Legislature(2013 - 2014)NOME
07/20/2013 09:30 AM House COMMUNITY & REGIONAL AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| HB181 | |
| HB166 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| = | HB 181 | ||
| = | HB 166 | ||
HB 166-BULK FUEL REVOLVING LOAN FUND
10:13:21 AM
CO-CHAIR NAGEAK announced that the final order of business would
be HOUSE BILL NO. 166, "An Act relating to the bulk fuel
revolving loan fund."
10:13:31 AM
REPRESENTATIVE FOSTER, speaking as the sponsor of HB 166, began
by informing the committee that Nome receives its fuel via the
barge, which substantially adds to its energy costs. Currently,
the bulk fuel revolving loan fund covers communities with a
population of 2,000 or less. The legislation recognizes there
are hub communities [with a population larger than 2,000] not on
the road system that receive their fuel via the barge as well.
Therefore, HB 166 proposes to expand the bulk fuel revolving
loan fund to serve more communities.
10:14:56 AM
PAUL LABOLLE, Staff, Representative Foster, Alaska State
Legislature, explained that small isolated communities located
off the road system that are frozen in most of the year have to
order fuel in the fall and have enough on hand for the entire
winter. The aforementioned is a large capital outlay for small
communities. Therefore, the bulk fuel revolving loan fund
offers reasonable interest and time to pay the cost. He noted
that in many cases these small communities are unable to even
get a loan of the amount necessary from a bank. Furthermore,
it's not uncommon for them to incorrectly estimate how much fuel
they will need for the winter. For instance, Teller frequently
runs out of fuel and Nome has to provide the fuel. Therefore,
the ability for the hub communities to have excess fuel is
helpful to the smaller communities. However, the current
population limits in statute don't allow hub communities to
participate in the bulk fuel revolving loan fund. The
legislation before the committee proposes to change that.
Although on page 2, line 5, the 2,000 population limit is
maintained, language is added such that communities located off
the interconnected state road system with a population of 4,000
can qualify for the bulk fuel revolving loan fund. The
legislation also changes the top end loan amount from $750,000
to $1,500,000 in order to mirror the increased population [of
the hub communities]. Echoing his comments at a prior hearing,
Mr. LaBolle emphasized that the population threshold of 4,000
was simply a starting point. He then pointed out that the
committee packet includes a list of communities, noting the
communities that would be included and those that would not.
The communities highlighted in green are included because of
population, but may not qualify for the bulk fuel revolving loan
fund if they are located on the state road system. Furthermore,
highlighted green communities such as Cordova would qualify for
the fund, but don't have the need for shipping the fuel all at
once since they have an open port year-round. Mr. LaBolle
pointed out that Barrow doesn't qualify because its population
is over 4,000. Bethel isn't on the list at all because the list
is of communities with a population under 5,000. He suggested
that the committee may want to consider what population and loan
amounts to target. Mr. LaBolle then reminded the committee of
the department's testimony that since the bulk fuel revolving
loan fund is a pre-capitalized fund, it doesn't go through the
appropriation process. Therefore, it would be a first come
first serve process such that new entrants would be involved in
an existing fund and when the fund is all loaned no more
entrants are included. The department suggested that the bulk
fuel revolving loan fund be capitalized with approximately $10
million to address the demand HB 166 would create.
10:20:16 AM
CO-CHAIR LEDOUX asked whether HB 166 would've addressed the
situation with the [Russian tanker] Renda.
REPRESENTATIVE FOSTER related his understanding that issue is in
litigation. The supplier says it was a force majeure situation
in which a storm made [the tanker] unable to deliver, but the
local fuel vendor disagrees. Either way, the situation isn't
related to what this legislation would address. In further
response to Co-Chair LeDoux, Representative Foster confirmed
that money had nothing to do with the situation.
10:21:17 AM
REPRESENTATIVE DRUMMOND related her understanding that the
department's presentation is a document entitled "Effects of
HB 166 on Bulk Fuel Loan Account." She then related that she
learned from Meera Kohler's presentation at the Pacific
NorthWest Economic Region (PNWER) this week that the Alaska
Village Electric Cooperative (AVEC) ensures that its
participating communities have 14 months of fuel available to
avoid running out. The AVEC communities, she noted, wouldn't
necessarily be able to participate in the bulk fuel revolving
loan fund. Representative Drummond agreed with earlier
statements regarding the need to ensure all citizens are kept
safe in terms of access to fuel, regardless of the population
size.
