Legislature(1993 - 1994)
03/10/1994 03:35 PM TRA
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
CHAIRMAN SHARP brings up SB 327 (TAX ON RESIDUAL MARINE FUEL OIL) as the next order of business before the Senate Transportation Committee. The chairman calls the first witness. Number 522 RICK SOLIE, Aide, Senate Finance Committee, prime sponsor of SB 327 thanks the committee for hearing the bill. Mr. Solie states the Finance Committee introduced SB 327 to try to create an industry where currently one does not exist. We hope to make this a treasury neutral bill by increasing residual fuel sales. This bill will create jobs through the marketing and sale of this fuel, in addition to refinery jobs. Mr. Solie says he would be happy to take questions. CHAIRMAN SHARP asks if there are any questions. Hearing none, he calls Senator Little to testify. Number 537 SENATOR LITTLE states SB 327 relates to bunker fuel, the residual, thick stuff that is left over after refining. Cruise ships use this type of fuel, and changing the tax rate on this fuel could open the market up for possible sales to cruise ships coming into Seward. Over 90 cruise ships will dock in Seward this summer, and they all currently purchase their fuel from Vancouver, B.C. The cruise ships have expressed an interest in purchasing their fuel in Alaska. SENATOR LITTLE says there are many incentives for the passage of SB 327. Not only will refueling in Seward require the cruise ships to remain in Seward longer, but it will also create an industry in transporting the fuel from the refinery to storage in Seward. It is anticipated that ten to twenty jobs will be created if SB 327 is passed. It is definitely a case where the tax policy dictates the market. SENATOR LITTLE states the proposed committee substitute (cs) before the committee would change the bill in two ways to allow a revenue neutral or a revenue positive situation. Those two changes are the lessening of the tax reduction from 1 cent to 1.5 cents and the restriction that the reduction of the tax would apply only to passenger vessels. Senator Little states she would be happy to take questions. Number 565 CHAIRMAN SHARP asks if there are any questions. SENATOR RANDY PHILLIPS states SB 327 is basically a tax reduction. CHAIRMAN SHARP calls James Burns to testify. Number 568 JAMES BURNS, Senior Vice President of Marketing, Petro Marine Services (PMS) says there is not a facility in the state to handle residual fuel. The fuel has to be handled carefully. If stored below 90 degrees fahrenheit, it solidifies. Princess Tours asked us if we would sell them residual fuel. We told them we would need to sell a certain amount of residual fuel to amortize our investment over a three-year period. Princess Tours agreed to that, so PMS spent about 500,000 dollars on a pumping system and a computer system. PMS completely re-did the pipes under the Alaska Railroad dock. We signed a two-year contract with Princess Tours and hired two additional dock workers. In addition, Weaver Brothers purchased two trucks and hired four drivers last summer. The treasury received 205,000 dollars revenue. Mr. Burns states residual fuel is a product that is difficult to handle. He does not think it is a product anyone would volunteer to sell in the state of Alaska. SENATOR KERTTULA asks what residual fuel is typically used for. MR. BURNS replies it is typically used in cruise ships, tankers, and cargo vessels for propulsion fuel. This product was sold in Alaska prior to 1972. The only instances in which this fuel is sold in the state currently, is on Princess Tours' ships, Tesoro's vessels, or if a freighter has an emergency fuel need. MR. BURNS says the impact to the state of SB 327, is to some degree, based on his figures. His figures are based on meetings with four of the cruise ship operators... TAPE 94-8, SIDE B Number 594 ...they have expressed interest in buying additional fuel in Seward if PMS is close in price to Vancouver. Mr. Burns states he cannot give a definition on what is "close", but he will get to that if he can establish a framework where the tax is reduced to a livable point. No other state taxes residual fuel at all. Vancouver does put a sales tax on a portion of the sale. Mr. Burns says his selling price in Seward is about 40 cents per gallon. Vancouver's selling price is about 34 cents per gallon. Mr. Burns shows the committee some graphs he has prepared. Number 580 SENATOR RANDY PHILLIPS asks if the figures Mr. Burns is referring to are in Canadian or U.S. funds. MR. BURNS responds his numbers are in U.S funds. MR. BURNS continues to explain the graphs he is showing the committee. Mr. Burns states the tax change in SB 327 would bring PMS's price close