Legislature(2007 - 2008)Anch LIO Conf Rm
10/23/2008 09:30 AM House JUDICIARY
| Audio | Topic |
|---|---|
| Start | |
| Overview(s): Matters Pertaining to the High Gas and Heating Oil Prices in Alaska | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE JUDICIARY STANDING COMMITTEE
Anchorage, Alaska
October 23, 2008
9:48 a.m.
MEMBERS PRESENT
Representative Jay Ramras, Chair
Representative Nancy Dahlstrom, Vice Chair
Representative John Coghill
Representative Bob Lynn
Representative Max Gruenberg
MEMBERS ABSENT
Representative Ralph Samuels
Representative Lindsey Holmes
OTHER LEGISLATORS PRESENT
Representative Scott Kawasaki (via teleconference)
Representative David Guttenberg (via teleconference)
Representative Paul Seaton (via teleconference)
COMMITTEE CALENDAR
OVERVIEW(S): MATTERS PERTAINING TO THE HIGH GAS AND HEATING OIL
PRICES IN ALASKA AND WHY GAS PRICES HAVE FALLEN IN THE LOWER 48
BUT NOT IN ALASKA
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
REPRESENTATIVE BILL THOMAS
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Provided comments during the presentation on
matters pertaining to the high gasoline and heating oil prices
in Alaska.
REPRESENTATIVE MIKE HAWKER
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Provided comments and asked questions during
the presentation on matters pertaining to the high gasoline and
heating oil prices in Alaska.
CLYDE (ED) SNIFFEN, JR., Senior Assistant Attorney General
Commercial/Fair Business Section
Civil Division (Anchorage)
Department of Law (DOL)
Anchorage, Alaska
POSITION STATEMENT: Provided comments and answered questions
during the presentation on matters pertaining to the high
gasoline and heating oil prices in Alaska.
REPRESENTATIVE CARL GATTO
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Provided comments and asked questions during
the presentation on matters pertaining to the high gasoline and
heating oil prices in Alaska.
BARRY PULLIAM, Senior Economist
Econ One Research, Inc.
El Segundo, California
POSITION STATEMENT: As a consultant to the Department of Law,
provided comments and responded to questions during the
presentation on matters pertaining to the high gasoline and
heating oil prices in Alaska.
SENATOR GENE THERRIAULT
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Provided comments and asked questions during
the presentation on matters pertaining to the high gasoline and
heating oil prices in Alaska.
JEFF COOK, Director
External Affairs
Flint Hills Resources
North Pole, Alaska
POSITION STATEMENT: Provided comments and responded to questions
during the presentation on matters pertaining to the high
gasoline and heating oil prices in Alaska.
STEPHEN RIBUFFO, Deputy Port Director
Port of Anchorage
Municipality of Anchorage (MOA)
Anchorage, Alaska
POSITION STATEMENT: Provided comments and responded to questions
during the presentation on matters pertaining to the high
gasoline and heating oil prices in Alaska.
ACTION NARRATIVE
CHAIR JAY RAMRAS called the House Judiciary Standing Committee
meeting to order at 9:48:23 AM. Representatives Coghill,
Dahlstrom, and Ramras were present at the call to order.
Representatives Lynn and Gruenberg arrived as the meeting was in
progress. Representatives Kawasaki (via teleconference),
Guttenberg (via teleconference), and Seaton (via teleconference)
were also in attendance.
^Overview(s): Matters pertaining to the high gas and heating
oil prices in Alaska
9:49:46 AM
CHAIR RAMRAS [announced that the only order of business would be
consideration of matters pertaining to the high gas and heating
oil prices in Alaska and why gas prices have fallen in the Lower
48 but not in Alaska].
9:51:35 AM
REPRESENTATIVE BILL THOMAS, Alaska State Legislature, in
response to a question, relayed that the retail price of
gasoline is $4.93/gallon in Cordova, $4.88/gallon in Haines -
though he'd heard that it has recently dropped $.30/gallon - and
either $5.50/gallon or $5.60/gallon in Kake. However, home
heating fuel, which is what most people in his district are
concerned about, has an average price of over $5.00/gallon.
CHAIR RAMRAS noted that the retail gasoline price in Anchorage
has dropped as low as $3.44/gallon, and is now [approximately]
$3.58/gallon in Fairbanks. He then read a letter by someone who
had expressed concern that a week ago, the retail price of
gasoline was $3.59/gallon in Anchorage and $4.26/gallon in Homer
even though the price had dropped to under $3.00/gallon in the
Lower 48.
9:53:19 AM
REPRESENTATIVE MIKE HAWKER, Alaska State Legislature, observed
that immediately after the committee began investigating the
pricing practices of Alaska's refineries, prices dropped, though
they are still much higher than the national average. He opined
that Alaska's refineries now recognize that they are in the
spotlight.
CHAIR RAMRAS relayed that the committee would be meeting again
next month to hear public testimony on this issue, that the
committee would be producing a report on this issue, and that
one of the committee's recommendations to the next legislature
will be that the legislature continue holding meetings on this
topic until prices again match those in the Lower 48. He
acknowledged that the high prices of petroleum products in
Alaska are unlikely to be the result of antitrust violations,
and opined that Governor Palin should also hold meetings with
Alaska's refiners on the issue of pricing regardless of the
administration's ongoing investigation into the matter.
REPRESENTATIVE THOMAS relayed that the high price of diesel fuel
is having a huge impact on his constituents because they are
heavily involved in the fishing industry.
REPRESENTATIVE COGHILL noted that with two refineries in his
district, a lot of his constituents are having a hard time
understanding the nexus between [continued high] heating oil
prices and the [recent reduction in the] price of a barrel of
oil. A lot of people are relying on wood and coal [for heat],
he relayed, and questioned whether this could be having an
impact on the volume [of heating oil being sold] and thus on
retail prices as well.
CHAIR RAMRAS offered his understanding that in his district, 300
coal-burning furnaces have been installed in various locations,
including the Fairbanks Community Food Bank.
REPRESENTATIVE COGHILL surmised that changes in conservation and
consumption could also be affecting retail prices.
REPRESENTATIVE LYNN suggested that they investigate how much
retail prices are being influenced by market fluctuations as
opposed to some other factor.
10:02:00 AM
[The committee then watched a short video from an
ABC News: Nightline episode titled "Gas Price Reprieve".]
REPRESENTATIVE COGHILL, in response to a question, mentioned
that he is often also asked about heating fuel prices.
CHAIR RAMRAS offered that correspondence his office has received
indicates that some people are under the impression that
government is somehow "aiding or abetting this adversary that's
out there." Such is not the case, he remarked, adding that all
Alaskans, including those in government service, are paying the
prevailing higher prices. He recalled that testimony provided
during the committee's previous hearing on this topic indicates
that both of Alaska's refineries have unique circumstances to
deal with. For example, the Flint Hills Resources' refinery in
North Pole is a small refinery and must use oil - instead of
natural gas, which is cheaper - to refine its raw crude oil into
the products that it sells; and the Tesoro Alaska Company's
[small] refinery in Nikiski must purchase all its raw crude oil
from several different sources - including foreign markets - and
must then export about one-third of its finished products at a
loss. Furthermore, neither of these small refineries could be
considered to be a model of efficiency.
10:11:47 AM
CLYDE (ED) SNIFFEN, JR., Senior Assistant Attorney General,
Commercial/Fair Business Section, Civil Division (Anchorage),
Department of Law (DOL), concurred, but pointed out that those
challenges have been the same for about 20 years and so
shouldn't account for the extraordinarily long time it's now
taking for retail prices in Alaska to fall as they have in the
Lower 48. By now, retail prices should have started to resemble
those down south, as they have historically, and so his
department has been investigating whether this lag is the result
of illegal activity on the part of the refiners.
