Legislature(2009 - 2010)BARNES 124

02/12/2009 03:00 PM House ENERGY

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03:08:09 PM Start
03:08:22 PM Review of House Judiciary Report on Retail Gasoline Prices in Alaska|| Hb68
04:59:30 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Overview: Railbelt Utilities by the
Alaska Power Association
<Above Item Canceled from Agenda>
+ Review of House Judiciary Report on TELECONFERENCED
retail gasoline prices in Alaska
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE SPECIAL COMMITTEE ON ENERGY                                                                              
                       February 12, 2009                                                                                        
                           3:08 p.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Representative Bryce Edgmon, Co-Chair                                                                                           
Representative Charisse Millett, Co-Chair                                                                                       
Representative Nancy Dahlstrom                                                                                                  
Representative Kyle Johansen                                                                                                    
Representative Jay Ramras                                                                                                       
Representative Pete Petersen                                                                                                    
Representative Chris Tuck                                                                                                       
MEMBERS ABSENT                                                                                                                
All members present                                                                                                             
OTHER MEMBERS PRESENT                                                                                                         
REPRESENTATIVE LES GARA                                                                                                         
COMMITTEE CALENDAR                                                                                                            
Review of House Judiciary Report on retail gasoline prices in                                                                   
PREVIOUS COMMITTEE ACTION                                                                                                     
No previous action to record                                                                                                    
WITNESS REGISTER                                                                                                              
Ed Sniffen, Senior Assistant Attorney General                                                                                   
Commercial/Fair Business Section                                                                                                
Civil Division                                                                                                                  
Department of Law (DOL)                                                                                                         
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Presented the Attorney General's Report                                                                  
2008 Alaska Gasoline Pricing Investigation.                                                                                     
JANE PIERSON, Chief of Staff                                                                                                    
Representative Jay Ramras                                                                                                       
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:   Answered questions  on the  House Judiciary                                                           
Standing Committee Alaska Gasoline Pricing Report                                                                               
ACTION NARRATIVE                                                                                                              
3:08:09 PM                                                                                                                    
CO-CHAIR CHARISSE  MILLETT called the House  Special Committee on                                                             
Energy meeting to order at  3:08 p.m.  Representatives Dahlstrom,                                                               
Ramras, Petersen,  Millett, and Edgmon  were present at  the call                                                               
to  order.   Representative  Johansen  and  Tuck arrived  as  the                                                               
meeting  was  in  progress.   Representative  Gara  was  also  in                                                               
3:08:22 PM                                                                                                                    
^Review of  House Judiciary Report  on retail gasoline  prices in                                                             
[Contains discussion of HB 68]                                                                                                  
CO-CHAIR MILLETT announced that the  only order of business would                                                               
be a review  of the House Judiciary Standing  Committee Report on                                                               
retail gasoline prices in Alaska.                                                                                               
3:08:46 PM                                                                                                                    
Ed  Sniffen, Senior  Assistant Attorney  General, Commercial/Fair                                                               
Business  Section,  Civil  Division,  Department  of  Law  (DOL),                                                               
summarized the  conclusion of the Attorney  General's Report 2008                                                               
Alaska Gasoline  Pricing Investigation,  and said that  there was                                                               
no  evidence  of  illegal  activity related  to  the  pricing  of                                                               
gasoline.   He described the investigative  process of collecting                                                               
information,  looking at  documents,  and interviewing  witnesses                                                               
from  the retail,  distribution, and  refinery businesses  of the                                                               
retail  gasoline  market.   The  collected  information was  then                                                               
reviewed  by a  petroleum economist.   Mr.  Sniffen informed  the                                                               
committee  that  after   careful  consideration,  the  conclusion                                                               
reached  was  that  there  are  market  reasons  for  the  recent                                                               
movement in  the price of  gas.  The initial  investigation began                                                               
in  August when  the differential  between  the price  of gas  in                                                               
Anchorage, compared  to prices  in the Lower  48, grew  to $1.06;                                                               
the difference  in gas prices  between the Pacific  Northwest and                                                               
Alaska  is historically  about $0.13  and  questions were  raised                                                               
about the cause of this increase.                                                                                               
3:11:15 PM                                                                                                                    
MR. SNIFFEN  stated that  after looking  at the  information, the                                                               
economist  concluded  that  the  record pace  of  the  rise,  and                                                               
subsequent fall,  of oil prices  was unprecedented.   The pricing                                                               
volatility of crude oil pricing  was coupled with Alaska's unique                                                               
oligopoly  market.     He  explained  that  an   oligopoly  is  a                                                               
concentrated market with  a few competitors that  account for all                                                               
of the  market share.  Even  when competitors do not  collude, in                                                               
this type of environment competitors'  market strategies are well                                                               
