Legislature(2005 - 2006)BUTROVICH 205

05/01/2006 03:30 PM RESOURCES


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 314 RETROACTIVE ADJUSTMENTS IN OIL PRICES TELECONFERENCED
Heard & Held
+ HB 304 COMMERCIAL FISHING LOAN PROGRAM TELECONFERENCED
Moved CSHB 304(FIN) am Out of Committee
+ Bills Previously Heard/Scheduled TELECONFERENCED
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                          May 1, 2006                                                                                           
                           3:39 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Thomas Wagoner, Chair                                                                                                   
Senator Ben Stevens                                                                                                             
Senator Fred Dyson                                                                                                              
Senator Bert Stedman                                                                                                            
Senator Kim Elton                                                                                                               
Senator Albert Kookesh                                                                                                          
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Ralph Seekins, Vice Chair                                                                                               
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
CS FOR HOUSE BILL NO. 304(FIN) am                                                                                               
"An Act relating to the commercial fishing loan program; and                                                                    
providing for an effective date."                                                                                               
     MOVED CSHB 304(FIN) am OUT OF COMMITTEE                                                                                    
                                                                                                                                
SENATE BILL NO. 314                                                                                                             
"An Act limiting retroactive adjustments in the sale price of                                                                   
state royalty oil sold by the state to a refiner."                                                                              
     HEARD AND HELD                                                                                                             
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                              
BILL: HB 304                                                                                                                  
SHORT TITLE: COMMERCIAL FISHING LOAN PROGRAM                                                                                    
SPONSOR(s): REPRESENTATIVE(s) COGHILL                                                                                           
                                                                                                                                
05/07/05       (H)       READ THE FIRST TIME - REFERRALS                                                                        
05/07/05       (H)       FSH, RES, FIN                                                                                          
03/22/06       (H)       FSH AT 8:30 AM CAPITOL 124                                                                             
03/22/06       (H)       Moved CSHB 304(FSH) Out of Committee                                                                   
03/22/06       (H)       MINUTE(FSH)                                                                                            
03/24/06       (H)       FSH RPT CS(FSH) 2DP 3NR                                                                                
03/24/06       (H)       DP: ELKINS, THOMAS;                                                                                    
03/24/06       (H)       NR: HARRIS, KAPSNER, WILSON                                                                            
04/03/06       (H)       RES AT 2:00 PM CAPITOL 124                                                                             
04/03/06       (H)       Heard & Held                                                                                           
04/03/06       (H)       MINUTE(RES)                                                                                            
04/10/06       (H)       RES AT 1:00 PM CAPITOL 124                                                                             
04/10/06       (H)       Moved CSHB 304(RES) Out of Committee                                                                   
04/10/06       (H)       MINUTE(RES)                                                                                            
04/12/06       (H)       RES RPT CS(RES) 2DP 1DNP 3NR 1AM                                                                       
04/12/06       (H)       DP: ELKINS, RAMRAS;                                                                                    
04/12/06       (H)       DNP: SEATON;                                                                                           
04/12/06       (H)       NR: OLSON, KAPSNER, CRAWFORD;                                                                          
04/12/06       (H)       AM: GATTO                                                                                              
04/18/06       (H)       FIN AT 10:00 AM HOUSE FINANCE 519                                                                      
04/18/06       (H)       <Bill Hearing Postponed>                                                                               
04/20/06       (H)       FIN AT 8:30 AM HOUSE FINANCE 519                                                                       
04/20/06       (H)       Moved CSHB 304(FIN) Out of Committee                                                                   
04/20/06       (H)       MINUTE(FIN)                                                                                            
04/21/06       (H)       FIN RPT CS(FIN) 3DP 3NR 1AM                                                                            
04/21/06       (H)       DP: FOSTER, KELLY, MEYER;                                                                              
04/21/06       (H)       NR: HOLM, MOSES, CHENAULT;                                                                             
04/21/06       (H)       AM: KERTTULA                                                                                           
04/24/06       (H)       TRANSMITTED TO (S)                                                                                     
04/24/06       (H)       VERSION: CSHB 304(FIN) AM                                                                              
04/25/06       (S)       READ THE FIRST TIME - REFERRALS                                                                        
04/25/06       (S)       RES, FIN                                                                                               
05/01/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
                                                                                                                                
BILL: SB 314                                                                                                                  
SHORT TITLE: RETROACTIVE ADJUSTMENTS IN OIL PRICES                                                                              
SPONSOR(s): JUDICIARY                                                                                                           
                                                                                                                                
04/12/06       (S)       READ THE FIRST TIME - REFERRALS                                                                        
04/12/06       (S)       RES, FIN                                                                                               
04/21/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
04/21/06       (S)       Scheduled But Not Heard                                                                                
05/01/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
REPRESENTATIVE COGHILL,                                                                                                         
Alaska State Capitol                                                                                                            
Juneau, AK 99801-1182                                                                                                           
POSITION STATEMENT:  Sponsor of HB 304                                                                                        
                                                                                                                                
