Legislature(2009 - 2010)BARNES 124
03/01/2010 03:15 PM House LABOR & COMMERCE
| Audio | Topic |
|---|---|
| Start | |
| HCR19 | |
| HB253 | |
| HB287 | |
| HB282 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 253 | TELECONFERENCED | |
| *+ | HB 282 | TELECONFERENCED | |
| *+ | HB 287 | TELECONFERENCED | |
| += | HCR 19 | TELECONFERENCED | |
| + | TELECONFERENCED |
HCR 19-AIDEA REPORT ON IN-STATE FUEL STORAGE
3:26:53 PM
Chair Olson announced that the first 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.
3:26:57 PM
REPRESENTATIVE JAY RAMRAS, Alaska State Legislature, speaking as
the prime sponsor, related that Mr. Leonard advises that the
Alaska Industrial Development and Export Authority (AIDEA) is
viewed as a project component, but is acting in an advisory
capacity and as a consultant for the proposed resolution he
sponsored. If the business case that is developed supports the
project moving forward, the AIDEA would transition to a de facto
proponent as a potential owner of the asset, seeking an entity
to operate the proposed "tank farm." In the event that the free
market works, that the storage is developed, and refineries drop
prices, the third party could cover their costs and reimburse
AIDEA. Mr. Hemsath and Ted Leonard are available to answer
questions on behalf of AIDEA.
REPRESENTATIVE RAMRAS related that a question arose as to
whether the proposed expansion of the Port of Anchorage, or the
"tank farm" would compete with the North Pole refinery. He
stated that the proposed tank storage is not a refinery. A
simple answer is that the only thing that competes with a
refinery is a refinery. AIDEA is being asked to build a
business case for a fee market alternative to price gouging
legislation that would benefit consumers and offer a return to
AIDEA if they participate in building a business case. This
resolution does not lead to a funding request or financing, but
just to construct a business case.
3:29:59 PM
REPRESENTATIVE BUCH asked for the inception of the proposed
project resolution.
REPRESENTATIVE RAMRAS responded that the timeframe for the
project is unknown since AIDEA's role is to determine the
viability of the project. Several years ago the answer would
have been that the project is not viable since the storage was
not available. He elaborated that if the business case is
strong, and the Port of Anchorage is ready, that the tentative
timetable would include bonding in 2011, construction in 2012,
and operational in 2013. He stated the timeframe is currently
undefined.
3:31:46 PM
REPRESENTATIVE NEUMAN assumed that the intent of this resolution
is to take advantage of the free enterprise to create storage
facilities.
REPRESENTATIVE RAMRAS answered yes. Two refineries, the Tesoro
Nikiski Refinery that produces 85 percent of the gasoline
consumed in the state, and Flint Hills Resources Refinery (Flint
Hills) that produces 15 percent of the gasoline. Most of the
jet aviation fuel has been produced at Flint Hills Refinery, but
due to the recession and a slowdown in demand at the Ted Stevens
International Airport, Flint Hills closed one of its towers and
at certain times an inadequate supply of jet fuel has been
available. Some air flights have bypassed the airport or have
had to pay a premium price on the spot market for jet fuel. The
same thing is true for low-sulphur diesel, which is being
produced at the Petro Star Refinery in Valdez, but not being
produced at its North Pole Refinery. Flint Hills may or may not
be in business in the next few years due to concerns previously
expressed. Consumers do not want to spend $.90 per gallon
higher than the "rack fuel" price. That is the reason for
competition, and if the case can be made to offer liquid storage
it would be preferable to him over the price gouging
legislation, which is not moving.
CHAIR OLSON agreed that the price gouging legislation is not
moving.
3:34:40 PM
REPRESENTATIVE NEUMAN recalled that the United Parcel Service
(UPS) also brought in a barge load of fuel.
REPRESENTATIVE RAMRAS stated he was unsure.
3:35:08 PM
REPRESENTATIVE NEUMAN confirmed that UPS brought up fuel to
assist with the aviation fuel shortage.
REPRESENTATIVE RAMRAS agreed.
