Legislature(2009 - 2010)BUTROVICH 205
02/12/2009 11:00 AM Senate ENERGY
| Audio | Topic |
|---|---|
| Start | |
| SB31 | |
| SB54 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 31 | TELECONFERENCED | |
| *+ | SB 54 | TELECONFERENCED | |
| + | TELECONFERENCED |
SB 54-PRICE GOUGING INVOLVING ENERGY RESOURCES
11:47:20 AM
CHAIR MCGUIRE announced the consideration of SB 54.
SENATOR WIELECHOWSKI is the sponsor of SB 54, which is a
response to the outcry against high gasoline prices in Alaska.
Alaskans have been paying the highest prices in the United
States. The bill makes it an unfair trade practice for refiners
to charge exorbitant costs to Alaskans. The bill is amending the
Unfair Trade Practices Act to add number 56. There are 55
consumer protection items already in statute. Some people are
critical of this, but we have always stepped in to help
consumers when such issues arise.
11:48:54 AM
SENATOR WIELECHOWSKI said Alaska historically pays about 10 to
20 cents above the national average. At one time Alaska was
actually lower than the national average. Recently Alaskans have
spent from $0.70 to $1.00 more than average rates. He and
Senator Davis asked the attorney general to investigate the
matter. The conclusion was that high prices are the result of an
oligopoly, which is a small market and not a free one.
Essentially there is one refiner, Tesoro, that controls the vast
amount of refining capacity in Alaska. So Tesoro can set any
price. Tesoro is a good business trying to make as much money as
it can, but Alaskans are paying exorbitant prices because of it.
11:50:17 AM
SENATOR WIELECHOWSKI referred to a chart that indicated a gap
between the retail margin and the refiner margin. Refiners have
always made a healthy profit, but when oil prices spiked, the
margins spiked, and then when oil prices went down, the margin
didn't go down. They kept charging the extremely high prices.
It's not like labor or transportation costs have increased. Oil
and gas is produced here, so there are no transportation costs
to add on. It's refined right here in the state. Alaska's gas
taxes are the lowest in the nation. Alaskans are rightfully
angry. It doesn't make any sense.
11:51:38 AM
SENATOR WIELECHOWSKI said there are people who don't want to
regulate the free market, but "we don't have a free market
here." Government has always intervened with energy rates so
that consumers can't be gouged. It's exactly why we have the RCA
[Regulatory Commission of Alaska]. There is this government
system in place to try to regulate prices. The TransAlaska
Pipeline and the upcoming natural gas line are regulated by
government. He is not asking for RCA oversight. "All we're
saying is you can charge what you want to charge, but if you
charge exorbitant or excess prices when compared to the charges
in the Lower 48.... We're even giving them the benefit of the
doubt by tracking it to West Coast, Seattle-based, refiner
prices, which are a little bit higher than national prices." The
bill is reasonable and will help consumers from being gouged.
Alaskans are tired of bailouts - sick and tired of subsidizing
large businesses so that large corporations can pay multi-
million dollar bonuses to their executives. This is one way to
stand up for the consumers in Alaska.
11:53:59 AM
The committee took a brief at-ease.
11:54:59 AM
KIP KNUDSON, Manager, External Affairs, Tesoro Alaska,
Anchorage, said Tesoro does not own oil or gas; it only refines
and markets them. Its plant was built in Nikiski in 1969. It is
an exciting year for his employees because the plant was built
40 years ago. The refinery was initially built to process Cook
Inlet crude. Production peaked in 1970 at 225,000 barrels.
"Today we refine every drop out of the inlet, which is roughly
15,000 barrels." So Tesoro has to buy 50 percent of its crude
from the North Slope. "We are having to import roughly 25
percent of our crude slate." It's sad but true. Crude is coming
from Norway, Nigeria, and Indonesia. Tesoro is on tide water and
must haul the crude in and products out. Tesoro supplies
Southcentral primarily through a clean-products line, which is a
10-inch pipeline to Anchorage. There is a distribution facility
at the Port of Anchorage. Tesoro has downstream retail sites,
with 31 company-owned stores and 56 independent businesses.
