| ACES
in Palin World |
Reports and Research Memoranda (Comment
11/11/09) |
Setting
the Record Straight .
. What Really Happened |
|
By Richard A. Fineberg
Eyes might well have crossed trying to reconcile reality with Palin's brief explanation of ACES for this simple reason: It was inaccurate and off-kilter. The first two elements of the "entirely new" system enacted during the special session were actually revisions of rates within the PPT (Petroleum Production Tax) system her predecessors created and enacted in 2006; the third also made minor changes to the existing system. The fourth and fifth items she listed dealt with intended improvements that, two years later, have yet to be implemented. They are part of the tall stack of unfulfilled promises and unfinished business that Palin left behind when she resigned from office. As discussed below, other key pieces of Palin's ACES proposal weren't adopted at all, but were rejected and reversed by the Legislature. Those reversals, increasing progressivity (instead of reducing it, as Palin proposed), had salutary results. While
the events recounted here focus on the 2007 ACES legislation, it should be noted
that over the past year informed observers have reported that the Palin administration's
failure to consider the consequences of ACES for natural gas production may hinder
development of the long-delayed North Slope natural gas pipeline, thereby undercutting
the possibility of building the pipeline she inaccurately told the nation was
already underway when she accepted the vice-presidential nomination Sept. 3, 2008.
(2) Two years after ACES was enacted, Palin's successor and state
legislators are once again considering modifying the production tax, further dimming
the luster of Palin's carefully polished image of ACES. (3) Preparing for ACES: Report from the Trenches Palin announced her call for a special legislative session to deal with oil production tax issues August 3, 2007. According to her press release, the cost-based production tax implemented under Palin's predecessor in 2006 wasn't working properly. Due to a sudden, unanticipated increase in reported field costs, a short Revenue Department report released at the press conference explained, the new, cost-based tax was not generating as much revenue as its proponents had anticipated. The press release announcing the special session stated that the governor "has asked the [Revenue] department to have the proposal ready for release to the public by September 4, 2007. This will provide the Legislature and the public with more than 40 days to become familiar with the proposal before the special session begins." (4) Also
on August 3, the Revenue Department announced the hiring of five consulting teams
to help sort through the complex and controversial realities of petroleum taxation,
craft legislation for the special session and then make the case for the proposal.
(5) The issue, as the Revenue Department background paper released
that day put it, was this: When the Legislature enacted a net profit-based tax
system in 2006, did the legislators fully understand the risks inherent in the
decision to add a major variable - cost deductions - to the state's former price-based
production tax system? (6) The issue had been simmering for months.
The executive actions of August 3 came 90 days after the Department of Revenue's
Spring 2007 Revenue Sources Book had identified this problem. (7)
I joined the Palin administration team as the leader of the only Alaska-based consulting firm selected to advise the Palin administration on this issue. My principal assignment was to help make sure, based on my experience, that the ideas of the visiting consultants, staff holdovers from previous administrations and newcomers to state officialdom could be meshed together and applied to the unusual economic and administrative realities of Alaska's oil patch. With the special session looming, I looked forward to the opportunity to serve, and to see from the inside how the state was dealing with current oil and gas issues. In
late August 2007 I arrived in Anchorage to spend four days with the Palin team
participating in a set of briefings by the visiting international experts. Uncertainty
and tension gripped the Palin team, whose members still didn't know exactly what
course of action the governor would select. Most of the visiting specialists -
and the state staff - favored keeping the new, profits-based tax because its tax
bite, which reflected both costs and prices, was better calibrated to fluctuating
petroleum revenue. But a coterie of legislators wanted to go back to the old (and
simpler) price-based tax. But during her gubernatorial campaign, Palin had expressed
support for the old tax. Nobody seemed to know which way Palin would go and many
members of the team, effectively leaderless, seemed to be tightly wrapped in a
state of controlled chaos. With the special session looming ever closer, Palin
had yet to decide on the course of action she would recommend to the Legislature.