to Vancouver's price. PMS's fuel is a better quality fuel than the cruise ship companies get anywhere else. In fact, a cruise ship operator in Florida is encouraging PMS to sell fuel in Florida. Mr. Burns says he has no chance of entering the market without this tax reduction. Number 564 SENATOR KELLY asks if Mr. Burns could make up the difference in price between PMS's price and Vancouver's price by simply cutting PMS's price by 13%. Number 562 MR. BURNS says if there was a way to reduce PMS's costs, he could cut the price charged for residual fuel. Number 552 SENATOR KELLY does not think the 5 cent per gallon tax is not the only reason PMS's price is not competitive with Vancouver. Number 551 MR. BURNS states his major costs are his environmental considerations, the cost of the improvements PMS's has made, trucking costs, and the wholesale price of the fuel. SENATOR KELLY asks if Tesoro couldn't drop their wholesale price to make this project work. Senator Kelly asks what Tesoro's position on that would be. Number 544 GENE BURDEN, Tesoro Alaska, testifying from Anchorage replies Tesoro had hoped that the tax reduction would apply to all vessels using residual fuel. The value that Tesoro receives on residual fuel is very low. It ranges as low, and sometimes lower than 50% of what Tesoro pays for the crude oil. Tesoro cannot sell the fuel at a lower price. Tesoro exports 98.5% of the residual fuel that it manufactures. The remaining 1.5% is used in Tesoro's tankers, with the exception of the 80,000 barrels sold to Petro Marine Services. Number 524 SENATOR KELLY asks if the 205,000 dollars the state received in taxes on residual fuel was just from PMS. (Someone in the audience answers "Yes".) Senator Kelly asks what the sales tax in Vancouver is. MR. BURNS responds it is 7%. SENATOR KELLY says if Alaska reduces its' tax, what is to keep Vancouver from reducing their tax. MR. BURNS replies the market place is always going to be dynamic, and he cannot control that. He can only reiterate what the cruise ships have told him: that if PMS is close in price to Vancouver, they will consider Seward as their bunker port. If they view Seward as their primary bunker port, there are other sales, namely marine diesel, which would net additional revenue for the state. Number 509 SENATOR LITTLE adds that SB 327 would sunset in five years, which may allay some of the concerns being expressed. Number 506 SENATOR KELLY states his initial concern is the loss of 200,000 dollars to the state treasury this year. If he felt confident that this tax reduction would create a new industry, and bring in other taxes, then he would not be concerned. But he is not convinced this will happen. He has read the letters of support, and they are all pretty vague. There are no commitments to buy fuel in Seward if we pass this legislation. There are other factors involved that would enable PMS to get to a lower price than just reducing this tax. If Sitka also sells fuel under this legislation, then these cruise ships might not need fuel when they reach Seward. Number 486 MR. BURNS says his feasibility study involves cruise ships that go to Seward. There are many other ships that go to Sitka, but do not go to Seward. Holland America has made a commitment to extend their time in Sitka by three or four hours to refuel. The estimated volume in Sitka is 15 million to 18 million gallons. That will only occur if the tax can be lowered. MR. BURNS states Los Angeles was the third largest bunker port in the world, next to Singapore and Rotterdam. After an 8.25% tax was imposed, LA fell to 22nd in the world. California then removed the tax, but the market in LA has never rebounded. The market is very, very sensitive to tax policy. Once the tax is lowered, there are other issues we can use to encourage the cruise ships to fuel in Seward. The quality of our fuel is better than Vancouver's. Also, the cruise industry will make a big deal of the fact that they're supporting an Alaskan industry. Mr. Burns states that no one can guarantee anything. He is just asking to have the chance to try. Number 456 SENATOR KELLY states he thinks Seward is doing a lot of good things, and he supports Sea-Wally World; he thinks Seward is a perfect tourism location. It is right on the sea with a connection to the Alaska Railroad, and he likes what they are trying to do, but he would feel a lot more comfortable if the state did not stand to lose 200,000 dollars. Why can't we work out an incentive deal, whereby the state maintains 200,000 a year, but PMS keeps anything above that. SENATOR RANDY PHILLIPS says he has the same concerns, and Senator Kelly is simply expressing them better than he could. SENATOR KELLY says it is