Thursday, September 13, 2007

Ethics And The Pete Kott Trial: The Other Reason Why Alaska Governor Sarah Palin Unveiled Her New "ACES" Plan For Oil & Gas Taxation

On September 4th, 2007, Alaska Governor Sarah Palin issued a press release in which she unveiled her new oil and gas tax plan, called "ACES" (Alaska's Clear and Equitable Share). ACES is a hybrid gross and net tax system, which integrates a minimum 10% gross receipts tax on North Slope legacy fields with a 25% net tax to encourage new development and reinvestment in existing infrastructure. ACES will also permit tax credits on future work, but restricts capital expense deductions to scheduled maintenance and implements strong audit and information-sharing provisions. One of the primary objectives appears to be to encourage secondary exploration and exploitation of longtime oil fields which are becoming depleted.

The proposal comes after an extensive evaluation of the current Petroleum Profits Tax by the Department of Revenue. That evaluation showed the state is expected to receive $800 million less for the current fiscal year than would have been expected under the actual PPT documentation presented by the prior administration.

In case there is any question on where we stand, let me be clear - PPT doesn’t work as promised,” said Governor Palin. “There are those who would say we should do nothing and that we should continue the PPT experiment. Doing nothing is not an option. This clearer, equitable plan fulfills our state constitution mandate that says I’m to develop our resources for the maximum benefit of all Alaskans.”

Governor Palin also announced the Special Session will be held in Juneau and urged lawmakers to hold oil tax committee hearings and public testimony in Anchorage and Fairbanks. The Special Session is slated to begin October 18, 2007.

When the original 22.5% petroleum profits tax was passed in special session during 2006, there was clearly a risk that it would not bring in the desired returns. Most lawmakers understood this and accepted the risk, although some Democratic lawmakers were skeptical and have seized upon Governor Palin's initiative as additional justification to re-visit the tax.

However, there is another problem with the existing tax. The tax itself, along with the legislative process used to construct it, have become hopelessly compromised in the ethical sense. And while Governor Palin has expressed some prior concern about the ethics of the process, the degree of corruption was starkly revealed during Day Two (Tuesday September 11th) of the trial of former Representative Pete Kott, who increasingly appears to be the "heavy hitter" in the VECO scandal which has also engulfed former representatives Vic Kohring (whose trial begins in October) and Bruce Weyhrauch (whose trial was severed from Kott's and which may begin as late as February 2008). Kott is accused of bribery, conspiracy, extortion and wire fraud, and prosecutors say he was paid off by Veco through a fake $7,993 invoice for his hardwood flooring business, a $2,750 political poll and $1,000 in cash. Audio and video played during the trial reveals a degree of cynicism and outright corruption that can only be described, even as charitably as possible, as "nauseating". Further muddying Kott's reputation was the revelation back in May that he might be a "deadbeat dad".

Click HERE to view the 27-page Kott indictment in PDF format.

Here are some highlights from a report published in the Anchorage Daily News:

On March 26th, 2006, while the Legislature was considering a new oil tax system, Kott called Smith on his cell phone. Kott was about to head over to the Prospector Hotel for drinks to celebrate Kodiak Rep. Gabrielle LeDoux's birthday. He urged Smith to come too. Kott had been trying to win her support on the oil tax.

He joked with Smith that he was later going to the opera -- Conoco Phillips had bought 50 seats -- then admitted he wasn't that cultured.

Kott told Smith he was putting pressure on state Sen. Fred Dyson, another Republican from Eagle River. He had voted that day to hold up an anti-abortion bill sponsored by Dyson, who cares a lot about the issue.

"He wants my vote, he better square up on oil taxes," Kott told Smith.


The tax rate they sought became intertwined with the proposed gas pipeline. Prosecutors say a gas line proposal, which never cleared the Legislature in 2006, could have been enormously profitable to Veco.

By May 7th, 2006, the Legislature was reaching a climactic showdown over the Petroleum Profits Tax, known as PPT.

Allen was calling Kott on the House floor to give him instructions on how to vote, according to a court paper filed in Allen's case.

Just after 8:30 that night, Kott was on the phone with Smith. Weyhrauch had voted the wrong way on an amendment that would raise the proposed tax to 21.5% of profits, up from 20%. The amendment passed, but barely, on a 21-19 vote. Kott told Smith they could ask for the vote to be rescinded.

An hour later, Kott reported back. The strategy worked. The tax rate was back at 20%.

"Way to go, partner," Smith told Kott (at current oil prices, every 1% change in the tax rate means as much as $150 million more in taxes, according to Dan Dickenson, the state's former director of the oil and gas audit division, who testified Monday September 10th).

By 11:30 that night, Kott was in Suite 604, celebrating with Smith, Allen and others. As the men drank and clinked glasses, Kott boasted that he told the minority leader, then-Rep. Ethan Berkowitz, that he had to have some of his Democratic votes. It was unclear what Kott said to Berkowitz or even whether Berkowitz swung any votes. But Kott sure made out like it happened his way.

"I outsmarted the fox," Kott told the room. Later he said it was a "sucker punch" and said "I use 'em and abuse 'em."


Kott played the tax rate battle like a hand of political poker, holding at 20%, which is what the oil companies wanted. He said on tape that if not for Allen, he'd be supporting a 30%.

The entire PPT oil tax measure died two days later at the end of the session, as the House and Senate failed to agree on the bill. The
final tax, at a rate of 22.5%, wasn't adopted until August 2006, after two special sessions.

You can actually hear the audiotapes and/or read the transcripts for yourself, archived on the ADN's Alaska Politics blog.

Governor Palin's ACES plan has already attracted some industry criticism. On September 7th, the Anchorage Daily News reported that Marilyn Crockett, the head of the Alaska Oil & Gas Association (AOGA), presented Gov. Sarah Palin with a long list of concerns regarding her new oil tax proposal. Crockett said that ACES could decrease investment in the state by raising the tax burden on companies, and claimed that PPT has not yet had a chance to work. Capital cost increases may be the primary reason for less-than-expected revenues from PPT.

Paul Jenkins, one of the editors of the conservative Voice Of The Times, which is funded by VECO, is also critical of Governor Palin's plan, claiming it promotes fiscal instability. Jenkins has been a frequent critic of Palin. Also see a report on ACES published September 9th in the Alaska Journal of Commerce.

Commentary: If the issue was revenue alone, I'd say leave PPT alone and allow it at least a couple of more years fully mature. However, the stench of corruption associated with the legislative process, combined with lower revenues, justifies a new approach. Governor Palin's program, focusing on "legacy" fields as it does, deserves a fair hearing.

However, the industry has a right to a certain amount of tax stability. Not the ridiculous 30 and 45-year tax freezes that former Governor Frank Murkowski proposed, but at least 10-15 years, with 20 years a good number for gas in order to spur development of the proposed natural gas pipeline. But neither Governor Palin nor the legislature should get it into their heads that they can be tinkering with the formula every year; whatever they come up with, either in the October special session or in the 2008 regular session, needs to be the final effort for a while.

I'm sure glad I'm not in Pete Kott's shoes, though.

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