEDMAN   asked  if  there  are   readjustments,  escape                                                               
clauses, or  negotiating clauses  if economic changes  happens in                                                               
the future that disadvantages the industry or state.                                                                            
COMMISSIONER HOFFBECK answered that  statutes can be changed, but                                                               
the larger  question pertains to  how the exactly  the commercial                                                               
agreements are  going to be  finalized and whether there  will be                                                               
constitutional provisions or contractual agreements.                                                                            
SENATOR  STEDMAN  asked  to  verify  that  the  gas  liquefaction                                                               
plant's dollar  amount includes  the dock  and everything  at the                                                               
COMMISSIONER HOFFBECK answered correct.                                                                                         
SENATOR  STEDMAN asked  if  the  LNG ships  were  outside of  the                                                               
taxing authority.                                                                                                               
COMMISSIONER HOFFBECK answered yes.                                                                                             
CHAIR BISHOP asked  to verify that the $500 million  is an annual                                                               
COMMISSIONER  HOFFBECK answered  correct. He  explained that  the                                                               
formula is fairly open ended to  take into account the $1 billion                                                               
per year  on property taxes on  a $50 billion project,  an amount                                                               
that is a  lot for the project to bear.  He specified that rather                                                               
than locking  in the  $1 billion tax  and making  everything else                                                               
work,  the thought  was  having some  flexibility  in the  fiscal                                                               
negotiations was more prudent.                                                                                                  
4:05:44 PM                                                                                                                    
SENATOR STEDMAN  noted that Sitka  was a 1-mill town  for decades                                                               
and the  millage rate was  3 mills.  He asserted that  the mill's                                                               
property  tax rate  worked very  well for  both the  industry and                                                               
community. He  asked what the magic  was in 20 mills  and how was                                                               
the number chosen.                                                                                                              
COMMISSIONER HOFFBECK  surmised that the  20 mill rate  was based                                                               
on oil and gas legislation in the 1970s.                                                                                        
CHAIR BISHOP opined  that everything was on the  table because SB
100 was  having its  first hearing in  the committee.  He pointed                                                               
out that the  committee is dealing with gas rather  than oil from                                                               
40 years in  the past. He asserted that there  is a difference in                                                               
value, so all things are on the table.                                                                                          
SENATOR STEDMAN  remarked that  he does  not understand  why some                                                               
millage rate from 30 to 50 years  ago is locked in on. He pointed                                                               
out that the millage rate and  formula can be changed to come out                                                               
with the  same numeric, but  opined that  the 20 mill  rate seems                                                               
extremely high.                                                                                                                 
COMMISSIONER HOFFBECK noted that he  was an assessor and 20 mills                                                               
is kind of a breaking point  where taxpayers won't allow it to go                                                               
any higher.  He pointed  out that the  only real  concerns within                                                               
the existing property tax laws is  that everybody has to be taxed                                                               
at the  same rate.  He opined  that care should  be taken  to not                                                               
create a threshold that is lower  than the local mill rates where                                                               
people start  feeling like  the big  industrial property  was not                                                               
paying the same rate as everybody else.                                                                                         
4:08:51 PM                                                                                                                    
SENATOR STEDMAN remarked  that the amount of money  that would go                                                               
into  local  coffers would  be  huge  from  the shear  value  and                                                               
dominance of the property. He  reiterated that Sitka had a 3-mill                                                               
rate  and the  pulp mill  virtually  carried the  whole town  and                                                               
enabled taxpayers  in the community  to pay 3 mills.  He remarked                                                               
that Sitka  could have raised the  property tax rate to  20 mills                                                               
and the  pulp mill would have  paid it, but then  everybody would                                                               
have had  to pay 20 mills.  He admitted that the  economic models                                                               
were a  little different in the  late 1950s, but the  3-mill rate                                                               
worked very  well in  Sitka for  decades and  did not  engulf the                                                               
industry and the community in a lot of adversarial dialogue.                                                                    
COMMISSIONER  HOFFBECK remarked  that  he did  not disagree  with                                                               
anything that Senator Stedman said.  He detailed the property tax                                                               
revenue benefits for the state as follows:                                                                                      
     When we talk about the  potential revenues to the state                                                                    