known to  each other.   These two  factors can explain  the price                                                               
differentials  to some  extent, although  oil companies  may have                                                               
taken  advantage of  this scenario  and  earned healthy  profits.                                                               
Mr. Sniffen advised  that the Department of Law  (DOL) could find                                                               
no  evidence of  a  violation of  state law  in  documents or  in                                                               
testimony.   He concluded  that high  prices are  unfortunate and                                                               
frustrating;  however,  the DOL  was  "satisfied  that there  was                                                               
nothing illegal going on."                                                                                                      
3:15:00 PM                                                                                                                    
REPRESENTATIVE    PETERSEN    asked    whether    "price-gouging"                                                               
legislation that is  now proposed before the  Senate, if enacted,                                                               
would have spurred an investigation  by the attorney general into                                                               
price fixing by refineries.                                                                                                     
3:16:11 PM                                                                                                                    
MR. SNIFFEN opined oil refiners  would have raised prices anyway;                                                               
however, an investigation  would have ensued when  prices did not                                                               
fall with  those in  the Lower 48  and the  differential exceeded                                                               
the statutory cap.                                                                                                              
3:16:37 PM                                                                                                                    
REPRESENTATIVE JOHANSEN gave  a point of order  on the discussion                                                               
of proposed bills.                                                                                                              
3:16:57 PM                                                                                                                    
REPRESENTATIVE  RAMRAS presented  the  House Judiciary  Committee                                                               
Report titled Alaska Gasoline Pricing  Report, and explained that                                                               
the report  was tasked  by the  speaker of  the house  during the                                                               
summer  of  2008.   Representative  Ramras  commended  his  staff                                                               
members for  their contributions and  the DOL for  its assistance                                                               
in preparing the  report.  He noted that the  report was prepared                                                               
entirely "in-house" and his office  is wholly responsible for its                                                               
content and  the process; nonetheless,  all members of  the House                                                               
Judiciary  Standing Committee  were  offered  the opportunity  to                                                               
attach   addendums.      Thus,    addendums   are   attached   by                                                               
Representatives Gruenberg,  Lynn, and Holmes.   Also attached for                                                               
reference is the Alaska  Petroleum Products Pricing Investigation                                                               
Closing Report prepared by the DOL and dated 11/21/2002.                                                                        
3:21:56 PM                                                                                                                    
CO-CHAIR MILLETT  asked for  clarification on  the timing  of the                                                               
Attorney  General's  report  and  that  of  the  House  Judiciary                                                               
Standing Committee.                                                                                                             
3:22:12 PM                                                                                                                    
REPRESENTATIVE  RAMRAS explained  that the  governor charged  the                                                               
attorney general to look into  possible illegal activity, and the                                                               
speaker  of  the  house  charged  the  House  Judiciary  Standing                                                               
Committee (HJUD)  to make recommendations to  the legislature for                                                               
possible action.  The reports  contain similar data, although the                                                               
intent of  the judiciary committee was  to consider price-gouging                                                               
legislation; in fact,  the legislation that has  been proposed to                                                               
the   current   legislature   is  referenced   in   the   report.                                                               
Representative Ramras  confirmed that the HJUD  committee reached                                                               
the  same  conclusion  as  the   attorney  general.    He  opined                                                               
government  has three  options: to  regulate the  market, through                                                               
proposed  price-gouging  legislation;  to subsidize  the  market,                                                               
through  a  discount  on  the  cost  of  royalty  oil;    and  to                                                               
incentivize  the market.   Representative  Ramras then  described                                                               
the status of Alaska refineries and their product share.                                                                        
3:25:22 PM                                                                                                                    
CO-CHAIR EDGMON  asked whether there  is vertical  integration in                                                               
Alaska, from the refinery level down to the retail [outlets.]                                                                   
3:26:07 PM                                                                                                                    
REPRESENTATIVE RAMRAS  suggested there is  a "Gordian knot."   He                                                               
explained the  State of Washington  produces 10 times  the volume                                                               
of gasoline  as Alaska;  however, Alaska  produces twice  as much                                                               
jet  aviation fuel.   The  HJUD committee  was interested  in the                                                               
fuel  storage  situation  and the  incentive  of  building  large                                                               
storage tanks  in Anchorage.  However,  an unintended consequence                                                               
of this  incentive is  to open  up the  market for  large grocery                                                               
chains that  are in a position  to fill the tanks  with unbranded                                                               
retail gas and  put smaller independent dealers  out of business.                                                               
Representative  Ramras said  that the  attorney general's  report                                                               
concurs  with the  HJUD  committee's concern  that  if the  state                                                               
provides a  large tanker  and storage in  the urban  and Railbelt                                                               
market, the price of the stored  gasoline over time may be higher                                                               
than recent, smaller shipments.                                                                                                 
3:29:06 PM                                                                                                                    
