Legislature(2013 - 2014)HOUSE FINANCE 519

04/11/2014 06:30 PM FINANCE

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06:36:21 PM Start
06:36:36 PM HB287
08:11:20 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
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Scheduled But Not Heard
                  HOUSE FINANCE COMMITTEE                                                                                       
                      April 11, 2014                                                                                            
                         6:36 p.m.                                                                                              
6:36:21 PM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Stoltze called the House Finance Committee meeting                                                                     
to order at 6:36 p.m.                                                                                                           
MEMBERS PRESENT                                                                                                               
Representative Alan Austerman, Co-Chair                                                                                         
Representative Bill Stoltze, Co-Chair                                                                                           
Representative Mark Neuman, Vice-Chair                                                                                          
Representative Mia Costello                                                                                                     
Representative Bryce Edgmon                                                                                                     
Representative Les Gara                                                                                                         
Representative David Guttenberg                                                                                                 
Representative Lindsey Holmes                                                                                                   
Representative Cathy Munoz                                                                                                      
Representative Steve Thompson                                                                                                   
Representative Tammie Wilson                                                                                                    
MEMBERS ABSENT                                                                                                                
ALSO PRESENT                                                                                                                  
Joe Balash, Commissioner Designee, Department of Natural                                                                        
HB 287    APPROVE TESORO ROYALTY OIL SALE                                                                                       
          HB 287 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
HOUSE BILL NO. 287                                                                                                            
     "An Act approving and ratifying the sale of royalty                                                                        
     oil by the State of Alaska to Tesoro Corporation and                                                                       
     Tesoro Refining and Marketing Company LLC; and                                                                             
     providing for an effective date."                                                                                          
6:36:36 PM                                                                                                                    
Co-Chair Stoltze discussed the meeting agenda.                                                                                  
Representative Wilson  WITHDREW Amendment  1 (28-GH2862\A.3,                                                                    
Nauman,  4/9/14) that  had  been moved  in  a prior  meeting                                                                    
[4/9/14 6:06 pm](copy on file).                                                                                                 
Representative Wilson  MOVED to ADOPT  replacement Amendment                                                                    
1, 28-GH2862\A.5, Nauman, 4/11/14 (copy on file).                                                                               
Co-Chair Stoltze OBJECTED for discussion.                                                                                       
6:38:36 PM                                                                                                                    
Representative  Thompson  discussed   that  the  replacement                                                                    
amendment made three  changes. He pointed to page  3, line 7                                                                    
of the amendment that changed  the allowable credit from $15                                                                    
million to $10 million per  refinery. Second, the credit for                                                                    
investment would  be changed from  10 percent to  40 percent                                                                    
with  a  maximum of  $10  million  (page 4).  The  amendment                                                                    
maintained  the  $20 million  maximum  for  the two  credits                                                                    
combined. Third,  the amendment  would expand  the qualified                                                                    
infrastructure credit per refinery  to include the transport                                                                    
of  refined  petroleum   products  or  petroleum-based  feed                                                                    
stock.  The  third  change  had  been  included  to  address                                                                    
getting piping  to two of  the refineries, which  could also                                                                    
be used as part of the refineries' infrastructure.                                                                              
Representative  Gara asked  for  the location  of the  third                                                                    
Representative  Thompson  replied   that  the  third  change                                                                    
appeared on page 5, lines 20 and 21.                                                                                            
6:40:57 PM                                                                                                                    
Co-Chair Stoltze  asked the Department of  Natural Resources                                                                    
(DNR) to comment on the amendment.                                                                                              
JOE  BALASH, COMMISSIONER  DESIGNEE,  DEPARTMENT OF  NATURAL                                                                    
RESOURCES,  discussed that  the amendment  was supported  by                                                                    
the administration.  The underlying  issue pertained  to the                                                                    
unhealthy  condition  of  Alaska's  instate  refineries.  He                                                                    
relayed that  with the upcoming  closure of the  Flint Hills                                                                    
Refinery  certain costs  would increase  for the  Petro Star                                                                    
facility  in   North  Pole.   The  department   was  greatly                                                                    
concerned about  the potential consequences the  state would                                                                    
face if it  were to lose Petro Star's North  Pole and Valdez                                                                    
Refineries. He  addressed benefits  provided by  the instate                                                                    
refineries. He detailed  that the Quality Bank  fees paid by                                                                    
refineries were reflected back in  increased revenue for the                                                                    
state; the fees included an  increase in the state's royalty                                                                    
and a  tax benefit. Estimates  on royalty revenue  were more                                                                    
precise given  the information  reported in  royalty values;                                                                    
taxes were  harder to assess due  to the way the  system was                                                                    
structured. He  communicated that  the royalty value  on the                                                                    
Quality  Bank  payments  was approximately  $20  million  in                                                                    
2013; the  tax impact approached an  additional $30 million.                                                                    
Additionally, when the state sold  its royalty in-kind (RIK)                                                                    
it  typically sold  it to  instate refineries.  In the  past                                                                    
three  years  the  state  had achieved  a  higher  value  by                                                                    
selling in-kind than  it would have received if  the oil had                                                                    
been left in-value with the  producers. The total difference                                                                    
for  2011 through  2013 exceeded  $136 million.  He stressed                                                                    
that the  figures represented real  benefits to  the state's                                                                    
treasury. He  did not  know exactly  what the  numbers would                                                                    
look like  if the refineries  shut down. He shared  that the                                                                    
state would continue  to look for opportunities  to sell its                                                                    
royalty for some marginal premium;  it was difficult to know                                                                    
whether it  would be achievable.  He theorized that  if FERC                                                                    
got the  Quality Bank formula  exactly right, in  theory the                                                                    
Quality  Bank  adjustment  would   no  longer  be  necessary                                                                    
because oil  coming out  at the southern  end of  the Trans-                                                                    
Alaska  Pipeline System  (TAPS) would  be more  valuable. He                                                                    
did not subscribe to the theory.                                                                                                
Commissioner Balash elaborated that  the issue was currently                                                                    
being   contested  with   the   Federal  Energy   Regulatory                                                                    
Commission (FERC);  exactly what it  would look like  in the                                                                    
