03/25/2009 03:15 PM House LABOR & COMMERCE
| Audio | Topic |
|---|---|
| Start | |
| HB68 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 68 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE LABOR AND COMMERCE STANDING COMMITTEE
March 25, 2009
3:24 p.m.
MEMBERS PRESENT
Representative Kurt Olson, Chair
Representative Mark Neuman, Vice Chair
Representative Mike Chenault
Representative John Coghill
Representative Bob Lynn
Representative Robert L. "Bob" Buch
MEMBERS ABSENT
Representative Lindsey Holmes
COMMITTEE CALENDAR
HOUSE BILL NO. 68
"An Act making sales of and offers to sell certain energy
resources by a refiner at prices that are exorbitant or
excessive an unlawful act or practice under the Alaska Unfair
Trade Practices and Consumer Protection Act."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 68
SHORT TITLE: PRICE GOUGING INVOLVING ENERGY RESOURCES
SPONSOR(s): REPRESENTATIVE(s) PETERSEN, GARA, TUCK, GRUENBERG,
KAWASAKI
01/20/09 (H) PREFILE RELEASED 1/16/09
01/20/09 (H) READ THE FIRST TIME - REFERRALS
01/20/09 (H) L&C, JUD, FIN
02/04/09 (H) L&C AT 3:15 PM BARNES 124
03/25/09 (H) L&C AT 3:15 PM BARNES 124
WITNESS REGISTER
REPRESENTATIVE PETE PETERSEN
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Testified as a joint prime sponsor of HB
68.
DAVID DUNSMORE, Staff
Representative Pete Petersen
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Testified and answered questions during the
discussion of HB 68.
BOB WEINSTEIN, Mayor
City of Ketchikan
Ketchikan, Alaska
POSITION STATEMENT: Testified during the discussion of HB 68.
CAROLINE POWELL, Owner
Mallotts General Store, Inc.
Yakutat, Alaska
POSITION STATEMENT: Testified during the discussion of HB 68.
LYNN WESTFALL, Senior Vice-President, External Affairs and Chief
Economist
Tesoro Petroleum Corporation (Tesoro)
San Antonio, Texas
POSITION STATEMENT: Testified and answered questions during the
discussion of HB 68.
KIP KNUDSON, Manager
External Affairs
Tesoro Alaska Company
Anchorage, Alaska
POSITION STATEMENT: Testified and answered questions during the
discussion of HB 68.
JEFF COOK, Director
External Affairs
Flint Hills Resources Alaska (Flint Hills)
North Pole, Alaska
POSITION STATEMENT: Testified and answered during the
discussion of HB 68.
PATRICK GAMBLE, President; CEO
Alaska Railroad Corporation (ARRC)
Anchorage, Alaska
POSITION STATEMENT: Testified during the discussion of HB 68.
ACTION NARRATIVE
3:24:35 PM
CHAIR KURT OLSON called the House Labor and Commerce Standing
Committee meeting to order at 3:24 p.m. Representatives Buch,
Chenault, Lynn, and Olson were present at the call to order.
Representative Coghill arrived as the meeting was in progress.
HB 68-PRICE GOUGING INVOLVING ENERGY RESOURCES
3:24:57 PM
CHAIR OLSON announced the only order of business would be HOUSE
BILL NO. 68, "An Act making sales of and offers to sell certain
energy resources by a refiner at prices that are exorbitant or
excessive an unlawful act or practice under the Alaska Unfair
Trade Practices and Consumer Protection Act."
3:25:03 PM
REPRESENTATIVE PETE PETERSEN, Alaska State Legislature, stated
he introduced the bill because so many of his constituents
complained about high gasoline prices. While the Attorney
General's office investigated the matter, he related that it is
yet unresolved. He opined fuel costs have had a devastating
effect on individuals, businesses, and communities. This bill
would restrict a refiner from selling or offering to sell fuel
at exorbitant or excessive costs. The bill would consider such
practices as an unfair trade practice and would establish strict
penalties as a deterrent. Additionally, the bill would shift
the burden of proof from the seller to the refiner. He
emphasized the biggest misconception is that the bill sets
prices, but it does not.
REPRESENTATIVE PETERSEN pointed out that the ten percent
threshold in the bill creates a triggering mechanism. Prices
would still be legal above the ten percent so long as the
refiners could prove the product price was not an exorbitant
profit. Under current statutes, the attorney general must
determine that collusion or price fixing exists in order to
prosecute. This bill would provide the attorney general with an
additional tool. Historically, Alaska's gas prices have been
close to West Coast prices. However, last year Alaska's gas
prices were dramatically higher than any place in the country.
He opined the disparity exists today. Last year, the
legislature suspended the state's gas tax. Still, Alaska's gas
prices remain higher than any place in the Lower 48. He
referred to a handout in members' packets labeled "Dist. by Rep.
Petersen" from AAA and API.org sources that lists gasoline
prices by state without state gasoline taxes included in the
price, listing Alaska's price as the highest per gallon price at
$2.52 per gallon. He pointed out that states without any oil
industry have lower gasoline prices than Alaska. Yet, Alaska is
one of the major oil producers in the U.S.
REPRESENTATIVE PETERSEN explained that high fuel prices affect
the prices of most goods due to the shipping costs. He opined
that is one reason Anchorage had a 4.6 percent inflation rate
last year. Rising fuel costs are especially hard on small
businesses since rising fuel costs increase their expenses while
decreasing customer demand. Some businesses have expressed
concern that high fuel costs will cause them to scale back or
even close. Separate investigations by the attorney general's
office, Legislative Research, and the House Judiciary Standing
Committee have all shown high prices are the result of
abnormally high margins charged by Alaska's two oil refineries.
He called attention to a graph on page 12 of the Legislative
Research report Number 09.053 dated December 18, 2008. He
interpreted that the graph clearly shows that even as crude oil
prices fell, the margins charged by the refiners increased
disproportionately to margins charged by Lower 48 refiners. He
explained that currently HB 68 would only apply to refineries.
