Legislature(2013 - 2014)HOUSE FINANCE 519
04/11/2014 06:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB287 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 287 | TELECONFERENCED | |
| += | HB 89 | TELECONFERENCED | |
HOUSE FINANCE COMMITTEE
April 11, 2014
6:36 p.m.
6:36:21 PM
CALL TO ORDER
Co-Chair Stoltze called the House Finance Committee meeting
to order at 6:36 p.m.
MEMBERS PRESENT
Representative Alan Austerman, Co-Chair
Representative Bill Stoltze, Co-Chair
Representative Mark Neuman, Vice-Chair
Representative Mia Costello
Representative Bryce Edgmon
Representative Les Gara
Representative David Guttenberg
Representative Lindsey Holmes
Representative Cathy Munoz
Representative Steve Thompson
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Joe Balash, Commissioner Designee, Department of Natural
Resources
SUMMARY
HB 287 APPROVE TESORO ROYALTY OIL SALE
HB 287 was HEARD and HELD in committee for
further consideration.
HOUSE BILL NO. 287
"An Act approving and ratifying the sale of royalty
oil by the State of Alaska to Tesoro Corporation and
Tesoro Refining and Marketing Company LLC; and
providing for an effective date."
6:36:36 PM
Co-Chair Stoltze discussed the meeting agenda.
Representative Wilson WITHDREW Amendment 1 (28-GH2862\A.3,
Nauman, 4/9/14) that had been moved in a prior meeting
[4/9/14 6:06 pm](copy on file).
Representative Wilson MOVED to ADOPT replacement Amendment
1, 28-GH2862\A.5, Nauman, 4/11/14 (copy on file).
Co-Chair Stoltze OBJECTED for discussion.
6:38:36 PM
Representative Thompson discussed that the replacement
amendment made three changes. He pointed to page 3, line 7
of the amendment that changed the allowable credit from $15
million to $10 million per refinery. Second, the credit for
investment would be changed from 10 percent to 40 percent
with a maximum of $10 million (page 4). The amendment
maintained the $20 million maximum for the two credits
combined. Third, the amendment would expand the qualified
infrastructure credit per refinery to include the transport
of refined petroleum products or petroleum-based feed
stock. The third change had been included to address
getting piping to two of the refineries, which could also
be used as part of the refineries' infrastructure.
Representative Gara asked for the location of the third
change.
Representative Thompson replied that the third change
appeared on page 5, lines 20 and 21.
6:40:57 PM
Co-Chair Stoltze asked the Department of Natural Resources
(DNR) to comment on the amendment.
JOE BALASH, COMMISSIONER DESIGNEE, DEPARTMENT OF NATURAL
RESOURCES, discussed that the amendment was supported by
the administration. The underlying issue pertained to the
unhealthy condition of Alaska's instate refineries. He
relayed that with the upcoming closure of the Flint Hills
Refinery certain costs would increase for the Petro Star
facility in North Pole. The department was greatly
concerned about the potential consequences the state would
face if it were to lose Petro Star's North Pole and Valdez
Refineries. He addressed benefits provided by the instate
refineries. He detailed that the Quality Bank fees paid by
refineries were reflected back in increased revenue for the
state; the fees included an increase in the state's royalty
and a tax benefit. Estimates on royalty revenue were more
precise given the information reported in royalty values;
taxes were harder to assess due to the way the system was
structured. He communicated that the royalty value on the
Quality Bank payments was approximately $20 million in
2013; the tax impact approached an additional $30 million.
Additionally, when the state sold its royalty in-kind (RIK)
it typically sold it to instate refineries. In the past
three years the state had achieved a higher value by
selling in-kind than it would have received if the oil had
been left in-value with the producers. The total difference
for 2011 through 2013 exceeded $136 million. He stressed
that the figures represented real benefits to the state's
treasury. He did not know exactly what the numbers would
look like if the refineries shut down. He shared that the
state would continue to look for opportunities to sell its
royalty for some marginal premium; it was difficult to know
whether it would be achievable. He theorized that if FERC
got the Quality Bank formula exactly right, in theory the
Quality Bank adjustment would no longer be necessary
because oil coming out at the southern end of the Trans-
Alaska Pipeline System (TAPS) would be more valuable. He
did not subscribe to the theory.