REPRESENTATIVE   RAMRAS  discussed   the  production   of  retail                                                               
gasoline   with  Petro   Star,   Inc.  (Petro   Star),  and   its                                                               
representative  said  that Alaska  is  a  static market  and  its                                                               
market share is two tenths of  one percent of the national total.                                                               
Furthermore, Alaska  has a very  "efficient market,  with matched                                                               
buyers  and  matched sellers,"  thus  the  refineries can  charge                                                               
whatever the market can bear.   He relayed that Petro Star is not                                                               
interested in  entering the retail  market even  with inducements                                                               
from the government  because the market is static,  the market is                                                               
not growing,  the market is well  served, and there are  too many                                                               
regulatory hurdles  to overcome.  Representative  Ramras returned                                                               
to his description of the  unusual period of time surrounding the                                                               
fluctuating  gas  pricing.    During  this  time,  the  Lower  48                                                               
marketplace  suffered   from  demand   destruction,  conservation                                                               
practices,  recessionary  economic   conditions,  and  a  surplus                                                               
supply of  refined gasoline.   There is a spectrum  of refineries                                                               
across the nation, from complex  refineries to simple refineries,                                                               
as are  found in Alaska.   A  complex refinery is  more efficient                                                               
but can not adjust its  output.  Alaska's simple refineries, like                                                               
Tesoro  Corporation (Tesoro)  and  Flint  Hills Resources  (Flint                                                               
Hills) refineries  in Alaska, can  adjust their  output according                                                               
to the  marketplace.  He  then explained that  demand destruction                                                               
is when  consumers can not  purchase a product because  the price                                                               
is too high.  Conservation is  an adjustment to how consumers use                                                               
the product.   A recessionary economic  condition effects whether                                                               
consumers purchase the  product, and a surplus  supply places too                                                               
much of the product on the market.                                                                                              
3:36:48 PM                                                                                                                    
REPRESENTATIVE  RAMRAS  gave  an  example of  this  effect.    He                                                               
stressed that  Alaska's simple refiners  were able to  respond to                                                               
the market and  were not forced to drop their   prices "far below                                                               
its  break-even price."   The  result  was that  the refiners  in                                                               
Alaska had a  great advantage over the consumers,  whereas in the                                                               
Lower  48,  the consumers  held  the  advantage.   Representative                                                               
Ramras  said the  comparison between  the  Alaska and  Washington                                                               
markets  was completely  inappropriate.   Furthermore, refineries                                                               
in the Lower 48 can easily  sell to a multi-state market, putting                                                               
lower  prices  within  the  reach  of  everyone  connected  by  a                                                               
highway.   This situation is  not the  same for Alaska,  even for                                                               
the folks who live in the shadow of a refinery.                                                                                 
3:41:45 PM                                                                                                                    
REPRESENTATIVE  RAMRAS returned  to  the boundaries  of the  HJUD                                                               
investigation and  noted that concerns were  raised about whether                                                               
confidential and  proprietary information  should be  revealed to                                                               
committee  members.    As  the  task  of  the  committee  was  to                                                               
determine  why  the  gasoline  prices are  still  high  and  what                                                               
solutions  can  be  legislated, the  committee  turned  to  other                                                               
variables in the  Southcentral and Railbelt areas.   He indicated                                                               
that  separate  investigations  should  study  the  peculiarities                                                               
surrounding the Southeast and Western Alaska retail gas markets.                                                                
3:44:23 PM                                                                                                                    
REPRESENTATIVE RAMRAS  further explained that the  HJUD committee                                                               
continued  its search  for another  significant  variable in  the                                                               
Southcentral  and  Railbelt  marketplace  that  could  negatively                                                               
impact the consumer, and concluded  that it was the production of                                                               
jet aviation  fuel.  He  referred to page  46 of the  HJUD report                                                               
and read:                                                                                                                       
       'Opportunity cost' is defined by Google as:  'The                                                                        
      value of the next best choice that one gives up when                                                                      
     making a decision.'                                                                                                        
REPRESENTATIVE RAMRAS reminded the  committee that Alaska refines                                                               
twice the amount  of aviation fuel as Washington.   On a personal                                                               
note,  he said  that  he  was not  defending  the refineries  and                                                               
described the  effect of  high gasoline  prices on  his business.                                                               
He then reminded the gallery  that the reason refineries exist in                                                               
Alaska is  for the production of  jet aviation fuel, and  not for                                                               
the purpose  of producing  refined gasoline  and diesel  fuel for                                                               
vehicles or  home heating oil.   He pointed out that  the Stevens                                                               
Anchorage  International  Airport  is the  fourth  busiest  cargo                                                               
airport  in  the  world  due   to  its  geographic  location  and                                                               
competitively priced  jet aviation fuel.   Furthermore, the price                                                               
of  jet  aviation  fuel  is  set by  the  world  market  and  the                                                               
Anchorage airport must compete.                                                                                                 