(8) At that point, with the special session was less than two months away, I found the lack of a clearly defined proposal surprising, since the problem had been clearly identified months earlier. Nevertheless, I could sympathize with Palin's dilemma. In the absence of clear data on past and estimated North Slope oil production and transportation costs, revenue and tax collections and a practical game plan for fixing the tax collection process, I did not feel I could make a recommendation as to which tax vehicle to adopt, either. Fortunately, I didn't need to. During the ACES policy formulation period I never met with - or even saw - the governor. My consulting colleague Walter Parker (who had logged considerably more time than I with state agencies and previous governors of the 49th state) were both surprised by Governor Palin's absence from the scene. On
August 24, 2007 when word finally came down that Palin had been dragged -- "kicking
and screaming," as she put it (9) -- to support the cost-based
tax she had originally opposed. With Palin's self-imposed deadline for releasing
the proposal 11 days away, officials were feverishly scribbling notes about how
they would present materials to the public. At the time I was told in confidence
that Palin wanted to maintain a gross tax element so that she could claim she
had forged a political compromise. (10) Although we learned later
that Palin had been quietly courting national attention, I doubt that anybody
on the Palin administration team dreamed we'd be seeing the "ACES" spin
in a million-book best seller two years later. When
it was finally released at a Sept. 4 press conference, the proposal that Palin
promised to make available 40 days before the session began was a five-page handout
that turned out to be a bust. (To review this document, click
here.) The first page proclaimed three guiding principles:
As a long-time advocate for greater clarity in oil revenue presentations to provide the public with a solid basis for evaluating oil and gas policy issues, I was delighted that transparency was prominently listed as a guiding principle. But when I looked at the final four pages of that document, I wanted to weep. The skimpy, five-page document the Palin team had prepared clearly violated that principle trumpeted in the opening page. The handout contained no discussion of policy issues, no background information and no links to more information. Moreover, on the data pages three different fiscal measuring systems (state FY 2008 total production tax revenue, total government take as a percentage of total project revenue in 2008; and industry life-of-field net present value) were smushed together without definitions. In fact, the data on the final three pages were so poorly presented that it was difficult to imagine a less transparent presentation. Two
weeks later, in another ACES-related presentation by the Palin team, an erroneous
summary of state revenues provided another example of sloppy data presentation.
Once again, the data were not accurate, clear or comprehensive. (To review this
example, click here.)
Both documents were discussed in my late 2008 posts on Palin's performance as
governor. At that time, I was slow to blame the governor for the performance of
her bureaucracy. In retrospect, I concluded that Palin's apparent lack of commitment
to quality presentations signaled an unhealthy tolerance for subpar performance,
rather than the commitment to clarity that found its way into the ACES acronym. The
special session was not without bright spots. For example, I watched with admiration
as visiting consultants responded vigorously to bogus industry pleas to reduce
their taxes. Though sometimes difficult to follow, the consultants did provide
an interactive model that made it clear that the industry was not telling the
whole story and was, in fact, masking significant North Slope profits. (11)
Throughout the special session, this factor remained constant: Sarah Palin was
seldom seen. As far as I could tell, she was strangely content to let her minions
and the Legislature wander through the complexities of petroleum economics and
sort out the problems associated with tax collection without her. At least two major flaws were evident in Palin's proposed changes to the production tax structure. First, the proposed increase to the basic tax rate (from 22.5% to 25%) was offset in large measure by a reduction to the progressivity factor the state had adopted the preceding year as part of the new tax. The progressivity factor enables the tax bite to rise and fall with oil prices, which, as a general rule, is considered good for both the industry and the host government. But critics believed Palin's proposed progressivity reduction would fail to deliver to the state its fair share of the gains from high oil prices. The second flaw was that Palin's original ACES proposal would have calculated the tax on an annual price average, further denying both the state and the industry the benefits of a more price-sensitive monthly calculation already in place. (12) Reduced progressivity and annual rather than monthly tax computation countered Palin's increase to the basic production tax rate and severely degraded the sensitivity of the production tax to fluctuating oil prices. In
the end, the Legislature stayed with the profits-based tax, adopted the proposal
to increase the basic production tax rate from 22.5% to 25% of net profits and
rejected both of the flawed Palin administration proposals mentioned above. (13)
According to the analysis of the ACES legislation in the Oil & Gas Journal,
approximately $1.6 billion of the $2.0 billion increase in state production tax
revenue over the measure enacted the year before Palin became governor can be
attributed to the Legislature's decision to scuttle Palin's proposed progressivity
rate decrease and replace it instead with a significant increase. (14) To put the ACES first-year fiscal results in perspective: The state's petroleum production tax is the largest generator of petroleum revenue for the state of Alaska, but not the only one. Other revenue sources are royalties, property and state income taxes. In the first year under the ACES production tax, total state petroleum revenues more than doubled, largely as a result of rising oil price, increasing from $5,352.9 million to $11,531.5 million. (15) While nearly three-quarters of this increase (roughly 40% of total state petroleum revenue) represents production tax gain, only a small portion can be attributed to Palin's ACES proposals. According to the Oil & Gas Journal analysis, almost 30% of the state's FY 2008 petroleum revenue total - a $3.3 billion gain - would have been captured under the profits-based tax implemented by Palin's predecessor in any event. As noted above, the Legislature can take credit for the $1.6 billion gained by reversing Palin's proposal to reduce progressivity; Palin's proposed increase to the production tax base, adopted by the Legislature, can take a bow for the remaining $0.4 billion gain, or 3.5% of the state's total petroleum revenue pot. In
sum, the personal impressions recounted here combine with the outline of ACES
revenue effects to demonstrate that the summary of the ACES legislation Palin
shared with her readers for laughs at the close of Going Rogue amounted
to a lie and her own, self-serving description of the ACES legislation was also
wildly inaccurate. The $200 Million Sideshow While working through documents during preparation for the special session, an obscure provision of the state production tax law caught my eye. That provision spells out general guidelines for dealing with transportation charges under both the old (price-based) and new (cost-based) production laws. (16) Because transportation charges are subtracted from the price of oil to determine the state's production tax base, overcharges reduce state revenue. According to a steady stream of court and regulatory agency opinions, throughout the life of North Slope production TAPS tariffs (shipping charges) have been excessive. TAPS
is one of the largest privately financed construction projects in history, and
the three principal owners of TAPS (British Petroleum, ConocoPhillips and ExxonMobil)
own more than 95% of TAPS and control a similar percentage of North Slope production.