CHAIR RAMRAS noted that a year ago, prices in Alaska resembled
those in other locations with similar population
characteristics, but currently the retail gasoline rack rate in
Seattle is $.90 lower than it is in Alaska. Furthermore, all
gasoline sold in Southeast Alaska is imported [from the Lower
48], and the retail prices are higher in Southeast Alaska than
they are in the Railbelt. He offered his understanding that
because of limited storage capacity at the Port of Anchorage for
retail gasoline, the aforementioned two refineries in Alaska are
able to, in effect, maintain a duopoly. He noted that Petro
Star, Inc. (PSI), doesn't refine its own gasoline.
MR. SNIFFEN concurred on the latter point, but suggested that
the point about sufficient storage might be debatable because
there are several tank farms [at the Port of Anchorage] and so
"terminaling" space is probably available for lease, though
perhaps not enough to incentivize an entrepreneur into hauling
gasoline up from the Northwest. Under import parity, one would
expect refineries to price their products at a price comparable
with what it would cost an entrepreneur to bring fuel up from an
Outside source, add overhead costs, and then sell it. Import
parity is the competitive check that drives Alaska's refiners'
prices. For example, if Alaska's refiners start charging too
much, it will encourage an entrepreneur to bring fuel up from
the Lower 48 to sell, but once the refiners see that something
like that is occurring, they would simply lower their prices,
resulting in a loss of investment for the entrepreneur.
MR. SNIFFEN remarked that the legal issues are different than
the economic issues, adding that Alaska doesn't have a "price
gouging" law. Furthermore, Alaskans need to understand that
with regard to petroleum products, it isn't a "price-plus"
market: no matter what it costs to produce a gallon of
gasoline, refiners don't have to price that gallon of gasoline
based on their costs - they can price their refined product at
whatever the market will bear, at whatever consumers are willing
to pay for it. Refiners have no legal requirement to lower
their prices, and thus could charge $10/gallon if they so chose,
if they thought consumers would pay that price. There aren't a
lot of legal limitations on how refineries and gasoline stations
can price their products, as long as no collusion, price-fixing
conduct, or coordinated activity occurs.
10:19:00 AM
MR. SNIFFEN said that although there are very few refineries in
Alaska and thus the market is a bit different here, there is
also a refinery in Anacortes, Washington, and yet gasoline
prices in that area are not the lowest in the nation.
Furthermore, there are refineries in California, and gasoline
prices in those areas are also not the lowest in the nation. So
despite what was portrayed in the video, locations in which a
refinery is located are not necessarily where the cheapest
gasoline prices will be found, particularly if they are small
refineries. And in Alaska, the refineries are very small and
not as complex as some of the big refineries in the Lower 48.
For example, the Flint Hills Resources' refinery is just a
topping plant - it can only do so much with its raw product, and
that must be of high quality in order that it can be turned into
jet fuel, heating oil, and gasoline - and the Tesoro Alaska
Company's refinery must use "light sweet crude" in order to
produce gasoline. The cost of these raw products is a lot
higher than the cost of lesser quality products that need to be
processed in a complex refinery such as some of those that have
the ability to basically turn "sludge" into gasoline.
MR. SNIFFEN, in response to comments and questions, after
mentioning that during the last administration, the DOL had
proposed a price-gouging statute to the legislature, concurred
that all of the price-gouging statutes that he is aware of are
triggered only by a declared state of emergency - declared by
either the local government or the federal government - and are
meant to prevent retailers from raising the price of a power
generator, for example, from $300 to $3,000 during an emergency
situation such as would be caused a hurricane. Such statutes
essentially say that during a declared state of emergency, a
retailer cannot raise prices to anything greater than they were
30 days prior to the declaration. This is an attempt to prevent
retailers from preying on consumer fears during unfortunate
circumstances in order to make a profit. However, he said he is
not aware of any statute that puts a cap on gasoline prices, or
that is triggered by a particular economic situation.
REPRESENTATIVE GRUENBERG asked Mr. Sniffen to provide the
committee with a copy of the legislation the DOL proposed.
CHAIR RAMRAS shared his understanding that that legislation
didn't address wholesalers or manufacturers. He offered his
recollection that previous testimony has indicated that there is
not a lot of money to be made by being a retailer of gasoline,
that selling gasoline at the retail level is simply an
inducement for people to come into a station or store and
purchase other products.
10:25:45 AM
MR. SNIFFEN acknowledged that most price-gouging legislation is
focused on retailers because that's where such conduct generally
occurs, though one piece of legislation he is familiar with did
somewhat address distributors as well.
REPRESENTATIVE GRUENBERG asked whether the legislation the DOL
proposed would be relevant to the issue before them.
MR. SNIFFEN said he doesn't know that it would have much impact
on gasoline pricing, or that the DOL could draft a bill that
would address an economic crisis outside of a declared state of
emergency.
REPRESENTATIVE GRUENBERG expressed interest in antitrust
legislation.
CHAIR RAMRAS asked whether legislation could be crafted to
address price gouging at the refinery level.
MR. SNIFFEN surmised that such legislation would be difficult to
craft because it would need to regulate the price that refiners
charge; it would essentially prohibit refiners from setting
prices based on market conditions. High gasoline prices are a
difficult problem to address because the demand in Alaska is
relatively constant. Prices in the Lower 48, for example, have
dropped due to a huge drop in demand, but Alaska doesn't have
the luxury of being able to similarly reduce its demand.
10:30:04 AM
CHAIR RAMRAS then read portions of an e-mail he'd received that
expressed concern about statements he'd made that were quoted in
a Fairbanks Daily News-Miner article; the author of the e-mail
suggested that it is the legislature's duty to take action on
this issue. Chair Ramras asked Mr. Sniffen what would be the
worst that could happen if the legislature were to enact a law
that limited what refineries could charge.
MR. SNIFFEN surmised that the worst that could happen is that
the refineries would simply close down, and even if that were
not the immediate outcome, such legislation could result in
refineries producing a poorer-quality product, or becoming
unreliable, or not being able to fulfill contractual obligations
as they attempt to cut costs.
REPRESENTATIVE LYNN asked what the difference is between price
control and anti-gouging legislation.
MR. SNIFFEN said that price-gouging legislation would put a
limit on how much may be charged for a product or service; price
control efforts, in contrast, are generally subsidized by
government programs. The only way to effectively implement some
sort of pricing limitation, he opined, would be to have an
entity such as the Regulatory Commission of Alaska (RCA)
regulate the product. However, he pointed out, a similar tack
taken in Hawaii with regard to gasoline prices didn't work out.
CHAIR RAMRAS asked Mr. Sniffen to provide the committee with
more information about the steps Hawaii took and the results.
MR. SNIFFEN, in response to a comments and a question, said he
suspects that regulating gasoline prices via an agency such as
the RCA could result in Alaskans paying higher prices, on
average, than in the past.
REPRESENTATIVE HAWKER suggested that Alaska's refiners should be
put on notice that they must either voluntarily decrease their
prices or face being regulated or being subject to criminal
penalties.
10:41:39 AM
REPRESENTATIVE LYNN suggested that regulating gasoline prices
would disrupt "the free market economy," which, he opined, most
people favor. He asked Mr. Sniffen whether, at this point in
time, he would recommend regulating gasoline prices via the RCA.
MR. SNIFFEN said he doesn't think he could recommend such
action. Gasoline is a tricky commodity to regulate, and so
instead its pricing is treated like that of other consumer
products such as milk, bread, and eggs, even though gasoline
isn't a product that people can simply choose not to buy.
Gasoline is almost an essential service, though not quite
because in many instances there are other means of
transportation available, though perhaps not necessarily in
Alaska. He suggested instead that it would be better if
refiners made a voluntarily commitment to fair pricing.