However, after hearing from Alaska residents from all parts of
the state, he suggested the committee consider adopting an
amendment to include wholesale distributers and retailers to
those affected by the bill.
3:29:54 PM
REPRESENTATIVE PETERSEN stated he has heard from many rural
Alaskans expressing concern about the impacts of high fuel
prices since often the community has one fuel source so
competition does not affect their fuel costs. He opined that
high prices continue to hurt Alaskans and Alaskan businesses.
Since fuel prices typically rise during the summer, he expressed
concern that prices could continue to rise. He said, "Under the
Alaska Constitution, we as legislators have a duty to ensure
that Alaska's resources are used to the maximum benefit of the
Alaskan people." He offered his belief that charging higher
prices for Alaska's petroleum products than in the Lower 48,
meets the "maximum benefit" test. He urged the committee to act
quickly adopt the amendment, and move HB 68 to the next
committee of referral so Alaska's businesses and families do not
need to wait another year for lower fuel prices.
3:30:46 PM
DAVID DUNSMORE, Staff, Representative Pete Petersen, Alaska
State Legislature offered to provide answers to issues and
arguments that have been raised about the bill since its
introduction. He explained that some people have a
philosophical objection to government intervention in commerce.
However, this bill would add to the list of 55 items that the
state has deemed as unfair trade practices. He related that
Hawaii had a law to address pricing, but its mechanism was
substantially different than the one in HB 68. He elaborated
that Hawaii had a commission similar to the Regulatory
Commission of Alaska (RCA) that capped fuel prices. This bill
prohibits exorbitant prices and establishes an objective
threshold, with a burden of proof shifted to the seller to
demonstrate the prices are justified by their expenses. Since
some discussion has arisen with respect to the Hawaii law, a
handout in members' packets titled Hawaii Fuels Study shows the
effect of the Hawaii law on gas prices. He explained that the
Hawaii law only regulated gasoline prices but not diesel prices.
He described the handout briefly and indicated the study had the
unfortunate timing of being implemented immediately after
Hurricane Katrina so the prices were uncharacteristically high.
3:33:48 PM
MR. DUNSMORE explained that pink and blue lines on the graph
represent prices in Honolulu and statewide prices in Hawaii,
which are not regulated by legislation. Additionally, Hawaii
did not experience reductions in diesel fuel that they did with
gasoline. He emphasized that this bill is fundamentally
different than the Hawaii bill. The Hawaii committee set prices
while HB 68 would establish that it would be an unfair trade
practice to charge excessive or exorbitant prices. The bill
would use a threshold rather than a cap on pricing. Thus, the
burden of proof will shift to the sellers.
3:35:31 PM
MR. DUNSMORE mentioned that Washington State was selected for
comparison since Alaska and Washington have traditionally been
linked commercially. Additionally, he pointed out Washington
does have a competitive refinery market and Alaska does not. He
opined the idea was to select a place in the Pacific Northwest.
He mentioned that some people suggested prices will simply
decline with the price of crude oil, but thus far that has not
been the case. He recalled the earlier handout of retail prices
by state, not including state gasoline taxes. He opined that
Alaska is radically higher than any state in the U.S. at $2.52.
He added that most of the crude oil is Alaska North Slope (ANS)
crude oil or Cook Inlet crude oil. He highlighted that the bill
is designed to protect consumers from excessive gas prices and
is not intended to criticize Alaskan refiners. He also
mentioned Alaskan for profit corporations have a fiduciary duty
to make the profits that they can within the bounds of the law.
He stated the point of HB 68 is to establish boundaries such
that excessive or exorbitant prices are prohibited.
3:37:35 PM
REPRESENTATIVE LYNN asked whether that would be price fixing if
the refiners are required to set the price within certain
limits.
MR. DUNSMORE answered that the language prohibits excessive or
exorbitant prices. He stated subsection (c) sets out it is
prima facie evidence that a price is exorbitant or excessive if
the price exceeds by more than 10 percent the average wholesale
price of comparable energy resource charged by refiners in the
state of Washington. Thus, the bill does not set price or a
cap, but an objective threshold. This subsection also allows a
refiner to rebut the presumption by proving evidence that the
amount charged by the refiner was justified by reasonable costs
incurred by the refiner.
3:38:34 PM
REPRESENTATIVE LYNN asked how the bill defines excessive or
exorbitant pricing.
MR. DUNSMORE offered his belief that the term was taken from an
Idaho consumer protection law. He related that it is a legal
term.
REPRESENTATIVE LYNN asked for the basis of determining
excessive.
MR. DUNSMORE related his understanding that excessive would be
decided by a court of law. However, the bill sponsor
specifically did not want to set prices since markets can
fluctuate. However, consumers should have reasonable protection
from excessive charges.
REPRESENTATIVE LYNN stated that he still does not understand the
definition of exorbitant.
3:40:17 PM
REPRESENTATIVE PETERSEN stated that setting the limit at ten
percent above Washington's pricing was chosen since it has been
the traditional price differential between Alaska and
Washington. He mentioned that rarely have prices fluctuated
from the ten percent difference until recently. This bill sets
up a trigger mechanism. Thus, any prices at the fuel pump that
are set at more than ten percent of the consumer price index in
Washington would be considered exorbitant prices.
REPRESENTATIVE LYNN related his understanding that gasoline
prices above ten percent would be considered exorbitant.
3:41:56 PM
CHAIR OLSON referred to the Legislative Research Report 09 187
dated March 12, 2009. He advised members that he asked the
agency for a comparison of prices between Anchorage and Seattle.
He stated that transportation costs are roughly 11 percent of
household expenditures. He opined that food is 12.5 percent of
the monthly expenditures and utilities are about 10 percent. He
further opined that all three items are related 10 percent
higher than in Anchorage. He inquired as to whether the other
items such as utilities and grocery costs should also be
included.
