Legislature(2009 - 2010)BELTZ 211

04/10/2009 01:30 PM JUDICIARY


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 54 PRICE GOUGING INVOLVING ENERGY RESOURCES TELECONFERENCED
Heard & Held
+ SB 68 FELONS' RIGHT TO VOTE TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
= SB 59 LOW- SPEED MOTOR VEHICLES
Moved CSSB 59(TRA) Out of Committee
= SB 48 MEETINGS OF ROAD SERVICE AREA BOARDS
Moved CSSB 48(JUD) Out of Committee
= SB 176 COMPACT: EDUCATION OF MILITARY CHILDREN
Moved Out of Committee
        SB  54-PRICE GOUGING INVOLVING ENERGY RESOURCES                                                                     
                                                                                                                                
1:41:39 PM                                                                                                                    
CHAIR FRENCH  announced the consideration  of SB 54.  [Before the                                                               
committee was CSSB 54(RES).]                                                                                                    
                                                                                                                                
SENATOR WIELECHOWSKI said this bill  is in response to the outcry                                                               
against high  fuel prices. Alaskans  are paying the  highest fuel                                                               
prices in  the U.S. and SB  54 makes it an  unfair trade practice                                                               
for  refiners,  distributors,  or retailers  to  charge  Alaskans                                                               
excessively.  Specifically,  the  bill amends  the  Unfair  Trade                                                               
Practices Act to add one more  consumer protection item to the 55                                                               
protections currently in statute.                                                                                               
                                                                                                                                
Historically Alaska  has paid 10  to 20 cents above  the national                                                               
average  for gasoline  and recently  it has  been as  high as  70                                                               
cents more. He and Senator  Davis have asked the attorney general                                                               
to investigate the  matter and they found that it  is largely due                                                               
to an oligopoly,  which is a market condition in  which there are                                                               
few sellers.  Some people don't  want to interfere with  the free                                                               
market,  but this  is not  a  free market.  Government has  often                                                               
intervened, particularly with energy  rates, to protect consumers                                                               
from getting gouged.  "This is exactly why we have  the RCA; this                                                               
is   exactly  why   we  have   the   Federal  Energy   Regulatory                                                               
Commission," he said.  The bill quite simply  says that consumers                                                               
can't get gouged. Some people  have questioned why the government                                                               
should intervene on the price  of fuel and not other commodities,                                                               
but there  is a difference.  You have  to have gasoline  and fuel                                                               
oil to live in this state.                                                                                                      
                                                                                                                                
1:44:36 PM                                                                                                                    
This  bill has  undergone  a variety  of  changes to  accommodate                                                               
concerns of  industry representatives, committee members  and the                                                               
administration,  Senator  Wielechowski  said.  For  example,  the                                                               
minimum fine  has been reduced from  $50 million to 10  times the                                                               
economic  benefit  of the  illegal  action.  Also, when  refiners                                                               
complained about  establishing a  link to Washington  prices, the                                                               
sponsors  removed  the link  and  instead  used the  standard  of                                                               
"excessive  and unconscionable."  Then they  added  a section  to                                                               
shield industry  from individual  or class  action law  suits and                                                               
put enforcement at the sole discretion of the attorney general.                                                                 
                                                                                                                                
SENATOR  WIELECHOWSKI said  that  in this  building when  someone                                                               
gives  their word  you  expect  them to  keep  it. I'm  therefore                                                               
extremely  disappointed  to see  the  recent  letter from  Tesoro                                                               
because the representative from Tesoro  told me that if the price                                                               
link  provision   were  removed,   they  would  back   off  their                                                               
opposition to the  bill. They made a misrepresentation  to me, he                                                               
said.                                                                                                                           
                                                                                                                                
The  bill was  further modified  to address  concerns from  rural                                                               
Alaska  and  other  areas  by  expanding  its  scope  to  include                                                               
retailers  and distributors.  They also  attempted to  reduce the                                                               
cost  of the  bill by  clarifying that  the attorney  general may                                                               
collect attorney's fees and costs.  Finally they clarified that a                                                               
reasonable  defense by  a refiner,  distributor,  or retailer  is                                                               
that the  seemingly exorbitant prices were  attributable to costs                                                               
incurred  in connection  with the  sale. The  bill may  need fine                                                               
tuning  and   I'm  happy  to   do  that,  but  we   have  already                                                               
accommodated  many interest  groups,  Senator Wielechowski  said.                                                               
Alaskans needs this legislation, he emphasized.                                                                                 
                                                                                                                                
1:47:02 PM                                                                                                                    
GEORGE ASCOT, Staff to Senator Wielechowski, introduced himself.                                                                
                                                                                                                                
CHAIR FRENCH  noted that Mr.  Sniffen with the Department  of Law                                                               
would like  to put sideboards  on the definition  for "exorbitant                                                               
or excessive."                                                                                                                  
                                                                                                                                