not just the 200,000 dollars, but is also a matter of principal. If, in these times of declining oil revenues, we start giving back taxes, in order to make things more competitive, that argument could be made for every tax there is. Number 436 SENATOR LITTLE states the Department of Revenue said it would cost too much to figure two different tax rates on residual fuel. CHAIRMAN SHARP says the committee will hear from a representative of the Department of Revenue later. Number 430 MR. BURNS states he is willing to be creative to find a solution. Number 424 CHRIS GATES, Director, Division of Economic Development, Department of Commerce & Economic Development (DCED) says DCED has been working on this issue for about eight months and has been trying hard to come up with some creative solutions to create a market, and yet at the same time not hurt the state's revenues. Mr. Gates is testifying primarily to inform the committee how important SB 327 is to Sitka. It is hoped this will help mitigate the affects of the Alaska Pulp Company's (APC) closure in Sitka. This is one of the items on the agenda to try to create a new industry in Sitka. This will also keep tourists in Sitka longer. This is an important source of local revenue and local sales tax revenue. SB 327 would mean possibly 15 to 12 jobs. MR. GATES states there are major refinery changes occurring in Vancouver. One refinery is shutting down, and another one will possibly also shut down. He would like to see Alaska begin positioning itself to serve as a major refueling port. There also will be added passenger and crew spending in communities where refueling occurs. MR. GATES makes a point that the air quality problems that are occurring in Juneau as a result of the stack emissions from the Princess Lines will be diminished as a result of burning Tesoro's residual fuel. So there is also a small air quality benefit to the state, if we can manage this switch. MR. GATES states Tesoro can only sell this product for 50% of what it costs them to purchase the crude. For Tesoro to only get 46% or 48% of what they buy it for is putting them in a bad position. Tesoro has no margins on bunker fuel. It is a loss for them. They have to subsidize 40% of all they produce with their gasoline and jet fuel sales. Tesoro is not extremely healthy; they made commitments to the State of Alaska many years ago that they have been fulfilling. We have been trying to support in-state manufacturers; this could be a way to help them a little bit as well. Number 390 SENATOR KELLY asks how the refineries in Vancouver closing would affect the situation. Number 387 MR. GATES replies Alaska would like to force its' way into the market and be the major supplier of bunker fuel if we can. This is an extremely cost sensitive product, and we will not ever be lower- priced than Vancouver. However, the closer we can get, the more likely we will be to be a major supplier for the cruise ships. As those refineries go down, Alaska's position relative to Vancouver improves. It is a matter of pennies and increments. CHAIRMAN SHARP asks if there are any questions. Hearing none, he thanks Mr. Gates for his testimony and calls the next witness. Number 376 ROBERT ERICKSON, Representative of Teamsters Local 959 states the teamsters have a real interest in SB 327. If this program goes through, and if it works and we capture the bunker fuel market from Vancouver, it would create, just in full-time driving jobs, eight to ten positions. This does not include any added positions in Nikiski and Seward. The Kenai Peninsula has had the highest unemployment rate for quite a while. Eight, ten, twelve, fourteen jobs does not seem like much, but it sure is in Kenai. We support SB 327. CHAIRMAN SHARP asks if there are any questions. Hearing none, he thanks Mr. Erickson for his testimony and calls the next witness. Number 354 LARRY MEYERS, Director, Income & Excise Audit Division, Department of Revenue says he has a few points of clarification. One, currently the state collects 5 cents per gallon on residual fuel. The departments current forms do not break down what type of residual fuel it is. Any numbers that have been mentioned so far have been provided by the industry. Number 345 CHAIRMAN SHARP asks what the difficulty would be with a J rate tax, which would guarantee the state 200,000 dollars, then drop the tax down to 1.5 cents after that. The chairman also asks if this tax can be collected at the refinery. MR. MEYERS responds the department would prefer to deal with as few distributors as possible, and it would be preferable for the department to collect the tax from the refinery. The way the motor fuel tax report works right now, is the Department of Revenue