REPRESENTATIVE PETERSEN related that he did not look at
traditional prices for utilities, groceries, or housing.
CHAIR OLSON offered his belief that food prices in Alaska are
still significantly higher than in Washington.
MR. DUNSMORE offered one difference is Alaska's Constitution
contains a provision that obligates it to use its resources to
the maximum benefit of Alaskans. Thus, other consumer goods
listed would not be affected by the constitutional provision.
Additionally, many of the items listed originate in Lower 48,
while much of the gasoline is refined in Alaska. He mentioned
that gasoline, heating oil, and diesel is known economically as
demand in Alaska because when fuel prices increase people have
few choices of items to eliminate. People are still going to
need to heat their homes and while they can lower the
thermostat, but to a large extent will need to absorb the
additional fuel costs.
3:44:08 PM
REPRESENTATIVE CHENAULT asked whether a chart shows the crude
oil prices for the timeframe of the chart.
MR. DUNSMORE offered to provide the chart.
3:44:41 PM
CHAIR OLSON, in response to Representative Chenault, stated that
29 percent refers to household income. He referred to page 2,
titled "Table 1: Cost of Living Index Comparison, Anchorage and
Seattle, 2008". He stated that compared to the national
average, housing in Anchorage is set at 137.2 percent and
Seattle is set at 152.0 percent. Thus, housing is 14 or 15
percent less expensive in Anchorage than in Seattle. Groceries
are 142.7 percent in Anchorage and 117.3 percent in Seattle.
3:45:42 PM
REPRESENTATIVE CHENAULT related that the Tesoro refinery is in
his district. He stated he takes the comments seriously. He
related that Alaska imports foreign crude oil to the Tesoro
facility. He recalled that about 30 percent of the crude oil at
the refinery was foreign crude oil. He stated that all the oil
products for Flint Hills Resources originate from ANS crude oil.
However, some fuel sources for regions such as Southeast Alaska
originate in Washington for SE Alaska. He offered his belief
that he could be mistaken. He also believed that some fuel is
barged from Washington to other areas in rural Alaska. He
suggested that the refineries could provide more details.
3:47:00 PM
REPRESENTATIVE COGHILL agreed that this is a legitimate
question. He offered that two refineries are in his district
and they provide 15 percent of the gasoline for Alaska. He
explained if the refineries did not also sell jet fuel to the
airports that gasoline for home heating would be higher. He
explained that in order to obtain economies of scale the
refinery needs the "flow through." He inquired as to whether
the sponsor considered the option "turning off the refinery and
importing oil." He surmised that if the crude oil destined for
jet fuel was not refined in Alaska the price would be costly.
Additionally, he expressed concern that jet fuel might not
available in Alaska if the refineries were not operational. He
inquired as to whether the sponsor considered the current
subsidy to home fuel and gasoline prices.
3:48:59 PM
REPRESENTATIVE PETERSEN recalled the House Judiciary Standing
Committee report discussed jet fuel at length. He related his
understanding that a large percentage of fuel produced by the
refineries is jet fuel. He said that based on his business
experience that it would be an unusual business model to sell
the majority of the product at a very low margin and try to make
up for low costs by increasing the price on the products that
the business sells that are a lesser volume. He opined that
traditionally this is not the way businesses are managed. He
related that his goal is not to shut down the state's
refineries, but to determine why prices have gone up and have
not gone down in comparison to crude oil prices. He stated that
traditionally the lines on the graph would move in conjunction
with one another. Last year gas prices at the pump and the
price of crude oil seemed to be disconnected, with a larger gap
between them than normal. He acknowledged the situation could
be unique. He reiterated that he would like to know the reason
for the significant gap.
3:50:44 PM
REPRESENTATIVE COGHILL related that he has the same question.
He recalled the business model in the gasoline report, noting
that sometimes stores such as Safeway sell gas at a loss to
attract people to the store to buy groceries. Thus, he
confirmed the business model can sometimes work that way. He
related his understanding that the fuel commodity is sold to two
different markets. He related he is more sympathetic to the
pricing than some people since he compares the cost to what it
would cost to ship the fuel to Alaska. He commented that since
the Tesoro Refinery produces 85 percent of the gasoline, the
Interior may feel "chaffed". He pointed out that the Interior
is using costly fuel from the Trans-Alaska Pipeline System
(TAPS) to refine their fuel. Thus, the two refineries have a
different price model than refineries that have the opportunity
to use natural gas in the refinery process. He stated he would
not be surprised with the whole market dynamic of using more gas
demand than diesel. He pointed out that in Interior Alaska the
refineries strive to make just the right amount of gasoline to
keep the contracts viable. He suggested that the lag tracks the
price per barrel of oil from the TAPS line and the lag for
contracts and subsequent products. He remarked that fuel prices
declined, but perhaps not as fast as he would have liked. He
explained his own observations convinced him that price-gouging
was not the case. He inquired as to whether 10 percent is the
right number to set. He further inquired as to whether the
number should be increased to allow for legitimate market lag.
He suggested he would rather increase the index to provide more
assurance. He opined that 10 percent is too close to the market
price to be considered exorbitant.
3:53:37 PM
REPRESENTATIVE BUCH related his understanding that jet fuel is
priced globally. He asked for clarification since the price is
established in a global market.
REPRESENTATIVE PETERSEN recalled that jet fuel prices were being
kept low in order to help prevent it from being shipped in from
the Lower 48. He opined that shipping costs for a barge load of
jet fuel would add 10 to 20 cents to the fuel cost. He said he
is trying to understand why jet fuel pricing works the way it
does in Alaska since Alaska is isolated. He highlighted that
Alaska has substantial demand from companies such as Fed-Ex. He
related his understanding that normally high demand causes the
price to increase. He recalled that the Interior refineries
produce 60 percent of the jet fuel with small profit margins.