Commissioner Balash elaborated that the issue was currently
being contested with the Federal Energy Regulatory
Commission (FERC); exactly what it would look like in the
end was not known. However, it was currently known that the
positive treasury impacts from the state's refineries
exceeded the sticker price on the amendment. He believed
the amendment was warranted and that the economic
consequences of the refinery closures would be quite
negative for Alaska in the long-term (particularly if there
was a normalized ANS Crude price). He communicated that the
department had considered multiple ways to address the
challenge including selling the state's royalty at a
discounted price. Additionally, the department had
considered Quality Bank tax credits; however, each of the
options had created their own problems including an
unleveled playing field for certain refineries that were
not connected with TAPS. He believed the amendment
represented a solution with the right combination of items.
6:47:03 PM
Commissioner Balash continued to discuss support for the
amendment. He detailed that the package provided an
incentive to producers to choose to sell their oil to
instate refineries. Second, the 40 percent capital
investment credit was provided. Investments could be made
in the facilities to increase efficiency and profitability
in order for the refineries to compete more effectively for
fuel products needed for military and commercial aviation
and for home heating, diesel, and gasline. He shared that
the refinery credit was modeled in part on the small
producer credit associated with the oil and gas production
tax. The figure was a fixed amount; a refinery would
qualify if it refined an average of more than 17,500
barrels per day (over the course of a year). He furthered
that the credit should keep a couple of North Slope
operations from qualifying. The target was facilities that
produced the products relied on by communities.
6:48:53 PM
Co-Chair Stoltze noted that the legislature was faced with
many requests for money. He referred a $20 million request
from the Alaska Railroad Corporation for the current year
and millions more in the coming years. He made additional
remarks about the railroad. He spoke to the benefits the
railroad provided to the tourism industry. He believed the
cost under replacement Amendment 1 seemed modest
comparatively. He discussed that the costs would buttress
opportunities for the military. He acknowledged that the
amendment represented an economic assist for businesses
that were healthy in many aspects of their broader
portfolio. He asked DNR to address how businesses behave
and some of the underpinnings of the economy. He remarked
that no business would request $80 million in order to earn
$2 million in a year. He continued that it was not a
business decision that would be made absent overall concern
for all of the other economic activity.
Commissioner Balash communicated that DNR had historically
gone through a fairly extensive best interest finding
process to support the sales. In the examination of
economic benefits to communities (particularly in the
Interior) the department was able to identify contributions
that the refineries made. He elaborated that the refineries
supported dozens to hundreds of high paying jobs to
families that participated in the state's communities. The
department had considered the potential effect of a Petro
Star closure and had examined what the facilities produced
and who the products were sold to. He detailed that Petro
Star was the provider of jet fuel for the state's air force
bases and to the Kodiak coast guard station; the product
was manufactured in Alaska and was distributed via truck,
barge, and rail. He addressed potential consequences of a
Petro Star facility closure. A closure would result in
increased cost pressure for the military and a knock-on
effect for the continued operation of facilities in the
Interior and Southcentral. He believed the closure would
eliminate the state's chances to base the F-35. The
department believed the opportunity to base the military
plane in Alaska was important to the state and nation. He
spoke to the upside down pricing position of ANS Crude
versus West Texas International (WTI); currently the jet
fuel coming in through the Port of Anchorage from external
refineries was competing against Alaska produced jet fuel
rather effectively; external sources were getting an
increasingly larger share of the jet fuel market at the Ted
Stevens International Airport in Anchorage.
6:55:33 PM
Commissioner Balash relayed that imported fuel would become
the "price maker" if the state did not act and the
refineries shut down due to the cost of crude oil. He
surmised that the shift would likely cause the cost of jet
fuel to increase.
Co-Chair Stoltze discussed a similar situation caused by
the closure of the Agrium closure. He relayed fertilizer
had increased from $200 per ton to $1,200 per ton.