3:49:03 PM                                                                                                                    
REPRESENTATIVE  RAMRAS called  the committee's  attention to  the                                                               
[bar  chart] on  page 4  of the  HJUD report  that indicated  the                                                               
average  spread between  Anchorage  and  Seattle retail  gasoline                                                               
prices from 2002  to 2008.  In March 2008,  began a decoupling of                                                               
the  spread  that  led  to the  investigations  by  the  attorney                                                               
general and  the HJUD  committee.   The HJUD  committee theorized                                                               
that the  U. S.  went into  a recession  at the  end of  2007 and                                                               
early in  2008, along with the  rest of the world.   Furthermore,                                                               
the chart indicates that in  April 2008, the disparity in pricing                                                               
between  Alaska and  Seattle moved  from  $0.20 to  $0.80.   This                                                               
happened  because at  the  same  time there  was  a  glut in  the                                                               
refined gasoline  market causing  gas to be  dumped in  the Lower                                                               
48,  jet aviation  fuel was  also  being dumped  onto the  global                                                               
market,  lowering  its  market   price.    Representative  Ramras                                                               
acknowledged that the HJUD report  was prepared without subpoenas                                                               
and the  investigation of  proprietary information;  however, the                                                               
committee found that the Alaska  refineries have two markets, the                                                               
global jet  aviation marketplace and the  Railbelt.  Furthermore,                                                               
the  two  refineries, Tesoro  and  Flint  Hills, must  match  the                                                               
global  price  of   aviation  fuel  in  order   to  maintain  the                                                               
competitive position  of the  Anchorage airport.   Representative                                                               
Ramras   emphasized  the   financial   connections  between   the                                                               
Anchorage  airport and  Fairbanks International  Airport and  the                                                               
fiscal  importance of  the  production of  jet  aviation fuel  to                                                               
both.    In  fact,  the  Fairbanks airport  is  subsided  by  the                                                               
Anchorage airport so that it  can serve as a diversionary airport                                                               
for  Anchorage.   He then  gave  an example  of different  profit                                                               
margins for a variety of products.                                                                                              
3:55:13 PM                                                                                                                    
REPRESENTATIVE RAMRAS reiterated that  the accepted conclusion of                                                               
the HJUD report is that the  refineries are laying off the losses                                                               
from jet aviation fuel onto  refined gasoline, low-sulfur diesel,                                                               
and diesel consumers.   Furthermore, seven infrastructure assets,                                                               
for  example, Eielson  Air  Force Base  and  Elmendorf Air  Force                                                               
Base,  were  identified  as  being   uniquely  dependent  on  jet                                                               
aviation fuel.  Representative Ramras remarked:                                                                                 
     What if the refiners  are laying off a disproportionate                                                                    
     amount  of  their  operating costs  when  they  lose  a                                                                    
     dollar a gallon  on jet aviation fuel,  are they laying                                                                    
     that cost off  onto the consumer?  Now,  the legal term                                                                    
     of art  for that we  just learned ... is  called 'cross                                                                    
     subsidization.'   ...  If we  take  testimony from  the                                                                    
     public  that this  will be  one  of the  considerations                                                                    
     that is greatly  offensive to the public.  ... that the                                                                    
     consumers of  Alaska could possibly be  subsidizing the                                                                    
     cost of jet aviation fuel for a global marketplace.                                                                        
REPRESENTATIVE  RAMRAS then  explained  that  the HJUD  committee                                                               
considered  the  possible  unintended  consequences  of  enacting                                                               
price regulations:  The exit  of the  Alaska refiners  leading to                                                               
the loss  of the  two air  force bases,  the two  refineries, the                                                               
Alaska  Railroad, the  Stevens  Anchorage International  Airport,                                                               
and  the  Fairbanks  International Airport.  These  losses  would                                                               
represent about 10 percent of  the state's gross domestic product                                                               
and  10 percent  of the  state's work  force.   In addition,  jet                                                               
aviation fuel  is a  value-added product  for Alaska,  along with                                                               
mining,  fishing,  oil,  and gas.  Representative  Ramras  opined                                                               
these jobs  and infrastructure  assets are put  at risk  when the                                                               
government tries to regulate the  consumer side of the market and                                                               
restricts  the refiner's  opportunity to  lay off  some of  their                                                               
costs.   Although this  theory is unpopular  with the  public the                                                               
HJUD committee,  in light of  the attorney general's proof  of no                                                               
anti-trust [violation],  no collusion, and no  criminal activity,                                                               
is trying to offer the reason why gasoline prices stay high.                                                                    
4:02:28 PM                                                                                                                    
CO-CHAIR MILLETT asked Mr. Sniffen for his theory.                                                                              
4:02:47 PM                                                                                                                    
MR. SNIFFEN  said that he  had no  reason to dispute  the factual                                                               
basis of the  conclusions of the HJUD committee.   He opined that                                                               
there  is  cross  subsidization  between jet  aviation  fuel  and                                                               
gasoline, even  though the economist felt  market factors weighed                                                               
more heavily.   He concluded that the pricing  dynamics of Tesoro                                                               
and  Flint Hills  must   include  consideration of  all of  their                                                               
products.  That said, he differed the question to the economist.                                                                