end was not known. However,  it was currently known that the                                                                    
positive  treasury  impacts   from  the  state's  refineries                                                                    
exceeded  the sticker  price on  the amendment.  He believed                                                                    
the   amendment  was   warranted  and   that  the   economic                                                                    
consequences  of  the  refinery   closures  would  be  quite                                                                    
negative for Alaska in the  long-term (particularly if there                                                                    
was a normalized ANS Crude  price). He communicated that the                                                                    
department  had  considered  multiple ways  to  address  the                                                                    
challenge  including  selling  the   state's  royalty  at  a                                                                    
discounted   price.   Additionally,   the   department   had                                                                    
considered Quality  Bank tax credits;  however, each  of the                                                                    
options  had   created  their  own  problems   including  an                                                                    
unleveled  playing field  for certain  refineries that  were                                                                    
not  connected   with  TAPS.   He  believed   the  amendment                                                                    
represented a solution with the right combination of items.                                                                     
6:47:03 PM                                                                                                                    
Commissioner  Balash continued  to discuss  support for  the                                                                    
amendment.  He   detailed  that  the  package   provided  an                                                                    
incentive  to  producers to  choose  to  sell their  oil  to                                                                    
instate   refineries.  Second,   the   40  percent   capital                                                                    
investment credit  was provided.  Investments could  be made                                                                    
in the  facilities to increase efficiency  and profitability                                                                    
in order for the refineries  to compete more effectively for                                                                    
fuel products  needed for  military and  commercial aviation                                                                    
and for  home heating, diesel,  and gasline. He  shared that                                                                    
the  refinery  credit  was  modeled in  part  on  the  small                                                                    
producer credit  associated with the oil  and gas production                                                                    
tax.  The  figure  was  a fixed  amount;  a  refinery  would                                                                    
qualify  if  it  refined  an average  of  more  than  17,500                                                                    
barrels per  day (over the  course of a year).  He furthered                                                                    
that  the  credit  should  keep  a  couple  of  North  Slope                                                                    
operations from  qualifying. The target was  facilities that                                                                    
produced the products relied on by communities.                                                                                 
6:48:53 PM                                                                                                                    
Co-Chair Stoltze  noted that the legislature  was faced with                                                                    
many requests for  money. He referred a  $20 million request                                                                    
from the  Alaska Railroad Corporation  for the  current year                                                                    
and millions  more in the  coming years. He  made additional                                                                    
remarks about  the railroad.  He spoke  to the  benefits the                                                                    
railroad provided  to the tourism industry.  He believed the                                                                    
cost   under   replacement   Amendment   1   seemed   modest                                                                    
comparatively. He  discussed that  the costs  would buttress                                                                    
opportunities  for the  military. He  acknowledged that  the                                                                    
amendment  represented  an  economic assist  for  businesses                                                                    
that  were   healthy  in  many  aspects   of  their  broader                                                                    
portfolio.  He asked  DNR to  address how  businesses behave                                                                    
and some  of the underpinnings  of the economy.  He remarked                                                                    
that no business would request  $80 million in order to earn                                                                    
$2  million in  a  year.  He continued  that  it  was not  a                                                                    
business decision that would be  made absent overall concern                                                                    
for all of the other economic activity.                                                                                         
Commissioner Balash  communicated that DNR  had historically                                                                    
gone  through  a  fairly  extensive  best  interest  finding                                                                    
process  to  support  the  sales.   In  the  examination  of                                                                    
economic  benefits  to   communities  (particularly  in  the                                                                    
Interior) the department was  able to identify contributions                                                                    
that the refineries made. He  elaborated that the refineries                                                                    
supported  dozens  to  hundreds   of  high  paying  jobs  to                                                                    
families that  participated in the state's  communities. The                                                                    
department had  considered the potential  effect of  a Petro                                                                    
Star closure  and had examined what  the facilities produced                                                                    
and who  the products were  sold to. He detailed  that Petro                                                                    
Star was the provider of jet  fuel for the state's air force                                                                    
bases and  to the  Kodiak coast  guard station;  the product                                                                    
was manufactured  in Alaska and  was distributed  via truck,                                                                    
barge, and  rail. He addressed  potential consequences  of a                                                                    
Petro  Star  facility closure.  A  closure  would result  in                                                                    
increased  cost pressure  for the  military  and a  knock-on                                                                    
effect  for the  continued  operation of  facilities in  the                                                                    
Interior  and Southcentral.  He believed  the closure  would                                                                    
eliminate  the  state's  chances   to  base  the  F-35.  The                                                                    
department  believed the  opportunity to  base the  military                                                                    
plane in  Alaska was important  to the state and  nation. He                                                                    
spoke  to the  upside  down pricing  position  of ANS  Crude                                                                    
versus  West Texas  International (WTI);  currently the  jet                                                                    
fuel coming in  through the Port of  Anchorage from external                                                                    
refineries was  competing against  Alaska produced  jet fuel                                                                    
rather  effectively;   external  sources  were   getting  an                                                                    
increasingly larger share of the  jet fuel market at the Ted                                                                    
Stevens International Airport in Anchorage.                                                                                     
6:55:33 PM                                                                                                                    
Commissioner Balash relayed that  imported fuel would become                                                                    
the  "price  maker"  if  the  state  did  not  act  and  the                                                                    
refineries  shut down  due  to  the cost  of  crude oil.  He                                                                    
surmised that the  shift would likely cause the  cost of jet                                                                    
fuel to increase.                                                                                                               
Co-Chair  Stoltze discussed  a similar  situation caused  by                                                                    
the  closure of  the Agrium  closure. He  relayed fertilizer                                                                    
had increased from $200 per ton to $1,200 per ton.                                                                              
Commissioner  Balash  shared   that  the  international  jet                                                                    
traffic in Anchorage drove a  significant amount of economic                                                                    
activity,  which benefitted  Alaska statewide.  He discussed                                                                    
that the  air cargo  fleet was generally  made up  of former                                                                    
passenger planes. Over time, larger  and more fuel efficient                                                                    
planes would  enter the cargo  fleet. The  department feared                                                                    
that  incremental  costs added  to  the  jet fuel  price  in                                                                    