SENATOR WIELECHOWSKI  said initially  the link was  to Washington                                                               
state prices. The  bill said that it was prima  facie evidence of                                                               
price gouging  if Alaska prices  were more than 10  percent above                                                               
the price  charged by  refiners in the  state of  Washington. The                                                               
refiners complained  so that provision  was removed.  Now they're                                                               
complaining that there isn't a  definition. He said he'd be happy                                                               
to either reinsert the link to  prices in Washington or work on a                                                               
definition.  "Exorbitant or  excessive" is  the standard  used in                                                               
utility  rate cases,  but  if people  want  a more  court-defined                                                               
definition such  as "unconscionable"  that's fine too.  He's open                                                               
to suggestions,  but this  is an  important piece  of legislation                                                               
that Alaskans are demanding.                                                                                                    
                                                                                                                                
1:49:17 PM                                                                                                                    
SENATOR THERRIAULT  pointed out that  that definition is  used in                                                               
utility cases  but the  difference is that  with the  RCA, people                                                               
have a designated  area in which they are the  only supplier. The                                                               
tradeoff is that suppliers get  that monopolistic geographic area                                                               
but  they  must  submit  themselves to  that  RCA  oversight  and                                                               
regulation of the  price they charge. "That's not  what we've got                                                               
here." These  are different market  conditions than what  the RCA                                                               
generally regulates. Also, tying the  price to the Seattle prices                                                               
didn't  speak to  the cost  of energy  to operate  in this  state                                                               
compared to  refineries in  the Seattle area.  I'm not  sure that                                                               
link provided a workable mechanism, he said.                                                                                    
                                                                                                                                
1:51:02 PM                                                                                                                    
SENATOR  WIELECHOWSKI said  this  situation is  analogous to  the                                                               
situation  with  regulated  utilities.  It's  an  oligopoly  when                                                               
Tesoro has 80 percent of the  market and Flint Hills has about 12                                                               
percent. It's  an extremely small  market and is very  similar to                                                               
what you have  with regulated utilities. In  situations like that                                                               
the  government has  to step  in to  prevent price  gouging. With                                                               
respect to the point about higher  energy costs here and the link                                                               
to Washington  prices, he  pointed to  the provision  that states                                                               
that if  costs of  doing business result  in higher  prices, then                                                               
that is  a defense  and in  that case you  can't be  charged with                                                               
price gouging. That provision has not been removed, he said.                                                                    
                                                                                                                                
CHAIR  FRENCH asked  Mr. Sniffen  to go  through the  concerns he                                                               
expressed  over   reaching  a   definition  for   "exorbitant  or                                                               
excessive."                                                                                                                     
                                                                                                                                
1:52:27 PM                                                                                                                    
ED SNIFFEN,  Senior Assistant  Attorney General,  Civil Division,                                                               
Commercial/Fair Business  Section, Department of  Law, Anchorage,                                                               
said he enforces consumer protection  and antitrust statutes. DOL                                                               
doesn't have a position on the  bill, but it has been a challenge                                                               
to come  up with  a definition of  "excessive or  exorbitant." In                                                               
doing some research  he found that the phrase is  used in utility                                                               
rate   cases.   In  further   research   he   found  the   phrase                                                               
"unconscionable  conduct." It's  probably a  higher standard  and                                                               
has support in  case law for a definition  of what unconscionable                                                               
conduct is.  Several cases  have defined that  to mean  an action                                                               
that "shows no  regard for conscience or affronting  the sense of                                                               
justice, decency  or reasonableness."  Some may argue  that those                                                               
terms aren't any  more specific, but there is case  law that says                                                               
those kinds of  things pass constitutional muster.  Then it would                                                               
be up  to the attorney general  and ultimately perhaps a  jury to                                                               
decide whether or  not certain pricing behavior did  any of those                                                               
things.                                                                                                                         
                                                                                                                                
MR. SNIFFEN  said the  phrase "excessive  and exorbitant"  may be                                                               
okay, but in State of  Alaska v. O'Neill Investigations, Inc. the                                                             
court said it  is an unfair trade practice under  existing law to                                                               
have any  "oppressive or unscrupulous" conduct.  He expressed the                                                               
view that  that's very close  to "unconscionable" and  noted that                                                               
"oppressive   or  unscrupulous"   hasn't   been   used  much   in                                                               
enforcement  actions. "But  we have  some room  there to  look at                                                               
completely outrageous  conduct and determine whether  or not it's                                                               
a violation of Alaska law," he said.                                                                                            
                                                                                                                                
