Legislature(2009 - 2010)BUTROVICH 205

03/18/2009 03:30 PM RESOURCES

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03:33:13 PM Start
03:33:35 PM SB54
04:28:20 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
Bills Previously Heard/Scheduled
        SB  54-PRICE GOUGING INVOLVING ENERGY RESOURCES                                                                     
3:33:35 PM                                                                                                                    
CO-CHAIR   WIELECHOWSKI   announced   SB   54  to   be   up   for                                                               
CO-CHAIR  MCGUIRE  moved  to  adopt   CSSB  54(RES)  version  26-                                                               
LS0209\T. There were no objections and it was so ordered.                                                                       
SENATOR WAGONER joined the committee.                                                                                           
CO-CHAIR WIELECHOWSKI explained that SB  54 is in response to the                                                               
outcry from across the state  about the extremely high fuel costs                                                               
and that  there is  no logical  explanation for  why they  are as                                                               
high as  they are in  Alaska. The bill  makes it an  unfair trade                                                               
practice  for  refiners,  distributors  or  retailers  to  charge                                                               
excessive or exorbitant  costs to Alaskans. It  amends the Unfair                                                               
Trade Practices Act  to add number 56 to the  already 55 consumer                                                               
protection items in the statue.                                                                                                 
He explained that  Alaska has historically paid  10-20 cents more                                                               
than the  national average for  gasoline, and at one  time Alaska                                                               
was  actually lower  than the  national average.  But during  the                                                               
recent run  up in  oil prices,  they have risen  to more  than 70                                                               
cents to  a dollar  above the national  average and  they haven't                                                               
fallen nearly as  quickly as what has happened in  the Lower 48 -                                                               
to the  point where we  have the  highest gasoline prices  in the                                                               
United States.                                                                                                                  
CO-CHAIR WIELECHOWSKI  said that  the oil  is produced  in Alaska                                                               
and the vast  majority of it is refined here.  The shipping costs                                                               
to market are very minimal and we  have the lowest gas tax in the                                                               
nation -  currently at zero  right now. The Attorney  General has                                                               
found that  Alaska has an  oligopoly, which essentially  means no                                                               
free market for gasoline.                                                                                                       
In  these situations,  in the  past, action  has been  taken when                                                               
excessive  prices are  charged.  This is  done in  the  RCA on  a                                                               
regular basis  with natural gas  prices. Oil is regulated  by the                                                               
RCA  in-state and  by the  Federal  Energy Regulatory  Commission                                                               
(FERC) when  it is shipped  down the  pipe lines. Natural  gas is                                                               
regulated by the FERC or by the  RCA when it's shipped. It is not                                                               
unusual to  do something  like this  with vital  commodities like                                                               
oil  and  gas.  He pointed  out  that  SB  54  does not  ask  for                                                               
regulation  or prices  caps; it's  just simply  saying you  can't                                                               
charge excess or exorbitant prices.                                                                                             
Provisions in the  bill allow for higher costs  that may incurred                                                               
because  of Alaska's  smaller market.  He has  heard overwhelming                                                               
support from  all over the state  for this measure. Years  ago, a                                                               
similar situation  was investigated  by the Attorney  General and                                                               
he  found that  the high  costs  were due  to essentially  market                                                               
conditions and  nothing was done.  They can choose to  do nothing                                                               
and continue  having Alaskans charged  the highest prices  in the                                                               
future or  they can  take some action  that will  protect Alaskan                                                               
consumers and businesses.                                                                                                       
3:37:28 PM                                                                                                                    
SENATOR WAGONER  asked when Alaska's  gas prices were  lower than                                                               
the Lower 48 average.                                                                                                           
GEORGE ASCOTT, staff  to Senator Wielechowski, sponsor  of SB 54,                                                               
answered  that said  he didn't  have  that information.  Tesoro's                                                               
representative might have it.                                                                                                   
3:38:15 PM                                                                                                                    
ED SNIFFIN,  Assistant Attorney General, Department  of Law, said                                                               
Anchorage  gas  prices  in  2007 were  lower  than  the  national                                                               
average for a good portion of the summer.                                                                                       
SENATOR STEDMAN  said some  areas don't have  much of  a shipping                                                               
distance, but  it's hard  to argue that  for Southeast  where oil                                                               