Anchorage  would  make  the state  more  challenged  from  a                                                                    
competitive  standpoint. He  detailed  that  some signs  had                                                                    
already occurred  related to  the state's  standing compared                                                                    
to  other  international air  cargo  hubs.  He believed  the                                                                    
state would  need to keep  a close eye  on the issue  and to                                                                    
ensure that it drove as much  competition to the jet fuel as                                                                    
possible to keep prices at  a reasonable level; the goal was                                                                    
to prevent companies such as  FedEx and UPS from relocating.                                                                    
Ultimately  the economic  consequences would  impact Alaskan                                                                    
residents. He discussed that  the refining industry received                                                                    
significant blame  and anger directed  its way for  the high                                                                    
cost of  gasoline and home  heating fuel; however,  the cost                                                                    
was  the price  realized in  the  market for  fuel that  was                                                                    
produced locally.  The concern  related to  refinery closure                                                                    
was that  all of  the fuel products  used in-state  would be                                                                    
priced on  imported products.  He surmised  that potentially                                                                    
the Tesoro refinery  at Nikiski could be  maintained, but it                                                                    
would  put  the state  at  one  refinery instead  of  three.                                                                    
Additionally,  competition  would  be reduced.  He  believed                                                                    
that  prices  would  increase  for  gasoline,  diesel,  home                                                                    
heating fuel, and marine diesel.                                                                                                
Co-Chair Stoltze  remarked that  asphalt was  also included.                                                                    
He asked  Commissioner Balash to  discuss where  the product                                                                    
was produced.                                                                                                                   
Commissioner Balash  replied that  Flint Hills had  been the                                                                    
state's largest  asphalt producer. He believed  Tesoro would                                                                    
be  able  to  help,  but  there  would  be  an  impact.  The                                                                    
department  was concerned  about  the economic  consequences                                                                    
and the  reduction in the  overall quality of life  in rural                                                                    
areas including North Pole, Valdez,  and Nikiski, should the                                                                    
refineries close.  He detailed  that the closures  would put                                                                    
pressure on  local budgets and  social service  agencies. He                                                                    
added that stress  in the home led to  domestic violence and                                                                    
substance abuse.  He remarked  that well-paying  jobs worked                                                                    
to remedy the  problems. He pointed to  the sticker-shock of                                                                    
the amendment, but the department  believed something had to                                                                    
be  done or  the state  would suffer  real consequences.  He                                                                    
surmised that Petro  Star wanted to remain  in business, but                                                                    
the  company  was  owned  by  parent  company  Arctic  Slope                                                                    
Regional Corporation (ASRC) that was  not in the business of                                                                    
7:01:50 PM                                                                                                                    
Commissioner    Balash   discussed    that   ASRC    had   a                                                                    
responsibility  to earn  a return  for its  shareholders. He                                                                    
believed if  Petro Star closed its  refineries the situation                                                                    
would be similar to that  of Flint Hills. He elaborated that                                                                    
Flint Hills  was happy to  sell its North Pole  facility and                                                                    
infrastructure,  but  he  was  not  aware  of  any  credible                                                                    
buyers.  He   stated  that   the  underlying   business  was                                                                    
challenged;  the  cost  of  crude  was  a  real  problem  at                                                                    
present. Economic  theory suggested that the  problem was an                                                                    
anomaly  that would  normalize; WTI  and ANS  would converge                                                                    
back  to historic  norms.  He stated  that  the problem  had                                                                    
persisted for  the past  three years.  He remarked  that the                                                                    
first casualty had occurred and  the goal was to prevent two                                                                    
more from occurring.                                                                                                            
7:02:58 PM                                                                                                                    
Co-Chair Stoltze  noted that the amendment  was sponsored by                                                                    
the  administration  but  was  carried  by  members  of  the                                                                    
Interior delegation on the committee.                                                                                           
Representative  Wilson   addressed  whether   Alaska  wanted                                                                    
instate refineries. She  remarked that if the  answer was no                                                                    
the state would  be dependent on price. She  did not believe                                                                    
it   was  the   answer.  She   provided  an   example  about                                                                    
competition  between large  and small  stores; small  stores                                                                    
closed because they  did not have the ability  to compete on                                                                    
the  same  level.  She  provided   the  capital-move  as  an                                                                    
example;  it   would  devastate  the  Juneau   economy.  She                                                                    
compared the issue to the  loss of Flint Hills for Fairbanks                                                                    
and the North Pole. She  stressed that the state royalty oil                                                                    
contract was $2.15 over the  North Slope price. She detailed                                                                    
that  the state  had done  very well  buying oil  from Flint                                                                    
Hills. She believed Tesoro provided  a backup as it received                                                                    
oil  from  other places  at  a  more affordable  price.  She                                                                    
discussed that currently the  state refineries provided fuel                                                                    
to Eielson Air  Force Base, Fort Wainwright,  and Joint Base                                                                    
Elmendorf-Richardson (JBER). She  discussed that heating oil                                                                    
had been affordable  in the past; she could  not imagine how                                                                    
much the  cost would increase  if oil  had to be  trucked to                                                                    
Representative  Wilson continued  to discuss  the amendment.                                                                    
She  spoke  to the  $50  million  investment requirement  to                                                                    
receive a  second $10  million. She  believed it  would take                                                                    
efficiencies  for  the  refineries to  be  competitive.  She                                                                    
opined that  Petro Star would  have to do upgrades  in order                                                                    
to  produce  some  of  the  product  that  Flint  Hills  had                                                                    
produced.  She  had  not heard  of  anyone  considering  the                                                                    
purchase of  the Flint Hills  Refinery. She had  asked Flint                                                                    
Hills whether  the amendment would incentivize  it to reopen                                                                    
the  refinery;  the  answer  had been  no.  She  pointed  to                                                                    
credits provided  to tourism, fish,  and the  film industry.                                                                    
She emphasized that the state  would be uneconomical in many                                                                    
areas until energy  issues were solved for  the Interior and                                                                    
rural  Alaska.   She  asked  whether   five  years   made  a                                                                    
difference. She pointed to a  difference of $6 between Lower                                                                    
48 cost and  North Slope costs. She referred  to the Quality                                                                    
Bank and  noted that 50  percent of federal taxes  came back                                                                    
to  the state.  She  acknowledged that  the amendment  would                                                                    