Due to this overlap, TAPS overcharges benefit North Slope producers by reducing
their tax payments, while inhibiting development by their independent competitors,
who must pay the excessive transportation charges out-of-pocket. After decades
of dealing fitfully with pipeline overcharges, court and regulatory processes
have begun nudging the tariff issue toward resolution, but excessive pipeline
tariffs still reduce the state production tax and royalty base. (17)
On inspection of the production tax statute governing transportation charges, I realized that minor changes to the section of the existing production tax statute dealing with transportation costs could enable the Revenue Department, in administering the production tax, to deal with the tariff overcharge issue. Although a pipeline tariff measure was not included in the Palin ACES proposal, the special session presented an opportunity to address this problem if legislators wished to do so. I brought this situation to the attention of the department and was assigned to work on the statutory changes that would enable the Revenue Department to correct this problem in its own bailiwick when sufficient evidence of tariff overcharges exists. State analysts told legislators that this provision would stimulate competition while generating an additional $160 to $200 million for the state during its first year. (18) This sideshow battle to improve the state fiscal regime was complicated by long-standing inter-agency tensions over tariff management issues. I was assigned by my handlers at the Department of Revenue to work with legislators on this issue and representatives of the administration would weigh in constructively at critical junctures, but the measure I was proposing did not represent administration policy; Governor Palin remained silent, aloof. Nevertheless, legislators realized that this measure could help speed resolution of tariff issues, assist in the recovery of hundreds of millions of dollars to the state due to past overcharges and enhance competition. The pipeline tariff fix was included in the final ACES measure that Governor Palin proudly signed it into law, but that's not the end of this story. (19) The pipeline tariff legislation required implementing regulations, which the Palin administration did not put in place. Instead of using information and substantive conclusions from tariff litigation to arrive at an appropriate tax determination, the Department of Revenue's drafted regulations that set up a cumbersome new tariff process, establishing a new venue that pipeline owners may be able to use to continue their quest for tariff overpayments while exposing shippers and pipeline operators to a new ratemaking proceeding that amounts to administrative double jeopardy. In June 2008, I felt compelled to join independent shippers in public opposition to the misguided draft regulations for the legislation I had worked to enact; by January 2009, the major oil companies had also objected. As of this date, the pipeline regulations are still wallowing in limbo. (20) In sum, the future of the pipeline tariff measure on which I worked, which was supposed to deliver an estimated $160 to $200 million for fiscal 2008 and aid open competition on the North Slope by demonstrating commitment to preventing tariff overcharges, remains uncertain. With
her characteristically insouciant disregard for facts and detail, in Going
Rogue Palin did not mention the ACES oil pipeline tariff measure or its unfortunate
fate. When ACES legislation passed in November 2007, I entertained the notion that Governor Palin, to whom I had consulted, might be a skilled, apolitical maestro who managed to get things done while rising above the fray of normal politics. But events unfolding on several fronts early in 2008 convinced me that my initial judgment was wrong. Apart from the notable discrepancies between reality and the Palin World version of the ACES legislation, two other Alaska energy endeavors reported previously on this web site underscore the importance of the questions raised in this report about the numerous factual discrepancies between Palin's version of events and reality. Example
No. 1 (North Slope Natural Gas): Palin had barely set foot on the big stage
when she stubbed her toe with the false claim that under her leadership construction
had already begun on the long-delayed natural gas pipeline from the North Slope.
