Legislature(2009 - 2010)BUTROVICH 205

04/11/2010 11:30 AM Senate LABOR & COMMERCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Moved HB 342 Out of Committee
Moved HB 376 Out of Committee
Moved HCR 19 Out of Committee
Moved HJR 51 Out of Committee
+ Bills Previously Heard/Scheduled TELECONFERENCED
          HCR 19-AIDEA REPORT ON IN-STATE FUEL STORAGE                                                                      
11:44:15 AM                                                                                                                   
CHAIR PASKVAN announced consideration of HCR 19.                                                                                
11:44:22 AM                                                                                                                   
REPRESENTATIVE JAY  RAMRAS, sponsor of  HCR 19, said he  gave the                                                               
committee  a  copy of  the  Alaska  Gasoline Pricing  Report  and                                                               
explained  that the  previous Speaker  of the  House charged  the                                                               
House Judiciary Committee  to look into why  Alaskans were paying                                                               
so much  for gasoline  as a companion  to the  Attorney General's                                                               
study.  They Attorney  General  addressed the  legal  issue -  if                                                               
there was price gouging, for instance.                                                                                          
The  committee actually  hypothesized other  potential solutions.                                                               
He  directed  them  to  page  44 of  the  report  that  concluded                                                               
incentivizing more  gas storage in  Alaska could help.  When they                                                               
first approached Governor Sheffield who  is in charge of the Port                                                               
of Anchorage there  was simply not enough space  available at the                                                               
port. Since then,  the Port has been expanded to  the extent that                                                               
it can  now handle more liquid  fuel storage - for  jet aviation,                                                               
low  sulphur  diesel  for  rural Alaska,  and  gasoline  for  all                                                               
Alaskans. In this particular case,  85 percent of the gasoline is                                                               
produced in  Nikiski and 15  percent in  North Pole at  the Flint                                                               
Hills Refinery.  Both refineries  have embedded  structural flaws                                                               
that increase the cost of producing wholesale gasoline.                                                                         
REPRESENTATIVE RAMRAS explained that  the Nikiski Refinery has to                                                               
refine all of the oil they  buy. They sell the bottoms (the lower                                                               
one-third of  the value added material)  at a loss and  that loss                                                               
becomes  embedded in  the cost  of  the other  two-thirds of  the                                                               
barrels that they sell, much of which is gasoline.                                                                              
He explained  that the  Flint Hills Refinery  is a  topping plant                                                               
and takes  royalty oil out of  the pipeline and puts  the rest of                                                               
the barrels  back in. Unfortunately,  it is the only  refinery in                                                               
the United  States that refines oil  with oil as opposed  to with                                                               
natural  gas.  Because  of  this  and the  fact  that  a  lot  of                                                               
electricity is used  in refining gasoline, the  cost of producing                                                               
it  in  Fairbanks can  be  22-23  cents kwh.    So,  both of  the                                                               
refineries have  embedded problems that  mean the price  of their                                                               
gas is higher.                                                                                                                  
REPRESENTATIVE RAMRAS said beyond that,  Alaska is also a trapped                                                               
market,  meaning  we  don't have  highways  where  other  refined                                                               
gasoline  can come  from other  states and  compete to  bring the                                                               
cost  of gasoline  down. Also  with government  regulation and  a                                                               
lack of  increasing demand, Alaska  hasn't been able to  induce a                                                               
third refinery to go into  the gasoline business. This has driven                                                               
him to  begin a dialogue  with Alaska Industrial  Development and                                                               
Energy Authority (AIDEA) about preparing  a business case for in-                                                               
state gas storage.                                                                                                              
REPRESENTATIVE  RAMRAS  said   the  state's  military  industrial                                                               
complex, Elmendorf, is  short 350,000 gallons of  storage and the                                                               
Ted  Stevens Airport  needs to  be competitive  for jet  aviation                                                               
fuel,  and because  Flint  Hills has  gone  from operating  three                                                               
towers to  two towers, there  have been shortages. The  future of                                                               
Flint Hills is not  known, but it may not be  in the market place                                                               
within  1000 days  from now  because  of the  aging refinery  and                                                               
their decision  not to  reinvest in it.  Without it  Alaska would                                                               
lose the ability to produce jet aviation fuel.                                                                                  
11:49:46 AM                                                                                                                   