MR. SNIFFEN  said he  is open  to working  with everyone  and has                                                               
included suggestions in his email.  "You could use unconscionable                                                               
instead  of excessive  or  exorbitant or  you  could just  define                                                               
excessive  or   exorbitant  and   use  the  same   definition  as                                                               
unconscionable."  These  are  ways  to bring  this  concept  into                                                               
something that's recognized as adequate by the court.                                                                           
                                                                                                                                
1:56:03 PM                                                                                                                    
CHAIR  FRENCH asked  if  this  will ultimately  come  down to  an                                                               
Alaska jury  being faced with  evidence about prices  in Seattle,                                                               
at the wellhead, and at a  refinery and then asked whether or not                                                               
the refiner or distributor was acting in an unscrupulous manner.                                                                
                                                                                                                                
MR. SNIFFEN replied  it could be, but most  enforcement cases are                                                               
resolved before getting  to court action. In the  case of Tesoro,                                                               
if DOL  initiated an investigation because  their prices appeared                                                               
to  be "excessive  or exorbitant"  or  "unconscionable" and  they                                                               
didn't agree, the question would potentially go to a jury.                                                                      
                                                                                                                                
SENATOR  THERRIAULT asked  if  DOL would  do  an economic  review                                                               
before bringing charges.                                                                                                        
                                                                                                                                
MR. SNIFFEN replied  it would be necessary for DOL  to review the                                                               
economic data to determine the  basis for the cost that's charged                                                               
and  to rule  out  the  possibility that  what  DOL  felt was  an                                                               
"excessive  or exorbitant"  price wasn't  actually the  result of                                                               
increased costs  or some  other market  condition such  as higher                                                               
crude prices.                                                                                                                   
                                                                                                                                
SENATOR THERRIAULT referenced  the recent work that  DOL has done                                                               
to  look into  oil prices  and asked  if he  feels that  standard                                                               
would have been met and that DOL would have brought charges.                                                                    
                                                                                                                                
1:58:58 PM                                                                                                                    
MR.  SNIFFEN   replied  they  weren't  looking   at  the  pricing                                                               
situation this last  year with this law in mind,  but it probably                                                               
wouldn't  have  met  the  test  for  "excessive  or  exorbitant."                                                               
Although  prices  were high  it  appeared  as though  there  were                                                               
sufficient  market-based reasons  for  the  pricing behavior.  He                                                               
expressed the  view that the  prices didn't appear to  be illegal                                                               
and  didn't   rise  to  the   level  of   "unconscionability"  or                                                               
"excessive or exorbitant."                                                                                                      
                                                                                                                                
CHAIR  FRENCH asked  which word  he would  select to  guide DOL's                                                               
future actions  with respect to  bringing cases if this  were the                                                               
last  committee  of  referral  and  he  was  asked  to  make  the                                                               
decision.                                                                                                                       
                                                                                                                                
1:59:58 PM                                                                                                                    
MR. SNIFFEN  replied he likes  to have terms  he can look  up and                                                               
that show  what the court  says they  mean. Currently there  is a                                                               
broad  definition for  "unconscionable"  and  the Alaska  Supreme                                                               
Court  has  allowed  DOL  to   take  action  on  "oppressive  and                                                               
unscrupulous" conduct.  "Excessive or exorbitant"  could probably                                                               
be likened  to those concepts  and DOL could probably  do similar                                                               
enforcement. He  said it's  a tough  call but  he would  prefer a                                                               
term  they have  familiarity with  as opposed  to something  that                                                               
isn't defined anywhere other than the regulation making context.                                                                
                                                                                                                                
2:01:03 PM                                                                                                                    
CHAIR  FRENCH recognized  the presence  of former  Representative                                                               
Mike Miller.                                                                                                                    
                                                                                                                                
SENATOR THERRIAULT  asked Mr.  Sniffen to  talk about  what other                                                               
states  do in  this regard  and  what happened  in Hawaii's  past                                                               
attempt to regulate prices.                                                                                                     
                                                                                                                                
MR. SNIFFEN explained that the  Hawaii regulatory experiment went                                                               
on in  2005 when the  legislature adopted a regulatory  scheme to                                                               
allow  the  Hawaii  Public Utility  Commission  to  regulate  the                                                               
wholesale price  of gasoline. Shortly  thereafter prices  rose to                                                               
the  statutory  cap, which  was  based  on  West and  Gulf  Coast                                                               
markets. Almost immediately Hawaiians  realized that their prices                                                               
were the  highest in the  nation. They further realized  that had                                                               
competition been  allowed to  run its  course, prices  would have                                                               
been  lower. The  legislature allowed  the  law to  lapse and  it                                                               
wasn't  renewed.  Hawaii  now  has   a  monitoring  program  that                                                               
requires  refineries  to  provide   pricing  information  to  the                                                               
utility  commission. He  noted  that the  Hawaii  market is  very                                                               
similar to the Alaska market.                                                                                                   
                                                                                                                                