GREG WINEGAR, Director                                                                                                          
Division of Investments                                                                                                         
Department of Commerce, Community & Economic Development                                                                        
PO Box 110800                                                                                                                   
Juneau, AK 99811-0800                                                                                                           
POSITION STATEMENT:  Testified on HB 304.                                                                                     
                                                                                                                                
BRIAN HOVE, staff                                                                                                               
Senator Ralph Seekins                                                                                                           
Alaska State Capitol                                                                                                            
Juneau, AK 99801-1182                                                                                                           
POSITION STATEMENT:  Introduced SB 314 on behalf of the sponsor.                                                              
                                                                                                                                
JEFF COOK, Director                                                                                                             
External Affairs                                                                                                                
Flint Hills Resources Alaska                                                                                                    
North Pole, AK                                                                                                                  
POSITION STATEMENT:  Supported SB 314.                                                                                        
                                                                                                                                
ANTHONY SEMENTELLI, Chief Financial Officer                                                                                     
Flint Hills Resources                                                                                                           
4111 E. 37th Street                                                                                                             
North Wichita, KS 67220                                                                                                         
POSITION STATEMENT:  Supported SB 314                                                                                         
                                                                                                                                
KEVIN BANKS, Petroleum Market Analyst                                                                                           
Division of Oil and Gas                                                                                                         
Department of Natural Resources                                                                                                 
400 Willoughby Ave.                                                                                                             
Juneau, AK  99801-1724                                                                                                          
POSITION STATEMENT:  Testified on SB 314.                                                                                     
                                                                                                                                
GOVERNOR BILL SHEFFIELD, Chair                                                                                                  
Alaska Railroad Corporation                                                                                                     
PO Box 107500                                                                                                                   
Anchorage, AK 99510-7500                                                                                                        
POSITION STATEMENT:  Presented the railroad perspective on SB                                                                 
314.                                                                                                                            
                                                                                                                                
MERRICK PIERCE                                                                                                                  
Fairbanks, AK                                                                                                                   
POSITION STATEMENT:  Opposed SB 314.                                                                                          
                                                                                                                                
LADD MCBRIDE                                                                                                                    
Fairbanks, AK                                                                                                                   
POSITION STATEMENT:  Opposed SB 314.                                                                                          
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CHAIR  THOMAS   WAGONER  called  the  Senate   Resources  Standing                                                            
Committee meeting to  order at 3:39:40 PM. Present  at the call to                                                            
order were  Senators Ben  Stevens, Bert  Stedman, Fred  Dyson, Kim                                                              
Elton and  Chair Thomas  Wagoner. Senator  Albert Kookesh  arrived                                                              
soon thereafter.                                                                                                                
                                                                                                                                
        CSHB 304(FIN) am-COMMERCIAL FISHING LOAN PROGRAM                                                                    
                                                                                                                              
CHAIR  THOMAS WAGONER  announced  CSHB 304(FIN)  am to  be up  for                                                              
consideration.                                                                                                                  
                                                                                                                                
REPRESENTATIVE  COGHILL,  sponsor,  explained  that HB  304  stems                                                              
from  his philosophical  belief  that  a government  loan  program                                                              
should  be a  source of  last resort.  The  bill establishes  that                                                              
anyone  who applies  for  a loan  through  the Commercial  Fishing                                                              
Revolving  Loan  Fund (CFRLF)  must  be ineligible  for  financing                                                              
from   a  federally   recognized   lending   institution  or   the                                                              
Commercial Fishing and Agricultural Bank.                                                                                       
                                                                                                                                
HB  304  reduces the  upper  limit  for  refinancing a  debt  from                                                              
$300,000 to $200,000  and caps the interest rate  at 10.5 percent.                                                              
It  reduces loan  collateral from  90  percent to  80 percent  and                                                              
increases the total  balance of federal tax loans  from $30,000 to                                                              
$35,000. Finally,  the total aggregated  loan amount for  a single                                                              
borrower  may not  exceed $400,000,  which is  adjusted down  from                                                              
the current $930,000 total.                                                                                                     
                                                                                                                                
3:43:56 PM                                                                                                                    
SENATOR BERT  STEDMAN asked  for the  reasoning behind  Section 4,                                                              
which  repeals   small  loans   for  repairing  and   refurbishing                                                              
existing vessels.                                                                                                               
                                                                                                                                
REPRESENTATIVE  COGHILL  replied   it  allows  the  department  to                                                              
reallocate the money,  but the funds could still be  used for that                                                              
purpose.                                                                                                                        
                                                                                                                                
3:44:50 PM                                                                                                                    
GREG  WINEGAR, Director,  Division of  Investments, Department  of                                                              
Commerce,  Community &  Economic  Development  (DCCED), said  this                                                              
fund has  been around since the  early 70s and about  6,000 people                                                              
have received loans.  The fund is self-sustaining  and hasn't used                                                              
general funds  since the  mid 80s. He  cautioned the  committee to                                                              
carefully review  any proposed changes  because at this  point the                                                              
fund works so well  that it provides money for  other programs. He                                                              
reported that  DCCED supports the  committee substitute  (CS) that                                                              
passed  the  House because  neither  the  borrowers nor  the  fund                                                              
appear to be adversely impacted.                                                                                                
                                                                                                                                
