Legislature(2009 - 2010)BARNES 124
02/24/2010 03:15 PM House LABOR & COMMERCE
| Audio | Topic |
|---|---|
| Start | |
| HB342 | |
| HB346 | |
| HCR19 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 342 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| *+ | HB 346 | TELECONFERENCED | |
| *+ | HCR 19 | TELECONFERENCED | |
HCR 19-AIDEA REPORT ON IN-STATE FUEL STORAGE
CHAIR OLSON announced that the final order of business would be
HOUSE CONCURRENT RESOLUTION NO. 19, Urging the Alaska Industrial
Development and Export Authority to present a business case to
the Alaska State Legislature that includes a method for
financing, a plan to solicit proposals for a public and private
venture, and an analysis of the economic feasibility of a state-
built and privately operated fuel storage facility that would
serve the public interest by providing Alaskans with a reliable
source of jet fuel, diesel, and gasoline at competitive prices.
4:47:14 PM
REPRESENTATIVE JAY RAMRAS, Alaska State Legislature, explained
that HCR 19 is a resolution that pertains to in state fuel
storage. He recalled over a year ago the previous speaker
tasked him with working on a gasoline pricing report. He has
worked closely with Mr. Sniffen, Department of Law on these
issues. An expansion of the Port of Anchorage would provide
incentives for other refineries to operate in Alaska to create
competition for the production of gasoline in Alaska. At the
time, the Port of Anchorage was simply not large enough to
accommodate any additional fuel storage. Since that time,
former Governor Sheffield has physically enlarged the Port of
Anchorage by filling in portions of the port with acres of
gravel. The Port of Anchorage is now large enough to
accommodate fuel storage. He acknowledged that a great debate
has arisen over price gouging and price regulation in Alaska.
He offered his belief that his view on this issue is similar to
the Chair's view on this issue. This resolution supports the
concept of having AIDEA build a business case for the free
market to work, which would create competition to allow
gasoline, diesel, and jet aviation fuel to potentially come from
Cherry Point, the largest refinery in Washington State. This
refinery operates primarily using North Slope crude, refines
with natural gas, at $.08 kilowatts, which would make the cost
of fuels more affordable to Alaskan consumers. The "rack rate"
for the past 16 months has ranged from $.60 to $.90 cents per
gallon less than the two refineries in Alaska. The Tesoro
refinery in Nikiski produces 85 percent of Alaska's fuel and the
Flint Hills Resources Alaska Refinery (Flint Hills) in North
Pole produces the remaining 15 percent. Southeast Alaska is
served by Seattle and often enjoys lower prices than the
remaining parts of the state, he stated. He recapped that this
resolution would request AIDEA prepare a business case to
determine whether it would warrant a third-party operator to
assume the risk and liability of bringing in fuel from another
refinery to serve Alaskans.
REPRESENTATIVE T. WILSON asked whether this would affect Flint
Hills and if AIDEA would be a competitor.
REPRESENTATIVE RAMRAS answered yes. He expressed that is the
whole point, to provide a competitor in the market for the
benefit of consumers across the State of Alaska that does not
come from price gouging or price regulation legislation, which
would have a more adverse affect on Flint Hills than
competition.
4:51:01 PM
REPRESENTATIVE NEUMAN asked whether this resolution is an
outcome of the research on price gouging, and is meant to
provide additional information.
REPRESENTATIVE RAMRAS related that in January 2009, at the time
the report was produced, the Port of Anchorage was not large
enough to accommodate the consideration of extra fuel storage.
Former Governor Sheffield has indicated that the Port of
Anchorage is ready and the terminal would be ready for bulk fuel
storage before the construction could begin.
4:51:52 PM
REPRESENTATIVE RAMRAS related that the risk for anyone entering
into a transaction such as this is that if the competition
lowers the price for Alaskans by $.30 and Flint Hills Resources
(Flint Hills) and Tesoro Refinery (Tesoro) lowers their prices
by $.32 that the fuel would be stranded in the storage tanks,
which is the inherent risk embedded in the free market. He
pointed out that discussions with Flint Hills and Tesoro
indicated their preference for competition rather than price
gouging legislation since that approach to address high fuel
costs could "run Flint Hills out of the State of Alaska."
4:52:34 PM
JAMES HEMSATH, Deputy Director, Business Development, AIDEA,
presented a PowerPoint describing AIDEA's viewpoint of this
opportunity for a business project. He offered to review the
potential problem and opportunities, and address how AIDEA could
participate in a potential plan to address the problem [slide
2].