REPRESENTATIVE NEUMAN stated that UPS was trying to address the
concern of inadequate supplies of fuel. He thought it would be
good in the future to ask AIDEA to also consider Gas to Liquids
(GTL), which could happen in the future.
3:35:51 PM
REPRESENTATIVE RAMRAS remarked that he shares that conviction.
3:36:03 PM
REPRESENTATIVE T. WILSON wondered if the legislature should wait
for the private sector to address the issue of gas shortage.
REPRESENTATIVE RAMRAS answered that the purpose is to attract a
private sector to be the lessee, with AIDEA as the potential
lessor. He inquired as to whether she was asking whether an
entity would be willing to make $100 million investment in a
"tank farm." He stated that the answer would likely be borne
out during the AIDEA process, with AIDEA possibly participating
as a lender. The idea is to bring relief to the Alaskan
consumers and honor the mission statement of AIDEA.
REPRESENTATIVE T. WILSON related that AIDEA's mission specifies
that is not to compete with the private sector.
REPRESENTATIVE RAMRAS suggested if the AIDEA was building a
business case to build a competing refinery, he would agree with
her. However, this resolution is for tank storage and the
refineries can participate as tenants of the tank storage.
AIDEA finances hotels, too. He disclosed that he holds a
relationship with AIDEA in that regard. He recalled that AIDEA
testified that it is to abide by own mission statement. He
acknowledged that he views this differently.
3:38:26 PM
REPRESENTATIVE T. WILSON posed a scenario in which the proposed
project is built. If so, outside firms would provide gasoline
or jet fuel, but would not pay the costs Flint Hills must pay
since it does not have natural gas to use as an operating fuel.
She suggested that the outcome would result in cheaper fuel
until facilities such as Flint Hills are put out of business.
She asked what would happen to prices.
REPRENTATIVE RAMRAS responded that he is not dealing with
hypothetical situations, but wants to address a statewide
perspective. He stated that he is not "a big fan of the price-
gouging legislation" that has moved through the legislature for
the past 18 months. He stated that allowing the free market to
work can create an alternative to refineries that brings a lower
cost fuel into Alaska. The free market can punish in-state
businesses, but we will not know that until the business case is
made. He stated that he is not talking about the traditional
spread of fuel in Alaska which ranged from $.10 to $.20 per
gallon, but a $.90 per gallon price disparity in gasoline
prices. He emphasized the importance of this legislature to
demonstrate elasticity to consider a business case. He restated
that this is not a funding request, just a request to consider
whether the "tank farm" storage is worthwhile.
3:40:36 PM
REPRESENTATIVE CHENAULT commented that Tesoro spent $100 million
on low-sulphur fuel so most of the low-sulphur fuel is produced
at the Tesoro Refinery.
REPRESENTATIVE RAMRAS stated that he stands corrected.
REPRESENTATIVE CHENAULT asked whether AIDEA is given a date to
respond.
REPRESENTATIVE RAMRAS deferred to Ted Leonard, AIDEA, to answer
questions.
3:41:23 PM
REPRESENTATIVE NEUMAN shared his concern about gas supplies in
Alaska. Certainly no one wants Flint Hills to shut down,
leaving only one refinery to provide for Alaska's needs and to
protect our military bases and missile defense system. He
characterized that as a critical issue. He surmised that would
be a huge catastrophe. Alaska needs storage facilities to
provide for Alaska's needs if something were to happen to
Alaska's refineries.
REPRESENTATIVE RAMRAS shared his concern. He related that Flint
Hill's management indicated to the legislature on numerous
occasions that its refinery business is in a precarious
position. He surmised that it could close its plant with 30
days notice. The Ted Stevens International Airport and the
military network is critical the state's economy. It would be
helpful for the state to develop a contingency plan. He stated
that he was raised in Fairbanks and has been involved in
discussions with Flint Hills. He offered his belief that Alaska
will be lucky if Flint Hills is in business in 1,000 days. He
emphasized the importance of the state in preparing a
contingency plan. He acknowledged that Flint Hills is
efficient, but did not think it has made long term decisions and
commitments to the state. He related that he is an advocate of
Flint Hills, and has toured the plant as well as well as others
including the Tesoro Nikiski plant. He highlighted the
precarious infrastructure of the industry.