MR. KNUDSON said Tesoro makes commodities: jet fuel, gasoline,
propane, and asphalt. Prices are determined by the fundamentals
of the commodity market: supply and demand. Commodity markets
don't care how much it costs to produce it in the short term. In
the long term, it is naturally regulating. That has been
effective, but it is not an easy business to be in.
11:58:33 AM
MR. KNUDSON said fishermen don't set fish prices; it's the buyer
at the dock who knows the demand for it. It is the same with
oil. When oil was $140 [per barrel], nobody asked how much it
cost to produce. Now that it is $40, it is the same. No one
cares how much it costs to produce it. Refining has gotten
exceptionally complicated and "this is just a few areas where
the government has gotten involved in the business, in areas
that we've had to make investments in order to stay in the
refining business. And we have a couple of big ones coming down
the pike. In order to stay in the gasoline business, we're going
to have to make a fairly significant investment in the plant to
remove benzene." Greenhouse gases will be regulated ultimately.
He showed a graph of "the oil and gas sector spending on
environmental projects." The big chunk in the middle is the
refining sector.
11:59:44 AM
MR. KNUDSON said independent refining is all Tesoro does. It is
better at it than the integrated majors. It is a competitive
alternative. "We don't make profit from high prices; we make
profit or a loss in the difference between the costs of the
inputs and the price we can finally charge to our customers." So
Tesoro was actually losing money when gas prices were high. It
is irritating, and it is difficult to understand.
12:00:23 PM
MR. KNUDSON said a refinery is fairly static; you turn it on and
it runs at a certain rate. Tesoro has a very hard time
modulating the amount of production. "You can only turn a
refinery down so far; it is a chemical process." There is a
limited ability to change the mixture of products that come out.
If Tesoro makes 50,000 barrels of product every day, it must
sell that much every day. It doesn't matter what the demand is.
Tesoro does not store it. It must sell it. "We're penalized
heavily by the financial markets if we end up with too much
product ... in our tanks." Tesoro has to move the product every
day and uses a multitude of sales channels.
12:01:28 PM
MR. KNUDSON said Tesoro is in the retail business. It knows it
can sell a certain amount to its own stores every day. Tesoro
also works with branded distributers that run their own
businesses and set their own prices. Tesoro also sells to mom
and pop gas stations in convenience stores. Some sales are on
contract and some are open. There are rack sales that are
public, but the rest of the sales are proprietary. Tesoro also
loads a barge with 30,000 barrels of product that goes to
coastal communities. Refiners will do exchanges. Five percent of
the gas stations in Alaska are owned by Tesoro, and another ten
percent are branded. The rest are somebody else's stores.
Alaska's market has low demand for transportation fuels, and it
has significant seasonal highs and lows.
12:04:08 PM
MR. KNUDSON compared the gallons sold per retail site in Alaska
with Washington and California. A retailer must pass along more
costs for each gallon sold. "Jet fuel is king in the state of
Alaska." He showed the amount of jet fuel sold in Anchorage and
Fairbanks. That is the reason there are refiners in Alaska.
About one third of Tesoro's product has no market in Alaska,
like asphalt and bunker fuel. It must be shipped south, and it
sells it for less than the cost of crude. "So one third of our
product is an instant loser."
12:05:35 PM
CHAIR MCGUIRE asked if there are ongoing efforts to identify
Alaskan markets for that product.
MR. KNUDSON said the traditional way a refiner would handle
those items is to add an expensive processer to the refinery to
make gasoline, diesel, and jet fuel. But there isn't enough
demand in Alaska for those.
CHAIR MCGUIRE asked about the innovation in his company to
develop more in Alaska.
MR. KNUDSON said the market has determined it wouldn't be worth
making a big investment. These are big units that would create a
tremendous excess of product that would have no demand. Some
refiners in Alaska have just gotten out of the gasoline and
diesel business because investments could not be amortized over
the return on the sales.
12:07:31 PM
MR. KNUDSON said price is determined by the last barrel supplied
into the market. He in not aware that transportation fuels are
imported into Southcentral. That would mean that the last barrel
comes from local refiners, and that price is lower than an
imported barrel of product. "We compete with outside refiners.