He opined that passing the cost to consumers on other products
such as gasoline does not make sense. He recalled that grocery
stores offer incentives to customers who buy gasoline, but their
primary product is not gasoline. Thus, the discount is small
compared to the overall grocery products the stores will sell.
3:57:15 PM
REPRESENTATIVE NEUMAN referred to the proposed Section 2, to
"Sales of certain energy resources by Alaska refiners." He
recalled that substantial amounts of fuel purchased in Southeast
Alaska and rural Alaska is from Washington and is not refined in
Alaska. He inquired as to how the mechanism would work to
determine "price-gouging."
REPRESENTATIVE PETERSEN recalled that the House Special
Committee on Energy discussed this when the committee held an
overview on the Regulatory Commission of Alaska. He related
that he did not include the RCA in the bill since the Department
of Law conducted an investigation on fuel costs. However, he
also recalled the RCA mentioned that it was within its purview
to look at fuel prices and monopolistic prices in rural and
Western Alaska. He suggested that he could ask the RCA to
review.
3:59:03 PM
REPRESENTATIVE NEUMAN related his understanding that RCA
regulates utility companies not gasoline producers or refiners.
He inquired as to the structure that would be used to consider
transportation costs when gasoline is refined in Seattle and
shipped to rural Alaska. He further inquired as to who would
decide the profit-making scale.
4:00:13 PM
REPRESENTATIVE PETERSEN stated that he requested an amendment to
the bill to include distributors. He recalled testimony during
a trip to Western Alaska that indicated prices were higher than
reasonable, even when they factored in transportation costs. He
offered that one company will provide fuel to an area, creating
monopolistic situations in rural Alaska. He emphasized that
residents feel the price is exorbitant, which is why he is
willing to consider amending the bill to include distributors.
4:01:22 PM
REPRESENTATIVE NEUMAN stated he still is interested in
understanding the type of system or structure that would be set
up to review the costs.
REPRESENTATIVE PETERSEN responded that the triggering mechanism
is 10 percent above the Washington index. He recalled
Representative Coghill mentioned that 10 percent might be too
low and had suggested setting it at 15 percent. He offered to
examine the percentage. However, he offered his belief that
some triggering mechanism should be in place to cause an
investigation to take place. Otherwise, he opined that prices
could spin out of control.
4:03:02 PM
REPRESENTATIVE NEUMAN maintained his interest in knowing what
structure would be in place to determine price gouging. He
related his understanding that to consider prices between
Seattle and various points in Alaska would lead to multiple
mechanisms. He stated that he did not see a structured
mechanism in place to do so. He asked if it would be left up to
the courts to decide.
REPRESENTATIVE PETERSEN answered that the attorney general's
office would investigate any complaints. However, he opined
that for some parts of the state, the RCA would be more
appropriate due to monopolistic conditions in rural Alaska. He
offered his belief that in those instances, the company could be
considered a utility.
4:04:20 PM
CHAIR OLSON mentioned that Ed Sniffen, Department of Law,
normally handles these issues, but had a pressing engagement in
Washington DC. He offered to try to have him available for
questions at the next hearing.
4:04:47 PM
REPRESENTATIVE LYNN recalled that the attorney general's office
investigated this matter.
REPRESENTATIVE PETERSEN reiterated that the attorney general's
office performed an investigation to determine whether there was
collusion. He explained collusion such as if companies got
together and made a coordinated plan. He opined that it is
difficult to prove collusion.
4:05:48 PM
REPRESENTATIVE LYNN asked what would cause a price to be
exorbitant or unusual.
MR. DUNSMORE explained the attorney general's report concluded
that nothing illegal transpired under current law since a law
prohibiting exorbitant prices did not exist. However, the
attorney general's report concluded that Alaska does not have a
competitive refinery market, but an oligopoly, which is where
several large firms control the market. Without a competitive
market to regulate prices, such as the Washington state market,
this bill would prohibit excessive prices that could arise due
to a non-competitive market. Ordinarily, competition causes a
downward pressure on prices. Furthermore, for most goods in
Alaska competitive pressure exists, but not for refined
petroleum products in Alaska
4:07:37 PM
MR. DUNSMORE, in response to Representative Lynn, stated that
the attorney general's office investigated fuel costs under
current Alaska law. The attorney general would not have
reviewed price gouging since it is not currently considered as
an illegal activity.
REPRESENTATIVE COGHILL reiterated the attorney general's office
advised the House Judiciary Standing Committee that Alaska does
not have a price-gouging law. Thus, collusion was only issue
the attorney general could investigate. However, the attorney
general's report indicated a price gouging law is usually event
driven, such as by Hurricane Katrina. He related his
understanding that this bill attempts to even costs out by
considering the lack of competition in Alaska as though it were
an event. Therefore, Alaska needs to index costs to another
state such as Washington to provide reasonable costs. He said
he was not sure if he agreed with this but offered his summary
of the intent of HB 68.
4:09:08 PM
REPRESENTATIVE LYNN pointed out that nothing in the bill
addresses specific events or a catastrophe.
REPRESENTATIVE BUCH asked who initiated the attorney general's
investigation that led to the report.
REPRESENTATIVE CHENAULT recalled the governor had requested the
investigation.
4:10:09 PM
REPRESENTATIVE PETERSEN stated that many consumers believe the
fuel prices represent a catastrophe, especially in many parts of
Alaska. Furthermore, fuel costs are a problem from the
consumer's point of view. He indicated that he introduced the
bill to address legitimate complaints from Alaskans who are
entitled to some measure of protection. He reiterated that the
threshold is set at 10 percent, but the committee could consider
another percentage.