Furthermore, if Alaska had an infrastructure that encouraged
competition, such as a public terminal that could be leased for
gasoline storage, the threat of that alone would perhaps go a
long way towards encouraging refiners to keep their prices a
little more competitive. Sooner or later, competition is really
the answer.
REPRESENTATIVE LYNN concurred. Competition is the answer
regardless of what product/commodity is being discussed, he
opined. With regard to the concept of regulating gasoline, he
said, "This is a very dangerous path we're going down, here; to
me, the answer ..., in a free market economy, is to increase the
competition ...."
MR. SNIFFEN concurred.
CHAIR RAMRAS questioned whether the Tesoro Corporation is
charging high prices at its refinery in Alaska in order to make
up for losses at its other refineries. He again suggested that
the committee be provided with information about the steps
Hawaii took and the results.
10:46:35 AM
MR. SNIFFEN said he would attempt to do so. In response to
comments and questions, he relayed that the statute the DOL uses
to investigate potential antitrust and consumer protection
violations requires that the DOL maintain the confidentiality of
the information it's gathered during an investigation. Because
of this, the DOL can't disclose the information recently
provided by Tesoro. He remarked, however, that the DOL did have
a good discussion with Tesoro, and that Tesoro was very
cooperative in providing the information that Mr. Pulliam and he
need in order to determine whether anything illegal is
occurring. He said he doesn't think that Tesoro is attempting
to ride the wave of high gasoline prices as long as possible;
instead, Tesoro has simply been reacting to market conditions in
a fairly responsible manner. "There [are] ... just ... a lot of
interesting complexities that go into their pricing decisions,"
he offered.
MR. SNIFFEN, in response to a question, explained that the
antitrust investigation that occurred during the Knowles
Administration focused on whether there was collusion among
refineries [and/or] distributors to artificially set the price
of gasoline at the level it was back then; there seemed to have
been a bubble between 1995 and 1998 of supra-competitive prices.
That investigation found no evidence of collusion, and prices
did come down after the investigation was concluded, and
normalized over time. The current investigation is similar,
though there are different dynamics present such as an
unprecedented run up in the price of crude oil, as well as an
unprecedented run down. And as the markets in the rest of the
United States adjusted to those price fluctuations, Alaska's
market hasn't really followed the same trends. The DOL's
current investigation is focused on whether that failure to
follow those trends is the result of some coordinated or
collusive activity.
MR. SNIFFEN, in response to another question, said that the DOL
is looking at more than just the refineries' rack rates; the DOL
is looking at all sellers of fuel, not just the refiners. He
said he is not convinced that there isn't some arrangement that
might be illegal, and so the DOL is still going to explore that
possibility, as well why it is that the relationship in Alaska
between the price of crude oil and the price of gasoline has
been so different than it has been everywhere else. There are
some explanations for why the price of gasoline is higher in
Alaska, but those contributing factors have always been present
and so don't explain why prices in Alaska haven't responded to
the market in the same way prices everywhere else have. Anytime
retailers and refiners are able to maintain supra-competitive
prices for an extended period of time, there is generally a
reason why and it's generally not a market-based reason. This
is raising a big red antitrust flag, so the DOL is still
investigating what that reason might be because supra-
competitive prices, although currently somewhat lowered, are
still in place in Alaska, and a market that's operating
rationally shouldn't be able to maintain supra-competitive
prices. Competitive pricing, in comparison, stays close to what
it would cost a company to make or provide a particular product
or service and have a reasonable rate of return.
10:56:41 AM
CHAIR RAMRAS questioned whether it is correct to say that the
retail sellers of gasoline have competitive pricing, and so the
supra-competitive pricing is occurring before the gasoline gets
to the retailers.
MR. SNIFFEN surmised that that might be true in Southcentral
Alaska, but not in Southeast Alaska because there just isn't a
lot of competition in Southeast Alaska. In response to comments
and questions, after noting that the DOL has the power to
subpoena information and keep it confidential, he suggested that
the legislature use its power to open up competition via
statutory changes, explore regulatory options, and consider
introducing price-gouging legislation that would apply in times
of emergencies, though the issue of whether extremely high crude
oil prices constitute an emergency would also need to be
addressed.
REPRESENTATIVE HAWKER asked whether the DOL needs anything more
from the legislature that would assist the DOL in its
investigation.
MR. SNIFFEN said he couldn't think of anything at this point,
but surmised that the committee's hearings on this topic have
been helpful to the public.
REPRESENTATIVE HAWKER offered his belief that these hearings
have resulted in price reductions.
REPRESENTATIVE THOMAS said he's heard complaints that the recent
repeal of Alaska's motor fuel tax hasn't actually been passed on
to consumers.
MR. SNIFFEN said that as soon as the repeal took effect, the
Department of Revenue (DOR) stopped charging that tax, and
retail gasoline prices in Anchorage did drop [by $.08], though
that doesn't necessarily mean that $.08 hasn't since been added
back onto retail prices. He pointed out that some areas of the
state have borough and city sales taxes, and consumers in those
areas are still paying those taxes.
REPRESENTATIVE THOMAS noted that he's seen some local
initiatives proposing to repeal those local taxes.
MR. SNIFFEN acknowledged that those local taxes can
significantly raise the price of petroleum products. In
response to a question, he offered his understanding that
Alaska's refineries are meeting their jet-fuel contract
requirements, that jet fuel still needs to be imported into the
state in order to meet demand, and that Alaska's refineries are
producing more gasoline than there is demand for in the state
because Alaska is the smallest user of gasoline in the nation -
Alaska's demand is tiny compared with that of any other state.
He added that he doesn't think that any attempts by the
refineries to meet the state's demand for jet fuel are driving
the state's gasoline-pricing problems. In response to a comment
and a question, he offered his understanding that gasoline is a
byproduct of jet fuel production, and said he doesn't know what
effect doing away with the state's jet fuel contracts would have
with regard to what the refineries decide to produce.
REPRESENTATIVE COGHILL suggested that the jet fuel contracts
might impact gasoline availability.
11:12:29 AM
REPRESENTATIVE GRUENBERG asked if the DOL has investigated
whether, at stores that also sell gasoline, the prices of their
other products went up when they lowered their gasoline prices.
MR. SNIFFEN said no.
REPRESENTATIVE GRUENBERG questioned whether, if newspapers were
to publish the gasoline prices at various local retail
locations, it would increase competition.
MR. SNIFFEN said it might and it certainly wouldn't hurt; to the
extent that lower prices can be rewarded by a higher volume of
sales, it certainly helps competition. However, the way most
people go about deciding where to buy gasoline is that they wait
until the low-fuel light comes on and then they buy gasoline at
the closest gas station regardless of the price, and still other
people are driven by the desire for convenience and so they
simply buy their gasoline at the most convenient location such
as at a gas station located on the way to work or on the way
home from work. He surmised, therefore, that having gasoline
prices published in newspapers will only affect the decisions of
those who make a point of investigating where the lowest prices
are, though at current prices, he acknowledged, perhaps more
people are choosing to do that.
REPRESENTATIVE GRUENBERG said it seems to him that at stores
that also sell gasoline, it is the other products that are the
loss lead items, and not gasoline; if such were not the case,
then those stores would advertize their gasoline prices in the
newspapers just as they do their other products.
MR. SNIFFEN offered his recollection that at the last meeting on
this topic, representatives from Safeway, Inc., testified that
they would much rather sell their other products than gasoline,
because their profits are higher for those other products. He
offered his understanding that some stores that offer a reward
program for gasoline sales will advertize that fact.
REPRESENTATIVE GRUENBERG surmised that perhaps most stores don't
advertize the price of their gasoline because the cost of the
gasoline to them fluctuates so much.