MR. LABOLLE explained that the change to $1.5 million in the
legislation is the result of taking an existing program and
scaling up to a larger population. He stressed that it's
possible that the numbers aren't where they should be in which
case the numbers should be decoupled if the desire is to ensure
that communities have 14 months of fuel available.
REPRESENTATIVE DRUMMOND suggested that it's a matter of
communication with Ms. Kohler regarding how AVEC came to its
number and ensures that 14 months of fuel is in its communities
prior to the end of the barge season.
MR. LABOLLE added that currently AVEC doesn't use the existing
bulk fuel revolving loan fund program, although it does qualify
for it.
10:24:10 AM
REPRESENTATIVE HERRON commented that AVEC doesn't need the
program rather the "mom and pop" communities need the program.
He then inquired as to the price of fuel when the current loan
threshold of $750,000 was established. He suggested that the
[loan thresholds] should be based on the current price of oil.
MR. LABOLLE informed the committee that the existing $750,000
loan threshold was established in the oil hike of 2008 and
prices are essentially the same now. In 2008 heating fuel was
set at $6.05 per gallon and as of March 2012 it was $5.83 per
gallon. The price of gasoline in 2008 was $5.36 per gallon and
now it's $6.11 per gallon.
10:25:23 AM
REPRESENTATIVE FOSTER informed the committee that in Nome today
diesel is $6.39 per gallon.
MR. LABOLLE, in response to Representative Foster, further
explained that there have been numerous increases to the cap of
this the program. For instance, in 2002 the cap was increased
to $200,000 and in 2003 it was increased to $300,000 and in 2006
it was increased to $400,000. In 2008 the program cap was
increased twice to $500,000 during the regular session and then
to $750,000 during the special session in Senate Bill 4002.
10:26:38 AM
CO-CHAIR LEDOUX suggested that perhaps an automatic adjustable
arm tied to the price of fuel should be included in the
legislation, which would alleviate the need to have legislation
to address it.
MR. LABOLLE explained that the state does that to a certain
extent in the operating budget with the fuel trigger for
departments. Through the fuel trigger when the price of oil is
over a certain amount, funds are automatically released. The
aforementioned meets the needs of the departments while
maintaining some budgetary control such that funds aren't over-
appropriated when they aren't needed. A complicating factor in
this situation is that since [the bulk fuel revolving loan fund]
is a capitalized fund not an appropriation, there isn't a way in
which to ensure there are sufficient funds within the
capitalized fund to meet a potential drain in funds if there was
a significant spike in price.
10:28:15 AM
REPRESENTATIVE FOSTER opined that although the increase in loan
amount from $750,000 to $1.5 million is large, it's a small
number in terms of the [cost of the fuel communities use]. For
example, the amount of fuel the small community of Unalakleet
uses in a year far exceeds $1.5 million, he suggested.
10:29:06 AM
CO-CHAIR NAGEAK opened public testimony.
10:29:42 AM
JOHN HANDELAND, General Manager, Nome Joint Utility System, City
of Nome, informed the committee that for Nome the price
difference in fuel as of June 1 and today is $.31. For the
order of 2.4 million gallons on the way to Nome that amounts to
a $749,520 increase.
10:31:32 AM
MR. HANDELAND, in response to Co-Chair LeDoux, stated that the
City of Nome purchases on an annual basis 2.4 million gallons of
fuel for the operation of its power utility and the heating of
its school district. The Nome City Council directed that the
fuel for the school district should be purchased with the annual
fuel purchase for the utility as it can result in a more
favorable rate. The school district contracts with a local
company to have the fuel brought to its facilities. The
aforementioned significantly reduces the cost of school
operations as well as the contribution the city makes directly,
he highlighted. Fuel can arrive in Nome once the port is ice
free, which can occur as early as the end of May. This year,
however, the port wasn't ice free until June 10. Some years, he
noted, fuel has been able to be delivered as late as the middle
of October. He lauded the valiant efforts of the U.S. Coast
Guard last year in assisting the Renda to Nome for a fuel
delivery in January. In response directly to Co-Chair LeDoux
regarding the purchase of fuel, Mr. Handeland explained that the
City of Nome contracts the purchase of fuel in January for
delivery during a delivery window. The contract includes a
known component for the transportation, which includes some
profit for the vendor. However, the price of the fuel is
unknown until delivery. The City of Nome uses a 30-day average
for the price of fuel in the month in which it's lifted. The
upcoming fuel will be lifted around August 2nd and thus the fuel
price will be based upon an average of the price of fuel in
August. Presently, the purchase price is estimated to be $8.5
million, although based on the June 1 price and the price Friday
the estimate will increase to about $9.3 million.
