Legislature(2009 - 2010)BUTROVICH 205

03/13/2009 11:00 AM ENERGY

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Moved CSSB 54(ENE) Out of Committee
<Bill Hearing Postponed>
Moved SB 132 Out of Committee
Moved SB 71 Out of Committee
        SB  54-PRICE GOUGING INVOLVING ENERGY RESOURCES                                                                     
11:39:17 AM                                                                                                                   
CHAIR MCGUIRE announced the consideration of SB 54.                                                                             
SENATOR  WIELECHOWSKI,  sponsor of  SB  54,  moved to  adopt  the                                                               
committee  substitute  (CS) to  SB  54,  labeled LS0209\S.  There                                                               
being no objection, the motion carried.                                                                                         
SENATOR  WIELECHOWSKI introduced  his staff,  George Ascott,  who                                                               
presented this bill  at the last hearing. Based  on the testimony                                                               
then, the  bill was  modified slightly.  A provision  was deleted                                                               
that created  an objective defined  standard for  "excessive" and                                                               
"exorbitant" to  be 10 percent above  the price that it  was sold                                                               
for  by  Seattle  refineries.  This concern  was  raised  by  the                                                               
refiners;  and   the  CS   still  keeps   the  bill   strong  and                                                               
accomplishes the objective.                                                                                                     
ED SNIFFEN,  Assistant Attorney General, Department  of Law, said                                                               
his duties  include enforcement  of Alaska's  Consumer Protection                                                               
Act, and  SB 54 would  make excessive  or exorbitant prices  by a                                                               
refiner  a  violation of  the  act  that  would fall  within  his                                                               
authority to enforce.                                                                                                           
He  explained that  making an  act  a violation  of the  Consumer                                                               
Protection Act creates an opportunity  for private individuals to                                                               
also bring an  action to stop the conduct. That  may be something                                                               
that hasn't  been considered.  Otherwise he  has no  comments and                                                               
was available to answer questions.                                                                                              
11:42:17 AM                                                                                                                   
SENATOR STEDMAN  asked how "exorbitant  or excessive"  is defined                                                               
on page 1, line 10.                                                                                                             
MR. SNIFFIN  replied that  it is a  fairly broad  description and                                                               
there  is  no  current  case law  that  addresses  exorbitant  or                                                               
excessive  prices in  a consumer  context.  This language  tracks                                                               
language that is used in price  gouging laws from some East Coast                                                               
states that prohibit  exorbitant or excess prices.  He is hopeful                                                               
that those  laws would  give some guidance  on exactly  what that                                                               
means, but  the standard is fairly  broad and they would  have to                                                               
work with it as best they can.                                                                                                  
11:43:44 AM                                                                                                                   
SENATOR  WIELECHOWSKI said  he was  simply trying  to accommodate                                                               
testimony from the refiners, and he  would be happy to go back to                                                               
the original  language. Otherwise  excessive and  exorbitant will                                                               
ultimately be defined by the courts.                                                                                            
CHAIR MCGUIRE  said most states  have a price gouging  statute on                                                               
the books, and asked if in  Mr. Sniffen's analysis of those if he                                                               
found that they used "excessive and exorbitant."                                                                                
11:45:15 AM                                                                                                                   
MR.  SNIFFEN answered  that  the  statutes he  looked  at used  a                                                               
variety of descriptions  for conduct that should  be stopped. For                                                               
example, when  Hurricane Katrina  hit, Louisiana's  price gouging                                                               
statute went into effect. Their  statute says during the state of                                                               
a  natural disaster  or a  declared  state of  emergency, if  you                                                               
charge prices in  excess of a certain percentage  above the price                                                               
that was charged  30 days before the disaster  that is considered                                                               
to  be  exorbitant or  excessive.  A  lot  of the  price  gouging                                                               
statutes are keyed  around prices that were in effect  prior to a                                                               
state  of  emergency  and  they  say  a  price  above  a  certain                                                               
percentage can't  be charged over that  preexisting price. Alaska                                                               
is  not trying  to  key this  provision to  a  declared state  of                                                               
emergency. Without a definition, they  would have to see what the                                                               
courts would  say about  it as it  works through  the enforcement                                                               
CHAIR MCGUIRE said this is his  area of expertise, and asked what                                                               
the  trends are  for  other departments  of  law in  interpreting                                                               