give  significant money,  but  the  industries were  putting                                                                    
money in. She understood the amendment was a big ask.                                                                           
7:07:44 PM                                                                                                                    
Representative  Wilson  stressed  that losing  the  industry                                                                    
would have  a significant impact.  She believed that  a loss                                                                    
of refineries  meant that additional  funds to  the railroad                                                                    
would only  act as a  band aid.  She stated that  the future                                                                    
impact  of refinery  closures on  the railroad  was not  yet                                                                    
known.  She  stressed  that   the  refineries  touched  many                                                                    
industries.    She   thanked    the   committee    for   its                                                                    
Representative  Guttenberg asked  about  the  nature of  the                                                                    
state's  refineries.   He  referred  to  the   Quality  Bank                                                                    
calculation and wondered if the  state was getting the value                                                                    
out of  the royalties  or ANS;  if not,  he wondered  if the                                                                    
administration  had considered  participating  in action  in                                                                    
front of  FERC. He  wondered about a  lack of  efficiency of                                                                    
scale. He opined that in some  scenarios it would be part of                                                                    
the norm to keep refining in  the state. He pointed to large                                                                    
refineries  out  of  state  that  had  cheaper  product.  He                                                                    
wondered whether  the instate refineries  were too  small to                                                                    
do the job the state needed.                                                                                                    
Commissioner Balash  replied that  the state  had intervened                                                                    
in   the  Quality   Bank  dispute   at  FERC.   The  state's                                                                    
overarching  goal and  position  in the  proceedings was  to                                                                    
ensure a fair system. The  state had a financial interest in                                                                    
the royalty produced that was  of higher quality (Alpine was                                                                    
the  best  quality  crude  produced  on  the  North  Slope);                                                                    
therefore, the  state did  not want  to take  a side  in the                                                                    
proceeding that  would harm the state's  other interests. He                                                                    
relayed that refineries operating  on the TAPS corridor were                                                                    
not  the most  sophisticated refineries  in existence;  some                                                                    
refineries in  the Lower  48 were  able to  recover products                                                                    
and  value  from an  entire  barrel  of  crude. One  of  the                                                                    
beauties of TAPS and the Quality  Bank was that it did allow                                                                    
the  refineries  along  the  pipeline  to  take  crude  off,                                                                    
recover  high-end product,  and  put the  remainder back  in                                                                    
TAPS. He was  uncertain that a tremendous  difference in the                                                                    
refinery  operation would  occur  if they  moved  to a  full                                                                    
barrel  cracking   system.  He  opined  that   it  could  be                                                                    
difficult. He believed  Tesoro did a much  more complete job                                                                    
of  recovering  the full  barrel  at  its Nikiski  Refinery;                                                                    
however,  he  did   not  know  if  the   entire  barrel  was                                                                    
recovered.  The  administration  was hoping  the  investment                                                                    
incentive  would  increase   opportunities  to  improve  the                                                                    
plants for  more complete  barrel recovery.  He communicated                                                                    
that a  $50 million  investment would  require a  company to                                                                    
make  the $50  million back  in order  to recover  costs. He                                                                    
stated that at best Petro  Star was breaking even, but could                                                                    
be in  the red.  He wondered  how the  company was  going to                                                                    
recover  its   capital  under  current   circumstances.  The                                                                    
company  would  have  to  consider  whether  the  investment                                                                    
improved its profitability enough to make it worthwhile.                                                                        
7:14:30 PM                                                                                                                    
Commissioner   Balash   continued   that  the   40   percent                                                                    
investment  incentive   reduced  the  cost  of   making  the                                                                    
Representative  Guttenberg   wondered  how  the   return  on                                                                    
investment was  measured. He asked  if success was  based on                                                                    
the refineries remaining  open. Commissioner Balash answered                                                                    
in the affirmative related to  the short-term. He elaborated                                                                    
that  in the  long-term  the  state would  like  to see  the                                                                    
locally produced jet  fuel to earn back more  of the product                                                                    
market share.                                                                                                                   
Representative  Thompson thanked  the  commissioner for  his                                                                    
presentation. He noted that the  impact of losing a refinery                                                                    
would be felt  statewide. He stated that  the possibility of                                                                    
losing  Eielson Air  Force Base  and jet  fuel produced  for                                                                    
JBER  were huge  for the  state. He  informed the  committee                                                                    
that  Petro Star  also provided  heating oil  to Kodiak  and                                                                    
propane to Valdez and Kodiak.  The fishing fleet depended on                                                                    
local  refineries  for  supply.  He  communicated  that  the                                                                    
Kodiak coast guard base was  supplied from Petro Star Valdez                                                                    
for diesel and aviation fuel.  He underscored that the issue                                                                    
was  not limited  to the  Interior; it  impacted the  entire                                                                    
state. He stressed  that the cost to the  state in increased                                                                    
prices  and  lost  business  could   not  be  estimated.  He                                                                    
emphasized  the importance  of the  issue.  He believed  the                                                                    
credits  would  allow  the refineries  to  streamline  their                                                                    
businesses.  He  noted  that Petro  Star  was  currently  in                                                                    
negotiations with  the railroad  to determine what  it could                                                                    
do  to access  rail. He  surmised that  the amendment  could                                                                    
potentially help the  railroad as well. He  conceded that it                                                                    
was  a  large  chunk  of   money  upfront.  He  referred  to                                                                    
Commissioner Balash's  testimony that  the state  would make                                                                    
extra money  from the instate  sale of royalty  oil compared                                                                    
to  shipping  it out;  figures  included  a minimum  of  $20                                                                    
million  from  the  Quality   Bank  and  approximately  $160                                                                    
million in  three years. He  reiterated his support  for the                                                                    
7:18:40 PM                                                                                                                    
Representative  Gara  testified  against the  amendment.  He                                                                    
agreed that  the state needed  to do  what it could  to keep                                                                    
the Petro Star  refineries open. He stated  that the company                                                                    
had  not disclosed  its  losses from  the  current year.  He                                                                    
remarked that Petro  Star had been profitable  the prior two                                                                    
years and  before. He stated  that the amendment  would give                                                                    
the company $10  million per year for five  years whether or                                                                    
not it  made a profit or  paid taxes. He continued  that the                                                                    