We compete with shipping up a barrel of gasoline to the state of
Alaska from a Washington refinery. Ultimately we must have
priced it lower than that imported barrel because those imported
barrels would come in otherwise and drive the price to that
imported price." The West Coast market has gotten significantly
more volatile. For a person in the fuel business "you can lose
your shirt one day and make money the next and never know if its
all going to balance out in the end."
12:08:59 PM
MR. KNUTSEN showed a comparison of prices in Seattle, Anchorage,
the P & W spot market, and crude. The chart has a pattern.
Alaska separates from the western markets occasionally but then
meets back up again. After December, the West Coast markets are
coming back to meet Alaska again. In a month, the lines will be
closer. When "that band" on the chart is narrow, refiners are
losing money on the West Coast. Alaska is not losing money, so
that is an advantage to Alaska refiners. He said Alaska is in
the range of historical price patterns, which is represented by
a percentage spread between crude and Anchorage street prices.
12:10:25 PM
MR. KNUDSON said refining in Alaska is a success story. "We've
underpinned the air cargo industry and helped them thrive."
Tesoro has provided jobs and tax revenues. Oregon and Arizona
have no refineries. Alaska has four. Washington has five. More
jet fuel is sold in Alaska than in Washington and Oregon
combined. Alaska refiners sell through many channels and compete
daily with import barrels. Government price caps will ultimately
distort all of the unique aspects of the Alaska market. The
proposed legislation is not anti-gouging, but it is a price cap.
Government control in a functioning market will be bad for
consumers and refiners. SB 54 will damage Tesoro's ability to do
business in Alaska and to make future investments. It will
damage value-added industries in the whole state.
12:12:30 PM
MIKE MCCARTHY, Homer, said he testified in 2008 and wrote to
assistant attorney general Ed Sniffen and got no response. He
has been a detective on the Portland police bureau and he worked
on organized crime detail in the FBI office. He found it most
baffling that Representative Ramras claimed that the
[indecipherable] refused to provide the actual cost to produce a
gallon of gasoline, claiming that it was proprietary. If this is
true, the attorney general needs to open the same type of
investigation that revealed the truth in the Enron fraud that
victimized millions of people. SB 54 is the exact strategy the
state needs to pursue. The November 20, 2008, Department of Law
press release states that Governor Palin directed it to
investigate gas prices. The result had 8 bullet points, and he
took serious exception to bullet point 5, which reads: "The
price of gasoline in the Lower 48 is not a good indicator of
what prices should be in Alaska. The competitive forces that
operate to control gasoline prices in the Lower 48 are
completely different from Alaska. The dynamics of supply,
demand, and competition are unique in Alaska." If this is a
fact, how does a person reconcile the existence of the Henry Hub
index pricing for natural gas? Enstar pushes that index as
gospel. "You can't have it both ways." SB 54 addresses the
constitutional responsibility of the state to ensure that
natural resources are used to the maximum benefit of Alaskans,
not to the benefit of giant, multinational corporations.
MR. MCCARTHY said that former attorney general Talis Colberg was
correct when he said that an investigation on price fixing or
other consumer fraud would be time consuming, complicated, and
expensive. It was proven in the three-year study done by the DOL
in 2002. The salient feature of SB 54 is that no complicated
investigation is required, but only that the average wholesale
price of a comparable energy resource charged by refineries in
Washington cannot be exceeded by more than 10 percent. This is
most logical. It is the best solution to this Alaska crisis. The
Homer newspaper has had numerous articles about people who have
to choose between food, heat, and medication.
12:17:13 PM
MR. MCCARTHY said his daughter in Portland told him that diesel
is $2.49 and regular is $1.99 [per gallon], and in Homer diesel
is $3.67 and regular is $2.73.
12:17:57 PM
PETE ROBERTS, Homer, seconded Mr. McCarthy's testimony. Crude
oil has had about a 5 percent surplus on the market until the
last couple of years. That tends to keep prices down somewhat.
As soon as the reserve came down to 2 percent, there was
considerable speculation, driving prices up to as high as about
$146 per barrel. That tripped up the "whole financial deal, and
what we see here is that we need to have free enterprise and
free markets, but there do need to be regulations and an even
playing field." The banks and the oil companies don't have that.
