Legislature(2009 - 2010)BARNES 124

02/24/2010 03:15 PM House LABOR & COMMERCE

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Moved Out of Committee
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Moved CSHB 346(L&C) Out of Committee
<Bill Hearing Rescheduled from 02/22/10>
Heard & Held
<Bill Hearing Rescheduled from 02/22/10>
          HCR 19-AIDEA REPORT ON IN-STATE FUEL STORAGE                                                                      
CHAIR OLSON announced that the final order of business would be                                                                 
HOUSE CONCURRENT RESOLUTION NO.  19, Urging the Alaska Industrial                                                               
Development and  Export Authority to  present a business  case to                                                               
the  Alaska   State  Legislature  that  includes   a  method  for                                                               
financing, a plan  to solicit proposals for a  public and private                                                               
venture, and an analysis of  the economic feasibility of a state-                                                               
built  and privately  operated fuel  storage facility  that would                                                               
serve the public  interest by providing Alaskans  with a reliable                                                               
source of jet fuel, diesel, and gasoline at competitive prices.                                                                 
4:47:14 PM                                                                                                                    
REPRESENTATIVE  JAY RAMRAS,  Alaska State  Legislature, explained                                                               
that  HCR 19  is  a resolution  that pertains  to  in state  fuel                                                               
storage.   He  recalled  over  a year  ago  the previous  speaker                                                               
tasked him  with working on  a gasoline  pricing report.   He has                                                               
worked  closely with  Mr.  Sniffen, Department  of  Law on  these                                                               
issues.   An  expansion of  the Port  of Anchorage  would provide                                                               
incentives for  other refineries to  operate in Alaska  to create                                                               
competition for  the production  of gasoline in  Alaska.   At the                                                               
time,  the Port  of  Anchorage  was simply  not  large enough  to                                                               
accommodate  any  additional  fuel  storage.   Since  that  time,                                                               
former  Governor Sheffield  has physically  enlarged the  Port of                                                               
Anchorage  by filling  in  portions  of the  port  with acres  of                                                               
gravel.    The   Port  of  Anchorage  is  now   large  enough  to                                                               
accommodate fuel  storage.  He  acknowledged that a  great debate                                                               
has arisen  over price  gouging and  price regulation  in Alaska.                                                               
He offered his  belief that his view on this  issue is similar to                                                               
the Chair's  view on  this issue.   This resolution  supports the                                                               
concept  of having  AIDEA  build  a business  case  for the  free                                                               
market  to   work,  which  would  create   competition  to  allow                                                               
gasoline, diesel, and jet aviation  fuel to potentially come from                                                               
Cherry Point,  the largest  refinery in  Washington State.   This                                                               
refinery  operates primarily  using  North  Slope crude,  refines                                                               
with natural  gas, at $.08  kilowatts, which would make  the cost                                                               
of fuels more  affordable to Alaskan consumers.   The "rack rate"                                                               
for the  past 16 months  has ranged from  $.60 to $.90  cents per                                                               
gallon  less than  the  two  refineries in  Alaska.   The  Tesoro                                                               
refinery in Nikiski produces 85  percent of Alaska's fuel and the                                                               
Flint  Hills Resources  Alaska Refinery  (Flint  Hills) in  North                                                               
Pole  produces the  remaining 15  percent.   Southeast Alaska  is                                                               
served  by  Seattle  and  often  enjoys  lower  prices  than  the                                                               
remaining parts of  the state, he stated.  He  recapped that this                                                               
resolution  would  request  AIDEA  prepare  a  business  case  to                                                               
determine  whether it  would warrant  a  third-party operator  to                                                               
assume the  risk and liability  of bringing in fuel  from another                                                               
refinery to serve Alaskans.                                                                                                     
REPRESENTATIVE T.  WILSON asked  whether this would  affect Flint                                                               
Hills and if AIDEA would be a competitor.                                                                                       
REPRESENTATIVE RAMRAS  answered yes.   He  expressed that  is the                                                               
whole  point, to  provide  a  competitor in  the  market for  the                                                               
benefit of  consumers across  the State of  Alaska that  does not                                                               
come from  price gouging or  price regulation  legislation, which                                                               
