PPT moves to second House committee

Alaska legislators told some clarification could be useful on proportioning replacement costs where maintenance an issue

By Kristen Nelson

Petroleum News

The bill to prevent deductions under the Petroleum Profits Tax due to no maintenance or improper maintenance passed out of the House Special Committee on Oil and Gas March 1 and had its first hearing in House Resources March 19.

Jon Iverson, deputy director of the Department of Revenue, told House Resources that the administration supports excluding these costs from being deducted under PPT. He said that if the Legislature wants a more bulletproof way to exclude these costs, it is the department’s position that it needs to be done in law, because if done in regulations it would be subject to challenge.

Iverson said the present law gives the state the ability to exclude costs attributable to gross negligence and said the proposed bill would add strength to any regulation that Revenue would write.

In response to a question from Rep. Peggy Wilson, R-Wrangell, Iverson said he thinks the bill would make a difference in how maintenance is done because it would be an incentive; it pushes the decision toward proper maintenance, he said.

Rep. Paul Seaton, R-Homer, questioned Iverson about replacements where high-priced items are showing wear and tear and could have been maintained differently: would those costs be excluded? Would the state be able to disallow capital replacements, he asked.

Iverson said he thought it would depend on the facts of any given case.

Rob Mintz, an attorney working with Law and Revenue on PPT matters, said the bill could be read as having the effect of disallowing part of the costs if replacement was required before the end of useful life due to improper maintenance. If the useful life was 25 years, he said, and replacement was required at 23 years due to improper maintenance, would all of the replacement cost be disallowed? Or a portion based on the two years of useful life not achieved? The introductory language says “cost or that portion of the cost” and the purpose may be to get at an allocation. This, he said, might benefit from clarification on the Legislature’s intent.

Asked by Rep. Bob Roses, R-Anchorage, if determining how much maintenance contributed to replacement costs might not be creating “murky waters,” Mintz said that under any legal standard the department would have to look at the facts and consult with other agencies. There will be controversy if a lot of money is involved, Mintz said, and there isn’t much of a way to avoid that.

Committee Co-Chair Carl Gatto, R-Palmer, asked Mintz if a decision of improper maintenance could be applied to a whole pipe, or just to the sections with corrosion. Mintz said this was another proportional issue which would benefit from guidance from the Legislature.

Negligence vs. improper maintenance

John Norman, chair of the Alaska Oil and Gas Conservation Commission, also an attorney, told the committee that when you look at a pattern of behavior, gross negligence or willful or wonton behavior or conduct in careless disregard of consequences are already in the PPT under section 6, which excludes “costs arising from fraud, willful misconduct or gross negligence.” Then there is negligence or simple negligence and finally strict liability: We don’t care why you did it; if it happened, you’re liable. The last category, Norman said, is at least partially covered in section 16, which excludes “costs incurred for containment, control, cleanup, or removal” due to spills of oil or hazardous substances.

What’s left, Norman said, is negligence. While gross negligence “often leaps out at you,” the section 19 addition to PPT which is under discussion is going to be more difficult, he said, because this is ordinary negligence. He said the commission believes “good oilfield practices” is a more standard way to describe this.

Norman also noted that in field operations, partners don’t usually penalize operators for simple negligence. No one would want to be an operator under such a condition, he said, because it would be like providing insurance for perfect operations.

When the committee continued hearing the bill March 21, Kevin Banks, acting director of the Division of Oil and Gas, said the Petroleum Systems Integrity Office will be examining records and documents provided by lessees on maintenance plans and equipment replacement planning and once Revenue starts pursuing costs for an item the PSIO records can be used to help determine whether an event was an accident, gross negligence or something in between.