tankers  go to  Cherry Point  for refining  and then  the product                                                               
gets shipped back.  It appears from a  Southeast perspective that                                                               
the issue wasn't at the  refinery, but somewhere between where it                                                               
left Washington State and came out of the end of the hose.                                                                      
SENATOR  WIELECHOWSKI  observed  that  Juneau's  gas  prices  are                                                               
always higher than  Anchorage gas prices with  the exception that                                                               
this  year when  at  about  the time  the  Legislature came  into                                                               
session  the price  in Anchorage  was  about $2.40  and $2.07  at                                                               
Juneau Fred Meyer's.                                                                                                            
SENATOR  WAGONER  said  other factors  go  into  calculating  the                                                               
prices of  the products. For instance,  you can fill a  tanker in                                                               
Valdez and  send it down  the West Coast,  but when it's  full it                                                               
cannot  go into  Puget Sound  and deliver.  It has  to go  to San                                                               
Francisco  and deliver  part of  its  load and  then deliver  the                                                               
balance of  the load in  Puget Sound, because of  the restriction                                                               
on how many barrels of oil a tanker can have there.                                                                             
3:41:06 PM                                                                                                                    
MR.  ASCOTT explained  the differences  between CSSB  54(ENE) 26-                                                               
LS0209/P  and  draft committee  substitute  (CS)  version T.  The                                                               
first  change is  on page  1,  lines 9-12.  The previous  version                                                               
applied only  to refiners,  because it appeared  that is  where a                                                               
majority  of  the  excessive pricing  happened.  In  response  to                                                               
concerns  expressed by  members  of the  previous committee  that                                                               
price  gouging was  occurring in  other areas  of the  state with                                                               
fuel  distribution by  one or  very few  suppliers, the  bill was                                                               
expanded to include distributors  and retailers. This is intended                                                               
to make price gouging illegal anywhere along the supply chain.                                                                  
The next  change appears on page  2, lines 7-10. In  the previous                                                               
version the  civil penalty was  not less  than the greater  of 10                                                               
times the  economic benefit  to the refiner  or $50  million. The                                                               
penalty was changed  to only be 10 times the  economic benefit to                                                               
the refiner  or distributor,  and it was  clarified that  it also                                                               
applies to  distributors and  retailers. This  is in  addition to                                                               
the civil  penalties that  would normally  be incurred  under the                                                               
Unfair Trade Practices and Consumer  Protection Act, which is not                                                               
more than $5,000 per violation.                                                                                                 
3:43:08 PM                                                                                                                    
Also  in response  to industry  concerns a  section was  added on                                                               
page 2,  lines 11-22,  that restricts the  power to  bring action                                                               
against  a  violator solely  to  the  Attorney General.  Normally                                                               
under  the Unfair  Trade Practices  and Consumer  Protection Act,                                                               
private individuals  can sue  a violator  for treble  damages. It                                                               
was  felt that  they could  be  bankrupted or  seriously hurt  by                                                               
numerous  individual  lawsuits.  Also   on  lines  12-14  the  CS                                                               
specifies that  the Attorney General may  collect attorney's fees                                                               
and  court costs.  This should  have  the effect  of lowering  or                                                               
negating the fiscal note which is currently indeterminate.                                                                      
3:44:04 PM                                                                                                                    
The next change  starts on page 2, lines 23-27,  that clarifies a                                                               
reasonable  defense by  a refiner,  distributor,  or retailer  is                                                               
that the  seemingly exorbitant prices  have been  attributable to                                                               
costs incurred in  connection with the sale. Finally,  on page 2,                                                               
line 28 - page 3, line  7, definitions for the term "distributor"                                                               
and "retailer"  were added to  the definition of  "refiner" which                                                               
had been previously defined.                                                                                                    
3:44:43 PM                                                                                                                    
]BOB WINESTEIN, Mayor, City of  Ketchikan, supported the proposed                                                               
CS.{ Ketchikan  has had  quite a  bit of  concern about  high gas                                                               
prices.  Giving  the  Attorney   General  this  authority  is  an                                                               
important legal  and economic tool  for the  state. Additionally,                                                               
this  may   cause  refiners  and  distributors   to  watch  their                                                               