He continued some concerns have  been raised that they are trying                                                               
to  use a  state  agency  to compete  with  refineries, but  they                                                               
aren't talking  about funding another refinery;  they are talking                                                               
about  AIDEA  funding storage  capacity.  Much  of the  unbranded                                                               
gasoline that  is sold  in Alaska  is to  Cost Co.,  Fred Meyers,                                                               
Sams  Club and  Safeway and  he saw  an opportunity  to bring  in                                                               
competition  other than  some of  the  price gouging  legislation                                                               
that moved through both bodies.                                                                                                 
REPRESENTATIVE RAMRAS  said they would  be looking for  an entity                                                               
with a balance sheet strong  enough that it would make refineries                                                               
drop their prices.  At this point, it is simply  a business case.                                                               
There is  nothing to be fearful  of; there are no  capital costs,                                                               
no  funding request.  He  said building  capacity  might make  it                                                               
possible to take  advantage of some seasonal  arbitrage and barge                                                               
in fuel  at a time when  it may be  more attractive to buy  it to                                                               
lower the cost for Rural Alaskans  who can only get fuel by barge                                                               
at a certain time of year  that happens to coincide with the most                                                               
expensive part of the driving season.                                                                                           
11:52:21 AM                                                                                                                   
SENATOR BUNDE asked if the zero  fiscal note simply refers to the                                                               
creation  of the  report  and  not to  any  costs  that might  be                                                               
related to building a storage facility.                                                                                         
REPRESENTATIVE RAMRAS indicated that was correct.                                                                               
SENATOR  BUNDE asked  if  financing  were put  in  place for  the                                                               
storage  of  he perceived  that  this  would provide  Alaskans  a                                                               
subsidy  or  would the  cost  of  the  storage  be borne  by  the                                                               
REPRESENTATIVE RAMRAS replied that he  sees this as a competitive                                                               
mechanism  in  the  market  place.  This is  simply  to  build  a                                                               
business case to  demonstrate whether there is  an opportunity or                                                               
if the state  has to incentivize building a facility  in the Port                                                               
of  Anchorage. They  anticipate that  if a  business case  can be                                                               
built,  someone  with a  strong  enough  balance sheet  might  be                                                               
interested  in  coming in  to  build  a facility.  Currently  the                                                               
refineries have a strangle-hold on Alaskan consumers.                                                                           
11:55:04 AM                                                                                                                   
SENATOR BUNDE said he understands that,  but he wanted to know if                                                               
the  consumer  would  have  to pay  for  this  increased  storage                                                               
capacity or would it become state subsidized.                                                                                   
REPRESENTATIVE  RAMRAS  replied  that  it will  not  be  a  state                                                               
subsidy. If  AIDEA, in  fact, financed  a storage  terminal, they                                                               
would only do  it if there was  a third party that  had a balance                                                               
sheet that  could withstand it. It  would be leased out  to other                                                               
entities that would  store the fuel. The fuel would  be bought at                                                               
a much lower  rack rate, and then the carrying  cost for the fuel                                                               
as well as the amortized cost  of the fuel storage facility would                                                               
then be embedded in the price.  That's why a business case has to                                                               
be  built.  In  addition,  the   cost  of  the  facility  can  be                                                               
amortized.  He  thought  consumers  would  save  dollars  on  the                                                               
11:57:44 AM                                                                                                                   
SENATOR  BUNDE  asked  if  this  might put  Flint  Hills  out  of                                                               
REPRESENTATIVE  RAMRAS  replied  that  Flint Hills  has  its  own                                                               
problems with  an aging facility, and  he had asked them  to view                                                               
this storage  facility as a  safety net. It would  store millions                                                               
of gallons of  fuel, but it is a small  fraction of the aggregate                                                               
amount of  liquid fuel that  Alaskans consume annually.  It would                                                               
not   displace   Flint   Hills,   but   it   would   bring   more                                                               
competitiveness to the market.                                                                                                  
12:00:27 PM                                                                                                                   
SENATOR MEYER asked  how the North Star refinery  in Valdez would                                                               
