Legislature(2009 - 2010)BARNES 124
03/01/2010 03:15 PM House LABOR & COMMERCE
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* first hearing in first committee of referral
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HCR 19-AIDEA REPORT ON IN-STATE FUEL STORAGE 3:26:53 PM Chair Olson announced that the first 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. 3:26:57 PM REPRESENTATIVE JAY RAMRAS, Alaska State Legislature, speaking as the prime sponsor, related that Mr. Leonard advises that the Alaska Industrial Development and Export Authority (AIDEA) is viewed as a project component, but is acting in an advisory capacity and as a consultant for the proposed resolution he sponsored. If the business case that is developed supports the project moving forward, the AIDEA would transition to a de facto proponent as a potential owner of the asset, seeking an entity to operate the proposed "tank farm." In the event that the free market works, that the storage is developed, and refineries drop prices, the third party could cover their costs and reimburse AIDEA. Mr. Hemsath and Ted Leonard are available to answer questions on behalf of AIDEA. REPRESENTATIVE RAMRAS related that a question arose as to whether the proposed expansion of the Port of Anchorage, or the "tank farm" would compete with the North Pole refinery. He stated that the proposed tank storage is not a refinery. A simple answer is that the only thing that competes with a refinery is a refinery. AIDEA is being asked to build a business case for a fee market alternative to price gouging legislation that would benefit consumers and offer a return to AIDEA if they participate in building a business case. This resolution does not lead to a funding request or financing, but just to construct a business case. 3:29:59 PM REPRESENTATIVE BUCH asked for the inception of the proposed project resolution. REPRESENTATIVE RAMRAS responded that the timeframe for the project is unknown since AIDEA's role is to determine the viability of the project. Several years ago the answer would have been that the project is not viable since the storage was not available. He elaborated that if the business case is strong, and the Port of Anchorage is ready, that the tentative timetable would include bonding in 2011, construction in 2012, and operational in 2013. He stated the timeframe is currently undefined. 3:31:46 PM REPRESENTATIVE NEUMAN assumed that the intent of this resolution is to take advantage of the free enterprise to create storage facilities. REPRESENTATIVE RAMRAS answered yes. Two refineries, the Tesoro Nikiski Refinery that produces 85 percent of the gasoline consumed in the state, and Flint Hills Resources Refinery (Flint Hills) that produces 15 percent of the gasoline. Most of the jet aviation fuel has been produced at Flint Hills Refinery, but due to the recession and a slowdown in demand at the Ted Stevens International Airport, Flint Hills closed one of its towers and at certain times an inadequate supply of jet fuel has been available. Some air flights have bypassed the airport or have had to pay a premium price on the spot market for jet fuel. The same thing is true for low-sulphur diesel, which is being produced at the Petro Star Refinery in Valdez, but not being produced at its North Pole Refinery. Flint Hills may or may not be in business in the next few years due to concerns previously expressed. Consumers do not want to spend $.90 per gallon higher than the "rack fuel" price. That is the reason for competition, and if the case can be made to offer liquid storage it would be preferable to him over the price gouging legislation, which is not moving. CHAIR OLSON agreed that the price gouging legislation is not moving. 3:34:40 PM REPRESENTATIVE NEUMAN recalled that the United Parcel Service (UPS) also brought in a barge load of fuel. REPRESENTATIVE RAMRAS stated he was unsure. 3:35:08 PM REPRESENTATIVE NEUMAN confirmed that UPS brought up fuel to assist with the aviation fuel shortage. REPRESENTATIVE RAMRAS agreed. REPRESENTATIVE NEUMAN stated that UPS was trying to address the concern of inadequate supplies of fuel. He thought it would be good in the future to ask AIDEA to also consider Gas to Liquids (GTL), which could happen in the future. 3:35:51 PM REPRESENTATIVE RAMRAS remarked that he shares that conviction. 