Legislature(2009 - 2010)BUTROVICH 205
04/11/2010 11:30 AM Senate LABOR & COMMERCE
| Audio | Topic |
|---|---|
| Start | |
| HB342 | |
| HB376 | |
| HCR19 | |
| HJR51 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 342 | TELECONFERENCED | |
| + | HB 376 | TELECONFERENCED | |
| + | HCR 19 | TELECONFERENCED | |
| + | HJR 51 | TELECONFERENCED | |
| + | TELECONFERENCED |
HCR 19-AIDEA REPORT ON IN-STATE FUEL STORAGE
11:44:15 AM
CHAIR PASKVAN announced consideration of HCR 19.
11:44:22 AM
REPRESENTATIVE JAY RAMRAS, sponsor of HCR 19, said he gave the
committee a copy of the Alaska Gasoline Pricing Report and
explained that the previous Speaker of the House charged the
House Judiciary Committee to look into why Alaskans were paying
so much for gasoline as a companion to the Attorney General's
study. They Attorney General addressed the legal issue - if
there was price gouging, for instance.
The committee actually hypothesized other potential solutions.
He directed them to page 44 of the report that concluded
incentivizing more gas storage in Alaska could help. When they
first approached Governor Sheffield who is in charge of the Port
of Anchorage there was simply not enough space available at the
port. Since then, the Port has been expanded to the extent that
it can now handle more liquid fuel storage - for jet aviation,
low sulphur diesel for rural Alaska, and gasoline for all
Alaskans. In this particular case, 85 percent of the gasoline is
produced in Nikiski and 15 percent in North Pole at the Flint
Hills Refinery. Both refineries have embedded structural flaws
that increase the cost of producing wholesale gasoline.
REPRESENTATIVE RAMRAS explained that the Nikiski Refinery has to
refine all of the oil they buy. They sell the bottoms (the lower
one-third of the value added material) at a loss and that loss
becomes embedded in the cost of the other two-thirds of the
barrels that they sell, much of which is gasoline.
He explained that the Flint Hills Refinery is a topping plant
and takes royalty oil out of the pipeline and puts the rest of
the barrels back in. Unfortunately, it is the only refinery in
the United States that refines oil with oil as opposed to with
natural gas. Because of this and the fact that a lot of
electricity is used in refining gasoline, the cost of producing
it in Fairbanks can be 22-23 cents kwh. So, both of the
refineries have embedded problems that mean the price of their
gas is higher.
REPRESENTATIVE RAMRAS said beyond that, Alaska is also a trapped
market, meaning we don't have highways where other refined
gasoline can come from other states and compete to bring the
cost of gasoline down. Also with government regulation and a
lack of increasing demand, Alaska hasn't been able to induce a
third refinery to go into the gasoline business. This has driven
him to begin a dialogue with Alaska Industrial Development and
Energy Authority (AIDEA) about preparing a business case for in-
state gas storage.
REPRESENTATIVE RAMRAS said the state's military industrial
complex, Elmendorf, is short 350,000 gallons of storage and the
Ted Stevens Airport needs to be competitive for jet aviation
fuel, and because Flint Hills has gone from operating three
towers to two towers, there have been shortages. The future of
Flint Hills is not known, but it may not be in the market place
within 1000 days from now because of the aging refinery and
their decision not to reinvest in it. Without it Alaska would
lose the ability to produce jet aviation fuel.
11:49:46 AM
He continued some concerns have been raised that they are trying
to use a state agency to compete with refineries, but they
aren't talking about funding another refinery; they are talking
about AIDEA funding storage capacity. Much of the unbranded
gasoline that is sold in Alaska is to Cost Co., Fred Meyers,
Sams Club and Safeway and he saw an opportunity to bring in
competition other than some of the price gouging legislation
that moved through both bodies.
REPRESENTATIVE RAMRAS said they would be looking for an entity
with a balance sheet strong enough that it would make refineries
drop their prices. At this point, it is simply a business case.
There is nothing to be fearful of; there are no capital costs,
no funding request. He said building capacity might make it
possible to take advantage of some seasonal arbitrage and barge
in fuel at a time when it may be more attractive to buy it to
lower the cost for Rural Alaskans who can only get fuel by barge
at a certain time of year that happens to coincide with the most
expensive part of the driving season.
11:52:21 AM
SENATOR BUNDE asked if the zero fiscal note simply refers to the
creation of the report and not to any costs that might be
related to building a storage facility.
REPRESENTATIVE RAMRAS indicated that was correct.
SENATOR BUNDE asked if financing were put in place for the
storage of he perceived that this would provide Alaskans a
subsidy or would the cost of the storage be borne by the
consumers.
REPRESENTATIVE RAMRAS replied that he sees this as a competitive
mechanism in the market place. This is simply to build a
business case to demonstrate whether there is an opportunity or
if the state has to incentivize building a facility in the Port
of Anchorage. They anticipate that if a business case can be
built, someone with a strong enough balance sheet might be
interested in coming in to build a facility. Currently the
refineries have a strangle-hold on Alaskan consumers.
11:55:04 AM
SENATOR BUNDE said he understands that, but he wanted to know if
the consumer would have to pay for this increased storage
capacity or would it become state subsidized.
REPRESENTATIVE RAMRAS replied that it will not be a state
subsidy. If AIDEA, in fact, financed a storage terminal, they
would only do it if there was a third party that had a balance
sheet that could withstand it. It would be leased out to other
entities that would store the fuel. The fuel would be bought at
a much lower rack rate, and then the carrying cost for the fuel
as well as the amortized cost of the fuel storage facility would
then be embedded in the price. That's why a business case has to
be built. In addition, the cost of the facility can be
amortized. He thought consumers would save dollars on the
gallons.