Commissioner Balash shared that the international jet
traffic in Anchorage drove a significant amount of economic
activity, which benefitted Alaska statewide. He discussed
that the air cargo fleet was generally made up of former
passenger planes. Over time, larger and more fuel efficient
planes would enter the cargo fleet. The department feared
that incremental costs added to the jet fuel price in
Anchorage would make the state more challenged from a
competitive standpoint. He detailed that some signs had
already occurred related to the state's standing compared
to other international air cargo hubs. He believed the
state would need to keep a close eye on the issue and to
ensure that it drove as much competition to the jet fuel as
possible to keep prices at a reasonable level; the goal was
to prevent companies such as FedEx and UPS from relocating.
Ultimately the economic consequences would impact Alaskan
residents. He discussed that the refining industry received
significant blame and anger directed its way for the high
cost of gasoline and home heating fuel; however, the cost
was the price realized in the market for fuel that was
produced locally. The concern related to refinery closure
was that all of the fuel products used in-state would be
priced on imported products. He surmised that potentially
the Tesoro refinery at Nikiski could be maintained, but it
would put the state at one refinery instead of three.
Additionally, competition would be reduced. He believed
that prices would increase for gasoline, diesel, home
heating fuel, and marine diesel.
Co-Chair Stoltze remarked that asphalt was also included.
He asked Commissioner Balash to discuss where the product
was produced.
Commissioner Balash replied that Flint Hills had been the
state's largest asphalt producer. He believed Tesoro would
be able to help, but there would be an impact. The
department was concerned about the economic consequences
and the reduction in the overall quality of life in rural
areas including North Pole, Valdez, and Nikiski, should the
refineries close. He detailed that the closures would put
pressure on local budgets and social service agencies. He
added that stress in the home led to domestic violence and
substance abuse. He remarked that well-paying jobs worked
to remedy the problems. He pointed to the sticker-shock of
the amendment, but the department believed something had to
be done or the state would suffer real consequences. He
surmised that Petro Star wanted to remain in business, but
the company was owned by parent company Arctic Slope
Regional Corporation (ASRC) that was not in the business of
charity.
7:01:50 PM
Commissioner Balash discussed that ASRC had a
responsibility to earn a return for its shareholders. He
believed if Petro Star closed its refineries the situation
would be similar to that of Flint Hills. He elaborated that
Flint Hills was happy to sell its North Pole facility and
infrastructure, but he was not aware of any credible
buyers. He stated that the underlying business was
challenged; the cost of crude was a real problem at
present. Economic theory suggested that the problem was an
anomaly that would normalize; WTI and ANS would converge
back to historic norms. He stated that the problem had
persisted for the past three years. He remarked that the
first casualty had occurred and the goal was to prevent two
more from occurring.
7:02:58 PM
Co-Chair Stoltze noted that the amendment was sponsored by
the administration but was carried by members of the
Interior delegation on the committee.
Representative Wilson addressed whether Alaska wanted
instate refineries. She remarked that if the answer was no
the state would be dependent on price. She did not believe
it was the answer. She provided an example about
competition between large and small stores; small stores
closed because they did not have the ability to compete on
the same level. She provided the capital-move as an
example; it would devastate the Juneau economy. She
compared the issue to the loss of Flint Hills for Fairbanks
and the North Pole. She stressed that the state royalty oil
contract was $2.15 over the North Slope price. She detailed
that the state had done very well buying oil from Flint
Hills. She believed Tesoro provided a backup as it received
oil from other places at a more affordable price. She
discussed that currently the state refineries provided fuel
to Eielson Air Force Base, Fort Wainwright, and Joint Base
Elmendorf-Richardson (JBER). She discussed that heating oil
had been affordable in the past; she could not imagine how
much the cost would increase if oil had to be trucked to
Fairbanks.
Representative Wilson continued to discuss the amendment.
She spoke to the $50 million investment requirement to
receive a second $10 million. She believed it would take
efficiencies for the refineries to be competitive. She
opined that Petro Star would have to do upgrades in order
to produce some of the product that Flint Hills had
produced. She had not heard of anyone considering the
purchase of the Flint Hills Refinery. She had asked Flint
Hills whether the amendment would incentivize it to reopen
the refinery; the answer had been no. She pointed to
credits provided to tourism, fish, and the film industry.