3:45:20 PM
CHAIR OLSON remarked that AIDEA envisioned that anyone could use
the facility.
REPRESENTATIVE RAMRAS agreed. He elaborated that large
retailers, including Fred Meyer, and Costco and others with
unbranded gasoline could benefit. He surmised that the rural
areas of the state would potentially benefit. The international
airport system must be competitive so it does not lose jet
service. He said, "Again, I just come back to the notion that
it probably is in our best interest to at least visit and
develop a contingency plan, and build a business case. It is
not a funding request for AIDEA. That's a battle to be fought
later, but it is an opportunity to develop a business case."
3:46:43 PM
REPRESENTATIVE T. WILSON asked whether Flint Hills may or may
not have the ability to make more fuel.
JEFF COOK, Director, External Affairs, Flint Hills Resources
Refinery (Flint Hills), stated that currently the "crude three
unit" is down. He asked to clarify some of the comments. He
said, "We have met all the contractual obligations we have for
jet fuel at the Ted Stevens Anchorage International Airport and
actually have gone beyond that." He related that Flint Hills
brought up a barge load of fuel at Thanksgiving to help. The
issue resulted as the airlines must nominate the jet fuel, and
the estimates were off, and they did not nominate enough jet
fuel. The Flint Hills refinery did not want to tie up its
working capital by storing fuel without the demand for it. He
stated that 23,000 barrels of jet fuel was made today, and Flint
Hills could make 40,000 barrels per day if necessary. He
related that as the economy picks up, that Flint Hills can
provide more. He offered that crude prices have helped, that
Flint Hills hired six people in the past month, and it plans on
a $12 million turnaround beginning April 27, 2010. He
emphasized the Flint Hills does want a long term presence, but
obviously having a cheaper fuel such as natural gas would be a
benefit. He said:
No matter what happens, we've got 720,000 barrels of
storage at the Port of Anchorage. That's not going to
go away. That's going to be available whether it is a
Delta Western, a Crowley, or some other private
enterprise that if the advantage and the necessity is
there, they can go out and have the ability to do the
business case.
3:49:35 PM
REPRESENTATIVE T. WILSON asked what impact that HCR 19 would
have on his business.
MR. COOK answered that he was unsure of the impact. He stated
that if it is not fully amortized and not fully operated on a
business basis, it could have an advantage. However, it is hard
to tell. He stressed that if a business case is to be made,
there are numerous companies that have the ability to make it.
CHAIR OLSON asked whether Flint Hills would use the Port of
Anchorage facility if it was built.
MR. COOK related that Flint Hills already has 720,000 barrels of
storage in Anchorage, a similar amount in Fairbanks, as well as
some rolling cars with the Alaska Railroad Corporation so he did
not see the need in near future to use the facility.
3:50:39 PM
KIRK PAYNE, Vice President of Supply and Logistics, Delta
Western, Inc. (Delta Western), explained that Delta Western has
been serving Alaska for over 25 years, delivering fuel to places
between Kivalina and Ketchikan, which places them in many
communities throughout Alaska. He stated that although some
fingers have been pointed at them, they have had the opportunity
to work with the legislature to improve the process. Recently
AIDEA and the administration asked Delta Western to develop a
white paper on the process. The framework was based on the
Attorney General's 2008 Alaska Gasoline Pricing Investigation.
The structural characteristics of Alaska's petroleum products
market contributed to unusually high prices. Thus, Delta
Western considered ways to fix the problem. He offered that in
reviewing historical prices, the supply and demand for petroleum
productions was basically balanced.
MR. PAYNE stated that in 2006, the Environmental Protection
Agency (EPA) mandated a shift to lower-sulfur fuels, which
resulted in an imbalance in supply and demand. It resulted in a
reduction in state petroleum production, clean fuels
essentially. The question is how to fill the gap. Currently,
the infrastructure is lacking to bring in fuel, or to store
fuel, or for refiners to sell at off-season demand, in which
Delta Western would buy when refineries are not running at peak
demand. Thus, the idea was to build storage, find someone to
lease it, obtain some market participants to store product in
the storage facilities. Delta Western believes that this
approach, sponsored by AIDEA, will help solve some of these
issues. The project provides the ability to buy product from
refineries at off-peak seasons. He urged members to pass the
resolution since it is just a study. If it makes sense, the
legislature can discuss whether to fund the facilities. He
said, "I believe that this is a viable solution for a lot of
Alaskans, a lot of Alaskan businesses, as well as communities.
