Legislature(1997 - 1998)

02/24/1998 02:10 PM House ECD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
  HOUSE SPECIAL COMMITTEE ON ECONOMIC DEVELOPMENT                              
                 February 24, 1998                                             
                     2:10 p.m.                                                 
                                                                               
                                                                               
COMMITTEE CALENDAR                                                             
                                                                               
FUEL PRICES AND THE EFFECT ON THE ECONOMY                                      
                                                                               
TAPE(S)                                                                        
                                                                               
98-1, SIDE(S) A & B                                                            
                                                                               
CALL TO ORDER                                                                  
                                                                               
Representative Jerry Sanders, Chairman, convened the House Special             
Committee on Economic Development meeting at 2:10 p.m.                         
                                                                               
PRESENT                                                                        
                                                                               
Committee members present at the call to order were                            
Representative(s) Sanders, Ivan, Berkowitz, Hodgins and Williams.              
Representative Austerman attended via teleconference from Kodiak.              
                                                                               
Also attending:                                                                
                                                                               
Representative Joe Ryan and Representative Pete Kott                           
                                                                               
SUMMARY OF INFORMATION                                                         
                                                                               
CHAIRMAN SANDERS thanked all the representatives present and gave              
a summary of why he has called the meeting.  He stated that gas                
prices in Alaska look to be 15 percent to 20 percent higher, with              
the prices in the Lower 48 running $.99 to $1.01 per gallon and                
Alaska's prices at $1.15 to $1.27.  But when broken down, you have             
to look at that Alaska does not have to pay freight on the crude,              
the refineries save roughly $.10 per gallon right there.  Alaska               
also only has a fuel tax of $.08 per gallon while California pays              
$.28 per gallon.  California has been selling their gas for $.99               
per gallon, take the $.28 off the top, their selling their gas for             
$.69 per gallon while at a $1.27 per gallon with the tax off,                  
Alaska is selling for $1.19 per gallon.  This has an effect on the             
economy of Alaska.  Why are these things true?  There are some                 
obvious reasons, low volume in Alaska, great distances to transport            
the fuel and severe weather problems.  However, government                     
employees and organizations like the Department of Transportation              
cite the same reasons when they are questioned about costs.  They              
all have the same problems.  It is his belief that this has a very             
significant effect on the economic development of Alaska.  There is            
not a lot of records to go back and check on, but there are some               
nationwide records.   Going back over the country the last 175                 
years, one can see that for 150 years America has an economic rate             
of growth that 3.4 percent on an average.  In 1973, when the OPEC              
(Organization of Petroleum Exporting Countries) nations tripled the            
price of oil, it dropped down, and for 25 years the economic growth            
rate has been only 2.3 percent.  Now that sounds like a difference             
of 1 percent point but it's not.  When you have a 3 percent growth             
rate and it drops 1 percent, that is a 50 percent drop.  That is               
what has happened with the nation and surely it is the same for                
Alaska.  A slow economic growth rate caused by the price of fuel is            
the main cause for the political and social unrest that faces                  
Alaskan's today.  Its effect can be felt in Alaskan's personal                 
self-esteem and Alaskan's frame of reference as a state.  It makes             
one look for scapegoats.  Is it rural people or it is urban people             
to blame?  Possibly governmental employees?  Someone is to blame               
and it is the slow growth that's inhibiting the state's                        
development.  Alaskan people appreciate how much they gain when                
crude prices go up, but what happens when prices fall?  Why do                 
retail prices go up three days after an increase, but it takes a               
year for it to come down when prices fall?  The next question is               
the hardest.  What, if anything, can the legislature do about it               
to get prices down and the growth rate up?  Chairman Sanders said              
he will call on people from the public, but first will let any                 
representatives with questions or comments speak first.                        
                                                                               