     from a  gas line at  $4 billion  a year, $1  billion of                                                                    
     that is  anticipated to be the  property tax component.                                                                    
     We need to  realize that the state will  be the largest                                                                    
     recipient of  the property  taxes when  it is  all said                                                                    
     and  done of  any  individual entity  and  then if  the                                                                    
     state decides  to trim everybody  back, saying  this is                                                                    
     more  than local  jurisdictions need,  even more  money                                                                    
     flows to  the state;  it is  not unreasonable  to think                                                                    
     that $500 million to $700  million of this property tax                                                                    
     would actually flow  to the state rather  than to local                                                                    
He  set  forth that  property  tax  revenue  is a  steady  income                                                               
stream. He noted that the state's  25 percent share in gas can be                                                               
fairly variable  due to gas  prices. He summarized  that property                                                               
tax revenue has to be part  of the total fiscal package and needs                                                               
to be treated as asset in negotiations.                                                                                         
4:11:32 PM                                                                                                                    
SENATOR EGAN noted varied tax factors as follows:                                                                               
     The state's  tax structure, a whole  bunch of different                                                                    
     factors weigh  in. There are  communities in  the state                                                                    
     that have  20 mills, there are  communities that charge                                                                    
     much  less  and  have  a sales  tax,  there  are  major                                                                    
     communities in the  state that don't have  a sales tax,                                                                    
     so that's got to weigh  into the discussion as well. My                                                                    
     community is not served by  this, I mean it's not going                                                                    
     to be  effected right off the  bat, but that has  to be                                                                    
     taken  into  consideration  as   well,  our  total  tax                                                                    
     structure and how it is written.                                                                                           
COMMISSIONER  HOFFBECK replied  that Senator  Egan was  right. He                                                               
specified that  the 20 mill  levy in  the formula sets  the total                                                               
take and how  the revenue gets divided up was  still a discussion                                                               
that needs  to occur.  He said  the lawmakers  could say  that it                                                               
does not  care what  the mill  rates were  and dictate  that each                                                               
jurisdiction gets a 5 mill  equivalent against the value in their                                                               
jurisdiction. He  remarked that a  lot of different  things could                                                               
be done to figure out how to "divide up the pie."                                                                               
SENATOR  EGAN asked  to verify  that  a community  could have  an                                                               
opportunity  to  collect  the  20   mills  and  still  charge  an                                                               
additional 5 percent or 6 percent sales tax.                                                                                    
4:13:20 PM                                                                                                                    
COMMISSIONER HOFFBECK answered yes.                                                                                             
SENATOR  EGAN explained  that Juneau  has mill  limits and  other                                                               
communities  do  as   well,  but  noted  that   Juneau  has  done                                                               
initiatives  for  sales taxes  as  well.  He admitted  that  more                                                               
thought would have to be put into the state's tax revenue.                                                                      
SENATOR  STEDMAN asked  to  clarify that  $500  million in  taxes                                                               
would come from the gas liquefaction  plant and the state owns 25                                                               
percent of the gas liquefaction plant as well.                                                                                  
COMMISSIONER HOFFBECK answered correct.                                                                                         
SENATOR STEDMAN  asked if the  state's 25 percent is  included in                                                               
the $500 million  where the 25 percent is knocked  out to see the                                                               
COMMISSIONER  HOFFBECK   answered  that  currently   the  state's                                                               
percentage  is included  in the  property tax.  He detailed  that                                                               
there  has not  been any  final discussion  on whether  the state                                                               
will be  a taxpayer  or not.  He pointed  out that  a lot  of the                                                               
decision ultimately  has to do  with TransCanada and a  few other                                                               
things as to  whether the state's portion is a  taxable entity or                                                               
CHAIR BISHOP  asked how  the gas treatment  plant (GTP)  would be                                                               
taxed and where would the revenue go.                                                                                           
COMMISSIONER  HOFFBECK answered  that  the GTP's  value would  be                                                               
taxed under  AS 43.56 at  20 mills.  He explained that  under the                                                               
current tax  structure, the revenue  would go to the  North Slope                                                               
Borough.  He  noted  that  the   North  Slope  Borough  typically                                                               
assesses  at  18.5  mills. He  revealed  that  another  provision                                                               
