Legislature(2009 - 2010)BUTROVICH 205

04/09/2010 03:30 PM Senate RESOURCES

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Continuation of Any Overviews or Bills TELECONFERENCED
Not Completed in Previous Hearings.
+ Bills Previously Heard/Scheduled TELECONFERENCED
Moved SCS CSHB 210(RES) Out of Committee
Heard & Held
Moved SCS HJR 26(RES) Out of Committee
Moved CSHCR 10(RES) Out of Committee
            HB 280-NATURAL GAS: STORAGE/ TAX CREDITS                                                                        
3:42:36 PM                                                                                                                    
CO-CHAIR WIELECHOWSKI announced HB 280 to be up for                                                                             
consideration [CSHB 2180(FIN)am was before the committee].                                                                      
3:44:39 PM                                                                                                                    
CO-CHAIR WIELECHOWSKI said a series of amendments had been                                                                      
combined into one. He moved Amendment 1 and objected for                                                                        
purposes of discussion.                                                                                                         
                          AMENDMENT 1                                                                                       
     OFFERED IN THE SENATE                                                                                                      
          TO: CSHB 280 (FIN) am                                                                                                 
     Page 2, line 11:Delete "and"                                                                                               
     Page 2, line 13, following "day":                                                                                          
          Insert "; and                                                                                                         
               (3) that the facility qualifies as a gas                                                                         
     storage facility for the purposes of  this section"                                                                        
     Page 9, line 4:                                                                                                            
          Delete ", treaters, and separators"                                                                                   
          Insert "and gas treatment plants, but not                                                                             
       including a liquefied natural gas or manufacturing                                                                       
     plant or facility"                                                                                                         
     Page 9, line 19:                                                                                                           
          Delete "claimed"                                                                                                      
          Insert "received for each gas storage facility"                                                                       
     Page 10, lines 11 - 12:                                                                                                    
          Delete all material and insert:                                                                                       
               "(4) must be regulated under AS 42.05 as a                                                                       
     utility  and be  available  to furnish  the service  of                                                                    
     natural gas storage to the  public for compensation; in                                                                    
     this paragraph,  "service of  natural gas  storage" has                                                                    
     the meaning given in AS 42.05.990"                                                                                         
     Page 10, line 28:                                                                                                          
          Delete "any taxable year ending before the date                                                                       
     of the refund claim"                                                                                                       
          Insert "the calendar year in which the claim is                                                                       
     Page 11, lines 25 - 28:                                                                                                    
          Delete all material.                                                                                                  
     Reletter the following subsections accordingly.                                                                            
     Page 12, following line 24:                                                                                                
          Insert a new bill section to read:                                                                                    
     "* Sec. 14. AS 43.55.020(f) is amended to read:                                                                          
          "(f) If oil or gas is produced but not sold, gas                                                                  
     is produced but is stored in a                                                                                         
     gas storage  facility, or [IF]  oil or gas  is produced                                                                
     and sold under circumstances  where the sale price does                                                                    
     not represent  the prevailing value  for oil or  gas of                                                                    
     like                                              kind,                                                                    
     character, or quality  in the field or  area from which                                                                    
     the  product is  produced, the  department may  require                                                                    
     the tax to  be paid upon the basis of  the value of oil                                                                    
     or                        gas                        of                                                                    
     the same  kind, quality,  and character  prevailing for                                                                    
     that      field      or       area      during      the                                                                    
     calendar month of production or sale."                                                                                     
     Renumber the following bill sections accordingly.                                                                          
     Page 12, line 25:                                                                                                          
          Delete "a new subsection"                                                                                             
          Insert "new subsections"                                                                                              
     Page 13, line 4:                                                                                                           
          Delete ""gas storage facility,''''                                                                                    
     Page 13, following line 5:                                                                                                 
          Insert a new subsection to read:                                                                                      
          "(j)      In this section, "gas storage facility"                                                                     
     has         the         meaning        given         in                                                                    
     AS 31.05.032"                                                                                                              
     Page 15, line 26 through page 16, line 12                                                                                  
          Delete all material.                                                                                                  
