Legislature(2009 - 2010)BUTROVICH 205

02/12/2009 11:00 AM ENERGY

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        SB  54-PRICE GOUGING INVOLVING ENERGY RESOURCES                                                                     
11:47:20 AM                                                                                                                   
CHAIR MCGUIRE announced the consideration of SB 54.                                                                             
SENATOR  WIELECHOWSKI  is  the  sponsor  of SB  54,  which  is  a                                                               
response to  the outcry against  high gasoline prices  in Alaska.                                                               
Alaskans  have  been paying  the  highest  prices in  the  United                                                               
States. The bill  makes it an unfair trade  practice for refiners                                                               
to charge exorbitant costs to  Alaskans. The bill is amending the                                                               
Unfair  Trade  Practices Act  to  add  number  56. There  are  55                                                               
consumer  protection items  already in  statute. Some  people are                                                               
critical  of  this,  but  we  have  always  stepped  in  to  help                                                               
consumers when such issues arise.                                                                                               
11:48:54 AM                                                                                                                   
SENATOR WIELECHOWSKI  said Alaska  historically pays about  10 to                                                               
20  cents above  the national  average.  At one  time Alaska  was                                                               
actually lower than the national  average. Recently Alaskans have                                                               
spent  from  $0.70 to  $1.00  more  than  average rates.  He  and                                                               
Senator  Davis  asked the  attorney  general  to investigate  the                                                               
matter. The conclusion was that high  prices are the result of an                                                               
oligopoly,  which  is  a  small   market  and  not  a  free  one.                                                               
Essentially there is one refiner,  Tesoro, that controls the vast                                                               
amount  of refining  capacity in  Alaska. So  Tesoro can  set any                                                               
price. Tesoro is a good business  trying to make as much money as                                                               
it can, but Alaskans are paying exorbitant prices because of it.                                                                
11:50:17 AM                                                                                                                   
SENATOR WIELECHOWSKI  referred to  a chart  that indicated  a gap                                                               
between the retail  margin and the refiner  margin. Refiners have                                                               
always made  a healthy  profit, but when  oil prices  spiked, the                                                               
margins spiked,  and then when  oil prices went down,  the margin                                                               
didn't go  down. They  kept charging  the extremely  high prices.                                                               
It's not like  labor or transportation costs  have increased. Oil                                                               
and gas  is produced here,  so there are no  transportation costs                                                               
to add  on. It's refined  right here  in the state.  Alaska's gas                                                               
taxes  are the  lowest  in the  nation.  Alaskans are  rightfully                                                               
angry. It doesn't make any sense.                                                                                               
11:51:38 AM                                                                                                                   
SENATOR  WIELECHOWSKI said  there are  people who  don't want  to                                                               
regulate  the free  market,  but  "we don't  have  a free  market                                                               
here."  Government has  always intervened  with  energy rates  so                                                               
that consumers can't be gouged. It's  exactly why we have the RCA                                                               
[Regulatory  Commission  of  Alaska]. There  is  this  government                                                               
system  in  place to  try  to  regulate prices.  The  TransAlaska                                                               
Pipeline  and the  upcoming  natural gas  line  are regulated  by                                                               
government.  He  is not  asking  for  RCA oversight.  "All  we're                                                               
saying is  you can  charge what  you want to  charge, but  if you                                                               
charge exorbitant or  excess prices when compared  to the charges                                                               
in the  Lower 48.... We're  even giving  them the benefit  of the                                                               
doubt  by  tracking  it to  West  Coast,  Seattle-based,  refiner                                                               
prices, which are a little  bit higher than national prices." The                                                               
bill is  reasonable and  will help  consumers from  being gouged.                                                               
Alaskans are  tired of bailouts  - sick and tired  of subsidizing                                                               
large  businesses  so  that large  corporations  can  pay  multi-                                                               
million dollar  bonuses to their  executives. This is one  way to                                                               
stand up for the consumers in Alaska.                                                                                           
11:53:59 AM                                                                                                                   
The committee took a brief at-ease.                                                                                             
11:54:59 AM                                                                                                                   
KIP   KNUDSON,   Manager,   External  Affairs,   Tesoro   Alaska,                                                               
Anchorage, said Tesoro  does not own oil or gas;  it only refines                                                               
and markets them.  Its plant was built in Nikiski  in 1969. It is                                                               
an exciting  year for his  employees because the plant  was built                                                               
40 years  ago. The refinery  was initially built to  process Cook                                                               
Inlet  crude.  Production  peaked  in 1970  at  225,000  barrels.                                                               
"Today we  refine every drop out  of the inlet, which  is roughly                                                               
15,000 barrels."  So Tesoro has  to buy  50 percent of  its crude                                                               
from  the  North Slope.  "We  are  having  to import  roughly  25                                                               
percent of our  crude slate." It's sad but true.  Crude is coming                                                               
from Norway, Nigeria, and Indonesia.  Tesoro is on tide water and                                                               
must  haul  the  crude  in  and  products  out.  Tesoro  supplies                                                               
Southcentral primarily through a  clean-products line, which is a                                                               
10-inch pipeline  to Anchorage. There is  a distribution facility                                                               
at the  Port of  Anchorage. Tesoro  has downstream  retail sites,                                                               
with 31 company-owned stores and 56 independent businesses.                                                                     
MR. KNUDSON  said Tesoro makes  commodities: jet  fuel, gasoline,                                                               
propane, and  asphalt. Prices are determined  by the fundamentals                                                               
of  the commodity  market: supply  and demand.  Commodity markets                                                               
don't care how much it costs to  produce it in the short term. In                                                               
the  long  term,  it  is  naturally  regulating.  That  has  been                                                               
effective, but it is not an easy business to be in.                                                                             
11:58:33 AM                                                                                                                   
MR. KNUDSON said fishermen don't  set fish prices; it's the buyer                                                               