11:17:28 AM
REPRESENTATIVE CARL GATTO, Alaska State Legislature, asked
whether the refineries commit to providing a specific amount of
jet fuel.
MR. SNIFFEN offered his understanding that all contracts for jet
fuel are long-term contracts of one to three years, and that
once a refinery enters into such a contract, the refinery is
then committed to providing a certain volume of jet fuel though
it may not actually refine all of it and may instead have to
import some of it. In response to another question, he offered
his understanding that the price of jet fuel is keyed to another
market - another price marker - and so when that market
fluctuates, the price also fluctuates.
CHAIR RAMRAS referred to a proposed confidentiality agreement
recently drafted by Legislative Legal and Research Services, and
asked Mr. Sniffen whether he thinks it would be worthwhile for
the legislature to pursue obtaining confidential information
from the refiners.
MR. SNIFFEN surmised that engaging in such an agreement and
pursing such confidential information would give the legislature
a much better understanding of how retailers determine their
pricing, but the legislature would then be precluded from
sharing anything it learns with the public - so it would
probably be enlightening but not useful. Notwithstanding that
point, he added that he would encourage the legislature to
pursue obtaining that confidential information, because then he
would be able to share his observations about that information
with the legislature.
REPRESENTATIVE LYNN, in response to comments, indicated that in
general, he has a problem with [entering into] confidentiality
agreements because he is wary of learning something that he
can't then share with his constituents.
The committee took an at-ease from 11:26 p.m. to 11:33 p.m.
11:33:38 AM
BARRY PULLIAM, Senior Economist, Econ One Research, Inc., as a
consultant to the Department of Law, first briefly recounted his
investigatory experience as it pertains to gasoline and its
pricing, and remarked that there have been many, many such
investigations at both the national level and at the state
level. In response to a question regarding whether the
legislature would benefit from pursuing confidential information
from refiners, he echoed Mr. Sniffen's comments. On the issue
of Alaska's gasoline market, he referred to page 1 of his
PowerPoint presentation, and said it illustrates that Alaska is
part of the West Coast supply area - Petroleum Administration
for Defense District (PADD) V - and thus although comparisons
can be made between Alaska and other states, with regard to
supply, the more relevant comparisons will be between Alaska and
the other PADD V states: Arizona, California, Hawaii, Nevada,
Oregon, and Washington. The Pacific Northwest, in other words,
is the potential supply alternative for Alaska, and in fact
somewhat already functions as such, particularly in Southeast
Alaska.
MR. PULLIAM said that from a refining standpoint and a petroleum
supply standpoint, the West Coast operates differently than the
rest of the country, just as Alaska operates differently than
the rest of the country and the West Coast. Alaska has to
contend with geographic distances and a lack of infrastructure
such as pipelines that could readily connect it with refineries
in the Gulf Coast or the rest of the West Coast, and so it is
not always in lockstep with those markets.
11:38:45 AM
MR. PULLIAM, referring to page 2 of his PowerPoint presentation,
indicated that it illustrates that Alaska has the lowest
percentage of gasoline sales of all the states, selling only
two-tenths of 1 percent of the national average. Alaska is not
a big demand area, and so it just doesn't have a lot of
refineries; [page 3 of the PowerPoint presentation illustrates
that] Alaska only has two refineries, one owned by Tesoro Alaska
Company, and one owned by Flint Hills Resources. In contrast,
Washington and California have 18 refineries owned by 10
companies that are readily able to move product up and down the
West Coast, thus resulting in a different competitive picture.
Furthermore, in terms of capacity, Alaska's refineries are small
- less than half the average size of those on the rest of the
West Coast - and are very simple refineries. One statistic on
page 3 refers to a refinery's "complexity" - how much of a
barrel of crude oil can it turn into the more valuable lighter
products such as gasoline and jet fuel. Compared to refineries
in the rest of the nation, Alaska's refineries are the least
complex refineries still operating, and they are not designed to
manufacture a lot of gasoline and so produce very little of it,
though they do have some limited ability to upgrade some "bottom
of the barrel" products into "middle distillates" such as jet
fuel and diesel.
MR. PULLIAM said Alaska's refineries, in addition to being
smaller and less efficient, have smaller footprints and so on a
"per unit" basis, the fixed costs must be spread over the
smaller number of barrels being refined. Referring to page 4 of
his PowerPoint presentation, he indicated that it illustrates
petroleum product sales in Alaska compared to the rest of the
PADD V region. Only about [15.4 percent] of what Alaska sells
is gasoline, whereas about [44.9 percent] of what the rest of
PADD V region sells is gasoline. However, about [60.8 percent]
of what Alaska sells is jet fuel, whereas only about [13.1
percent] of what the rest of the PADD V region sells is jet
fuel. Alaska's consumption is really geared towards jet fuel.
He noted that because of confidentiality issues, page 4 doesn't
reflect production statistics, only consumption statistics. He
predicted that if he were able to list production statistics,
Alaska could be seen to be producing a larger percentage of
residual fuel than other [PADD V states]; these bottom-of-the-
barrel products are not as valuable as either jet fuel or
gasoline.
MR. PULLIAM, referring to page 5 of his PowerPoint presentation,
indicated that it illustrates that for the last 10 years, the
demand in Alaska compared to elsewhere on the West Coast is very
seasonal, with a big spike in demand during the summer months.
This seasonality somewhat affects how refiners operate and what
they manufacture. So although some comparisons can be made
between Alaska and other PADD V region states - and doing so is
more relevant than comparing Alaska with any of the other states
- Alaska is still different, particularly with regard to the
types of products offered, the average consumption levels, the
types of refineries it has, and the nature of the competition in
that there just aren't as many "players" in Alaska.
MR. PULLIAM, referring to page 6 of his PowerPoint presentation,
indicated that it illustrates the price of Alaska North Slope
(ANS) crude oil compared with after-tax retail prices of
gasoline in Anchorage and Seattle since 2004. Page 7 of his
PowerPoint presentation, he relayed, illustrates combined local,
state, and federal gasoline taxes throughout the country.
Alaska, even before the repeal of its state motor fuel tax, had
the lowest taxes in the country. Currently, except for local
taxes, Alaska only pays a federal tax of $.18/gallon, whereas
the average taxes in the U.S. as a whole come to about
[$.484/gallon], and Washington has taxes of about $.56/gallon.
Page 8 of his PowerPoint presentation, he explained, illustrates
the price of ANS crude oil compared with before-tax retail
prices of gasoline in Anchorage and Seattle since 2004.
Essentially, retail gasoline prices generally keep pace with the
price of crude oil, but don't go in lockstep - they are "sticky"
and so it takes time, even in places other than Alaska, for "oil
prices to work themselves through the system." Furthermore,
there are other factors that go into the pricing of gasoline,
such as what is occurring in the refining market.
MR. PULLIAM noted that what has occurred recently is that from
the beginning of 2008, crude oil essentially doubled in price
and then fell back down to what it was in 2007. This has been
the most volatile period that he can remember, he added, and
indicated that page 9 of his PowerPoint presentation illustrates
that as the price of ANS crude oil goes up in the latter part of
2007 and first part of 2008, gasoline prices in both Anchorage
and Seattle went up as well, though the margin between oil
prices and gasoline prices did shrink until the point when oil
prices started to decrease, sometime in July 2008. Seattle
gasoline prices fell off at a slower rate than oil but more
quickly than Alaska gasoline prices. The fact that Alaska's
gasoline prices fall more slowly than in other states is a
pattern that's been seen historically, though not to the degree
seen recently.
MR. PULLIAM, in response to a question, explained that residual
oil - sometimes referred to as the bottom of the barrel - can be
used for asphalt, and more sophisticated refineries can "crack"
residual oil into bunker fuel oil; generally, though, residual
fuel is not as valuable as even crude oil itself. In response
to comments and a question regarding page 9 of his PowerPoint
presentation, he explained that lags in prices work both ways.