Two weeks ago his son bought gas for $1.55 per gallon in Santa
Cruz, California. It is $2.80 here, and crude oil futures were
$38.40 - that's less than a quarter of the high prices, "and we
need to regulate the companies." Their books should be open. He
said they have a right to get a 20 percent return, but "I'll bet
you one hundred bucks that in the last six months ... they are
in the hundred percent and maybe considerably more." Big
companies do very well for themselves, but the legislators
should be protecting the citizens of Alaska. One of government's
prime duties is reasonable regulations. "I'm a Republican, and
that has been given short shrift in recent years, but that's
what we need to do."
12:20:25 PM
JUSTIN POWELL, Fairbanks, said it was unfair for Mr. Knudson to
compare fish prices to gasoline prices. Tesoro controls 85
percent of the gasoline market and 100 percent of the diesel
market so prices aren't influenced by demand. It produces enough
to meet the demand, and it has a vested interest in preventing a
surplus situation. If demand did influence prices, prices would
drop in the winter because gasoline demand drops 25 percent. In
reality, it is the opposite with winter prices spiking. He
imagines that this committee has read the House Judiciary
Committee's report on gas prices. There are several omissions
from the report that dramatically affect the conclusion of the
committee chair. The burden of high prices in Alaska is real.
The prices over the past year are unjustified. Gasoline, diesel,
and heating oil are not luxury items that households can go
without. Energy in the winter is a life and death matter.
MR. POWELL said high energy prices have a ripple effect
throughout the economy. The high prices have been highly visible
and contentious, but there are also the higher freight costs for
food, clothing, and retail products. "We pay more to heat our
homes, and then, in turn, have to pay more for goods and
services as businesses are forced to pass on their additional
energy costs." Quantitative information was lacking from the
committee report. Annual gasoline consumption in Alaska is 285
million gallons per year, and so consumers are paying at least
$230 million per year more for gasoline alone. This money leaves
the state and has no direct or indirect benefit. The report also
said that Ft. Greely, Eielson, and Ft. Wainwright could be shut
down. The supplier for all military installations in Alaska is
the Petro Star refinery, which is exempt under this bill. In
conclusion, lower gas prices will have a positive impact on
Alaska's economy. The benefits far outweigh the potential
impacts to the airline industry. Fishing, tourism, and ground
transportation are no less important than air transportation.
The $230 million in extra gas costs could be used in the state
rather than go to the large airlines.
12:24:40 PM
TOM LAKOSH, Anchorage, said [the bill] is a good idea but it
needs work. "I think what you're trying to do is gain parity
with the Washington prices." It might be better to restrict the
profit margins by establishing a timeframe for the term
"average" on page 2, line 5. Instead of adding 10 percent of
that price, add a phrase such as "110 percent of the
transportation costs" that can be added to that average price,
rather than a 10 percent gross profit above the average price.
It will probably work out to be similar, but it is not as much
of a price cap as a profit cap.
12:26:19 PM
MR. LAKOSH said there may be some gouging by fuel wholesalers
too. He would add fuel wholesalers in two places in the bill.
"We don't need to be subsidizing the airline industry or the
heavy fuel oil sales of Tesoro." Those may be invested illegally
because they ship crude into the Aleutians and have refined
products throughout the Aleutians without the necessary spill
prevention and response equipment. Consumers would be much
better off not having to deal with refined products that are
created by Tesoro. "We want to be able to subsidize the use of
geothermal heat."
12:28:14 PM
MERRICK PIERCE, Fairbanks, said he is involved with the Alaska
Gasline Port Authority, but he emphasized he wasn't representing
it now. He said SB 54 seeks to remedy obvious price gouging. It
is a positive step because of the significant cost to consumers
of price gouging by Flint Hills and Tesoro. There are additional
remedies to reduce the cost of energy to Alaskans, and one is to
reduce transportation costs by building energy infrastructure.