4:11:37 PM
BOB WEINSTEIN, Mayor, City of Ketchikan, stated that he would
speak in support of the concept of the bill. He related that a
considerable number of people expressed concern last November
and December about what appeared to be an unusually high
disparity between gasoline and fuel oil prices in Ketchikan as
compared to prices in the Lower 48. He opined that the issue
was the topic of angry letters to the newspaper and media, as
well as to legislators. Finally, the concern became so great
that people picketed and protested the high prices. He
explained that prices dropped "at the pump" by $1 to $1.40 per
gallon. He offered his belief that the causes of possible
exorbitant pricing may be different in Ketchikan than in other
parts of Alaska, the concerns are similar. He further opined
that HB 68 would do at least two things. First, it would give
the attorney general a new tool to protect Alaska consumers in
the event a refiner does charge excessive prices. Second, the
very fact that the tool exists might in and of itself deter a
refiner from selling energy resources at excessive or exorbitant
prices.
4:14:00 PM
MR. WEINSTEIN, in response to Representative Chenault, stated
that the fuel in Ketchikan is barged in from Seattle.
4:14:31 PM
CAROLINE POWELL, Owner, Mallotts General Store, Inc. stated that
she and her husband have been the owners/operators of a store in
Yakutat for over 40 years. She explained that their electric
bill has generally been about $4,000 per month, but swelled to
$17,000 one month due to high fuel surcharges. She highlighted
the average increase in the surcharge alone is $200 per day, or
$6,000 per month, or $72,000 per year. She said:
We won't be able to survive at these rates. The
community has no purchasing dollars left after paying
fuel surcharges on their power bills, plus the high
cost of home heating fuel. The surcharge on a
residential electric bill of $270 is $400, making it
over $600 total. One hundred gallons of home heating
fuel cost over $500.
MS. POWELL opined that if Mallotts General Store has to close,
the effects on Yakutat would evolve into greater losses,
including losses to their employees and families, to customers,
and reductions of sales taxes to the City and Borough of
Yakutat. She explained some ramifications such as that the
local fishing fleets would not be able to fish. She pointed out
that gas cost $5 per gallon. She recalled that recently a
halibut boat delivered his catch, but after the skipper paid
fuel bill he said he would not be returning. She opined that
others would also not return. She highlighted that Delta
Western Bulk Fuel (Delta Western) is the only distributor. It
bought fuel in Yakutat when prices were the highest. She
offered that there is not any competition. She described a
scenario in which a distributor sells $2 fuel at 10 percent
profit would receive $.20 profit. If it sells $5 fuel at the
same profit, the distributor would make $.50 or $.30 more.
Delta Western is the only fuel company so it has a monopoly.
She offered her belief that the state has an obligation to
protect consumers from monopolies. She recalled that the mayor
advised the distributor informing them that the Yakutat Power
Company could bring in cheaper fuel from Seattle. The response
was that it would take the community longer to buy up the higher
cost fuel if Yakutat Power Company does not help purchase the
fuel. She also recalled that the Yakutat Power Company did
bring in fuel from Seattle several times. However, this week
the barge was cancelled due to weather. Thus, Yakutat Power
Company is forced to purchase fuel from Delta Western again.
Furthermore, Delta Western increased the cost to Yakutat Power
Company by $.30 per gallon advising the company it is no longer
on its preferred customer list or entitled to the utility rate.
Therefore, electric rates will rise, she stated. She said,
"Yakutat needs some relief. And I thank you for the opportunity
to speak."
4:17:44 PM
REPRESENTATIVE BUCH thanked Ms. Powell for her testimony. He
inquired as to the source of the fuel under normal
circumstances.
MS. POWELL stated she was not certain. She opined that the fuel
costs are lower when the fuel is barged in on Alaska Marine
Lines from Washington. She said, "Delta Western has basically
said they won't be dealing with anyone who does this."
4:18:55 PM
LYNN WESTFALL, Senior Vice-President, External Affairs and Chief
Economist, Tesoro Petroleum Corporation (Tesoro), introduced
himself.
KIP KNUDSON, Manager, External Affairs, Tesoro Alaska Company,
introduced himself to members.
MR. WESTFALL stated that Tesoro is an independent refiner, which
means it does not own any crude oil. Tesoro purchases its
product on the free market from third parties. He also stated
that Tesoro does not necessarily make its profit from high gas
prices. He said, "We make profit on the difference in price
between gasoline and the other products we sell and the price we
have to pay for crude oil." Last year when the headlines were
filled with news about the large profits being made in the oil
companies: those were from profits being made by crude
producers. Last year was one of the worst years for
profitability in history for the refining business. And the
outlook for the refining business as a whole is continuing to
deteriorate. Last year, gasoline demand in the United States
declined by 3.5 percent, which was its second worse decline
since 1965. Jet fuel demand is down over 10 percent, a larger
decline than we saw in the aftermath of the 9/11 incident. U.S.
refineries are only running at about 80 percent capacity versus
a historical average in the 90s. But oversees refineries
continue to be built. Last month, one of the largest refineries
in the world started up in India. That refinery alone can
provide enough gasoline to fill 40 percent of the U.S.'s
requirements for imports. The Chinese are building between 4
and 5 refineries per year, some of which will be dedicated for
the export market. Many refineries are in the planning stage in
the Middle East. He opined the final word that can be said on
the state of the industry can be had simply by looking at
Tesoro's stock price. A little over a year ago, the stock at
Tesoro was about $60 a share, about a month and a half ago it
went down to $6, and it has only recovered to about $15.
4:22:22 PM
MR. WESTFALL opined the industry is not healthy or earning high
profits. However, he pointed out that refining is the industry
he has chosen and will continue to be in so long as the industry
knows the risks it operates within. He explained that with its
system of seven refineries, the Nikiski refinery is core to
their operations. He highlighted that it the only refinery in
the state to invest in technologies to produce ultra low sulphur
diesel fuel. He offered the investment was approximately $65
million. He related that to be certain the product "had a home"
and all markets were served, Tesoro entered into a unique
marketing arrangement with Flint Hills Resources to purchase a
large portion of its product to sell to their customers. He
mentioned another significant capital project of similar size
will be to remove benzene content in gasoline. However, Tesoro
could face a new risk, which is the bill before members today.
