Legislature(1993 - 1994)

03/10/1994 03:35 PM TRA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
 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           
 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            
 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                 
 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           
 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               
 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              
 SENATOR RANDY PHILLIPS asks if there is a federal tax on residual             
 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             
 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                
 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.                                                    

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