company  would  receive  an additional  $10  million  if  it                                                                    
invested $25  million in the  purchase of  transportation or                                                                    
manufacturing equipment.  He detailed that Petro  Star would                                                                    
receive $200 million  from the state in five  years (half of                                                                    
the money for certain and the  other half as long as it made                                                                    
$25  million   of  investments).   He  believed  it   was  a                                                                    
significant  amount  of  money  to give  a  company  without                                                                    
asking the company  what it needed and  without knowing what                                                                    
the company's financial situation  was. He opined that there                                                                    
had to be  a better way for the state  to help the business.                                                                    
He  asserted that  the amendment's  worst  problem was  that                                                                    
Tesoro did  not want  the $100 million  it would  receive in                                                                    
the  five years.  He noted  that the  company had  testified                                                                    
previously that  all it  wanted was the  renewal of  its RIK                                                                    
contract. He noted  that the state had  been struggling with                                                                    
money.  He  wondered  why  giving   the  money  away  was  a                                                                    
responsible decision.                                                                                                           
Commissioner Balash replied that  the opportunity to provide                                                                    
an incentive  for instate refining  was something  the state                                                                    
needed to weigh  carefully; it wanted to ensure  that it did                                                                    
not pick  winners and losers.  He detailed that  because the                                                                    
state  had  so  few  refineries operating,  it  presented  a                                                                    
challenge. The administration had  considered a Quality Bank                                                                    
credit. He relayed  that the credit would  have helped Flint                                                                    
Hills and  Petro Star, but it  would not help Tesoro  in any                                                                    
way.  He took  exception  to the  characterization that  the                                                                    
state  did   not  ask  Petro   Star  about  its   need;  the                                                                    
administration had looked at the  company's need. He was not                                                                    
going  to share  the  company's tax  information in  public.                                                                    
Petro  Star  had asked  for  a  volume  of  oil at  a  price                                                                    
discounted to royalty in-value;  the company was prepared to                                                                    
take the lower cost for the state's crude.                                                                                      
7:25:07 PM                                                                                                                    
Commissioner  Balash communicated  that it  could have  been                                                                    
feasible  if the  state  was confident  it  could limit  the                                                                    
discount to  the Petro Star contract  only; however, because                                                                    
of  the likely  constitutional  problem  the solution  would                                                                    
have  presented  from  an   interstate  commerce  and  equal                                                                    
protection   perspective,  the   state  was   concerned  the                                                                    
discount would  have extended to all  80,000-plus barrels of                                                                    
the  state's  royalty  production.  He stressed  that  a  $5                                                                    
difference on  all of the  state's royalty  production would                                                                    
cost  far more  than costs  presented in  the amendment.  He                                                                    
returned  to the  question of  picking  winners and  losers,                                                                    
which the state  would do if it selectively sold  its oil to                                                                    
one company  at a  discounted price. The  administration was                                                                    
happy  to  consider alternatives,  but  it  felt action  was                                                                    
necessary due to potential long-term repercussions.                                                                             
Representative Gara  discussed that  the bill  represented a                                                                    
$300  million  cost to  the  state  over the  upcoming  five                                                                    
years. He stated that $100 million  of the total would go to                                                                    
a  company that  had not  asked for  the money.  He surmised                                                                    
that there had to be a  better way to approach the issue. He                                                                    
could live with a low-interest  loan or a loan that provided                                                                    
Petro  Star with  a  five-year grace  period  on paying  the                                                                    
state back.  He noted  that the state  would need  the money                                                                    
more  in  five  years'  time  than it  did  at  present.  He                                                                    
requested that  the administration  present a  more fiscally                                                                    
responsible  solution. He  had  never  heard of  legislation                                                                    
that would give  $20 million per year to a  company that did                                                                    
not  need  the  funds.  He expressed  ire  at  the  proposed                                                                    
solution. He agreed  that the state should  take some action                                                                    
to help  Petro Star  in its  first year  of loss.  He stated                                                                    
that if the company's first year  of loss was $5 million and                                                                    
the bill  provided $20  million the  company could  give the                                                                    
money to  its shareholders  or to ASRC.  He stated  that the                                                                    
bill guaranteed the company $15  million in profits per year                                                                    
for  the next  five years  if it  had an  annual loss  of $5                                                                    
million.  He believed  the  amendment  represented a  sloppy                                                                    
response   to   an   important   problem.   He   asked   the                                                                    
administration to  consider a low-interest loan.  He equated                                                                    
the  amendment to  a $220  Base Student  Allocation increase                                                                    
that had been denied to schools.                                                                                                
7:30:43 PM                                                                                                                    
Co-Chair  Austerman  spoke  against the  amendment.  He  was                                                                    
upset  by the  lateness of  the amendment  that he  felt was                                                                    
hijacking  Tesoro's royalty.  He agreed  with Representative                                                                    
Gara that there  was a better way to deal  with the problem.                                                                    
He  stated that  the  administration  had spent  significant                                                                    
time on  items such  as the  shipyard in  Ketchikan; through                                                                    
the  Alaska  Industrial  Development  and  Export  Authority                                                                    
(AIDEA) the  shipyard had survived  and had become  a viable                                                                    
business. He  continued that the  state was  investing money                                                                    
through AIDEA to  expand the shipyard. He  stressed that the                                                                    
funds were  not just a  giveaway. He  knew for at  least the                                                                    
past  three years  the administration  had  been working  to                                                                    
help the refineries.  He stressed that it was  wrong for the                                                                    
administration  to attach  the amendment  to a  bill at  the                                                                    
last minute.  He opined that  the strategy should  have been                                                                    
introduced  at the  beginning  of session  or  in the  prior                                                                    
year.  He underscored  that the  administration should  have                                                                    
developed a  business plan for  the refineries to  work with                                                                    
AIDEA  on their  long-term viability.  He felt  that it  was                                                                    
unfair to  put the issue  before the legislature at  the end                                                                    
of session.  He would gladly  work on  a bill with  AIDEA to                                                                    
help  the  refinery.  He  stated   that  ASRC  had  made  an                                                                    