2:04:08 PM                                                                                                                    
About half  the states  have laws  on price  gouging and  all but                                                               
three trigger their  laws on a declared state  of emergency. They                                                               
all provide  a timeframe after  which the price can't  exceed the                                                               
pre-emergency  price unless  it  can be  justified  on some  cost                                                               
basis. States that have price  gouging laws that aren't triggered                                                               
on a  declared state  of emergency  trigger the  law on  a market                                                               
emergency.  Those are  declared  by the  governor  of the  state.                                                               
During  a  market  emergency retailers  can't  charge  more  than                                                               
vendors in areas  that are not affected by  the market emergency.                                                               
The  point of  reference  is either  tied to  an  area where  the                                                               
emergency  doesn't exist  or to  a time  period before  which the                                                               
emergency was declared.                                                                                                         
                                                                                                                                
2:06:00 PM                                                                                                                    
SENATOR WIELECHOWSKI said it's important  to remember that diesel                                                               
prices weren't  regulated under the Hawaii  regulatory scheme and                                                               
they spiked  dramatically during  the time  that gas  prices were                                                               
capped.                                                                                                                         
                                                                                                                                
Mr. Sniffen said he believes that's correct.                                                                                    
                                                                                                                                
SENATOR WIELECHOWSKI added that  many people believe that without                                                               
the cap  that gasoline  prices in Hawaii  would have  spiked even                                                               
higher.                                                                                                                         
                                                                                                                                
MR. SNIFFEN responded he's heard that  but he doesn't know how to                                                               
tell  for  sure.  Diesel  pricing   was  separate  from  gasoline                                                               
pricing.                                                                                                                        
                                                                                                                                
SENATOR WIELECHOWSKI  pointed out  that at  the time  that Hawaii                                                               
adopted its  regulatory scheme, hurricanes occurred  in Louisiana                                                               
and devastated oil operations in  the Gulf Coast. That caused all                                                               
prices to rise.                                                                                                                 
                                                                                                                                
2:07:30 PM                                                                                                                    
MR. SNIFFEN  agreed and  added that  there's some  speculation by                                                               
regulation proponents  that but for Hurricane  Katrina, the price                                                               
cap would have brought down prices significantly.                                                                               
                                                                                                                                
MR.  ASCOTT added  that both  diesel and  gasoline prices  spiked                                                               
immediately after  Hurricane Katrina and subsequently  came down.                                                               
Once  prices  came  down  Hawaii's   capped  gas  prices  dropped                                                               
significantly  while  its  diesel  prices remained  at  the  post                                                               
Katrina rates.                                                                                                                  
                                                                                                                                
SENATOR  THERRIAULT  cautioned  about  attaching  yourself  to  a                                                               
market.  Hawaii  didn't  tie  its  prices  to  Pacific  Northwest                                                               
prices; it had  a market basket and something happened  to one of                                                               
the markets  in that  basket that influenced  prices. One  of the                                                               
difficulties with  that method is  deciding what  your comparison                                                               
is  going to  be  to. He  noted  that the  Speaker  of the  House                                                               
introduced a resolution expressing concern  about a fuel tax that                                                               
the  state of  Washington  was considering  for  fuels that  were                                                               
exported.  After  some  discussion  it was  determined  that  the                                                               
suggested tax  was the result of  a dispute between the  state of                                                               
Washington  and  the state  of  Oregon.  He again  cautioned  the                                                               
committee  to  be mindful  when  linking  Alaska fuel  prices  to                                                               
another market.                                                                                                                 
                                                                                                                                
He noted  that Mr.  Sniffen said  that if this  bill had  been in                                                               
place during the recent high-price  scenario, he doesn't think it                                                               
would have done anything. He  emphasized that he'd very much like                                                               
to find a  meaningful way to control prices, but  he doesn't want                                                               
to promise people something that doesn't deliver.                                                                               
                                                                                                                                
2:11:02 PM                                                                                                                    
JEFF COOK,  Director of External Affairs,  Flint Hills Resources-                                                               
Alaska, said  they share concerns about  the impact of SB  54. He                                                               
said  it's   important  to  understand   that  all   Flint  Hills                                                               
Resources' products  are sold  on the  wholesale market  and they                                                               
make less  than one-fifth of the  gasoline used in the  state and                                                               
one-third of  the heating  oil used in  the Fairbanks  area. They                                                               
run a safe and efficient  refinery and their employment goes well                                                               
beyond the  175 employees based  in North Pole and  Anchorage. He                                                               
mentioned the  Alaska Railroad,  various trucking  companies, and                                                               
the Local 375.                                                                                                                  
                                                                                                                                