play into the refinery mix.                                                                                                     
REPRESENTATIVE RAMRAS replied that  the North Star refinery makes                                                               
low sulphur  diesel and not  gasoline and this measure  is driven                                                               
largely by  the disparity in  the price of gasoline  for Railbelt                                                               
consumers. He  commented that the  state's royalty  throughput in                                                               
Nikiski is so low that they buy  all of the Alaskan oil they can,                                                               
but  only a  quarter  of the  oil they  buy  actually comes  from                                                               
Alaska. They cannot get any more  Alaskan oil because the rest of                                                               
it is  committed to  the West  Coast. Flint  Hills' oil  is taken                                                               
right off  the pipeline, because  it's a topping plant,  and then                                                               
put right back on the pipeline;  they actually pay a premium over                                                               
Alaska royalty oil.  So, when Alaskans are looking  for a villain                                                               
as  to why  the costs  are  so high  and  they look  to the  base                                                               
commodity, it's Alaskan oil. The  Alaskan treasury is setting the                                                               
price  in   a  manner  of   speaking  along  with  the   lack  of                                                               
competitiveness in the market place for oil.                                                                                    
12:02:07 PM                                                                                                                   
SENATOR  MEYER followed  up saying  that the  state's 12  percent                                                               
royalty share  could be refined  and be  sold at a  lesser price,                                                               
but then there  are constitutional issues of whether  or not that                                                               
is the highest and best use of the resource.                                                                                    
REPRESENTATIVE RAMRAS agreed.                                                                                                   
12:02:55 PM                                                                                                                   
SENATOR MEYER said it would  be an interesting conversation as to                                                               
whether or not  this money should go to  new playground equipment                                                               
at a school versus keeping somebody warm during the winter.                                                                     
12:03:29 PM                                                                                                                   
TED  LEONARD, Executive  Director, Alaska  Industrial Development                                                               
and  Export Authority  (AIDEA), said  they believe  one of  their                                                               
roles  is  as   an  economic  adviser  to   the  legislature  for                                                               
infrastructure projects. One of  the interesting questions coming                                                               
out of  the House  Finance Committee was  whether AIDEA  could do                                                               
this by itself without a resolution, and he thought they could.                                                                 
MR.  LEONARD  explained  that  AIDEA would  probably  look  at  a                                                               
project like this  based on jet A fuel. They  have heard concerns                                                               
in  the Anchorage  area  for the  international  airport and  the                                                               
military that  there may be a  problem with the security  of fuel                                                               
One of the eight in Anchorage  is tied to air transportation. The                                                               
reason they think  that this process is good is  because, if they                                                               
thought this was  a good project, they would have  to come to the                                                               
legislature  to  justify   it  when  they  would   ask  for  bond                                                               
In response  to Senator Bunde's  question about cost, he  said if                                                               
AIDEA was  to do this  financing, by  statute they have  to prove                                                               
they  would get  paid  back  for it,  and  it  would probably  be                                                               
through  an  open  season  type of  process  where  people  would                                                               
guarantee that  they would buy a  portion of the space  for their                                                               
fuel. So, if  AIDEA was going to be doing  this total project, it                                                               
would not be done as a subsidy.                                                                                                 
12:06:05 PM                                                                                                                   
SENATOR BUNDE  said that is what  he expected. He just  wanted it                                                               
on  the record  that  this is  not a  silver  bullet for  cheaper                                                               
gasoline for some people in the state.                                                                                          
MR. LEONARD agreed.                                                                                                             
12:06:43 PM                                                                                                                   
JAMES HEMSATH, Deputy Director,  Development and Finance Program,                                                               
AIDEA, said he  sees the goal of this resolution  is for AIDEA to                                                               
provide a  financial and  business review  of the  possibility of                                                               
additional storage  at the  Port of  Anchorage that  would impact                                                               