(21) Contrary to the impression Palin gave when she accepted the
vice-presidential nomination in September 2008, financing for this project has
yet to be sanctioned. Nor have construction plans received the required approvals
of the U.S. federal government or its Canadian counterpart. After examining the mechanics of financing the proposed North Slope natural gas pipeline under Palin's Alaska Gas Line Inducement Act (AGIA) for the Alaska Public Interest Research Group, I reported on what I believe are major unanswered questions regarding the proposed natural gas pipeline tariff regime in July 2008. (22) After following up with legislators and members of the Palin team, I put together a packet of seven documents for the governor's review. In the second week of August 2008, I personally handed these documents to the governor during brief encounter in which requested a meeting with her to discuss why I found myself in respectful disagreement with her natural gas team. I offered to meet her in Anchorage, if necessary, to alert her to the facts and the questions that had led me to go rogue on her natural gas line plans. Palin was either unwilling or unable to meet with me and never responded to my concerns. Two weeks later, she ascended the national platform. (Click here for this web site's fall 2008 posts on Palin's natural gas pipeline efforts.) In December of this year the U.S. Army Corps of Engineers quietly began convening public scoping meetings in Alaska to consider the recent petition of current Alaska Governor Sean Parnell, Sarah Palin's 2006 running mate and successor, that the federal government conduct an environmental impact statement (EIS) as a precursor to an in-state natural gas pipeline. (23) The project is known by the acronym ASAP - the Alaska Stand Alone Pipeline (ASAP). At the Fairbanks meeting Dec. 10, Michael Soptak, a consultant with ASRC Energy Services and the principal presenter for the ASAP project, commented that the state's request for an EIS for the in-state pipeline is driven by the fact that southcentral Alaska may be running out of gas. If we knew the Alaska Highway gas pipeline were going to be built, he explained, either under Palin's plan or the competing Denali project of two major North Slope producers, a spur line to the Anchorage / Cook Inlet region would be the most economic solution. But it will not be known until later this year whether financing for an Alaska Highway gas pipeline project can be found. That is why, Sotak explained, at this time it is necessary for the state to begin laying the groundwork for an in-state pipeline instead. Palin's natural gas line claims are generally recognized to be exaggerations. Ne ertheless, I scanned her autobiography, hoping for insights into a fundamental question at the root of the long-delayed North Slope natural gas pipeline: Did Palin really move the North Slope natural gas project forward? Or did she simply distract from viable in-state development by urging the Alaska Legislature to throw a half billion dollars of state money at the industry in a mistaken effort to induce a project whose economics will be determined, in the end, by factors that include the volatile pricing of natural gas, the resulting bubble-prone oscillations of natural gas development and the effects of shale gas and other unconventional natural gas production triggered by the last decade's run-up in oil prices? In writing her autobiography, the erstwhile energy maven had a golden opportunity to speak to this important question, but she presented no new information or insights. If Palin were a male poilitician, we'd call her an empty suit or coat rack. Example No. 2 (The Alaska Oil and Gas Infrastructure Risk Assessment Project): Even before Senator John McCain selected Sarah Palin to be his running-mate, her Alaska oil and gas infrastructure risk assessment project (ARA) seemed to be on the road to failure. How that project got stuck in the bureaucratic trenches has also been told on the pages of this web site. In this case, Palin's failure is documented in a record that includes a harsh rejection of her administration's game plan by an independent panel of national experts. (Information on this project was covered on this web site in posts of July - August 2009 and Nov. 11, 2009.) In sum, review of Palin's record on Alaska energy issues reveals a very different picture from the superficial, self-serving story Palin tells in Going Rogue. Palin's efforts on ACES, AGIA and ARA all demonstrate this maiden of misinformation's startling inattention to the essential details of public administration. In my estimation, these shortcomings seriously undermine Sarah Palin's credibility, as well as her capacity to govern effectively. ______ Endnotes (1)
Here is Palin's description of the ACES bill in Going Rogue:
Palin
then went on to describe (at considerably greater length) how the wife of her
revenue commissioner dreamed up the acronym "ACES," which her partner
brought to the governor the following morning. (Sarah Palin, Going Rogue
[Harper Collins, 2009], pp. 163-164.) (3) Wesley Loy, "Seeking answers: 15 lawmakers ask Parnell if state oil tax policy helps or hurts Alaska investment," Petroleum News, Dec. 13, 2009. (4) Office of the Governor, "Governor Palin Announces Special Session to Revisit Oil Taxes," August 3, 2007 (For Immediate Release 07-173). (5)
Associated Press, "State to hire consultants to review oil tax - TASK: Experts
will look at other plans, consider alternatives to PPT," Anchorage Daily
News, Aug. 4, 2007. (6) Alaska Dept. of Revenue, "Petroleum Profits Tax (PPT) Implementation Status Report," Aug. 3, 2007, p. 5. (7)
Alaska Dept. of Revenue, Fall 2007 Revenue Sources Book, pp. 15-16. (8) Nearly a month after calling the special session, in an extended interview with the Anchorage Daily News, Palin still expressed uncertaintywas asked whether she was going to push for the gross production tax she had talked about during the campaign. She responded:
A few moments later, in response to another question, she left simplicity behind:
The
interview was published Sept. 3, 2007 -- the day before she announced the outline
of her plan. ("Palin's oil agenda includes credits as well as tax,"
Anchorage Daily News, Sept. 3, 2007 [part II of 3-part series]). (9) Adam Brinkley, "Aces and the Army," Sept. 13, 2007 [accessed Dec. 7 , 2009 at http://palinforvp.blogspot.com/2007/09/aces-and-army.html]). (10)
At that time, in-house we referred to the still-unformulated proposal that would
later be (11)
The work of consultants Robert George and Rich Ruggiero of Gaffney Cline &
Associates, a Houston-based international consulting firm, was particularly insightful.
