Saturday, May 25, 2013

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Alaska’s Future: Election 2012
With 59 of 60 legislative seats on the ballot, the future of oil production economics hangs on the election results
By Bill McAllister
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There are two major inter-related themes in this election

Is the Senate Bipartisan Working Group good or bad for Alaska? And should oil production taxes be reduced along the lines suggested by Governor Sean Parnell, basically a no-strings-attached break of up to $2 billion a year, or should the Legislature modify certain parts of the tax system known as ACES – such as the progressivity feature, which escalates the government's percentage take at high per-barrel prices – only if the North Slope producers somehow commit to or actually achieve production increases?

The overlap between the themes

It was the Senate bipartisan coalition – 10 Democrats and 6 Republicans – who blocked Parnell's oil tax break bill. (Four Republicans chose to form a minority rather than join the coalition.)

The back-story

North Slope production has been decreasing since 1988, when the pipeline through-put peaked at 2.1 million barrels a day. Although the industry declared "no decline after '99," production has continued to drop in the 21st century, and is now below 600,000 barrels a day.

Under the previous Economic Limit Factor (ELF) tax structure, many fields were paying no taxes. That changed in 2006, when Governor Frank Murkowski and the producers proposed a shift to a profits-based tax system, rather than the gross value tax under ELF. Murkowski was seeking an agreement to build a natural gas pipeline to the Lower 48, and his contract to do that would have established a profits tax of 20 percent. But the Legislature passed PPT (alternately Petroleum Profits Tax, or Petroleum Production Tax) at 22.5 percent, while leaving Murkowski's contract to gather dust due to its eyebrow-raising features, such as a tax rate lock-in for 30 years and a gas tax lock-in for 45 years.

The passage of PPT, it turned out, involved corruption among senior executives of oilfield services company VECO and certain legislators.

The FBI raided six legislators' offices on August 31, 2006, nine days after Murkowski lost the Republican gubernatorial primary, gathering only 19 percent of the vote, while Sarah Palin won with over 50 percent (former legislator John Binkley accounted for nearly 30 percent). Thus, PPT was considered highly suspect by the end of 2006, when Palin assumed the governorship. And by the following spring, she declared that it was not raising the projected revenue. That, along with the arrest on May 4, 2007, of Representative Vic Kohring and former Representatives Pete Kott and Bruce Weyhrauch, led both Palin and Democratic legislators to call for a review of PPT.

In a special session that began on Alaska Day, October 18, 2007, Palin called legislators back to re-examine PPT. Kott already been convicted and Kohring's trial was under way when the session began. (Former Representative Tom Anderson also had been convicted in a separate scandal not involving oil and gas issues.)

Despite resistance from Senate President Lyda Green, Palin's nemesis, on the 30th and final day of the session the Legislature increased the base tax rate to 25 percent and put the progressivity feature on steroids. In December, Palin signed the bill, which was partially retroactive.

These five years later, state spending has increased dramatically and the Legislature has at least $16 billion in savings, not including the permanent fund. But Parnell and the industry say the result has been diminished prospects for oil production. Although North Slope investment and employment are at or near record levels, the producers say this is based upon the need to maintain the facilities originally constructed in the 1970s. They say they're not exploring for new oil.

ACES has generous credits – too generous, some say – and this has drawn in explorers, such as Repsol, Great Bear and Armstrong. But critics of the tax policy say that those companies are going to want to see a break in production taxes when they're actually ready to produce. The other side counters that the majors have enormous profits even after the taxes, and enjoy political stability in Alaska, where their facilities are unlikely to be seized at gunpoint, which is a danger in a few other parts of the world.

Although this is the main issue in both House and Senate races, the Senate is getting the focus because of the coalition. Parnell, GOP State Chair Randy Ruedrich and the industry have made it their primary goal to break up the coalition.

Two Republican members of the coalition were defeated in the primary – Linda Menard of Wasilla and Tom Wagoner of Kenai – and their victorious opponents have spoken against the coalition. Two others, Anchorage Republicans Kevin Meyer and Lesil McGuire, have publicly disavowed the coalition. So there is incredible pressure on the remaining members to hold their seats.

Top Senate races

Senator Hollis French (D) vs. Bob Bell (R) in West Anchorage (Senate District J)

French is considered the father of the progressivity feature. Bell's engineering firm has done work with the producers for decades. Bell was fined $390 by the Alaska Public Offices Commission (APOC) for initially failing to disclose his firm's clients and the amounts they paid. He blames confusion over a rule change in December 2011, which put CEOs under the same obligations as owners of companies. Meanwhile, a Republican operative has filed a complaint against French with APOC, saying he coordinated with an independent group that was running ads on his behalf. Such coordination would be illegal. French says despite an overlap of personnel among his campaign and the independent group, Putting Alaskans First, there was no discussion of advertising strategies between them. French was touting an Alaska Dispatch story saying that Bell broke state game laws in 2010 by keeping horns from a subsistence musk ox hunt. Bell denied that he removed the horns from the game management unit, which would be illegal unless the trophy value was first destroyed by cutting them. (The issue is that the state doesn't want meat wasted in subsistence hunts by trophy hunters.) Since then, the online-only Alaska Dispatch hammered away at Bell, until troopers clarified Bell had not broken the law. By all indications, this is a close race.