3:36:03 PM REPRESENTATIVE T. WILSON wondered if the legislature should wait for the private sector to address the issue of gas shortage. REPRESENTATIVE RAMRAS answered that the purpose is to attract a private sector to be the lessee, with AIDEA as the potential lessor. He inquired as to whether she was asking whether an entity would be willing to make $100 million investment in a "tank farm." He stated that the answer would likely be borne out during the AIDEA process, with AIDEA possibly participating as a lender. The idea is to bring relief to the Alaskan consumers and honor the mission statement of AIDEA. REPRESENTATIVE T. WILSON related that AIDEA's mission specifies that is not to compete with the private sector. REPRESENTATIVE RAMRAS suggested if the AIDEA was building a business case to build a competing refinery, he would agree with her. However, this resolution is for tank storage and the refineries can participate as tenants of the tank storage. AIDEA finances hotels, too. He disclosed that he holds a relationship with AIDEA in that regard. He recalled that AIDEA testified that it is to abide by own mission statement. He acknowledged that he views this differently. 3:38:26 PM REPRESENTATIVE T. WILSON posed a scenario in which the proposed project is built. If so, outside firms would provide gasoline or jet fuel, but would not pay the costs Flint Hills must pay since it does not have natural gas to use as an operating fuel. She suggested that the outcome would result in cheaper fuel until facilities such as Flint Hills are put out of business. She asked what would happen to prices. REPRENTATIVE RAMRAS responded that he is not dealing with hypothetical situations, but wants to address a statewide perspective. He stated that he is not "a big fan of the price- gouging legislation" that has moved through the legislature for the past 18 months. He stated that allowing the free market to work can create an alternative to refineries that brings a lower cost fuel into Alaska. The free market can punish in-state businesses, but we will not know that until the business case is made. He stated that he is not talking about the traditional spread of fuel in Alaska which ranged from $.10 to $.20 per gallon, but a $.90 per gallon price disparity in gasoline prices. He emphasized the importance of this legislature to demonstrate elasticity to consider a business case. He restated that this is not a funding request, just a request to consider whether the "tank farm" storage is worthwhile. 3:40:36 PM REPRESENTATIVE CHENAULT commented that Tesoro spent $100 million on low-sulphur fuel so most of the low-sulphur fuel is produced at the Tesoro Refinery. REPRESENTATIVE RAMRAS stated that he stands corrected. REPRESENTATIVE CHENAULT asked whether AIDEA is given a date to respond. REPRESENTATIVE RAMRAS deferred to Ted Leonard, AIDEA, to answer questions. 3:41:23 PM REPRESENTATIVE NEUMAN shared his concern about gas supplies in Alaska. Certainly no one wants Flint Hills to shut down, leaving only one refinery to provide for Alaska's needs and to protect our military bases and missile defense system. He characterized that as a critical issue. He surmised that would be a huge catastrophe. Alaska needs storage facilities to provide for Alaska's needs if something were to happen to Alaska's refineries. REPRESENTATIVE RAMRAS shared his concern. He related that Flint Hill's management indicated to the legislature on numerous occasions that its refinery business is in a precarious position. He surmised that it could close its plant with 30 days notice. The Ted Stevens International Airport and the military network is critical the state's economy. It would be helpful for the state to develop a contingency plan. He stated that he was raised in Fairbanks and has been involved in discussions with Flint Hills. He offered his belief that Alaska will be lucky if Flint Hills is in business in 1,000 days. He emphasized the importance of the state in preparing a contingency plan. He acknowledged that Flint Hills is efficient, but did not think it has made long term decisions and commitments to the state. He related that he is an advocate of Flint Hills, and has toured the plant as well as well as others including the Tesoro Nikiski plant. He highlighted the precarious infrastructure of the industry. 