at the  dock who  knows the demand  for it. It  is the  same with                                                               
oil. When  oil was $140  [per barrel],  nobody asked how  much it                                                               
cost to  produce. Now  that it  is $40,  it is  the same.  No one                                                               
cares  how much  it  costs  to produce  it.  Refining has  gotten                                                               
exceptionally complicated  and "this  is just  a few  areas where                                                               
the  government has  gotten involved  in the  business, in  areas                                                               
that  we've had  to  make investments  in order  to  stay in  the                                                               
refining business. And  we have a couple of big  ones coming down                                                               
the pike. In order to stay  in the gasoline business, we're going                                                               
to have to  make a fairly significant investment in  the plant to                                                               
remove benzene."  Greenhouse gases will be  regulated ultimately.                                                               
He  showed  a graph  of  "the  oil  and  gas sector  spending  on                                                               
environmental  projects." The  big  chunk in  the  middle is  the                                                               
refining sector.                                                                                                                
11:59:44 AM                                                                                                                   
MR. KNUDSON said  independent refining is all Tesoro  does. It is                                                               
better  at it  than the  integrated majors.  It is  a competitive                                                               
alternative.  "We don't  make profit  from high  prices; we  make                                                               
profit  or a  loss in  the difference  between the  costs of  the                                                               
inputs and the price we can  finally charge to our customers." So                                                               
Tesoro was  actually losing money  when gas prices were  high. It                                                               
is irritating, and it is difficult to understand.                                                                               
12:00:23 PM                                                                                                                   
MR. KNUDSON said a refinery is  fairly static; you turn it on and                                                               
it  runs  at  a  certain  rate.  Tesoro  has  a  very  hard  time                                                               
modulating  the  amount  of  production. "You  can  only  turn  a                                                               
refinery  down so  far; it  is a  chemical process."  There is  a                                                               
limited ability to change the  mixture of products that come out.                                                               
If  Tesoro makes  50,000 barrels  of product  every day,  it must                                                               
sell that much  every day. It doesn't matter what  the demand is.                                                               
Tesoro  does not  store it.  It  must sell  it. "We're  penalized                                                               
heavily  by the  financial markets  if we  end up  with too  much                                                               
product ... in  our tanks." Tesoro has to move  the product every                                                               
day and uses a multitude of sales channels.                                                                                     
12:01:28 PM                                                                                                                   
MR. KNUDSON  said Tesoro is in  the retail business. It  knows it                                                               
can sell  a certain amount  to its  own stores every  day. Tesoro                                                               
also  works   with  branded  distributers  that   run  their  own                                                               
businesses and  set their  own prices. Tesoro  also sells  to mom                                                               
and pop  gas stations  in convenience stores.  Some sales  are on                                                               
contract  and  some are  open.  There  are  rack sales  that  are                                                               
public, but  the rest of  the sales are proprietary.  Tesoro also                                                               
loads  a  barge with  30,000  barrels  of  product that  goes  to                                                               
coastal communities. Refiners will  do exchanges. Five percent of                                                               
the gas stations  in Alaska are owned by Tesoro,  and another ten                                                               
percent  are  branded.  The  rest  are  somebody  else's  stores.                                                               
Alaska's market has  low demand for transportation  fuels, and it                                                               
has significant seasonal highs and lows.                                                                                        
12:04:08 PM                                                                                                                   
MR. KNUDSON compared  the gallons sold per retail  site in Alaska                                                               
with Washington and California.   A retailer must pass along more                                                               
costs for  each gallon sold.  "Jet fuel is  king in the  state of                                                               
Alaska." He showed  the amount of jet fuel sold  in Anchorage and                                                               
Fairbanks.  That is  the  reason there  are  refiners in  Alaska.                                                               
About  one third  of Tesoro's  product has  no market  in Alaska,                                                               
like asphalt  and bunker fuel. It  must be shipped south,  and it                                                               
sells it for  less than the cost  of crude. "So one  third of our                                                               
product is an instant loser."                                                                                                   
12:05:35 PM                                                                                                                   
CHAIR  MCGUIRE asked  if there  are ongoing  efforts to  identify                                                               
Alaskan markets for that product.                                                                                               
MR.  KNUDSON said  the  traditional way  a  refiner would  handle                                                               
those items is  to add an expensive processer to  the refinery to                                                               
make  gasoline, diesel,  and  jet fuel.  But  there isn't  enough                                                               
demand in Alaska for those.                                                                                                     
CHAIR  MCGUIRE  asked about  the  innovation  in his  company  to                                                               
develop more in Alaska.                                                                                                         
MR. KNUDSON said  the market has determined it  wouldn't be worth                                                               
making a big investment. These are  big units that would create a                                                               
tremendous  excess of  product that  would have  no demand.  Some                                                               
refiners  in Alaska  have just  gotten  out of  the gasoline  and                                                               
diesel business  because investments could not  be amortized over                                                               
the return on the sales.                                                                                                        
12:07:31 PM                                                                                                                   
MR. KNUDSON said price is  determined by the last barrel supplied                                                               
into the  market. He in  not aware that transportation  fuels are                                                               
imported into Southcentral. That would  mean that the last barrel                                                               
comes  from local  refiners,  and  that price  is  lower than  an                                                               
imported barrel  of product. "We  compete with  outside refiners.                                                               
We compete with shipping up a  barrel of gasoline to the state of                                                               
Alaska  from  a  Washington  refinery. Ultimately  we  must  have                                                               
