Rep. Josephson: HB 247 has merit

Anchorage Democrat, House Resources Committee member says strong, varied points, considerations being made in oil tax credit debate

STEVE QUINN

For Petroleum News

House Rep. Andy Josephson says the debate over Gov. Bill Walker’s oil tax credit bill, House Bill 247, is not a matter of who is right and who is wrong. Rather the Anchorage Democrat who serves on the House Resources Committee says in a way everyone is right.

Josephson shared his views with Petroleum News in a recent interview.

Petroleum News: You’ve been holding hearings, almost daily on the governor’s oil tax credit bill. What are your observations of the debate and the bill?

Josephson: My impressions are the bill is receiving the fullest airing it could possibly receive, that everyone - and I mean everyone - has had the opportunity to testify, explain their point of view, their perceived logic behind that point of view and make recommendations. The sense I’ve gotten, and I’ve shared this with co-Chair (David) Talerico today is that in some ways everyone is right. That makes this especially difficult. On the other hand, what we are into right now is largely unsustainable.

That’s because, for example, if you take the current amount of the credits expected this year - $650 million - and you look at the amount of new revenue we are deriving from all sources, other than the Permanent Fund and the earnings of the Permanent Fund, you have I believe $1.8 billion. So you have a situation where the state is projected to spend 36 to 38 percent of its total new revenue on tax credits. Almost by definition that’s not sustainable.

The thing that makes this difficult is the compelling testimony from industry and from the utilities, and the fact that there are situations where the state would derive substantial new tax and royalty. So the carrot that’s out there from the state is very clear.

The bigger share of this - about two-thirds of this - is in Cook Inlet. The question there is between the qualified capital expenditures, the well lease expenditure, the net operating loss and the fact that there is no production tax. My concern is we have created a situation that is so favorable to the industry that it’s become unaffordable. I agree with those who say we don’t want to yank the rug out. Just as the industry - BP in Alaska is retreating - we have to economize as well.

I also think the administration makes a good argument that there are a number of inadvertent ways in which SB 21 favored the industry without anyone catching it. The ones that come to mind is the month-to-month calculation of tax and what’s called the migration issue where you can move a loss to a different month. A second one is the combination of the GVR with the NOL where we are paying a profit on 100 percent loss is what it amounts too. Those are two in particular that I think were inadvertent.

I think whenever you find something that wasn’t fully vetted. ... There was pushback from one member of the committee who asserted that no indeed the committee in 2013 acted with thorough due diligence and that nothing was missed. That’s true if you are dealing with prices above $60 a barrel. What we found was there was no evidence from the documents on BASIS that anyone looked at $30 a barrel and the implications of that.

Politically, by the way, I think for a number of progressive legislators it will be hard to ask us to cut dividends and raise other new revenue unless there is some reform of this bill. As Rep. (Paul) Seaton noted what’s being considered for reform is a substantial part of what’s being paid out for a dividend. To make the argument with a constituent that the system is sustainable and fine and should be left untouched while cutting a dividend is sort of unpalatable. Not just politically but rationally.

So those are some of my quick thoughts on this.

Petroleum News: What are some of the most compelling things you heard from industry?

Josephson: I would expect them, beginning in 2013, and before with credits that existed before as part of ACES or PPT, I would expect them to make plans pursuant to those credits. When they made investments, they made projects and they hired Alaskans, to then say there will be a wholesale end or suspension to something, I think does real damage to our credibility and is unfair on its face. So that was certainly a compelling argument.

One of the arguments you heard most from the North Slope producers was this is a punch to the face when we are already on our knees. I get that. I get that. But I don’t like the fact that these credits are open ended. When you look at how modest they were before PPT - $30 million - they just can’t be sustained in our current form.

Petroleum News: On the flip side what has the administration said to get your attention?

Josephson: (Ken Alper, tax director) makes the case that both PPT and ACES were designed on the high end of the price to capture more than they might otherwise have because of the credit system. The credits were supposed to act as an offset to this aggressive tax schedule. The administration has been very clever about finding ways in which there was legislative inadvertence in 2013 and finding egregious ways in which credit applications and stacking have resulted in a fiscally unsustainable portfolio of credits. They have been very good at that. I get the controversy about increasing the gross minimum floor from 4 percent to 5 percent. Everybody has to see that it is an overt change to SB 21 and there are members of my caucus who say we need to change SB 21. Well SB 21 passed, the 2014 referendum was defeated and the governor said he wouldn’t change SB 21. So I view that one provision as a separate item. So my answer to what the administration has done well is that it found areas that are unacceptably generous and inadvertently so.