4:54:35 PM
MR. HEMSATH discussed the regular grade retail gasoline prices
[slide 3]. He explained that the graphs on this slide outline
data obtained from the Department of Law (DOL) and use
Representative Ramras's report, which is updated through 2009.
The top graph shows the absolute prices between Seattle and
Anchorage. The bottom graph provides the average price spread
between Anchorage and Seattle. Historically the spread has been
in the $.10 per gallon range, but in the last 18 months rose as
high as a $1 per gallon differential. Currently the difference
is running at $.75 per gallon. Qualitatively, it is reasonable
to assume a price differential should range between $.10 to $.20
per gallon, which accommodates transportation costs and
efficiencies of refineries. He concluded that $.75 to $1.00
price difference between Seattle and Anchorage may be seen as
less than reasonable.
4:56:00 PM
MR. HEMSATH provided an overview of transportation links between
Alaska and Seattle [slide 4]. He related this small graphic
provides the transportation paths between Cherry Point in
Washington State, Anchorage, the North Pole Refinery, and other
parts of Alaska to transport a variety of fuels.
4:56:23 PM
MR. HEMSATH explained the reasons for HCR 19 [slide 5]. He
stated that this past winter a question arose whether sufficient
jet fuel was available at the international airports, raising
the question of whether planes could operate. He explained that
a spike arose in the cargo load, combined with a lowering of the
production rate at Flint Hills. He recalled that UPS provided
the remedy and fuel for Cathay Pacific to operate. He
characterized the issue as a "little bit of a squeeze" and
suggested that security issues also need to be addressed. He
related that from AIDEA's perspective an infrastructure need
exists, that something is missing in the infrastructure itself.
Something is needed to alleviate the problems and provide an
opportunity for economic development, at least from the
perspective of maintaining and saving jobs in Alaska. Further,
AIDEA, in its Development Finance Program can own and operate an
asset of this nature to serve this need. However, he
acknowledged that a business case must exist in order to do so.
4:57:51 PM
MR. HEMSATH outlined what AIDEA must review to develop the
business case [slide 6]. He explained that by law, AIDEA is
required to have projects pay for themselves. He related that
the proposed project would be open access, AIDEA owned, and
contractor operated. The proposed project would need to
generate sufficient revenue to pay for itself. Additionally,
AIDEA would review the market and market risk, as well as
address competition issues. He pointed out that AIDEA does not
want to be viewed as being in the middle of competition as a
state authority, although what AIDEA "brings to the table" is
not necessarily a grant or non-business aspect. However, AIDEA
needs to ensure that it is not putting one business out of
business in order to sustain another business. Specifically,
one of eight jobs in Anchorage relates to the airport, so
reliability of fuel is important. Thus, AIDEA would build for a
specific reason and a specific project.
4:59:36 PM
REPRESENTATIVE NEUMAN asked whether AIDEA is currently involved
in projects that use a business plan that is similar to the
proposed arrangement in HCR 19.
MR. HEMSATH responded that as projects are considered by AIDEA,
such as a small iron ore project currently under consideration,
that each project has own mode. The overriding factors AIDEA
considers are the business case, the revenue aspects, the market
for the product, and the risks in that market. It is not
specifically defined in a stop-gap format, but that is the
approach that AIDEA takes when considering projects, which is
similar to the process being used for this project.
5:00:42 PM
REPRESENTATIVE T. WILSON asked whether AIDEA is currently
involved in any plan that would compete against the private
sector. She offered her belief that the proposed project would
specifically compete with the private sector, such as the Flint
Hills Refinery in North Pole.
MR. HEMSATH responded that it depends on how competition is
defined. Competition is not necessarily a definitive condition.
For example, AIDEA owns the road and the port that makes it
possible for the Red Dog Mine Facility to operate. He asked
whether that constitutes competition with the private sector.
He answered that while it does compete with mines in other parts
of the country, AIDEA's involvement does not necessarily compete
with the private sector in Alaska. He offered his belief that
AIDEA competes with other areas of the country or the world in
order to provide jobs in Alaska. He said that he did not
believe that AIDEA has a specific project in Alaska that is
potentially as overt a competitor as the proposed Port of
Anchorage expansion project, which is the reason the market
dynamic needs to be fully addressed and understood, he stated.