3:45:20 PM CHAIR OLSON remarked that AIDEA envisioned that anyone could use the facility. REPRESENTATIVE RAMRAS agreed. He elaborated that large retailers, including Fred Meyer, and Costco and others with unbranded gasoline could benefit. He surmised that the rural areas of the state would potentially benefit. The international airport system must be competitive so it does not lose jet service. He said, "Again, I just come back to the notion that it probably is in our best interest to at least visit and develop a contingency plan, and build a business case. It is not a funding request for AIDEA. That's a battle to be fought later, but it is an opportunity to develop a business case." 3:46:43 PM REPRESENTATIVE T. WILSON asked whether Flint Hills may or may not have the ability to make more fuel. JEFF COOK, Director, External Affairs, Flint Hills Resources Refinery (Flint Hills), stated that currently the "crude three unit" is down. He asked to clarify some of the comments. He said, "We have met all the contractual obligations we have for jet fuel at the Ted Stevens Anchorage International Airport and actually have gone beyond that." He related that Flint Hills brought up a barge load of fuel at Thanksgiving to help. The issue resulted as the airlines must nominate the jet fuel, and the estimates were off, and they did not nominate enough jet fuel. The Flint Hills refinery did not want to tie up its working capital by storing fuel without the demand for it. He stated that 23,000 barrels of jet fuel was made today, and Flint Hills could make 40,000 barrels per day if necessary. He related that as the economy picks up, that Flint Hills can provide more. He offered that crude prices have helped, that Flint Hills hired six people in the past month, and it plans on a $12 million turnaround beginning April 27, 2010. He emphasized the Flint Hills does want a long term presence, but obviously having a cheaper fuel such as natural gas would be a benefit. He said: No matter what happens, we've got 720,000 barrels of storage at the Port of Anchorage. That's not going to go away. That's going to be available whether it is a Delta Western, a Crowley, or some other private enterprise that if the advantage and the necessity is there, they can go out and have the ability to do the business case. 3:49:35 PM REPRESENTATIVE T. WILSON asked what impact that HCR 19 would have on his business. MR. COOK answered that he was unsure of the impact. He stated that if it is not fully amortized and not fully operated on a business basis, it could have an advantage. However, it is hard to tell. He stressed that if a business case is to be made, there are numerous companies that have the ability to make it. CHAIR OLSON asked whether Flint Hills would use the Port of Anchorage facility if it was built. MR. COOK related that Flint Hills already has 720,000 barrels of storage in Anchorage, a similar amount in Fairbanks, as well as some rolling cars with the Alaska Railroad Corporation so he did not see the need in near future to use the facility. 3:50:39 PM KIRK PAYNE, Vice President of Supply and Logistics, Delta Western, Inc. (Delta Western), explained that Delta Western has been serving Alaska for over 25 years, delivering fuel to places between Kivalina and Ketchikan, which places them in many communities throughout Alaska. He stated that although some fingers have been pointed at them, they have had the opportunity to work with the legislature to improve the process. Recently AIDEA and the administration asked Delta Western to develop a white paper on the process. The framework was based on the Attorney General's 2008 Alaska Gasoline Pricing Investigation. The structural characteristics of Alaska's petroleum products market contributed to unusually high prices. Thus, Delta Western considered ways to fix the problem. He offered that in reviewing historical prices, the supply and demand for petroleum productions was basically balanced. MR. PAYNE stated that in 2006, the Environmental Protection Agency (EPA) mandated a shift to lower-sulfur fuels, which resulted in an imbalance in supply and demand. It resulted in a reduction in state petroleum production, clean fuels essentially. The question is how to fill the gap. Currently, the infrastructure is lacking to bring in fuel, or to store fuel, or for refiners to sell at off-season demand, in which Delta Western would buy when refineries are not running at peak demand. Thus, the idea was to build storage, find someone to lease it, obtain some market participants to store product in the storage facilities. Delta Western believes that this approach, sponsored by AIDEA, will help solve some of these issues. The project provides the ability to buy product from refineries at off-peak seasons. He urged members to pass the resolution since it is just a study. If it makes sense, the legislature can discuss whether to fund the facilities. He said, "I believe that this is a viable solution for a lot of Alaskans, a lot of Alaskan businesses, as well as communities. We're finding it harder and harder to buy in state production and that doesn't bode well for local businesses and local communities." 