investment,  but he  had not  heard  them agree  to put  any                                                                    
money  forward.  He  was  uncomfortable  being  put  in  the                                                                    
position. He  knew that Petro  Star was a great  company and                                                                    
that ASRC  was a great  corporation. He did not  believe the                                                                    
administration's request was responsible.                                                                                       
Co-Chair  Austerman referred  to the  seafood industry  that                                                                    
had  plummeted in  2001  when Chilean  and  farmed fish  had                                                                    
driven the pink  salmon price down to under  $0.05 per pound                                                                    
in some  locations. Federal dollars had  bailed the industry                                                                    
out; it  had made a big  difference, but the funds  had been                                                                    
matching grant  programs. The $50  million provided  had not                                                                    
been a  giveaway. He noted  that some fishermen  in affected                                                                    
areas did receive some money in  the form of a grant. He did                                                                    
not  believe the  state could  just give  the money  away to                                                                    
refineries without  something. He reiterated  his opposition                                                                    
to  the amendment.  He hoped  the committee  would not  hold                                                                    
Tesoro's royalty hostage  because of the issue.  He would be                                                                    
happy to look  at a bill if the  administration proposed one                                                                    
that included a  loan program through AIDEA  that would help                                                                    
refineries become solvent in the long-term.                                                                                     
7:36:15 PM                                                                                                                    
Representative   Munoz   referred  to   the   commissioner's                                                                    
testimony that  one of the  reasons instate  refineries were                                                                    
struggling  was  because the  price  of  ANS crude  had  not                                                                    
normalized. She asked for further detail.                                                                                       
Commissioner  Balash  answered  that the  department  had  a                                                                    
graph showing the difference between  ANS West Coast and WTI                                                                    
on  a  cost per  barrel  basis.  He  detailed that  in  2004                                                                    
through 2007, ANS had been $2  less than WTI. The prices had                                                                    
converged and had  been nearly identical from  2007 to 2009.                                                                    
A price divergence began in 2010  and in 2011 ANS priced out                                                                    
at  $15  more   per  barrel  than  WTI.   He  detailed  that                                                                    
conversations  about the  cost  of refining  began with  the                                                                    
cost of  the raw crude barrel  of oil. The gap  had narrowed                                                                    
and  was  closer  to  a   $10  difference  at  present.  The                                                                    
department expected  that in time  the price  would converge                                                                    
closer to  historic trends;  up until  2007, ANS  had priced                                                                    
less  than WTI.  He did  not want  to make  a prediction  on                                                                    
whether it would occur again.  He concluded that because oil                                                                    
was a fungible product traded  globally it was expected that                                                                    
the differential would close at some point.                                                                                     
7:39:12 PM                                                                                                                    
Representative  Munoz referred  to prior  industry testimony                                                                    
that  Quality Bank  payments had  a profound  effect on  the                                                                    
business  in a  negative sense.  She asked  how much  of the                                                                    
funds  went to  the state  and how  the payment  had changed                                                                    
over the past several years.                                                                                                    
Commissioner   Balash  answered   that  numbers   from  2013                                                                    
provided a good  baseline for the prior couple  of years. He                                                                    
detailed that  in 2013 payments  into the Quality  Bank from                                                                    
TAPS   refineries    were   approximately    $112   million.                                                                    
Approximately $20 million of the  total had been returned to                                                                    
the state through increased royalty  value. He noted that it                                                                    
was also necessary  to look at the  production tax equation.                                                                    
The state was  not able to go through tax  payer by taxpayer                                                                    
to determine  the total impact,  but because  the production                                                                    
tax system was  profits-based (it taxed on the  margin at 35                                                                    
percent)  it  could  be determined  that  after  taking  the                                                                    
royalty aspect  away, the amount  was close to  $30 million.                                                                    
Combining the two figures  totaled approximately $50 million                                                                    
returned to the treasury from refineries.                                                                                       
Representative  Munoz wondered  how the  funds were  used by                                                                    
the  state. Commissioner  Balash replied  that the  payments                                                                    
into  the  Quality Bank  were  repairing  or "making  whole"                                                                    
other parties.  He discussed that there  were many varieties                                                                    
of crude  produced on  the North Slope;  each oil  field had                                                                    
its  own  API  [American Petroleum  Institute]  gravity  and                                                                    
quality  (not all  barrels were  the  same). Originally  the                                                                    
Quality Bank  had been a  way to equalize the  parties; each                                                                    
barrel  put into  TAPS may  be different  at the  start, but                                                                    
once  in the  pipeline  they  were one  blend  of crude.  He                                                                    
explained that  the parties  providing higher  quality crude                                                                    
had contributed  value to other  parties with  lower quality                                                                    
crude. There  were facilities  in North  Pole and  in Valdez                                                                    
that took  crude off of TAPS  and took the high  quality oil                                                                    
for  jet  fuel,  diesel,  and   gasoline  and  returned  the                                                                    
remainder  to the  TAPS  stream;  therefore, the  refineries                                                                    
made  a payment  to  the  other oil  producers  to keep  the                                                                    
entities whole.                                                                                                                 
7:43:36 PM                                                                                                                    
Representative Wilson understood the  concept of not wanting                                                                    
to pick  winners and losers,  but she did not  understand it                                                                    
under  the  given context.  She  clarified  that by  instate                                                                    
refineries  she  had been  referring  to  refineries in  the                                                                    
middle of  the state (i.e.  North Pole). She  explained that                                                                    
there  were  circumstances  occurring   in  the  North  Pole                                                                    
refineries that were  not happening in the  other areas. She                                                                    
stated that Petro  Star was under different  stresses due to                                                                    
costs it had shared with  Flint Hills. She detailed that the                                                                    
pipe  running   between  the  rail  yard   and  Flint  Hills                                                                    
represented $3 million to $4  million in additional cost for                                                                    
Petro Star.  She emphasized that  the system was  not equal.                                                                    
She discussed  a storage tax  credit bill that had  passed a                                                                    
few years earlier; Anchorage had  built a large storage tank                                                                    
with the credits.                                                                                                               
Co-Chair Stoltze noted that the  storage tank had been built                                                                    
