HCR 19-AIDEA REPORT ON IN-STATE FUEL STORAGE  CHAIR OLSON announced that the final order of business would be HOUSE CONCURRENT RESOLUTION NO. 19, Urging the Alaska Industrial Development and Export Authority to present a business case to the Alaska State Legislature that includes a method for financing, a plan to solicit proposals for a public and private venture, and an analysis of the economic feasibility of a state- built and privately operated fuel storage facility that would serve the public interest by providing Alaskans with a reliable source of jet fuel, diesel, and gasoline at competitive prices. 4:47:14 PM REPRESENTATIVE JAY RAMRAS, Alaska State Legislature, explained that HCR 19 is a resolution that pertains to in state fuel storage. He recalled over a year ago the previous speaker tasked him with working on a gasoline pricing report. He has worked closely with Mr. Sniffen, Department of Law on these issues. An expansion of the Port of Anchorage would provide incentives for other refineries to operate in Alaska to create competition for the production of gasoline in Alaska. At the time, the Port of Anchorage was simply not large enough to accommodate any additional fuel storage. Since that time, former Governor Sheffield has physically enlarged the Port of Anchorage by filling in portions of the port with acres of gravel. The Port of Anchorage is now large enough to accommodate fuel storage. He acknowledged that a great debate has arisen over price gouging and price regulation in Alaska. He offered his belief that his view on this issue is similar to the Chair's view on this issue. This resolution supports the concept of having AIDEA build a business case for the free market to work, which would create competition to allow gasoline, diesel, and jet aviation fuel to potentially come from Cherry Point, the largest refinery in Washington State. This refinery operates primarily using North Slope crude, refines with natural gas, at $.08 kilowatts, which would make the cost of fuels more affordable to Alaskan consumers. The "rack rate" for the past 16 months has ranged from $.60 to $.90 cents per gallon less than the two refineries in Alaska. The Tesoro refinery in Nikiski produces 85 percent of Alaska's fuel and the Flint Hills Resources Alaska Refinery (Flint Hills) in North Pole produces the remaining 15 percent. Southeast Alaska is served by Seattle and often enjoys lower prices than the remaining parts of the state, he stated. He recapped that this resolution would request AIDEA prepare a business case to determine whether it would warrant a third-party operator to assume the risk and liability of bringing in fuel from another refinery to serve Alaskans. REPRESENTATIVE T. WILSON asked whether this would affect Flint Hills and if AIDEA would be a competitor. REPRESENTATIVE RAMRAS answered yes. He expressed that is the whole point, to provide a competitor in the market for the benefit of consumers across the State of Alaska that does not come from price gouging or price regulation legislation, which would have a more adverse affect on Flint Hills than competition. 4:51:01 PM REPRESENTATIVE NEUMAN asked whether this resolution is an outcome of the research on price gouging, and is meant to provide additional information. REPRESENTATIVE RAMRAS related that in January 2009, at the time the report was produced, the Port of Anchorage was not large enough to accommodate the consideration of extra fuel storage. Former Governor Sheffield has indicated that the Port of Anchorage is ready and the terminal would be ready for bulk fuel storage before the construction could begin. 4:51:52 PM REPRESENTATIVE RAMRAS related that the risk for anyone entering into a transaction such as this is that if the competition lowers the price for Alaskans by $.30 and Flint Hills Resources (Flint Hills) and Tesoro Refinery (Tesoro) lowers their prices by $.32 that the fuel would be stranded in the storage tanks, which is the inherent risk embedded in the free market. He pointed out that discussions with Flint Hills and Tesoro indicated their preference for competition rather than price gouging legislation since that approach to address high fuel costs could "run Flint Hills out of the State of Alaska." 4:52:34 PM JAMES HEMSATH, Deputy Director, Business Development, AIDEA, presented a PowerPoint describing AIDEA's viewpoint of this opportunity for a business project. He offered to review the potential problem and opportunities, and address how AIDEA could participate in a potential plan to address the problem [slide 2]. 4:54:35 PM MR. HEMSATH discussed the regular grade retail gasoline prices [slide 3]. He explained that the graphs on this slide outline data obtained from the Department of Law (DOL) and use Representative Ramras's report, which is updated through 2009. The top graph shows the absolute prices between Seattle and Anchorage. The bottom graph provides the average price spread between Anchorage and Seattle. Historically the spread has been in the $.10 per gallon range, but in the last 18 months rose as high as a $1 per gallon differential. Currently the difference is running at $.75 per gallon. Qualitatively, it is reasonable to assume a price differential should range between $.10 to $.20 per gallon, which accommodates transportation costs and efficiencies of refineries. He concluded that $.75 to $1.00 price difference between Seattle and Anchorage may be seen as less than reasonable. 4:56:00 PM MR. HEMSATH provided an overview of transportation links between Alaska and Seattle [slide 4]. He related this small graphic provides the transportation paths between Cherry Point in Washington State, Anchorage, the North Pole Refinery, and other parts of Alaska to transport a variety of fuels. 