3:46:16 PM                                                                                                                    
MR.  WINEGAR   explained   that  the  repealer   relates   to  the                                                              
requirement that  10 percent of the  funds are held to  ensure the                                                              
availability of  funds for loans  amounting to $35,000  and under.                                                              
That has  never been an  issue with this  fund so the  unnecessary                                                              
requirement is removed.                                                                                                         
                                                                                                                                
3:46:53 PM                                                                                                                    
CHAIR WAGONER asked how many loans have gone into arrears.                                                                      
                                                                                                                                
MR.  WINEGAR  said  he  didn't  have  that  information,  but  the                                                              
current  delinquency  rate is  about  4.9 percent.  He  elaborated                                                              
that  fishing  permits  have  been taken  back,  but  because  the                                                              
division has some  flexibility to accommodate individuals  who are                                                              
going through  tough times, the  number of repossessions  has been                                                              
minimal.                                                                                                                        
                                                                                                                                
CHAIR WAGONER  requested a  report reflecting  the history  of the                                                              
program.                                                                                                                        
                                                                                                                                
3:47:57 PM                                                                                                                    
SENATOR STEDMAN  asked how the bill  would modify the  CDQ program                                                              
and how it might impact communities.                                                                                            
                                                                                                                                
MR.  WINEGAR  clarified that  HB  304  would  not cap  CDQ  loans.                                                              
Currently a  person could  combine different  loans and  borrow up                                                              
to  $930,000.  HB 304  would  reduce  that  limit to  $400,000  so                                                              
someone who  wants to borrow  up to $300,000  to buy  quota shares                                                              
wouldn't be impacted,  but someone who tries to  combine loans and                                                              
get above the $400,000 limit would be impacted.                                                                                 
                                                                                                                                
CHAIR WAGONER closed the public hearing and asked for a motion.                                                                 
                                                                                                                                
3:49:40 PM                                                                                                                    
SENATOR  KIM  ELTON   moved  to  report  CSHB   304(FIN)  am  from                                                              
committee  with  individual recommendations  and  attached  fiscal                                                              
note. There was no objection and it was so ordered.                                                                             
                                                                                                                                
          SB 314-RETROACTIVE ADJUSTMENTS IN OIL PRICES                                                                      
                                                                                                                              
CHAIR   THOMAS   WAGONER  announced   SB   314   to  be   up   for                                                              
consideration.                                                                                                                  
                                                                                                                                
3:51:15 PM                                                                                                                    
SENATOR KOOKESH arrived.                                                                                                        
                                                                                                                                
BRIAN HOVE, staff to Senator Seekins, presented SB 314 on behalf                                                                
of the sponsor. He read the following sponsor statement into the                                                                
record. [Original punctuation is provided.]                                                                                     
                                                                                                                                
   This  legislation  corrects  the  unintended   consequence                                                                   
   resulting from the  State's filing of  a protest  with the                                                                   
   Federal  Energy  Regulatory  Commission  (FERC)  regarding                                                                   
   interstate  tariff rates  on  the  Trans  Alaska  Pipeline                                                                   
   System (TAPS).  SB 314  amends  AS 38.05.183(f)  so as  to                                                                   
   disallow retroactive  adjustments  in  the sale  price  of                                                                   
   royalty oil where  a TAPS  transportation rate change  has                                                                   
   occurred.                                                                                                                    
                                                                                                                                
   The effect of  the State's  filing (from  January 1,  2005                                                                   
   forward) is to create a potential retroactive  payment for                                                                   
   any in-state refinery  purchasing State royalty  oil until                                                                   
   the FERC case is settled. This could be  as late as August                                                                   
   of 2009.  Though the  State is a  signer to  both the  ten                                                                   
   year royalty  oil  contract  with  Flint  Hills  Resources                                                                   
   Alaska (effective April 1,  2004) and the  TAPS Settlement                                                                   
   Methodology (TSM) which  governs TAPS rates  through 2009,                                                                   
   the State  chose  to  challenge  TSM prior  to  2009  thus                                                                   
   creating   retroactivity   potential   for   Flint   Hills                                                                   
   Resources Alaska (Flint Hills).                                                                                              
                                                                                                                                
   The negative impact on Flint Hills and  other entities has                                                                   
   been  real  and  immediate.  FHR  must  reserve  for  this                                                                   
   potential liability up  to $50 million  per year.  With up                                                                   
   to five years  to settle the  case with FERC,  accumulated                                                                   
   retroactive liability  could reach  $200 million or  more.                                                                   
   This has  caused  Flint Hills  to  cancel a  $175  million                                                                   
   clean fuels project and  a $91 million naphtha  stabilizer                                                                   
   project.                                                                                                                     
                                                                                                                                
   In addition,  low  margin products  such  as naphtha  have                                                                   
   been discontinued in  2006 and  Flint Hills is  purchasing                                                                   
   10,000 barrels  less per  day  of State  royalty oil,  for                                                                   
   which a premium  is paid.  This has  also resulted in  the                                                                   
   loss of approximately $7  million in shipping  revenue for                                                                   
   the Alaska Railroad  and $1 million  in fuel flowage  fees                                                                   
   for the  Port  of Anchorage.  FHRA  is  also not  able  to                                                                   
   provide long  term  contracts to  fuel  customers such  as                                                                   
   Golden  Valley   Electric  Association   because  of   the                                                                   
   uncertainty caused by potential retroactivity.                                                                               
                                                                                                                                