3:54:22 PM JIM HEMSATH, Deputy Director - Development, Alaska Industrial Development & Export Authority (AIDEA), recalled a comment made by Representative T. Wilson, with respect to awaiting the private sector to build this project. He suggested that she has identified an important question. Private industries, such as Costco or Safeway, have not proceeded with this project because they do not view the value for their companies. The AIDEA study can demonstrate the business case for the private sector. Thus, AIDEA can demonstrate to industry the opportunities for them to be involved. Perhaps someone would become a consolidator of fuel needs, if any exist. The point of the proposed study is to examine the questions, identify the facts, fiction, and the overall fuel system. The process of making the business case would create a total picture for the legislature to formulate its decisions. 3:56:13 PM REPRESENTATIVE T. WILSON referred to a page in the AIDEA handout, titled "AIDEA's Role," which states that AIDEA will 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. She asked whether the proposed project would be completed only with public funding, and that more favorable financing would be available with public funding. MR. HEMSATH said he thought his answer is yes. He elaborated that part of the business case is to explore costs and financing. The AIDEA finances through project ownership, which is the development project model. One key in an AIDEA model is to find the operator of a facility. He stated that if a business offered to invest in this project and asked for financing, AIDEA would do so. 3:57:41 PM REPRESENTATIVE T. WILSON recalled that Fairbanks Natural Gas asked AIDEA for help in trucking in the gas, and proposed biomass projects in other areas. She did not think those types of projects would compete with Alaskan businesses She asked for the reason that AIDEA is placing its efforts on a project that she believes competes with private businesses instead of biomass or other alternate energy projects. MR. HEMSATH offered that the Fairbanks Natural Gas LNG study is similar in that the business approached AIDEA to explore the viability of owning $250 million in facilities with part of the analysis including discussions with Flint Hills. At the time, due to the crude oil prices and other factors, no overriding business case existed to make that project viable. At the time the two major natural gas customers in the Fairbanks area both declined. He related that in the event that a business case was made to use willow, fish oil, or other biomass products, and a business case could be made to build a biomass facility, AIDEA could be a financier and could support the project. Similarly, if natural gas were available from a pipeline with the potential for a GTL storage facility, AIDEA could also consider the project. He related that the business case must be made, including that revenues must be sufficient to pay AIDEA's cost of debt and cost of service. Thus, AIDEA would consider any projects that can do so. AIDEA's primary goals are economic development, job growth, job retention, and diversification in the state. 4:00:37 PM REPRESENTATIVE T. WILSON asked who will pay for this study. MR. HEMSATH responded that the preliminary study will be funded in part by the Department of Law, who is financing Econ One through the market analysis, and AIDEA would finance the cost estimate by the engineering contractor. Thus, the proposed project will be an internally-funded feasibility study to examine the viability of a potential project. MR. HEMSATH, in response to Chair Olson estimated the timeline, including Econ One at approximately 30 days. 4:01:51 PM TED LEONARD, Executive Director, Alaska Industrial Development & Export Authority (AIDEA), introduced himself. 4:02:35 PM REPRESENTATIVE NEUMAN asked whether a Gas-to-Liquids (GTL) project would be beneficial and economical. MR. LEONARD answered that in the event that an in state pipeline is built, that a GTL facility would be one of the major industrial participants. He stated that AIDEA would be available to provide analysis and potential funding for a proposed GTL facility. REPRESENTATIVE NEUMAN asked whether he could provide a "10,000 foot view". 