She emphasized that the state would be uneconomical in many
areas until energy issues were solved for the Interior and
rural Alaska. She asked whether five years made a
difference. She pointed to a difference of $6 between Lower
48 cost and North Slope costs. She referred to the Quality
Bank and noted that 50 percent of federal taxes came back
to the state. She acknowledged that the amendment would
give significant money, but the industries were putting
money in. She understood the amendment was a big ask.
7:07:44 PM
Representative Wilson stressed that losing the industry
would have a significant impact. She believed that a loss
of refineries meant that additional funds to the railroad
would only act as a band aid. She stated that the future
impact of refinery closures on the railroad was not yet
known. She stressed that the refineries touched many
industries. She thanked the committee for its
consideration.
Representative Guttenberg asked about the nature of the
state's refineries. He referred to the Quality Bank
calculation and wondered if the state was getting the value
out of the royalties or ANS; if not, he wondered if the
administration had considered participating in action in
front of FERC. He wondered about a lack of efficiency of
scale. He opined that in some scenarios it would be part of
the norm to keep refining in the state. He pointed to large
refineries out of state that had cheaper product. He
wondered whether the instate refineries were too small to
do the job the state needed.
Commissioner Balash replied that the state had intervened
in the Quality Bank dispute at FERC. The state's
overarching goal and position in the proceedings was to
ensure a fair system. The state had a financial interest in
the royalty produced that was of higher quality (Alpine was
the best quality crude produced on the North Slope);
therefore, the state did not want to take a side in the
proceeding that would harm the state's other interests. He
relayed that refineries operating on the TAPS corridor were
not the most sophisticated refineries in existence; some
refineries in the Lower 48 were able to recover products
and value from an entire barrel of crude. One of the
beauties of TAPS and the Quality Bank was that it did allow
the refineries along the pipeline to take crude off,
recover high-end product, and put the remainder back in
TAPS. He was uncertain that a tremendous difference in the
refinery operation would occur if they moved to a full
barrel cracking system. He opined that it could be
difficult. He believed Tesoro did a much more complete job
of recovering the full barrel at its Nikiski Refinery;
however, he did not know if the entire barrel was
recovered. The administration was hoping the investment
incentive would increase opportunities to improve the
plants for more complete barrel recovery. He communicated
that a $50 million investment would require a company to
make the $50 million back in order to recover costs. He
stated that at best Petro Star was breaking even, but could
be in the red. He wondered how the company was going to
recover its capital under current circumstances. The
company would have to consider whether the investment
improved its profitability enough to make it worthwhile.
7:14:30 PM
Commissioner Balash continued that the 40 percent
investment incentive reduced the cost of making the
investment.
Representative Guttenberg wondered how the return on
investment was measured. He asked if success was based on
the refineries remaining open. Commissioner Balash answered
in the affirmative related to the short-term. He elaborated
that in the long-term the state would like to see the
locally produced jet fuel to earn back more of the product
market share.
Representative Thompson thanked the commissioner for his
presentation. He noted that the impact of losing a refinery
would be felt statewide. He stated that the possibility of
losing Eielson Air Force Base and jet fuel produced for
JBER were huge for the state. He informed the committee
that Petro Star also provided heating oil to Kodiak and
propane to Valdez and Kodiak. The fishing fleet depended on
local refineries for supply. He communicated that the
Kodiak coast guard base was supplied from Petro Star Valdez
for diesel and aviation fuel. He underscored that the issue
was not limited to the Interior; it impacted the entire
state. He stressed that the cost to the state in increased
prices and lost business could not be estimated. He
emphasized the importance of the issue. He believed the
credits would allow the refineries to streamline their
businesses. He noted that Petro Star was currently in
negotiations with the railroad to determine what it could
do to access rail. He surmised that the amendment could
potentially help the railroad as well. He conceded that it
was a large chunk of money upfront. He referred to
Commissioner Balash's testimony that the state would make
extra money from the instate sale of royalty oil compared
to shipping it out; figures included a minimum of $20
million from the Quality Bank and approximately $160
million in three years. He reiterated his support for the
amendment.