priced it lower than that  imported barrel because those imported                                                               
barrels  would come  in otherwise  and  drive the  price to  that                                                               
imported price."  The West Coast market  has gotten significantly                                                               
more volatile.  For a person in  the fuel business "you  can lose                                                               
your shirt one day and make money  the next and never know if its                                                               
all going to balance out in the end."                                                                                           
12:08:59 PM                                                                                                                   
MR. KNUTSEN showed a comparison  of prices in Seattle, Anchorage,                                                               
the  P &  W spot  market,  and crude.  The chart  has a  pattern.                                                               
Alaska separates  from the western markets  occasionally but then                                                               
meets back up  again. After December, the West  Coast markets are                                                               
coming back to  meet Alaska again. In a month,  the lines will be                                                               
closer. When  "that band"  on the chart  is narrow,  refiners are                                                               
losing money  on the West Coast.  Alaska is not losing  money, so                                                               
that is  an advantage to  Alaska refiners.  He said Alaska  is in                                                               
the range of  historical price patterns, which  is represented by                                                               
a percentage spread between crude and Anchorage street prices.                                                                  
12:10:25 PM                                                                                                                   
MR. KNUDSON  said refining in  Alaska is a success  story. "We've                                                               
underpinned  the  air cargo  industry  and  helped them  thrive."                                                               
Tesoro has  provided jobs  and tax  revenues. Oregon  and Arizona                                                               
have no  refineries. Alaska has  four. Washington has  five. More                                                               
jet  fuel  is  sold  in  Alaska than  in  Washington  and  Oregon                                                               
combined. Alaska refiners sell through  many channels and compete                                                               
daily with import barrels. Government  price caps will ultimately                                                               
distort  all of  the unique  aspects  of the  Alaska market.  The                                                               
proposed legislation is not anti-gouging,  but it is a price cap.                                                               
Government  control  in a  functioning  market  will be  bad  for                                                               
consumers and refiners. SB 54  will damage Tesoro's ability to do                                                               
business  in  Alaska and  to  make  future investments.  It  will                                                               
damage value-added industries in the whole state.                                                                               
12:12:30 PM                                                                                                                   
MIKE  MCCARTHY, Homer,  said he  testified in  2008 and  wrote to                                                               
assistant attorney  general Ed  Sniffen and  got no  response. He                                                               
has been a detective on the  Portland police bureau and he worked                                                               
on organized  crime detail in  the FBI  office. He found  it most                                                               
baffling   that   Representative    Ramras   claimed   that   the                                                               
[indecipherable] refused to provide the  actual cost to produce a                                                               
gallon of gasoline, claiming that  it was proprietary. If this is                                                               
true,  the  attorney general  needs  to  open  the same  type  of                                                               
investigation that  revealed the  truth in  the Enron  fraud that                                                               
victimized millions  of people. SB  54 is the exact  strategy the                                                               
state needs to  pursue. The November 20, 2008,  Department of Law                                                               
press  release   states  that  Governor  Palin   directed  it  to                                                               
investigate gas  prices. The result  had 8 bullet points,  and he                                                               
took  serious exception  to  bullet point  5,  which reads:  "The                                                               
price of  gasoline in  the Lower  48 is not  a good  indicator of                                                               
what  prices should  be in  Alaska. The  competitive forces  that                                                               
operate  to  control   gasoline  prices  in  the   Lower  48  are                                                               
completely  different  from  Alaska.   The  dynamics  of  supply,                                                               
demand,  and competition  are unique  in  Alaska." If  this is  a                                                               
fact, how does a person reconcile  the existence of the Henry Hub                                                               
index  pricing  for natural  gas?  Enstar  pushes that  index  as                                                               
gospel.  "You can't  have  it  both ways."  SB  54 addresses  the                                                               
constitutional  responsibility  of  the   state  to  ensure  that                                                               
natural resources  are used to  the maximum benefit  of Alaskans,                                                               
not to the benefit of giant, multinational corporations.                                                                        
MR. MCCARTHY said that former  attorney general Talis Colberg was                                                               
correct when  he said  that an investigation  on price  fixing or                                                               
other consumer  fraud would be  time consuming,  complicated, and                                                               
expensive. It was proven in the  three-year study done by the DOL                                                               
in 2002.  The salient  feature of  SB 54  is that  no complicated                                                               
investigation is  required, but  only that the  average wholesale                                                               
price of  a comparable energy  resource charged by  refineries in                                                               
Washington cannot  be exceeded by  more than 10 percent.  This is                                                               
most logical. It is the best  solution to this Alaska crisis. The                                                               
Homer newspaper has  had numerous articles about  people who have                                                               
to choose between food, heat, and medication.                                                                                   
12:17:13 PM                                                                                                                   
MR. MCCARTHY said  his daughter in Portland told  him that diesel                                                               
is $2.49 and  regular is $1.99 [per gallon], and  in Homer diesel                                                               
is $3.67 and regular is $2.73.                                                                                                  
12:17:57 PM                                                                                                                   
PETE  ROBERTS, Homer,  seconded Mr.  McCarthy's testimony.  Crude                                                               
oil has  had about a  5 percent surplus  on the market  until the                                                               
last couple  of years. That  tends to keep prices  down somewhat.                                                               
As  soon  as the  reserve  came  down  to  2 percent,  there  was                                                               
considerable speculation, driving  prices up to as  high as about                                                               
$146 per barrel.  That tripped up the "whole  financial deal, and                                                               
what we  see here  is that  we need to  have free  enterprise and                                                               
free markets,  but there do  need to  be regulations and  an even                                                               
playing field." The banks and  the oil companies don't have that.                                                               