We're finding it harder and harder to buy in state production
and that doesn't bode well for local businesses and local
communities."
3:54:22 PM
JIM HEMSATH, Deputy Director - Development, Alaska Industrial
Development & Export Authority (AIDEA), recalled a comment made
by Representative T. Wilson, with respect to awaiting the
private sector to build this project. He suggested that she has
identified an important question. Private industries, such as
Costco or Safeway, have not proceeded with this project because
they do not view the value for their companies. The AIDEA study
can demonstrate the business case for the private sector. Thus,
AIDEA can demonstrate to industry the opportunities for them to
be involved. Perhaps someone would become a consolidator of
fuel needs, if any exist. The point of the proposed study is to
examine the questions, identify the facts, fiction, and the
overall fuel system. The process of making the business case
would create a total picture for the legislature to formulate
its decisions.
3:56:13 PM
REPRESENTATIVE T. WILSON referred to a page in the AIDEA
handout, titled "AIDEA's Role," which states that AIDEA will
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. She asked whether the proposed
project would be completed only with public funding, and that
more favorable financing would be available with public funding.
MR. HEMSATH said he thought his answer is yes. He elaborated
that part of the business case is to explore costs and
financing. The AIDEA finances through project ownership, which
is the development project model. One key in an AIDEA model is
to find the operator of a facility. He stated that if a
business offered to invest in this project and asked for
financing, AIDEA would do so.
3:57:41 PM
REPRESENTATIVE T. WILSON recalled that Fairbanks Natural Gas
asked AIDEA for help in trucking in the gas, and proposed
biomass projects in other areas. She did not think those types
of projects would compete with Alaskan businesses She asked for
the reason that AIDEA is placing its efforts on a project that
she believes competes with private businesses instead of biomass
or other alternate energy projects.
MR. HEMSATH offered that the Fairbanks Natural Gas LNG study is
similar in that the business approached AIDEA to explore the
viability of owning $250 million in facilities with part of the
analysis including discussions with Flint Hills. At the time,
due to the crude oil prices and other factors, no overriding
business case existed to make that project viable. At the time
the two major natural gas customers in the Fairbanks area both
declined. He related that in the event that a business case was
made to use willow, fish oil, or other biomass products, and a
business case could be made to build a biomass facility, AIDEA
could be a financier and could support the project. Similarly,
if natural gas were available from a pipeline with the potential
for a GTL storage facility, AIDEA could also consider the
project. He related that the business case must be made,
including that revenues must be sufficient to pay AIDEA's cost
of debt and cost of service. Thus, AIDEA would consider any
projects that can do so. AIDEA's primary goals are economic
development, job growth, job retention, and diversification in
the state.
4:00:37 PM
REPRESENTATIVE T. WILSON asked who will pay for this study.
MR. HEMSATH responded that the preliminary study will be funded
in part by the Department of Law, who is financing Econ One
through the market analysis, and AIDEA would finance the cost
estimate by the engineering contractor. Thus, the proposed
project will be an internally-funded feasibility study to
examine the viability of a potential project.
MR. HEMSATH, in response to Chair Olson estimated the timeline,
including Econ One at approximately 30 days.
4:01:51 PM
TED LEONARD, Executive Director, Alaska Industrial Development &
Export Authority (AIDEA), introduced himself.
4:02:35 PM
REPRESENTATIVE NEUMAN asked whether a Gas-to-Liquids (GTL)
project would be beneficial and economical.
MR. LEONARD answered that in the event that an in state pipeline
is built, that a GTL facility would be one of the major
industrial participants. He stated that AIDEA would be
available to provide analysis and potential funding for a
proposed GTL facility.
REPRESENTATIVE NEUMAN asked whether he could provide a "10,000
foot view".