MR. WESTFALL stated HB 68 attempts to stop a perceived practice
of price gouging by instituting a cap on the price of gasoline
and other petroleum products. Not only do these requirements
not work where they have been tried, but the have an opposite
effect. He highlighted a scenario in which price controls were
established in the 70s in Texas, with long gas lines, and even
or odd filling days, depending on the license plate number. He
opined every study conducted during the 1970s time frame
concluded that the shortage was caused by price controls and not
by the oil embargo. He explained that Hawaii attempted to
institute price caps on gasoline. Shortly after the price caps
were instituted, a hurricane in the Gulf Coast made the Gulf
Coast gasoline prices go from the lowest in the world to being
one of the highest. However, since Hawaii placed a cap on
prices gasoline prices could not increase enough to compete for
limited volumes of gasoline that was available. The result was
that "gasoline left the state of Hawaii." He said:
So you can control the price, but if you do it at a
level that can't compete with the rest of the world,
we have an obligation for our corporation to send it
to another market. The Hawaii regulation is now in
abeyance and as you know is not being enforced. Price
caps don't work because you can't outguess or forecast
the market. It is a world market for crude. It's a
world market for petroleum products. And a piece of
legislation can't compete with a daily decision making
process of millions of consumers world wide. And just
as price caps don't work; neither do vague terms like
exorbitant or excessive.
I think one of the basis tenets of our legal system is
that we have to have enough clarity in our laws that
someone knows ahead of time that a contemplated action
is illegal so he can change his behavior before
breaking the law. Having government officials tell us
after the fact that our actions were illegal because
the law is vague is a very great risk to ask us to
bear.
In conclusion, I need to say the Tesoro Corporation
has and would like to continue investing their assets
in the State of Alaska. But since we have limited
capital, and we have to choose the best places to use
that resource, we have to consider business risks.
And the bill before you today would add a new risk to
our decision-making process. Thank you very much for
your time. And I expect I'll get a question or two.
4:25:47 PM
CHAIR OLSON asked if this bill had been enacted a year ago,
whether Tesoro would be in business at the current time.
MR. WESTFALL answered yes. He stated he did not mean to imply
that there would be an immediate effect to the bill. However,
the effect will be in Tesoro's long-term investment decisions.
He explained that had the bill been in effect at the time Tesoro
decided to invest the $65 million to make ultra-low sulphur
diesel fuel; it would have been a factor. He acknowledged that
he cannot go back in history and re-make the decision. However,
he offered his belief that it would have been a factor.
CHAIR OLSON inquired as to the current source of Tesoro's oil.
MR. WESTFALL related that generally about 50 percent is Alaska
North Slope (ANS) crude oil and 25 percent is Cook Inlet crude
oil, and the remaining 25 percent is purchased worldwide. He
also mentioned that Tesoro buys all of Cook Inlet's crude oil.
In response to CHAIR OLSON, Mr. Westfall reiterated that 25
percent is Cook Inlet crude oil.
4:26:57 PM
REPRESENTATIVE COGHILL related his understanding that Tesoro
buys refined fuel at market price. Thus, Tesoro has a good idea
about its fixed cost, but not the cost of the crude for
refining, what the market will bear, and how regulators will
affect them. He inquired as to whether instead of considering
price gouging by the refinery, if the legislature should be
examining upstream since those prices would affect the refiners,
consumers, and everyone. He further inquired as to whether that
has been considered.
MR. WESTFALL recalled that in the initial stages of the Hawaii
law, the government considered retail instead of wholesale, but
decided that would hurt smaller businessmen. Thus, Hawaii
targeted retail prices. He said:
I think overall, it has the same chilling affect.
Eventually each chain in the supply chain has to make
a reasonable profit. If you try to limit any chain,
you're going to damage that part, be it the wholesale
chain, the retail chain, or the refining chain. So I
don't think by moving the point of enforcement
significantly changes what the impact of the bill
would have been or would be.
4:28:45 PM
REPRESENTATIVE COGHILL stated the problem is when someone is
taking advantage of a "run up" some companies make the most
profit. He opined that one of the things the Congress was
attempting to do was to level out the profits of those oil
producers with huge windfall profits. He recalled the Congress
brought major producers before it to ask questions. He further
recalled that Hurricane Katrina spurred the investigation. He
related his understanding since price gouging is usually event
driven that seemed like a reasonable starting point. Based on
Mr. Westfall's testimony, the fixed costs would be plant
management, hardware, cost of fuel used during the refining
process. Thus, the crude oil purchase price is the issue, he
opined. He asked if the committee is "barking up the wrong
tree" or is the market so complex that an index point cannot be
found.
MR. WESTFALL said:
The answer to your question, I believe, is that I
would love to tell you we are a cost plus business,
where you can take the cost of "crude" add in our
funding manager's salary, adding 10 percent and that
is or should be the price of gasoline. Unfortunately,
the crude oil market has its own supply and demand
factors worldwide. For instance, it certainly wasn't
U.S. demand that drove the price up to $140 per
barrel. That was Chinese demand. Gasoline has its
own supply and demand characteristics, either at the
international level or even down to the store across
the street level. And they move in different
directions. So there really is no tie between, at
"this crude price" gasoline should be at "this price."
So, as I say, they're really different, but both are
global supply and demand factors that you have to
account for. And you can't, I can't tell you today,
I'm certainly not smart enough, what the relationship
between any two markets should be tomorrow. People
have talked about Pacific Northwest, looking back in
history. I don't know what that relationship will be
next year. Washington state is out of compliance with
federal ozone standards and they're going to have to
come up with a compliance plan and part of that plan
may be instituting California grade gasoline, which is
a whole different animal when it comes to gasoline.