Two weeks  ago his son bought  gas for $1.55 per  gallon in Santa                                                               
Cruz, California.  It is $2.80  here, and crude oil  futures were                                                               
$38.40 - that's  less than a quarter of the  high prices, "and we                                                               
need to regulate  the companies." Their books should  be open. He                                                               
said they have a right to get  a 20 percent return, but "I'll bet                                                               
you one  hundred bucks that in  the last six months  ... they are                                                               
in  the  hundred  percent  and   maybe  considerably  more."  Big                                                               
companies  do  very  well for  themselves,  but  the  legislators                                                               
should be protecting the citizens  of Alaska. One of government's                                                               
prime duties  is reasonable regulations.  "I'm a  Republican, and                                                               
that  has been  given short  shrift in  recent years,  but that's                                                               
what we need to do."                                                                                                            
12:20:25 PM                                                                                                                   
JUSTIN POWELL, Fairbanks,  said it was unfair for  Mr. Knudson to                                                               
compare  fish  prices  to gasoline  prices.  Tesoro  controls  85                                                               
percent  of the  gasoline market  and 100  percent of  the diesel                                                               
market so prices aren't influenced  by demand. It produces enough                                                               
to meet the demand, and it  has a vested interest in preventing a                                                               
surplus situation.  If demand did influence  prices, prices would                                                               
drop in the  winter because gasoline demand drops  25 percent. In                                                               
reality,  it  is the  opposite  with  winter prices  spiking.  He                                                               
imagines  that  this  committee  has  read  the  House  Judiciary                                                               
Committee's  report on  gas prices.  There are  several omissions                                                               
from the  report that dramatically  affect the conclusion  of the                                                               
committee chair.  The burden  of high prices  in Alaska  is real.                                                               
The prices over the past  year are unjustified. Gasoline, diesel,                                                               
and  heating oil  are not  luxury  items that  households can  go                                                               
without. Energy in the winter is a life and death matter.                                                                       
MR.  POWELL  said  high  energy   prices  have  a  ripple  effect                                                               
throughout the economy. The high  prices have been highly visible                                                               
and contentious, but there are  also the higher freight costs for                                                               
food, clothing,  and retail  products. "We pay  more to  heat our                                                               
homes,  and  then, in  turn,  have  to  pay  more for  goods  and                                                               
services as  businesses are  forced to  pass on  their additional                                                               
energy  costs." Quantitative  information  was  lacking from  the                                                               
committee report.  Annual gasoline  consumption in Alaska  is 285                                                               
million gallons  per year, and  so consumers are paying  at least                                                               
$230 million per year more  for gasoline alone. This money leaves                                                               
the state and has no direct  or indirect benefit. The report also                                                               
said that Ft.  Greely, Eielson, and Ft. Wainwright  could be shut                                                               
down. The  supplier for all  military installations in  Alaska is                                                               
the  Petro Star  refinery, which  is exempt  under this  bill. In                                                               
conclusion,  lower gas  prices  will have  a  positive impact  on                                                               
Alaska's  economy.  The  benefits   far  outweigh  the  potential                                                               
impacts  to the  airline industry.  Fishing, tourism,  and ground                                                               
transportation  are no  less important  than air  transportation.                                                               
The $230  million in extra gas  costs could be used  in the state                                                               
rather than go to the large airlines.                                                                                           
12:24:40 PM                                                                                                                   
TOM LAKOSH,  Anchorage, said  [the bill]  is a  good idea  but it                                                               
needs work.  "I think  what you're  trying to  do is  gain parity                                                               
with the Washington  prices." It might be better  to restrict the                                                               
profit  margins   by  establishing  a  timeframe   for  the  term                                                               
"average" on  page 2,  line 5.  Instead of  adding 10  percent of                                                               
that  price,   add  a  phrase   such  as  "110  percent   of  the                                                               
transportation costs"  that can be  added to that  average price,                                                               
rather than  a 10 percent  gross profit above the  average price.                                                               
It will probably  work out to be  similar, but it is  not as much                                                               
of a price cap as a profit cap.                                                                                                 
12:26:19 PM                                                                                                                   
MR. LAKOSH  said there  may be some  gouging by  fuel wholesalers                                                               
too. He  would add fuel  wholesalers in  two places in  the bill.                                                               
"We  don't need  to be  subsidizing the  airline industry  or the                                                               
heavy fuel oil sales of  Tesoro." Those may be invested illegally                                                               
because  they ship  crude  into the  Aleutians  and have  refined                                                               
products  throughout the  Aleutians without  the necessary  spill                                                               
prevention  and  response  equipment.  Consumers  would  be  much                                                               
better  off not  having to  deal with  refined products  that are                                                               
created by  Tesoro. "We want to  be able to subsidize  the use of                                                               
geothermal heat."                                                                                                               
12:28:14 PM                                                                                                                   
MERRICK PIERCE,  Fairbanks, said he  is involved with  the Alaska                                                               
Gasline Port Authority, but he  emphasized he wasn't representing                                                               
it now. He  said SB 54 seeks to remedy  obvious price gouging. It                                                               
is a positive  step because of the significant  cost to consumers                                                               
of price gouging by Flint  Hills and Tesoro. There are additional                                                               
remedies to reduce the cost of  energy to Alaskans, and one is to                                                               
reduce  transportation costs  by building  energy infrastructure.                                                               
That will also  promote competition and put  downward pressure on                                                               
wholesale  gasoline  prices.  The  best  alternative  to  gas  is                                                               
compressed natural  gas (cng),  and the  highest priority  of the                                                               
legislature should be getting the  all-Alaska gasline built. That                                                               