these terms.                                                                                                                    
11:47:25 AM                                                                                                                   
MR. SNIFFEN  explained that  90 percent of  the states  that have                                                               
price gouging laws only have them  triggered in the event of some                                                               
declared state of emergency. A few  states on the East Coast have                                                               
price  gouging laws  that are  triggered in  the face  of "market                                                               
emergencies" that don't  require a natural disaster  - but rather                                                               
a financial disaster  of some kind. Once the  laws are triggered,                                                               
most  states have  laws that  say the  price cannot  be increased                                                               
more  than a  certain amount  over  what was  charged before  the                                                               
disaster. They try to prevent  retailers from taking advantage of                                                               
consumers during their  most dire times of need.  Some states say                                                               
that means what other people are  charging for the same goods and                                                               
services  in areas  where a  market emergency  doesn't exist.  In                                                               
these  states,  "excessive  and   exorbitant"  hasn't  ever  been                                                               
11:49:23 AM                                                                                                                   
SENATOR HOFFMAN said this legislation  seems to be geared for the                                                               
refineries, but  why doesn't it  include other businesses  in the                                                               
state that don't have refiners.                                                                                                 
SENATOR WIELECHOWSKI answered that he  considered that, and he is                                                               
open  to  addressing  that. But  the  Attorney  General's  report                                                               
indicated that the gap appeared to exist with the refiners.                                                                     
SENATOR HOFFMAN said  he thought the question to  Mr. Sniffen was                                                               
regarding gasoline, and his investigation  was in that regard. He                                                               
didn't think Mr. Sniffen looked  at what was happening in western                                                               
Alaska and other parts of the state.                                                                                            
11:51:07 AM                                                                                                                   
MR. SNIFFEN responded  that is correct for the most  part. But as                                                               
part  of  the  investigation  he  became aware  of  some  of  the                                                               
practices related to heating fuel  and other products sold by the                                                               
refineries.  He  explained  that  there  are  only  two  gasoline                                                               
refiners  in Alaska  - one  of them  produces a  majority of  the                                                               
gasoline. But there  are a number of  retailers and distributers,                                                               
so  the  competition  among the  sellers  of  petroleum  products                                                               
becomes better the farther away  one gets from the refinery. That                                                               
is different in  different parts of the state.  The Railbelt area                                                               
has fairly  decent retail competition,  but in rural  areas there                                                               
is no competition.                                                                                                              
SENATOR HOFFMAN  remarked that  is thrust  of his  concern. Other                                                               
areas of the state such as  the YK Delta, Bristol Bay, and Norton                                                               
Sound have primarily one distributor  and the potential for price                                                               
gouging exists there as well.                                                                                                   
11:52:49 AM                                                                                                                   
SENATOR  WIELECHOWSKI  said  he  would be  happy  to  modify  the                                                               
language to include that issue.                                                                                                 
SENATOR HOFFMAN  thanked him, and  said he wasn't asking  to hold                                                               
it up at  this stage, but he  would like to work  with his office                                                               
to broaden it to areas of the  state that have very little if any                                                               
SENATOR STEDMAN  said Southeast Alaska  imports most of  its fuel                                                               
oil from Seattle.  His constituents' concern is that  some of the                                                               
larger fuel  buyers can  purchase fuel at  $1.20 per  gallon, and                                                               
the pump  price is $3.00.  The issue  is broader than  a refinery                                                               
issue.  Prices in  Southeast  have come  down  into its'  "normal                                                               
spread"  over  Seattle,  but  it  "was  awful  inelastic  on  the                                                               
downside."  He understands  that  had to  do  with some  "hedging                                                               
business practices." But  it is a great concern because  a lot of                                                               
communities in  Southeast have virtually  one supplier.  He asked                                                               
the sponsor also  to take a look at  broadening the applicability                                                               
as the bill moves along.                                                                                                        
11:54:53 AM                                                                                                                   
SENATOR  WIELECHOWSKI said  he  would  be happy  to  do that.  He                                                               