For example, in 2007, when prices were going up, the price in
Seattle rose more quickly than did the price in Alaska. He
acknowledged that once the price in Alaska hits a high peak, it
is then slow to come off that high price. Page 9 compares the
before-tax retail gasoline price in Anchorage between November
2007 and mid-October 2008 with that of Seattle, and with the
price of ANS crude oil. In mid-October 2008 the price in
Seattle was approximately $1/gallon more than crude oil, and the
price in Anchorage was about $1.76/gallon more than crude oil.
Noting that he'd looked at data from as far back as 2000, he
characterized this three-and-a-half-month price lag between the
West Coast and Anchorage as the longest on record. In response
to a request, he relayed that he would also look at data as far
back as the early 1990s. In response to a question, he said
that page 9 reflects daily numbers turned into monthly averages.
11:54:27 AM
SENATOR GENE THERRIAULT, Alaska State Legislature, referring to
page 8 of Mr. Pulliam's PowerPoint presentation, asked whether
the lag in a reduction of Alaska's prices is due to gouging by
the refineries or due to the fact that the state's supply
infrastructure is less competitive and less sophisticated. He
also asked whether other PADD V states that have found
themselves awash in gasoline are then encouraged to drop their
prices faster.
MR. PULLIAM said that all of those factors have contributed [to
the current higher prices in Alaska compared to other
locations]. He indicated that in a purely competitive market,
one would expect people to take advantage of the lower prices
elsewhere by getting that cheaper product to Alaska and selling
it at Alaska's higher price, which is currently higher than
Seattle's by about $.80/gallon. So, since it certainly doesn't
cost $.80/gallon to transport gasoline from one location to
another, and since the structure of Alaska's market is less
competitive - fewer refiners, fewer wholesalers - the question
then becomes, why hasn't that difference in price been
arbitraged away, since that's what competitive markets do. What
he has found, he relayed, is that in small markets, such as
Alaska's, even a three-month lag in price reduction doesn't
really provide enough incentive to bring in cheaper product; the
aforementioned sort of market discipline is only possible if the
lag continues long term. Furthermore, outside of Southeast,
Alaska doesn't really have the infrastructure for handling such
additional imports of gasoline. He then offered an example in
which California, for a brief period of time, experienced fewer
imports and [thus higher prices].
12:01:51 PM
MR. PULLIAM, referring to page 10 of his PowerPoint
presentation, indicated that it compares the before-tax retail
gasoline price in Anchorage between November 2007 and mid-
October 2008 with those of Seattle and Honolulu, and with the
price of ANS crude oil. Hawaii is similar to Alaska in that
they both have only two refineries and about the same number of
wholesalers, and thus they have a similar competitive structure,
though the demand in Hawaii is larger than it is in Alaska.
Regardless, the price of gasoline in Alaska is still higher, by
about $.29, than it is in Hawaii, and the rate at which prices
are adjusting in Hawaii is not as great as it is in Seattle.
Referring to page 11 of his PowerPoint presentation, he
indicated that it illustrates the rack price - the wholesale
price - of gasoline in Anchorage and in Seattle, along with the
price of ANS crude oil, since 2004. In Alaska, rack prices are
set by the refiners and some distributors, and are typically
more responsive to changes in the price of crude oil than are
subsequent retail prices. The drop off in rack price and the
margins between the rack prices illustrated on page 11 is
similar to the drop off and margins with regard to retail prices
as illustrated on previous pages of the PowerPoint presentation.
This indicates that at issue is the question of what is going on
at the refinery/wholesale level, not the wholesale/retail level.
MR. PULLIAM, in response to comments and a question, explained
that the recent large margin between Seattle's rack price and
Anchorage's rack price, such as is illustrated on page 11, can
be found with any two markets or locations that are as far apart
from each other as are Anchorage and Seattle - there simply will
be periods in which the rack prices move far apart as a result
of the particulars of each location/market. He acknowledged
that this current period and large margin have lasted far longer
than any others in the past. Additionally, the recent huge
increase in the price of crude oil, as well as the recent huge
price decline is also unprecedented. He said that at this
point, he doesn't have an explanation for why there is currently
such a large margin between Anchorage and Seattle prices, other
than to say that the nature of Alaska's market is different and
could potentially account for the lag in a price reduction.
CHAIR RAMRAS expressed interest in learning which questions the
committee should be asking the refineries.
12:10:01 PM
MR. PULLIAM, in response to a question, explained that for
arriving at what a gallon of ANS crude oil would cost, he used a
calculation of 42 gallons per barrel.
REPRESENTATIVE GRUENBERG suggested that a graph illustrating the
price differentials as percentages, as opposed to monetary
amounts, would be helpful.
MR. PULLIAM said that although he could create such a graph, he
doesn't think it would be helpful because what is being
investigated is the difference between prices in Alaska and
prices in Seattle, for example, and so what should be considered
is the difference in price as it relates to the cost of
importing product to Alaska from elsewhere in the Pacific
Northwest; that cost, although it can change some depending on
the cost of the fuel it takes to transport product, doesn't
change in the same kind of "percentage manner" as the underlying
price of oil.
REPRESENTATIVE GRUENBERG argued that he would still find it
helpful to see such a graph.
12:13:32 PM
MR. PULLIAM, referring to page 12 of his PowerPoint
presentation, indicated that it illustrates that at least since
2004, the statewide average after-tax price of kerosene-type jet
fuel in Alaska pretty much mirrors that in Washington. Jet fuel
prices aren't subject to the same kind of disparity found with
gasoline prices, in part because that's how that particular
market works; there are a larger number of suppliers as well as
importation from other sources - thus there is far more
competition - and the buyers of jet fuel are very sophisticated
and have the ability to leverage a nationwide buying package,
and thereby bring that to bear in Alaska. He predicted that if
the chart were to include a jet fuel price for Hawaii, it would
also mirror the Alaska and Washington prices. Buyers of jet
fuel could probably even leverage to bring product in to their
area and thus avoid being reliant upon local supply if the local
price got too far out of line.
SENATOR THERRIAULT surmised that Alaska is a big player in the
jet fuel market, that it's refineries are well suited to the
manufacture of jet fuel, and that if the jet fuel price in
Alaska gets too high, buyers will simply bring jet fuel in from
elsewhere.
MR. PULLIAM concurred, adding that jet fuel is already regularly
imported into Alaska and this has resulted in [price] stability.
SENATOR THERRIAULT asked what would be the impact on gasoline
prices in Alaska if a similar importation infrastructure were
put in place.
MR. PULLIAM opined that having an adequate importation
infrastructure in place would be a big factor and something
worth looking at. When other states have looked into the issue
of high fuel prices, they've determined that having an adequate
importation infrastructure is key to being able to discipline
price. The only thing that can discipline price when there are
only two refiners is the potential for cheaper product to be
imported into the area, and even if product isn't brought in,
just having an adequate importation infrastructure in place can
provide more price discipline. And, of course, there would
still be challenges associated with importing product to Alaska;
for example, having enough buyers, and having sufficient storage
space. And with regard to having enough buyers, that issue is
further complicated by the fact that in Alaska, there just
aren't a lot of retailers that aren't already affiliated with,
or have a contract with, a particular supplier. Nonetheless, he
reiterated, establishing an adequate importation infrastructure
is something worth looking at.
MR. PULLIAM, in response to a question, said that the focus of
the DOL's investigation has been on the price of gasoline, not
the price of home heating oil or diesel. He offered, however,
that the buying leverage of diesel is more akin to that of
gasoline than to that of jet fuel.
