Legislature to deal with hot issues this session

Posted: Sunday, January 16, 2011

The Legislature meets in Juneau Thursday for what is likely to be a lively and challenging 90 days. Two hot issues at the top of the heap are coastal zone management and possible changes in the state's oil and gas production tax.

Gov. Sean Parnell has said he will review the oil tax and suggest changes. Parnell appears willing to tweak the tax -- he proposed some changes last year that the Legislature only partly adopted -- but it isn't known whether he will tackle a significant reduction of the tax.

Industry argues that is needed to stimulate new drilling and development, and could halt the decline in North Slope oil production. Any major changes face challenges in the state Senate, however, where Sen. Hollis French, D-Anchorage, a key architect of the current tax, said he will oppose a tax reduction.

House Speaker Mike Chenault, R-Nikiski, said the current tax regime, Alaska's Clear and Equitable Share, or ACES, is not working and must be changed if not rewritten entirely.

"When we have legislators that will say that ACES is working perfectly, we know that's not true and we should be calling them on it," Chenault told the Resource Development Council at a meeting Jan. 6.

Chenault said he expects multiple bills to be introduced to alter ACES.

"A number of us feel and have felt since it was passed that it was an unfair tax," he said. "It needs to be addressed. I think we need to rewrite the whole piece of legislation. We need to make some major changes."

Coastal zone management changes emerged as a major issue late in the 2010 session and will appear again in January. The proposal the North Slope Borough and some other coastal communities is pushing is to restore the program to something like it was before former Gov. Frank Murkowski brought the program under the control of the state Department of Natural Resources.

Previously communities along the coast had more ability to influence state decisions on development permits, which they argue has been lost now that the coastal management program is operated under the state DNR.

"I can't tell you where we'll be on it," Chenault told the RDC. "I know that my stance is the state can't give up its sovereignty anywhere."

Bills making those changes offered last year by Sen. Donny Olson, D-Nome, and Rep. Reggie Joule, D-Kotzebue, were strongly opposed by Parnell, who argued the legislation would have essentially given coastal communities the right to control state permitting decisions that affect development of state lands.

One area where state officials have dug in their heels is giving coastal municipalities or communities any authority to veto or change air or water quality permits issued by the state Department of Environmental Conservation. Since the state issues these permits under guidelines of the federal Clean Air and Clean Water laws and the U.S. Environmental Protection Agency, any involvement of other entities in the approvals would complicate the permitting process, state Commissioner of Environmental Conservation Larry Hartig told legislators last year.

On the other hand, the clean air and water permit approvals are the kind of decisions coastal communities like the North Slope Borough want to be involved with.

The issue is almost certain to be joined again in the 2011 session. This is also the year in which the coastal management program sunsets, unless the Legislature extends it. Given that, some form of legislation is likely to pass. The question is whether it will be a simple extension of the current program or whether a substantial change will be made.

Oil taxes

The oil and gas tax changes will be particularly contentious. The North Slope producing companies say the state's tax rate is among the highest in the world as it applies to new development, to the point that it makes many projects uneconomic.

Defenders of the tax, like French, dispute this, and point to evidence of increasing industry investment published by the state Department of Revenue in the fall 2010 state revenue forecast. Producing companies, such as ConocoPhillips, have said that much of the new investment cited in the revenue department reports is money spent on maintenance and upgrades of existing infrastructure, not on drilling and new projects that add to oil production.

Sen. Tom Wagoner, R-Kenai, new co-chairman the Resources Committee along with Sen. Joe Paskvan, D-Fairbanks, was involved in the original crafting of ACES and told the RDC the Legislature "got it wrong" on the bill's escalating progressivity based on the price of oil.

"We can't have a tax regime in this state that strangles that growth," Wagoner said. "I was part of ACES, and we thought we were doing the right thing at the time. I told the companies, 'If we aren't doing the right thing, you come to us and show us where we made mistakes and I'll work with you to correct it.' That's very important to our state to have that happen."

Paskvan was elected in 2008 after the passage of ACES and the Alaska Gasline Inducement Act, or AGIA. Tracing his Alaska roots back more than 100 years, Paskvan told the RDC his Democratic affiliation did not mean he didn't appreciate the need for resource development.

"I understand what the state of Alaska was like before oil was the primary component of our economy," he said. "There wasn't a lot of economic development in the state. I'm coming in looking at these issues with a fresh set of eyes trying to figure out what is going to be the solution to make sure we have an economic future for the next 50 years."

ConocoPhillips Alaska President Trond-Erik Johansen said in an interview that about 60 percent of his company's capital investment is aimed at maintaining infrastructure and only 40 percent is invested in projects that create new production.

During the summer election campaign Parnell said he is wary of a general reduction in tax because it is almost impossible for industry to guarantee that a tax reduction will actually stimulate new investment. Parnell said he prefers a targeted type of tax incentive, like an investment tax credit, where the investment has to be made before the tax credit can be claimed.

Wagnoner said he planned to introduce the Alaska Oil and Gas Reinvestment Act.

"We'd work with the companies to allow them to reinvest that money with the state in partnership to do certain projects that would result in betterment of oil and gas production, and exploration for access to additional land to develop," Wagoner said.

Last year the governor proposed expanded investment tax credits for new development in existing fields, such as well "workovers," which are linked to increased production. The Legislature approved Parnell's request for Cook Inlet fields but not the North Slope.

Early in the 2010 election campaign, Parnell said he would introduce legislation to expand the in-field tax credits to the North Slope, but later in the campaign said he would also consider a tax incentive specific to "technically challenged" new oil production, like heavy oil.

ConocoPhillips' Johansen said in the interview it would be preferable to have a general tax reduction than a targeted tax incentive to encourage new heavy oil production because having different tax rates apply to different kinds of oil would create administrative challenges when the oil is co-mingled for processing in the large production plants on the Slope.

Other issues

In other issues, the governor's plan for a state-funded college tuition-assistance program will be back before lawmakers this spring. Last year the Legislature created the framework of the program but appropriated no money for scholarships.

A special legislative task force held hearings during the summer on the proposal. The governor has proposed an appropriation but lawmakers may also propose changes.

No particular issues seem to be developing, at least not yet, for the state's agencies funded under the operating budget, although there will be scrutiny of rising health care costs paid for by Medicaid, a health services program funded partly by the state. The state's implementation of the new federal health care reform law also will be of intense interest to lawmakers.

The capital budget is always significant, and it will be again in the 2011 session. The governor has proposed a capital budget of about $1.6 billion, down slightly from the current year.

Parnell has indicated that he expects legislators to add to this but will not indicate a top spending level beyond which he will veto projects.

Alaska Journal of Commerce reporter Andrew Jensen contributed to this story.

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