practices  more closely  and reduce  the likelihood  of excessive                                                               
pricing.  He also  agreed with  Senator Stedman's  comments about                                                               
how the  situation in Southeast  differs from other parts  of the                                                               
3:46:09 PM                                                                                                                    
]DAVE   OTNESS,  representing   himself,  Cordova,   said  what's                                                               
happening lately is  destroying the fabric of  Alaska.{ This step                                                               
up  has kept  going for  years based  on the  attendant costs  of                                                               
being in  remote communities, but  something went wrong  with the                                                               
equation  to where  we can't  support our  coastal societies  any                                                               
more. It behooves  investigation on that level. We  have no state                                                               
taxes on our gas, and we're paying more than anybody else.                                                                      
3:48:24 PM                                                                                                                    
]RANDY  GRIFFIN, representing  himself,  Fairbanks, opposed  CSSB
54(RES) because it is contrary  to the principals of freedom.{ He                                                               
argued, "That fuel is private  property and it belongs to whoever                                                               
manufactured it and  I think that they should be  able to sell it                                                               
for  whatever they  want  since  it belongs  to  them." The  free                                                               
market keeps prices in check.                                                                                                   
3:50:01 PM                                                                                                                    
STEVE ALLEY,  representing himself,  Valdez, supported SB  54. He                                                               
believes we  are being gouged.  In Anchorage, gas is  $2.27 today                                                               
and  in Valdez  it is  $2.81.09, $2.95.09  and $2.95.09.  That is                                                               
price gouging.                                                                                                                  
3:51:14 PM                                                                                                                    
DEAN WESTLAKE, representing himself,  Kotzebue, supported CSSB 54                                                               
(RES). He  remarked, "Remember, these numbers  only represent the                                                               
villages that  the state surveyed,  and unfortunately  our region                                                               
is not one  of the places that surveyed." A  place like Noatak is                                                               
$9.99/gal for heating  fuel. Their local fuel  provider said they                                                               
would  blend last  year's price  with this  year's when  the fuel                                                               
barge  comes to  Kotzebue  in  July. It  sounds  great until  one                                                               
realizes that  when the prices hit  there last July 5,  they went                                                               
up  without the  benefit of  price blending.  This year's  spring                                                               
barges  to the  villages will  be selling  at last  years' prices                                                               
when they upload.  So, in effect, they will  be paying exorbitant                                                               
prices  for  two  years  because  of  a  delivery  schedule  that                                                               
maximizes  outside   profitability  at   the  expense   of  local                                                               
3:52:49 PM                                                                                                                    
MARGARET  HANSON, Kotzebue,  supported CSSB  54(RES). Because  of                                                               
the high  cost of fuel in  the Northwest Region, some  cities are                                                               
having a  hard time keeping  their doors  open. In fact  one city                                                               
closes its  doors two days  per week,  and they are  open Monday,                                                               
Wednesday and  Friday four  hours/day. Taxes  can be  raised, but                                                               
there are  no jobs out there  to support them. The  electric fuel                                                               
surcharge for  the one  community was $69,000  in one  month; the                                                               
electricity charge was $2,000. It's  too much for the consumer to                                                               
handle. She  said her family bought  $600 worth of frozen  meat a                                                               
couple of  months ago and  when it got  to Kotzebue it  cost $900                                                               
for freight.                                                                                                                    
3:55:35 PM                                                                                                                    
MERRICK PIERCE,  representing himself, Fairbanks,  supported CSSB
54(RES).  He   thinks  eliminating   obvious  price   gouging  by                                                               
regulation  is a  very positive  step  because of  the amount  of                                                               
price gouging  Flint Hills/Tesoro  do to Alaskan  consumers. Last                                                               
fall he was  in Sinclair, Wyoming, where today gas  can be bought                                                               
for $1.42/gal. after subtracting the  state gas tax. Wyoming is a                                                               
rural  state with  493,000 people  and  they have  a refinery  in                                                               
Sinclair. Fairbanks has  a refinery just like  Sinclair does, but                                                               
they are  paying over $2.56/gal.  "Obviously there is  some price                                                               
gouging occurring in our market."                                                                                               
He  noted  the Legislature  could  adopt  additional remedies  to                                                               