south of Anchorage.                                                                                                             
Representative  Wilson  agreed   with  the  correction.  She                                                                    
furthered  that  the  storage   tank  allowed  importing  of                                                                    
cheaper fuels. She  wondered why the Quality  Bank could not                                                                    
be used  for the  refinery that needed  it. She  wondered if                                                                    
the  reason was  legal or  moral. She  wanted to  help Petro                                                                    
Star  for the  next  several  years to  allow  time for  the                                                                    
company to upgrade items that  resulted from the loss of its                                                                    
partner or to  allow time for another party  to purchase the                                                                    
Flint Hills Refinery.                                                                                                           
7:46:18 PM                                                                                                                    
Commissioner Balash answered  that the hydrocarbon business,                                                                    
specifically  the gasoline,  diesel,  and  jet fuel  markets                                                                    
were  unregulated  markets;  the  markets  were  trusted  to                                                                    
produce a  price that  allowed a  product to  be continually                                                                    
supplied. Therefore, the administration  had been careful to                                                                    
not upset the  market balance or to provide  a clear benefit                                                                    
to one  party, which was  the reason the  administration had                                                                    
not  focused  solely  on  the   Quality  Bank.  He  did  not                                                                    
characterize the issue as a question of mortality.                                                                              
Representative  Wilson pointed  to the  tax credit  that had                                                                    
been provided  to the storage  facility south  of Anchorage.                                                                    
She  stressed that  the state  had already  "unbalanced" the                                                                    
system by providing  a credit to the  facility. She surmised                                                                    
that the imbalance had caused part of the problem.                                                                              
Commissioner Balash  replied that  the storage  facility was                                                                    
for  natural gas.  He detailed  that the  gas was  primarily                                                                    
utilized by  public utilities, but  there was  an associated                                                                    
benefit that accrued to Tesoro  because it relied on natural                                                                    
gas to operate  its facility. He supposed there  could be an                                                                    
argument that some of the  other credits provided to support                                                                    
natural gas  deliverability and long-term supply  had been a                                                                    
benefit realized only by Tesoro.                                                                                                
Representative Wilson  spoke to  the legality of  the issue.                                                                    
She stated  that it had  been established that life  was not                                                                    
fair;  Anchorage had  natural gas,  Juneau had  the capital,                                                                    
and  Fairbanks wanted  its refinery.  She wondered  if there                                                                    
was any  legal reason why  there could  not be a  credit for                                                                    
the Quality  Bank. Commissioner  Balash was  not aware  of a                                                                    
constitutional  challenge  that   the  item  would  present;                                                                    
however, he had not spoken with legal counsel.                                                                                  
7:50:00 PM                                                                                                                    
Representative  Wilson communicated  that she  did not  have                                                                    
plans to hold  Tesoro's bill hostage. She was  looking for a                                                                    
solution and  wanted to address  the issue further  with the                                                                    
commissioner. She  stated that it  was not possible  to keep                                                                    
everything  equal. She  did not  believe her  solution would                                                                    
disadvantage  other refineries.  Additionally,  she did  not                                                                    
believe  there was  any indirect  competition. The  refinery                                                                    
was  using diesel;  affordable  gas may  also  make it  more                                                                    
economical. She did  think there were some  legal reasons to                                                                    
help the  refinery under the given  circumstances. She spoke                                                                    
to avoiding spreading the benefit  unequally to parties that                                                                    
may not need the help.                                                                                                          
Representative Costello  asked about the timing  aspect. She                                                                    
wondered how  long the  administration had  been considering                                                                    
the three options  it had identified (two of  which had been                                                                    
Commissioner   Balash  replied   that   normally  when   the                                                                    
administration pursued legislation or  made proposals to the                                                                    
legislature the  process began in  August. He  detailed that                                                                    
the department  advised the governor's office  about certain                                                                    
topics it  would like to  see addressed by  the legislature.                                                                    
He elaborated that a round  of internal and external vetting                                                                    
occurred  in the  process. Under  the current  circumstance,                                                                    
the department  had not had  a specific proposal in  mind in                                                                    
August; it had not believed  there was a dire situation that                                                                    
warranted   action.  He   relayed   that   there  had   been                                                                    
conversations    about    Quality    Bank    matters;    the                                                                    
administration had been watching  the spread between WTI and                                                                    
ANS and  had believed it  could wait the situation  out. The                                                                    
department had  believed the Quality  Bank issue  could have                                                                    
been resolved  or settled at  FERC. However, on  February 4,                                                                    
2014  when the  news about  Flint  Hills had  broken it  had                                                                    
taken him by surprise.  As the administration considered all                                                                    
of the components following the  Flint Hills announcement he                                                                    
had  thought about  the revenue  requirement  for the  lines                                                                    
running   between  TAPS   and   the   North  Pole   Refinery                                                                    
facilities. He relayed that the  revenue requirement for the                                                                    
lines was $4.5  million in 2013. He stated  that the revenue                                                                    
requirement  had  been  met  by both  refineries  on  an  85                                                                    
percent  to 15  percent ratio,  the latter  portion paid  by                                                                    
Petro  Star.  He detailed  that  as  a result  Petro  Star's                                                                    
payment would  increase from  less than  $1 million  to $4.5                                                                    
million per year. He understood  that 2012 was a thin margin                                                                    
for Petro  Star and that 2013  would be a breakeven  year at                                                                    
best.  He  stated  that  a  Petro  Star  representative  had                                                                    
confirmed  his  understanding   of  the  cost  consequences.                                                                    
Subsequently,  he had  asked  Petro Star  if  it planned  to                                                                    
close its  refinery too. He  relayed that the  company could                                                                    
not  answer  in  February.  The company  renewed  its  crude                                                                    
contracts in March; the severity  of the situation prevented                                                                    
the  company  from  knowing  whether   it  would  renew  its                                                                    
contract for the following year.                                                                                                
7:56:26 PM                                                                                                                    
Commissioner  Balash continued  to answer  the question.  He                                                                    
discussed that  Petro Star had  asked what the state  may be                                                                    
