Legislature(1993 - 1994)
03/17/1994 08:00 AM House STA
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
(REPRESENTATIVE ULMER joined the meeting at 8:04 a.m.)
CSHB 453, Version U: "An Act establishing, for purposes of
the levy and collection of the motor fuel tax and for a
limited period, a different tax levy on residual fuel oil
used in and on certain watercraft; and providing for an
effective date."
CHAIRMAN VEZEY opened CSHB 453 for discussion.
Number 090
REPRESENTATIVE GARY DAVIS, PRIME SPONSOR, addressed CSHB
453, version U. He stated CSHB 453 attempts to create an
equal playing between Alaska's residual fuel oil industry
and their counterparts in the Lower 48 and Canada. The
sponsor statement is as follows:
"Residual fuel oil is the residue from crude oil after the
light oils, gasoline, naphtha, kerosene, and mid-distillates
are extracted in the refining process. The only
applications for residual fuel oil in Alaska are asphalt,
cruise ship fuel and reinjection into the pipeline."
Alaska's motor fuel tax rate for residual fuel oil is five
cents per gallon.
"As a result of the current rate of taxation on this
product, Alaska's residual fuel oil is automatically
noncompetitive with the same product available elsewhere.
The cruise ship industry is the prime potential market for
this fuel oil. However, even though many ships cruise
Alaska waters during the summer, minimal quantities of this
extremely tax sensitive fuel oil are purchased in Alaska.
Consequently, the state receives minimal revenue from the
tax.
"House Bill 453 will reduce the tax rate levied on the sale
of residual fuel oil, which will stimulate sales of residual
fuel oil and benefit Alaska's economy. This legislation
will increase job opportunities in the trucking and fuel
industries. Simultaneously, state revenues will likely
remain consistent and possibly increase."
REPRESENTATIVE G. DAVIS commented, in the final report of
the Governor's Task Force on Regulation Review, it was
recommended that the marketing of "heavy bunker oil" be made
more economically competitive by eliminating or reducing the
taxes. He noted the cruise ship industry is growing every
year and all of the ships run on "bunker oil," which is a
blend of residual fuel and No. 2 diesel.
REPRESENTATIVE G. DAVIS stated Princess Tours has been
landing in Seward for quite a while; using only a bit of
residual loaded there for ballast only. They currently
purchase their fuel in Vancouver, Canada; however, they have
indicated, without guarantee, that they will purchase
adequate quantities to compensate for the revenue Alaska has
taken in on residual fuel over the past few years.
REPRESENTATIVE G. DAVIS mentioned the Tesoro refinery in
Kenai probably has upward of 200 million gallons of residual
fuel oil per year that they have to market. Without a local
market, they ship out from Cook Inlet to the West Coast and
the Far East. He believed 13+ million gallons could be sold
in Seward on the assurances from a few of the cruise lines
e.g., Princess Tours, Holland America, etc.
REPRESENTATIVE G. DAVIS stated last year, Alaska received
about $205,000 from residual taxes. The estimation of the
proposed sale of 13 million gallons would compensate for
this loss, plus each year they believe the sales will
increase. He noted in Sitka, with the pulp mill closing
down, they have tanks that can store the oil and keep it
heated. Sitka is also looking for commitments from the
cruise lines that fuel would be bought from there. All of
these results are predicated on the reduction of the fuel
tax.
REPRESENTATIVE G. DAVIS stated information in the packets
shows the increase in California's fuel taxes made their
markets plummet. Alaska had significant fuel sales before
the 5 cent tax, and after the tax the market plummeted just
as California did. He believed 15-20 jobs would arise from
CSHB 453. He also noted Alaskan fuel burns cleaner than
others.
CHAIRMAN VEZEY wanted to know why CSHB 453 was being limited
to passenger watercraft and he felt the definition of
residual fuel oil should be improved.
REPRESENTATIVE G. DAVIS responded last year Tesoro sold fuel
to Marathon to fuel Liquid Natural Gas (LNG) tankers, which
amounted to $300,000-$400,000 in tax dollars to the state.
He commented in order to make CSHB 453 revenue neutral and
improve revenues in the future, they believed they should
focus the bill on passenger ships.
REPRESENTATIVE G. DAVIS referred to the question of the
definition of residual fuel oil. The Labor & Commerce
Committee attempted to correct the definition of residual
fuel oil in their committee substitute, version U.