within the  property tax  statutes limits  the amount  of revenue                                                               
that  can  flow to  any  jurisdiction,  the statute  changed  the                                                               
previous  year and  used  to be  fixed at  225.  He detailed  the                                                               
formula as follows:                                                                                                             
     The  formula  was you  took  the  statewide per  capita                                                                    
     assessed  value,  so  how much  per  person  statewide,                                                                    
     times 225 percent,  that was the limit  of your taxable                                                                    
     asset that you  could tax, times 30 mills  would be the                                                                    
     maximum  amount  of  revenue that  you  could  actually                                                                    
     generate for operations within your jurisdiction.                                                                          
He revealed  that the North  Slope Borough is already  capped and                                                               
any additional property tax revenue  would not be allowed for the                                                               
gas operations.  He noted  that there  is another  provision that                                                               
states that there  is no cap for bonded debt,  so the North Slope                                                               
Borough could acquire additional bonded  debt and tax at a little                                                               
bit higher rate,  but there would likely be a  debt component. He                                                               
specified  that there  would  be absolutely  no  more money  that                                                               
would go  towards operations to  the North Slope Borough,  so the                                                               
GTP's mill rate would drop and  the money should flow back to the                                                               
4:16:19 PM                                                                                                                    
SENATOR STEDMAN asked  to verify that everything  upstream to the                                                               
point of  production would  fall under  the current  structure on                                                               
COMMISSIONER  HOFFBECK  answered  correct. He  pointed  out  that                                                               
there is  one more provision  that will  be reviewed in  the next                                                               
section  of SB  100 that  actually tightens  the structure  a bit                                                               
SENATOR STEDMAN  asked if  there have  been any  conversations on                                                               
what kind of buildout might  or might not come after construction                                                               
of the AKLNG line.                                                                                                              
COMMISSIONER HOFFBECK answered no.                                                                                              
He addressed section 5 as follows:                                                                                              
     Section  5 amends  AS 43.56.210,  adding subsection  7,                                                                    
     which defines  the various  components of  the project;                                                                    
     it says  the North  Slope Natural  Gas Project  means a                                                                    
     project to  transport gas produced north  of 68 degrees                                                                    
     north latitude to gas treatment  plant, a gas pipeline,                                                                    
     a liquefaction  plant, and a marine  terminal, and then                                                                    
     it goes on to fairly  generic fashion to define each of                                                                    
     those four  components. There are  two things  that I'd                                                                    
     like to point out on the  gas pipeline, at the very end                                                                    
     of the  last sentence,  there's a provision  that says,                                                                    
     "Including  any pipelines  down  stream  of an  offtake                                                                    
     point between a gas  treatment plant and a liquefaction                                                                    
     plant;" so what that is  saying is anything between the                                                                    
     GTP on  the North Slope  and the liquefaction  plant in                                                                    
     Kenai,  if there's  any offtake  points, anything  past                                                                    
     that offtake point does not  fall under this agreement,                                                                    
     it would be a separate asset taxed separately.                                                                             
CHAIR  BISHOP   asked  if  the  sentence   Commissioner  Hoffbeck                                                               
referred to could be called "middle earth."                                                                                     
COMMISSIONER HOFFBECK  answered yes. He reiterated  that anything                                                               
beyond an offtake point is not part of the project.                                                                             
SENATOR STEDMAN inquired  what the property tax  collected by the                                                               
state for oil  and gas revenue was,  including municipalities. He                                                               
said he recalls $450 million was collected.                                                                                     
4:18:45 PM                                                                                                                    
COMMISSIONER  HOFFBECK replied  that  he thought  the amount  was                                                               
mid-$300 million.                                                                                                               
SENATOR STEDMAN  asked if Commissioner Hoffbeck's  estimation was                                                               
the state's share.                                                                                                              
COMMISSIONER  HOFFBECK responded  that the  he thought  the total                                                               
oil and gas property tax collected was in the $16 billion range.                                                                
SENATOR STEDMAN hypothesized as follows:                                                                                        
     Say it  is $350 million,  just for conversation,  so if                                                                    
