Lindsay Holmes on votes for SB 21, HB 4

Anchorage Republican says legislators got ‘too cute’ with ACES; fix to tax needed because result not expected production increase

Steve Quinn

For Petroleum News

Just when things seemed to be moving along quietly toward the first day of the Legislative session, Anchorage Rep. Lindsey Holmes stunned the state’s political world by switching from the Democratic to the Republican party. It gave the Republicans a super majority of 30 that included several Democratic coastal lawmakers.

Holmes received a seat on the House Finance Committee and sided with the oil tax reform put forth by Gov. Sean Parnell in Senate Bill 21.

Holmes, who once supported the current tax system, Alaska’s Clear and Equitable Share, or ACES, supported SB 21.

But while she was in Juneau, recall efforts began, making her vote among a few that drew hostile responses. Holmes sat down with Petroleum News to discuss her change.

Petroleum News: What’s it like being on the other side of the votes, at least for the oil tax? I know you voted for House Bill 4 last year when it was HB 9. But on the oil tax argument you migrated toward a different position, so what’s it like being on that side having voted for ACES and against HB 110?

Holmes: It was kind of a progression, really. I’ve been saying for several years that I thought we needed to make changes to the existing system. I was not convinced that HB 110 was the right change. I’m still convinced HB 110 wasn’t the right change, so I voted against that. But, it’s funny. People asked me at the beginning of the session, are you going to vote for or against ‘X’ bill. In this case the oil tax bill. I think that’s just a really interesting question because at the beginning of the session, you don’t know what the oil tax bill is going to look like. It went through lots and lots of changes. So I came into this session looking for an oil tax bill that I could support. That was my approach. That was actually my approach two years ago, too, and I was disappointed we got to a place where I couldn’t support it.

I was convinced having been here and voted for ACES, that we got a little too cute and a little too smart for our own good. We set up this system with ACES that’s really complicated with a lot of moving parts. At the time we anticipated that all those moving parts would work together well to not only bring in a lot of money to the state but also spur production.

We thought that the spending that was going to happen under the credits and the spending that was all going to happen under the buy down, the ability to buy down your tax rate, was all going to lead to production. What we’ve seen was a lot of that was going toward maintenance and production was declining about a rate of about 6 percent a year.

This year, sitting on the Finance Committee was a really, really interesting experience. You sit there looking at the projections and looking at what’s happening with the state. We are at deficit spending for the current (fiscal) year we are in; we are in deficit spending for the budget we just passed for next year; the current projections are it’s going to get worse and worse and worse each year. I was fully convinced we had to do something.

Once I was convinced of the fact that the way the ACES parts came together created a really complicated system that was hard to model and hard to predict, and I saw that the governor was coming forward with something that was still a net profits tax.

A lot of people think it’s a complete break from ACES. It’s not. It’s still a net profits tax. It still has credits. It is a little simpler; it is a little easier to model; it is easier to work with. And being in the room on the finance team and having access to all the experts really convinced me this was the right way to go.

Petroleum News: You might have voted yourself out of office.

Holmes: You can do that on any given vote. When I was a freshman, then Gov. Palin came forward with a $1,200 energy rebate that she wanted to tack on to the permanent fund. I thought that was bad public policy. I didn’t think it was targeted to the program. I called my dad and I said I want to vote against it but everybody is telling me that it’s politically untenable. You can’t vote against giving away money in an election year. And I’m a freshman and this is going to ensure that somebody will run against me o this issue and takes me out. My dad said, “are you down there to do what’s popular or are you down there to do what’s right? Go get ‘em.” So I voted against it. Nobody ran against me that year. The only people who complained are those who mistakenly thought I voted for it. That was a big lesson to me. And I thought long and hard about whether I thought this was the right bill and whether or not I thought it was the right solution. Once I was convinced it was, I couldn’t vote any other way. That’s not why I’m here. If I start doing what I think is popular over what I think is right, then I shouldn’t be here.

Petroleum News: Do you think SB 21 created unreasonable expectations of a quick turn around?

Holmes: I hope not. There are a couple of different parts that if everything goes the way we expect it to, there will be some changes that come online quickly with some of the legacy fields. A couple of those changes can be done in a couple year timeframe. Some of the new fields will take longer. If that’s going to happen, you’re going to see some movement.

It may not be that all of the new projects are up and running in the next two to four years. But you’ll see them moving forward. I think we’ll know pretty quickly. I think we’ll know in the next couple of years whether or not things are headed in the right direction — even if not all the new oil is in the pipeline yet. If you see the projects moving forward, then you know we’ve got it right.

We were going to be in deficit spending for the next couple of years under the current regime. And we are going to be under deficit spending under this regime? We are. We know that. We are planning for that. You saw that this year when we flattened out the operating budget and we cut the capital budget.

You’re going to see a lot of steps over the summer of us figuring out ways to tighten our belts and prepare for this. We were going to have to do this regardless of which tax regime we were under. The numbers and the rate of decline, we were not going to have the amount of money we’ve had in the past, regardless of the tax regime.