will  insure that  Alaskans will  have ready  access to  low-cost                                                               
natural  gas,  particularly  in the  Interior.  Vehicles  can  be                                                               
converted to  run on  it. Some  are already built  to do  so. The                                                               
benefits of  cng vehicles  are enormous, including  a cost  of 50                                                               
cents  per  gallon. Natural  gas  prices  are collapsing  because                                                               
there  are  vast shale  gas  deposits  being developed  in  North                                                               
America. Vehicles that use cng  have cleaner emissions. A vehicle                                                               
like the Honda  Civic GX has tailpipe emissions  that are cleaner                                                               
than the  air of a  polluted city. Here  is an opportunity  for a                                                               
state that  has hundreds  of trillions of  cubic feet  of natural                                                               
gas  to demonstrate  some  real  leadership to  the  rest of  the                                                               
MR. PIERCE said  that in 1970 the U.S. imported  about 24 percent                                                               
of its oil, and in 2008 it  was 70 percent. Those imports cost us                                                               
almost  $700 billion  in 2008.  That contributes  to the  massive                                                               
trade deficit and  weakens the U.S. economy. So  Alaska should be                                                               
doing three  things. First, build the  infrastructure with direct                                                               
equity  investment  so Alaska  has  access  to its  natural  gas.                                                               
Second,  the  state  should  be   purchasing  or  converting  its                                                               
vehicles to  run on cng.  Thirdly, the political  subdivisions in                                                               
Alaska should be encouraged to run vehicles on cng.                                                                             
12:32:02 PM                                                                                                                   
CRAIG  MCCONNELL,  Northwest   Arctic  Borough  School  District,                                                               
Kotzebue, said he  supports SB 54, and he would  like the bill to                                                               
include  wholesalers. Crowley  Marine  is the  prime supplier  of                                                               
heating fuel, propane,  and gasoline in western Alaska.  It has a                                                               
true monopoly. Heating fuel was  recently selling for $12.10 [per                                                               
gallon] in  a village in  the region. It  could get worse  as the                                                               
winter progresses. "We can't afford  these prices." Other options                                                               
for getting fuel to the area  haven't been found. Crowley buys up                                                               
the competition,  like Yukon,  which was a  good supplier  at one                                                               
time.  In the  anti-trust  agreement there  were provisions  like                                                               
renting tank space  from Crowley. Mr. McConnell  pursued that but                                                               
ran into  roadblocks; he was stalled  or blocked in every  way he                                                               
attempted to  lower fuel costs  for residents. Western  Alaska is                                                               
paying three to five times the  price of fuel beyond Alaska urban                                                               
areas.  "We support  this bill  in western  Alaska, and  we would                                                               
like to include language that addresses wholesalers."                                                                           
12:34:39 PM                                                                                                                   
MARGARET  HANSEN,  Treasurer,  Northwest  Arctic  Borough  School                                                               
District,  Kotzebue, said  she supports  SB 54  and wants  to add                                                               
wholesalers  to  the  language.  Many  other  states  have  price                                                               
gouging  laws,  and Alaska  should  too.  The rate  that  Alaskan                                                               
prices  have  been higher  than  the  Lower 48  has  consistently                                                               
exceeded  historical  norms  during  these  recent  high  prices.                                                               
Alaska  prices  increased while  Lower  48  rates declined,  even                                                               
though  Alaska suspended  its gasoline  tax. The  House Judiciary                                                               
Committee showed  that the price disparities  have arisen because                                                               
of the  prices that  refineries sell  products to  retailers, and                                                               
then the  wholesaler, Crowley, has  no competition. A  person had                                                               
to walk away from  the community to cut wood and  drag it back to                                                               
keep houses warm  and keep the plumbing from  freezing. The state                                                               
has put millions of dollars  into water and sewer infrastructure.                                                               
Selawik  is   an  AVEC  [Alaska  Village   Electric  Cooperative]                                                               
community,  and it  owes $200,000  to AVEC  and is  working on  a                                                               
payment plan. Selawik owes $22,702  for the water plant. AVEC has                                                               
to  pay $18,955  for  fuel  charges. They  get  $7,300 credit  in                                                               
"PCE", thanks  to the state,  so that cuts down  their kilowatts,                                                               
but  the price  of  fuel  is enormous.  In  one month,  Selawik's                                                               
electric bill  to AVEC, not  including the  cost of fuel  to heat                                                               
the facilities,  is $65,558.  January is going  to be  a problem.                                                               
Many  Alaskans have  to decide  to buy  stove oil,  food, or  pay                                                               
their electric and water bills.                                                                                                 
12:37:56 PM                                                                                                                   
MS. HANSEN said an elderly woman  in Noatak got on the VHF asking                                                               
for  food.  She  had  no  electricity,  but  she  had  heat.  The                                                               
community came  together to help her.  Fuel is $9.90 a  gallon in                                                               
Shugnak, and it  is over $12.00 in Noatak. She  has seen suicides                                                               
increase in the region. "I  think teens feel the economic crisis,                                                               
so  we  have  a  sense of  hopelessness."  Working  together  has                                                               
stopped  some  suicides, she  believes.  The  school district  is                                                               
paying $1.5  million more for energy.  It takes money out  of the                                                               
classroom.  "How can  we do  better teaching  our kids  with less                                                               
money?" They  need more vocational  training to  prevent dropouts                                                               
and  suicides. Taking  money  out  of the  classroom  to pay  for                                                               
energy is  drastic. Alaska has the  constitutional responsibility                                                               
to insure that natural resources  are used to the maximum benefit                                                               
of the  Alaskan people. This  bill will prohibit  refineries from                                                               
charging exorbitant  prices that  are detrimental to  the welfare                                                               
of individual Alaskans. It is an economic emergency.                                                                            
12:40:50 PM                                                                                                                   
JEFF  COOK, Director,  External  Affairs,  Flint Hills  Resources                                                               