REPRESENTATIVE JOE RYAN stated that he had a copy of a report done             
in 1980, by Mr. Frank DeLong and another fellow whose name he has              
forgotten.  It was written for Senator Fahrenkamp's Resources                  
Committee.  Mr. DeLong resides in Fairbanks and was the person who             
started the North Pole Refinery for Earth Resources.  He had it for            
a couple years and sold it.  Mr. DeLong states in the report that              
there are a couple of the major refiners that sell refined products            
in Alaska and their prices always seem to be within reach of each              
other, within a penny or so.  The report talked about the refinery             
in North Pole being one of the most profitable in the history of               
the oil business.  They do get royalty oil under a special                     
agreement with the state and that, supposedly, under the agreement             
the citizens of Alaska would receive lower petroleum prices.  They             
pay a degradation fee of some $80 million.  He has seen an article             
where there is a 20 percent degradation in the oil that is taken               
out and then put back in.  The refiner should be paying $.12, but              
are only paying about $.04 due to the 20 percent degradation.                  
Fairbanks had a very large economic development program at the                 
airport to bring foreign air carriers in because it is 250 to 300              
miles shorter on the great circle route to the Far East than it is             
to Anchorage.  It was a consortium of people who bought pretty                 
cheap fuel products in Singapore, poured them into Anchorage in the            
duty free zone and lowered the price $.06 per gallon.  That just               
took care of Fairbanks, they could not compete with those prices.              
Representative Ryan questioned how fuel could be shipped to                    
Anchorage and sold cheaper than where it was refined.  Due to the              
market, competition?  He didn't think that was it.  He Also                    
questioned why prices were always constant with Tesoro.  Why is                
there no difference if there is competition?  With the trades they             
do, instead of shipping petro up the Kenai Peninsula to Fairbanks,             
they trade with Tesoro stations then get a corresponding agreement             
from the lower areas to save shipping costs.  The report listed                
some of these things that the committee is now questioning.                    
                                                                               
REPRESENTATIVE AUSTERMAN stated that he is in Kodiak and gasoline              
prices are $1.529 for regular, but one can go down to the plant and            
buy gas for little cheaper, like $1.05 plus taxes on top of that of            
$.314.                                                                         
                                                                               
REPRESENTATIVE BILL WILLIAMS didn't feel comfortable getting into              
a position of dealing with the private sector business, but would              
like to hear from people in the public sector.                                 
                                                                               
REPRESENTATIVE MARK HODGINS agreed that it is difficult in getting             
involved in the competitive market.  He stated that the House                  
Special Committee on Oil and Gas is looking into some of the                   
spillage and tanks that led to the underground tank thing.  That               
costs the industry a lot of dollars and it could or could not have             
something to do with the high prices.  If there was just one                   
business that had high prices, there might be something to look at             
but with competition, it is difficult to try and come in to mess               
with the economic situation.  Prices have fallen in Juneau since               
three years ago when Mapco came in.  The main axiom is that when               
you're in business, they owe it to their customers to continue to              
offer their services.  It's kind of thin ice that the committee is             
treading on, but he still thinks it's a good idea to have meeting              
to see if they can get them to self-examine themselves.                        
                                                                               
CHAIRMAN SANDERS thanked the other representatives and introduced              
the first public person to testify.                                            
                                                                               