would  have   a  more   adverse  affect   on  Flint   Hills  than                                                               
4:51:01 PM                                                                                                                    
REPRESENTATIVE  NEUMAN  asked  whether   this  resolution  is  an                                                               
outcome  of  the research  on  price  gouging,  and is  meant  to                                                               
provide additional information.                                                                                                 
REPRESENTATIVE RAMRAS related  that in January 2009,  at the time                                                               
the  report was  produced, the  Port of  Anchorage was  not large                                                               
enough to  accommodate the consideration  of extra  fuel storage.                                                               
Former  Governor  Sheffield  has   indicated  that  the  Port  of                                                               
Anchorage is ready and the terminal  would be ready for bulk fuel                                                               
storage before the construction could begin.                                                                                    
4:51:52 PM                                                                                                                    
REPRESENTATIVE RAMRAS  related that the risk  for anyone entering                                                               
into  a transaction  such  as  this is  that  if the  competition                                                               
lowers the price  for Alaskans by $.30 and  Flint Hills Resources                                                               
(Flint Hills)  and Tesoro Refinery  (Tesoro) lowers  their prices                                                               
by $.32  that the fuel  would be  stranded in the  storage tanks,                                                               
which  is the  inherent risk  embedded in  the free  market.   He                                                               
pointed  out  that  discussions   with  Flint  Hills  and  Tesoro                                                               
indicated  their preference  for  competition  rather than  price                                                               
gouging  legislation since  that  approach to  address high  fuel                                                               
costs could "run Flint Hills out of the State of Alaska."                                                                       
4:52:34 PM                                                                                                                    
JAMES  HEMSATH,  Deputy  Director, Business  Development,  AIDEA,                                                               
presented  a  PowerPoint  describing AIDEA's  viewpoint  of  this                                                               
opportunity for  a business  project.  He  offered to  review the                                                               
potential problem and opportunities,  and address how AIDEA could                                                               
participate in  a potential  plan to  address the  problem [slide                                                               
4:54:35 PM                                                                                                                    
MR. HEMSATH  discussed the regular  grade retail  gasoline prices                                                               
[slide 3].   He explained that  the graphs on this  slide outline                                                               
data  obtained  from   the  Department  of  Law   (DOL)  and  use                                                               
Representative Ramras's  report, which  is updated  through 2009.                                                               
The  top graph  shows  the absolute  prices  between Seattle  and                                                               
Anchorage.   The bottom graph  provides the average  price spread                                                               
between Anchorage and Seattle.   Historically the spread has been                                                               
in the $.10 per  gallon range, but in the last  18 months rose as                                                               
high as a  $1 per gallon differential.   Currently the difference                                                               
is running at  $.75 per gallon.  Qualitatively,  it is reasonable                                                               
to assume a price differential  should range between $.10 to $.20                                                               
per   gallon,  which   accommodates   transportation  costs   and                                                               
efficiencies  of refineries.   He  concluded that  $.75 to  $1.00                                                               
price difference  between Seattle  and Anchorage  may be  seen as                                                               
less than reasonable.                                                                                                           
4:56:00 PM                                                                                                                    
MR. HEMSATH provided an overview  of transportation links between                                                               
Alaska  and Seattle  [slide 4].   He  related this  small graphic                                                               
provides  the  transportation  paths   between  Cherry  Point  in                                                               
Washington State,  Anchorage, the North Pole  Refinery, and other                                                               
parts of Alaska to transport a variety of fuels.                                                                                
4:56:23 PM                                                                                                                    
MR.  HEMSATH explained  the reasons  for HCR  19 [slide  5].   He                                                               
stated that this past winter  a question arose whether sufficient                                                               
jet  fuel was  available at  the international  airports, raising                                                               
the question of whether planes  could operate.  He explained that                                                               
