Legislature(2009 - 2010)BUTROVICH 205
04/11/2010 11:30 AM LABOR & COMMERCE
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* first hearing in first committee of referral
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HCR 19-AIDEA REPORT ON IN-STATE FUEL STORAGE 11:44:15 AM CHAIR PASKVAN announced consideration of HCR 19. 11:44:22 AM REPRESENTATIVE JAY RAMRAS, sponsor of HCR 19, said he gave the committee a copy of the Alaska Gasoline Pricing Report and explained that the previous Speaker of the House charged the House Judiciary Committee to look into why Alaskans were paying so much for gasoline as a companion to the Attorney General's study. They Attorney General addressed the legal issue - if there was price gouging, for instance. The committee actually hypothesized other potential solutions. He directed them to page 44 of the report that concluded incentivizing more gas storage in Alaska could help. When they first approached Governor Sheffield who is in charge of the Port of Anchorage there was simply not enough space available at the port. Since then, the Port has been expanded to the extent that it can now handle more liquid fuel storage - for jet aviation, low sulphur diesel for rural Alaska, and gasoline for all Alaskans. In this particular case, 85 percent of the gasoline is produced in Nikiski and 15 percent in North Pole at the Flint Hills Refinery. Both refineries have embedded structural flaws that increase the cost of producing wholesale gasoline. REPRESENTATIVE RAMRAS explained that the Nikiski Refinery has to refine all of the oil they buy. They sell the bottoms (the lower one-third of the value added material) at a loss and that loss becomes embedded in the cost of the other two-thirds of the barrels that they sell, much of which is gasoline. He explained that the Flint Hills Refinery is a topping plant and takes royalty oil out of the pipeline and puts the rest of the barrels back in. Unfortunately, it is the only refinery in the United States that refines oil with oil as opposed to with natural gas. Because of this and the fact that a lot of electricity is used in refining gasoline, the cost of producing it in Fairbanks can be 22-23 cents kwh. So, both of the refineries have embedded problems that mean the price of their gas is higher. REPRESENTATIVE RAMRAS said beyond that, Alaska is also a trapped market, meaning we don't have highways where other refined gasoline can come from other states and compete to bring the cost of gasoline down. Also with government regulation and a lack of increasing demand, Alaska hasn't been able to induce a third refinery to go into the gasoline business. This has driven him to begin a dialogue with Alaska Industrial Development and Energy Authority (AIDEA) about preparing a business case for in- state gas storage. REPRESENTATIVE RAMRAS said the state's military industrial complex, Elmendorf, is short 350,000 gallons of storage and the Ted Stevens Airport needs to be competitive for jet aviation fuel, and because Flint Hills has gone from operating three towers to two towers, there have been shortages. The future of Flint Hills is not known, but it may not be in the market place within 1000 days from now because of the aging refinery and their decision not to reinvest in it. Without it Alaska would lose the ability to produce jet aviation fuel. 11:49:46 AM He continued some concerns have been raised that they are trying to use a state agency to compete with refineries, but they aren't talking about funding another refinery; they are talking about AIDEA funding storage capacity. Much of the unbranded gasoline that is sold in Alaska is to Cost Co., Fred Meyers, Sams Club and Safeway and he saw an opportunity to bring in competition other than some of the price gouging legislation that moved through both bodies. REPRESENTATIVE RAMRAS said they would be looking for an entity with a balance sheet strong enough that it would make refineries drop their prices. At this point, it is simply a business case. There is nothing to be fearful of; there are no capital costs, no funding request. He said building capacity might make it possible to take advantage of some seasonal arbitrage and barge in fuel at a time when it may be more attractive to buy it to lower the cost for Rural Alaskans who can only get fuel by barge at a certain time of year that happens to coincide with the most expensive part of the driving season. 11:52:21 AM SENATOR BUNDE asked if the zero fiscal note simply refers to the creation of the report and not to any costs that might be related to building a storage facility. REPRESENTATIVE RAMRAS indicated that was correct. SENATOR BUNDE asked if financing were put in place for the storage of he perceived that this would provide Alaskans a subsidy or would the cost of the storage be borne by the consumers. REPRESENTATIVE RAMRAS replied that he sees this as a competitive mechanism in the market place. This is simply to build a business case to demonstrate whether there is an opportunity or if the state has to incentivize building a facility in the Port of Anchorage. They anticipate that if a business case can be built, someone with a strong enough balance sheet might be interested in coming in to build a facility. Currently the refineries have a strangle-hold on Alaskan consumers. 11:55:04 AM SENATOR BUNDE said he understands that, but he wanted to know if the consumer would have to pay for this increased storage capacity or would it become state subsidized. REPRESENTATIVE RAMRAS replied that it will not be a state subsidy. If AIDEA, in fact, financed a storage terminal, they would only do it if there was a third party that had a balance sheet that could withstand it. It would be leased out to other entities that would store the fuel. The fuel would be bought at a much lower rack rate, and then the carrying cost for the fuel as well as the amortized cost of the fuel storage facility would then be embedded in the price. That's why a business case has to be built. In addition, the cost of the facility can be amortized. He thought consumers would save dollars on the gallons. 11:57:44 AM SENATOR BUNDE asked if this might put Flint Hills out of business. REPRESENTATIVE RAMRAS replied that Flint Hills has its own problems with an aging facility, and he had asked them to view this storage facility as a safety net. It would store millions of gallons of fuel, but it is a small fraction of the aggregate amount of liquid fuel that Alaskans consume annually. It would not displace Flint Hills, but it would bring more competitiveness to the market. 