DAVID REAUME, Economic Consultant from Juneau, stated that the                 
information suggested that there is something worth investigating.             
Is not the fact prices in Alaska are generally higher than                     
elsewhere, or the Kodiak prices are higher than Anchorage prices?              
Those differences can be explained by such things as weather.  He              
said he thinks it is interesting the way prices respond over time              
or fail to respond over time.  He gave examples of numbers he has              
taken between January and December of 1997.  The price that Mapco              
paid for crude oil fell 30 1/2 percent and the price Tesoro paid               
for crude fell a little bit more than 38 percent.  The two                     
companies have different contracts.  At the same time, prices at               
the pumps in Anchorage fell less than 2 percent.  If one expects to            
see a one for one translation of crude oil prices changes into pump            
prices, that would depend on the percent of the total operating                
costs and other factors that crude oil took up.  Mr. Reaume passed             
out some annual report statements he had gotten off the Internet               
for Unical, Mapco and Tesoro.  He addressed Tesoro's and said to               
illustrate under the income statement for December 1996, and                   
December 1995, these are the year ending statements.  The costs of             
goods sold, let's set a high percentage of something like 8/9th,               
whatever translates into somewhere above 80 percent of the revenue             
is the costs of goods sold.  The costs of goods sold has in it                 
other items other than simply crude oil, but he thinks it's safe to            
conclude from this that crude oil, the acquisition price of crude,             
constitutes something in excess of half the total costs for these              
operations.  If one was to see a 40 percent reduction in crude oil             
and if that were translated competitive market to retail pump, one             
could expect to see something like a 20 percent reduction at the               
pump instead of the 2 percent.  There are some time elements                   
involved.                                                                      
                                                                               
REPRESENTATIVE ETHAN BERKOWITZ said that's assuming there is no                
other costs in the price of production.                                        
                                                                               
MR. REAUME stated that was correct.  (Indisc.) no, this was                    
suggestive, it did not prove anything but it was suggestive.  It               
did state the issue.                                                           
                                                                               
REPRESENTATIVE HODGINS pointed out, from memory, that Tesoro uses              
about 55 percent of the barrel and gasoline was 25 percent to 30               
percent of that so in the barrel itself, they only get 55 percent              
out that they can actually utilize.  The rest was recedes that some            
of the refineries get to put back into the pipeline.  Tesoro had to            
ship it out to get rid of it and it costs them $20 million.  What              
struck him was that it's not the portion of the barrel that goes               
for gasoline, it's like maybe 25 percent of the barrel, so even if             
there is a 25 percent decrease, they are looking at at least an 8              
percent to 10 percent decrease that should be for the cost of the              
crude.  It is not a ratio of one to one.                                       
                                                                               
MR. REAUME said no and that was what he tried to point out, that               
the percentage translation at the pump under a competitive market              
would be, in part, a function of the share of total costs that the             
product in question took up.  If there were no other changes, the              
costs of crude oil was 50 percent of the total cost producing a                
slate of products than one would expect something like one half the            
percentage reduction in retail price then one saw in terms of the              
acquisition price of crude.  So crude prices dropping 38 percent,              
that implies something in the order of 15 percent to 20 percent                
reduction.  With all things equal in a competitive market and                  
sometime lags involved, but thinks that the issue whether or not               
there is a problem there.  It isn't simply that gas prices are                 
$1.50 in Kodiak and a $1.20 in Los Angeles that directs attention              
in the wrong direction.  We need to look at how pump prices change             
when crude oil prices change and some other things.  For example,              
compare, if the data is available, the way in which average gas                
prices charged by Tesoro and Mapco have changed in the same January            
to December period.  Mr. Reaume said he thinks that the nature of              
the problem is better focused drawn to the way in which retail                 
prices relate to changes in crude oil prices rather than simply                
enter area costs differentials.  The next point he made was                    
regardless of whether one is talking about the retail or the                   
wholesale level, there is both extensive empirical and theoretical             
research indicating that price fixing is not only possible, but in             
fact has gone on a relatively regular basis across the United                  
States for a number of years.  He gave the committee a copy of a               
journal article from the Autumn 1996 Rand Journal of Economics by              
two authors.  One is Sevrin Borinstine from the University of                  
California Berkley.  He has done a fair amount of work on the                  
question of the relationship between retail petroleum prices and               
crude oil prices and the issue of how one, if one were a player in             
the market, would one go about price fixing without getting caught.            
If one wanted to contact someone who is not only capable of                    
analyzing but in effect up to speed, that would be the sort of                 
person to contact.  He gave the telephone number of Mr. Borinstine             
to the committee.  One of the papers passed out to the committee               
was co-authored by Mr. Borinstine titled, "Do Gasoline Prices                  
Respond as Symmetrically to Crude Oil Prices Change."  Mr. Reaume              
stated that the mere fact that somebody at the University of                   
California has a research paper that asked that question suggests              
that somebody around here has been looking at some numbers that a              
least make a reasonable being want to inquire into it.  The second             
article was authored by Karen Brock, he was not an acquaintance of             
hers, titled. "The Behavior of Retail Gasoline Prices   Symmetric              
or Not?"  What that discusses when they are talking about symmetry             
is the tendency for people (indisc.) to see and these can tell you             
whether they have actually recorded them.  Retail prices going up              
when crude oil goes up is relatively lock step fashion and then                
falling to come down.  That's the symmetry that they are referring             
to in these two articles.  The third article Mr. Reaume passed out             
was from the GAO US Journal Accounting Office, its "Energy Security            
and Policy:  Analysis of the Pricing of Crude Oil and Petroleum                
Products."  These three articles are fairly readable and have other            
references.                                                                    
                                                                               
