My Turn: Bills provide stable price structure

Posted: Tuesday, April 22, 2003

There has been a lot of talk in the media lately about the effects of House Bill 57/Senate Bill 50 and the motives of those who stand most to profit from its success. The bill has been called the "Agrium Bill" and, while as a manufacturer that uses gas in the products it makes Agrium does benefit from this bill, it needs to be made clear this is a bill that assists all manufacturers of value-added products throughout Alaska.

More importantly, this bill is not only the right and fair thing to do; it also helps companies like Agrium grow and prosper.

Manufacturing is an important part of the economic engine and one that is greatly underrepresented in Alaska. Manufacturing represents, on average, 15 percent of the U.S. economy. Manufacturers spend large amounts of money buying local services and other goods to support operations. They pay wages that are usually well above average. Additionally, they produce localized expertise and facilities that are hard to duplicate, making it difficult for competitors to form or to move the operations elsewhere. In Alaska, the corresponding percentage is only 5 percent, far short of the national average.

Agrium is the nation's second-largest manufacturer of nitrogen products and provides a clear example of the economic potential of manufacturing in Alaska. Agrium's Kenai nitrogen operation pays high wages compared to the local average, buys large quantities of local goods ($95 million in purchases of local goods and services in 2001), and provides substantial state and local tax revenues ($2.5 million in local tax and lease payments in addition to state taxes in 2001).

The state of Alaska's royalty revenue policies on natural resources increase the uncertainty on Agrium and other firms that add value to our natural resources. They are charged royalties based on the higher of several different possible values of the gas they use. Some of these values are not accurately calculable until long after the sale is made. Thus, Agrium buys gas without knowing the real cost and often will not get a final cost for as many as five years later.

Currently, Agrium sells fertilizer in a world market. They make decisions on how much to manufacture and selling price based on market conditions and their costs. Profit margins are small. To protect themselves from potential retroactive royalties, they must assume the worst case when planning for costs. This reduces their potential market and their output. The intent of HB 57 is to eliminate this uncertainty. Agrium will know up front how much they will pay for the products they are producing.

Some people argue this will result in reducing state royalties. There are several arguments against this. First is the fairness issue. It is certainly unfair to go back years after an event and change the amount paid for a product, in this case natural gas. Second, it is untrue the state will lose money. The reality is that the value of the tax to the state is less than its face value. For example, businesses also pay state income tax, and the net result of the tax increase is to reduce income, so the net revenue effect to the state is less than stated. Third, the reduction of uncertainty will promote more aggressive exploration and production in Cook Inlet. This will provide Agrium with a stable, reliable source of product, allowing them to be competitive and set a predictable price.

What manufacturers are asking for is a stable, reliable pricing structure that makes it possible to make responsible business decisions. Alaska's value-added industries, including Agrium, are not asking for an exemption from state royalties. They are asking for an environment in which they, and in turn state and local economies, can compete and thrive. By basing royalties on prices agreed on at the time of sale, rather than audits in the indefinite future, Senate Bill 50/House Bill 57 will promote the success of manufacturing industries. This is a good bill. It is the right thing to do, the fair thing to do, and it will increase economic activity in Alaska, as well as grow the tax base for state and local governments.

Dave Arnsdorf of Anchorage is president of the Alaska Manufacturing Association.

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