     our current infrastructure is  worth $350 million, then                                                                    
     this  additional  construction  is going  to  be  worth                                                                    
     somewhere  at $1  billion,  not to  the  state, but  in                                                                    
     gross  value. Does  the formula  before you  deduct out                                                                    
     the state's percentage of ownership?                                                                                       
COMMISSIONER  HOFFBECK answered  correct. He  specified that  the                                                               
value of the project will probably  be as much as three times the                                                               
value of  the existing  oil and  gas assets  within the  State of                                                               
SENATOR  STEDMAN asked  to  verify  that Commissioner  Hoffbeck's                                                               
statement does not include any buildout.                                                                                        
COMMISSIONER HOFFBECK answered yes.                                                                                             
SENATOR STEDMAN asked if the state can we get a pre-payment.                                                                    
COMMISSIONER HOFFBECK  pointed out that another  component within                                                               
the definition is  in the GTP and the final  line goes to Senator                                                               
Stedman's question  and says,  "Excluding any  transmission lines                                                               
that  deliver  gas to  the  inlet  flange  of the  facility."  He                                                               
revealed that  a tighter  boundary was  drawn for  property taxes                                                               
that  had been  discussed  in other  presentations. He  specified                                                               
that the  Point Thomson pipeline would  not be part of  the AKLNG                                                               
Project nor  would the  pipeline from  the central  gas facility,                                                               
the GTP. He explained that  the tightened property tax boundaries                                                               
was  done  to  deal  with   expansion  issues  and  clarify  that                                                               
pipelines feeding the GTP would  not automatically fall under the                                                               
fixed PILT,  the asset would  be taxed separately. He  noted that                                                               
producers feared that  taxes would possibly double  on a pipeline                                                               
like Pt. Thomson.  He reiterated that Pt. Thomson  would be taxed                                                               
under the standard  tax regime, but starting at  the inlet flange                                                               
all  would fall  under whatever  is agreed  in the  PILT for  the                                                               
He  summarized that  the  pushbacks from  the  producers were  as                                                               
   · 20 mill rate.                                                                                                              
   · Tying a tighter boundary around the project.                                                                               
   · Anticipating a PILT with a fixed cents per MCF or cents per                                                                
COMMISSIONER HOFFBECK admitted that  the necessary inputs are not                                                               
available for  the formula to  derive what the project  will cost                                                               
and how much gas is going to be carried.                                                                                        
4:22:02 PM                                                                                                                    
SENATOR  STEDMAN  asked how  the  state  will be  protected  with                                                               
alignment where  alignment translated into  a percent of  the gas                                                               
equaling   to   the   percent   of   the   ownership   with   the                                                               
infrastructure:  GTP,   pipeline,  and  liquefaction   plant.  He                                                               
continued to comment as follows:                                                                                                
     It just appears on the  surface the further we get away                                                                    
     from that  with TransCanada's ownership, the  more risk                                                                    
     that we have  as a state getting these  numbers off. If                                                                    
     we are  low, or  for that  matter high,  and we  are in                                                                    
     balance  or  in  alignment  with the  industry,  so  it                                                                    
     pretty much  will come  out in the  wash, a  lot easier                                                                    
     than  if TransCanada  is  in the  middle  of our  lunch                                                                    
     table eating our beef sandwich  and we get a little bit                                                                    
     of salad on the side or  something. So there is at some                                                                    
     point  I   think  we   need  to   have  that   type  of                                                                    
     conversation  so  we  understand  as  policymakers  any                                                                    
     potential imbalance  or balancing  that may  take place                                                                    
     as we change that ownership percentage.                                                                                    
COMMISSIONER  HOFFBECK  agreed that  a  discussion  will need  to                                                               
occur  and TransCanada's  ultimate  position in  the pipeline  is                                                               
still not determined.                                                                                                           
CHAIR BISHOP agreed  that the AKLNG project is going  to have far                                                               
reaching  impacts  on communities  along  the  route as  well  as                                                               
communities  not  connected  to  the  route.  He  referenced  the                                                               
impacts of  TAPS on Fairbanks and  asked that in order  to defray                                                               
costs  to   the  municipalities,   how  would   SB  100   or  the                                                               
administration  handle impacts  during  the  construction of  the                                                               