REPRESENTATIVE BERKOWITZ said it seems to him that according to the            
Rand Journal, there is an assumption that there is a tacit                     
collusion as opposed to active collusion.  When dealing with a                 
retail market for gasoline.  It's competitive as there are a lot of            
players.  There is a good knowledge base by everyone.  How does one            
distinguish between tacit collusion and just competition?                      
                                                                               
MR. REAUME answered to distinguish tacit collusion from active                 
collusion and then competition from tacit collusion.  "Active                  
collusion" means one gets on the phone and talks to the other guy              
and they plot, a memo changes hands.  That, on occasion, has been              
found.  Tacit collusion usually is embodied in what is called price            
leader/price follower behavior where for a time they might have                
tried to cut each others throats.  They learned that it makes sense            
for them as business people to simply let one of them set the tone             
with respect to raising and lowering prices or changing the way                
they do business and that qualifies as tacit collusion.  When firms            
are tacitly colluding, they refrain from taking aggressive action              
on price and other marketing methods against one another.  They, in            
effect, let the lead firm dictate what is going on.  That can break            
down but he has seen it only once in 20 odd years here in Alaska.              
It happened once in Juneau when Mapco came to town, then it                    
appeared that somebody had reestablished themselves as the price               
leaders if that model is to be believed.  If one is to believe                 
tacit collusion is going on in Juneau, what one might have seen was            
a period of competition when Mapco first came in followed by a                 
renewed understanding that it isn't the best way for them to                   
conduct business.  Competition is simply one does what one thinks              
is best for their own business.  If it means one thinks it's best              
to match somebody else's price to keep from losing customers, which            
it usually does, that also means that from that point of view, it              
is pretty difficult to determine if tacit collusion or competition             
is going on.  If the committee believes that there is a problem,               
then the anti-trust road is where they have to head.  If they                  
believe that a company or group of companies is behaving in an                 
anti-competitive manner, there are only two avenues in which to                
establish a case.  One is statistical and the other is finding the             
smoking gun.  Having someone come forth and testify that is                    
credible or having memos, tapes of telephone conversations, things             
of that nature.  Based on Mr. Reaume's reading of history on anti-             
trust cases, ones based on statistical evidence are drawn out and              
frequently come to no conclusion.  That is not a cost effective way            
to use public money unless there is a large amount of money at                 
stake.  He cited the example of tobacco companies, the antitrust               
cases against them were years in the making and until the "smoking             
gun" came forward in the forms of memos and testimony from Liggett,            
was going no where.  He thinks that if the committee is looking to             
pursue litigation, it has a long way to go.  He gave an idea that              
he thinks is pretty straight forward but it is not fully developed.            
They could consider making the price of which companies pay for                
royalty crude dependent upon their retail performance.  He couldn't            
give a formula, but said it could in effect say if retail prices               
don't behave symmetrically according to a formula figured out by               
the state and written into a contract that has been signed, then               
there is going to be a transfer of funds   in effect, the price of             
royalty crude would go up or vise versa.  If the problem is that               
prices tend to go up with the price of crude but don't tend to go              
down quite as rapidly this is an avenue the committee might want to            
seriously investigate.  He concluded that the period of                        
investigation has just begun and they might find prices to be                  
reasonable.  He doesn't think they are but would keep an open mind             
and asked if there were any questions from the committee members.              
                                                                               