7:18:40 PM
Representative Gara testified against the amendment. He
agreed that the state needed to do what it could to keep
the Petro Star refineries open. He stated that the company
had not disclosed its losses from the current year. He
remarked that Petro Star had been profitable the prior two
years and before. He stated that the amendment would give
the company $10 million per year for five years whether or
not it made a profit or paid taxes. He continued that the
company would receive an additional $10 million if it
invested $25 million in the purchase of transportation or
manufacturing equipment. He detailed that Petro Star would
receive $200 million from the state in five years (half of
the money for certain and the other half as long as it made
$25 million of investments). He believed it was a
significant amount of money to give a company without
asking the company what it needed and without knowing what
the company's financial situation was. He opined that there
had to be a better way for the state to help the business.
He asserted that the amendment's worst problem was that
Tesoro did not want the $100 million it would receive in
the five years. He noted that the company had testified
previously that all it wanted was the renewal of its RIK
contract. He noted that the state had been struggling with
money. He wondered why giving the money away was a
responsible decision.
Commissioner Balash replied that the opportunity to provide
an incentive for instate refining was something the state
needed to weigh carefully; it wanted to ensure that it did
not pick winners and losers. He detailed that because the
state had so few refineries operating, it presented a
challenge. The administration had considered a Quality Bank
credit. He relayed that the credit would have helped Flint
Hills and Petro Star, but it would not help Tesoro in any
way. He took exception to the characterization that the
state did not ask Petro Star about its need; the
administration had looked at the company's need. He was not
going to share the company's tax information in public.
Petro Star had asked for a volume of oil at a price
discounted to royalty in-value; the company was prepared to
take the lower cost for the state's crude.
7:25:07 PM
Commissioner Balash communicated that it could have been
feasible if the state was confident it could limit the
discount to the Petro Star contract only; however, because
of the likely constitutional problem the solution would
have presented from an interstate commerce and equal
protection perspective, the state was concerned the
discount would have extended to all 80,000-plus barrels of
the state's royalty production. He stressed that a $5
difference on all of the state's royalty production would
cost far more than costs presented in the amendment. He
returned to the question of picking winners and losers,
which the state would do if it selectively sold its oil to
one company at a discounted price. The administration was
happy to consider alternatives, but it felt action was
necessary due to potential long-term repercussions.
Representative Gara discussed that the bill represented a
$300 million cost to the state over the upcoming five
years. He stated that $100 million of the total would go to
a company that had not asked for the money. He surmised
that there had to be a better way to approach the issue. He
could live with a low-interest loan or a loan that provided
Petro Star with a five-year grace period on paying the
state back. He noted that the state would need the money
more in five years' time than it did at present. He
requested that the administration present a more fiscally
responsible solution. He had never heard of legislation
that would give $20 million per year to a company that did
not need the funds. He expressed ire at the proposed
solution. He agreed that the state should take some action
to help Petro Star in its first year of loss. He stated
that if the company's first year of loss was $5 million and
the bill provided $20 million the company could give the
money to its shareholders or to ASRC. He stated that the
bill guaranteed the company $15 million in profits per year
for the next five years if it had an annual loss of $5
million. He believed the amendment represented a sloppy
response to an important problem. He asked the
administration to consider a low-interest loan. He equated
the amendment to a $220 Base Student Allocation increase
that had been denied to schools.
7:30:43 PM
Co-Chair Austerman spoke against the amendment. He was
upset by the lateness of the amendment that he felt was
hijacking Tesoro's royalty. He agreed with Representative
Gara that there was a better way to deal with the problem.
He stated that the administration had spent significant
time on items such as the shipyard in Ketchikan; through
the Alaska Industrial Development and Export Authority
(AIDEA) the shipyard had survived and had become a viable
business. He continued that the state was investing money
through AIDEA to expand the shipyard. He stressed that the
funds were not just a giveaway. He knew for at least the
past three years the administration had been working to
help the refineries. He stressed that it was wrong for the
administration to attach the amendment to a bill at the
last minute. He opined that the strategy should have been
introduced at the beginning of session or in the prior
year. He underscored that the administration should have
developed a business plan for the refineries to work with
AIDEA on their long-term viability. He felt that it was
unfair to put the issue before the legislature at the end
of session. He would gladly work on a bill with AIDEA to
help the refinery. He stated that ASRC had made an
investment, but he had not heard them agree to put any
money forward. He was uncomfortable being put in the
position. He knew that Petro Star was a great company and
that ASRC was a great corporation. He did not believe the
administration's request was responsible.