AKLNG pipeline.                                                                                                                 
COMMISSIONER HOFFBECK  explained that  the discussion  on impacts                                                               
was  underway  with three  avenues  being  reviewed to  determine                                                               
impacts as follows:                                                                                                             
   1. Environmental impact process with the Federal Energy                                                                      
     Regulatory Commission (FERC), impacts will be identified,                                                                  
     but a dollar value is not attached.                                                                                        
   2. The department has a tremendous amount of information that                                                                
     was developed under the Stranded Gas Development Act and                                                                   
     the Alaska Gasline Inducement Act (AGIA).                                                                                  
   3. Within the sponsor group there is a team that is working on                                                               
COMMISSIONER  HOFFBECK   summarized  that   all  of   the  impact                                                               
information  will ultimately  come  together  and the  department                                                               
will try to come up with a  schedule of impact payments and a way                                                               
to  determine  where  the  payments  should  be  distributed.  He                                                               
revealed  that  the  impact discussion  was  underway  with  MAGP                                                               
4:25:36 PM                                                                                                                    
SENATOR  STEDMAN  asked  to address  substantial  property  taxes                                                               
given during  the construction phase  for a mega-project  that is                                                               
extremely capital  intensive like  the AKLNG Project.  He pointed                                                               
out  that  consideration  has  to  be given  to  not  burden  the                                                               
economics  of  the time-value  of  money  in the  calculation  in                                                               
trying to  move the project  forward. He asked  that Commissioner                                                               
Hoffbeck  address  why the  state  might  or might  not  consider                                                               
relief on any big project.                                                                                                      
COMMISSIONER  HOFFBECK answered  that the  biggest impact  on the                                                               
project  is the  time before  actual revenue  is being  generated                                                               
with  outflows of  cash  during construction  with  no inflow  of                                                               
revenue. He  explained that the  time-value of money is  the lost                                                               
opportunity elsewhere where  the money could be  used to generate                                                               
revenue. He  pointed out  that the tax  burden is  something that                                                               
does  not really  add  to the  value of  the  project during  the                                                               
period before  revenue is  being generated, but  the taxes  are a                                                               
significant outflow of cash to the project.                                                                                     
He asserted that the state is  very sensitive to the relief issue                                                               
as are the  producer groups. He explained that the  idea would be                                                               
that  rather than  having $1  billion taxed  incrementally during                                                               
construction,  a   lesser  amount   would  be  paid   that  would                                                               
sufficiently cover direct and  indirect impacts from construction                                                               
that would hold the municipalities whole  and yet would not put a                                                               
lot of impact  on the pipeline where the taxes  could be deferred                                                               
or  simply  becomes  part  of the  state's  contribution  to  the                                                               
project. He said  there are a lot of ways  to deal with municipal                                                               
impact,  but there  is real  sensitivity to  the early  cash flow                                                               
years prior to revenue paying the taxes.                                                                                        
4:28:26 PM                                                                                                                    
SENATOR  STEDMAN remarked  that as  policymakers, looking  at the                                                               
AKLNG Project as potentially in  boroughs entirely from coast-to-                                                               
coast was in the state's best  interest in how property taxes are                                                               
COMMISSIONER  HOFFBECK replied  that  the  potential for  Senator                                                               
Stedman's  statement does  exist. He  opined that  there is  some                                                               
hope by  the state  that the  project would  create incorporation                                                               
within  areas that  would  have a  local  government and  revenue                                                               
source where the state would not  have to take care of the areas.                                                               
He noted  that the  entire borough scenario  for the  project has                                                               
not occurred around the TAPS pipeline.                                                                                          
4:30:17 PM                                                                                                                    
SENATOR STEDMAN  recommended that a  stress test would be  a good                                                               
exercise in the  direction that he suggested. He  opined that the                                                               
recent  oil tax  structure was  not stress  tested anywhere  near                                                               
enough  and ultimately  led  to  some issues  that  the state  is                                                               
currently dealing  with. He summarized  that the agreed  upon tax                                                               