Petroleum News: As you look at all of this and as you’ve lived it being from Anchorage, what would you like to see emerge from this bill before it goes to Finance?

Josephson: I think one change that needs to be made and it would be a change to SB 21 but it’s not part of the governor’s bill, it would be my proposal. I don’t like the fact that new oil is treated like new oil in perpetuity. I think that’s weird. I’ve made the point in committee a couple of times that although production is important to us in terms of jobs and overall economic quality of our lives, I am concerned - setting aside projects like Pikka, CD5 and Greater Mooses Tooth - what we are talking about is such incremental production at a time when everyone projects us to go to 350,000 barrels in less than a decade. Part of me wonders about lost opportunity and opportunity costs, so I may make some proposals that probably won’t be successful but will have sort of a broader perspective about what’s going on there.

Petroleum News: Some have characterized the discussions as spirited or even contentious. What’s your take?

Josephson: I think that it’s a pretty politically charged atmosphere. I think the tax director is a pretty brilliant man. He cut his teeth working for the Democratic caucus and I hope that the majorities on both sides treat him with fairness. I think they will. I think they have. But this is politically charged because the majority pretty overtly is frustrated with the administration. This administration was not their candidate in the 2014 election. They don’t like criticism of SB 21. The administration has been clever to say this is 90 percent not a reform of SB 21. You have a counter argument from AOGA, principally Ms. (Kara) Moriarty, and others in the industry, that in fact it’s part and parcel of the tax package from SB 21, that in some level - in their view anyway - the credits aren’t distinguishable from the base tax rate. I don’t really take that view. There has been tension. There have also been moments where for example enalytica has indicated great surprise at the stacking phenomenon that drives the cost to essentially nothing for the industry in limited circumstances, and puts us in the position of paying more than 100 percent of their bills.

One of the criticisms we’ve heard repeatedly is the administration has not modeled the impact of any fiscal bill, not just HB 247 but the cigarette tax bill, the mining tax bill, the alcohol tax bill. My own response is when you cut $283 million from the operating budget as we did last week, the same criticisms can be made there. Gunnar Knapp has said if you cut $300 million, you will lose 4,500 jobs. I would like to know, representing District 17, which jobs will be lost. Many of them are not public sector. At least half of them are not. I would make the same inquiry show me the modeling.

A second issue that has created some tension - I think it was Kara Moriarty called this a money grab. I think there are two things going on here. One is creating a policy that creates incentives without breaking our bank. The nature of a credit cut or in the case of other bills, like tobacco and alcohol, a tax increase, are just that: new revenue.

We have a situation where the majority has managed to cut $300 million. But we still have a $3.5 billion deficit. I’m left to conclude we have a massive, massive revenue problem. I’m eager for the majority to tell me how they would plan to solve that revenue problem. As I have said publicly many times I don’t want to merely watch the majority try to do it. I want to help them. They are welcome to call me, ask me for a cup of coffee and let me know how I can help. This situation goes beyond politics and beyond the fall campaigns. It’s about getting Alaska to a place of fiscal sustainability.

Petroleum News: So do you think this is a rewrite of SB 21?

Josephson: I think it’s arguably a rewrite relative to the interest rate where the proposal is to go from simple to compound interest and increase the rate and pretty obviously to increase the gross floor from 4 percent to 5 percent. Otherwise, the credits are designed to buttress and support the tax structure and are not part of the tax structure. In fact some of the credits pre-date SB 21. Any reform of those is not a reform of SB 21.

Petroleum News: Part of this week has been about public testimony. Do you ever learn something from public testimony?

Josephson: Yes, occasionally. One of the things that astounds me is how often a bill will be before a committee and nine out of 10 people will say this bill is great or this bill is evil, and that testimony does not move the final bill draft or the results of the bill. That’s always sort of amazed me. So an example was the university budget, which I have been a staunch defender of and fought hard to protect this year. You’ve seen hundreds of unique emails particularly from Fairbanks - hundreds of them - to protect cooperative extension, Arctic research, research grants, all the great things that go on there.