That will also promote competition and put downward pressure on
wholesale gasoline prices. The best alternative to gas is
compressed natural gas (cng), and the highest priority of the
legislature should be getting the all-Alaska gasline built. That
will insure that Alaskans will have ready access to low-cost
natural gas, particularly in the Interior. Vehicles can be
converted to run on it. Some are already built to do so. The
benefits of cng vehicles are enormous, including a cost of 50
cents per gallon. Natural gas prices are collapsing because
there are vast shale gas deposits being developed in North
America. Vehicles that use cng have cleaner emissions. A vehicle
like the Honda Civic GX has tailpipe emissions that are cleaner
than the air of a polluted city. Here is an opportunity for a
state that has hundreds of trillions of cubic feet of natural
gas to demonstrate some real leadership to the rest of the
country.
MR. PIERCE said that in 1970 the U.S. imported about 24 percent
of its oil, and in 2008 it was 70 percent. Those imports cost us
almost $700 billion in 2008. That contributes to the massive
trade deficit and weakens the U.S. economy. So Alaska should be
doing three things. First, build the infrastructure with direct
equity investment so Alaska has access to its natural gas.
Second, the state should be purchasing or converting its
vehicles to run on cng. Thirdly, the political subdivisions in
Alaska should be encouraged to run vehicles on cng.
12:32:02 PM
CRAIG MCCONNELL, Northwest Arctic Borough School District,
Kotzebue, said he supports SB 54, and he would like the bill to
include wholesalers. Crowley Marine is the prime supplier of
heating fuel, propane, and gasoline in western Alaska. It has a
true monopoly. Heating fuel was recently selling for $12.10 [per
gallon] in a village in the region. It could get worse as the
winter progresses. "We can't afford these prices." Other options
for getting fuel to the area haven't been found. Crowley buys up
the competition, like Yukon, which was a good supplier at one
time. In the anti-trust agreement there were provisions like
renting tank space from Crowley. Mr. McConnell pursued that but
ran into roadblocks; he was stalled or blocked in every way he
attempted to lower fuel costs for residents. Western Alaska is
paying three to five times the price of fuel beyond Alaska urban
areas. "We support this bill in western Alaska, and we would
like to include language that addresses wholesalers."
12:34:39 PM
MARGARET HANSEN, Treasurer, Northwest Arctic Borough School
District, Kotzebue, said she supports SB 54 and wants to add
wholesalers to the language. Many other states have price
gouging laws, and Alaska should too. The rate that Alaskan
prices have been higher than the Lower 48 has consistently
exceeded historical norms during these recent high prices.
Alaska prices increased while Lower 48 rates declined, even
though Alaska suspended its gasoline tax. The House Judiciary
Committee showed that the price disparities have arisen because
of the prices that refineries sell products to retailers, and
then the wholesaler, Crowley, has no competition. A person had
to walk away from the community to cut wood and drag it back to
keep houses warm and keep the plumbing from freezing. The state
has put millions of dollars into water and sewer infrastructure.
Selawik is an AVEC [Alaska Village Electric Cooperative]
community, and it owes $200,000 to AVEC and is working on a
payment plan. Selawik owes $22,702 for the water plant. AVEC has
to pay $18,955 for fuel charges. They get $7,300 credit in
"PCE", thanks to the state, so that cuts down their kilowatts,
but the price of fuel is enormous. In one month, Selawik's
electric bill to AVEC, not including the cost of fuel to heat
the facilities, is $65,558. January is going to be a problem.
Many Alaskans have to decide to buy stove oil, food, or pay
their electric and water bills.
12:37:56 PM
MS. HANSEN said an elderly woman in Noatak got on the VHF asking
for food. She had no electricity, but she had heat. The
community came together to help her. Fuel is $9.90 a gallon in
Shugnak, and it is over $12.00 in Noatak. She has seen suicides
increase in the region. "I think teens feel the economic crisis,
so we have a sense of hopelessness." Working together has
stopped some suicides, she believes. The school district is
paying $1.5 million more for energy. It takes money out of the
classroom. "How can we do better teaching our kids with less
money?" They need more vocational training to prevent dropouts
and suicides. Taking money out of the classroom to pay for
energy is drastic. Alaska has the constitutional responsibility
to insure that natural resources are used to the maximum benefit
of the Alaskan people. This bill will prohibit refineries from
charging exorbitant prices that are detrimental to the welfare
of individual Alaskans. It is an economic emergency.