Co-Chair Austerman referred to the seafood industry that
had plummeted in 2001 when Chilean and farmed fish had
driven the pink salmon price down to under $0.05 per pound
in some locations. Federal dollars had bailed the industry
out; it had made a big difference, but the funds had been
matching grant programs. The $50 million provided had not
been a giveaway. He noted that some fishermen in affected
areas did receive some money in the form of a grant. He did
not believe the state could just give the money away to
refineries without something. He reiterated his opposition
to the amendment. He hoped the committee would not hold
Tesoro's royalty hostage because of the issue. He would be
happy to look at a bill if the administration proposed one
that included a loan program through AIDEA that would help
refineries become solvent in the long-term.
7:36:15 PM
Representative Munoz referred to the commissioner's
testimony that one of the reasons instate refineries were
struggling was because the price of ANS crude had not
normalized. She asked for further detail.
Commissioner Balash answered that the department had a
graph showing the difference between ANS West Coast and WTI
on a cost per barrel basis. He detailed that in 2004
through 2007, ANS had been $2 less than WTI. The prices had
converged and had been nearly identical from 2007 to 2009.
A price divergence began in 2010 and in 2011 ANS priced out
at $15 more per barrel than WTI. He detailed that
conversations about the cost of refining began with the
cost of the raw crude barrel of oil. The gap had narrowed
and was closer to a $10 difference at present. The
department expected that in time the price would converge
closer to historic trends; up until 2007, ANS had priced
less than WTI. He did not want to make a prediction on
whether it would occur again. He concluded that because oil
was a fungible product traded globally it was expected that
the differential would close at some point.
7:39:12 PM
Representative Munoz referred to prior industry testimony
that Quality Bank payments had a profound effect on the
business in a negative sense. She asked how much of the
funds went to the state and how the payment had changed
over the past several years.
Commissioner Balash answered that numbers from 2013
provided a good baseline for the prior couple of years. He
detailed that in 2013 payments into the Quality Bank from
TAPS refineries were approximately $112 million.
Approximately $20 million of the total had been returned to
the state through increased royalty value. He noted that it
was also necessary to look at the production tax equation.
The state was not able to go through tax payer by taxpayer
to determine the total impact, but because the production
tax system was profits-based (it taxed on the margin at 35
percent) it could be determined that after taking the
royalty aspect away, the amount was close to $30 million.
Combining the two figures totaled approximately $50 million
returned to the treasury from refineries.
Representative Munoz wondered how the funds were used by
the state. Commissioner Balash replied that the payments
into the Quality Bank were repairing or "making whole"
other parties. He discussed that there were many varieties
of crude produced on the North Slope; each oil field had
its own API [American Petroleum Institute] gravity and
quality (not all barrels were the same). Originally the
Quality Bank had been a way to equalize the parties; each
barrel put into TAPS may be different at the start, but
once in the pipeline they were one blend of crude. He
explained that the parties providing higher quality crude
had contributed value to other parties with lower quality
crude. There were facilities in North Pole and in Valdez
that took crude off of TAPS and took the high quality oil
for jet fuel, diesel, and gasoline and returned the
remainder to the TAPS stream; therefore, the refineries
made a payment to the other oil producers to keep the
entities whole.
7:43:36 PM
Representative Wilson understood the concept of not wanting
to pick winners and losers, but she did not understand it
under the given context. She clarified that by instate
refineries she had been referring to refineries in the
middle of the state (i.e. North Pole). She explained that
there were circumstances occurring in the North Pole
refineries that were not happening in the other areas. She
stated that Petro Star was under different stresses due to
costs it had shared with Flint Hills. She detailed that the
pipe running between the rail yard and Flint Hills
represented $3 million to $4 million in additional cost for
Petro Star. She emphasized that the system was not equal.
She discussed a storage tax credit bill that had passed a
few years earlier; Anchorage had built a large storage tank
with the credits.
Co-Chair Stoltze noted that the storage tank had been built
south of Anchorage.