4:03:48 PM
MR. HEMSATH responded that he was uncertain. The current study
provides that Econ One is analyzing the need and demand for jet
fuel. The military has indicated that by 2015, it would like to
have a 50 percent synthetic fuel. This proposed tank farm could
be part of fuel storage. However, to review the GTL
technologies and capital cost is beyond the AIDEA's funding at
this time. However, he stated that the analysis needs to be
done. In further response to Representative Neuman, he agreed
that the analysis needs to be done.
4:05:07 PM
CHAIR OLSON, after first determining no one else wished to
testify, closed public testimony on HCR 19.
4:05:16 PM
REPRESENTATIVE T. WILSON offered her belief that this resolution
represents direct competition to the private sector. Currently,
refineries are producing gas and diesel in the state. She
expressed concern that the proposal discusses bringing in fuel
from other states. This could jeopardize the Tesoro or Flint
Hills refineries and without them, the prices could increase.
She viewed this proposal as problematic. Price gouging was
examined but could not be proved. This resolution would
indicate to the public that price gouging occurs in Alaska.
Ultimately, the state should not compete with private business.
If the private sector wants to invest the $100 million, as
Tesoro did, that would be fine, but the state should not be
involved.
4:06:15 PM
REPRESENTATIVE RAMRAS emphasized that this resolution supports
building a business case. He pointed out that the proposed tank
farm would represent about 15 percent of the state's usage and
is not a cure all.
REPRESENTATIVE T. WILSON understood that this resolution
supports a study, but the state could use the funding for other
purposes such as a bullet line or biomass that avoids
competition.
REPRESENTATIVE RAMRAS explained that residents and consumers
think $.90 per gallon over the "rack rate" in Seattle is too
much. He said, "I've never been afraid to have a discussion or
look at competitive opportunity. Competition makes us all
stronger and we can't be afraid to look at options. That's what
we're here for is to look out for 700,000 Alaskans."
REPRESENTATIVE T. WILSON agreed. However, she did not think
this proposal is responsible if the ultimate consequence will be
for local businesses to close and Alaskans ending up completely
dependent on the Lower 48 for necessities. She said, "Although
everything is started with just a study, I've always found it is
better to stop it on this level than try to do it later on."
4:08:30 PM
CHAIR OLSON offered that he has spent considerable time with the
DOL on two issues. One question investigated excessive pricing
and discovered that while prices were excessive, nothing illegal
transpired. What led to the DOL's office involvement with this
as an alternative, even though it only represents 10 to 15
percent of the market, is that the proposed project could have
an impact on gasoline prices but fuel supplies going to rural
Alaska. This could have a stabilizing effect. While he
expressed mixed feelings on this resolution, he offered that it
offers the potential for a positive outcome for the overall good
of the state.
REPRESENTATIVE T. WILSON remarked that if everyone could stay in
business that would be true. She maintained her concern about
out of state businesses adversely impacting local businesses to
the extent that fuel prices for all Alaskans could cost the same
as in rural Alaska.
CHAIR OLSON related that Econ One is within a month of
completing its work. He recalled that the committee has worked
extensively with Econ One in the past.
4:10:18 PM
REPRESENTATIVE NEUMAN offered his belief that HCR 19 is exactly
the approach to address the concerns that Representative T.
Wilson has with the refineries, such as Flint Hills and Tesoro.
Storage facilities for fuel can help reduce the dependence on
Lower 48 fuel in Western Alaska. Fuel storage would enhance the
ability of Alaska refineries to provide fuel for Alaskans. When
oil prices are low, the refineries could produce more fuel for
storage to supply Alaska's needs for fuel. He characterized
this as a "win win situation." He said, "I wholeheartedly
support this."
4:12:05 PM
REPRESENTATIVE NEUMAN moved to report HCR 19 out of committee
with individual recommendations and the accompanying fiscal
notes.
REPRESENTATIVE T. WILSON objected.
A roll call vote was taken. Representatives Chenault, Lynn,
Buch, Neuman, and Olson voted in favor of moving HCR 19 out of
committee. Representative T. Wilson voted against it.
Therefore, HCR 19 was reported out of the House Labor and
Commerce Standing Committee by a vote of 5-1.
4:13:20 PM
The committee took an at-ease from 4:13 to 4:15 p.m.