2:13:53 PM                                                                                                                    
MR. COOK  said the  North Pole refinery  began operation  in 1977                                                               
and Flint Hills  Resources has owned and operated  it since 2004.                                                               
The  facility   has  undergone   modifications,  but   the  basic                                                               
configuration is the same. It is  a topping plant, which means it                                                               
lacks the  sophistication to refine  all the crude oil  coming to                                                               
the plant into a finished  product. They take between 180,000 and                                                               
220,000 barrels of crude oil per  day to distill into a few basic                                                               
products for  sale. The rest  of the  stream is returned  to TAPS                                                               
and  that isn't  for  free. In  2008 they  paid  $180 million  in                                                               
quality bank  assessment, which is  equivalent to $8.90  for each                                                               
barrel they  sold that year.  That is a  cost that only  they and                                                               
Petrostar pay.  During peak times  they distilled  70,000 barrels                                                               
per day and now they are down to 30,000 barrels per day.                                                                        
                                                                                                                                
Flint Hills Resources has significant  fixed costs and is selling                                                               
significantly less  product making  it difficult to  operate. The                                                               
majority of  their product  is jet fuel.  He distributed  a chart                                                               
showing  the decline  in number  of refineries  between 1980  and                                                               
2008.  Flint Hills  Resources is  one of  the few  topping plants                                                               
that hasn't gone out of  business. Environmental requirements are                                                               
responsible  for the  closure of  many of  the plants.  The North                                                               
Pole refinery  has kept pace with  environmental regulations, but                                                               
the changes have impacted the  amount of gasoline and diesel that                                                               
they  are  able  to  produce. While  the  refinery  continues  to                                                               
produce  some gasoline  and off-road  diesel, they  now buy  from                                                               
other  sources to  meet consumer  needs. Supplies  are tight  and                                                               
margins  for  refineries  such  as   theirs  are  small.  As  the                                                               
committee is  aware, Flint  Hills Resources  is working  with the                                                               
Department of Natural Resources to  explore options and develop a                                                               
better  understanding of  the circumstances  that threaten  their                                                               
long-term viability in this state, he said.                                                                                     
                                                                                                                                
2:18:11 PM                                                                                                                    
MR. COOK said  several things about the North  Pole refinery make                                                               
it difficult to  compare to others. First is the  cost of fuel to                                                               
run  the  refinery. At  the  peak  they  use 147,000  gallons  of                                                               
gasoline  per  day.  At  peak prices  that  cost  $24/mbtu  while                                                               
refiners in the state that have  natural gas were able to operate                                                               
at  $7.67/mbtu. 72  percent of  their cost  was fuel  to run  the                                                               
refinery and  that typically  should be 30  percent. Next  is the                                                               
quality bank. Flint Hills Resources  is the state's only buyer of                                                               
royalty-in-kind and in the last several  years they paid a low of                                                               
$23 million  and up  to $37  million above  what the  state would                                                               
have gotten had it sold  as royalty-in-value. He noted that their                                                               
energy cost is  238 percent higher than refineries  that are able                                                               
to operate  on natural gas.  Flint Hills Resources is  also faced                                                               
with dropping  crude oil  temperature, which  means they  have to                                                               
expend  more energy  to  make  product than  in  the past.  Other                                                               
refineries don't have that problem.                                                                                             
                                                                                                                                
In many ways SB 54 doesn't  make sense for our business, he said.                                                               
They don't  receive subsidies; they  pay premiums,  quality bank,                                                               
and   high  energy   prices.  The   bill  doesn't   specify  what                                                               
"exorbitant or  excessive" is,  yet it  calls for  penalties that                                                               
are  ten times  the economic  benefit from  an unlawful  sale. If                                                               
enacted this  legislation will adversely affect  Alaska consumers                                                               
and  businesses and  may  drive Flint  Hills  Resources from  the                                                               
state, he said.                                                                                                                 
                                                                                                                                
2:21:17 PM                                                                                                                    
MR. COOK  said consumers certainly  should seek the  lowest price                                                               
possible  for  any  commodity,  but  government  intervention  in                                                               
pricing  ultimately  creates  more  harm than  good.  While  this                                                               
legislation could  result in the  shutdown of their  company, the                                                               
harm  to  Alaskans  would  be   greater.  Flint  Hills  Resources                                                               
understands that  high fuel prices  can be a hardship,  but price                                                               
control  legislation will  harm  consumers in  the  long term  by                                                               
causing  shortages. Challenges  due  to the  economy are  serious                                                               
enough without being  further burdened with the  provisions of SB
54. He respectfully asked the committee not to advance the bill.                                                                
                                                                                                                                
2:23:52 PM                                                                                                                    
CHAIR FRENCH asked if Flint  Hills Resources produces gasoline at                                                               
the North Pole refinery.                                                                                                        
                                                                                                                                