Representative Wilson agreed with the correction. She
furthered that the storage tank allowed importing of
cheaper fuels. She wondered why the Quality Bank could not
be used for the refinery that needed it. She wondered if
the reason was legal or moral. She wanted to help Petro
Star for the next several years to allow time for the
company to upgrade items that resulted from the loss of its
partner or to allow time for another party to purchase the
Flint Hills Refinery.
7:46:18 PM
Commissioner Balash answered that the hydrocarbon business,
specifically the gasoline, diesel, and jet fuel markets
were unregulated markets; the markets were trusted to
produce a price that allowed a product to be continually
supplied. Therefore, the administration had been careful to
not upset the market balance or to provide a clear benefit
to one party, which was the reason the administration had
not focused solely on the Quality Bank. He did not
characterize the issue as a question of mortality.
Representative Wilson pointed to the tax credit that had
been provided to the storage facility south of Anchorage.
She stressed that the state had already "unbalanced" the
system by providing a credit to the facility. She surmised
that the imbalance had caused part of the problem.
Commissioner Balash replied that the storage facility was
for natural gas. He detailed that the gas was primarily
utilized by public utilities, but there was an associated
benefit that accrued to Tesoro because it relied on natural
gas to operate its facility. He supposed there could be an
argument that some of the other credits provided to support
natural gas deliverability and long-term supply had been a
benefit realized only by Tesoro.
Representative Wilson spoke to the legality of the issue.
She stated that it had been established that life was not
fair; Anchorage had natural gas, Juneau had the capital,
and Fairbanks wanted its refinery. She wondered if there
was any legal reason why there could not be a credit for
the Quality Bank. Commissioner Balash was not aware of a
constitutional challenge that the item would present;
however, he had not spoken with legal counsel.
7:50:00 PM
Representative Wilson communicated that she did not have
plans to hold Tesoro's bill hostage. She was looking for a
solution and wanted to address the issue further with the
commissioner. She stated that it was not possible to keep
everything equal. She did not believe her solution would
disadvantage other refineries. Additionally, she did not
believe there was any indirect competition. The refinery
was using diesel; affordable gas may also make it more
economical. She did think there were some legal reasons to
help the refinery under the given circumstances. She spoke
to avoiding spreading the benefit unequally to parties that
may not need the help.
Representative Costello asked about the timing aspect. She
wondered how long the administration had been considering
the three options it had identified (two of which had been
rejected).
Commissioner Balash replied that normally when the
administration pursued legislation or made proposals to the
legislature the process began in August. He detailed that
the department advised the governor's office about certain
topics it would like to see addressed by the legislature.
He elaborated that a round of internal and external vetting
occurred in the process. Under the current circumstance,
the department had not had a specific proposal in mind in
August; it had not believed there was a dire situation that
warranted action. He relayed that there had been
conversations about Quality Bank matters; the
administration had been watching the spread between WTI and
ANS and had believed it could wait the situation out. The
department had believed the Quality Bank issue could have
been resolved or settled at FERC. However, on February 4,
2014 when the news about Flint Hills had broken it had
taken him by surprise. As the administration considered all
of the components following the Flint Hills announcement he
had thought about the revenue requirement for the lines
running between TAPS and the North Pole Refinery
facilities. He relayed that the revenue requirement for the
lines was $4.5 million in 2013. He stated that the revenue
requirement had been met by both refineries on an 85
percent to 15 percent ratio, the latter portion paid by
Petro Star. He detailed that as a result Petro Star's
payment would increase from less than $1 million to $4.5
million per year. He understood that 2012 was a thin margin
for Petro Star and that 2013 would be a breakeven year at
best. He stated that a Petro Star representative had
confirmed his understanding of the cost consequences.
Subsequently, he had asked Petro Star if it planned to
close its refinery too. He relayed that the company could
not answer in February. The company renewed its crude
contracts in March; the severity of the situation prevented
the company from knowing whether it would renew its
contract for the following year.
7:56:26 PM
Commissioner Balash continued to answer the question. He
discussed that Petro Star had asked what the state may be
able to do in response to the situation. Ultimately the
administration had asked Petro Star what it would take to
keep the company in operation. The company had suggested
that the state could sell it crude at a discounted price.