Senator Bill Wielechowski (D) vs. Bob Roses (R) in East Anchorage

Wielechowski is a union lawyer (IBEW) and a strong supporter of ACES. Roses, who served one term in the House when ACES was passed, says he knew from the start that the progressivity was going to be a problem. The state GOP hopes to knock Wielechowski out of the Senate in this race, taking out another bipartisan coalition member.

Senator Bettye Davis (D) vs. Representative Anna Fairclough (R) in East Anchorage / Eagle River

Davis lost 70 percent of her district through reapportionment. The only African-American legislator is considered a heavy underdog against former Anchorage Assembly Chair Fairclough.

Representative Berta Gardner (D) vs. Don Smith (R) in Midtown

Smith is a member of the school board, and is a former assemblyman and, long ago, state representative. He is often viewed as a conservative curmudgeon, complaining, for example, about the number of kids getting free lunches in the school district. But he also bills himself as the "father of the [municipal] tax cap," and is complaining about bloated state spending. Gardner is an intelligent liberal, whose incumbency may count in this race.

Senator Cathy Giessel (R) vs. independent Ron Devon in South Anchorage / Northern Kenai

Giessel is one of the four minority Republicans in the Senate. She has been called a "tea-bagger." She recently was attacked for comments on subsistence, which she said were taken wildly out of context. Devon, who is being staunchly supported by Democrats and Democratic-leaning interest groups, is the husband of famous/infamous Mudflats blogger Jeanne Devon.

Senator Joe Thomas (D) vs. Senator John Coghill (R) in Fairbanks / North Pole and Senator Joe Paskvan (D) vs. former Senator Pete Kelly in Fairbanks

Top House races

No one is predicting Republicans will lose their majority in the House, where they now have 22 of 40 seats, and where four rural Democrats have joined them. But the oil tax issue still resonates in those races.

Representative Mia Costello (R) vs. Michelle Scannell (D) in South Anchorage

This is by far the nastiest race in the state this year, thanks to Scannell. Before the primary, Scannell joined with Costello's Republican opponent to claim Costello had a sham address in the district and didn't really live there. That was quickly debunked. Then this fall Scannell stirred things up by saying that Costello's negotiating posture with the oil companies is "on her knees." Against much scoffing and derision, she insisted that was not a sexual reference.

Representative Lance Pruitt (R) vs. Representative Pete Petersen (D) in Muldoon / East Anchorage

This incumbent-vs.-incumbent match-up became a little ugly, with Petersen running an ad saying Pruitt voted against the Permanent Fund, a gross distortion.

Former Representative Gabrielle LeDoux (R) vs. Kay Rollison (D) and write-in candidate Barbara Bachmeier in Muldoon / Elmendorf

LeDoux faces charges of being a carpetbagger, as she previously represented Kodiak in the House. Rollison is a last-minute replacement for the Democrats. Bachmeier complained that the Division of Elections took her off the primary ballot for not meeting residency requirements; the division said she finally qualified in time for the general election.

Representative Charisse Millett (R) vs. Patti Higgins (D) in South Anchorage

Millett and former House Majority Leader Kyle Johansen of Ketchikan walked out of the Republican organizational meeting after the last election because Millett didn't get the committee assignments she wanted. This was an issue for constituents because she gave up significant influence by leaving the majority. Higgins is a former member of the school board, and, until recently, the state chair of the Democratic Party.

Odds and ends

The socially conservative Alaska Family Council wants people in the local judicial district to vote against the retention of Superior Court Judge Sen Tan, who has ruled against a parent's consent for a minor's abortion, among other decisions that rankle supporters of traditional family values.

There is a question on the ballot about whether the state should have a constitutional convention – Ballot Measure No. 1. This question is asked every 10 years, as required by the constitution. There appears to be no organized effort for a "yes" vote, whereas there have been several op-eds advising against what could be a free-for-all re-write of the document.

Also on the ballot are nearly half a billion dollars worth of general obligation bonds for transportation projects. The largest single item is $50 million dollars for expanding the Port of Anchorage. There's $50 million more for two projects on the Glenn highway, including reconstruction of the interchange with Muldoon Road. $26 million dollars would go to reconstructing the intersection of the New Seward Highway and 36th Avenue.

Election night is basically the start of the 2014 campaign, in which both Governor Parnell and U.S. Senator Mark Begich will be up for re-election. Both those contests will actually be under way a year from now, and the positioning and posturing will begin with this year's election results.