reduce the cost  of energy for Alaskans. One of  the best ways to                                                               
reduce  the   cost  of  transportation  energy   is  through  the                                                               
construction of energy infrastructure  that will make better cost                                                               
alternatives to  gasoline and diesel  fuel available.  That added                                                               
competition   will  place   significant   downward  pressure   on                                                               
wholesale  gasoline  prices.  He  said the  best  alternative  to                                                               
gasoline is compressed natural gas (CNG).                                                                                       
MR. PIERCE  said the highest  priority of the  Legislature should                                                               
be  getting the  all-Alaska  gas line  built.  With natural  gas,                                                               
existing  state  vehicles can  be  converted  to  run on  CNG  or                                                               
factory CNG vehicles can be purchased  - like the Honda Civic GX.                                                               
He said the cost equivalent for  running a vehicle on CNG is less                                                               
than  50  cents per  gallon  versus  the $2.50/gal.  Natural  gas                                                               
prices are collapsing, because vast  shale gas deposits are being                                                               
developed in  North America. This  is a  chance for the  state to                                                               
provide some real leadership for the rest of the country.                                                                       
4:00:05 PM                                                                                                                    
BILL ZORIK, representing himself,  Fairbanks, supported SB 54. He                                                               
said he can  think of several reasons that gas  should be cheaper                                                               
up here, but  Flint Hills has been very reluctant  to share their                                                               
true costs and profits.                                                                                                         
4:02:04 PM                                                                                                                    
JEFF  COOK, Director,  External  Affairs,  Flint Hills  Resources                                                               
Alaska, opposed SB 54. It  would adversely affect their business,                                                               
and  have longer  term negative  implications for  the people  of                                                               
Alaska.  It's important  to understand  that Flint  Hills doesn't                                                               
own retail stations or crude oil.  All of their products are sold                                                               
on the  wholesale market,  and they make  less than  one-fifth of                                                               
the gasoline used in Alaska and  only a third of the heating fuel                                                               
in the Fairbanks area.                                                                                                          
Their  175 employees  are very  proud of  their contributions  to                                                               
Alaska; they run a very  efficient and safe refinery. Flint Hills                                                               
Resources has  more than 60  years of experience in  the refining                                                               
business. They  have owned and  operated the North  Pole refinery                                                               
since  2004  and  they  also   own  and  operates  refineries  in                                                               
Minnesota and Texas.                                                                                                            
The North  Pole refinery  began operating  in 1977  shortly after                                                               
TAPS  was  completed.  The  facility  has  gone  through  various                                                               
modifications  over the  years, but  its basic  configuration has                                                               
remained unchanged. The refinery is  a topping plant, which means                                                               
it lacks  the sophisticated processing  capability to  refine all                                                               
the crude  oil coming into  the plant into finished  products. It                                                               
takes in 180,000-220,000 barrels of  crude oil per day; they heat                                                               
the crude  to distill it into  a few basic products  to sell; the                                                               
rest  of the  stream is  returned to  TAPS for  which they  pay a                                                               
quality  bank  assessment. As  a  result,  they keep  only  about                                                               
40,000 barrels/day  of saleable product,  a majority of  which is                                                               
jet fuel.  In addition,  they keep an  energy source  for heating                                                               
the  crude  oil  and  refining process,  a  disadvantage  because                                                               
natural gas fuels most refineries in the U.S.                                                                                   
Many topping plants like the  North Pole refinery operated in the                                                               
U.S.  years ago,  but  now just  a few  remain  due to  increased                                                               
environmental emissions regulations  and the increasing stringent                                                               
federal requirements on the different types of fuels.                                                                           
MR. COOK said the North Pole  refinery has kept pace with the new                                                               
environmental  regulations,   but  federal  mandates   for  lower                                                               
sulphur  content  in  the  last   few  years  have  substantially                                                               
diminished their ability  to produce these two  fuels. They still                                                               
produce  some gasoline  and  off-road diesel,  but  they now  buy                                                               
gasoline and diesel from other sources  to meet the full needs of                                                               
their customers.  Due to  these regulations  and their  affect on                                                               