a spike arose in the cargo  load, combined with a lowering of the                                                               
production rate  at Flint Hills.   He recalled that  UPS provided                                                               
the  remedy  and  fuel  for   Cathay  Pacific  to  operate.    He                                                               
characterized  the issue  as  a  "little bit  of  a squeeze"  and                                                               
suggested that  security issues  also need to  be addressed.   He                                                               
related  that from  AIDEA's  perspective  an infrastructure  need                                                               
exists, that  something is missing in  the infrastructure itself.                                                               
Something  is needed  to alleviate  the problems  and provide  an                                                               
opportunity  for   economic  development,   at  least   from  the                                                               
perspective of maintaining  and saving jobs in  Alaska.  Further,                                                               
AIDEA, in its Development Finance  Program can own and operate an                                                               
asset  of  this   nature  to  serve  this  need.     However,  he                                                               
acknowledged that a business case must exist in order to do so.                                                                 
4:57:51 PM                                                                                                                    
MR.  HEMSATH  outlined what  AIDEA  must  review to  develop  the                                                               
business case  [slide 6].   He  explained that  by law,  AIDEA is                                                               
required to  have projects pay  for themselves.  He  related that                                                               
the  proposed project  would  be open  access,  AIDEA owned,  and                                                               
contractor  operated.    The  proposed   project  would  need  to                                                               
generate  sufficient revenue  to pay  for itself.   Additionally,                                                               
AIDEA  would  review the  market  and  market  risk, as  well  as                                                               
address competition issues.   He pointed out that  AIDEA does not                                                               
want to  be viewed  as being  in the middle  of competition  as a                                                               
state authority,  although what  AIDEA "brings  to the  table" is                                                               
not necessarily a  grant or non-business aspect.   However, AIDEA                                                               
needs  to ensure  that  it is  not putting  one  business out  of                                                               
business  in order  to sustain  another business.   Specifically,                                                               
one  of  eight jobs  in  Anchorage  relates  to the  airport,  so                                                               
reliability of fuel is important.   Thus, AIDEA would build for a                                                               
specific reason and a specific project.                                                                                         
4:59:36 PM                                                                                                                    
REPRESENTATIVE NEUMAN  asked whether AIDEA is  currently involved                                                               
in  projects that  use a  business plan  that is  similar to  the                                                               
proposed arrangement in HCR 19.                                                                                                 
MR. HEMSATH responded  that as projects are  considered by AIDEA,                                                               
such as a  small iron ore project  currently under consideration,                                                               
that each  project has  own mode.   The overriding  factors AIDEA                                                               
considers are the business case,  the revenue aspects, the market                                                               
for  the product,  and  the risks  in  that market.    It is  not                                                               
specifically  defined  in a  stop-gap  format,  but that  is  the                                                               
approach  that AIDEA  takes when  considering projects,  which is                                                               
similar to the process being used for this project.                                                                             
5:00:42 PM                                                                                                                    
REPRESENTATIVE  T.  WILSON  asked   whether  AIDEA  is  currently                                                               
involved  in any  plan  that would  compete  against the  private                                                               
sector.  She  offered her belief that the  proposed project would                                                               
specifically compete with  the private sector, such  as the Flint                                                               
Hills Refinery in North Pole.                                                                                                   
MR.  HEMSATH responded  that  it depends  on  how competition  is                                                               
defined.  Competition is not  necessarily a definitive condition.                                                               
For  example, AIDEA  owns the  road and  the port  that makes  it                                                               
possible for  the Red  Dog Mine  Facility to  operate.   He asked                                                               
whether  that constitutes  competition with  the private  sector.                                                               
He answered that while it does  compete with mines in other parts                                                               