If they do that you can take your historical charts
and throw them away. The relationship will change.
But I guess my point is, "I don't know next year what
any of those relations are going to be." And to
assume a cap or regulate it is something that I don't
have the brains to tell you what it ought to be.
4:31:36 PM
REPRESENTATIVE COGHILL stated that it would be helpful to know
how many other refineries Tesoro competes with that service the
Washington market. He also asked how the Tesoro refinery
decides the cost of diesel and gasoline based the varying
volumes of diesel and gasoline.
MR. WESTFALL answered, with respect to overall competition in
refining, that Tesoro has refineries in Alaska, Hawaii, two in
northern California. He recalled 13 refineries in CA, four in
Washington, two in Hawaii, and those in Alaska. He pointed out
that when a company has a refinery in one location, it can
compete with many others. For example, there is a pipeline that
joins Salt Lake City to Eastern Washington State. Thus, part of
the supply originates in Utah. A pipeline from El Paso, Texas
connects to Arizona, and one from Arizona to California, which
connects those two markets. He related it is difficult to draw
a supply corridor that is narrow. Furthermore, once product is
placed in a tank, as is done in Alaska, the product can be
shipped anywhere in the world. He opined that he just described
the competition just in the Pacific Northwest area.
4:33:44 PM
REPRESENTATIVE COGHILL related that he is interested in the
market dynamic in order to be able to gauge excessive or
exorbitant prices. He also indicated he would like to determine
how similar the market is in Washington in order to assess the
10 percent index. He mentioned that the "price at the pump" is
what is viewed, but the distribution system and consumption
rates would likely be different.
MR. WESTFALL offered his belief that every market is a unique
market. Certainly, Alaska is smaller and is geographically
diverse. He opined that he could not find another market
similar to Alaska except Hawaii. However, Hawaii has its own
characteristics such that it does not have any crude oil or
natural gas.
4:34:32 PM
CHAIR OLSON related his understanding that Tesoro is buying 25
percent of its crude oil for Alaska on the spot market. He
asked how far out purchases are made.
MR. WESTFALL answered that it would depend. He stated that in
South America it ranges from 30 to 45 days, but in the Middle
East it can be up to 90 days. In further response to Chair
Olson, Mr. Westfall stated the crude oil that is arriving in
Alaska today was purchased at some other price.
4:35:05 PM
REPRESENTATIVE BUCH asked for the market of Nikiski plan
products.
MR. WESTFALL related that approximately 60 percent of its
gasoline is sent to other refiners. He related that the
molecules purchased at Alaska's gas stations originated at
Tesoro's refinery. Additionally, besides its own brand, Tesoro
sells to wholesalers with their own brand, and to the
independent gasoline stations. He stated that diesel goes to
another refiner, Flint Hills Resources Alaska, and to wholesale
and bulk fuel facilities. He further stated that jet fuel is
destined to the airport. Furthermore, he mentioned about 30
percent of Tesoro's product is heavy oil, which is exported at a
loss. He offered to provide more detail to the committee.
4:37:16 PM
MR. WESTFALL, in response to Representative Buch, stated that it
does not export Tesoro's products to other parts of the world.
He clarified that the "bottom of the barrel" is destined to Far
East markets.
4:37:32 PM
JEFF COOK, Director, External Affairs, Flint Hills Resources
Alaska (Flint Hills), expressed his concern with HB 68. He
opined that HB 68 would adversely affect the Flint Hills
refinery, harm consumers, and have long term negative effects
for Alaskans. He provided the Flint Hills refinery's history.
He stated that Flint Hills is not in the crude oil production
business nor does it have retail gasoline stations. All of its
products are sold on wholesale market. Flint Hills produces
less than one-fifth of the gasoline used in Alaska and only one-
third of the heating fuel used in the Fairbanks area. Its 175
employees are proud of their contributions to Alaska. He
pointed out that Flint Hills recently won awards and recognition
and is an efficient and safe refinery. Flint Hills Resources
has more than 60 years experience in the refining business. It
has owned and operated the North Pole refinery since 2004. The
company also owns and operates refineries in Minnesota and
Texas. He explained that the North Pole refinery began
operating in 1977, shortly after the Trans-Alaska Pipeline
System was completed. The facility has undergone modifications
but its basic configuration has remained unchanged. The
refinery is a topping plant, which means it lacks the
sophisticated processing capability to refine all the incoming
crude oil into finished products.
MR. COOK indicated that the North Pole plant receives 180,000 to
220,000 barrels of crude oil per day, heats the crude oil to
distill it into a few products for resale, and the rest of the
stream is returned to TAPS, and Flint Hills pays an adjustment
or penalty to do so. As a result, Flint Hills currently retains
about 40,000 barrels per day of saleable product, the majority
of which is jet fuel. Additionally, Flint Hills retains a
quantity of fuel as an energy source for its refinery operations
since it does not have access to natural gas. He opined that
many topping plants were in operation in 1977, but most have
closed due to environmental emissions regulations and
increasingly stringent federal requirements on the types of
fuels produced. He offered his belief that the North Pole
refinery has kept pace with new environmental regulations but
the changes in the types of fuels produced has impacted the
amount of gasoline and diesel fuel that Flint Hills can produce.
Federal mandates to lower sulphur content in the last few years
have substantially diminished its ability to produce the fuels.
Although it produces some gasoline and off-road diesel, it now
purchases gas and diesel to meet the full needs of its
customers. He further opined that is the reason that supplies
are tight and profit margins are very small.
4:41:17 PM
MR. COOK pointed out that Flint Hills is working with the
Department of Natural Resources (DNR) to develop a better
understanding of its operations and the circumstances that
threatens its long-term viability in the state. Even though the
refinery has been recently profitable, that is not currently the
case. He related that Flint Hills is facing substantial
uncertainty and is in the process of exploring its options.