CHAIR RAMRAS added that the committee is also primarily focused
on gasoline prices. He expressed interest in learning why, if
the industry was making a profit when selling gasoline at
$2.77/gallon a year ago when oil was $81/barrel, the industry
must now charge $3.94 even though oil is again $81/barrel. At
issue, he opined, is the question of what was it that occurred
which resulted in gasoline prices in Alaska not keeping pace
with prices in the Lower 48 once those prices started to
decrease.
12:22:58 PM
MR. PULLIAM, acknowledging that short-term prices are volatile
and prone to disparity, suggested that it would helpful for the
committee to look at average prices over the long term. Page 13
of the PowerPoint presentation, for example, illustrates the
spread between Anchorage and Seattle before-tax retail gasoline
prices every year since 2002; the average spread for the last
seven years was about $.15/gallon, which is not too far out of
line with what one would expect it to cost to bring product up
to Alaska and the incremental cost of selling product in a place
where there is less demand. Early on in 2008 the spread was
about $.18/gallon; however, most recently it has been about
$.36/gallon.
MR. PULLIAM indicated that page 14 of his PowerPoint
presentation illustrates the spread between Anchorage and
Seattle's before-tax retail gasoline prices for the months of
August through October every year since 2002. From 2002 through
2007, the spread averaged only about $.17/gallon, whereas in
2008, the spread was $.71/gallon. Therefore, he concluded, the
seasonality of demand in Alaska had nothing to do with the
failure of prices in Alaska to decrease when prices in the Lower
48 decreased - there is nothing that explains a spread of
$.71/gallon. He then indicated that page 15 of his PowerPoint
presentation illustrates the average monthly spread between
Anchorage and Seattle's before-tax retail gasoline prices for
the period between 2002 and 2007, compared with the monthly
spread for 2008. The monthly spreads in 2008 do not follow the
spread pattern of the prior six years. In response to a
question, he said that even if he were to add more prior-year
data, the monthly spreads in 2008 still wouldn't resemble the
spreads in prior year.
REPRESENTATIVE HAWKER noted that the vast difference in monthly
spreads started to occur in April 2008. He asked what occurred
at that point in time to account for the abrupt change in
spreads.
MR. PULLIAM said he can't point to a particular event or cause
other than to say that the structure of Alaska's market is
simply different; there is less competition in Alaska, and so
there is no incentive to lower prices again once a company has
been forced to raise prices to keep up with higher costs.
REPRESENTATIVE HAWKER maintained his belief that something
specific had to have happened.
12:29:43 PM
MR. PULLIAM, in response to comments, offered his belief that at
least in the Anchorage and Fairbanks areas, any extra profit
resulting from Alaska's lag in reduced pricing is not, for the
most part, being seen at the retail level, regardless that there
might be some anecdotal evidence which suggests that some
retailers are enjoying a higher profit margin for short periods
of time. This lack of consistent large profits over the long
term for retailers is the result of there being sufficient
competition at that level; again, however, in Alaska, there is
less competition at the "rack/distribution" level. Referring,
then, to page 16 of his PowerPoint presentation, he noted that
he'd also given consideration to whether the pricing lag Alaska
is experiencing is simply something that happens after oil
prices have fallen, but research of past oil price decreases
indicates that such is not the case. He said he doesn't have an
answer regarding why Alaska's retail prices are not now keeping
pace with retail prices elsewhere other than the fact that this
year, the oil market has been more volatile than it's ever been,
that gasoline prices tend to lag oil prices, and that they tend
to lag even more in a less competitive environment such as
Alaska's. It just doesn't seem to be the case that continued
high retail prices in Alaska are the result of illegal activity,
he concluded, adding that this same conclusion has been reached
in various past investigations.
CHAIR RAMRAS asked what would be the effect of enacting anti-
gouging legislation that would be triggered by an economic
disaster, defined as occurring anytime oil prices rise above
$100/barrel, and that would apply to rack prices rather than
retail prices.
MR. PULLIAM - speaking of his experience with the state of
Hawaii when it attempted to address, via a price cap and
regulatory oversight, high gasoline prices at the wholesale
level - expressed disfavor with the concept of such legislation,
and warned members to be extremely cautions when considering
that approach because it could result in decreasing the state's
gasoline supply. Hawaii geared it's wholesale-price cap to an
average of wholesale prices in Los Angeles, Houston, and New
York, under the theory that product could come from a variety of
locations; in reality, however, Hawaii was able to obtain less
expensive gasoline from Asian markets, and this enabled
wholesalers in Hawaii to raise prices up to the cap and thus
charge more for product than consumers were paying on the West
Coast. Eventually, Hawaii allowed that legislation to lapse,
and there is still ongoing debate regarding whether it actually
did anything to control high gasoline prices.
12:41:17 PM
CHAIR RAMRAS suggested that the legislature could perhaps
institute a price cap that would preclude a rack rate in Alaska
from being more than $.17/gallon higher than the rack rate in
Seattle, or from being more than the average historical
difference between Alaska and Seattle prices over the preceding
seven years.
MR. PULLIAM suggested that any such price cap should be tied to
the movement of the price of a barrel of oil as it either
approaches or recedes from a particular price, not just tied to
a fixed price.
CHAIR RAMRAS asked whether a price cap on rack rates would
negatively affect the market.
MR. PULLIAM said he could research that issue further, but again
warned that there are potential pitfalls associated with trying
to implement such a cap.
CHAIR RAMRAS acknowledged that point, but argued that his
constituents are strongly urging him to do something about the
high price of gasoline in Alaska. He then reiterated his
suggestion to institute a price cap on rack rates, as well his
question about what the unintended consequences of such a cap
would be.
MR. PULLIAM, in response to a different question, explained that
the federal gasoline tax is the same for all states -
$.18/gallon, and reiterated that Alaska no longer has a state
gasoline tax. In response to another question, he said that
although there are items the prices of which the State controls,
to do so with petroleum products should only be undertaken with
extreme caution.
The committee took a recess from 12:47 p.m. to 2:19 p.m.
2:19:05 PM
JEFF COOK, Director, External Affairs, Flint Hills Resources,
noting that he'd already provided written testimony during the
committee's last hearing on the topic of high gasoline prices,
and that he didn't have much to add, explained that Flint Hills
Resources supplies only about 15 percent of the gasoline
consumed in Alaska, and that all of the gasoline his company
refines is consumed in the Interior. From the aforementioned
written testimony, he repeated that his company sells about one-
third of the heating fuel sold in the Interior. He then relayed
that Flint Hills Resources has provided the DOL with all the
information it requested, though that information remains
confidential, even from him.
MR. COOK went on to say:
Federal laws relative to price fixing inclusion
prohibit us from discussing details of pricing, costs,
and our marketing in a forum where our competitors
attend or might be able to gain information from a
public forum. My guess is our competitors are
probably on line listening as we speak. So, to the
extent possible, ... I will answer questions you have
....
CHAIR RAMRAS asked whether Flint Hills Resources would be
amenable to providing legislators with confidential information
if legislators sign the proposed confidentiality agreement.
MR. COOK, noting that he is not the company's legal counsel,
relayed that Flint Hills Resources would be willing to look at
that document to see if it is satisfactory.
CHAIR RAMRAS, noting that some members are reluctant to be
provided with information that can't then be shared, said he
wants to be provided with confidential information in order to
better understand the issue.
REPRESENTATIVE HAWKER opined that such information would be
helpful, but cautioned that confidentiality agreements impose
incredible responsibilities on those who sign them.
2:23:59 PM
REPRESENTATIVE GRUENBERG suggested changes to the proposed
confidentiality agreement.
REPRESENTATIVE COGHILL indicated that he is not in favor of
signing a confidential agreement.
REPRESENTATIVE DAHLSTROM indicated that she is in favor of
signing a confidentiality agreement.