   Senate Bill 314 eliminates  the uncertainty for  buyers of                                                                   
   State royalty oil  and encourages  investment and  product                                                                   
   production  decisions  to  be  based  on   genuine  market                                                                   
   factors rather than the prospect of  tariff retroactivity.                                                                   
   It  also   restores   fairness   in  terms   of   avoiding                                                                   
   retroactivity with  respect  to  raw materials  that  have                                                                   
   long  since   been   manufactured   and  sold   into   the                                                                   
   marketplace.                                                                                                                 
                                                                                                                                
3:54:24 PM                                                                                                                    
JEFF  COOK,  Director,  External Affairs,  Flint  Hills  Resources                                                              
Alaska,  "Flint   Hills",  outlined  the  company's   business  in                                                              
Alaska. He  said that Flint Hills  has worked with  the Department                                                              
of Natural Resources  (DNR) on this issue for over  a year and has                                                              
provided  as  much  information   as  possible.  However,  due  to                                                              
proprietary  issues  and anti  trust  considerations,  it has  not                                                              
been  possible  to  provide  the  detailed  pricing  and  contract                                                              
information that DNR has requested.                                                                                             
                                                                                                                                
Fortunately,  Mr. Cook  said, that  information is  not needed  to                                                              
understand that  tariff retroactivity  is mutually harmful  to the                                                              
Flint  Hills refinery,  to  its  customers, and  to  the State  of                                                              
Alaska.  Tariff retroactivity  was  addressed in  the royalty  oil                                                              
contract with  the state and Flint  Hills considered the  issue in                                                              
its  purchase  economics of  the  refinery.  However,  it did  not                                                              
expect  the   state  to  protest   the  agreement  prior   to  its                                                              
expiration at the end of 2009.                                                                                                  
                                                                                                                                
3:57:10 PM                                                                                                                    
MR.  COOK   said  that  beginning   in  March  2005   Flint  Hills                                                              
approached  DNR to  suggest  possible options,  but  there was  no                                                              
agreement.  As  a result,  Flint  Hills  has cancelled  over  $260                                                              
million in projects  for clean fuels and naphtha  stabilizer. This                                                              
has resulted  in lost  jobs, smaller purchases  of crude  oil from                                                              
the state, lost  revenue to the Alaska Railroad,  and lost revenue                                                              
to  the Port  of Anchorage.  Furthermore,  Golden Valley  Electric                                                              
Association would  like a five-year  contract for naphtha  for its                                                              
new turbines  at North  Pole, but that's  not possible  unless the                                                              
long-term  price for  naphtha is  known. Not  only does this  hurt                                                              
Flint Hills,  it also hurts GVEA  and its customer base,  he said.                                                              
Also, asphalt prices  for the 2006 construction  season and beyond                                                              
are uncertain and  that impacts road construction  and upgrades in                                                              
Interior Alaska.                                                                                                                
                                                                                                                                
Historically  the   Flint  Hills  refinery  has   been  profitable                                                              
because of  its cost advantage over  the West Coast price  for ANS                                                              
crude,   but    that   advantage   would   be    eliminated   with                                                              
retroactivity.  He offered  the information  that refineries  that                                                              
don't grow don't tend to survive.                                                                                               
                                                                                                                                
MR. COOK  stated that SB  314 puts the  state at a  crossroads. It                                                              
can  support and  pass the  legislation, which  would be  mutually                                                              
advantageous  to a host  of beneficiaries, or  it can  continue on                                                              
the  path  of   tariff  retroactivity  thereby   perpetuating  the                                                              
negative results  outlined above. He asserted that  when the total                                                              
impact of retroactivity  is considered it is clear  that the long-                                                              
term  losses  are  far  greater   than  any  windfall  retroactive                                                              
payment the state might receive in the future.                                                                                  
                                                                                                                                
SB 314 provides  equity, fairness and certainty  for any purchaser                                                              
of  state royalty  oil.  It  will encourage  production  decisions                                                              
based on legitimate market factors, he concluded.                                                                               
                                                                                                                                
4:02:24 PM                                                                                                                    
SENATOR FRED  DYSON asked  for a summary  of pipeline  tariffs and                                                              
questioned  why  the  shipper  would  owe  retroactively  if  FERC                                                              
decided that a pipeline owner had over charged for shipping.                                                                    
                                                                                                                                
MR. COOK deferred to Mr. Sementelli.                                                                                            
                                                                                                                                
TONY SEMENTELLI,  Chief Financial Officer, Flint  Hills Resources,                                                              
explained  that the  tariff calculation  starts  with a  published                                                              
West  Coast  price  for ANS  crude.  Deductions  are  applied  for                                                              
marine  freight and  the pipeline  tariff to  arrive at a  Prudhoe                                                              
Bay value. In the  next step Flint Hills moves the  barrels to the                                                              
Flint Hills  refinery at  the intrastate rate.  He said  the lower                                                              
the tariff, the more Flint Hills pays for crude at Prudhoe Bay.                                                                 
                                                                                                                                