is geared up to give refunds. The form could be modified. Number 332 SENATOR KELLY asks Mr. Burns that since Petro Marine Services capitalized their infrastructure for 500,000 dollars on a three year contract, if they made enough revenue to be able to amortize that investment over three years. MR. BURNS replies that is correct. PMS sold 4,106,000 gallons of residual fuel in 1993. Revenue from sales was about 1.2 million dollars. SENATOR RANDY PHILLIPS asks if there is a federal tax on residual fuel. MR. BURNS responds there is no federal tax on residual fuel. PMS pays 0.6 cents per gallon to the Alaska Railroad Corporation because they own the dock, 1.5 cents for labor costs, and 5.2 cents for trucking costs per gallon. The fuel is trucked from the refinery in Nikiski. It comes from the refinery at about 140 degrees fahrenheit. The temperature cannot drop below 110 degrees by the time it gets to Seward. PMS's tank is kept heated. PMS pays over a penny per gallon in heating and electric costs. The residual fuel must be kept heated, or it will solidify. SENATOR KELLY asks if Sitka has infrastructure in place to handle this type of fuel. MR. GATES replies they do not, but they would like to build it using Alaska Pulp Corporation tanks. SENATOR KELLY asks if there will be competition between Sitka and Seward. MR. BURNS says there will not be competition because the two ports will be servicing different ships. Mr. Burns states he supports the project in Sitka. He thinks it is a win-win-win situation for Sitka, Seward, and the State of Alaska. The only advantage Sitka has that PMS does not have is the free APC tanks in Sitka. That is the only way that project would fly, is from the free use of those tanks. Sitka has added costs, so the free use of those tanks makes Sitka's cost about equal with those of Petro Marine Services. Number 236 SENATOR KERTTULA states the problem is we do not want to raise taxes, yet we must balance the budget. Number 181 MR. BURNS says he understands the concerns being voiced. Number 180 SENATOR RANDY PHILLIPS shares the concerns being voiced and is worried about the future of state taxing policies. What the state does for one, we have to do for all. What other groups will ask for similar tax breaks if we pass SB 327? Number 155 SENATOR KELLY says a sunset date of 2000 seems to long to him. He says there ought to be a way to make the bill revenue neutral to the state. Number 145 CHAIRMAN SHARP also thinks there are some ways to make the bills revenue neutral, and he would like to talk to Mr. Burden about that. Number 140 MR. BURDEN says Tesoro shares some of the same concerns that have been voiced. He says Tesoro wanted to demonstrate that additional sales would make SB 327 revenue neutral. There is a concern that an alternative approach would generate a tax rate that is still to high for Petro Marine Services to capture the market. He suggests possibly having PMS pay the same amount of taxes paid last year, and then not being taxed after that amount is reached. Number 092 CHAIRMAN SHARP says he would like to keep things simple. Perhaps the tax could drop down after current levels of tax have been collected. That would at least give the advantage of letting PMS try to get additional business. The revenue on other residual fuel sales would not be jeopardized, since this tax break would only go to cruise ships. CHAIRMAN SHARP says perhaps if we can guarantee that the present level of tax would be collected, we could then give a break on future sales. The chairman says he is inclined to hold SB 327 in committee to work on a solution. Number 026 SENATOR KELLY says he is also concerned with the length of the sunset date, and would like to look at changing it. Number 016 SENATOR SHARP says he would like to look at amendments to SB 327 and see if the committee can't release the bill as a revenue neutral bill. TAPE 94-9, SIDE A Number 001 SENATOR RANDY PHILLIPS asks if Sitka has docking facilities. Number 015 MR. GATES says the tanks are located so far from the main town, that Sitka plans to use a shuttle barge to fuel the cruise ships. Number 020 SENATOR RANDY PHILLIPS asks if Sitka will then come to the state to ask for money to fund this project. Number 025 MR. GATES replies Sitka is hustling as hard as it can to mitigate the loss of the pulp company. SENATOR RANDY PHILLIPS says he has a feeling Sitka is going to come to the state asking for more money. Number 031 CHAIRMAN SHARP asks the Department of Revenue, Mr. Burns of Petro Marine Services, and the Department of Commerce & Economic Development to work with the committee staff to come up with something doable. The chairman states he would like to schedule SB 327 in a week to ten days.