         Insert "(o) For the purposes of (m) and (n) of this                                                                    
     section,  a  Cook Inlet  well  lease  expenditure is  a                                                                    
     lease expenditure  that is incurred  in the  Cook Inlet                                                                    
     sedimentary basin that is                                                                                                  
          (1) directly related to an exploration well, a                                                                        
     stratigraphic  test  well,  a  producing  well,  or  an                                                                    
     injection  well  other than  a  disposal  well, if  the                                                                    
     expenditure is  a qualified capital expenditure  and an                                                                    
     intangible  drilling  and development  cost  authorized                                                                    
     under 26  U.S.C. (Internal  Revenue Code),  as amended,                                                                    
     and  26 C.F.R.  1.612-4,  regardless  of the  elections                                                                    
     made  under  26 U.S.C.  263(c);  in  this paragraph  an                                                                    
     expenditure  directly related  to  a  well includes  an                                                                    
     expenditure  for  well  sidetracking,  well  deepening,                                                                    
     well  completion  or  recompletion, or  well  workover,                                                                    
     regardless  as to  whether the  well is  or has  been a                                                                    
     producing well; or                                                                                                         
          (2) an expense for seismic work conducted within                                                                      
     the boundaries of a production or exploration unit."                                                                       
CO-CHAIR WIELECHOWSKI objected for discussion purposes.                                                                         
3:45:27 PM                                                                                                                    
REPRESENTATIVE  MIKE HAWKER,  sponsor of  HB 280,  explained that                                                               
the Department of Revenue had raised  a number of issues based on                                                               
their final comprehensive review of  the bill, and he worked very                                                               
closely with  them on  this amendment  that clarifies  his intent                                                               
and  responds  to  the department's  concerns.  There  are  three                                                               
actual changes  in the amendment.  In the  bill the AOGCC  is the                                                               
certifying agency  for the gas  storage facility. It  was pointed                                                               
out  that  in  those  certifications they  were  never  asked  to                                                               
certify  that   the  gas  facility  itself   actually  meets  the                                                               
definition of a gas storage facility  in the bill; so a provision                                                               
was added to clarify that.                                                                                                      
3:46:00 PM                                                                                                                    
CO-CHAIR MCGUIRE joined the committee.                                                                                          
REPRESENTATIVE HAWKER said the next  provision that was clarified                                                               
is the  one that allows  the small producer buy-back  credit. The                                                               
previous version  said in  order to avail  yourself of  the state                                                               
purchasing the credits  you have earned, that  your tax liability                                                               
from all  years has be zero.  The department pointed out  that it                                                               
is possible  that someone could be  in a very honest  tax dispute                                                               
from  a  prior  year,  which  would leave  an  open  return.  The                                                               
department suggested  providing a little leeway  and allowing the                                                               
credits to be viewed on an  incremental annual basis. So in order                                                               
to cash out  a credit, your current year tax  liability had to be                                                               
The third  change involved a  struggle that several  bills moving                                                               
through the legislature have had  in attempting to define a "well                                                               
lease expenditure,"  the idea being  to allow a  credit structure                                                               
for  the  improvement  of  existing  wells  in  existing  infield                                                               
drilling   for  the   purposes  of   enhancing,  improving,   and                                                               
maintaining the deliverability of  gas. This bill adopts language                                                               
that  was close  to  the original  definition.   Previously  they                                                               
included an allowance  for the ".023" CAPEX  credits and overhead                                                               
allocation  on  the direct  costs;  this  version eliminates  the                                                               
overhead component.                                                                                                             
CO-CHAIR WIELECHOWSKI said it is a very complex bill.                                                                           
3:49:31 PM                                                                                                                    
JULIE LUCKY,  staff to Representative Hawker,  said the amendment                                                               
makes two changes on  page 2, lines 11 and 13.  This is where the                                                               
AOGCC will certify  that the gas storage  facility actually meets                                                               
the definition of  a GSF. The changed  on page 9, line  4, is one                                                               
of those negative assurances that  they did not intend to include                                                               
liquefied natural gas  in a definition and they do  not intend to                                                               
allow  the  RCA  to  have  regulatory  authority  over  liquefied                                                               
natural gas or  manufacturing plants or facilities.  Page 9, line                                                               
19, gives statutory authority to  the Department of Revenue (DOR)                                                               
to give the information to the RCA.                                                                                             
She said there was some concern on  page 10, lines 11 - 12, about                                                               
insuring that  the state knows  which facility was  available for                                                               
the credit.  It seemed that  the cleaner  approach was to  lay it                                                               
out in the area of the statute  that says a credit can be claimed                                                               