5:02:03 PM
REPRESENTATIVE T. WILSON asked for the closest business plan
similar to this proposed project.
MR. HEMSATH answered that the closest business plan would be the
ownership at the Ketchikan Shipyard. While other shipyards,
such as the ones in Kodiak and Seward provide similar work, some
aspects and variations between the shipyards make them not
completely competitive with the Ketchikan Shipyard project.
5:02:40 PM
MR. HEMSATH discussed product storage of jet fuel, gasoline, and
distillate [slide 7]. He stated the various grades of gasoline,
and noted the importance of recognizing the processing capacity
in the state. Additionally, product storage includes
distillate, the ultra low-sulfur, and number two fuel oil. It
is also important to discuss how storage relates to the Railbelt
and what type of storage is required for Western Alaska, he
stated. The graphic depicted was taken from a 2007 report of
the Energy Information Authority, which provides an indication
of the amounts of sales of petroleum products in Alaska. He
related that two-thirds of the fuel is jet fuel, and the
distillate and motor fuel make up the other third.
5:04:06 PM
MR. HEMSATH compared typical crude oil yields [slide 8]. He
stated that the graphic on the right is a light crude oil,
typical of a West Texas intermediate, with about 50 - 60 percent
in atmospheric distillates, 20 - 25 percent in vacuum
distillates, and 20 percent in vacuum residue or heavy ends.
Alaska currently is some place under that, but not quite at the
heavy oil level. He said, "This is where we think we are going,
with the crude slate, when we start looking at producing some of
the heavier or more viscous crudes on the North Slope, where the
atmospheric distillates count for only 20 percent of the barrel,
and the bottoms account for as must as 60 percent of the
barrel." This is important in terms of how the refinery
processes the oil. Flint Hills Resources Alaska (Flint Hills)
and the two Petro Star, Inc. (Petro Star) refineries are light
end distillation only, so these refineries would produce their
products from only 20 percent of the barrel of heavy oil crude.
He related that their products consist of light straight-run
gasoline, kerosene, jet fuel, and some heating oil [slide 9].
Tesoro has a hydrotreater, but Flint Hills and the Petro Star
plants do not so they cannot produce any of the low-sulphur
diesel fuels. Tesoro has some vacuum-unit capacity and some
ability to make other gasoline products, but they are also
limited, in that a full quarter of their production consist of
the heavy ends or bottoms that some refineries would destroy as
a Coker, or sell as a potential feed stock for other refineries
on the West Coast, or as bunker fuel for ships. The ability of
the refineries to produce predominately jet fuel changes, which
is an aspect for consideration in terms of fuel security and how
the system might work.
5:06:26 PM
MR. HEMSATH described the Anchorage Port Expansion Phasing Plan
[slide 10]. He referred to the color slide and related that the
fuel storage tanks would be located in the red and yellow area
on the far right of the facility. The yellow area has been
filled, while the red area is open water and is scheduled to be
filled this summer. While there is space at the Port of
Anchorage, and staging space exists, some space is not yet
completed, he stated. The Port of Anchorage would relocate its
existing fuel off-loading facility to that area, he said.
5:07:31 PM
MR. HEMSATH outlined AIDEA's action plan [slide 11]. He related
that the Market Analysis is currently being done by Econ One
Research Inc. (Econ One) and is a continuation of last year's
efforts on the pricing mechanism, which is supported by the
Department of Law. From the market analysis, AIDEA will review
the military capacity, long-term air cargo, and fuel supply
reliability. The AIDEA is also in the midst of bringing on
board an engineering contract to perform a layout and cost
estimate. He suggested that it is important to assess the
storage constraints. The market analysis may provide a
tolerance for one million barrels of storage capacity, but if
there is only room for 500,000 barrels, that could change the
business case. He related that the project is not just tanks,
but also includes vapor recovery, and space for additives to
change the jet fuel for military specifications. Further, the
schedule of the proposed port expansion is also important. He
said he would like to say that the AIDEA would do a quick market
analysis and examine the estimates, but many other aspects will
need to be considered to develop the business case. The
business case model will examine how the project impacts
competition, the ability to produce fuel, the market risks and
economic impact, including any new jobs that may be created.
5:09:38 PM
MR. HEMSATH described the AIDEA's mission and its relevance to
HCR 19 [slide 12]. He asked why this resolution is being
written for AIDEA. Part of AIDEA's mission in terms of economic
development and growth is the ability to own assets, and treat
them as a business entity with a different feel. AIDEA has a
bylaw that allows it to manage and operate projects as the
authority considers necessary and appropriate to serve a public
purpose, which puts this type of project "directly in our lap."