of the country, AIDEA's involvement  does not necessarily compete                                                               
with the  private sector in Alaska.   He offered his  belief that                                                               
AIDEA competes  with other areas of  the country or the  world in                                                               
order  to provide  jobs  in Alaska.    He said  that  he did  not                                                               
believe  that AIDEA  has a  specific  project in  Alaska that  is                                                               
potentially  as  overt  a  competitor as  the  proposed  Port  of                                                               
Anchorage  expansion  project, which  is  the  reason the  market                                                               
dynamic needs to be fully addressed and understood, he stated.                                                                  
5:02:03 PM                                                                                                                    
REPRESENTATIVE  T. WILSON  asked  for the  closest business  plan                                                               
similar to this proposed project.                                                                                               
MR. HEMSATH answered that the  closest business plan would be the                                                               
ownership  at the  Ketchikan Shipyard.    While other  shipyards,                                                               
such as the ones in Kodiak  and Seward provide similar work, some                                                               
aspects  and  variations  between  the shipyards  make  them  not                                                               
completely competitive with the Ketchikan Shipyard project.                                                                     
5:02:40 PM                                                                                                                    
MR. HEMSATH discussed product storage  of jet fuel, gasoline, and                                                               
distillate [slide 7].  He  stated the various grades of gasoline,                                                               
and noted  the importance of recognizing  the processing capacity                                                               
in   the  state.      Additionally,   product  storage   includes                                                               
distillate, the  ultra low-sulfur, and  number two fuel oil.   It                                                               
is also important to discuss  how storage relates to the Railbelt                                                               
and  what type  of storage  is  required for  Western Alaska,  he                                                               
stated.   The graphic depicted  was taken  from a 2007  report of                                                               
the Energy  Information Authority,  which provides  an indication                                                               
of the  amounts of  sales of  petroleum products  in Alaska.   He                                                               
related  that  two-thirds  of  the  fuel is  jet  fuel,  and  the                                                               
distillate and motor fuel make up the other third.                                                                              
5:04:06 PM                                                                                                                    
MR.  HEMSATH compared  typical crude  oil yields  [slide 8].   He                                                               
stated  that the  graphic  on the  right is  a  light crude  oil,                                                               
typical of a West Texas intermediate,  with about 50 - 60 percent                                                               
in   atmospheric  distillates,   20  -   25  percent   in  vacuum                                                               
distillates,  and 20  percent in  vacuum residue  or heavy  ends.                                                               
Alaska currently is  some place under that, but not  quite at the                                                               
heavy oil level.  He said, "This  is where we think we are going,                                                               
with the crude slate, when we  start looking at producing some of                                                               
the heavier or more viscous crudes  on the North Slope, where the                                                               
atmospheric distillates count for only  20 percent of the barrel,                                                               
and  the  bottoms account  for  as  must  as  60 percent  of  the                                                               
barrel."    This  is  important  in terms  of  how  the  refinery                                                               
processes the  oil.  Flint  Hills Resources Alaska  (Flint Hills)                                                               
and the  two Petro Star,  Inc. (Petro Star) refineries  are light                                                               
end distillation  only, so these  refineries would  produce their                                                               
products from only  20 percent of the barrel of  heavy oil crude.                                                               
He  related that  their products  consist  of light  straight-run                                                               
gasoline, kerosene,  jet fuel,  and some  heating oil  [slide 9].                                                               
Tesoro has  a hydrotreater,  but Flint Hills  and the  Petro Star                                                               
plants  do not  so they  cannot  produce any  of the  low-sulphur                                                               
diesel  fuels.   Tesoro has  some vacuum-unit  capacity and  some                                                               
ability  to  make other  gasoline  products,  but they  are  also                                                               
limited, in  that a full  quarter of their production  consist of                                                               
the heavy ends  or bottoms that some refineries  would destroy as                                                               
a Coker, or  sell as a potential feed stock  for other refineries                                                               