if  you are  one of  these  things: you  must be  regulated as  a                                                               
utility  under AS  42.05 and  also  be available  to furnish  the                                                               
service of  natural gas  storage to  the public  for compensation                                                               
(as that term is defined earlier in the bill).                                                                                  
MS. LUCKY  said language  on page  10, line  28, talks  about the                                                               
calendar  year  versus  having  a  zero  tax  liability  for  any                                                               
previous years,  and language on  page 11, lines 25-28,  was seen                                                               
as duplicative  and is about  how the  RCA has the  authority and                                                               
information to  insure that  the price  a company  gets as  a tax                                                               
claim is passed on to the consumer.                                                                                             
3:53:16 PM                                                                                                                    
The change  on page  12, line  24 goes through  page 13,  line 5,                                                               
because there are  technical changes that need to be  made by the                                                               
addition of the  new section 14. This was a  way of insuring that                                                               
they are not changing the  way production taxes are calculated by                                                               
the DOR now.                                                                                                                    
She said  the last change was  on page 15, line  26, through page                                                               
16, line 12,  and deleted the well lease  expenditure section and                                                               
inserted  the language  that all  parties have  agreed to.  Doing                                                               
that  removes  the  overhead  language  even  though  they  don't                                                               
actually see a deletion.                                                                                                        
SENATOR FRENCH asked  if this is a transition  between Section 14                                                               
and the next part she was talking about.                                                                                        
MS. LUCKY  explained that the changes  on page 12, line  25, page                                                               
13, line  4, and page  13, line 5,  are all technical  changes to                                                               
accommodate the insertion of Section 14.                                                                                        
3:56:19 PM                                                                                                                    
MARCIA DAVIS,  Deputy Commissioner, Department of  Revenue (DOR),                                                               
said that Ms. Lucky had  accurately characterized the amendments.                                                               
She explained  that the language  on page 2, lines  12-19, became                                                               
necessary because  the department had  taken issue with  a simple                                                               
statement that was intended to  address how "non-native gas" that                                                               
is coming out  of storage (that was not produced  for purposes of                                                               
production  tax law)  is treated.  Their concern  was the  unique                                                               
situation where a producer owns gas,  stores it, has not yet sold                                                               
it  and  then when  and  if  it comes  out  of  storage, how  the                                                               
department evaluates it.  They made it absolutely  clear that the                                                               
department  retains its  discretion to  value the  gas either  at                                                               
prevailing value  at the time it  was produced or at  the time it                                                               
was sold, because  those could be two different  time periods and                                                               
two different values.                                                                                                           
3:58:39 PM                                                                                                                    
SENATOR  FRENCH  asked  what  would guide  them  in  making  that                                                               
MS. DAVIS answered  that other laws direct them  to select either                                                               
prevailing  or market  value; they  use market  value unless  for                                                               
some  reason it  isn't a  good indicator  of what  the prevailing                                                               
market value  is. And simplistically  under regulations  you take                                                               
the "higher  of" either  the market or  the prevailing  value for                                                               
gas. Oil has a little bit of a buffer.                                                                                          
SENATOR FRENCH  asked if that is  at the time it  was produced or                                                               
MS. DAVIS  answered that up to  now they have been  deferring the                                                               
price, by regulation, to the price  at the point of audit. So, if                                                               
you're a tax  payer and a producer and you  have produced gas and                                                               
want  to put  it into  storage,  you need  to report  the gas  as                                                               
having  been  produced.  That  gas   has  to  be  reported  at  a                                                               
prevailing value posted  for the region, which would  be the Cook                                                               
Inlet gas  in this case. If  they actually have a  contract price                                                               
and know they are going to  be selling it, then they would likely                                                               
report that. But not all gas that is stored is under contract.                                                                  
SENATOR  FRENCH asked  if  gas comes  out of  the  ground in  the                                                               
summer and it is $7, and  then it's stored until winter when they                                                               
can get $12, which value would the state choose.                                                                                
MS. DAVIS  replied that the taxpayer  may report it and  price it                                                               
at the  $7 when it's produced  in its monthly estimates.  Once it                                                               
gets to the annual return, if they  have sold the gas at $12 they                                                               
will essentially  revise their monthly  estimates. If it  spans a                                                               
period that  moves beyond the  tax year, so  that it has  been in                                                               
storage longer  than when they had  to report the tax  ($7), then                                                               
they will file  an amended return or the tax  division would pick                                                               
it  up on  audit -  presuming in  that instance  that the  market                                                               