formula should be stress-tested under several scenarios.                                                                        
CHAIR BISHOP pointed  out that the sponsor  statement talks about                                                               
taking recommendations  from the MAGP Board  regarding PILTs, but                                                               
SB 100 does not specifically address PILTs.                                                                                     
COMMISSIONER HOFFBECK  answered that  the bill  does not  make it                                                               
all  the way  to  the PILT  process.  He set  forth  that SB  100                                                               
isolates  the components  needed for  working through  the fiscal                                                               
negotiations and gets rid of a  lot of the issues associated with                                                               
He  stated  that  he  would  like  to  addresses  Senator  Egan's                                                               
comments on property taxes and  Chair Bishop's question on PILTs.                                                               
He  noted that  the Denali  Borough  is a  jurisdiction that  the                                                               
pipeline will  flow through  that does not  have a  property tax,                                                               
but the borough  is obviously interested in having a  PILT to get                                                               
some  value off  of the  project  without having  to implement  a                                                               
property tax. He  said there are issues associated  with the PILT                                                               
versus a  standard taxing authority  that needs to  be addressed.                                                               
COMMISSIONER  HOFFBECK addressed  PILTs  and  said the  producers                                                               
ultimately desire a  cents per MCF PILT that could  be applied to                                                               
every molecule  of gas that  flows down the  pipeline, ultimately                                                               
making the calculation much easier.                                                                                             
4:33:08 PM                                                                                                                    
CHAIR  BISHOP asked  if the  proposed  tax assessment  in SB  100                                                               
takes into account the 12  FERC resource books, particularly book                                                               
number-5 which deals with community socioeconomic conditions.                                                                   
COMMISSIONER HOFFBECK answered that  the particular resource book                                                               
Chair Bishop noted  is anticipated to be part of  the analysis on                                                               
impact payments.  He added  that he believes  that MAGP  Board is                                                               
aware of the public hearings  associated with FERC and intends to                                                               
have some input as well.                                                                                                        
CHAIR BISHOP  noted that  he appreciates  Commissioner Hoffbeck's                                                               
comments on "getting it right."  He concurred that a mega-project                                                               
does burn through  some major cash during  the construction phase                                                               
and recounted his  TAPS construction days as to  how critical the                                                               
first tanker out of Valdez was.                                                                                                 
4:35:21 PM                                                                                                                    
COMMISSIONER HOFFBECK  shared that MAGP Board  expressed the same                                                               
sentiment   in  recognizing   that  the   project  has   to  work                                                               
economically as well. He opined  that the change in sentiment was                                                               
due to the  stranded gas days where there was  a lot of animosity                                                               
between the  state, producers, and  municipalities. He  said MAGP                                                               
Board has been  very open and willing to work  the issues. He set                                                               
forth  that  a  lot  of  the  credit  has  to  go  to  the  early                                                               
involvement  of  the  Parnell Administration  that  brought  MAGP                                                               
Board in early in the process.                                                                                                  
CHAIR BISHOP noted  that decisions have not been  made on Royalty                                                               
In Kind (RIK) from  SB 138 and PILT from SB 100.  He asked if the                                                               
project  is sliding  behind schedule  because  the two  benchmark                                                               
decisions have not been made.                                                                                                   
COMMISSIONER  HOFFBECK answered  no. He  detailed that  a lot  of                                                               
work  is  being  done  to  set the  foundation  for  making  good                                                               
decisions rather  than being driven  by a timeline. He  set forth                                                               
that the  project is definitely  within the time frames  laid out                                                               
by the heads of agreement (HOA).                                                                                                
4:38:44 PM                                                                                                                    
CHAIR  BISHOP   announced  that  seeing  and   hearing  no  other                                                               
comments, SB 100 will be set aside.                                                                                             

Document Name Date/Time Subjects
SB 100 Presentation on Property Tax Bill.pdf SCRA 4/14/2015 3:30:00 PM
SB 100
SB 100 Sectional Analysis.pdf SCRA 4/14/2015 3:30:00 PM
SB 100
SB100 Fiscal Note-0832-DOR-TAX-4-1-15 (3).pdf SCRA 4/14/2015 3:30:00 PM
SB 100
SB100 Sponsor Statement.pdf SCRA 4/14/2015 3:30:00 PM
SB 100
SB100 Supporting Documents - DOR Hearing Request Letter.pdf SCRA 4/14/2015 3:30:00 PM
SB 100
SB100 ver A.PDF SCRA 4/14/2015 3:30:00 PM
SB 100
CSHB 75 Letter of Support CBJ.pdf SCRA 4/14/2015 3:30:00 PM
HB 75
CSHB 75 Amendment Opposition CRCL.pdf SCRA 4/14/2015 3:30:00 PM
HB 75
SB 100 Support Letter Kenai Peninsula.pdf SCRA 4/14/2015 3:30:00 PM
SB 100
CSHB 75 Hoffman Amendment.pdf SCRA 4/14/2015 3:30:00 PM
HB 75
SB 100 MAGP Board PILT Modeling Analysis 3.2.15.pdf SCRA 4/14/2015 3:30:00 PM
SB 100
SB 100 Municipal Advisory Gas Project Review Board Annual Report - DOR 3.3.15.pdf SCRA 4/14/2015 3:30:00 PM
SB 100