on the West Coast,  or as bunker fuel for ships.   The ability of                                                               
the refineries  to produce predominately jet  fuel changes, which                                                               
is an aspect for consideration in  terms of fuel security and how                                                               
the system might work.                                                                                                          
5:06:26 PM                                                                                                                    
MR. HEMSATH  described the Anchorage Port  Expansion Phasing Plan                                                               
[slide 10].  He referred to  the color slide and related that the                                                               
fuel storage  tanks would be located  in the red and  yellow area                                                               
on  the far  right of  the facility.   The  yellow area  has been                                                               
filled, while the  red area is open water and  is scheduled to be                                                               
filled  this  summer.   While  there  is  space  at the  Port  of                                                               
Anchorage,  and  staging space  exists,  some  space is  not  yet                                                               
completed, he stated.   The Port of Anchorage  would relocate its                                                               
existing fuel off-loading facility to that area, he said.                                                                       
5:07:31 PM                                                                                                                    
MR. HEMSATH outlined AIDEA's action  plan [slide 11].  He related                                                               
that  the Market  Analysis is  currently being  done by  Econ One                                                               
Research Inc.  (Econ One)  and is a  continuation of  last year's                                                               
efforts  on the  pricing  mechanism, which  is  supported by  the                                                               
Department of Law.   From the market analysis,  AIDEA will review                                                               
the  military  capacity, long-term  air  cargo,  and fuel  supply                                                               
reliability.   The  AIDEA is  also in  the midst  of bringing  on                                                               
board  an  engineering contract  to  perform  a layout  and  cost                                                               
estimate.   He  suggested  that  it is  important  to assess  the                                                               
storage  constraints.     The  market  analysis   may  provide  a                                                               
tolerance for  one million  barrels of  storage capacity,  but if                                                               
there is  only room  for 500,000 barrels,  that could  change the                                                               
business case.   He related that  the project is not  just tanks,                                                               
but  also includes  vapor recovery,  and space  for additives  to                                                               
change the  jet fuel for  military specifications.   Further, the                                                               
schedule of  the proposed port  expansion is also important.   He                                                               
said he would like to say that  the AIDEA would do a quick market                                                               
analysis and examine  the estimates, but many  other aspects will                                                               
need  to  be  considered  to  develop the  business  case.    The                                                               
business  case  model  will  examine   how  the  project  impacts                                                               
competition, the  ability to produce  fuel, the market  risks and                                                               
economic impact, including any new jobs that may be created.                                                                    
5:09:38 PM                                                                                                                    
MR. HEMSATH  described the AIDEA's  mission and its  relevance to                                                               
HCR  19 [slide  12].    He asked  why  this  resolution is  being                                                               
written for AIDEA.  Part of  AIDEA's mission in terms of economic                                                               
development and  growth is the  ability to own assets,  and treat                                                               
them as  a business entity  with a different  feel.  AIDEA  has a                                                               
bylaw  that allows  it  to  manage and  operate  projects as  the                                                               
authority considers  necessary and appropriate to  serve a public                                                               
purpose, which puts this type of project "directly in our lap."                                                                 
5:10:26 PM                                                                                                                    
MR. HEMSATH discussed  AIDEA's purpose [slide 13].   The AIDEA is                                                               
also  allowed,  by  statute,  to  equip,  operate,  and  maintain                                                               
facilities  that   will  enhance   the  competitiveness   of  the                                                               
International  Airport  System,   specifically  the  Ted  Stevens                                                               
International Airport  [slide 20].   Issues  on that  fuel supply                                                               
and fuel reliability are probably the  number one risk to our air                                                               
cargo business in the state.   Thus, these types of excerpts from                                                               
our  enabling statute  drive AIDEA  to  be part  of this  project                                                               