Alaska,  North  Pole,  said  SB  54  will  adversely  affect  his                                                               
business,  harm consumers,  and  have long-term  impacts for  the                                                               
people  of Alaska.  Flint Hills  does  not produce  crude or  own                                                               
retail stations.  All of its  products are sold on  the wholesale                                                               
market. It  makes less  than one  fifth of  the gasoline  used in                                                               
Alaska and  a third of  the heating  fuel in the  Fairbanks area.                                                               
His employees  are proud  of their  contributions to  Alaska. "We                                                               
run a  very efficient  and very  safe refinery."  It has  over 60                                                               
years of  experience and  has owned and  operated the  North Pole                                                               
refinery since  2004. It  also owns  refineries in  Minnesota and                                                               
Texas. The  North Pole  facility has  had modifications  since it                                                               
opened  in   1977.  It   is  a  topping   plant  and   lacks  the                                                               
sophisticated processing  capability to refine all  the crude oil                                                               
coming into  the plant into  finished products. It  takes between                                                               
180,000 and  220,000 barrels per day  and distills it into  a few                                                               
basic products  that it sells,  and the  rest is returned  to the                                                               
TransAlaska Pipeline.  "We keep only  about 50,000 barrels  a day                                                               
of  saleable products,  the majority  of which  is jet  fuel." It                                                               
also keeps fuel to run the  refining process. "That energy to run                                                               
the refinery is  the second largest cost other  than crude." It's                                                               
energy cost is 2.6 times higher than the state of Washington.                                                                   
MR.  COOK said  there  were  many topping  plants  in the  United                                                               
States  in  1977,  but  now  there  are  just  a  few.  Increased                                                               
environmental  emissions regulations  caused many  to shut  down.                                                               
Increasingly stringent federal requirements  on the types of fuel                                                               
produced  forced others  to close.  The North  Pole refinery  has                                                               
kept pace with  the new environment regulations,  but the changes                                                               
in  the  types  of  fuel  required has  impacted  the  amount  of                                                               
gasoline and  diesel fuel that  it can produce.  Federal mandates                                                               
to  lower  sulfur  content   have  substantially  diminished  the                                                               
ability to produce  fuels. While it still  produces some gasoline                                                               
and off-road  diesel, "we now  buy gasoline and diesel  fuel from                                                               
other sources in order to meet  the full needs of our consumers."                                                               
So supplies are  tight and margins for refineries  like the North                                                               
Pole one  are small. The  company is working with  the Department                                                               
of  Natural  Resources  to   understand  the  circumstances  that                                                               
threaten their viability in the  state. "Even though our refinery                                                               
has been profitable recently, that  has not always been the case,                                                               
and we must  explore all options to deal  with that uncertainty."                                                               
If SB 54 becomes law it will be a very serious threat.                                                                          
12:44:56 PM                                                                                                                   
MR. COOK  said SB 54 caps  prices at 10 percent  above Washington                                                               
prices,  and it  subjects  refiners to  penalties  ten times  the                                                               
amount  of the  economic benefit  from  an unlawful  sale or  $50                                                               
million  dollars. Such  a  measure would  be  so oppressive  that                                                               
Flint  Hills  Resources  may  be forced  to  cease  refining  and                                                               
distributing in  the state. Consumers  can seek the  lowest price                                                               
for  any commodity.  Government  intervention ultimately  creates                                                               
far more harm  than good. Producers react to price  controls in a                                                               
number of  ways and  none are good  for consumers.  Producers may                                                               
choose  to produce  only when  it can  be profitable.  Investment                                                               
decisions will be  based on whether the price  is sufficient. All                                                               
this leads  to shortages, and a  lower price is not  good for the                                                               
consumer if there  is no fuel. Trying to out-guess  the market by                                                               
setting a price cap is a  dangerous game and Flint Hills will not                                                               
engage in  it. The bill has  good intentions but could  shut down                                                               
his  facilities.  High  fuel  prices  are  a  hardship  for  many                                                               
families, but  North Pole workers pay  the same price for  gas as                                                               
anyone else.                                                                                                                    
12:47:16 PM                                                                                                                   
CHAIR  MCGUIRE noted  his statement  that  it is  2.6 times  more                                                               
expensive to operate  his refinery in Alaska  than his refineries                                                               
in the Lower 48. Is that cost passed along to the consumer?                                                                     
MR. COOK  said, "You're not always  able to do that."  Prices are                                                               
based on  the market. He  referred her  to the fall  quarterly of                                                               
the  Fairbanks  North Star  Borough,  which  compares the  energy                                                               
index  of Fairbanks  with Anchorage  and Seattle.  It is  high in                                                               
Fairbanks  because there  isn't natural  gas. He  has to  run his                                                               
refinery on refined products of crude.                                                                                          
SENATOR  MCGUIRE asked  if his  company  considered switching  to                                                               
alternative energy to lower the cost of operations.                                                                             
MR. COOK  replied that his  company is following  the discussions                                                               
of  a bullet  line and  the coal-to-liquids  project, but  it has                                                               
found no other source.                                                                                                          
12:49:23 PM                                                                                                                   
CHAIR  MCGUIRE  asked  if  there   are  adequate  incentives  for                                                               
lowering the cost of running the refinery.                                                                                      
MR. COOK said they do everything  they can to minimize the costs.                                                               
The  refinery  was  losing  money  from  mid-2007  to  2008.  The                                                               
refinery wants to be there for the long term.                                                                                   
12:50:38 PM                                                                                                                   
SENATOR  WIELECHOWSKI said  many people  are concerned  about the                                                               