MR.  COOK said  yes; they  produce about  3,000 barrels  per day,                                                               
which  is down  from their  peak of  6,000 barrels  per day.  The                                                               
reduction came about  as a result of the  new sulfur requirements                                                               
starting in January 2007.                                                                                                       
                                                                                                                                
CHAIR FRENCH asked if his company operates in other states.                                                                     
                                                                                                                                
MR. COOK replied their three  primary refineries are in Texas and                                                               
Minnesota.   The   corporate   parent  company   has   operations                                                               
worldwide.                                                                                                                      
                                                                                                                                
CHAIR  FRENCH  asked if  either  Texas  or  Minnesota has  a  law                                                               
similar to what's being considered here today.                                                                                  
                                                                                                                                
MR. COOK said no.                                                                                                               
                                                                                                                                
SENATOR WIELECHOWSKI  asked if Flint Hills  Resources is charging                                                               
exorbitant or excessive prices for the products it refines.                                                                     
                                                                                                                                
MR. COOK said no.                                                                                                               
                                                                                                                                
SENATOR WIELECHOWSKI responded, "Then  you wouldn't be subject to                                                               
this law."                                                                                                                      
                                                                                                                                
2:25:39 PM                                                                                                                    
SENATOR  THERRIAULT  remarked  that  the  concern  is  that  they                                                               
wouldn't know. According  to Mr. Sniffen even during  the time of                                                               
high  prices they  probably would  not have  met that  threshold.                                                               
That  doesn't  mean that  DOL  wouldn't  have looked  into  their                                                               
business, but that isn't any different  from what DOL is asked to                                                               
do today. He  asked Mr. Cook how much of  the gas that's consumed                                                               
in the state is refined by Flint Hills Resources.                                                                               
                                                                                                                                
MR. COOK  replied they provide  somewhere between 12  percent and                                                               
15 percent.                                                                                                                     
                                                                                                                                
SENATOR  THERRIAULT  asked  him   to  restate  the  quality  bank                                                               
numbers.                                                                                                                        
                                                                                                                                
MR. COOK  explained that their  quality bank assessment  for 2008                                                               
was  $180 million,  which  is  about $8.90  per  barrel for  each                                                               
barrel they sold that year.                                                                                                     
                                                                                                                                
2:27:22 PM                                                                                                                    
SENATOR  MCGUIRE  related  that  when  this  was  introduced  she                                                               
objected  to the  idea of  a  strict liability  standard tied  to                                                               
Washington state prices. When the  sponsor removed that provision                                                               
and adopted the exorbitant standard  she didn't think that Tesoro                                                               
or  Flint Hill  engaged  in  that conduct.  She  thinks that  DOL                                                               
already has  this tool available so  if this were in  statute the                                                               
result  would  have  been  the  same. This  doesn't  seem  to  be                                                               
harmful; it articulates what is  already known to be illegal. She                                                               
asked him  to comment on that  and tell her why  we wouldn't want                                                               
this in  place. A  safeguard may be  to protect  Alaska consumers                                                               
from things we aren't aware of, she said.                                                                                       
                                                                                                                                
2:29:57 PM                                                                                                                    
MR. COOK  said his company  is proud of  its ties to  Alaska. The                                                               
impact of having penalties that are  10 times a number that isn't                                                               
defined is that  it will divert time and resources  to respond to                                                               
that  potential  liability. They  appreciate  that  the bill  was                                                               
modified so  that only  the attorney general  could do  that, but                                                               
the uncertainties  are cause for  concern. Second,  profit breeds                                                               
competition and an unfettered market works best.                                                                                
                                                                                                                                
SENATOR MCGUIRE  asked him to  further explain the  quality bank.                                                               
If it  does relate to returning  oil to the system  she asked why                                                               
they don't expand their storage  capacity so they aren't beholden                                                               
to that fee.                                                                                                                    
                                                                                                                                
MR. COOK explained  that they are a topping plant  and can't make                                                               
more gasoline, diesel,  or asphalt than the quality  of the crude                                                               
allows. Also,  they make product  according to the demand  in the                                                               
state. This  state has a  different market than other  states. As                                                               
far as  storage goes it's  expensive to store inventory  and it's                                                               
highly regulated.                                                                                                               
                                                                                                                                
2:34:16 PM                                                                                                                    
CHAIR  FRENCH  surmised   that  quality  banking  is   a  way  of                                                               
compensating TAPS for removing quality from the crude stream.                                                                   
                                                                                                                                
MR. COOK said that's right. They  tend take out gasoline, with is                                                               
a lighter  product and that  reduces the  value of what  they put                                                               
back so they have to pay  for that. That's not any different than                                                               
the owners of different values of  crude on the Slope paying into                                                               
that. Without that mechanism Flint  Hills Resources and Petrostar                                                               
refineries  wouldn't be  there.  There just  isn't  a market  for                                                               
bunker fuel or asphalt year round in Fairbanks.                                                                                 
                                                                                                                                