REPRESENTATIVE RYAN stated that he had comments regarding                      
Representative Hodgins' remarks.  Tesoro does not have the luxury              
of reinjecting residual fuel.  (Indisc.) He checked the prices of              
bunker fuel in the West Coast, it was about $13.                               
                                                                               
REPRESENTATIVE HODGINS questioned Mr. Reaume about selling royalty             
oil and tying the price to retail prices.  He didn't know how it               
would be a savings to the consumer and didn't it seem more like a              
tax.                                                                           
                                                                               
MR. REAUME answered that suppose the company fails to perform, that            
the price of crude oil goes down and they fail to pass it through              
to the consumer.  The nature of the formula would be to see that               
the break in crude oil prices is passed on to the consumer.  If                
they fail to pass it on to consumers a portion of money is passed              
over to the state treasury.  It doesn't affect the retail price of             
crude immediately but it is passed over.                                       
                                                                               
REPRESENTATIVE BERKOWITZ asked why the state should get involved.              
                                                                               
MR. REAUME answered that the justification Representative Berkowitz            
was looking for in constructing such a formula was an arguable                 
point.  It would be a testable hypothesis that if installed he                 
conjectured the result would not be failure to perform, the result             
would be performance on the part of companies for fear that the                
other would perform and thereby create a noncompetitive situation              
for those that were not performing.  Failure to respond would lead             
to the second part of this.  Assuming right now that there is a                
problem and there is structured a formula and both companies fail              
to perform.  The companies would have a certain amount in public               
interest advertising.  They are concerned about the legislative                
body investigating, it could lead to different tax laws, regulatory            
changes.   The failure to respond at the retail level leads to                 
publicity in the form of the public knowing the company had to                 
write a check back to the state because prices did not go down.                
That would stimulate price changes.  There are really two ways in              
which a formula of this sort, if constructed properly, would impact            
the consumer in a positive way.  One would be by one company trying            
to avoid have to pay back money and the other would be the negative            
publicity that would arise if the company did have to pay back the             
money.  He stated he could not go beyond this in terms of the                  
formula, he has not thought it all the way through but thinks it is            
worthy of further investigation.                                               
                                                                               
AN UNKNOWN SPEAKER asked Mr. Reaume was his background in retail at            
all.  Because what he described was if they punish the companies               
then they will drop their prices and be more competitive but if                
they didn't punish them, then there was no competition.                        
                                                                               
REPRESENTATIVE BERKOWITZ said he thought they would be competitive             
in either stance.                                                              
                                                                               
MR. REAUME answered that the discussion of the formula was on the              
assumption there was a finding of minimum tacit collusion, if there            
is no finding of that then nothing need be done.  He did not have              
a problem using the word punish.                                               
                                                                               
REPRESENTATIVE BERKOWITZ was not ready to jump to a conclusion                 
there was anything going on.                                                   
                                                                               
MR. REAUME said he was not either but was conjecturing.                        
                                                                               
REPRESENTATIVE BERKOWITZ asked if there was any information that               
Mr. Reaume knew of that compared Alaska's wholesale prices with                
those of the Lower 48.  He saw through looking through the                     
information retail prices but no wholesale prices.                             
                                                                               