value is higher than the prevailing value.                                                                                      
CO-CHAIR WIELECHOWSKI  asked if the amendment  addresses applying                                                               
only to south of the 68th latitude.                                                                                             
MS. DAVIS answered  that there was no change put  in to alter the                                                               
geographic  zone. But  rather,  Representative Hawkers  satisfied                                                               
them  with language  saying that  anyone getting  the tax  credit                                                               
from DNR  is going  to have  to be  a "42.05  regulated utility."                                                               
That  means  it's  going  to  have  to  meet  criteria,  and  the                                                               
definition  which  means  it's  a  depleted  or  nearly  depleted                                                               
reservoir, which would remove a  lot of the reservoirs that could                                                               
potentially  claim to  be storage  on the  North Slope.  And two,                                                               
it's  going to  have  to  require that  storage  be the  dominant                                                               
prevailing  use  of that  reservoir.  Requiring  regulation by  a                                                               
"42.05" will  make it difficult  to game the statute  for storage                                                               
as  far   as  the  North   Slope  goes.  The   administration  is                                                               
comfortable with this.                                                                                                          
CO-CHAIR WIELECHOWSKI  asked if open  access in Section 4  of the                                                               
original draft had been addressed.                                                                                              
4:03:24 PM                                                                                                                    
REPRESENTATIVE  HAWKER responded  that  Mr.  Banks' concerns  had                                                               
been  alleviated with  the  overall structure  of  the bill  that                                                               
specifically allows  a producer  to build  a warehouse  for their                                                               
own gas on its way to market.                                                                                                   
MS. DAVIS said that DOR didn't "have a dog in that fight."                                                                      
4:04:20 PM                                                                                                                    
CO-CHAIR WIELECHOWSKI  said there had  been a question on  page 8                                                               
about  whether  or  not  a natural  gas  storage  facility  could                                                               
include an  LNG plant  and asked if  the administration  was okay                                                               
with language now.                                                                                                              
MS. DAVIS answered yes.                                                                                                         
CO-CHAIR  WIELECHOWSKI asked  if she  was okay  with the  concern                                                               
about  the vagueness  in "must  be available  for storage  of gas                                                               
that is owned by a utility  regulated under AS 42.05" on page 10,                                                               
lines 11-12.                                                                                                                    
MS. DAVIS  answered yes; the language  change that was put  in on                                                               
the bottom of page 1 very  clearly requires that not only the gas                                                               
storage facility  itself be  a regulated  utility under  AS 42.05                                                               
(which means  that the  RCA will be  examining any  rates offered                                                               
for storage),  in addition it's making  it clear that it  also be                                                               
available to  furnish the service  of natural gas storage  to the                                                               
public  for compensation.  The concern  she  heard expressed  was                                                               
that  simply  being  available  for  storage  didn't  necessarily                                                               
dictate that the  terms offered would be reasonable.  That now is                                                               
gone  with the  fact that  the storage  facility is  going to  be                                                               
regulated by the RCA.                                                                                                           
4:06:01 PM                                                                                                                    
CO-CHAIR  WIELECHOWSKI  said they  talked  about  Section (o)  of                                                               
Section 18 quite a bit.                                                                                                         
REPRESENTATIVE HAWKER said they "had  been around that wheel many                                                               
times" and this is the best definition they could come up with.                                                                 
MS. DAVIS  said the administration  was okay with  that language;                                                               
tying it to  IRS terms that have very clear  definitions makes it                                                               
very clean and  easy to use for industry as  well. The department                                                               
appreciated  the removal  of the  "overhead expense"  item simply                                                               
because it doesn't exist under any of the other credits.                                                                        
4:07:07 PM                                                                                                                    
CO-CHAIR WIELECHOWSKI  asked if the administration  had any other                                                               
concerns with the bill.                                                                                                         
MS.  DAVIS answered  no; they  support the  idea of  gas storage.                                                               
This approach seems to be fair and  clear as far as it goes (Cook                                                               
Inlet) as opposed to a statewide credit.                                                                                        
CO-CHAIR    WIELECHOWSKI   thanked    the   administration    and                                                               
Representative Hawker for  working very collaboratively together,                                                               
and said they would  hold the bill for a very  short time so that                                                               
members could digest the amendment.                                                                                             
4:10:17 PM                                                                                                                    
CO-CHAIR  WIELECHOWSKI withdrew  his  objection,  and finding  no                                                               
further objection,  Amendment 1 was  adopted. He held HB  280 for                                                               
tomorrow and adjourned the meeting at 4:10 p.m.                                                                                 

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