4:04:27 PM                                                                                                                    
CO-CHAIR  EDGMON returned  to page  32  of the  HJUD report  that                                                               
discussed the Tesoro  refinery and its 31  convenience stores and                                                               
58 branded stores.  He asked:                                                                                                   
     So, in terms  of the pricing dynamics  from the refiner                                                                    
     to  the wholesaler  to the  retail outlet  down to  the                                                                    
     consumer, what kind of  market presence, the percentage                                                                    
     basis, are the  29 outlets owned by Tesoro?  ... Are we                                                                    
     talking 50 percent, 20 percent? Do we know?                                                                                
4:05:51 PM                                                                                                                    
MR. SNIFFEN assured  the committee that his office  looked at the                                                               
numbers;   however, this is  proprietary information.   He stated                                                               
that there is vertical integration  from the Tesoro refinery down                                                               
to the   company-owned stations.  Mr. Sniffen  explained that the                                                               
branded  stations are  a little  more independent  and set  their                                                               
prices after  paying the delivery  price at their  station (DTW).                                                               
The Alaska  Tesoro stations  are not integrated  in that  they do                                                               
not own  the supply of oil;  in Alaska, the level  of integration                                                               
starts at  the refiner.   Therefore, Tesoro has the  advantage of                                                               
setting  the  wholesale and  retail  price,  in addition  to  its                                                               
significant  share  of  the  Alaska  market.    The  other  major                                                               
suppliers are  Chevron U.S.A. Inc., Holiday  Stationstores, Inc.,                                                               
and Shell Oil Company.                                                                                                          
4:08:22 PM                                                                                                                    
CO-CHAIR EDGMON remarked:                                                                                                       
     You can't  tell the  committee the exact  percentage of                                                                    
     ownership of our retail outlets  that the major refiner                                                                    
     in the  State of  Alaska which  produces 85  percent of                                                                    
     the gasoline,  that supplies  basically 100  percent of                                                                    
     the Railbelt, you can't tell  us that percentage of the                                                                    
     market  in Anchorage,  but it's  a significant  amount.                                                                    
     And  we  know there  is  vertical  integration, but  we                                                                    
     can't  say that  there's  price-gouging,  we can't  say                                                                    
     there's  parallel  pricing,  we can't  say  if  there's                                                                    
     collusion, we can't say  that there's monopoly activity                                                                    
     because - can you finish that sentence for me?                                                                             
4:09:09 PM                                                                                                                    
MR.  SNIFFEN  agreed that  there  is  parallel pricing,  but  not                                                               
necessarily due  to illegal  activity.    Furthermore,   there is                                                               
competition  in  most of  Alaska,  with  the exception  of  rural                                                               
Alaska,  where   monopolistic  practices   exist,  but   are  not                                                               
necessarily illegal.   This situation  is troubling, but  the DOL                                                               
is limited by what can be done.                                                                                                 
4:10:47 PM                                                                                                                    
CO-CHAIR EDGMON  observed there are  two different  messages: the                                                               
literal  interpretation  and  the  "gray   area".      He  called                                                               
attention to page  19 of the attorney general's  report and read,                                                               
"Tesoro  owns  or leases  several  tanker  trucks to  make  these                                                               
4:11:46 PM                                                                                                                    
REPRESENTATIVE PETERSEN disagreed  that consumers are subsidizing                                                               
jet  fuel.    His  theory  is  that  traditionally  the  aviation                                                               
industry and airlines  like to know in advance the  cost of fuel;                                                               
thus  they contract  in advance  for  30 to  60 days  to lock  in                                                               
prices and  set airfares.   Last year  the airlines  contracted a                                                               
price with the  refiners, but when the price of  oil went up, the                                                               
refiners sold  jet fuel  at a  significant loss.   That  kept the                                                               
wholesale  price up  until now.    Representative Petersen  noted                                                               
that the  graph on page 5  of the HJUD report  indicates there is                                                               
still a  large differential between  Alaska prices and  the Lower                                                               
48; therefore the companies have  to continue to keep prices high                                                               
to "get back to profitability."                                                                                                 
4:15:25 PM                                                                                                                    
MR.   SNIFFEN,   in    response   to   Representative   Petersen,                                                               
acknowledged  that may  have  been the  case  for some;  however,                                                               
airline contracts  are keyed  to market indices.   He  opined the                                                               
refiners would  not have  been losing  money because  losses were                                                               
tempered as prices moved with the market.                                                                                       
4:16:38 PM                                                                                                                    
REPRESENTATIVE PETERSEN  observed that  Alaska residents  want to                                                               
know  why  gasoline and  diesel  fuel  prices are  high;  neither                                                               
report gives a  definite answer.  He encouraged  the committee to                                                               
continue to look for satisfactory answers.                                                                                      
4:17:45 PM                                                                                                                    
REPRESENTATIVE RAMRAS read from Representative Lynn's addendum:                                                                 