10:36:01 AM
REPRESENTATIVE DRUMMOND inquired as to the definition of
"lifted."
MR. HANDELAND answered that "lifted" refers to the date on which
the hose is connected to the header [on the barge at the
departure point]. Usually, it takes 10 days from the time the
fuel is lifted to its arrival in Nome because of other stops
along the way. Nome Utilities is part of the Western Alaska
Fuel Group, which is a group of communities that band together
to receive volume discounts in the purchase of bulk fuel. The
Norton Sound Economic Development Corporation (NSEDC) has a
program through which it attempts to assist communities with
fuel purchases. The assistance from NSEDC isn't limited to a
utility or city but rather can include a store, a church, or
other entity that has a large volume fuel purchase. Mr.
Handeland highlighted that Nome has had a great relationship
with Wells Fargo Bank over the last 25 years; money hasn't been
the problem, but Nome is looking for ways to cut costs where it
can in order to avoid utility rate increases. He informed the
committee that Nome pays a rate of 5 percent on its fuel
currently. If Nome were able to participate in the [bulk fuel
revolving loan] program, it appears Nome could have a rate of 3
percent.
10:39:30 AM
MR. HANDELAND, speaking specifically to HB 166, suggested that
there would have to be significant adjustments made to HB 166 in
order for Nome to participate. The placeholder numbers in
HB 166 are a good start as they would likely address many of the
smaller communities, but Nome is considering $8-$10 million in
purchases. Since the fund only has $20 million if no one else
borrows from it, there wouldn't be room for Nome, he pointed
out.
10:40:38 AM
MR. HANDELAND highlighted the city's suggestions to increase the
cap and adjust the repayment as mentioned by AVEC, which has a
14-month supply of fuel on hand. Since it's unknown when the
ocean will be [free of ice], the desire would be to have more
than a year's worth of fuel available. With regard to the
reference that loans must be payable in nine equal monthly
payments, the City of Nome makes payments on cargo over the
course of 12-16 monthly payments, depending upon the quantity.
He explained that they're attempting to match the [city's]
revenue stream to the actual fuel cost. Therefore, he suggested
that the repayment period language on page 1, line 11, of HB 166
be adjusted.
MR. HANDELAND then turned his comments to energy costs
generally. As has been mentioned communities in rural Alaska
are locked into a season when they can receive fuel as they
don't have the opportunity to avail themselves of the
fluctuation in the market. At one point there was discussion of
the option of purchasing fuel in advance and storing it at Adak,
but that results in double shipping costs and there continue to
be storage and financing costs as well as costs related to the
oil spill pollution requirement. Therefore, that option
includes additional costs. He informed the committee that the
City of Nome has considered purchasing futures in order to have
the opportunity to hedge market fluctuations. However, that
proposal initially ran into a snag with the power cost
equalization (PCE) program because with futures sometimes one
wins and sometimes one loses. Furthermore, the hedging costs
when the futures were higher were considered ineligible. Mr.
Handeland suggested addressing this issue on a statewide basis
by having economists in the permanent fund determining how to
reduce fuel costs such that communities have some certainty in
terms of fuel costs.
10:46:54 AM
REPRESENTATIVE FOSTER characterized Mr. Handeland's suggestion
as a great idea. Although Representative Foster acknowledged
that the futures market is volatile, he pointed out that over
the course of a year it's the same in terms of communities being
unable to purchase [when the fuel is cheaper].
10:47:37 AM
CO-CHAIR NAGEAK suggested opening the rest of Alaska to what the
rest of the state enjoys whether it is by a rail system or road
system that at least reaches the regional centers. Such action
would open markets for rare earth minerals and other things that
would drive up the economy of the state, help the communities in
those regions, and reduce costs for the communities in the
regions.
MR. HANDELAND remarked that the City of Nome appreciates Co-
Chair Nageak's efforts.
10:50:49 AM
CO-CHAIR NAGEAK, upon determining no one else wished to testify,
closed public testimony.
10:51:27 AM
MR. LABOLLE pointed out that one of the benefits of including
larger entrants in the bulk fuel revolving loan program is that
they are more reliable. He explained that the more people
paying the fund on time, the better off the fund is in general.
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