11:57:44 AM
SENATOR BUNDE asked if this might put Flint Hills out of
business.
REPRESENTATIVE RAMRAS replied that Flint Hills has its own
problems with an aging facility, and he had asked them to view
this storage facility as a safety net. It would store millions
of gallons of fuel, but it is a small fraction of the aggregate
amount of liquid fuel that Alaskans consume annually. It would
not displace Flint Hills, but it would bring more
competitiveness to the market.
12:00:27 PM
SENATOR MEYER asked how the North Star refinery in Valdez would
play into the refinery mix.
REPRESENTATIVE RAMRAS replied that the North Star refinery makes
low sulphur diesel and not gasoline and this measure is driven
largely by the disparity in the price of gasoline for Railbelt
consumers. He commented that the state's royalty throughput in
Nikiski is so low that they buy all of the Alaskan oil they can,
but only a quarter of the oil they buy actually comes from
Alaska. They cannot get any more Alaskan oil because the rest of
it is committed to the West Coast. Flint Hills' oil is taken
right off the pipeline, because it's a topping plant, and then
put right back on the pipeline; they actually pay a premium over
Alaska royalty oil. So, when Alaskans are looking for a villain
as to why the costs are so high and they look to the base
commodity, it's Alaskan oil. The Alaskan treasury is setting the
price in a manner of speaking along with the lack of
competitiveness in the market place for oil.
12:02:07 PM
SENATOR MEYER followed up saying that the state's 12 percent
royalty share could be refined and be sold at a lesser price,
but then there are constitutional issues of whether or not that
is the highest and best use of the resource.
REPRESENTATIVE RAMRAS agreed.
12:02:55 PM
SENATOR MEYER said it would be an interesting conversation as to
whether or not this money should go to new playground equipment
at a school versus keeping somebody warm during the winter.
12:03:29 PM
TED LEONARD, Executive Director, Alaska Industrial Development
and Export Authority (AIDEA), said they believe one of their
roles is as an economic adviser to the legislature for
infrastructure projects. One of the interesting questions coming
out of the House Finance Committee was whether AIDEA could do
this by itself without a resolution, and he thought they could.
MR. LEONARD explained that AIDEA would probably look at a
project like this based on jet A fuel. They have heard concerns
in the Anchorage area for the international airport and the
military that there may be a problem with the security of fuel
issue.
One of the eight in Anchorage is tied to air transportation. The
reason they think that this process is good is because, if they
thought this was a good project, they would have to come to the
legislature to justify it when they would ask for bond
financing.
In response to Senator Bunde's question about cost, he said if
AIDEA was to do this financing, by statute they have to prove
they would get paid back for it, and it would probably be
through an open season type of process where people would
guarantee that they would buy a portion of the space for their
fuel. So, if AIDEA was going to be doing this total project, it
would not be done as a subsidy.
12:06:05 PM
SENATOR BUNDE said that is what he expected. He just wanted it
on the record that this is not a silver bullet for cheaper
gasoline for some people in the state.
MR. LEONARD agreed.
12:06:43 PM
JAMES HEMSATH, Deputy Director, Development and Finance Program,
AIDEA, said he sees the goal of this resolution is for AIDEA to
provide a financial and business review of the possibility of
additional storage at the Port of Anchorage that would impact
the fuel chain infrastructure in the state and through their
ability to finance and own a project they might have a lower
hurdle rate if that business case would be competitive and bring
lower fuel costs to, predominantly, the Railbelt but potentially
Western Alaska.
12:07:45 PM
PAT CARTER, Delta Western Fuel Distribution Company, said he was
available for questions.
12:08:10 PM
12:08:33 PM
REPRESENTATIVE RAMRAS asked if he could find what benefit Delta
Western would derive from this since they are a bulk fuel
shipper to rural Alaska.
12:08:59 PM
MR. CARTER answered that this project started out of discussions
about price gouging and Representative's Ramras interest in
lowering fuel prices throughout the state. He said that Delta
Western had a number of meetings on what they could do and
identified fuel storage as the main issue.
He said that Delta Western met with the Port this fall about
sufficient room for storage expansion and then met with the
AIDEA folks; then they met with Representative Ramras. The
bottom line is they don't have enough storage in Southcentral to
meet all of their needs. Over time they have had fairly steady
demand, but a decrease in production from the refineries. This
caused them to increase their importation of fuels from Outside,
so the economies of scale they use now are on barges. They do
not have capacity to bring a tanker from somewhere else and
would need about 300,000 barrels of storage to do that. If they
had that sort of storage they could wait for a time when prices
were depressed and buy the fuel fully or in part with another
fuel transportation company and import it at a greatly reduced
cost.
The model they have chosen to use would be for a storage
facility operated independently, so Delta Western wouldn't
actually pay for the storage. It would be financed as
Representative Ramras represented through an open season
process. The benefit that would be gained by this would be that
historically the price differential has been around 10-15 cents
in the rack prices between Seattle and Anchorage. Over the last
couple of years that has grown to somewhere over $1.00. If they
get proprietary storage that price wouldn't change much because
whoever owns the storage would raise the price of the storage.
If the storage is with a third-party and they can buy fuel on
the open market from around the world at competitive prices and
import it, the trend would push those prices down over time
because they have other options rather than the local refineries
to purchase from. Local refineries could benefit from this; they
could also purchase fuel and bid on storage as well.
12:14:05 PM
CHAIR PASKVAN thanked Mr. Carter for his comments and finding no
further comments, closed public testimony.
12:14:50 PM
SENATOR DAVIS commended Representative Ramras for this
legislation. She moved to report HCR 19 from committee with
individual recommendations and attached fiscal note(s). There
being no objection, the motion carried.
12:15:57 PM
CHAIR PASKVAN called a brief at ease from 12:15-12:17 p.m.
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