the market place,  supplies are tight and  margins for refineries                                                               
like North Pole are very small.                                                                                                 
Flint Hills  is currently working  with the Alaska  Department of                                                               
Natural Resources  (DNR) to develop their  understanding of their                                                               
operation  and the  circumstances that  threaten their  long-term                                                               
viability  in  the  state.  Even though  the  refinery  has  been                                                               
profitable recently, that  doesn't mean it will  remain that way.                                                               
It is not the case currently.                                                                                                   
He  said  they  are  exploring  all options  to  deal  with  this                                                               
uncertainty and they have provided  financial data to DNR so they                                                               
can analyze and understand the  challenges facing their refinery.                                                               
SB 54 would be  a very serious threat to the  future of the North                                                               
Pole Refinery.  The CS  does not  specify what  exorbitant prices                                                               
are, yet  subjects refiners to  penalties 10 times the  amount of                                                               
the economic  benefits of  an unlawful sale;  this leaves  a high                                                               
level of  uncertainty. They  may be forced  to cease  refining in                                                               
the state.                                                                                                                      
Finally, he argued that lower  prices don't attract producers who                                                               
will come into a market only  if they believe they can make money                                                               
under  the  controlled  price.  This  could  lead  to  shortages.                                                               
Setting price caps  is a dangerous game; no one  can forecast the                                                               
future with any degree of  accuracy and the consequences of being                                                               
wrong will result in a shortage of fuel in Alaska.                                                                              
4:08:22 PM                                                                                                                    
In  closing,  he said  that  Flint  Hills understands  that  high                                                               
prices can  be a hardship  for many Alaskan families.  North Pole                                                               
workers pay  the same high  price for gasoline as  everyone else.                                                               
Price  control   legislation  will  harm  consumers   by  causing                                                               
shortages;  their  refinery  is facing  serious  challenges  now.                                                               
Demand   for   jet  fuel,   their   primary   product,  is   down                                                               
significantly  in  Alaska,  and  particularly  at  the  Anchorage                                                               
International  Airport.  This is  evidenced  recently  by Fed  Ex                                                               
taking 68 pilots out of Anchorage.                                                                                              
4:09:30 PM                                                                                                                    
JAVEN OSE,  representing himself, said  he is a  50-year resident                                                               
of Anchorage, and  that he had seen enough of  free market forces                                                               
with  $140/barrel  for gasoline.  He  is  not ready  for  another                                                               
summer of  price gouging. Instead  of comparing  Anchorage prices                                                               
to  Seattle prices,  because we  have no  demographics in  common                                                               
with  them, we  should compare  our state  to Wyoming  where they                                                               
have reported a low of $1.14/gal. over the last two months.                                                                     
The  state has  failed in  its fiduciary  duty to  its citizenry.                                                               
They have known this manipulation has  been going on in Kenai for                                                               
years where gas  is 15 cents higher than in  Anchorage - and they                                                               
make it right there.                                                                                                            
MR. OSE  said he had  contacted the Attorney General's  Office to                                                               
administer the  contract to keep  Flint Hills from  gouging. Over                                                               
the last  five years they  have averaged 46,000 barrels  per day.                                                               
By  contract, the  upper limit  is 77,000  barrels. If  the limit                                                               
were to be refined that might  bring prices down to below $1/gal.                                                               
where it belongs.  He summarized, "I'm mad as hell  and thank you                                                               
for listening."                                                                                                                 
4:16:43 PM                                                                                                                    
GABRIEL  ACEVES,  Executive   Director,  Alaska  Public  Interest                                                               
Research  Group (AKPIRG),  supported SB  54. Everyone  recognizes                                                               
there are  certain costs  to doing business  in Alaska,  and it's                                                               
not good for companies to  take advantage of consumers because of                                                               
lack of competition.                                                                                                            
Price  control legislation  sets  floors and  ceilings, but  this                                                               
bill doesn't do  either one of those. It simply  puts the onus on                                                               
the folks refining  and distributing to prove that  what they are                                                               
