Bradners'

Alaska Legislative Digest

November 8, 2007     

Oil and Gas Bulletin

Comments? E-mail: timbradner@pobox.alaska.net

Galvin: Latest version of House bill needs a few “fixes”

Revenue Commissioner Pat Galvin went over a few “fixes” the administration wants in the House Resources Committee version of the governor’s oil tax revamp in review before the committee Tuesday. Galvin said the governor has recognized that the Legislature is “tilting'” toward a high windfall profits tax linked to saving of much of that revenue. It was not lost on committee members that Galvin did not mention tax rates or the changes in the “progressivity” formula in the Resources bill, which was taken as a signal that Gov. Palin approves of the higher taxes. Rep. Bill Stoltze (R-Chugiak) pressed Galvin for a commitment that surplus income would be saved. Galvin said the governor’s support for major savings has been clear but also said that it wasn't a question to be decided in the special session.

The specific changes the administration wants Galvin noted, not by priority, include:

• Elimination of the $25 million annual cap on explorer credit claims. He also said some $1 billion in pending Transitional Investment Credits (from prior capital expenditures) remaining to be claimed under PPT, and those are cut to $750 million under the three-year limit for the transition credits in the Resources draft, and to tens of millions of dollars in the Senate Judiciary Committee version.
• Elimination of requirements that operating cost deductions be limited to in-state activities and properties. Auditing those would require “tremendous amounts” of interpretation, Galvin said.
• Reinstatement of the incident-based approach to disallowing maintenance-related cost deductions. The present language requires auditors to make too many subjective decisions.

Rep. Mike Hawker (R-Anch.) said elimination of PPT language that allows deductions and credits for conversion of a North Slope diesel topping plant to make ultra-low sulfur diesel would discourage capital investment. Galvin said this view would allow the state’s allowance of tax credits for capital expenditures to creep out of control. Hawker also expressed concern with provisions allowing DOR to write regulations to specify allowable lease expenditures. Galvin said the alternative to the regulation process, which is public, would be negotiations with individual taxpayers that would be hidden by confidentiality protections.

Rural lawmakers note “PCE plus” in tax provision for Fairbanks gas

Language added to the governor’s tax bill that extends the low Cook Inlet tax rate to natural gas sold for in-state use drew attention during the House Finance Committee review of the Resources Committee bill Monday. The issue arose because the governor’s bill raises tax rates on natural gas as well as oil, and it could adversely affect exploration in the Nenana Basin, in Interior Alaska, or gas purchased at the North Slope by Fairbanks Natural Gas, a small utility, to supply residential and commercial customers in the Interior city. Under Regulatory Commission of Alaska rules, taxes are a direct pass-through by the utility to consumers. The problem was solved in the House by limiting taxes on gas sold for in-state use to the protected tax rate now applied in Cook Inlet.

Rep. Mary Nelson (D-Bethel) called the cap on gas rates and prices at 2005-06 levels “PCE plus” because it can potentially lower the cost of heating as well as electrical generation for any gas users. Rep. Bill Thomas (R-Haines) noted that the Power Cost Equalization subsidy lowers only Bush electricity rates and only for residential users. Rep. Bill Stoltze (R-Chugiak) said he didn’t want to get bogged down in the “equity issue” (between regions) since it mainly benefits Interior Alaska where gas would be sold.

Steve Porter, the legislative consultant who reviewed the bill for the committee, said the provision offers the best chance rural communities have to benefit directly from the governor’s tax bill. Revenue Commissioner Galvin said the administration “very much supports'” the provision and said imposition of any cap on the volume of production subject to the rate reduction would be arbitrary and unnecessary because domestic demand, which is small, will provide an effective cap. In-state use of gas could be much larger, however, if it is used in industrial processes, such as with the Agrium fertilizer plant or the ConocoPhillips and Marathon liquefied natural gas plant near Kenai.

The administration is not worried about the ramifications the possible discovery of a gas “elephant” field may have until one is found, Commissioner Galvin said, because this would change the face of Alaska’s economy.

Thursday’s schedule

• 9 a.m. House Finance Committee: stakeholder testimony
• 9 a.m. Senate Finance Committee: Econ One Research Inc. overview of PPT base tax & progressivity.
• 1 p.m. Senate Finance Committee: industry testimony.
• 5:30 p.m. Joint House/Senate Finance Committees: Public testimony on ACES. Call 1-888-295-4546 to testify from private locations.

Legislative Digest is a paid-for private subscription service. Our special session Bulletin is distributed free as a public service, and is supported by special grants from a group of subscribers. Editors: Mike and Tim Bradner. Contributing writer: Bob Tkacz.  Interested in getting the regular Legislative Digest and Alaska Economic Report? Contact: mbradner@GCI.net or fax at: (907) 522-1761.