Legislature(1993 - 1994)

03/17/1994 08:00 AM STA

Audio Topic
* first hearing in first committee of referral
+ 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                                                                   
  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                    
  "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                    
  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                     
  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                                                                   
  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                                                                   
  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                                                                   
  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                      
  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                     
                 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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