able  to do  in response  to the  situation. Ultimately  the                                                                    
administration had  asked Petro Star  what it would  take to                                                                    
keep  the company  in operation.  The company  had suggested                                                                    
that the  state could sell  it crude at a  discounted price.                                                                    
He noted  that the cost of  crude and the Quality  Bank were                                                                    
the two issues that were  "killing" the company. He informed                                                                    
the  committee that  there was  not much  the administration                                                                    
could do about the Quality Bank;  it could try to work out a                                                                    
settlement between parties, but if  parties did not agree to                                                                    
a settlement, the issue would be  left in the hands of FERC.                                                                    
He  did not  know how  long  the agreement  would take.  The                                                                    
administration  had  considered  selling its  royalty  at  a                                                                    
discount to  Petro Star, but  due to risks to  the remainder                                                                    
of   its  royalty   production  from   a  royalty   in-value                                                                    
perspective,    the   idea    had   been    dismissed.   The                                                                    
administration  had  begun looking  at  tax  credits in  the                                                                    
middle   of  March.   Ultimately,  the   process  had   been                                                                    
compressed into  approximately three weeks. He  believed the                                                                    
legislature  could  improve  the  option  presented  to  the                                                                    
Representative Edgmon  understood that there  were statewide                                                                    
impacts  related to  the refineries.  He  pushed for  taking                                                                    
some  action  to  address  the  problem.  He  observed  that                                                                    
sometimes it took more than one try to get things right.                                                                        
Co-Chair  Stoltze had  hoped to  adopt the  amendment during                                                                    
the meeting  as a  starting point. He  remarked that  it was                                                                    
hard to  edit a  blank page.  He had hoped  to begin  with a                                                                    
plan even if  it was viewed to be flawed.  He believed there                                                                    
were universal levels of discomfort  even from the sponsors.                                                                    
He  viewed the  amendment  like a  committee substitute  and                                                                    
reiterated that it was hard to work off of a blank page.                                                                        
Representative  Edgmon replied  that  the  response did  not                                                                    
answer his  question. He  stated that a  plan b  was needed,                                                                    
but he  did not see it  at the table. He  strongly supported                                                                    
taking action that worked.                                                                                                      
8:01:29 PM                                                                                                                    
Representative  Gara stated  that Petro  Star had  noted its                                                                    
profits had not been good in  the past few years. He pointed                                                                    
to  the high  cost of  ANS  compared to  WTI as  one of  the                                                                    
problems. He  referred to  the extra cost  to Petro  Star of                                                                    
approximately  $4 million  due to  the Flint  Hills Refinery                                                                    
closure.  He referred  to  the hope  that  crude oil  prices                                                                    
would normalize. He hoped  the administration could consider                                                                    
some type  of financing provision for  distressed companies.                                                                    
He noted that the  amendment included language requiring the                                                                    
commissioner to  make a best  interest finding.  He believed                                                                    
language  could be  devised  requiring  the commissioner  to                                                                    
make  a  finding  to  justify  the  low  interest  loan  for                                                                    
companies  in  need. He  referred  to  prior testimony  that                                                                    
Petro  Star needed  a few  years  to find  ways to  increase                                                                    
efficiency in  its operations.  He asked  the administration                                                                    
to  consider  a  loan  for  companies  that  met  a  certain                                                                    
standard.  He did  not object  to  the idea  of a  repayment                                                                    
holiday  to  allow  the  company time  to  get  a  financial                                                                    
Representative Holmes  pointed to  the sticker shock  of the                                                                    
amendment. She  referred to  multiple conversations  she had                                                                    
had  about  the  amendment.   She  associated  herself  with                                                                    
comments  made by  Representative  Edgmon.  She did  believe                                                                    
something needed  to be  done, but  she was  not comfortable                                                                    
with the amendment.                                                                                                             
8:05:14 PM                                                                                                                    
Co-Chair Austerman  believed that AIDEA was  the appropriate                                                                    
way address the  problem. He stated that the  agency had the                                                                    
ability through simple legislation to  bond and take care of                                                                    
industries. He  did not  believe it would  take long  to sit                                                                    
down with  the agency to  develop a  plan; it had  been done                                                                    
Co-Chair Stoltze remarked that the suggestion was good.                                                                         
Commissioner  Balash was  happy  to discuss  the issue  with                                                                    
AIDEA.  The  administration  had discussed  with  AIDEA  the                                                                    
possibility of  refinancing the  pipelines between  TAPS and                                                                    
the North Pole  refineries, but it had  found that financing                                                                    
anything without  some surety that the  business was solvent                                                                    
had raised red flags.                                                                                                           
8:07:06 PM                                                                                                                    
Representative  Wilson  WITHDREW  replacement  Amendment  1.                                                                    
There being NO OBJECTION, it was so ordered.                                                                                    
Co-Chair  Stoltze noted  that the  issue would  be discussed                                                                    
the following day.                                                                                                              
Commissioner Balash  appreciated the  latitude given  on the                                                                    
issue. He  was confident  that the  approval of  the royalty                                                                    
contract was not controversial. He  did not want to hurt the                                                                    
bill for Tesoro.                                                                                                                
Representative  Gara remarked  that there  was no  reason to                                                                    
address  Amendment  2.  He looked  forward  to  a  continued                                                                    
discussion on the issue.                                                                                                        
Co-Chair Stoltze  assumed that  Amendment 2  presupposed the                                                                    
adoption of replacement Amendment 1.                                                                                            
Representative   Gara  replied   that  he   had  presupposed                                                                    
Amendment 2 would have been given more sideboards.                                                                              
Co-Chair  Stoltze  thanked  the  committee  for  its  honest                                                                    
dialogue. He discussed schedule for the following day.                                                                          
Representative  Gara  clarified  that he  personally  should                                                                    
have provided more sideboards for Amendment 2.                                                                                  
HB  287  was  HEARD  and   HELD  in  committee  for  further                                                                    
8:11:20 PM                                                                                                                    
The meeting was adjourned at 8:11 p.m.                                                                                          

Document Name Date/Time Subjects
HB 287 Replacement Amendment #1 Thompson, Wilson.pdf HFIN 4/11/2014 6:30:00 PM
HB 287
HB 89 Amendment #1 Austerman.pdf HFIN 4/11/2014 6:30:00 PM
HB 89