the  fuel chain  infrastructure in  the state  and through  their                                                               
ability to  finance and  own a  project they  might have  a lower                                                               
hurdle rate if that business  case would be competitive and bring                                                               
lower fuel costs to, predominantly,  the Railbelt but potentially                                                               
Western Alaska.                                                                                                                 
12:07:45 PM                                                                                                                   
PAT CARTER, Delta Western Fuel  Distribution Company, said he was                                                               
available for questions.                                                                                                        
12:08:10 PM                                                                                                                   
12:08:33 PM                                                                                                                   
REPRESENTATIVE RAMRAS asked  if he could find  what benefit Delta                                                               
Western  would  derive from  this  since  they  are a  bulk  fuel                                                               
shipper to rural Alaska.                                                                                                        
12:08:59 PM                                                                                                                   
MR. CARTER answered that this  project started out of discussions                                                               
about  price  gouging  and Representative's  Ramras  interest  in                                                               
lowering fuel  prices throughout  the state.  He said  that Delta                                                               
Western  had a  number  of meetings  on what  they  could do  and                                                               
identified fuel storage as the main issue.                                                                                      
He said  that Delta  Western met  with the  Port this  fall about                                                               
sufficient  room for  storage  expansion and  then  met with  the                                                               
AIDEA  folks;  then  they met  with  Representative  Ramras.  The                                                               
bottom line is they don't  have enough storage in Southcentral to                                                               
meet all  of their needs. Over  time they have had  fairly steady                                                               
demand, but  a decrease in  production from the  refineries. This                                                               
caused them to increase their  importation of fuels from Outside,                                                               
so the  economies of scale  they use now  are on barges.  They do                                                               
not  have capacity  to bring  a  tanker from  somewhere else  and                                                               
would need about  300,000 barrels of storage to do  that. If they                                                               
had that sort  of storage they could wait for  a time when prices                                                               
were depressed  and buy the  fuel fully  or in part  with another                                                               
fuel transportation  company and import  it at a  greatly reduced                                                               
The  model  they have  chosen  to  use  would  be for  a  storage                                                               
facility  operated  independently,   so  Delta  Western  wouldn't                                                               
actually  pay   for  the  storage.   It  would  be   financed  as                                                               
Representative   Ramras  represented   through  an   open  season                                                               
process. The benefit  that would be gained by this  would be that                                                               
historically the  price differential has been  around 10-15 cents                                                               
in the rack  prices between Seattle and Anchorage.  Over the last                                                               
couple of years  that has grown to somewhere over  $1.00. If they                                                               
get proprietary  storage that price wouldn't  change much because                                                               
whoever owns  the storage would  raise the price of  the storage.                                                               
If the  storage is with  a third-party and  they can buy  fuel on                                                               
the open market  from around the world at  competitive prices and                                                               
import  it, the  trend would  push  those prices  down over  time                                                               
because they have other options  rather than the local refineries                                                               
to purchase from. Local refineries  could benefit from this; they                                                               
could also purchase fuel and bid on storage as well.                                                                            
12:14:05 PM                                                                                                                   
CHAIR PASKVAN thanked Mr. Carter  for his comments and finding no                                                               
further comments, closed public testimony.                                                                                      
12:14:50 PM                                                                                                                   
SENATOR   DAVIS   commended   Representative  Ramras   for   this                                                               
legislation.  She moved  to  report HCR  19  from committee  with                                                               
individual  recommendations and  attached  fiscal note(s).  There                                                               
being no objection, the motion carried.                                                                                         
12:15:57 PM                                                                                                                   
CHAIR PASKVAN called a brief at ease from 12:15-12:17 p.m.                                                                      

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