CHAIR RAMRAS mentioned that at its next meeting, the committee
will further address the question of whether to enter into a
confidentiality agreement with the refiners.
REPRESENTATIVE COGHILL observed that were he to enter into a
confidentiality agreement with refineries, constituents might
begin to question his motives for any actions he takes regarding
the refineries after being provided with their confidential
information.
[Following was a brief discussion regarding how the committee
might be proceeding should all or some members choose to enter
into a confidentiality agreement.]
REPRESENTATIVE HAWKER, referring to page 15 of Mr. Pulliam's
PowerPoint presentation, asked Mr. Cook what occurred in April
2008 to account for the abrupt change in historical pricing
spreads.
MR. COOK said he does not know of anything.
REPRESENTATIVE HAWKER asked him to speculate.
MR. COOK declined to do so.
REPRESENTATIVE GRUENBERG asked Mr. Cook whether he would be
willing speculate if he could do so in a confidential setting.
MR. COOK explained that were Flint Hills Resources to enter into
a confidentiality agreement with legislators, he would not be
the one providing legislators with the confidential information,
and thus he couldn't speculate then, either.
2:35:24 PM
CHAIR RAMRAS asked whether Flint Hills Resources is producing
less gasoline in order to be able to produce more jet fuel.
MR. COOK said no.
CHAIR RAMRAS asked whether refineries are attempting to recoup,
via high gasoline prices, any losses they experienced as a
result of high crude oil prices.
MR. COOK explained that that's not how refineries price their
products; instead, prices are considered in terms of what the
daily markets are doing. He noted that the confidential
information provided by Flint Hills Resources to the DOL
addresses this point in more detail.
CHAIR RAMRAS asked how environmental regulations have impacted
Flint Hills Resources, and whether the cost of complying with
any such regulations is being amortized into the price of its
products.
MR. COOK, in response, repeated a portion of his written
testimony provided during the committee's last hearing on the
topic of high gasoline prices:
There were many topping plants operating in the United
States when the North Pole Refinery opened for
business in 1977. Now, there are just a few.
Increased environmental emissions regulations caused
many topping plants to shut down and increasingly
stringent federal requirements on the type of fuels
produced forced others to close.
The North Pole Refinery was able to keep pace with new
environmental regulations but the changes in the type
of fuels required has impacted the amount of gasoline
that can be produced at our North Pole plant.
Since federally mandated decreases in sulfur content
for gasoline and diesel fuel came into effect in the
last few years, our ability to produce those two fuels
has been substantially diminished. While the refinery
still produces some gasoline and off-road diesel, we
now buy gasoline and diesel fuel from other sources in
order to meet the full needs of our customers.
MR. COOK, in response to a question, said Flint Hills Resources
is currently able to meet gasoline demands in the Interior, but
only just. In response to another question, he acknowledged
that the type of crude oil being acquired by a refinery does
affect its ability to refine products. For example, crude oil
that contains more impurities can cause problems with a
refinery's equipment, and crude oil with more viscosity must be
heated more in order for it to flow through to the refining
equipment. There is some concern that as Alaska's remaining
supply of crude oil increases in viscosity, a refinery located
in the Interior would not be able to operate on any resulting
intermittent supply of crude.
REPRESENTATIVE COGHILL asked whether the quality of the raw
crude oil that Flint Hills Resources refined resulted in
Alaska's high retail gasoline prices compared with those of
other PADD V states.
MR. COOK said he is not qualified to answer that question.
REPRESENTATIVE COGHILL said he assumes that the cost of
operation is higher when the raw product is more viscous.
CHAIR RAMRAS asked what it would cost for Flint Hills Resources
to convert its refinery such that natural gas, instead of oil,
could be used to produce its refined products.
MR. COOK explained that Flint Hills Resources has not yet
conducted a complete analysis, but feels that such a conversion
would be an advantageous step to take, assuming a stable supply
and a competitive price. In response to a question, he said:
The future of refining in Alaska and North Pole is
uncertain. On the positive side, we have a great
workforce, and they have ... hit a number of safety
records in our operation recently, and we're very
proud of those. ... We believe that the people of
Alaska value having in-state refining, and we
certainly know that some of the larger economic
entities such as the Alaska railroad, the Ted Stevens
International Airport, and [the] Fairbanks airport
realize the value of having in-state refining.
However, these uncertain economic times and recent
high crude prices have hurt our refinery in
particular. ... Additional federal regulations on
fuels could also negatively impact our operations.
There's also discussion on climate change, and other
regulations that have the potential to challenge our
operations. And ... declining North Slope crude
production is also a concern, as is the challenge of
places like Prince George, B.C., saying they want to
take away the cargo business out of the Ted Stevens
International Airport in Anchorage. So these are some
of the challenges we face in the future - very
uncertain.
2:42:50 PM
CHAIR RAMRAS asked Mr. Cook what he sees as being the major
factors contributing to the fact that gasoline prices in Alaska
do not come down as quickly as they do in the Lower 48 and lag
behind the price of oil when it falls.
MR. COOK declined to answer that question because of
confidentiality concerns, but noted that Flint Hills Resources
has provided the DOL with information on that point.
CHAIR RAMRAS asked what effect a price cap, such as was
discussed earlier, would have on Flint Hills Resources.
MR. COOK said it would be difficult to say without being able to
analyze the specific language of such a cap. Flint Hills
Resources, he added, would never compromise on the quality of
the fuel it sells, and strongly believes in free enterprise and
the competitive system; in the long term, consumers are best
served by unfettered economic enterprise. In response to
another question, he relayed that when his friends and relatives
ask him about the high retail price of gasoline, he replies that
the market will work [to lower prices] and they must just have
patience. He noted that he, too, is paying those same retail
prices.
REPRESENTATIVE HAWKER asked Mr. Cook what he thinks the State
could do to increase competition.
MR. COOK, remarking that it would be very difficult for Flint
Hills Refinery to increase its gasoline production, offered his
belief that the State is doing a good job of providing for a
competitive environment. He also mentioned that Flint Hills
Resources no longer sells fuel to the military.
REPRESENTATIVE COGHILL surmised that most military bases in
Alaska get their fuel from Petro Star, Inc. (PSI).
MR. COOK, in response to a question, offered his understanding
that the Alaska Railroad Corporation (ARRC) obtains about 40
percent of its revenue from transporting fuel for Flint Hills
Resources.
CHAIR RAMRAS observed that having a healthy railroad is critical
to having a healthy infrastructure in the state. He then asked
the representative from the Port of Anchorage to address the
issue of [terminaling] space at the Port of Anchorage.
2:55:02 PM
STEPHEN RIBUFFO, Deputy Port Director, Port of Anchorage,
Municipality of Anchorage (MOA), first explained that the Port
of Anchorage considers itself to be a "landlord port," and that
everything it does with respect to property leases and tariff
assessments must first be approved by the Anchorage Assembly.
As a landlord port, the Port of Anchorage is responsible for
taking care of the property: maintaining the dock space,
keeping the lights on, and keeping the roads clean. However,
any operations that take place at the port are not the Port of
Anchorage's to run. There are 22 people on staff at the Port of
Anchorage, 15 of them are what he called "maintainers", and the
rest comprise office staff and management. All the equipment
and personnel - either in-house or contract - necessary to
operate the port belong to the companies that do business down
at the port.
MR. RIBUFFO said that the Port of Anchorage earns revenue in
three different ways: from lease arrangements; from dockage - a
per/foot charge per/12-hour period for the size of the vessel
tied to the dock; and "wharfage" - also known as tonnage - based
on the amount of commodity that crosses the dock, whether coming
or going. The Port of Anchorage generates approximately $14
million in revenue yearly, with a yearly profit of between $3
million and $4 million depending on a given year's expenditures;
those changing expenditures include payroll, overtime in the
wintertime, and the cost of gravel/sand.