4:03:48 PM MR. HEMSATH responded that he was uncertain. The current study provides that Econ One is analyzing the need and demand for jet fuel. The military has indicated that by 2015, it would like to have a 50 percent synthetic fuel. This proposed tank farm could be part of fuel storage. However, to review the GTL technologies and capital cost is beyond the AIDEA's funding at this time. However, he stated that the analysis needs to be done. In further response to Representative Neuman, he agreed that the analysis needs to be done. 4:05:07 PM CHAIR OLSON, after first determining no one else wished to testify, closed public testimony on HCR 19. 4:05:16 PM REPRESENTATIVE T. WILSON offered her belief that this resolution represents direct competition to the private sector. Currently, refineries are producing gas and diesel in the state. She expressed concern that the proposal discusses bringing in fuel from other states. This could jeopardize the Tesoro or Flint Hills refineries and without them, the prices could increase. She viewed this proposal as problematic. Price gouging was examined but could not be proved. This resolution would indicate to the public that price gouging occurs in Alaska. Ultimately, the state should not compete with private business. If the private sector wants to invest the $100 million, as Tesoro did, that would be fine, but the state should not be involved. 4:06:15 PM REPRESENTATIVE RAMRAS emphasized that this resolution supports building a business case. He pointed out that the proposed tank farm would represent about 15 percent of the state's usage and is not a cure all. REPRESENTATIVE T. WILSON understood that this resolution supports a study, but the state could use the funding for other purposes such as a bullet line or biomass that avoids competition. REPRESENTATIVE RAMRAS explained that residents and consumers think $.90 per gallon over the "rack rate" in Seattle is too much. He said, "I've never been afraid to have a discussion or look at competitive opportunity. Competition makes us all stronger and we can't be afraid to look at options. That's what we're here for is to look out for 700,000 Alaskans." REPRESENTATIVE T. WILSON agreed. However, she did not think this proposal is responsible if the ultimate consequence will be for local businesses to close and Alaskans ending up completely dependent on the Lower 48 for necessities. She said, "Although everything is started with just a study, I've always found it is better to stop it on this level than try to do it later on." 4:08:30 PM CHAIR OLSON offered that he has spent considerable time with the DOL on two issues. One question investigated excessive pricing and discovered that while prices were excessive, nothing illegal transpired. What led to the DOL's office involvement with this as an alternative, even though it only represents 10 to 15 percent of the market, is that the proposed project could have an impact on gasoline prices but fuel supplies going to rural Alaska. This could have a stabilizing effect. While he expressed mixed feelings on this resolution, he offered that it offers the potential for a positive outcome for the overall good of the state. REPRESENTATIVE T. WILSON remarked that if everyone could stay in business that would be true. She maintained her concern about out of state businesses adversely impacting local businesses to the extent that fuel prices for all Alaskans could cost the same as in rural Alaska. CHAIR OLSON related that Econ One is within a month of completing its work. He recalled that the committee has worked extensively with Econ One in the past. 4:10:18 PM REPRESENTATIVE NEUMAN offered his belief that HCR 19 is exactly the approach to address the concerns that Representative T. Wilson has with the refineries, such as Flint Hills and Tesoro. Storage facilities for fuel can help reduce the dependence on Lower 48 fuel in Western Alaska. Fuel storage would enhance the ability of Alaska refineries to provide fuel for Alaskans. When oil prices are low, the refineries could produce more fuel for storage to supply Alaska's needs for fuel. He characterized this as a "win win situation." He said, "I wholeheartedly support this." 4:12:05 PM REPRESENTATIVE NEUMAN moved to report HCR 19 out of committee with individual recommendations and the accompanying fiscal notes. REPRESENTATIVE T. WILSON objected. A roll call vote was taken. Representatives Chenault, Lynn, Buch, Neuman, and Olson voted in favor of moving HCR 19 out of committee. Representative T. Wilson voted against it. Therefore, HCR 19 was reported out of the House Labor and Commerce Standing Committee by a vote of 5-1. 4:13:20 PM The committee took an at-ease from 4:13 to 4:15 p.m.