4:56:23 PM MR. HEMSATH explained the reasons for HCR 19 [slide 5]. He stated that this past winter a question arose whether sufficient jet fuel was available at the international airports, raising the question of whether planes could operate. He explained that a spike arose in the cargo load, combined with a lowering of the production rate at Flint Hills. He recalled that UPS provided the remedy and fuel for Cathay Pacific to operate. He characterized the issue as a "little bit of a squeeze" and suggested that security issues also need to be addressed. He related that from AIDEA's perspective an infrastructure need exists, that something is missing in the infrastructure itself. Something is needed to alleviate the problems and provide an opportunity for economic development, at least from the perspective of maintaining and saving jobs in Alaska. Further, AIDEA, in its Development Finance Program can own and operate an asset of this nature to serve this need. However, he acknowledged that a business case must exist in order to do so. 4:57:51 PM MR. HEMSATH outlined what AIDEA must review to develop the business case [slide 6]. He explained that by law, AIDEA is required to have projects pay for themselves. He related that the proposed project would be open access, AIDEA owned, and contractor operated. The proposed project would need to generate sufficient revenue to pay for itself. Additionally, AIDEA would review the market and market risk, as well as address competition issues. He pointed out that AIDEA does not want to be viewed as being in the middle of competition as a state authority, although what AIDEA "brings to the table" is not necessarily a grant or non-business aspect. However, AIDEA needs to ensure that it is not putting one business out of business in order to sustain another business. Specifically, one of eight jobs in Anchorage relates to the airport, so reliability of fuel is important. Thus, AIDEA would build for a specific reason and a specific project. 4:59:36 PM REPRESENTATIVE NEUMAN asked whether AIDEA is currently involved in projects that use a business plan that is similar to the proposed arrangement in HCR 19. MR. HEMSATH responded that as projects are considered by AIDEA, such as a small iron ore project currently under consideration, that each project has own mode. The overriding factors AIDEA considers are the business case, the revenue aspects, the market for the product, and the risks in that market. It is not specifically defined in a stop-gap format, but that is the approach that AIDEA takes when considering projects, which is similar to the process being used for this project. 5:00:42 PM REPRESENTATIVE T. WILSON asked whether AIDEA is currently involved in any plan that would compete against the private sector. She offered her belief that the proposed project would specifically compete with the private sector, such as the Flint Hills Refinery in North Pole. MR. HEMSATH responded that it depends on how competition is defined. Competition is not necessarily a definitive condition. For example, AIDEA owns the road and the port that makes it possible for the Red Dog Mine Facility to operate. He asked whether that constitutes competition with the private sector. He answered that while it does compete with mines in other parts of the country, AIDEA's involvement does not necessarily compete with the private sector in Alaska. He offered his belief that AIDEA competes with other areas of the country or the world in order to provide jobs in Alaska. He said that he did not believe that AIDEA has a specific project in Alaska that is potentially as overt a competitor as the proposed Port of Anchorage expansion project, which is the reason the market dynamic needs to be fully addressed and understood, he stated. 5:02:03 PM REPRESENTATIVE T. WILSON asked for the closest business plan similar to this proposed project. MR. HEMSATH answered that the closest business plan would be the ownership at the Ketchikan Shipyard. While other shipyards, such as the ones in Kodiak and Seward provide similar work, some aspects and variations between the shipyards make them not completely competitive with the Ketchikan Shipyard project. 5:02:40 PM MR. HEMSATH discussed product storage of jet fuel, gasoline, and distillate [slide 7]. He stated the various grades of gasoline, and noted the importance of recognizing the processing capacity in the state. Additionally, product storage includes distillate, the ultra low-sulfur, and number two fuel oil. It is also important to discuss how storage relates to the Railbelt and what type of storage is required for Western Alaska, he stated. The graphic depicted was taken from a 2007 report of the Energy Information Authority, which provides an indication of the amounts of sales of petroleum products in Alaska. He related that two-thirds of the fuel is jet fuel, and the distillate and motor fuel make up the other third. 5:04:06 PM MR. HEMSATH compared typical crude oil yields [slide 8]. He stated that the graphic on the right is a light crude oil, typical of a West Texas intermediate, with about 50 - 60 percent in atmospheric distillates, 20 - 25 percent in vacuum distillates, and 20 percent in vacuum residue or heavy ends. Alaska currently is some place under that, but not quite at the heavy oil level. He said, "This is where we think we are going, with the crude slate, when we start looking at producing some of the heavier or more viscous crudes on the North Slope, where the atmospheric distillates count for only 20 percent of the barrel, and the bottoms account for as must as 60 percent of the barrel." This is important in terms of how the refinery processes the oil. Flint Hills Resources Alaska (Flint Hills) and the two Petro Star, Inc. (Petro Star) refineries are light end distillation only, so these refineries would produce their products from only 20 percent of the barrel of heavy oil crude. He related that their products consist of light straight-run gasoline, kerosene, jet fuel, and some heating oil [slide 9]. Tesoro has a hydrotreater, but Flint Hills and the Petro Star plants do not so they cannot produce any of the low-sulphur diesel fuels. Tesoro has some vacuum-unit capacity and some ability to make other gasoline products, but they are also limited, in that a full quarter of their production