charging is not exorbitant.                                                                                                     
4:20:32 PM                                                                                                                    
KIP  KNUTSON, Manager,  External  Affairs,  Tesoro Alaska,  noted                                                               
that "excessive" and "exorbitant" had  not been defined, and that                                                               
would add risk to their  operation here. And he offered, "Perhaps                                                               
you would consider applying the  golden rule to this legislation,                                                               
if it's so good for refiners,  perhaps it could be applied to all                                                               
commercial transactions in the state."                                                                                          
When he read  the Attorney General's report that can  be found at                                                               
the Department  of Law's  website, he saw  that the  AG concluded                                                               
that  the  Alaska  refiners  are  abiding  by  Alaska's  consumer                                                               
protection laws. It  found no evidence of  collusion or restraint                                                               
of trade  or monopolistic practices.  The same  report highlights                                                               
that  although  there  are only  two  in-state  manufacturers  of                                                               
gasoline,  the market  forces of  supply and  demand account  for                                                               
prices  paid by  Alaskans.  The report  concluded that  oligopoly                                                               
competition is  common for many  goods and services in  the state                                                               
of  Alaska  and  it  doesn't  by  definition  mean  there  is  no                                                               
competition, but it means there are few competitors.                                                                            
MR. KNUTSON said  the report says that economic  realities of the                                                               
Alaska gasoline market likely explain  the price of gas in Alaska                                                               
and  the  relationship between  Alaska  gasoline  prices and  the                                                               
prices in the Lower 48.                                                                                                         
4:23:18 PM                                                                                                                    
SENATOR WAGONER asked him where their crude oil comes from.                                                                     
MR. KNUTSON answered  their refinery is located  in Nikiski. They                                                               
haul roughly  50 percent  of the crude  they purchase  from North                                                               
Slope producers by  tanker from Valdez. They buy  every drop that                                                               
is purchased  in the Cook Inlet,  which is roughly 25  percent of                                                               
their  crude  throughput.  They  are now  having  to  source  the                                                               
remaining 25 percent from as far away as Norway or Nigeria.                                                                     
SENATOR WAGONER asked  the cost of the low sulphur  unit at their                                                               
MR.  KNUTSON replied  $65  million -  to just  stay  in the  road                                                               
diesel business.                                                                                                                
SENATOR WAGONER asked why they were forced to do that.                                                                          
MR. KNUSTON  answered the  Environmental Protection  Agency (EPA)                                                               
required that on-road vehicles burn  ultra low sulphur diesel - a                                                               
new fuel specification.                                                                                                         
SENATOR WAGONER asked  what their timeline is  on recouping their                                                               
investment on that.                                                                                                             
MR. KNUTSON answered that he didn't have that information.                                                                      
4:26:10 PM                                                                                                                    
SENATOR WAGONER  said a couple of  other things need to  be said.                                                               
First of  all the average  family received $3,800 from  the state                                                               
of Alaska last  year to defray the cost of  higher fuel for which                                                               
there are  various reasons.  He asked  what Tesoro's  stock value                                                               
was in 2006 and what it is now.                                                                                                 
MR. KNUSTON answered  that he couldn't quote the  2006 price, but                                                               
at one  point the stock peaked  out at $65/share. Late  last year                                                               
it hit $6/share. It has recovered somewhat to the $12-$14 range.                                                                
SENATOR WAGONER said that Tesoro is  in his district and a lot of                                                               
people work  full time there.  "They are Alaskans, too.  They had                                                               
to buy the  same high prices on the fuels."  He remarked if there                                                               
is so  much profit on a  gallon of gas  at the pump, then  why in                                                               
the center of  Kenai, probably the best location  there, is there                                                               
a brand  new station built 10  years ago by Petro  Marine that is                                                               
vacant and has been vacant for three years.                                                                                     
4:27:36 PM                                                                                                                    
CO-CHAIR WIELECHOWSKI  closed public testimony and  said he would                                                               
hold the bill to address committee concerns.                                                                                    

Document Name Date/Time Subjects
SB 54 - Bill Packet.pdf SRES 3/18/2009 3:30:00 PM
SB 54