2:35:32 PM                                                                                                                    
SENATOR WIELECHOWSKI asked what refiner margin is.                                                                              
                                                                                                                                
MR.  COOK  replied  federal  antitrust  laws  preclude  him  from                                                               
talking  about  anything  relative  to  price,  but  he  actually                                                               
doesn't know.                                                                                                                   
                                                                                                                                
SENATOR WIELECHOWSKI asked if refiner margin is the profit.                                                                     
                                                                                                                                
MR. COOK said he isn't an accountant and he won't speculate.                                                                    
                                                                                                                                
2:36:39 PM                                                                                                                    
SENATOR WIELECHOWSKI showed  a graph from the  U.S. Department of                                                               
Energy (DOE) and asked if he'd ever seen it before.                                                                             
                                                                                                                                
MR. COOK said he hasn't seen that particular graph.                                                                             
                                                                                                                                
SENATOR WIELECHOWSKI said  the bottom is retail  margin, which he                                                               
understands is the price that  retailers make. It's been about 25                                                               
cents. The line above is  the refiner margin. He understands that                                                               
the  refiner margin  remained at  about 50  cents until  May 2008                                                               
when it peaked at about $1.25. He asked if that looks familiar.                                                                 
                                                                                                                                
2:38:25 PM                                                                                                                    
MR. COOK responded he sees the graph.                                                                                           
                                                                                                                                
SENATOR WIELECHOWSKI  said the  top line is  the price  of retail                                                               
gasoline and  the line just  below is the wholesale  price. Those                                                               
lines track perfectly.  The only difference is  the huge increase                                                               
in refiner margin since May 2008. Do you agree?                                                                                 
                                                                                                                                
MR. COOK  said he can  only say  that they have  cooperated fully                                                               
with the  attorney general.  He cannot and  will not  speak about                                                               
specifics on pricing.                                                                                                           
                                                                                                                                
2:40:03 PM                                                                                                                    
SENATOR  WIELECHOWSKI said  so you  don't know  if your  refinery                                                               
margin has increased roughly 150 percent since May 2008.                                                                        
                                                                                                                                
MR. COOK said that's correct.                                                                                                   
                                                                                                                                
SENATOR  WIELECHOWSKI said  you gave  detailed answers  about why                                                               
you  were charging  consumers higher  prices yet  you don't  know                                                               
whether or not it's due to increased refiner margin.                                                                            
                                                                                                                                
MR.  COOK again  said  he is  aware  of some  things  that he  is                                                               
precluded   from   speaking   about  publicly.   They   delivered                                                               
information  to  assistant  attorney  general  Sniffen  and  have                                                               
cooperated fully with the investigation.                                                                                        
                                                                                                                                
SENATOR  WIELECHOWSKI   again  said  this  is   not  confidential                                                               
information yet you don't feel you can talk about it.                                                                           
                                                                                                                                
MR.  COOK responded  you are  asking if  this reflects  the North                                                               
Pole  refinery  and he  is  again  saying  he is  precluded  from                                                               
talking about that.                                                                                                             
                                                                                                                                
2:41:25 PM                                                                                                                    
SENATOR  THERRIAULT said  with respect  to  quality banking  when                                                               
they reinjected  oil into the TAPS  line it dilutes the  value of                                                               
everyone's oil and they have to pay for that difference.                                                                        
                                                                                                                                
With respect  to the  cost of  energy he said  once you  heat the                                                               
barrel  you could  invest in  a hydrocracker  to reformulate  the                                                               
bunker oil  into gasoline.  You'd be able  to capture  more value                                                               
out of  the energy you've expended,  but you don't have  a market                                                               
to sell into.                                                                                                                   
                                                                                                                                
MR.  COOK  said the  economics  aren't  there; the  equipment  is                                                               
expensive and the market in Alaska is small.                                                                                    
                                                                                                                                
SENATOR THERRIAULT noted that the price  of gas today is $2.16 in                                                               
Seattle, $2.29  in Anchorage and  $2.39 in Fairbanks so  it looks                                                               
like we're back to the normal spread.                                                                                           
                                                                                                                                
MR.  COOK said  supply and  demand  are coming  into balance.  He                                                               
clarified  that under  their crude  oil contract  with the  state                                                               
they  are required  by  law  to have  their  wholesale prices  in                                                               
Fairbanks and  Anchorage be the  same so that  price differential                                                               
doesn't come from the North Pole refinery.                                                                                      
                                                                                                                                
2:44:36 PM                                                                                                                    
SENATOR THERRIAULT  asked if the  information on  quality banking                                                               
and energy  is considered when  determining whether  somebody has                                                               
made excessive profit.                                                                                                          
                                                                                                                                
MR. SNIFFEN said that's correct.                                                                                                
                                                                                                                                