Number 290
CHAIRMAN VEZEY clarified residual fuel is a product that has
to be heated to reduce its viscosity and it is rated
kinematic units. He had believed reducing viscosity was the
result of an increase in kinematic units.
Number 300
REPRESENTATIVE JOE GREEN addressed CHAIRMAN VEZEY's
question. He stated the higher the kinematic viscosity, the
less likely the fluid is to flow. Conversely, the lower the
kinematic rate, the less viscous the fuel becomes.
CHAIRMAN VEZEY commented, to avoid future disputes, a trade
standard for the fuel should be mentioned in CSHB 453.
REPRESENTATIVE HARLEY OLBERG believed the notation of No. 6
fuel oil was specific.
CHAIRMAN VEZEY replied No. 6 fuel oil would probably
describe 100 different fuels. He felt the No. 6 fuel oil
could be stated as rated by "API" to close the loophole.
Number 325
REPRESENTATIVE G. DAVIS interjected that JAMES BURNS was on
teleconference and he might be able to answer those
questions in his testimony.
Number 334
ROBERT M. ERICKSON, TEAMSTERS LOCAL 959, supported CSHB 453.
He stated CSHB 453 was an attempt to attract new businesses
into the state. Teamsters Local 959 has a collective
bargaining agreement with Weaver Brothers, who presently
hauls fuel from Nikiski to Seward using four tankers and
four drivers, during the tourist season. Weaver Brothers
has notified him that if CSHB 453 were to materialize like
it should, they would employ up to 12-14 more people to haul
the fuel back and forth. Both Nikiski and Seward would have
one-two more people working at the plants. He emphasized
the unemployment rate in the Kenai Peninsula has been for
quite some time the highest in the state of Alaska.
Number 363
CHAIRMAN VEZEY moved to the Kenai teleconference site.
Number 370
BERNIE SMITH, MANAGER, GOVERNMENT AFFAIRS, TESORO ALASKA,
supported CSHB 453. He referred to CHAIRMAN VEZEY's
previous question about why CSHB 453 focuses on passenger
watercraft and responded, in 1993, Tesoro paid $450,000 in
state taxes on bunker fuel. He noted if Tesoro had to sell
51-55 million gallons more of bunker fuel, CSHB 453 would
not be revenue neutral.
MR. SMITH stated both the Kenai and Soldotna Chambers of
Commerce have passed resolutions supporting CSHB 453.
Number 396
CHAIRMAN VEZEY reiterated there were indications that 13
million gallons of Tesoro's fuel would be purchased if CSHB
453 were to pass. He estimated this to equal 1300+
truckloads. He noted currently 200 million gallons of
bunker fuel is produced on the Kenai Peninsula and it is
exported to foreign markets to dispose of it at a loss. He
asked if was correct.
Number 406
MR. SMITH responded over 6.5 million barrels of residual oil
was produced in 1993, equivalent to nearly 200 million
gallons. The oil is distributed to the West Coast
refineries that can better process the fuel and then it is
shipped overseas. This oil is shipped at a substantial
reduction of what was originally paid for the crude oil.
Number 421
CHAIRMAN VEZEY moved to the Anchorage teleconference site.
Number 430
JAMES BURNS, SENIOR VICE PRESIDENT OF MARKETING, PETROMARINE
SERVICES, commented on CSHB 453. He stated Seward is set up
to "in-line blend" the product transferred over from Kenai.
The process of loading and storing the fuel, because it must
be heated, is complicated. In 1993, about 4 million
gallons were sold and $205,000 was paid in residual fuel
tax. If CSHB 453 were to achieve its objective by selling
13 million gallons, the state treasury would receive an
additional $30,000 above the $205,000 they paid last year.
If Seward were developed to be the choice bunker port for
the cruise industry the potential sale of fuel increases to
around 22 million gallons. The state treasury would then
receive an additional $260,000 above the current $205,000.
If Tesoro were to sell 13 million gallons in the summer of
1994, they would employ four dock workers, one supervisor
and eight truck drivers. He believed Weaver Brothers would
have to purchase three additional tankers.