     Trying to  get definitive  answers was difficult.   The                                                                    
     best  we could  do  was to  confirm  a multiplicity  of                                                                    
     factors is  involved.  Many of  the public explanations                                                                    
     by the  refinery representatives were a  rehash of what                                                                    
     we  already knew  or suspected.  ... I  have a  problem                                                                    
     with  government imposed  price  controls, whether  for                                                                    
     gasoline or  anything else.   Typically  price controls                                                                    
     are  counterproductive,   result  in   many  unintended                                                                    
     consequences,  and  create   more  problems  than  they                                                                    
REPRESENTATIVE RAMRAS read from Representative Holmes' addendum:                                                                
     First, the attorney general's  office has been studying                                                                    
     this issue  in greater depth  and its public  report is                                                                    
     expected  in  the very  near  future;   this  committee                                                                    
     would   benefit   from   seeing  that   report   before                                                                    
     finalizing our own. ... Second,  the report comments on                                                                    
     newly  introduced legislation  that  has  not yet  been                                                                    
     heard by any committee, let alone by this committee.                                                                       
REPRESENTATIVE  RAMRAS   read  from   Representative  Gruenberg's                                                               
     ...  it  was  unfortunate  that we  do  not  have  that                                                                    
     department's    thinking    before   publishing    this                                                                    
     committee's report.  ... The laws of  other states were                                                                    
     not  adequately   discussed,  there   was  insufficient                                                                    
     review  of  other  state [laws],  such  as  those  from                                                                    
     Hawaii and  North Carolina. ... [The  report] offers no                                                                    
     serious discussion on whether  government should take a                                                                    
     more active role  in solving the problem.   Finally the                                                                    
     report  paints a  doomsday portrait  should HB  68 pass                                                                    
     before hearings  have ever been scheduled  on the bill.                                                                    
     Ultimately, the  report concludes that  the legislature                                                                    
     is powerless to do anything about the problem.                                                                             
REPRESENTATIVE  RAMRAS invited  Mr.  Sniffen to  speak about  the                                                               
subpoena  process  used  in  the  DOL  investigation,  and  about                                                               
Hawaii's experience with price regulation.                                                                                      
4:21:01 PM                                                                                                                    
CO-CHAIR MILLETT asked Mr. Sniffen  whether his report discovered                                                               
that any anti-trust laws were broken.                                                                                           
4:21:38 PM                                                                                                                    
MR. SNIFFEN  said no.   In response  to Representative  Ramras he                                                               
described Hawaii's price  regulation  legislation.   In 2005, the                                                               
power to regulate the wholesale  price of gasoline was granted to                                                               
the Hawaii  Public Utilities Commission.   The  legislation keyed                                                               
the maximum price  allowed the two Hawaii refiners  to Gulf Coast                                                               
and  West Coast  prices.   After  Hurricane  Katrina, Gulf  Coast                                                               
prices were  driven up,  and the  refiners immediately  set their                                                               
prices at  the maximum allowable.   He opined that the  price cap                                                               
creates a  "safe harbor," that encourages  manufacturers to price                                                               
products at  the cap.  On  the subject of subpoenas,  Mr. Sniffen                                                               
affirmed   during   his   investigation   subpoenas   and   civil                                                               
investigative demands (CIDs)  were  issued for interviews and for                                                               
written  information  from   the  refineries,  distributors,  and                                                               
retailers.   Thousands of documents regarding  pricing strategies                                                               
and  wholesale contracts  were  studied.   He  said  that he  was                                                               
"comfortable  that  the  conclusions we  reached  are  absolutely                                                               
accurate  and correct."  In response  to Representative  Edgmon's                                                               
comment about price  gouging, he advised that in  Alaska law, the                                                               
only thing  illegal about pricing  could be  anti-trust behavior,                                                               
or  "unconscionable" pricing  that violates  the Alaska  Consumer                                                               
Protection Act.   He concluded  that gas prices are  high because                                                               
the  market is  at  work and  there is  not  much competition  in                                                               
Alaska; these conditions allow the  gasoline wholesalers to price                                                               
their  products  as   they  are  unless  there   is  evidence  of                                                               
4:27:07 PM                                                                                                                    
REPRESENTATIVE  JOHANSEN expressed  his  disappointment that  the                                                               
HJUD report did  not include Southeast and Western  Alaska in its                                                               
investigation.   He recalled  two prior  reports on  gas pricing,                                                               
one  issued during  the Knowles  Administration, that  also found                                                               
nothing wrong. He said that he has  faith in the work done by the                                                               
DOL.  Regarding price  gouging he  referred to  page [11]  of the                                                               
attorney general's report and read:                                                                                             
      Simply having a high price for gasoline is not price                                                                      
     gouging in Alaska, even if those prices are in excess                                                                      
     of prices in other parts of the country.                                                                                   
REPRESENTATIVE JOHANSEN  understood the difficulty  to consumers,                                                               