since it fits  one of AIDEA's project modes.   He reiterated that                                                               
AIDEA  is  looking  for  projects that  it  can  demonstrate  are                                                               
economically   advantageous  to   the   state,  are   financially                                                               
responsible, and  produce revenue  [slide 21 -  22].   He pointed                                                               
out that  AIDEA has  a business  case it must  meet.   He related                                                               
that if  the terminal project  does not meet  these requirements,                                                               
that  AIDEA  cannot  participate  in the  project.    He  related                                                               
similar types of  projects, such as the road and  port at the Red                                                               
Dog mine, the FedEx hangar  in Anchorage, the Ketchikan Shipyard,                                                               
and the  Skagway Ore  Terminal.  He  stated that  AIDEA envisions                                                               
the Port  of Anchorage fuel  terminal as fitting into  that mode.                                                               
The project  size would  entail 500,000  to 1,000,000  barrels of                                                               
fuel storage capacity  [slide 29].  The project  would consist of                                                               
an open access  project, and the product would  be transferred by                                                               
pipeline, barge,  and railcar.   This project should  enhance the                                                               
statewide fuel  system, which encompasses  storage, distribution,                                                               
as well as  manufacturing.  He related that  AIDEA would contract                                                               
with  an operator,  and  would  use an  open  season concept  for                                                               
storage commitments.  Thus, AIDEA  must be able to guarantee that                                                               
it has  the business for a  sufficient period of time  to pay off                                                               
the debt.                                                                                                                       
5:12:18 PM                                                                                                                    
MR. HEMSATH related  that depending on the size  of the terminal,                                                               
the total cost is estimated from  $75 to $100 million [slide 29].                                                               
He concluded by stating that  AIDEA believes this type of project                                                               
fits  its  mission and  its  strategic  vision  to be  an  active                                                               
partner  with  Alaskans  and  a  dynamic  resource  in  statewide                                                               
economic development.                                                                                                           
5:12:38 PM                                                                                                                    
REPRESENTATIVE T.  WILSON referred to  page 16 of  his PowerPoint                                                               
presentation and read,  "AIDEA does not compete  with the private                                                               
MR. HEMSATH responded that she is correct.                                                                                      
REPRESENTATIVE  T. WILSON  related her  understanding that  under                                                               
this  resolution  that  AIDEA  would  compete  with  the  private                                                               
MR. HEMSATH  agreed that  it might  be considered  competing with                                                               
the private  sector.  He  explained that the aspects  to consider                                                               
are whether the  reasons for the distorted fuel costs  are due to                                                               
strictly non-competition  reasons or whether a  problem exists in                                                               
the infrastructure itself.  He  related that fuel prices would be                                                               
more competitive if someone were  able to build storage capacity,                                                               
but any single individual might  not have enough capacity to make                                                               
the  project economic.    The consolidator  would  be looking  at                                                               
projects to  bring in  other storage.   Whether these  prices are                                                               
due strictly to  competition is not yet known.   However, another                                                               
reason for AIDEA's involvement is  whether this could be an issue                                                               
of security.   He said, "The question is there  may be a business                                                               
case  in this  in  jet fuel  only,  and has  nothing  to do  with                                                               
whether we're competing to lower price, but on the business case                                                                
[HCR 19 was held over].                                                                                                         

Document Name Date/Time Subjects
HB342 ver A.pdf HL&C 2/24/2010 3:15:00 PM
HB 342
HB342 Sponsor Statement ver A.pdf HL&C 2/24/2010 3:15:00 PM
HB 342
HB342 Legislative Audit Summary.pdf HL&C 2/24/2010 3:15:00 PM
HB 342
HB342-Legislative Audit Report.pdf HL&C 2/24/2010 3:15:00 PM
HB 342
HCR19 AIDEA ppt Testimony.pdf HL&C 2/24/2010 3:15:00 PM
HCR 19
HB346 Lettter ASMA 2-22-10.pdf HL&C 2/24/2010 3:15:00 PM
HB 346
HB346 Lettter ASMA 2-24-10.pdf HL&C 2/24/2010 3:15:00 PM
HB 346
HB346 Letter IAIABC 2-23-10.pdf HL&C 2/24/2010 3:15:00 PM
HB 346
HB342 Fiscal Note-CED-CBPL-2-18-10.pdf HL&C 2/24/2010 3:15:00 PM
HB 342
HB346 Letter NFIB 2-17-10.PDF HL&C 2/24/2010 3:15:00 PM
HB 346