12:00:27 PM SENATOR MEYER asked how the North Star refinery in Valdez would play into the refinery mix. REPRESENTATIVE RAMRAS replied that the North Star refinery makes low sulphur diesel and not gasoline and this measure is driven largely by the disparity in the price of gasoline for Railbelt consumers. He commented that the state's royalty throughput in Nikiski is so low that they buy all of the Alaskan oil they can, but only a quarter of the oil they buy actually comes from Alaska. They cannot get any more Alaskan oil because the rest of it is committed to the West Coast. Flint Hills' oil is taken right off the pipeline, because it's a topping plant, and then put right back on the pipeline; they actually pay a premium over Alaska royalty oil. So, when Alaskans are looking for a villain as to why the costs are so high and they look to the base commodity, it's Alaskan oil. The Alaskan treasury is setting the price in a manner of speaking along with the lack of competitiveness in the market place for oil. 12:02:07 PM SENATOR MEYER followed up saying that the state's 12 percent royalty share could be refined and be sold at a lesser price, but then there are constitutional issues of whether or not that is the highest and best use of the resource. REPRESENTATIVE RAMRAS agreed. 12:02:55 PM SENATOR MEYER said it would be an interesting conversation as to whether or not this money should go to new playground equipment at a school versus keeping somebody warm during the winter. 12:03:29 PM TED LEONARD, Executive Director, Alaska Industrial Development and Export Authority (AIDEA), said they believe one of their roles is as an economic adviser to the legislature for infrastructure projects. One of the interesting questions coming out of the House Finance Committee was whether AIDEA could do this by itself without a resolution, and he thought they could. MR. LEONARD explained that AIDEA would probably look at a project like this based on jet A fuel. They have heard concerns in the Anchorage area for the international airport and the military that there may be a problem with the security of fuel issue. One of the eight in Anchorage is tied to air transportation. The reason they think that this process is good is because, if they thought this was a good project, they would have to come to the legislature to justify it when they would ask for bond financing. In response to Senator Bunde's question about cost, he said if AIDEA was to do this financing, by statute they have to prove they would get paid back for it, and it would probably be through an open season type of process where people would guarantee that they would buy a portion of the space for their fuel. So, if AIDEA was going to be doing this total project, it would not be done as a subsidy. 12:06:05 PM SENATOR BUNDE said that is what he expected. He just wanted it on the record that this is not a silver bullet for cheaper gasoline for some people in the state. MR. LEONARD agreed. 12:06:43 PM JAMES HEMSATH, Deputy Director, Development and Finance Program, AIDEA, said he sees the goal of this resolution is for AIDEA to provide a financial and business review of the possibility of additional storage at the Port of Anchorage that would impact the fuel chain infrastructure in the state and through their ability to finance and own a project they might have a lower hurdle rate if that business case would be competitive and bring lower fuel costs to, predominantly, the Railbelt but potentially Western Alaska. 12:07:45 PM PAT CARTER, Delta Western Fuel Distribution Company, said he was available for questions. 12:08:10 PM 12:08:33 PM REPRESENTATIVE RAMRAS asked if he could find what benefit Delta Western would derive from this since they are a bulk fuel shipper to rural Alaska. 12:08:59 PM MR. CARTER answered that this project started out of discussions about price gouging and Representative's Ramras interest in lowering fuel prices throughout the state. He said that Delta Western had a number of meetings on what they could do and identified fuel storage as the main issue. He said that Delta Western met with the Port this fall about sufficient room for storage expansion and then met with the AIDEA folks; then they met with Representative Ramras. The bottom line is they don't have enough storage in Southcentral to meet all of their needs. Over time they have had fairly steady demand, but a decrease in production from the refineries. This caused them to increase their importation of fuels from Outside, so the economies of scale they use now are on barges. They do not have capacity to bring a tanker from somewhere else and would need about 300,000 barrels of storage to do that. If they had that sort of storage they could wait for a time when prices were depressed and buy the fuel fully or in part with another fuel transportation company and import it at a greatly reduced cost. The model they have chosen to use would be for a storage facility operated independently, so Delta Western wouldn't actually pay for the storage. It would be financed as Representative Ramras represented through an open season process. The benefit that would be gained by this would be that historically the price differential has been around 10-15 cents in the rack prices between Seattle and Anchorage. Over the last couple of years that has grown to somewhere over $1.00. If they get proprietary storage that price wouldn't change much because whoever owns the storage would raise the price of the storage. If the storage is with a third-party and they can buy fuel on the open market from around the world at competitive prices and import it, the trend would push those prices down over time because they have other options rather than the local refineries to purchase from. Local refineries could benefit from this; they could also purchase fuel and bid on storage as well. 12:14:05 PM CHAIR PASKVAN thanked Mr. Carter for his comments and finding no further comments, closed public testimony. 12:14:50 PM SENATOR DAVIS commended Representative Ramras for this legislation. She moved to report HCR 19 from committee with individual recommendations and attached fiscal note(s). There being no objection, the motion carried. 12:15:57 PM CHAIR PASKVAN called a brief at ease from 12:15-12:17 p.m.