Yet it doesn’t in the end have that much influence on anybody. That’s troublesome. In effect, it’s anti democratic. If for some reason I had bill X and the testimony seemed irrational to me because of some movement in society or economic malaise or something that created an imbalance in the democratic process, I could see myself perceiving that in the same way. I trust the public. I think there is great wisdom in the public. The key point I’m trying to make is where the public makes rational arguments, and 90 percent of them make rational arguments for one position and that position is disregarded, we have to ask why.

Petroleum News: OK, so you just heard public testimony on HB 247?

Josephson: I heard compelling testimony from one gentleman in Fairbanks who expressed some concerns with the portfolio that is the tax credits that the state affords. I also heard from one testifier who noted that the cost of the entire credits package exceeds the cost of financing 10 of our lower budget government agencies. I think those are important points. I balance those with a meeting I had with representatives from Caelus who make good arguments about what they are doing at Smith Bay and Oooguruk and elsewhere. So my experience has been that public testimony has been important. I actually have had moments where I’ve been dismayed by public testimony not necessarily with this bill but other bills where the testimony went 9 to 1 (ratio) in favor or against something, yet the committee will go in an opposing direction. Sometimes there may be wisdom in that, but I think overall we should be reluctant to do that and rely on the wisdom on the Alaskan people. Relative to the testimony yesterday (March 14), there 29 witnesses and it was sort of evenly split. So in that instance, I just listen to each person’s testimony and I take from it what I can.

Petroleum News: Also in Resources, early on you received an update on AKLNG then got word from the governor that the economics could lead to some changes. What are your thoughts on the status? Are you worried or is this to be expected given the current market conditions?

Josephson: I am concerned. What I would say is the governor appears to be pleased the industry has committed gas to the project. I think the industry is well aware there is likely not going to be a project because of the abundance of natural gas on the worldwide market and because of the cost of the project, and at current gas prices the margins that we are dealing with.

So I have real concerns about AKLNG. I don’t know that I would use the word pessimism, but I’m no longer thinking 2025 and having gas online at that time.

I think of even further into the out years. I will say that critics of the governor will say that SB 138, which I voted for, is this perfect blueprint, and if he had just stuck by it, which arguably he did, then all would have been well. In fact, I can imagine critics saying this met its demise because he was looking at alternative proposals and flew to Japan, and looked for different ways to form partnerships to finance the project. I think that is mostly silly.

What really undermined the project in the end were the things I described: inundation of the worldwide market; the gas prices; the costs. Those really were the factors. So I think the net result of all of these discussions - the tax credits, AKLNG falling off its timeline - is that Alaska is going to look more and more to be like the other 49 states. It’s going to have to exist in a more mature cost to revenue portfolio. That’s just the way it’s going to have to be.

Petroleum News: Many have said there really isn’t a plan that will get a project online. Do you see a project actually coming forward?

Josephson: That gas can be stranded for a long time. The positives will always be the positives. There is no chance there will be a civil war in Alaska. There is no chance it will be nationalized. There is going to be a growing need for natural gas - generally. It’s closer to the Asian market place than most of the other projects. And the other big factor is we know the gas is there. We’ve put it there several times. All these things will remain positives. It’s the assurances we need about the profitability of it that remain evasive.

Petroleum News: Last week, President Obama and Canadian Prime Minister Justin Trudeau held the first such meeting between these leaders in nearly 15 years. What were your takeaways?

Josephson: There has been a lot in the press about it. Rep. (Bob) Herron made at least one special order. If Rep. Herron is right, the agreement between Obama and Trudeau calls for protecting 10 percent of Arctic land and 17 percent of Arctic water, to which I say what is the problem here? That doesn’t seem like too much.

The criticism from the North Slope Borough and Rex Rock is that their comments weren’t included, that nobody consulted them. You know, when I hear that part of what I hear is someone saying the president should have seen this my way and he didn’t. We knew all along that he was a supporter of efforts to curb climate change and that’s why he came here Aug. 31. His trip was principally about climate change, so what is the real surprise here? He’s been a big backer of the EPA’s rule 111-D rule making. By the way, I’m a big supporter of that, too.

A senator in the other body who indicated in one hearing that it’s most unfortunate that the president is taking this position. This strikes me as unfortunate in a different way. One could say, we are lucky to have an administration that cares about the future and that doesn’t want every glacier to melt and believes what 97 percent of the scientists report to them. I view this as mostly rhetoric. He had a steak dinner with Prime Minister Trudeau, they see the climate change issue similarly, they made some statements about it. That’s all I see going on.