Senate panel advances gas pipeline bill with reduced community payments

The Alaska Senate Resources Committee on Thursday adopted a substitute for a major gas pipeline bill after cutting community impact payments by three-quarters and incorporating the governor's proposal to raise oil taxes.

The committee adopted the substitute for Senate Bill 280 as its working document. The new version reduces community impact payments from the original $800 million proposal to $200 million. It requires a $50 million upfront payment plus $30 million annually for five years, replacing the earlier plan of $1 million per mile of pipeline.

Chair Cathy Giessel said the committee substitute combines SB 280 tax provisions with SB 275 policy provisions, merging what had been separate tax and policy bills into a single piece of legislation.

The substitute incorporates the governor's proposal from Senate Bill 227 to raise the gross minimum oil tax floor from 4 percent to 6 percent. The increase would apply to all oil produced on the North Slope beginning Jan. 1, 2027. Dan Stickle, chief economist with the Department of Revenue, told the committee the change would generate an average of $137 million annually through fiscal year 2032.

"We're estimating under the spring revenue forecast, holding all else equal, no changes to company behavior, a $71 million increase for fiscal year 2027," Stickle said. "That represents a half year of impact, and then an average of $137 million of increase for fiscal years 28 through 2032."

The bill establishes a $15 billion threshold for pipeline cost overruns that cannot be passed to Alaska consumers. Committee members questioned how the provision would work in practice. Legal counsel acknowledged uncertainty about whether the threshold was set above or below expected project costs.

"At the time that we requested this figure to be set into the bill, I don't know that we really thought the cost would be over $15 billion, and we were trying to set a firm figure to it," said Sonya Kawasaki, Senate Majority legal counsel. She added that if the developer indicates the cost will be lower than $15 billion, "it would be in the interest of Alaskans to lower the dollar figure that we have in the bill right now."

The substitute caps consumer gas prices at $12 per thousand cubic feet after completion of the Phase 1 pipeline and $5 per thousand cubic feet after an LNG export facility begins operations. Stickle said the bill would result in a break-even price of $4.78 for in-state gas, compared to $4.86 under current law.

The alternative volumetric tax would be set at 6 cents on both the gas treatment plant and the pipeline during Phase 1. Once Phase 2 is reached, the tax would increase to 10 cents on the gas treatment plant and 15 cents on both the pipeline and LNG terminal. The tax would sunset 10 years after LNG exports begin.

Committee members raised concerns about what happens when the alternative volumetric tax expires and the state returns to property taxes. One member asked whether the state would face expensive litigation similar to disputes over the Trans-Alaska Pipeline System.

"We would need to do assessment and appraisal out of Department of Revenue for the pipeline at that time," Stickle said. "There would be an appeal process, and certainly it would be the right of the property owner to take that up through the appeal process, potentially to court."

Stickle said the alternative volumetric tax generates more certainty than property taxes. "The alternative volumetric tax does have an inflation assumption, so that would be assumed to increase annually over time," he said. "Depending on inflation and depreciation and ultimately capital cost and value of the project, there is a range of uncertainty around the property tax revenues once we get out a decade or more."

Department analysis showed that not sunsetting the alternative volumetric tax would produce more long-run revenue under the department's assumptions, with the tax inflating at 2.5 percent annually while property tax values were assumed to remain stable.

The Department of Revenue analysis shows state revenues would be slightly lower than current law for the first decade of operations, then higher than current law after the alternative volumetric tax expires.

"The revenues to the state are a little bit lower than current law for the first decade of operations, but then they're actually higher than current law later in the time horizon of the analysis as the alternative volumetric tax expires," Stickle said.

The bill would result in a tax decrease for midstream operators and a tax increase for upstream producers. Stickle told the committee that with gas price caps in place for in-state sales, an in-state only pipeline would not make economic sense for developers.

"With the gas tax or gas rate caps in place for in-state sales, an in-state only line would not make sense under this bill for the developer," he said. "So it's really that all or nothing proposition under this version."

The committee held its 30th hearing on the bill Thursday and adjourned with plans to take up SB 280 again Friday morning for a 31st hearing.

The Department of Revenue is requesting four positions to administer the pass-through entity tax, the alternative volumetric tax, and increased valuation and audit requirements. The department also requested $1 million for tax revenue management programming changes and $250,000 for commercial analysis support.