MR. REAUME said that it is possible to get it but a subpoena might             
be needed in some cases.  These prices are not typically published             
and made readily available to the general public.  He did not know             
of any place he could get those numbers right away but knew of                 
where to get them in principal but it would take time.  He went on             
to say that there was a time that the attorney general's office was            
looking into this matter and the answers they got from the local               
stations was the stations were only passing on the higher prices               
due to the high wholesale price.  If one were to figure out the                
differences between the prices of Southeast Alaska and Seattle,                
being very generous with tanker travel costs, one could never get              
the wholesale price differential that they had come up with.  At               
that point in time, it appeared that Chevron and Unical were taking            
advantage of their duopoly (ph.) in Southeast Alaska and exploiting            
it.  The prices in Juneau as it was then and the prices as they                
would have been under a really competitive market was probably                 
eaten up by the wholesale markup.  He did not have those numbers               
but the AG's office did and probably got them cooperatively, he was            
not sure if they had to subpoena the companies.                                
                                                                               
CHAIRMAN SANDERS asked Mr. Reaume if he thought that if they could             
get the television stations to give out the prices of gas, showing             
where the lowest prices were, if it would have any affect on                   
prices.  He thought though getting the stations to do it might                 
prove difficult due to advertising dollars.                                    
                                                                               
MR. REAUME answered that the first problem would be getting them to            
do it and that it could lower prices for awhile, but after a time              
there would not be a long run effect.  He wanted to point out                  
something else also when he was talking about deviation gas prices,            
average gas prices has dropped he conjectures, more or less with               
the price of crude.  That situation exists in other fields.  He                
gave an example of trash pick up in Juneau ten years ago.                      
Consumers were paying the lion's share of the profit margin of the             
company instead of the businesses, who dumped the most garbage.                
Individual consumers are not organized and, therefore, have a                  
harder time getting things changed, where as larger consumers would            
have less of a problem.  That is a general theme, anytime one                  
constitutes the largest part of a business, they have more of a say            
on prices.                                                                     
                                                                               
REPRESENTATIVE RYAN gave a scenario and asked if it was reasonable.            
If the legislature looked at the contracts of Mapco and Tesoro and             
see if there is advantage.  Looking at the general oil business,               
refineries in particular, they are located near a large seaport                
because they receive ocean shipments of oil.  Fairbanks has a                  
unique situation, the refinery is allowed to tap off the                       
TransAlaska pipeline and pay a degradation fee.  He doesn't                    
remember if there is a transportation fee involved.                            
                                                                               
MR. REAUME gave his understanding of the degradation charge.  That             
it is based on the volume put back versus the volume taken out,                
that's one factor and the BTU value of what was put back versus                
what was taken out.  There may be additional factors going into the            
composition of what was taken out but he didn't know.  It is the               
quantity and quality of what is taken and that is figured right at             
the Fairbanks terminal.   Transportation should not figure in for              
the crude that goes on down to the Valdez terminal.  He would be               
surprised if it was.  He thinks the issue is the total amount they             
exact and that they do to take out valuable hydrocarbons at                    
Fairbanks that could otherwise be sold to the West Coast, Gulf of              
Mexico.                                                                        
                                                                               
REPRESENTATIVE RYAN asked if that fee makes up for the                         
transportation from Fairbanks to Valdez.  The fees are supposedly              
for the degradation of the oil.  Someone has to pay it.                        
                                                                               
MR. REAUME answered that the ultimate buyer at the end of the line             
pays for that.                                                                 
                                                                               
REPRESENTATIVE RYAN asked is that a concession.                                
                                                                               
MR. REAUME answered yes.                                                       
                                                                               
REPRESENTATIVE RYAN said if that's true and they have given certain            
concessions and under the tacit understanding he was reading about.            
Mr. Reaume interrupted and said that it really isn't a concession,             
it is a reflection that when Mapco takes the oil, it doesn't have              
to go all the way.  Oil purchased in the Gulf of Mexico is going to            
be higher due to transportation costs.  It is a cost advantage for             
Mapco over having not to transport it from Valdez.                             
                                                                               
REPRESENTATIVE RYAN asked what does Tesoro get out of the market               
when they have to pay transportation costs and they are getting a              
product that is of less value due to have Mapco putting back in the            
degraded oil residue.  It lowers the value of the royalty oil at               
the Valdez terminal.  They are at a competitive disadvantage to                
Mapco.  How can they stay competitive and still make a profit.                 
                                                                               