especially  those  communities limited  to  bulk  fuel supply  by                                                               
barge  lines or  air  service.   He  described  the situation  in                                                               
4:31:35 PM                                                                                                                    
MR.  SNIFFEN, in  response  to  Representative Ramras,  confirmed                                                               
that  the attorney  general's office  holds broad  subpoena power                                                               
not  subject to  judicial  approval.   He said  that  he was  not                                                               
familiar with  legislative subpoena  power.  In  further response                                                               
to Representative  Ramras, he said  that the report  was produced                                                               
by himself,  as the primary and  only attorney, with the  help of                                                               
an  investigator and  an economist  with Econ  One Research  Inc.                                                               
(Econ One).  The contract with Econ One cost under $150,000.                                                                    
4:33:46 PM                                                                                                                    
REPRESENTATIVE  RAMRAS pointed  out that  the HJUD  committee did                                                               
not  have subpoena  powers or  CIDs, and  had no  investigator or                                                               
support  from  an  economist.    He  opined  the  HJUD  committee                                                               
produced  a report  in agreement  with the  attorney general  and                                                               
that also  presented a  hypothesis beyond  the scope  of previous                                                               
reports.  He asked Mr.  Sniffen whether price gouging legislation                                                               
would prevent high prices.                                                                                                      
4:35:22 PM                                                                                                                    
MR.  SNIFFEN acknowledged  the difficulty  of  this question  and                                                               
cited the  problem that  arose in  Hawaii.   He opined  there are                                                               
potential risks,  such as  driving refiners  out of  business and                                                               
forcing  prices higher.   In  response to  Representative Ramras,                                                               
Mr.  Sniffen  provided  his resume  and  title.  Regarding  price                                                               
gouging regulation,  he said that  he held no authority  to speak                                                               
to the DOL position with regard to regulatory legislation.                                                                      
4:38:05 PM                                                                                                                    
REPRESENTATIVE  TUCK   stated  his  appreciation  for   the  HJUD                                                               
committee  report.   He  referred  to the  graph  on  page 5  and                                                               
surmised  the blue  line representing  average  USA prices  would                                                               
have been lower had Alaska prices not been included.                                                                            
4:39:28 PM                                                                                                                    
JANE  PIERSON,  Chief  of Staff  to  Representative  Jay  Ramras,                                                               
Alaska State Legislature, agreed.                                                                                               
4:39:40 PM                                                                                                                    
REPRESENTATIVE  TUCK  noted  that  gasoline prices  in  July  and                                                               
August could have been as high as  $7 per gallon and asked for an                                                               
4:39:54 PM                                                                                                                    
MS. PIERSON  opined during this time  there was a glut  on market                                                               
and  this   was  also  the   time  of  highest  use   in  Alaska.                                                               
Furthermore, in Alaska change does not  come as quickly as in the                                                               
Lower 48.                                                                                                                       
4:40:42 PM                                                                                                                    
REPRESENTATIVE  TUCK referred  to  a 2008  Reuters [news  agency]                                                               
report and read:                                                                                                                
     American  based companies  are shipping  record amounts                                                                    
     of  gasoline and  diesel fuel  to other  countries.   A                                                                    
     record of 1.6 billion barrels  a day for the first four                                                                    
     months  of  this  year  up   to  33  percent  from  1.2                                                                    
     [billion] barrels prior to that year.                                                                                      
REPRESENTATIVE  TUCK  observed  that  a shortage  of  oil  causes                                                               
prices to up, but there was  no shortage.  Referring to the chart                                                               
on  page  13 of  the  HJUD  report,  he asked  whether  petroleum                                                               
products refined in Alaska are exported.                                                                                        
4:42:32 PM                                                                                                                    
MS. PIERSON  advised that  Alaska does  not export  gas; however,                                                               
she was unsure  about jet aviation fuel.  In  further response to                                                               
Representative Tuck,  she said  that Alaska  consumes all  of the                                                               
gas it refines.                                                                                                                 
4:43:03 PM                                                                                                                    
REPRESENTATIVE  PETERSEN   relayed  in  Hawaii   the  legislature                                                               
regulated  the price  of  gas, but  not of  diesel  fuel.   After                                                               
Hurricane Katrina, gas  prices came down due  to the regulations,                                                               
but the  price of diesel fuel  stayed high.  He  then asked about                                                               
"cross subsidization" and  how much is added to the  price of gas                                                               
to subsidize jet fuel.                                                                                                          
4:44:10 PM                                                                                                                    
REPRESENTATIVE RAMRAS said he was not  sure.  He gave the example                                                               
of Agrium  Inc., and surmised the  price of jet aviation  was the                                                               
same for all  consumers.   He did not  offer the legal definition                                                               
of the term "cross subsidization."                                                                                              
4:46:14 PM                                                                                                                    
REPRESENTATIVE PETERSEN asked whether  the residents of the North                                                               