12:40:50 PM
JEFF COOK, Director, External Affairs, Flint Hills Resources
Alaska, North Pole, said SB 54 will adversely affect his
business, harm consumers, and have long-term impacts for the
people of Alaska. Flint Hills does not produce crude or own
retail stations. All of its products are sold on the wholesale
market. It makes less than one fifth of the gasoline used in
Alaska and a third of the heating fuel in the Fairbanks area.
His employees are proud of their contributions to Alaska. "We
run a very efficient and very safe refinery." It has over 60
years of experience and has owned and operated the North Pole
refinery since 2004. It also owns refineries in Minnesota and
Texas. The North Pole facility has had modifications since it
opened in 1977. It is a topping plant and lacks the
sophisticated processing capability to refine all the crude oil
coming into the plant into finished products. It takes between
180,000 and 220,000 barrels per day and distills it into a few
basic products that it sells, and the rest is returned to the
TransAlaska Pipeline. "We keep only about 50,000 barrels a day
of saleable products, the majority of which is jet fuel." It
also keeps fuel to run the refining process. "That energy to run
the refinery is the second largest cost other than crude." It's
energy cost is 2.6 times higher than the state of Washington.
MR. COOK said there were many topping plants in the United
States in 1977, but now there are just a few. Increased
environmental emissions regulations caused many to shut down.
Increasingly stringent federal requirements on the types of fuel
produced forced others to close. The North Pole refinery has
kept pace with the new environment regulations, but the changes
in the types of fuel required has impacted the amount of
gasoline and diesel fuel that it can produce. Federal mandates
to lower sulfur content have substantially diminished the
ability to produce fuels. While it still produces some gasoline
and off-road diesel, "we now buy gasoline and diesel fuel from
other sources in order to meet the full needs of our consumers."
So supplies are tight and margins for refineries like the North
Pole one are small. The company is working with the Department
of Natural Resources to understand the circumstances that
threaten their viability in the state. "Even though our refinery
has been profitable recently, that has not always been the case,
and we must explore all options to deal with that uncertainty."
If SB 54 becomes law it will be a very serious threat.
12:44:56 PM
MR. COOK said SB 54 caps prices at 10 percent above Washington
prices, and it subjects refiners to penalties ten times the
amount of the economic benefit from an unlawful sale or $50
million dollars. Such a measure would be so oppressive that
Flint Hills Resources may be forced to cease refining and
distributing in the state. Consumers can seek the lowest price
for any commodity. Government intervention ultimately creates
far more harm than good. Producers react to price controls in a
number of ways and none are good for consumers. Producers may
choose to produce only when it can be profitable. Investment
decisions will be based on whether the price is sufficient. All
this leads to shortages, and a lower price is not good for the
consumer if there is no fuel. Trying to out-guess the market by
setting a price cap is a dangerous game and Flint Hills will not
engage in it. The bill has good intentions but could shut down
his facilities. High fuel prices are a hardship for many
families, but North Pole workers pay the same price for gas as
anyone else.
12:47:16 PM
CHAIR MCGUIRE noted his statement that it is 2.6 times more
expensive to operate his refinery in Alaska than his refineries
in the Lower 48. Is that cost passed along to the consumer?
MR. COOK said, "You're not always able to do that." Prices are
based on the market. He referred her to the fall quarterly of
the Fairbanks North Star Borough, which compares the energy
index of Fairbanks with Anchorage and Seattle. It is high in
Fairbanks because there isn't natural gas. He has to run his
refinery on refined products of crude.
SENATOR MCGUIRE asked if his company considered switching to
alternative energy to lower the cost of operations.
MR. COOK replied that his company is following the discussions
of a bullet line and the coal-to-liquids project, but it has
found no other source.
12:49:23 PM
CHAIR MCGUIRE asked if there are adequate incentives for
lowering the cost of running the refinery.
MR. COOK said they do everything they can to minimize the costs.
The refinery was losing money from mid-2007 to 2008. The
refinery wants to be there for the long term.