consist of the heavy ends or bottoms that some refineries would destroy as a Coker, or sell as a potential feed stock for other refineries on the West Coast, or as bunker fuel for ships. The ability of the refineries to produce predominately jet fuel changes, which is an aspect for consideration in terms of fuel security and how the system might work. 5:06:26 PM MR. HEMSATH described the Anchorage Port Expansion Phasing Plan [slide 10]. He referred to the color slide and related that the fuel storage tanks would be located in the red and yellow area on the far right of the facility. The yellow area has been filled, while the red area is open water and is scheduled to be filled this summer. While there is space at the Port of Anchorage, and staging space exists, some space is not yet completed, he stated. The Port of Anchorage would relocate its existing fuel off-loading facility to that area, he said. 5:07:31 PM MR. HEMSATH outlined AIDEA's action plan [slide 11]. He related that the Market Analysis is currently being done by Econ One Research Inc. (Econ One) and is a continuation of last year's efforts on the pricing mechanism, which is supported by the Department of Law. From the market analysis, AIDEA will review the military capacity, long-term air cargo, and fuel supply reliability. The AIDEA is also in the midst of bringing on board an engineering contract to perform a layout and cost estimate. He suggested that it is important to assess the storage constraints. The market analysis may provide a tolerance for one million barrels of storage capacity, but if there is only room for 500,000 barrels, that could change the business case. He related that the project is not just tanks, but also includes vapor recovery, and space for additives to change the jet fuel for military specifications. Further, the schedule of the proposed port expansion is also important. He said he would like to say that the AIDEA would do a quick market analysis and examine the estimates, but many other aspects will need to be considered to develop the business case. The business case model will examine how the project impacts competition, the ability to produce fuel, the market risks and economic impact, including any new jobs that may be created. 5:09:38 PM MR. HEMSATH described the AIDEA's mission and its relevance to HCR 19 [slide 12]. He asked why this resolution is being written for AIDEA. Part of AIDEA's mission in terms of economic development and growth is the ability to own assets, and treat them as a business entity with a different feel. AIDEA has a bylaw that allows it to manage and operate projects as the authority considers necessary and appropriate to serve a public purpose, which puts this type of project "directly in our lap." 5:10:26 PM MR. HEMSATH discussed AIDEA's purpose [slide 13]. The AIDEA is also allowed, by statute, to equip, operate, and maintain facilities that will enhance the competitiveness of the International Airport System, specifically the Ted Stevens International Airport [slide 20]. Issues on that fuel supply and fuel reliability are probably the number one risk to our air cargo business in the state. Thus, these types of excerpts from our enabling statute drive AIDEA to be part of this project since it fits one of AIDEA's project modes. He reiterated that AIDEA is looking for projects that it can demonstrate are economically advantageous to the state, are financially responsible, and produce revenue [slide 21 - 22]. He pointed out that AIDEA has a business case it must meet. He related that if the terminal project does not meet these requirements, that AIDEA cannot participate in the project. He related similar types of projects, such as the road and port at the Red Dog mine, the FedEx hangar in Anchorage, the Ketchikan Shipyard, and the Skagway Ore Terminal. He stated that AIDEA envisions the Port of Anchorage fuel terminal as fitting into that mode. The project size would entail 500,000 to 1,000,000 barrels of fuel storage capacity [slide 29]. The project would consist of an open access project, and the product would be transferred by pipeline, barge, and railcar. This project should enhance the statewide fuel system, which encompasses storage, distribution, as well as manufacturing. He related that AIDEA would contract with an operator, and would use an open season concept for storage commitments. Thus, AIDEA must be able to guarantee that it has the business for a sufficient period of time to pay off the debt. 5:12:18 PM MR. HEMSATH related that depending on the size of the terminal, the total cost is estimated from $75 to $100 million [slide 29]. He concluded by stating that AIDEA believes this type of project fits its mission and its strategic vision to be an active partner with Alaskans and a dynamic resource in statewide economic development. 5:12:38 PM REPRESENTATIVE T. WILSON referred to page 16 of his PowerPoint presentation and read, "AIDEA does not compete with the private sector." MR. HEMSATH responded that she is correct. REPRESENTATIVE T. WILSON related her understanding that under this resolution that AIDEA would compete with the private sector. MR. HEMSATH agreed that it might be considered competing with the private sector. He explained that the aspects to consider are whether the reasons for the distorted fuel costs are due to strictly non-competition reasons or whether a problem exists in the infrastructure itself. He related that fuel prices would be more competitive if someone were able to build storage capacity, but any single individual might not have enough capacity to make the project economic. The consolidator would be looking at projects to bring in other storage. Whether these prices are due strictly to competition is not yet known. However, another reason for AIDEA's involvement is whether this could be an issue of security. He said, "The question is there may be a business case in this in jet fuel only, and has nothing to do with whether we're competing to lower price, but on the business case alone." [HCR 19 was held over].