Thus, HB 68 poses a serious threat to future of the refinery,
particularly since the bill does not establish a definition of
exorbitant or excessive prices, yet subjects refineries to
penalties that are 10 times the amount of the economic benefit
from unlawful sales or $50 million, whichever is greater. This
bill would have an adverse affect on Alaskan consumers and
businesses. He offered his belief that the bill would be so
oppressive to its business, that Flint Hills would be forced to
cease refining and distributing fuel in the state due to the
uncertainty of pricing and the burdensome penalties. No one
questions consumers can and should seek the lowest cost fuels.
However, government intervention creates far more harm than
good, he opined. He highlighted that producers react to price
controls or cap legislation in a number of ways and none are
good for consumers. He emphasized that a producer could shut
down facilities or it may only produce the product when the
price makes a sale profitable. Additionally, price controls
affect investment decisions. If the control price is not
sufficient to generate an acceptable rate of return, the
investment will not occur. Competing producers observing the
market will only enter if they believe they can earn money under
the control price.
MR. COOK stressed that all of this leads to shortages. A lower
price is not of any use to a consumer if the fuel is not
available. He offered his belief that trying to outguess the
market by setting a price cap that is thought to be adequate to
address these problems is a dangerous game and one that Flint
Hills will not engage in. He highlighted that none of us can
forecast the future with any degree of accuracy and the
consequences of being wrong will result in a shortage of fuel in
Alaska. He acknowledged the sponsor's intentions are good, but
he implored the committee to not to advance HB 68. He stressed
that the bill could shut down the Flint Hills facility, but
could do greater harm to Alaskans. He related his understanding
that high fuel costs are burdensome for many Alaskan families.
North Pole workers pay the same prices for their gasoline and
heating fuels. However, price control legislation will harm
consumers by causing shortages. The Flint Hills refinery is
facing serious challenges with the demand for jet fuel down
significantly in Alaska, particularly at the Anchorage
International Airport. He highlighted that Federal Express is
transferring 68 pilots from Anchorage. He respectfully
requested the committee not move HB 68 from committee.
4:44:46 PM
REPRESENTATIVE BUCH recalled an article from the parent company,
Koch Industries, Inc. He recalled reading that when oil prices
are high the company could not "make any money" but when the
price was low it could not earn profits. He stated he was
initially confused. He inquired as to whether some margin
exists or certain price ranges that allows the company is more
profitable.
MR. COOK cautioned that he is not an economist. He stressed
that he is restricted from making some comments in a public
setting. However, he related that when prices were high the
company was challenged since it takes crude oil, refines it into
energy source to run the refinery, and did pay three times the
average cost of other refineries to process crude oil. He
stated that besides crude oil, the cost of energy is the second
highest cost the company incurs. He offered his belief that he
could not specifically answer the question due to his lack of
knowledge and the legal constraints.
4:46:56 PM
PATRICK GAMBLE, President and CEO, Alaska Railroad Corporation
(ARRC), stated that since 2004 he has held a close association
with Flint Hills in his role as the president of the ARRC. He
explained that the ARRC transports Flint Hill's products to the
airport. He further explained that he has currently been more
involved with DNR and Flint Hills to examine all options to keep
the refinery open. He opined that this involvement has enabled
him to assess the impacts if the refinery was not there. He
emphasized that part of the process is to collectively work with
Flint Hills and DNR to build a value chain for the state to
determine what is in the best interests of Alaska with respect
to the refining portion of the royalty oil, which belongs to all
Alaskans. He stressed that building that value chain is
different for the state than it is for a private corporation
such as Flint Hills. He asked to comment on "the other side of
the coin". He indicated that he has a clearer picture of the
consequences of not having the Flint Hills refinery. He opined
that it is simply a business case, reviewing one value chain and
comparing it to another, and presenting to the legislature the
factual data in terms of the viability of the Flint Hills
refinery. However, "the other side of that coin" is the fallout
of that process. He stated that not having a refinery in
Interior Alaska would affect all Alaskans. The ARRC depends on
Flint Hills as its dominant customer, and a long list of ARRC
customers along the Railbelt in turn depend on the ARRC, such as
ports and companies extending as far as the North Slope in terms
of providing support for producers, gold mines, and the
military. He highlighted that ARRC is part of the strategic
defense transportation system and is a defense connector line
that is ready to transport the military within Alaska. He also
mentioned several large projects are underway that could be
affected, such as the Fairbanks Bypass, the Northern Line
Extension and the Matanuska-Susitna extension. He opined that
the viability of the ARRC is important to all these customers
and projects since it allows all these customers to look to the
railroad as a tool for economic development.
4:52:07 PM
MR. GAMBLE said "I am thoroughly convinced that HB 68 would be
almost tantamount to a heart shot in terms of the opportunity to
continue a reasonable dialogue with Flint Hills, with the
opportunity for a reasonable outcome, and the ability to look at
several reasonable options that would keep the refinery open."
He offered his belief the impact of HB 68 would be so egregious
as to render some options as not worthwhile. He further
emphasized his concern due to the impact on ARRC. He explained
the ARRC estimates 600 jobs including the Flint Hills refinery,
the ARRC, and others that the University of Alaska ISER study
indicated would also be affected. He opined that 500 indirect
jobs would also be at stake. He offered his belief that without
the ARRC revenue, the business would also be affected. He
stressed that besides payroll, capital is also pumped into the
economy. Thus, when considering the value chain to Alaska, all
of these items must also be considered. He concluded that he
wanted to provide this perspective to the committee.
4:55:07 PM
CHAIR OLSON announced that HB 68 would be held over for further
consideration.
4:55:31 PM
ADJOURNMENT
There being no further business before the committee, the House
Labor and Commerce Standing Committee meeting was adjourned at
4:55 p.m.