Legislature(1993 - 1994)
03/17/1994 08:00 AM STA
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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.