health of the North Pole refinery,  and because of that there was                                                               
a  hearing last  week. Mr.  Cook was  invited to  testify but  he                                                               
canceled at the  last minute. "I was very  disappointed at that."                                                               
The state has  reached out to Flint Hills many  times. It already                                                               
gets significant  government subsidies in the  form of royalties.                                                               
"You pay less for oil than what  many people pay for our oil, and                                                               
you've asked for many government  subsidies for years. And you've                                                               
been  threatening to  shut down  unless you  got those  subsidies                                                               
since long before this bill came along."                                                                                        
MR. COOK said, "We have never  asked for a subsidy or a bailout."                                                               
But the company has talked  about ways to structure its agreement                                                               
with the  state. In  times of  low margins there  may be  a risk-                                                               
sharing arrangement  with the state.  During higher  margins, the                                                               
state might  actually get more  for the oil. "We  pay fair-market                                                               
value plus  a premium  for the crude  oil." People  don't realize                                                               
another cost,  which is 22 cents  a gallon for every  gallon sold                                                               
in 2008.                                                                                                                        
12:52:27 PM                                                                                                                   
MR. COOK said he  felt it prudent to hold off  last week when the                                                               
House  Labor  and Commerce  committee  canceled  its hearing.  He                                                               
hadn't seen the attorney general's report either.                                                                               
CHAIR MCGUIRE  said the committee  just received the  report: The                                                               
2008 Alaska Gasoline Pricing Investigation.                                                                                     
12:54:14 PM                                                                                                                   
ED  SNIFFIN,  Assistant  Attorney  General,  Department  of  Law,                                                               
Anchorage,  said   he  is  responsible  for   enforcing  Alaska's                                                               
consumer  protection  and  antitrust  laws.  He  thought  Senator                                                               
Wielechowski  did an  excellent job  summarizing the  frustration                                                               
that consumers  feel. It's  frustrating and  there isn't  an easy                                                               
answer.  The report  concluded that  there  wasn't evidence  that                                                               
there  was illegal  activity occurring  with respect  to gasoline                                                               
pricing. That doesn't  mean that the prices aren't  high; it just                                                               
means  there wasn't  any illegal  collusion  that his  department                                                               
could find. Pricing isn't a  cost-based phenomenon. It's tempting                                                               
to  look  at  how  much  it costs  per  gallon  to  produce,  but                                                               
commodities aren't  priced that  way. Supply  and demand  is what                                                               
matters and  how much  a company  can actually sell  it for  in a                                                               
competitive market.  But we don't  have very  competitive markets                                                               
here. There are two refineries  that produce gasoline. Tesoro has                                                               
the  lion's share  of that  market. So  competition doesn't  work                                                               
nearly as well in Alaska as in other parts of the country.                                                                      
MR. SNIFFEN said  he looked at Hawaii as a  comparison because it                                                               
is geographically isolated and it  has two refineries: Tesoro and                                                               
Chevron. The market  structure is an oligopoly  just like Alaska.                                                               
Looking at both,  Alaska prices were "a little  higher at times,"                                                               
but he  found the same  general pattern.  The price of  crude oil                                                               
last year  drove prices  up and "they  couldn't increase  it fast                                                               
enough  to  keep   up  with  the  rising  cost   of  crude  oil."                                                               
Competition is what brings prices  down, so when oil prices fell,                                                               
gasoline prices dropped quickly in  the Lower 48. There is always                                                               
a  little lag  between the  run up  in prices.  The unprecedented                                                               
rise  in crude  oil  prices  last summer  followed  an even  more                                                               
unprecedented fall,  and that  lag was  exaggerated tremendously.                                                               
That  lag was  what made  Alaskans angry.  The best  economist he                                                               
could  find came  to the  same conclusion  that in  an oligarchic                                                               
market those kinds  of spreads occur. The prices  are starting to                                                               
come  closer now.  So there  are some  market-based explanations,                                                               
but it doesn't make it  any easier to handle. Perhaps legislation                                                               
is the only way to address  it, but "we couldn't substantiate any                                                               
kind  of   law  enforcement  action  against   the  distributers,                                                               
refiners, or retailers."                                                                                                        
12:59:45 PM                                                                                                                   
CHAIR MCGUIRE noted page 11 of  the report. Under the language on                                                               
Unfair  Trade Practice  Laws, it  states that  this wouldn't  fit                                                               
under the price  gouging law. "But when you get  into a potential                                                               
application  of  Alaska's  Unfair  Trade  Practice  and  Consumer                                                               
Protection Act,  which we worked  together on over  in Judiciary,                                                               
then  you go  on  to define  'unfair' and  then  you include  the                                                               
Alaska Supreme Court's  factors for unfairness." But  on page 12,                                                               
it  says "no  cases applied  the test  to the  price of  gasoline                                                               
except in connection with a  price-gouging statute that prohibits                                                               
excessive prices during an emergency." It  goes on to say that it                                                               
may seem that gasoline prices  are unfair or perhaps excessive or                                                               
unconscionable, "and  there you're using the  exact terminology -                                                               
the  terms of  art listed  in the  Act and  in the  Supreme Court                                                               
language.  You  then   go  on  to  say   the  attorney  general's                                                               
investigation  did not  uncover,  however,  evidence that  Alaska                                                               
gasoline  prices were  unconscionable or  oppressive in  light of                                                               
the market structure."                                                                                                          
CHAIR MCGUIRE said  she doesn't know where that  test comes from.                                                               
She sees the report going through  the various layers of laws. It                                                               