mentioned that he did get  some e-mails from people in Southeast,                                                               
Ketchikan  in particular.  He figured  Senator  Kookesh would  be                                                               
interested in Angoon prices as well.                                                                                            
SENATOR STEDMAN  asked Mr.  Sniffen to  respond to  the Southeast                                                               
portion of his report.                                                                                                          
MR.  SNIFFEN  said  the  Southeast  portion  of  his  report  was                                                               
limited. He  gathered information about energy  suppliers of fuel                                                               
into Juneau and other points  in Southeast Alaska to determine if                                                               
there was  an economic  basis for  the prices  they charge  or if                                                               
those prices  were the  result of  some kind  of collusion  or an                                                               
anti-trust activity.  There seemed  to be  economic justification                                                               
for the prices that they charged.                                                                                               
One of  the concerns he  keeps hearing from  Southeast consumers,                                                               
in Ketchikan in particular, is that  they know how much gas costs                                                               
in  Seattle  and  that  it  can't  possibly  cost  that  much  to                                                               
transport it up here. So why is it so much more?                                                                                
MR.  SNIFFEN'S answer  is that  the amount  of profit  a business                                                               
wants  to  tack  on  to  their landed  price  of  fuel  can't  be                                                               
controlled through statute.  Looking at the component  of what it                                                               
costs to  get fuel  to an  area is not  the way  to look  at what                                                               
prices  should be.  The prices  are what  the market  will allow.                                                               
When   there  aren't   many   competitors  monopolistic   pricing                                                               
practices go on, and that is  not illegal, which is why this bill                                                               
would at  least allow him  to look at that  kind of conduct  - to                                                               
see if  while there  is no an  illegal anti-trust  pricing scheme                                                               
going on, that  the prices are exorbitant and  "they shouldn't be                                                               
allowed to charge them."                                                                                                        
His  conclusion  for  Southeast  market  is  that  there  was  no                                                               
collusion that could  be identified from the evidence  - and they                                                               
looked at  quite a  bit and  interviewed a  number of  people. It                                                               
seems like the  prices were the result of big  fluctuations and a                                                               
lot of "hedging activity."                                                                                                      
11:58:47 AM                                                                                                                   
SENATOR STEDMAN  said he understands the  hedging mechanisms, and                                                               
when  you  hedge  on  the  wrong  side of  a  bet  you  can  have                                                               
substantial losses,  and when you  have no competition,  it makes                                                               
it very easy to embed those into  your price to recoup. That is a                                                               
concern, but  from a  historical standpoint,  Sitka once  had two                                                               
vendors, and then one purchased  the other which created a little                                                               
bit of  interest. A lot  of people  in the community  expected an                                                               
increase in prices with one supplier,  but they hoped it would be                                                               
backed up with  service and the quality of  the installation. But                                                               
as time  went on,  more constituents got  concerned that  what in                                                               
fact happened  is that they ended  up with a monopoly  - to their                                                               
detriment  in   general.  Although  that  hasn't   been  publicly                                                               
expressed, it has been expressed privately.                                                                                     
If they were  to be able to  back up the clock, there  would be a                                                               
lot of interest in the community  to object to mergers like that,                                                               
because  it puts  them in  a position  of one  supplier. A  small                                                               
operation came in  with one fuel pump for a  little bit, but when                                                               
you try  to site a bulk  facility in a community  it is difficult                                                               
and expensive.  He cautioned other  communities around  the state                                                               
to not hesitate  to speak up if there is  consolidation going on.                                                               
Petersburg was also consolidated into one bulk plant.                                                                           
12:01:26 PM                                                                                                                   
CHAIR  MCGUIRE  said   when  the  bill  first   came  before  the                                                               
committee, the  concern was  trying to  define the  dollar amount                                                               
relative to  Seattle pricing. There  might be  legitimate reasons                                                               
for the price disparity, but  having this tool is appropriate, as                                                               
is any tool  to keep the pressure on fair  prices for the benefit                                                               
of Alaskans is healthy.                                                                                                         