12:50:38 PM
SENATOR WIELECHOWSKI said many people are concerned about the
health of the North Pole refinery, and because of that there was
a hearing last week. Mr. Cook was invited to testify but he
canceled at the last minute. "I was very disappointed at that."
The state has reached out to Flint Hills many times. It already
gets significant government subsidies in the form of royalties.
"You pay less for oil than what many people pay for our oil, and
you've asked for many government subsidies for years. And you've
been threatening to shut down unless you got those subsidies
since long before this bill came along."
MR. COOK said, "We have never asked for a subsidy or a bailout."
But the company has talked about ways to structure its agreement
with the state. In times of low margins there may be a risk-
sharing arrangement with the state. During higher margins, the
state might actually get more for the oil. "We pay fair-market
value plus a premium for the crude oil." People don't realize
another cost, which is 22 cents a gallon for every gallon sold
in 2008.
12:52:27 PM
MR. COOK said he felt it prudent to hold off last week when the
House Labor and Commerce committee canceled its hearing. He
hadn't seen the attorney general's report either.
CHAIR MCGUIRE said the committee just received the report: The
2008 Alaska Gasoline Pricing Investigation.
12:54:14 PM
ED SNIFFIN, Assistant Attorney General, Department of Law,
Anchorage, said he is responsible for enforcing Alaska's
consumer protection and antitrust laws. He thought Senator
Wielechowski did an excellent job summarizing the frustration
that consumers feel. It's frustrating and there isn't an easy
answer. The report concluded that there wasn't evidence that
there was illegal activity occurring with respect to gasoline
pricing. That doesn't mean that the prices aren't high; it just
means there wasn't any illegal collusion that his department
could find. Pricing isn't a cost-based phenomenon. It's tempting
to look at how much it costs per gallon to produce, but
commodities aren't priced that way. Supply and demand is what
matters and how much a company can actually sell it for in a
competitive market. But we don't have very competitive markets
here. There are two refineries that produce gasoline. Tesoro has
the lion's share of that market. So competition doesn't work
nearly as well in Alaska as in other parts of the country.
MR. SNIFFEN said he looked at Hawaii as a comparison because it
is geographically isolated and it has two refineries: Tesoro and
Chevron. The market structure is an oligopoly just like Alaska.
Looking at both, Alaska prices were "a little higher at times,"
but he found the same general pattern. The price of crude oil
last year drove prices up and "they couldn't increase it fast
enough to keep up with the rising cost of crude oil."
Competition is what brings prices down, so when oil prices fell,
gasoline prices dropped quickly in the Lower 48. There is always
a little lag between the run up in prices. The unprecedented
rise in crude oil prices last summer followed an even more
unprecedented fall, and that lag was exaggerated tremendously.
That lag was what made Alaskans angry. The best economist he
could find came to the same conclusion that in an oligarchic
market those kinds of spreads occur. The prices are starting to
come closer now. So there are some market-based explanations,
but it doesn't make it any easier to handle. Perhaps legislation
is the only way to address it, but "we couldn't substantiate any
kind of law enforcement action against the distributers,
refiners, or retailers."
12:59:45 PM
CHAIR MCGUIRE noted page 11 of the report. Under the language on
Unfair Trade Practice Laws, it states that this wouldn't fit
under the price gouging law. "But when you get into a potential
application of Alaska's Unfair Trade Practice and Consumer
Protection Act, which we worked together on over in Judiciary,
then you go on to define 'unfair' and then you include the
Alaska Supreme Court's factors for unfairness." But on page 12,
it says "no cases applied the test to the price of gasoline
except in connection with a price-gouging statute that prohibits
excessive prices during an emergency." It goes on to say that it
may seem that gasoline prices are unfair or perhaps excessive or
unconscionable, "and there you're using the exact terminology -
the terms of art listed in the Act and in the Supreme Court
language. You then go on to say the attorney general's
investigation did not uncover, however, evidence that Alaska
gasoline prices were unconscionable or oppressive in light of
the market structure."
CHAIR MCGUIRE said she doesn't know where that test comes from.
She sees the report going through the various layers of laws. It
is clearly not an illegal act, but it may be an unfair act, and
the report sites the reasons why it could be unfair. But then
Mr. Sniffen determined that it's not unfair based on a standard
that Chair McGuire is not familiar with.