SENATOR DYSON indicated that his question was not answered.                                                                     
                                                                                                                                
MR.  SEMENTELLI  used the  following  example. The  published  ANS                                                              
price  in California  is $60.  To arrive  at an  Alaska price  you                                                              
would deduct marine  transportation and the tariff.  The agreement                                                              
with  the state  is that  the marine  transportation deduction  is                                                              
$1.55.  For  simple   math  consider  the  tariff   to  be  $4.00.                                                              
Basically, the price  Flint Hills pays the State of  Alaska is $60                                                              
less  $1.55  less $4.  If  the  tariff  were  reduced to  $2,  the                                                              
deduction from the  West Coast is lower and therefore  Flint Hills                                                              
would owe the state more for the crude oil.                                                                                     
                                                                                                                                
4:05:43 PM                                                                                                                    
SENATOR DYSON  again asked why his  company has to pay  as opposed                                                              
to pipeline owners who were overcharging.                                                                                       
                                                                                                                                
MR. SEMENTELLI replied  because Flint Hills has  indexed its crude                                                              
oil  contract to  the published  tariffs  so the  pricing term  is                                                              
used as a proxy to get a value to pay the state.                                                                                
                                                                                                                                
SENATOR  DYSON questioned  why the  pipeline  company wouldn't  be                                                              
required to pay back the overcharge instead of Flint Hills.                                                                     
                                                                                                                                
MR.  SEMENTELLI  replied  they  would  if  they  actually  shipped                                                              
barrels  interstate, but  they don't.  The  rate is  just use  for                                                              
pricing terms.                                                                                                                  
                                                                                                                                
SENATOR DYSON mused  that the cost of shipping the  barrels to the                                                              
refinery at North Pole is not in contention here.                                                                               
                                                                                                                                
MR. SEMENTELLI replied that is correct.                                                                                         
                                                                                                                                
4:07:58 PM                                                                                                                    
SENATOR KIM  ELTON commented  on the DNR  fiscal note and  said he                                                              
would agree with  the analysis. No one should have  been caught by                                                              
surprise because  the RCA had  already determined that  the tariff                                                              
valuation method was flawed. He asked Mr. Cook to respond.                                                                      
                                                                                                                                
MR. COOK  said it may or  may not be  flawed, but the state  was a                                                              
signatory  to TSM  so  Flint Hills  did not  expect  the state  to                                                              
oppose the contract prior to the expiration at the end of 2009.                                                                 
                                                                                                                                
MR.  SEMENTELLI   said  the   point  is  that   the  RCA   has  no                                                              
jurisdiction  on interstate rates.  The RCA  decision is  still on                                                              
appeal so  Flint Hills  could get  a decision in  06 or  07 saying                                                              
that the RCA was not correct in that particular rule.                                                                           
                                                                                                                                
MR.  SEMENTELLI added  that  running the  refinery  five years  in                                                              
arrears is not  a good way to  run a business and that  policy has                                                              
caused Flint  Hills to  seek ways  to avoid retroactive  payments.                                                              
First they  have worked  proactively to  address the concerns  Mr.                                                              
Cook expressed  and second  they have  reduced production  so that                                                              
fewer  barrels  are  at  risk  of  retroactivity.  He  noted  that                                                              
refining  is  a  very  capital-intensive  business  that  requires                                                              
continuous  reinvestment, but  the current  policy is for  minimum                                                              
investment until  there is cost  certainty. This could  take years                                                              
longer than 2009, he concluded.                                                                                                 
                                                                                                                                
4:11:56 PM                                                                                                                    
SENATOR ELTON followed  up saying the fiscal note is  based on the                                                              
premise  that the potential  liability  is up  to $50 million  per                                                              
year  so if  a potential  decision  is far  into  the future,  the                                                              
potential impact to the state could be well over $100 million.                                                                  
                                                                                                                                
MR. SEMENTELLI  agreed. It  could go  on for  years such  that the                                                              
retroactivity bill  could potentially be  larger than the  cost of                                                              
the  refinery. Clearly,  he  said, it  is  not possible  to run  a                                                              
business  with  a potential  liability  that  is larger  than  the                                                              
actual physical cost of the asset.                                                                                              
                                                                                                                                
SENATOR  ELTON asked  if other  refineries are  buying product  on                                                              
the open  market rather than  from the  state and whether  that is                                                              
more competitive.                                                                                                               
                                                                                                                                
MR. SEMENTELLI  replied Flint Hills  is very competitive  with the                                                              
Kenai  refinery,  but if  Flint  Hills  were  put on  parity  with                                                              
Valdez then it  would be at a competitive disadvantage  because it                                                              
would have to pay the higher price and the railroad costs.                                                                      
                                                                                                                                