12:02:42 PM                                                                                                                   
DANA OLSON, representing herself, said  this issue belongs in the                                                               
Attorney General's  Office. She  has heard  a major  problem with                                                               
inconsistencies  regarding  42  USDA   Section  2000(d)  where  a                                                               
refinery cannot get a grant and have no grievance procedure.                                                                    
12:04:44 PM                                                                                                                   
JEFF  COOK, Director,  External  Affairs,  Flint Hills  Resources                                                               
Alaska, said his previous testimony  from February 12 stands, but                                                               
with some  additional comments on  the CS. He was  concerned that                                                               
removing the 10 percent cap could  arguably make it worse for the                                                               
refinery. They wouldn't  have any idea of what to  price to avoid                                                               
the  ruinous  penalties.  The  world  economy  and  markets  have                                                               
continued to change  for the worse since  his February testimony.                                                               
His refinery is losing money  again and the outlook is uncertain.                                                               
International   cargo  flights   are   down   at  the   Anchorage                                                               
International  Airport by  30-40  percent and  jet  fuel for  the                                                               
airport  is Flint  Hills' primary  product. He  just read  in the                                                               
paper that Fed Ex has transferred  68 pilots out of the Anchorage                                                               
area. This legislation  threatens the long term  viability of the                                                               
12:06:36 PM                                                                                                                   
SENATOR  STEDMAN  asked  if  the  refinery  is  running  at  full                                                               
capacity  or if  they are  having shut  down issues.  The Finance                                                               
Committee  had testimony  from the  Department of  Transportation                                                               
and Public  Facilities (DOTPF)  concerning the  Anchorage airport                                                               
and  he asked  the department  for an  update on  the volumes  of                                                               
freight and fuel there.                                                                                                         
MR. COOK responded  that last Saturday they shut  down Crude Unit                                                               
3, an  unprecedented move,  because the demand  for jet  fuel was                                                               
down so significantly.  They had no further  storage capacity and                                                               
couldn't market it.  He hoped the shutdown was for  only three to                                                               
four weeks. One  year ago they were shipping 80  railcars per day                                                               
from Fairbanks to Anchorage, now they are down to 40.                                                                           
12:08:13 PM                                                                                                                   
SENATOR STEDMAN  asked him to  put that shutdown into  some scale                                                               
so people could understand.                                                                                                     
MR. COOK  replied that they have  three units. Crude Unit  1, the                                                               
original  one, came  on line  with  construction of  the TAPS  in                                                               
1977; it  produces diesel and jet  fuels. Crude Unit 2,  built in                                                               
1984/85, produces gasoline and asphalt  as well as diesel and jet                                                               
fuels. Crude  Unit 3 was  built in  1998 and its  primary purpose                                                               
was  to  take care  of  the  increased  jet  fuel demand  at  the                                                               
Anchorage  Airport. That  would  account for  one-third of  their                                                               
SENATOR STEDMAN  invited him to  join in the presentation  to the                                                               
Finance  Committee with  DOTPF as  a separate  presenter to  have                                                               
input about  the impacts to the  refinery. He said he  would also                                                               
invite the Alaska Railroad.                                                                                                     
12:09:39 PM                                                                                                                   
KIP KNUTSEN, Manager, External Affairs,  Tesoro Alaska, said this                                                               
CS is  a dramatic change since  it is now a  gouging bill instead                                                               
of a price  cap bill. He wanted to reserve  comment at this time.                                                               
He  noted  that  his  company would  have  to  spend  significant                                                               
limited  resources  to  define   these  terms  of  excessive  and                                                               
SENATOR STEDMAN  extended the  same invitation  to him  to attend                                                               
the  Finance  Committee  since  it  is  a  large  issue  for  the                                                               
community of Anchorage.                                                                                                         
12:11:40 PM                                                                                                                   
SENATOR WIELECHOWSKI  moved to  report CS for  SB 54,  version S,                                                               
from  committee  with  individual  recommendations  and  attached                                                               
fiscal  note(s). There  being no  objection,  CSSB 54(ENE)  moved                                                               
from committee.                                                                                                                 

Document Name Date/Time Subjects
SB 54 - CS (Version S) Energy.pdf SENE 3/13/2009 11:00:00 AM
SB 54
SB 132 - Bill Packet.pdf SENE 3/13/2009 11:00:00 AM
SB 132
SB 71 - Bill Packet.pdf SENE 3/13/2009 11:00:00 AM
SB 71