Senators call for new gas tax structure

Senate leaders have decided that the potential loss of billions to the state's treasury is an unacceptable risk, and are backing a major review of Alaska's tax on natural gas before May 1.

After hours of testimony this week from the state, attorneys and consultants before the Senate Finance Committee, chairman Bert Stedman, R-Sitka, said he's preparing a committee bill that calls for a new gas tax structure.

Senate President Gary Stevens, R-Kodiak, said he fully supports a bill and will set one on the fast track, giving it a single hearing referral to the Finance committee instead of the typical three committees. With nearly half the legislative session gone, it could be an important move.

Stevens sat in on the hearings this week, and saw too great a potential for legal and financial risk to let a gas tax change go unheard.

"The risk to the treasury is too great," he said. "I don't want to see (a bill) delayed ... it's right that we be very cautious."

Under the state's current tax scheme, oil and gas are taxed together, with gas turned into oil based on its comparative energy value. That has the potential to flood high-price oil with low-price gas, bringing down the taxes paid to the state on both.

Using a range of price scenarios, consultants demonstrated the treasury hits that high-price oil and low-price gas could have. Producers could end up paying no tax on the gas, and less on oil. If the two were taxed separately using current rates, the state would take in up to $2 billion more.

If gas had flowed the past two years under the current tax scheme, the state would have missed out on billions of dollars due to the gap between the high price of oil and the low price of gas -- called parity.

Stedman wants to break oil and gas taxes apart, setting a new structure for gas that avoids assessing it in relationship to the value of gas compared to oil.

"I think we should decouple oil and gas, there's no doubt in my mind at all," Stedman said. "The risk level is far too high."

His chief concern is the potential loss of tax revenue to state coffers during the first 10 years of pipeline flow, providing companies take advantage of a state-offered incentive by bidding on pipe space during an initial open season, slated to start May 1.

With a license under the Alaska Gasline Inducement Act and $500 million in state money, TransCanada is planning an open season May 1 on a large-diameter line that would run from the North Slope to Canada. Companies with gas to ship in the line are expected to evaluate the terms during an open season and, ideally, bid on space.

The producers can lock in the state's tax rate as it is on May 1, if the bids evolve into firm agreements as conditions are sorted out.

State Revenue Commissioner Pat Galvin told senators this week that the tax break on gas associated with the lock-in was intentional, a "give" from the state in order to increase the chances Alaska will realize the long-held dream of a gas pipeline.

Legislative Affairs attorney Don Bullock told lawmakers on Thursday that the lock-in is real, but not set in stone. Lawmakers can change the gas tax at any time and not risk contractual violations because the inducement is set in statute and consequently subject to change.

"This is not binding, except morally," Bullock told senators.

However, doing so could open another layer of risk. If the state changes the tax after producers lock it in and an open season fails to draw firm commitments, TransCanada could seek damages from the state for taking away an incentive that may have helped.

Bullock's advice? To play it safe, if lawmakers see fit to change the gas tax, they should do it before May 1, instead of after.

TransCanada vice president for Alaska, Tony Palmer, said on Thursday that he'll leave any interpretation of the AGIA statutes to the state.

"It is what it is," he said. "We agreed to certain obligations to the state under AGIA, and we have certain rights. We intend in good faith to meet our obligations."

He said all indications so far are that the state will do the same.

Acknowledging that producers have said publicly they want some changes in AGIA's inducements, he said specifics will have to come from the companies. Any changes sought by lawmakers are up to the state to decide.