4:15:09 PM                                                                                                                    
KEVIN BANKS,  Petroleum Market Analyst,  Division of Oil  and Gas,                                                              
Department   of    Natural   Resources   (DNR),    explained   the                                                              
department's  perspective. When  the state  chose to  sell oil  to                                                              
Flint Hills, the  decision was to take oil that  would normally be                                                              
paid  for  by  the  lessees  in-value.   Those  contracts  include                                                              
retroactive  provisions. When the  lessees ship  oil to  the Lower                                                              
48, they  pay an interstate  tariff. When  the tariff  is adjusted                                                              
downward   and   the  FERC   rules   that   it  should   be   paid                                                              
retroactively,  the companies do  get a  refund from the  pipeline                                                              
company and then the refund is passed on to the state.                                                                          
                                                                                                                                
That is  where the  basis for the  decision to  sell oil  to Flint                                                              
Hills begins,  he said.  When the  state is negotiating  contracts                                                              
with potential  RIK buyers, it may  not sell the royalty  for less                                                              
than what it receives  for it in-value. The state  tried to make a                                                              
contract  with  Flint  Hills  that  has as  few  moving  parts  as                                                              
possible,  but   the  tariff  allowance   and  the   quality  bank                                                              
allowance were left with retroactive provisions.                                                                                
                                                                                                                                
4:18:34 PM                                                                                                                    
Although  there may  be discussion  about what  was said when  the                                                              
deal  was  struck,  the  state   has  always  recognized  that  in                                                              
insisting on a  retroactive provision items were  traded away. One                                                              
such  example is  interest.  Under normal  circumstances  interest                                                              
begins  to accrue  once  the payment  is  due.  However, should  a                                                              
retroactive  payment  be  required,  Flint  Hills  will  enjoy  an                                                              
interest break  from today up to  the point that the  state issues                                                              
an invoice.                                                                                                                     
                                                                                                                                
To put it  into context, he said  the state last year  received 56                                                              
percent or $1.2  billion of its royalty revenue  from Flint Hills,                                                              
which makes  it the largest royalty  payer in the state.  It is by                                                              
far  larger than  the royalty-in-value  lessee  payers. Over  time                                                              
Flint Hill's  percentage is  expected to increase,  so by  the end                                                              
of  the  contract it  could  take  nearly  80 percent  of  state's                                                              
royalty  oil. Although  Flint  Hills  says it  anticipates  buying                                                              
less  oil  from  the state  to  avoid  the  potential  retroactive                                                              
liability, the current  contract does allow it to take  as much as                                                              
77,000 barrels a  day so the state cannot sell that  oil to anyone                                                              
else.                                                                                                                           
                                                                                                                                
4:21:01 PM                                                                                                                    
Historically  the  state has  had  retroactive provisions  in  its                                                              
contracts and that  has been an issue for other  purchasers. If SB                                                              
314 were  to pass a question  of fairness would arise  because the                                                              
state would  be offering new contracts  to new purchasers,  but it                                                              
would only have a limited amount of oil to sell.                                                                                
                                                                                                                                
4:21:28 PM                                                                                                                    
SENATOR DYSON  asked if he  said that if SB  314 were to  pass new                                                              
companies would not  be subject to retroactivity,  but Flint Hills                                                              
still would be.                                                                                                                 
                                                                                                                                
MR. BANKS  said no.  He said that  SB 314  would require  that the                                                              
state  sell oil  without a  retroactive provision.  That would  be                                                              
attractive  to other  potential  purchasers, but  there  is not  a                                                              
large  quantity  of  royalty  oil  available  to  sell.  When  the                                                              
contract  with Flint  Hills  was negotiated,  a  finding was  that                                                              
there was not competition  for the crude oil. But  now, because of                                                              
the current  contract, the state  couldn't meet other  refineries'                                                              
needs.                                                                                                                          
                                                                                                                                
4:22:44 PM                                                                                                                    
SENATOR DYSON  asked if  this legislation  would make  the current                                                              
Flint  Hills  contract  significantly  more  attractive  than  the                                                              
original bargain.                                                                                                               
                                                                                                                                
MR. BANKS  replied  yes, because  the company  would no longer  be                                                              
subject to the potential $50 million lump sum payment.                                                                          
                                                                                                                                
SENATOR  DYSON asked  if  the original  contract  had  a lump  sum                                                              
provision.                                                                                                                      
                                                                                                                                
MR.  BANKS said  technically  there was  no  bidding process.  The                                                              
contract was  based on a  negotiated price  and there was  no lump                                                              
sum provision.                                                                                                                  
                                                                                                                                
SENATOR ELTON restated  his understanding of the  previous answer.                                                              
Passing SB 314  would negate the retroactive provision  and compel                                                              
the   state   to   sell   royalty-in-kind    to   others   without                                                              
retroactivity.  However,  because  of the  Flint  Hills  contract,                                                              
there may not be much royalty -in-kind oil to sell to others.                                                                   
                                                                                                                                
MR. BANKS replied that is basically true.                                                                                       
                                                                                                                                
4:25:57 PM                                                                                                                    
SENATOR ELTON  said that  would suggest that  the sweeter  deal is                                                              
already  locked in  at  77,000 barrels.  Companies  buying on  the                                                              
open market  may want  to get  back in  if retroactivity  is gone,                                                              
but there may not be enough oil available.                                                                                      
                                                                                                                                