MR. REAUME answered that it is cheaper to ship refined products                
than it is to ship crude so Mapco has to ship their products to                
Anchorage and that offsets some of the costs.  He said it is a good            
point Representative Ryan was trying to make and he thinks it bears            
investigating.  One has to look at the total cost of acquisition of            
crude and the quality of crude they are buying, what sort of                   
competitive edge would Tesoro have over Mapco and vise versa in a              
well defined market.  He didn't have any answers and that is one of            
the things the committee needed to look into to before any firm                
conclusions can be drawn.                                                      
                                                                               
CHAIRMAN SANDERS asked that if transportation costs are higher for             
Mapco to ship down to Anchorage, why is the price $.13 to $.15                 
lower in Anchorage than it is in Fairbanks.                                    
                                                                               
MR. REAUME said that is one of the questions the committee will                
need to send its research people.  It is going to take                         
investigating and will take time.                                              
                                                                               
CHAIRMAN SANDERS thanked Mr. Reaume for his testimony and said that            
the next person to testify would be someone who uses fuel for his              
business.  The focus would be on diesel fuel, which drives the                 
economy.                                                                       
                                                                               
ERROL CHAMPION, Silver Bay Logging, Southeast Alaska, testified                
that the business' costs for fuel was their second largest expense             
next to personnel costs.  He thinks that statement would hold true             
for any business which is in natural resource harvesting.  They                
operate all over the state.  Their business uses a fleet of                    
helicopter which last year used 954,000 gallons of fuel.  The small            
fleet of turbo planes used 67,000 gallons.  They have five tugs and            
they haul their own fuel to the smaller locations because it cannot            
be delivered any other way.  The five tugs burned 1,550,000 million            
gallons of fuel in 1997.  The traditional logging and construction             
sights that operate across the state burnt 4,680,000 gallons of                
fuel.  Total fuel 7,257,000 in 1997.  Wholesalers who bring it out             
by barge weekly deliver the fuel in Southeast.   Montague Island               
and Afognak Island are supplied by the company's own tugs which                
take up to 250,000 gallons loaded up in Anacortes Washington.  They            
make five trips a year.   The quick math on that is that they spent            
7.2 million dollars on fuel last year and a dime off a gallon is a             
savings of three quarters of a million.  That amount of savings                
goes to the bottom line, allowing the company to make other                    
investments, improve their operation, etc.  The cost of fuel is                
extremely significant to the business's operation.                             
                                                                               
CHAIRMAN SANDERS said he assumes they buy their fuel in Anacortes              
because it is cheaper than Alaska.  Kenai is closer and if it was              
cheaper, they would save money.                                                
                                                                               
MR. CHAMPION said it is approximately 40 percent cheaper in                    
Anacortes than to purchase it in Kenai.  The company buys in bulk              
consistently and pays about $.80 a gallon.   They purchase it from             
Texaco or BP.  There are three refineries and they are very                    
competitive with each other.  Even if they filled their tugs at the            
Seattle waterfront, they will pay less than buying in Alaska.                  
Ballard WA the price is about $.90 per gallon.                                 
                                                                               
CHAIRMAN SANDERS asked if the crude was from Alaska.                           
                                                                               
MR. CHAMPION replied that was correct.                                         
                                                                               
REPRESENTATIVE RYAN asked what was the cost of transporting the                
fuel back up to Alaska.                                                        
                                                                               
MR. CHAMPION said they figured it was about $.06 per gallon.  The              
fuel is from Alaska and they transport it back.  They try to have              
a back run of logs, whatever, so they don't make an empty trip.                
                                                                               
CHAIRMAN SANDERS asked what taxes were involved.  They do have a               
water born freight and tax tariff.                                             
                                                                               