MR. SNIFFEN said the test for unfairness is fairly subjective.
The State v. O'Neill Investigations, Inc. case in the Alaska
Supreme Court lists those factors. The second factor is if
something is immoral, unethical, oppressive, or unscrupulous,
"and that's what we say on page 12; we look to see whether or
not a gasoline price is to be unfair or excessive or
unconscionable - relying on some of the terminology that the
Alaska Supreme Court has used." He spoke of a case from North
Carolina where the court looked at gasoline pricing under their
laws and tried to determine if it was unscrupulous, and it was
found not to be. Mr. Sniffen gave the example of a person with
access to a vaccine that cost one dollar that people will die
without, and that person charges $10,000 for it. That seems
obviously unscrupulous and unfair because it is a life-saving
vaccine and there is no need for the cost to be that high. This
investigation of Alaska gasoline found that there was some
evidence that the volatility in the market supported the swing
in prices and didn't conclude that prices were unscrupulous,
oppressive, or unfair.
1:04:50 PM
SENATOR WIELECHOWSKI said that is the supreme court definition
of unfair. However, the legislature has the right to add to the
55 acts that are already considered unfair, and then the supreme
court would be required to accept that definition.
MR. SNIFFEN replied that was correct.
1:05:00 PM
SENATOR MCGUIRE referred to page 20, which states that many
consumers assume that there's collusion among gasoline stations
when prices increase and decrease at nearly the identical time.
She said that is the impetus for many of the discussions because
constituents ask how that can be. She finds it interesting that
this report changes from an investigative style to a general
report style at different points. "Here's a place where ... that
broad statement is made, and then below it, it doesn't say, 'and
so we investigated this and we subpoenaed emails, we asked for
methods of communication that could be possible between gasoline
stations.'" Instead it just suggests other ways that retail gas
stations might possibly know of each other's prices. She wants
to know what was done in the investigation so Alaskans can be
assured that it was thorough and included subpoenas.
1:07:20 PM
MR. SNIFFEN said the stylistic changes within the report might
be the result of two different authors: himself and an Econ-1
consultant. Parallel pricing it not unusual, because the prices
are displayed for everyone to see. As soon as one price sign
changes the next one does. Alaska is a small market with
stations close together. Anchorage gasoline retails in a 10-cent
range. The range in Seattle is about 40 cents. He did issue
subpoenas and "CIEs". He interviewed station owners about how
they make their pricing decisions. That data is extremely
confidential and proprietary. "I believe we thoroughly
investigated all of those issues, and we're satisfied with the
conclusions."
1:09:45 PM
SENATOR MCGUIRE said it's a commodity, but it ends up being a
utility. There are price gouging laws in other states. She noted
the RCA, and said that energy in the form of electricity and
natural gas are necessities, especially in Alaska. There could
be extremely high prices and people would pay them because of a
lack of alternatives. Rates have to go through the RCA for that
reason. "I guess you could argue that [driving a car] is a
privilege and it's not a right." But if someone is going to the
hospital to deliver a baby or to respond to a life-threatening
situation, "I think you could argue it is a necessity, and yet
it is a commodity." What have other jurisdictions done to deal
with this issue besides price gouging legislation?
MR. SNIFFEN said there have been recent attempts to regulate gas
prices. In 2005 Hawaii passed a statute to give their public
utilities commission the authority to set the wholesale rates
for gasoline. It was allowed to sunset because the prices went
right up to the cap and stayed there. It may have kept prices
higher than they would be in some instances. The legislation
created a "safe harbor" instead of letting competition drive
prices down. Some people attribute Hawaii's failure to politics
or hurricane Katrina. One of the features of the legislation was
tying the price to a Gulf Coast price.
CHAIR MCGUIRE closed public testimony and adjourned the meeting
at 1:13 p.m. SB 54 was held over.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 54 Bill Packet.pdf |
SENE 2/12/2009 11:00:00 AM |
SB 54 |
| SB 31 Bill Packet.pdf |
SENE 2/12/2009 11:00:00 AM |
SB 31 |