He noted that the cost of crude and the Quality Bank were
the two issues that were "killing" the company. He informed
the committee that there was not much the administration
could do about the Quality Bank; it could try to work out a
settlement between parties, but if parties did not agree to
a settlement, the issue would be left in the hands of FERC.
He did not know how long the agreement would take. The
administration had considered selling its royalty at a
discount to Petro Star, but due to risks to the remainder
of its royalty production from a royalty in-value
perspective, the idea had been dismissed. The
administration had begun looking at tax credits in the
middle of March. Ultimately, the process had been
compressed into approximately three weeks. He believed the
legislature could improve the option presented to the
committee.
Representative Edgmon understood that there were statewide
impacts related to the refineries. He pushed for taking
some action to address the problem. He observed that
sometimes it took more than one try to get things right.
Co-Chair Stoltze had hoped to adopt the amendment during
the meeting as a starting point. He remarked that it was
hard to edit a blank page. He had hoped to begin with a
plan even if it was viewed to be flawed. He believed there
were universal levels of discomfort even from the sponsors.
He viewed the amendment like a committee substitute and
reiterated that it was hard to work off of a blank page.
Representative Edgmon replied that the response did not
answer his question. He stated that a plan b was needed,
but he did not see it at the table. He strongly supported
taking action that worked.
8:01:29 PM
Representative Gara stated that Petro Star had noted its
profits had not been good in the past few years. He pointed
to the high cost of ANS compared to WTI as one of the
problems. He referred to the extra cost to Petro Star of
approximately $4 million due to the Flint Hills Refinery
closure. He referred to the hope that crude oil prices
would normalize. He hoped the administration could consider
some type of financing provision for distressed companies.
He noted that the amendment included language requiring the
commissioner to make a best interest finding. He believed
language could be devised requiring the commissioner to
make a finding to justify the low interest loan for
companies in need. He referred to prior testimony that
Petro Star needed a few years to find ways to increase
efficiency in its operations. He asked the administration
to consider a loan for companies that met a certain
standard. He did not object to the idea of a repayment
holiday to allow the company time to get a financial
breather.
Representative Holmes pointed to the sticker shock of the
amendment. She referred to multiple conversations she had
had about the amendment. She associated herself with
comments made by Representative Edgmon. She did believe
something needed to be done, but she was not comfortable
with the amendment.
8:05:14 PM
Co-Chair Austerman believed that AIDEA was the appropriate
way address the problem. He stated that the agency had the
ability through simple legislation to bond and take care of
industries. He did not believe it would take long to sit
down with the agency to develop a plan; it had been done
before.
Co-Chair Stoltze remarked that the suggestion was good.
Commissioner Balash was happy to discuss the issue with
AIDEA. The administration had discussed with AIDEA the
possibility of refinancing the pipelines between TAPS and
the North Pole refineries, but it had found that financing
anything without some surety that the business was solvent
had raised red flags.
8:07:06 PM
Representative Wilson WITHDREW replacement Amendment 1.
There being NO OBJECTION, it was so ordered.
Co-Chair Stoltze noted that the issue would be discussed
the following day.
Commissioner Balash appreciated the latitude given on the
issue. He was confident that the approval of the royalty
contract was not controversial. He did not want to hurt the
bill for Tesoro.
Representative Gara remarked that there was no reason to
address Amendment 2. He looked forward to a continued
discussion on the issue.
Co-Chair Stoltze assumed that Amendment 2 presupposed the
adoption of replacement Amendment 1.
Representative Gara replied that he had presupposed
Amendment 2 would have been given more sideboards.
Co-Chair Stoltze thanked the committee for its honest
dialogue. He discussed schedule for the following day.
Representative Gara clarified that he personally should
have provided more sideboards for Amendment 2.
HB 287 was HEARD and HELD in committee for further
consideration.
ADJOURNMENT
8:11:20 PM
The meeting was adjourned at 8:11 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 287 Replacement Amendment #1 Thompson, Wilson.pdf |
HFIN 4/11/2014 6:30:00 PM |
HB 287 |
| HB 89 Amendment #1 Austerman.pdf |
HFIN 4/11/2014 6:30:00 PM |
HB 89 |