is clearly not an  illegal act, but it may be  an unfair act, and                                                               
the report  sites the reasons  why it  could be unfair.  But then                                                               
Mr. Sniffen determined  that it's not unfair based  on a standard                                                               
that Chair McGuire is not familiar with.                                                                                        
MR. SNIFFEN  said the test  for unfairness is  fairly subjective.                                                               
The  State v.  O'Neill Investigations,  Inc. case  in the  Alaska                                                             
Supreme  Court  lists those  factors.  The  second factor  is  if                                                               
something  is immoral,  unethical,  oppressive, or  unscrupulous,                                                               
"and that's  what we say  on page 12; we  look to see  whether or                                                               
not  a   gasoline  price  is   to  be  unfair  or   excessive  or                                                               
unconscionable  - relying  on some  of the  terminology that  the                                                               
Alaska Supreme  Court has used."  He spoke  of a case  from North                                                               
Carolina where the  court looked at gasoline  pricing under their                                                               
laws and  tried to determine if  it was unscrupulous, and  it was                                                               
found not  to be. Mr. Sniffen  gave the example of  a person with                                                               
access to  a vaccine that  cost one  dollar that people  will die                                                               
without,  and that  person  charges $10,000  for  it. That  seems                                                               
obviously  unscrupulous and  unfair because  it is  a life-saving                                                               
vaccine and there is  no need for the cost to  be that high. This                                                               
investigation  of  Alaska  gasoline  found that  there  was  some                                                               
evidence that  the volatility in  the market supported  the swing                                                               
in  prices and  didn't  conclude that  prices were  unscrupulous,                                                               
oppressive, or unfair.                                                                                                          
1:04:50 PM                                                                                                                    
SENATOR WIELECHOWSKI  said that  is the supreme  court definition                                                               
of unfair. However,  the legislature has the right to  add to the                                                               
55 acts that are already  considered unfair, and then the supreme                                                               
court would be required to accept that definition.                                                                              
MR. SNIFFEN replied that was correct.                                                                                           
1:05:00 PM                                                                                                                    
SENATOR  MCGUIRE referred  to  page 20,  which  states that  many                                                               
consumers assume  that there's collusion among  gasoline stations                                                               
when prices increase  and decrease at nearly  the identical time.                                                               
She said that is the impetus  for many of the discussions because                                                               
constituents ask how  that can be. She finds  it interesting that                                                               
this  report changes  from an  investigative style  to a  general                                                               
report style at different points.  "Here's a place where ... that                                                               
broad statement is made, and then  below it, it doesn't say, 'and                                                               
so we  investigated this and  we subpoenaed emails, we  asked for                                                               
methods of communication that could  be possible between gasoline                                                               
stations.'" Instead it  just suggests other ways  that retail gas                                                               
stations might  possibly know of  each other's prices.  She wants                                                               
to know  what was done  in the  investigation so Alaskans  can be                                                               
assured that it was thorough and included subpoenas.                                                                            
1:07:20 PM                                                                                                                    
MR. SNIFFEN  said the stylistic  changes within the  report might                                                               
be the  result of  two different authors:  himself and  an Econ-1                                                               
consultant. Parallel  pricing it not unusual,  because the prices                                                               
are displayed  for everyone  to see.  As soon  as one  price sign                                                               
changes  the  next  one  does.  Alaska is  a  small  market  with                                                               
stations close together. Anchorage  gasoline retails in a 10-cent                                                               
range.  The range  in Seattle  is about  40 cents.  He did  issue                                                               
subpoenas  and "CIEs".  He interviewed  station owners  about how                                                               
they  make  their  pricing  decisions.  That  data  is  extremely                                                               
confidential   and   proprietary.   "I  believe   we   thoroughly                                                               
investigated all  of those issues,  and we're satisfied  with the                                                               
1:09:45 PM                                                                                                                    
SENATOR MCGUIRE  said it's a  commodity, but  it ends up  being a                                                               
utility. There are price gouging  laws in other states. She noted                                                               
the RCA,  and said  that energy  in the  form of  electricity and                                                               
natural gas  are necessities, especially  in Alaska.  There could                                                               
be extremely high  prices and people would pay them  because of a                                                               
lack of alternatives.  Rates have to go through the  RCA for that                                                               
reason.  "I guess  you  could argue  that [driving  a  car] is  a                                                               
privilege and it's  not a right." But if someone  is going to the                                                               
hospital to  deliver a baby  or to respond to  a life-threatening                                                               
situation, "I  think you could argue  it is a necessity,  and yet                                                               
it is  a commodity." What  have other jurisdictions done  to deal                                                               
with this issue besides price gouging legislation?                                                                              
MR. SNIFFEN said there have  been recent attempts to regulate gas                                                               
prices.  In 2005  Hawaii passed  a statute  to give  their public                                                               
utilities  commission the  authority to  set the  wholesale rates                                                               
for gasoline.  It was allowed  to sunset because the  prices went                                                               
right up  to the cap  and stayed there.  It may have  kept prices                                                               
higher  than they  would be  in some  instances. The  legislation                                                               
created  a "safe  harbor" instead  of  letting competition  drive                                                               
prices down.  Some people attribute Hawaii's  failure to politics                                                               
or hurricane Katrina. One of  the features of the legislation was                                                               
tying the price to a Gulf Coast price.                                                                                          
CHAIR MCGUIRE  closed public testimony and  adjourned the meeting                                                               
at 1:13 p.m. SB 54 was held over.                                                                                               

Document Name Date/Time Subjects
SB 54 Bill Packet.pdf SENE 2/12/2009 11:00:00 AM
SB 54
SB 31 Bill Packet.pdf SENE 2/12/2009 11:00:00 AM
SB 31