How That Innocent “Decoupling” Bill
Might Become a $20 Billion Trojan Horse
& Enstar Loses Rate Hike Attempt

Dear Neighbors,

         So, what’s the buzzword around the halls of the capitol these days?  I’ll give you a hint.  It rhymes with “Demuppling”.   Need another hint?  How about looking at the newsletter title!  Alright, I’ll give you some slack.  It’s a  “buzzword” you’ve probably never used in your life. 

         A few Senators have launched an effort they call “Decoupling”.    It’s an innocent idea, with honest pros and cons.  But despite the best intentions of those proposing it, the effort could become a very expensive Trojan Horse and cost us billions in lost tax revenue – the opposite result the decoupling proponents are trying to achieve.   

But First, You Win, Enstar Loses . . . .

         First, some good news on a different topic.  Remember that $5.7 million billing mistake Enstar charged you for last year?  This week the Regulatory Commission of Alaska did what we asked, and said Enstar can’t retroactively charge you for their billing and accounting errors.  They’ll now have to return an average of roughly $30 to their customers.  Thanks to the efforts of the Attorney General, Sen. Bill Wielechowski, and Reps. Pete Petersen and Chris Tuck, who led our effort to bring this to light. 

         Now. . . . about the word that’s being spoken more in Alaska’s State Capitol than anywhere else on Earth. . . .

Decoupling: The Innocent Idea That Could Become An Expensive Trojan Horse

         I wish I could explain Decoupling on a flash card.  Here’s my best shot at summarizing the issue, and its potential benefits and dangers.

         When we passed our oil tax law in 2007 we had to grapple with the reality that the biggest known reserves of natural gas on the North Slope – the gas we’ll need to start a gas pipeline project – are contained in our biggest oil fields, like Prudhoe Bay.  At some point, the same drilling and development that produces oil will produce natural gas.  So, when we tax a company’s profits, it’s not easy to determine what are “gas” costs to be deducted from their gas taxes, and “oil” costs to be deducted from their oil taxes. 

         We therefore blended the oil and gas tax rates together.  While ACES resulted in a fair share for Alaskans, and has generated more than $5 billion in additional revenue beyond what we would have received if we didn’t repair our broken oil tax system in 2007, we chose to do something the decoupling proponents are now having second thoughts about.  We chose to allow companies to deduct their oil and gas costs, in total, from their oil and gas tax payments.

         We did one more important thing to incentivize the development of natural gas, and to help move a gasline forward. 

         We said that if companies moved ahead with a gas pipeline, we’d let them deduct their gas field and infrastructure development costs in the year the costs were expended.  That will be before gas starts flowing through a gas pipeline, and before they start paying taxes on their natural gas production.  Let’s say a company expends $1 billion in developing its gas infrastructure between the years 2018 – 2022, but that gas doesn’t start flowing until 2023.  We want companies to make these expenditures, so we chose to let them deduct their expenditures from their oil tax payments in those earlier years.  In future years, we’ll get the money back, because they won’t deduct those costs again when they start paying natural gas taxes.

         OK.  Now, decoupling.

         The Senators who propose this idea say that at certain oil and gas prices, the blended oil and gas tax rates will generate as much as $2 billion less in revenue than if we had a separate tax, at the same tax rates, for oil and for gas.  Under our current law, the tax rate rises at higher oil and higher gas prices, to reflect the fact that oil company profits rise when prices rise.  There are certain circumstances where low natural gas prices, combined with high oil prices, might create a lower oil tax rate than if we had a stand along oil pipeline, with no gas production. 

         We are in the early stages of work on this proposed “Decoupling” legislation.  I still need to review the accuracy of the “worst case” projections folks are talking about, whether the decoupling effort is truly needed, and if it is, how a decoupling bill might be written. 

         But here are a few things to think about, and one thing that should concern you greatly.

         The Trojan Horse Problem: There are a lot of folks in the Capitol who want to roll back oil taxes.  One proposal that has some traction in the House would reduce oil taxes by roughly $1.2 billion a year when oil is $100/barrel; and by roughly $800 million a year at projected oil prices of $70- $80/barrel.  I’m skeptical that big tax reductions will do what those proponents say – get oil companies to invest more of their profits into new production.  I’ve addressed that in a recent e-newsletter.

         If the Senators’ “decoupling” bill comes to the House, many believe there may be enough votes to pass a major oil tax rollback.  If that’s the case, amendments could be added to a “Decoupling” bill that would roll state oil revenue back, starting immediately, by $1 billion or more a year.  In a democracy, you can’t stop legislators from tacking on amendments they believe in. 

         So - a decoupling bill risks that it will be re-written to give away roughly $1 billion a year or more in state revenue, until a gasline starts delivering natural gas.  If that happens, we could lose $10 billion or more in revenue that the state needs as we enter lean years of budget deficits. 

         For now, we have a lot of work to do.  We have to assess the decoupling bill as it moves through the process.  And we have to balance its potential benefits and dangers. 

         Does Decoupling Harm Prospects For A Gasline?  When we wrote our oil tax law, we wanted to create a natural gas tax that was fair, and that would encourage progress on a gas pipeline.  There is some truth to the concerns by those who oppose decoupling that the original tax in 2007 was written to incentivize a gas pipeline.  Under most circumstances under the existing tax, a gas line, and the oil pipeline, will generate substantial revenue for the state.  And without a gas pipeline, this state’s economic and fiscal future are both harmed greatly.

         Some legislators may want to prevent companies from deducting their gas field development costs until the gas pipeline starts operating.  That would roll back an intended incentive we passed in the 2007 legislation.  And the current law tries to recognize that when combined oil and gas field costs are high, and production less profitable, taxes should reflect that reality.  So, we have to assess that concern in reviewing decoupling proposals.

         Finally, a gasline can help us develop more oil.  We don’t want to harm the prospects that a gasline project will move forward.  With a gasline, companies will be more likely to develop smaller oil fields.  Why?  A small oil field today may not be economic to produce.  But a small oil field that has natural gas in it, when there’s a gas pipeline, might become economic.  So – we have to be very careful not to change taxes in a way that jeopardizes the viability of a gasline project.  A gasline project is important to both future natural gas and oil development and revenue.

         With that, we have a lot of work to do.  This week we’ve been working on the Governor’s budget proposal, and amendments will be offered in the House Finance Committee Monday.  Then, I suspect, I’ll be able to shift my attention to the looming oil and gas issues that threaten to consume much of the rest of this legislative session.

         I hope this newsletter finds you well.  As always, let us know if you have any concerns.

         Best regards,