MR. CHAMPION said that was included in the price.  It does not                 
include any federal highway tax or sales tax.  But it would be the             
same here.                                                                     
                                                                               
REPRESENTATIVE RYAN asked if they received a rebate on the Federal             
highway tax for using a marine application.                                    
                                                                               
MR. CHAMPION said if they paid it, they would get rebate but they              
avoided doing that, as it was a long time to get the rebate checks.            
They try and buy from a wholesale dealer who is not levied.  They              
don't run on federal highways, they are consistently in remote                 
locations.  They consume their fuel on off road situations.                    
                                                                               
CHAIRMAN SANDERS asked Representative Austerman if this seemed to              
comport with information he had in Kodiak about diesel prices.  Are            
prices less outside.                                                           
                                                                               
REPRESENTATIVE ALAN AUSTERMAN said that was true.  Small businesses            
buy off the West Coast also.                                                   
                                                                               
MIKE PRINCE, Emmonak, Alaska, representing Lower Yukon School                  
Board, gave testimony on gas prices for the school board.  They pay            
$2.30 per gallon and they have a $.03 sales tax.  They might dip in            
price a little bit in summer but it is usually $2.30.  They use the            
gas for their snow machines.  They use stove oil and it is $2.20               
per gallon.  They bring it in by barge.  He said that his household            
uses about 110 a month on stove oil, maybe more.  Their house is               
pretty well insulated.  The figures might be conservative.  He has             
a wood stove and uses 100 to 110 per month.  Fuel use for machines             
is broken down, that in summer they use outboard motors and winter             
for their snow machines.                                                       
                                                                               
REPRESENTATIVE RYAN asked what amount of fuel did the school use.              
                                                                               
MR. CHAMPION said that they put it out to bid.  They have 11 sights            
and seems like bulk rate for heating fuel is about $1.73.  They buy            
a lot of fuel and that price might be a bit conservative.  They                
have on occasion transferred fuel to local entities on an emergency            
basis.  It's an emergency basis only as they are very tight on                 
fuel.  The fuel is deliver as late of September, maybe October.                
They are mandated by insurance companies to have the barges out of             
the area by a certain time.  He did not know where the distributors            
got their fuel.                                                                
                                                                               
ART HECKMAN, Pilot Station, runs the retail store in Pilot Station.            
They retail their gas for $2.60 per gallon.  They have a holding               
tank for approximately 50,000 gallons for heating fuel and gas.                
That includes the $.04 per dollar sales tax.  Heating fuel is $2.30            
per gallon.  His household uses about 1,000 to 1,500 per year to               
heat up his home.  He uses driftwood to supplement heating costs.              
The school has a holding tank of, his guesses, 8,000 gallons for               
heating fuel.  That covers the school and the living quarters for              
the teachers.  The light plant has anywhere between 80,000 to                  
110,000.   The electric company tacks on a charge for 55 gallons of            
fuel to each bill.  That is approximately $75 per month to each                
bill.  He said that their distributor got their fuel from the West             
Coast.  It was cheaper.   The people run out of heating fuel around            
spring.  They cannot live a subsistence lifestyle, there are only              
40 permit holders for subsistence use.  When the people run out of             
fuel, they have to rely on neighbors.  Everyone rations their gas.             
When people want to moose hunt, they are limited to five to six                
gallons but they need much more to hunt moose.                                 
                                                                               
ADJOURNMENT                                                                    
                                                                               
The meeting was adjourned at 3:30 p.m.                                         
                                                                               
COMMITTEE ACTION                                                               
                                                                               
Committee took no action.                                                      
                                                                               
NOTE:                                                                          
                                                                               
The meeting was recorded and handwritten log notes were taken.  A              
copy of the tape and log notes may be obtained by contacting the               
House Records Office at 130 Seward Street, Suite 211, Juneau,                  
Alaska 99801-1182, (907) 465-2214, and after adjournment of the                
second session of the Twentieth Alaska State Legislature, in the               
Legislative Reference Library.                                                 
                                                                               

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