My hope and what I’ve told my colleagues all along is the goal of this wasn’t a lower tax. The different number of a tax receipt doesn’t interest me at all. What interests me is stemming that decline for the single purpose of having a more sustainable and predictable future for the state. That’s the goal. The goal is to turn the decline around and actually have a more predictable income stream instead of a declining one.

Holmes: You know, I think HB 4 is head and shoulders above HB 9. I think it’s moved in a really good direction. I voted for HB 9 last year, although I had reservations about the bill as it was written. I didn’t think it had quite enough sideboards on it. I voted for it last year because I knew when it got over to the Senate, if it was going to come out of the Senate it was going to have more sideboards.

I wanted to signal that I fundamentally broke from the rest of my caucus on the issue of whether or not we should be looking at an in-state line. Everyone wants a big line. Everyone says if the big line is economic and can go ahead, then it should go ahead. You’ll find all of us agreeing with that.

A lot of people say it’s going to be really expensive gas. If you’re looking at my neck of the woods, you’re talking about Chugach or Enstar. They are not going to buy gas out of a pipeline from North Slope gas if it’s going to be cheaper out of Cook Inlet or cheaper from LNG imports. All this talk about it’s going to quadruple your bills. I don’t buy that. If that’s what’s going to happen, then that line won’t get built. I’m pretty comfortable with it. I think a lot of good work was done on the bill and I think there were a lot of good regulatory provisions and good sideboards put in.

Petroleum News: So do you believe in the end, the market will decide?

Holmes: I think it will. There may or may not be a role for the government in that line. I know that the plan of the bill sponsors was after this initial investment is made, somebody will hopefully come in and build it without state money. If any state money is going to be used, that was one of the changes we made in the bill, they have to come back to the Legislature. They can’t go out and bond and put the state on the hook without coming back and asking permission. That was another safeguard we put it.

But I am willing to have the conversation about having state investment if it’s needed to ensure the gas is supportable. If it’s not needed, great. But if it comes back that the way to make it happen means the state kicks in a little bit of money. I don’t have a problem considering that. We just did something like that for LNG trucking in Fairbanks.

This is one of the things government does. Government does education. Government does infrastructure. Government does public safety. Infrastructure, roads, pipelines, the sort of thing, I don’t have a problem with the idea of government having that kind of role.

Petroleum News: Let’s move on to LNG. It’s clear lawmakers understood there was a need in Fairbanks. What’s your take on this?

Holmes: We can’t have the second largest city in the state freeze to death in the dark. That’s just not OK. One of the cool things you didn’t see this session was we really didn’t break down into this fractional thing: Anchorage v. Fairbanks v. Southeast v. rural Alaska. There really was an understanding by Anchorage legislators and from around the state that Fairbanks is in distress, and that we have to do something.

I’ll be honest when I first heard about this Fairbanks trucking thing, I thought it was the nuttiest idea I ever heard. It took me a couple of months to get my hands around it, but my Fairbanks colleagues did their homework and they sold me on it, that the LNG facility on the North Slope will be something they can break down into components and move. The goal is to have this is sort of the bridge energy for Fairbanks until the gas line is built at which point we might move that LNG facility down to Fairbanks or somewhere in the Interior and do LNG or CNG or propane and get it out to the river system.

There is an attempt to find something that is a statewide, phased solution rather than something that is scattershot: how does this project tie into that project then into that project. They convinced me that this LNG trucking project was part of the long-term solutions and something we could do to help them out.

Petroleum News: You’ve got LNG, you’ve got oil tax and you’ve got the in-state gas line work accomplished, but the interests of Arctic development took on a peripheral role. Do you see Arctic interest taking on a larger role during the interim or next session?

Holmes: I do. They idea that there are some competing countries moving forward on Arctic plans shows that. Obviously we are the only Arctic part of the country. We’ve seen Alaska understand that we have to take the lead; we can’t wait for Washington to do it.

You’re seeing more and more the Arctic policy groups come together. You’re hearing talk about Arctic ports and what we’re going to do with the need for deepwater ports and ice breakers. The last couple of years, this year in particular, there has been more and more talk in this building about where we are headed and people wanting to sit down and figure out again a plan, as opposed to a scattershot approach, for where we might want to develop these deepwater ports. I think there is going to be a lot of talk about it these next few years. It’s time sensitive. As other countries move forward, we need to get our act together.

Petroleum News: Yet, Shell and ConocoPhillips have delayed their plans for Arctic development. Does that concern you?

Holmes: It does. Absolutely. When it comes to offshore drilling, obviously you want to make sure they are doing it right and doing it safely.

The other big thing that needs to be figured out going forward is the revenue sharing aspect, the fact that Alaska doesn’t get any dollars from offshore drilling whereas other states, like along the Gulf of Mexico, do. Of course, being on finance, I have a deep interest in some of that revenue coming to our state. It’s going to have impacts on our state, so we should share in some of the revenue.

But yeah, it concerns me that they slowed that down. It ties into the whole discussion about the need for icebreakers and the need for ports. If we are going to have any development, we need to be able to monitor it and we need to be able to respond to any incidents that might happen.

I do appreciate that Shell and Conoco are taking the time to study the issue and make sure they have got all of the safety procedures in place. I’m hoping it’s just a temporary slowdown.