SENATOR  THERRIAULT said  so  the refining  margin  in the  graph                                                               
Senator  Wielechowski  displayed   wouldn't  have  triggered  the                                                               
excessive price because of the  components related to the cost of                                                               
production.                                                                                                                     
                                                                                                                                
MR. SNIFFEN  said he understands  the point  Senator Wielechowski                                                               
is making  and it's  good. Some  margins probably  did go  up but                                                               
there are a lot of other  factors to consider when looking at the                                                               
spreads,  which were  fairly unique  to Alaska.  DOL looked  into                                                               
margins and did consider that in its investigation.                                                                             
                                                                                                                                
SENATOR THERRIAULT asked if DOL  has received all the information                                                               
it requested from Flint Hills Resources and Tesoro.                                                                             
                                                                                                                                
MR. SNIFFEN replied he can't think of any outstanding requests.                                                                 
                                                                                                                                
SENATOR  THERRIAULT  noted  that  Econ   One  said  there  was  a                                                               
decoupling between Alaska and Pacific  Northwest prices. Mr. Cook                                                               
suggested  that the  slowdown hit  the  Pacific Northwest  harder                                                               
than  Alaska suppressing  demand and  causing a  glut of  product                                                               
being dumped on  the market. He asked if he  has information that                                                               
would verify that did in fact happen.                                                                                           
                                                                                                                                
MR. SNIFFEN said  yes. COL reviewed a variety of  data to explain                                                               
the decoupling. One conclusion was the  drop in price was a money                                                               
losing  proposition for  lower 48  refineries and  the profit  in                                                               
Alaska was in line with what might be expected.                                                                                 
                                                                                                                                
2:48:38 PM                                                                                                                    
PAUL D. KENDALL, representing himself,  said hydro is where there                                                               
is potential.  He suggested the  committee require  the following                                                               
from refineries:  1) a  block diagram of  all things  secret that                                                               
are connected;  2) a plain  English description of the  secrets -                                                               
why they  are secret and  what they are;  3) a numerical  list of                                                               
all  things  that  are  secret;  and  4)  a  question  about  the                                                               
potential to make hydrogen.                                                                                                     
                                                                                                                                
The overriding issue is information, Mr. Kendall said.                                                                          
                                                                                                                                
2:52:33 PM                                                                                                                    
AVIS THOMPSON,  Executive Director, Alaska  Trucking Association,                                                               
stated several  concerns: 1) the terms  "excessive or exorbitant"                                                               
are difficult to objectively define;  2) having a reliable source                                                               
and  supply  of  fuel  for  trucks  is  a  concern;  and  3)  the                                                               
availability of  jobs is  a concern.  We don't  want to  create a                                                               
climate of undue uncertainty, he said.                                                                                          
                                                                                                                                
SENATOR  THERRIAULT   noted  that   trucking  drivers   are  huge                                                               
consumers of fuel, and asked how the two are balanced.                                                                          
                                                                                                                                
MR. THOMPSON agreed it is  a difficult situation. Typically labor                                                               
costs are  highest, but  last summer that  was displaced  by fuel                                                               
costs. Not  all those costs can  be passed on to  the customer so                                                               
they adjust operations  to account for that. That gets  back to a                                                               
reliable source of reasonably priced fuel.                                                                                      
                                                                                                                                
2:55:32 PM                                                                                                                    
CHAIR  FRENCH  said  he  will  set the  bill  aside  for  further                                                               
consideration.                                                                                                                  
                                                                                                                                
SENATOR THERRIAULT  asked Mr. Sniffen  if it is state  or federal                                                               
law that requires that some information be held from the public.                                                                
                                                                                                                                
MR. SNIFFEN  replied there are  two Alaska statutes.  The state's                                                               
Restrain  of  Trade Act  provides  that  information produced  in                                                               
response  to  a  civil  investigation demand  is  not  considered                                                               
public information subject  to the Public Records  Act. The other                                                               
statute  is  the Consumer  Protection  Act,  which provides  that                                                               
information  gathered  in the  course  of  a consumer  protection                                                               
investigation is confidential.                                                                                                  
                                                                                                                                
2:57:11 PM                                                                                                                    
SENATOR THERRIAULT asked about SEC  rules or other state statutes                                                               
that  require  companies to  keep  pricing  information from  the                                                               
public.                                                                                                                         
                                                                                                                                
MR. SNIFFEN  said in  the anti trust  realm pricing  is extremely                                                               
proprietary. Federal  investigations labor under the  Sherman Act                                                               
and the Clayton  Act to request information by  subpoena and both                                                               
those statutes require confidentiality.                                                                                         
                                                                                                                                
2:58:03 PM                                                                                                                    
CHAIR FRENCH announced he would set SB 54 aside.                                                                                
                                                                                                                                

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