5:10:26 PM
MR. HEMSATH discussed AIDEA's purpose [slide 13]. The AIDEA is
also allowed, by statute, to equip, operate, and maintain
facilities that will enhance the competitiveness of the
International Airport System, specifically the Ted Stevens
International Airport [slide 20]. Issues on that fuel supply
and fuel reliability are probably the number one risk to our air
cargo business in the state. Thus, these types of excerpts from
our enabling statute drive AIDEA to be part of this project
since it fits one of AIDEA's project modes. He reiterated that
AIDEA is looking for projects that it can demonstrate are
economically advantageous to the state, are financially
responsible, and produce revenue [slide 21 - 22]. He pointed
out that AIDEA has a business case it must meet. He related
that if the terminal project does not meet these requirements,
that AIDEA cannot participate in the project. He related
similar types of projects, such as the road and port at the Red
Dog mine, the FedEx hangar in Anchorage, the Ketchikan Shipyard,
and the Skagway Ore Terminal. He stated that AIDEA envisions
the Port of Anchorage fuel terminal as fitting into that mode.
The project size would entail 500,000 to 1,000,000 barrels of
fuel storage capacity [slide 29]. The project would consist of
an open access project, and the product would be transferred by
pipeline, barge, and railcar. This project should enhance the
statewide fuel system, which encompasses storage, distribution,
as well as manufacturing. He related that AIDEA would contract
with an operator, and would use an open season concept for
storage commitments. Thus, AIDEA must be able to guarantee that
it has the business for a sufficient period of time to pay off
the debt.
5:12:18 PM
MR. HEMSATH related that depending on the size of the terminal,
the total cost is estimated from $75 to $100 million [slide 29].
He concluded by stating that AIDEA believes this type of project
fits its mission and its strategic vision to be an active
partner with Alaskans and a dynamic resource in statewide
economic development.
5:12:38 PM
REPRESENTATIVE T. WILSON referred to page 16 of his PowerPoint
presentation and read, "AIDEA does not compete with the private
sector."
MR. HEMSATH responded that she is correct.
REPRESENTATIVE T. WILSON related her understanding that under
this resolution that AIDEA would compete with the private
sector.
MR. HEMSATH agreed that it might be considered competing with
the private sector. He explained that the aspects to consider
are whether the reasons for the distorted fuel costs are due to
strictly non-competition reasons or whether a problem exists in
the infrastructure itself. He related that fuel prices would be
more competitive if someone were able to build storage capacity,
but any single individual might not have enough capacity to make
the project economic. The consolidator would be looking at
projects to bring in other storage. Whether these prices are
due strictly to competition is not yet known. However, another
reason for AIDEA's involvement is whether this could be an issue
of security. He said, "The question is there may be a business
case in this in jet fuel only, and has nothing to do with
whether we're competing to lower price, but on the business case
alone."
[HCR 19 was held over].
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB342 ver A.pdf |
HL&C 2/24/2010 3:15:00 PM |
HB 342 |
| HB342 Sponsor Statement ver A.pdf |
HL&C 2/24/2010 3:15:00 PM |
HB 342 |
| HB342 Legislative Audit Summary.pdf |
HL&C 2/24/2010 3:15:00 PM |
HB 342 |
| HB342-Legislative Audit Report.pdf |
HL&C 2/24/2010 3:15:00 PM |
HB 342 |
| HCR19 AIDEA ppt Testimony.pdf |
HL&C 2/24/2010 3:15:00 PM |
HCR 19 |
| HB346 Lettter ASMA 2-22-10.pdf |
HL&C 2/24/2010 3:15:00 PM |
HB 346 |
| HB346 Lettter ASMA 2-24-10.pdf |
HL&C 2/24/2010 3:15:00 PM |
HB 346 |
| HB346 Letter IAIABC 2-23-10.pdf |
HL&C 2/24/2010 3:15:00 PM |
HB 346 |
| HB342 Fiscal Note-CED-CBPL-2-18-10.pdf |
HL&C 2/24/2010 3:15:00 PM |
HB 342 |
| HB346 Letter NFIB 2-17-10.PDF |
HL&C 2/24/2010 3:15:00 PM |
HB 346 |