Star Borough  are subsidizing  jet fuel  by paying  higher prices                                                               
for home heating fuel.                                                                                                          
4:46:39 PM                                                                                                                    
REPRESENTATIVE  RAMRAS assured  Representative Petersen  that the                                                               
residents of  Fairbanks are subsidizing the  economy of Anchorage                                                               
because,  if  the HJUD  committee  theory  is correct,  they  are                                                               
paying higher prices to protect  the supply of aviation fuel that                                                               
supports jobs in  Anchorage.  He strongly expressed  his point of                                                               
view supporting a free market over more government control.                                                                     
4:47:51 PM                                                                                                                    
CO-CHAIR MILLETT  asked Mr.  Sniffen for  historical data  on how                                                               
many previous  reports have been  issued by the  attorney general                                                               
on Alaska gasoline pricing.                                                                                                     
4:48:07 PM                                                                                                                    
MR. SNIFFEN  said that he  was aware of  one other that  began in                                                               
1999.      The   investigation   was  slowed   by   debate   over                                                               
confidentiality and an interim report  was issued in 2000 and the                                                               
closing report  was issued in  2002. These reports  are available                                                               
for  the committee.   Interestingly,  in  the 80's  there was  an                                                               
investigation of  gasoline prices  that resulted  in prosecutions                                                               
of anti-trust violations  in Anchorage.  In  response to Co-Chair                                                               
Millett,  he added  that  two or  three  independent gas  station                                                               
owners were involved, and the refineries were not.                                                                              
4:51:01 PM                                                                                                                    
REPRESENTATIVE   JOHANSEN  corrected   his  previous   statement,                                                               
although the reports come to the same conclusion, he said.                                                                      
4:51:32 PM                                                                                                                    
REPRESENTATIVE PETERSEN recalled that  the price of gasoline went                                                               
down as a result of the investigation.                                                                                          
4:52:13 PM                                                                                                                    
REPRESENTATIVE  RAMRAS  pointed out  that  gas  prices came  down                                                               
after the HJUD committee investigation.                                                                                         
4:53:09 PM                                                                                                                    
REPRESENTATIVE  TUCK assumed  that Alaska  is self  sustaining as                                                               
far as  its source of  gas.   Furthermore, according to  the HJUD                                                               
committee report, it  is not cost effective for  another party to                                                               
enter the market outside of the  existing refineries.  If this is                                                               
so, there  is no reason  that Alaska  prices would increase.   He                                                               
then turned to page 9, and paraphrased:                                                                                         
     Pricing strategies and the refining/distribution costs                                                                     
        ... have global and regional factors, ... which                                                                         
     include but  are not limited to  electricity costs, gas                                                                    
     fuel cost,  environmental regulations,  equipment cost,                                                                    
     maintenance  cost,   labor  costs   and  the   cost  of                                                                    
     additional capital investments that  may be required by                                                                    
     regulation changes.                                                                                                        
REPRESENTATIVE  TUCK  understood  the   increase  in  energy  and                                                               
equipment  costs and  asked whether  there have  been changes  in                                                               
environmental regulations.   If not,  and Alaska is  refining its                                                               
own gas, there was no reason for the increase in prices.                                                                        
4:55:48 PM                                                                                                                    
MS.  PIERSON confirmed  that there  have  been strict  regulatory                                                               
standards,  especially  regarding  the production  of  low-sulfur                                                               
diesel; in fact, Tesoro is  the only facility in Alaska producing                                                               
low-sulfur diesel.                                                                                                              
4:56:28 PM                                                                                                                    
REPRESENTATIVE TUCK maintained his question.                                                                                    
4:56:44 PM                                                                                                                    
CO-CHAIR  EDGMON stated  his appreciation  of both  reports.   He                                                               
noted frustration over high prices  in Alaska; however, no one is                                                               
breaking the  law and market  forces prevail in Alaska  and other                                                               
states.   He cautioned about the  danger of crossing the  line to                                                               
unfair  trade practices.   Representative  Edgmon concluded  that                                                               
there  is a  business relationship  between major  refineries and                                                               
the  outlets  in  Anchorage  and   questions  remain  for  expert                                                               
witnesses.    He cited  the  situation  in Western  Alaska  where                                                               
residents  are  "paying  incredibly  high  prices  with  no  real                                                               
understanding  of  what  goes  into  ...  the  [overall]  pricing                                                               
4:59:14 PM                                                                                                                    
CO-CHAIR MILLETT thanked the presenters.                                                                                        
4:59:30 PM                                                                                                                    
There being no  further business before the  committee, the House                                                               
Special Committee on Energy meeting was adjourned at 4:59 p.m.                                                                  

Document Name Date/Time Subjects
Retail Gasoline Study.pdf.pdf HENE 2/12/2009 3:00:00 PM
2008GasolinePricingReport.pdf HENE 2/12/2009 3:00:00 PM