MR. BANKS  said there's  another problem with  the concept  of the                                                              
77,000-barrel reservation.  Nominations are made each  month based                                                              
on a  range of 56,000-barrels  to 77,000-barrel per  day. Although                                                              
current projections  indicate that  44 percent  of royalty  oil is                                                              
available to  sell to someone else,  that might not always  be the                                                              
situation  during the  summer when  North  Slope production  falls                                                              
and Flint Hills' demand for product rises.                                                                                      
                                                                                                                                
4:27:20 PM                                                                                                                    
MR.  BANKS noted  that  Article  VIII, Section  2,  says that  the                                                              
maximum benefit of  the people rule would apply  when disposing of                                                              
royalties.  He related  that in  1980 Judge Compton  ruled  on the                                                              
ANS  Royalty  Litigation  and  created   a  bright  line  when  he                                                              
indicated that in  that particular case RIK could not  be sold for                                                              
less than RIV.                                                                                                                  
                                                                                                                                
If attorneys were  to argue on behalf of a less  bright line, they                                                              
would  need to  demonstrate that  in  return for  selling RIK  for                                                              
less  than RIV  the state  would  receive a  measurable benefit  -                                                              
such  as  jobs.  Flint  Hills  would   have  to  make  a  definite                                                              
commitment  to  provide  that  measurable  benefit  such  that  it                                                              
sufficiently  balances what the  state gives  up and therefore  is                                                              
not  found unconstitutional.  The issue  is whether  or not  Judge                                                              
Compton's view  of what RIK  can be sold  for in the  state allows                                                              
the state to sell it for less than RIV.                                                                                         
                                                                                                                                
4:30:06 PM                                                                                                                    
SENATOR ELTON  asked if he agrees  with the previous  speaker that                                                              
the decision  could be pushed well  into the future in  which case                                                              
the fiscal note would be significantly understated.                                                                             
                                                                                                                                
MR.  BANKS said  given  the past  performance  of the  FERC it  is                                                              
reasonable to assume  that the wait could be  lengthy. He outlined                                                              
that a hearing is  scheduled for early 2007 and a  decision is due                                                              
by  the  end  of  April 2007.  However,  it  will  be  subject  to                                                              
judicial appeal so the process could go on for some time.                                                                       
                                                                                                                                
SENATOR  DYSON mused  that a  prudent company  negotiating to  buy                                                              
royalty  oil might  figure this  sort of  perfect storm  situation                                                              
into its  business plan and  set the money  aside to  address that                                                              
potential.                                                                                                                      
                                                                                                                                
4:32:28 PM                                                                                                                    
MR. BANKS  replied a prudent  company would  make sure it  had the                                                              
money  it needed  if  the FERC  lowered  the  tariff and  required                                                              
retroactive adjustment.  It's a  reserve against owner  equity and                                                              
not available for spending anywhere.                                                                                            
                                                                                                                                
There  is more  here  than  just  retroactivity, he  added.  Flint                                                              
Hills  had   to  make  adjustments   to  meet  the   Environmental                                                              
Protection  Agency (EPA)  low-sulphur diesel  requirements and  to                                                              
do  that they  elected  to  join with  Tesoro,  which  was a  less                                                              
costly   option   than   retooling  the   North   Pole   refinery.                                                              
Furthermore,  Flint  Hills's  ability  to supply  naphtha  to  the                                                              
local and  export markets  has been affected  by the  treatment of                                                              
naphtha  as a  cut in  the quality  bank.  Previously naphtha  was                                                              
relatively less  expensive and it  was possible to remove  it from                                                              
the oil stream  and export it to  Asia. With the new  quality bank                                                              
naphtha will cost Flint Hills much more.                                                                                        
                                                                                                                                
He concluded that  retroactivity undoubtedly is  important because                                                              
$50 million  a year comes  right out of  Flint Hill's  pocket. The                                                              
issue that DNR struggles  with is whether the $50  million will be                                                              
returned to the economy of the state or go to the Lower 48.                                                                     
                                                                                                                                
4:35:49 PM                                                                                                                    
SENATOR  DYSON  questioned whether  it's  fair  to impose  such  a                                                              
significant uncertainty  factor on Foot Hills when  it didn't have                                                              
a watchman or any control on the process.                                                                                       
                                                                                                                                
MR. BANKS  disagreed  with the portrayal  of  the issue and  noted                                                              
Flint Hills  is a subsidiary of  Koch Industries and  that company                                                              
owns a  portion of the  pipeline so they  too are involved  in the                                                              
dispute  with the  FERC  to keep  the  tariff  high. Clearly,  the                                                              
intrastate  tariff   is  lower  so  transportation   between  Pump                                                              
Station 1  and North Pole is  based on a lower  tariff methodology                                                              
that  the  RCA  imposed.  So a  distance-adjusted  tariff  on  the                                                              
interstate  would be  a higher price.  The reason  royalty  oil is                                                              
sold  to Foot  Hills based  on the  interstate  tariff is  because                                                              
that's where the  oil goes if it doesn't stay in  the state so the                                                              
opportunity for  the state is to  either go to the West  Coast and                                                              
sell the  oil in-value or  sell it in  state to someone  else. Mr.                                                              
Banks emphasized  that the interstate  deduction for tariff  is an                                                              
appropriate  deduction.  The  difficulty  is that  the  tariff  is                                                              
being adjudicated by the FERC.                                                                                                  
                                                                                                                                
