House passes ambitious plan to cut subsidies to oil and gas industry

After a month of debate, the Alaska House of Representatives has approved legislation that cuts the annual state subsidy for the oil and gas industry.

In a 25-12 vote, the House approved a modified version of House Bill 247, proposed by a pair of Republicans: Rep. Tammie Wilson, R-North Pole; and Rep. Paul Seaton, R-Homer. With an amendment, the pair tossed out a version proposed by the House Rules Committee and substituted their own.

The new bill is an ambitious compromise proposal that incorporates Democratic and Republican measures alike.

“We were able to get to that common place where we could agree,” Seaton said. “Everybody was a little bit out of their comfort zone, but it was, you know, a compromise.”

The Wilson-Seaton proposal, according to a Department of Revenue analysis, will save between $5 million and $25 million in the fiscal year that starts July 1. Savings rise in subsequent years, peaking as high as $470 million in fiscal year 2021.

Gov. Walker’s original version of HB 247 promised savings as high as $305 million in the next fiscal year, with savings rising to as much as $515 million in fiscal year 2019.

The rules committee’s version promised savings of up to $10 million in the next fiscal year, rising to $370 million by fiscal year 2022.

The bill is the second-largest part of a plan to solve Alaska’s $4 billion annual deficit, and its passage removes a key stumbling block for further budget negotiations.

A carry-forward problem

The state subsidizes oil and gas operations in Alaska with a series of different-flavored tax credits. Some are refundable, meaning they are effectively worth cash. Others can be sold or traded to other companies and used to erase the taxes a company would otherwise pay to the state.

One of the biggest problems in the system is that oil prices are so low that North Slope oil producers are losing money with every barrel they pump through the trans-Alaska Pipeline System. That makes them eligible for a credit intended just for companies starting up operations — a period when a company would be expected to invest in new equipment and spend more than it earns in production.

These “net operating loss” credits, combined with a loophole in the state’s existing tax system (which was created in 2013 through Senate Bill 21), allow producers to reduce their effective production tax rate to zero.

The Wilson-Seaton proposal forbids companies producing more than 15,000 barrels of oil per day from collecting net operating loss credits.

That only solves part of the issue. By the end of the fiscal year, companies will have already earned hundreds of millions of dollars in these credits, which can be rolled forward to future years. That could wipe out much of the state’s oil tax revenue for years to come.

According to Department of Revenue estimates, Walker’s version of HB 247 would have left companies with more than $1.2 billion in credits by 2020. The rules committee version would have reduced that stockpile to $685 million. The Wilson-Seaton proposal reduces it to $516 million by 2020 and eradicates it entirely by 2024, something no other plan does.

“That’s a huge fiscal impact,” Seaton said.

Investment as solution

Under the Wilson-Seaton proposal, oil companies would be encouraged to sell their outstanding credits for cash, something they might need as oil prices stay low.

The buyer would be the Alaska Retirement Management Board, which governs the state’s public employee retirement system. The ARM Board, as it is known, could offer 60 cents on the dollar for the credits.

That might be attractive for cash-strapped companies. In turn, the state would buy back the credits over time from the ARM Board at 70 cents on the dollar.

That allows the state to spread out the expense and it guarantees the public retirement system a 10 percent return on its investment.

According to a memo dated May 11 from Alaska Department of Revenue Commissioner Randall Hoffbeck and supplied by Seaton: “I have reviewed the language of the amendment with Gary Bader, (Chief Investment Officer) for the ARM Board, and we agree that as proposed this would be a viable investment for the ARMB and support this amendment.”

Changes in Cook Inlet

Until oil prices plunged and net operating loss credits became a problem, drilling operations in Cook Inlet, which produces natural gas for use in Anchorage and the Kenai Peninsula, accounted for about half the state’s annual subsidies to the oil and gas industry.

According to figures from the Department of Revenue, oil and gas companies spent $1.09 billion in Cook Inlet between fiscal year 2007 and fiscal year 2015. About $450 million of that was provided by the state.

Those subsidies were implemented when it appeared Anchorage was in danger of running out of natural gas, its principal source of electric power and home heating.

Rep. Liz Vazquez, R-Anchorage, was a board member of Chugach Electric, Anchorage’s principal power company.

Speaking on the House floor, she said the company was within six months of signing a long-term deal to import natural gas from overseas.

Under the Wilson-Seaton proposal, all Cook Inlet subsidies will expire by Jan. 1, 2018, and limits on oil and gas taxes in the region (which has a different, much lighter tax structure than the North Slope) will expire in 2019.

The Wilson-Seaton proposal calls for a Legislative working group to come up with a new Cook Inlet tax and subsidy system before that expiration.

Opposition on the floor

While House Bill 247 passed out of the House with more than the minimum 21 votes needed, it was a close-run thing. The rules committee’s version of the bill was on the agenda when the House convened its Friday session, and the pair of Republicans had to offer their plan as an amendment overwriting that rules committee proposal.

The amendment passed by a single vote, 21-16.

“To me, this is a recipe for disaster,” said Rep. David Talerico, R-Healy, of the Wilson-Seaton plan.

Talerico and others in the House criticized the idea of limiting net operating loss credits to companies producing less than 15,000 barrels of oil. Doing so would keep the North Slope’s three big producers — ConocoPhillips, BP, and Exxon — from receiving loss credits.

“Over the next few years, we need to keep oil in the pipeline,” Talerico said.

Rep. Lance Pruitt, R-Anchorage, went even farther. “This is a jobs bill, if the job you’re talking about is dismantling the pipeline,” he said.

Rep. Craig Johnson, R-Anchorage and chairman of the rules committee, said he’s concerned that taking away subsidies in Cook Inlet will lead to higher natural gas prices in Anchorage.

“This is particularly troubling to me, living in Anchorage,” he said.

Despite the opposition, the amendment vote passed, and so did the vote to send the bill to the Senate.

Work in progress

Wilson said the work to craft an alternative to the Rules Committee’s work started about two and a half weeks ago, about the time the House and Senate were forced from their Capitol offices by construction.

In a story last month, Nat Herz of the Alaska Dispatch News described how Wilson and Seaton ran into each other while shopping at Juneau’s Fred Meyer grocery store and began talking.

Wilson and Seaton are at the opposite ends of the Republican Party’s split — Wilson toward the tea party end and Seaton toward the moderate end.

While they might differ on other subjects, they found common ground on the issue of subsidies to the oil and gas industry.

“For us, we started the conversation,” Wilson said, but the proposal wouldn’t have gotten as far as it did without others’ support.

“This is a group that did it,” she said. “It wasn’t just the two of us.”

The Senate is scheduled to hear the bill at 9:30 a.m. Saturday.

“I expect they will tweak it,” Wilson said.

In the House, the vote is expected to open the door to other matters.

“We hope it breaks things open,” Seaton said. “The budgetary things are what’s next, and hopefully the finance committee can start working on other things now.”

Like an operating budget, Wilson added.

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