MR. RIBUFFO, on the issue of petroleum products, relayed that
there is enough storage capacity at the Port of Anchorage for
2.8 million barrels. This capacity is spread between all the
Port of Anchorage's petroleum tenants: Flint Hills Resources,
"Signature Fuels" - which services the airport - Tesoro [Alaska
Company], and "Chevron" - which has two primary customers, the
downtown service stations that it supports, and the "defense
fuels" contract it has with Elmendorf Air Force Base for jet
fuel. He noted that all the jet fuel used at Elmendorf Air
Force Base comes through the Port of Anchorage. That 2.8
million barrels of storage capacity is what he termed static
storage capacity, whereas about three to four times that amount
actually passes through the Port of Anchorage in any given year.
A little more than 50 percent of the Port of Anchorage's revenue
is generated by petroleum products, and the Port of Anchorage
collects about $.125 per ton.
MR. RIBUFFO said that the Port of Anchorage receives [refined]
petroleum products from all the refineries in Alaska, and the
only refined fuel it receives from out of state is aviation
gasoline; this aviation gasoline, which contains lead, comes
from California because that's where one of the few refineries
in the U.S. that can still produce leaded fuel is located.
2:58:49 PM
CHAIR RAMRAS asked where the fuel that Tesoro stores in its
allocated space comes from, and where any of the fuels stored in
the Port of Anchorage's 2.8 million barrels of static storage
space comes from.
MR. RIBUFFO said that when a petroleum product comes across the
Port of Anchorage's dock, "it has no color" in that the Port of
Anchorage has no knowledge of where a customer's petroleum
product originated from. Furthermore, the Port of Anchorage
receives no crude oil; all petroleum products received at the
Port of Anchorage are refined.
MR. RIBUFFO in response to questions, said that should an entity
wish to buy gasoline in the Lower 48 and bring it to the Port of
Anchorage in order to resell it up here, currently the entity
would be limited with regard to available space; however, the
Port of Anchorage is undergoing expansion, and so once that
expansion is completed, it will open up opportunities for the
aforementioned type of enterprise.
CHAIR RAMRAS asked whether the Port of Anchorage would be able
to work with the Institute of Social and Economic Research
(ISER) if the ISER could be persuaded to conduct a study
regarding the Port of Anchorage and its expansion as they relate
to possibly providing an entity with the storage space necessary
to bring gasoline up to Alaska from the Lower 48.
MR. RIBUFFO said that the Port of Anchorage would find the time
to assist the ISER in any such study, and would view doing so as
an exciting opportunity. In response to a question, he noted
that with regard to the aforementioned expansion, the Port of
Anchorage could use as much help from the State as it is willing
to provide.
3:06:20 PM
CHAIR RAMRAS reiterated that the committee would be meeting
again next month to hear public testimony on this issue, that
the committee would be producing a report on this issue, that at
its next meeting, the committee will further address the
question of whether to enter into a confidentiality agreement
with the refiners, and that one of the committee's
recommendations to the next legislature will be that the
legislature continue holding meetings on this topic until prices
again match those in the Lower 48. He then offered some
suggestions regarding how the next hearing on this issue would
proceed.
REPRESENTATIVE HAWKER suggested that the issue of import parity
be discussed further during the next meeting; for example, the
committee could invite comments from those companies that barge
refined fuel to Alaska.
REPRESENTATIVE LYNN said he has serious concerns about price
fixing, maintaining the free market, and the problems that would
arise for those who decide to sign a confidentiality agreement.
REPRESENTATIVE COGHILL - noting that no one thus far has been
able to pinpoint a reason why retail gasoline prices in
Anchorage started being so much higher than in Seattle as of
April 2008, as illustrated via page 15 of Mr. Pulliam's
PowerPoint presentation - reiterated his concerns regarding
entering into confidentiality agreements, and how his
constituents might view any actions he takes afterwards should
he choose to sign such an agreement.
CHAIR RAMRAS asked Mr. Sniffen when the DOL's report could be
expected, what topics were going to be highlighted, and how the
DOL will separate confidential information from that which will
be disclosed to the public.
MR. SNIFFEN concurred that the DOL doesn't yet know what has
occurred to cause the aforementioned anomalous spread between
Anchorage and Seattle retail gasoline prices, but assured the
committee that the DOL will know the answer at some point,
though it may not be an answer that anyone wants to hear; for
example, the answer could simply be that prices are higher in
Alaska because refiners are able to charge more in Alaska and
therefore do so, or it could simply be that the higher prices
are the result of recent fluctuations in the price of crude oil.
He said he anticipates that the DOL will be able to provide
something - at least an interim report - to the legislature
before the start of the next session. The final report, he
indicated, will educate the public with regard to current law,
market influences, and factors unique to Alaska. Right now,
however, the only thing that the DOL can point to that might
have resulted in Alaska's higher gasoline prices is the dramatic
increase and dramatic decrease in the price of crude oil.
MR. SNIFFEN, with regard to creating a report for the public
that doesn't contain any confidential information, acknowledged
that that will be a challenge, but surmised that after the DOL
has a chance to review the confidential information given to it,
at least some of the DOL's conclusions could be relayed to the
public without disclosing any confidential information. He
added that he is already considering how best to phrase what can
be disclosed. He then offered his understanding that the cost
of shipping gasoline to Alaska runs between $.08/gallon and
$.10/gallon, and so those figures are being considered by the
DOL as it investigates the issue of import parity and what would
really be necessary in order for someone to successfully import
gasoline to Alaska.
3:22:18 PM
MR. SNIFFEN, in response to a question, explained that the
administration is considering drafting some proposed revisions
to the state's antitrust statutes, such as providing for
stronger penalties; under existing law, certain antitrust
violations only warrant a misdemeanor penalty. Alaska is not in
line with other states or the federal government with regard to
antitrust enforcement and penalties.
REPRESENTATIVE GRUENBERG noted that he's asked Legislative Legal
and Research Services to provide him with the antitrust laws of
all states and the federal government, and with a listing of
their provisions, differences, [and similarities]. He offered
his understanding that Alaska's antitrust law was drafted in the
'70s or early '80s, and that the current penalties provide for
one year in jail and a fine of $20,000 for an individual or
$50,000 for a corporation.
MR. SNIFFEN, in response to a question, offered his belief that
under federal law, the fine is $10 million for an individual and
$100 million for a corporation.
CHAIR RAMRAS asked how many people have been convicted of
antitrust violations in Alaska over the last 10 years.
MR. SNIFFEN said not many, but noted that there have been a
couple of civil actions brought by the state for the purpose of
stopping some potentially illegal conduct; he then offered an
example.
REPRESENTATIVE GRUENBERG indicated that he is considering
proposing legislation that would alter all sections of "the
Act."
CHAIR RAMRAS expressed interest in incorporating information
about the administration's proposed changes into the
aforementioned forthcoming committee report.
MR. SNIFFEN agreed to work with the committee on that point. In
response to a question, he indicated that Deborah Behr heads up
the DOL's Legislation & Regulations Section.
3:27:25 PM
REPRESENTATIVE GRUENBERG noted that the National Conference of
Commissioners on Uniform State Laws (NCCUSL), of which Ms. Behr
is a member, is currently working on revisions to some sections
of the Uniform Commercial Code (UCC), and offered his
understanding that at some point those revisions would be coming
before the committee.
[Following was a brief discussion about how the committee might
be proceeding at its next meetings, and what might be included
in the aforementioned forthcoming committee report.]
ADJOURNMENT
There being no further business before the committee, the House
Judiciary Standing Committee meeting was adjourned at 3:33 p.m.
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