MR. BURNS noted residual fuel is not taxed by any other
state in the Union. Canada does have a sales tax, however,
their price is still comparable with Seattle. Tesoro,
therefore, has to compete with the entire West Coast. In
his negotiations, he has been assured that if Tesoro were to
lower their prices closer to the others, the cruise lines
would be very interested in having Seward as their bunker
port, as opposed to Vancouver.
Number 484
CHAIRMAN VEZEY asked to have the definition of residual fuel
oil clarified.
Number 486
MR. BURNS answered CSHB 453 was written to cover any
situation where residual fuel is blended with another
product, typically No. 2 Diesel. He had requested the use
of the "No. 6 fuel oil" and "kinematic viscosity" as
terminology in CSHB 453. Blended residual fuel is sold by
the kinematic number. The fuel is labeled "Intermediate
Fuel Oil" and it is given a number such as 100, 180, 380,
and 420. He noted, however, the names for fuel differ
internationally with varied definitions.
MR. BURNS stated the importance was to not allow the tax
reduction to No. 2 diesel. By definition No. 2 diesel has a
viscosity no greater than 4.1. He emphasized if even a
small portion of residual fuel was mixed with No. 2 diesel,
the viscosity would rate 6 or greater. Therefore, the
definition in CSHB 453 would in no way qualify No. 2 diesel
for the tax break.
Number 513
CHAIRMAN VEZEY asked what unit of viscosity MR. BURNS meant
when he mentioned 4 and 6.
MR. BURNS answered 4 and 6 refer to the number of
centistokes. The higher the centistoke, the more fluid the
product. He gave the example that a 380 centistoke product
would take 380 seconds to fall through whatever device it is
being read in. Temperature is also a factor. He noted 180-
420 material is very thick and viscous, therefore it must be
kept warm in order to flow.
Number 526
CHAIRMAN VEZEY stated he had wanted to refer to a
professional organization for a standard of quality control
for fuel oils. For example, API or ASTM.
Number 536
MR. BURNS responded there are three international standards,
International Council of Combustion Engines, The British
Standard Institute and The International Standards
Organization (ISO).
Number 539
CHAIRMAN VEZEY stated he was very familiar with ISO and
asked about their standard for No. 6 fuel oil.
MR. BURNS answered they refer to it as Fuel Oil Grade No. 6.
He noted the problem is, on the international level, marine
fuels are also heavy oils. There is a marine fuel grade,
title DMV, that has a viscosity at a maximum of 11. The
grades decrease from 11. He was concerned that narrowing
the definition to ISO standards would focus on kinematic
viscosity, thereby becoming too complicated.
Number 553
C.J. ZANE, DIRECTOR, GOVERNMENT & COMMUNITY RELATIONS,
HOLLAND AMERICA LINE/WESTOURS INC., supported CSHB 453. He
stated Holland America contributes close to $600 million per
year to Alaska's economy in goods and services, and they
would like to increase this amount with the purchase of
fuel.
MR. ZANE stated in 1994, Holland America will operate five
large modern cruise ships in Alaska, increasing to six ships
in 1995. Their total demand for residual fuel in 1994 will
be nearly 57,000 metric tons or just over 15 million
gallons. This amount will increase in 1995 to 68,000 metric
tons or 18+ million gallons.
MR. ZANE noted Holland America has to take in other
considerations when determining which bunker port to use.
For one of their ships to take on a load of bunker fuel it
takes 8-10 hours, therefore, they need to know how long they
can be in port. If they cannot be in port long enough, they
would need to adjust their cruise itineraries. They were
also concerned about guaranteed supply. He mentioned Sitka
might also be a possible stop, besides Seward.
MR. ZANE emphasized the reduction in the residual sales tax
he was sure would increase both the demand and the purchases
of fuel.
(REPRESENTATIVE SANDERS left the meeting at 8:32 a.m.)
Number 617
CHAIRMAN VEZEY asked the pleasure of the committee.
Number 626
REPRESENTATIVE OLBERG moved to pass CSHB 453 with individual
recommendations and the accompanying fiscal note.
Number 628
CHAIRMAN VEZEY asked the committee secretary to call the
roll.
IN FAVOR: REPRESENTATIVES OLBERG, G. DAVIS, B. DAVIS,
ULMER, KOTT, VEZEY.
CHAIRMAN VEZEY announced CSHB 453 passed from the House
State Affairs Committee.
CHAIRMAN VEZEY called for a recess at 8:42 a.m.
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