In a blog report, Anchorage Daily News reporter Sean Cockerham told readers
that anyone with an "Excel" program should be able to adjust the adjust
the costs and tax rates and other factors in the examples BP presented and see
the results by using the Gaffney Cline model. He noted that legislators from both
sides of the aisle were impressed with the Gaffney Cline model and conclusions.
("More on Prudhoe profits," Nov. 2, 2007 [accessed Nov. 5, 2007 at http://community.adn.com/alaska/node/112776?page=2].)
Cockerham also posted the interactive model the consultants created, which he
accessed at http://www.gov.state.ak.us/aces/pdf/11-1-07%20Prudhoe%20Bay%20costs%20analysis.xls,
[accessed Nov. 5, 2007]). (12) See: "Palin's PPT Proposal: The bill at a glance," Alaska Budget Report, Oct. 22, 2007, p. 3. (13)
For inquiring minds (or restless insomniacs) who desire more substantive information,
here is a summary of the essential mechanics of the net profits tax implemented
in 2006, as modified by the ACES legislation in November 2007: (14) See: Dickinson and Wood, "Alaskan tax reform: Intent met with oil," pp. 24-25 (Table 2, "2008 Production Tax Revenues: Actual vs. Potential Under Alternative Mechanisms"). Approximately half of production tax gains -- $2.0 billion -- would have been captured by the cost-based PPT statute enacted in 2006, the year before Palin took office. (15) Total state petroleum revenues for state fiscal year 2008 (July 1, 2007 through June 30, 2008) and FY 2007 (July 1, 2006 through June 30, 2007) are calculated as follows: FY 2007 and 2008 petroleum revenues of $5,141.7 million and $11,255.0 million, respectively (Alaska Department of Revenue, Fall 2008 Revenue Sources Book, Dec. 08, p. 106), plus state property taxes distributed to municipalities of $211.2 million in state fiscal year 2007 (Fall 2007 Revenue Sources Book, p. 50) and $276.5 million in FY 2008 (Fall 2008 Revenue Sources, p. 57) in state fiscal year 2008. (16) AS 43.55.150. (17)
For background on TAPS tariff issues, see posts on this web site summarized and
linked to "Federal
Energy Regulatory Commission (FERC) and State Supreme Court Confirm TAPS Overcharges,
Hand Pipeline Owners Their Sixth Successive Defeat Since 2002," July
1, 2008. (18) Antony Scott, "Transportation Deductions" (The Palin-Parnell Administration Presents ACES [Alaska's Clear and Equitable Share]), Oct. 30, 2007. (19) The final version of the ACES bill (SCS CSHB 2001[FIN] am S) was signed into law as Chapter 1, SSSLA 07. Section 53 of that bill amended AS 43.55.150. (20) Information from ADOR (personal communication). (21)
Here is what Palin said in St. Paul: "I fought to bring about the largest
private-sector infrastructure project in North American history. And when that
deal was struck, we began a nearly $40 billion natural gas pipeline to help lead
America to energy independence" ("Text of Gov. Sarah Palin's speech,"
Los Angeles Times, Sept. 4, 2007). (23)
The Dec. 10, 2009 meeting in Fairbanks was one of a statewide series of meetings
being held by the U.S. Army Corps of Engineers pursuant to notice posted in Federal
Register, Vol. 74, No. 232 (Dec. 4, 2009), pp. 63736-63737. |
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