4:38:43 PM                                                                                                                    
GOVERNOR  BILL  SHEFFIELD,  Chair,   Alaska  Railroad  Corporation                                                              
(ARC),  Director,  Port  of Anchorage,  presented  the  railroad's                                                              
perspective  on the  issue. He  explained  that hauling  petroleum                                                              
from the North  Pole refinery accounts for $45  million in revenue                                                              
or  48  percent  of  the  railroad's   revenue  freight  business.                                                              
Because  Flint  Hill's business  is  down  about 15  percent  this                                                              
year, the  railroad will  make $7 million  less revenue,  which is                                                              
essentially the profit.                                                                                                         
                                                                                                                                
He  related that  the  railroad  must prepare  this  year for  the                                                              
anticipated further  decline in Flint  Hills business and  to that                                                              
end ARC management  expects to lay off 200 to 208  people from the                                                              
United  Transportation   Union.  To  emphasize  what   that  means                                                              
Governor  Sheffield told  the committee  that a  March 2005  study                                                              
indicated that  the Alaska Railroad  supports nearly  1,900 Alaska                                                              
jobs and  about $83  million in payroll.  He calculated  that with                                                              
the  expected drop  in  business about  $21.5  million in  payroll                                                              
would disappear.                                                                                                                
                                                                                                                                
Governor  Sheffield  continued to  outline  expected  cuts to  the                                                              
$108 million in  capital operating programs and  resulting payroll                                                              
losses  to further  demonstrate  the potential  impact this  issue                                                              
has on the  railroad and the ripple  affect that it would  have on                                                              
the Port of  Anchorage and other Alaskan businesses.  He estimated                                                              
that it would  take five years  to develop an industry  that would                                                              
create the  kind of jobs  that would be  lost if this  issue isn't                                                              
resolved.                                                                                                                       
                                                                                                                                
4:46:58 PM                                                                                                                    
MERRICK   PIERCE,  Fairbanks,   described  SB   314  as   horrible                                                              
legislation  and corporate  welfare. He related  that Flint  Hills                                                              
Resources is  a subsidiary of Koch  Industries Inc., which  is the                                                              
largest  privately held  corporation  in the  U.S.  with over  $80                                                              
billion  in   annual  revenue.   The  principle  owners   of  Koch                                                              
Industries Inc.  are among  the 50 wealthiest  people in  the U.S.                                                              
and although  he doesn't  disagree with  their political  leanings                                                              
he does take  issue with the  apparent hypocrisy when it  comes to                                                              
self-interest.  They support  the  elimination  of social  welfare                                                              
programs  claiming that they  result in  undue government  control                                                              
being exerted over  individual lives. Perhaps they'd  like to give                                                              
a straight-faced  explanation of why  welfare for the poor  is bad                                                              
while corporate welfare for billionaires is okay, he said.                                                                      
                                                                                                                                
MR. PIERCE  referenced page 9 of  the 2004 contract  between Flint                                                              
Hills  Resources and  the  State  of Alaska  and  said it  clearly                                                              
states  that  the  tariff  allowance  is  subject  to  retroactive                                                              
adjustment so Flint  Hills knew it should establish  a contingency                                                              
fund  for   when  the  tariff   was  revised.  Furthermore,   it's                                                              
important  to note  Flint  Hill's  parent company  is  one of  the                                                              
owners of  the Trans  Alaska Pipeline  and as  such it  is acutely                                                              
aware of the tariff issue.                                                                                                      
                                                                                                                                
In closing  he stated the  belief that it  would be better  to get                                                              
Alaska roads  in decent shape  before giving hundreds  of millions                                                              
of dollars to billionaires living in Minnesota.                                                                                 
                                                                                                                                
4:50:33 PM                                                                                                                    
LADD  McBRIDE, Fairbanks,  reported  that  he is  not  sympathetic                                                              
with Flint  Hills Resources  because the  tariff adjustment  was a                                                              
known  expense item  when the  contract was  signed. He  expressed                                                              
the  view  that  Alaskans  should not  "eat"  the  potential  $200                                                              
million. Flint  Hills certainly has  not given Alaska  customers a                                                              
break, he  said. In  fact, up until  recently the locally  refined                                                              
gas came  at a premium. Furthermore,  Flint Hills has not  met any                                                              
of   the   obligations   or   contract   requirements   concerning                                                              
manufacture of  low sulphur fuel  and that is costing  everyone in                                                              
Alaska money.                                                                                                                   
                                                                                                                                
MR. McBRIDE  urged the  committee to look  at the maximum  benefit                                                              
to Alaskans when considering how to handle SB 314.                                                                              
                                                                                                                                
CHAIR WAGONER held SB 314 in committee.                                                                                         
                                                                                                                                
There  being no  further business  to come  before the  committee,                                                              
Chair Wagoner adjourned the meeting at 4:55:39 PM.                                                                            
                                                                                                                                

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