Legislature(2007 - 2008)FBX LIO Conf Rm
09/10/2008 09:00 AM House JUDICIARY
| Audio | Topic |
|---|---|
| Start | |
| Overview(s): Matters Pertaining to the High Gas and Heating Oil Prices in Alaska | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE JUDICIARY STANDING COMMITTEE
Fairbanks, Alaska
September 10, 2008
9:14 a.m.
MEMBERS PRESENT
Representative Jay Ramras, Chair
Representative Nancy Dahlstrom, Vice Chair (via teleconference)
Representative John Coghill
Representative Max Gruenberg
Representative Lindsey Holmes
MEMBERS ABSENT
Representative Bob Lynn
Representative Ralph Samuels
COMMITTEE CALENDAR
OVERVIEW(S): MATTERS PERTAINING TO THE HIGH GAS AND HEATING OIL
PRICES IN ALASKA AND WHY GAS PRICES HAVE FALLEN IN THE LOWER 48
BUT NOT IN ALASKA
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
LOIS HEIN, Co-Owner
Riverview Quick Stop, Inc.
North Pole, Alaska
POSITION STATEMENT: Provided comments and responded to
questions during the presentation on matters pertaining to the
high gasoline and heating oil prices in Alaska.
REPRESENTATIVE DAVID GUTTENBERG
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Asked questions during the presentation on
matters pertaining to the high gasoline and heating oil prices
in Alaska.
CLYDE (ED) SNIFFEN, JR., Senior Assistant Attorney General
Commercial/Fair Business Section
Civil Division (Anchorage)
Department of Law (DOL)
Anchorage, Alaska
POSITION STATEMENT: Provided comments and answered questions
during the presentation on matters pertaining to the high
gasoline and heating oil prices in Alaska.
REPRESENTATIVE MIKE HAWKER
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Provided comments and asked questions
during the presentation on matters pertaining to the high
gasoline and heating oil prices in Alaska.
JANE W. PIERSON, Staff
to Representative Jay Ramras
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Responded to a question during the
presentation on matters pertaining to the high gasoline and
heating oil prices in Alaska.
REPRESENTATIVE BOB ROSES
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Asked questions and provided comments
during the presentation on matters pertaining to the high
gasoline and heating oil prices in Alaska.
JEFF COOK, Director
External Affairs
Flint Hills Resources
North Pole, Alaska
POSITION STATEMENT: Provided comments and responded to
questions during the presentation on matters pertaining to the
high gasoline and heating oil prices in Alaska.
REPRESENTATIVE SCOTT KAWASAKI
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Asked questions and provided comments
during the presentation on matters pertaining to the high
gasoline and heating oil prices in Alaska.
DOUG CHAPADOS, President
Petro Star Inc. (PSI)
Anchorage, Alaska
POSITION STATEMENT: Provided comments and responded to
questions during the presentation on matters pertaining to the
high gasoline and heating oil prices in Alaska.
KIP KNUDSON, Manager
External Affairs
Tesoro Alaska Company
Anchorage, Alaska
POSITION STATEMENT: Provided comments and responded to
questions during the presentation on matters pertaining to the
high gasoline and heating oil prices in Alaska.
RAY WEST, Senior Corporate Counsel
Safeway, Inc.
Pleasanton, California
POSITION STATEMENT: Provided comments and responded to
questions during the presentation on matters pertaining to the
high gasoline and heating oil prices in Alaska.
GLENDA WOOD, Director
Pricing and Promotion
Safeway, Inc.
Pleasanton, California
POSITION STATEMENT: Provided comments and responded to
questions during the presentation on matters pertaining to the
high gasoline and heating oil prices in Alaska.
JOE GULLEY, Manager
Denali District
Safeway, Inc.
Anchorage, Alaska
POSITION STATEMENT: Provided comments and responded to
questions during the presentation on matters pertaining to the
high gasoline and heating oil prices in Alaska.
LISA SUNDBORG, Office Manager
Alaska Petroleum Distributing Inc.
Fairbanks, Alaska
POSITION STATEMENT: Provided comments and responded to
questions during the presentation on matters pertaining to the
high gasoline and heating oil prices in Alaska.
ACTION NARRATIVE
CHAIR JAY RAMRAS called the House Judiciary Standing Committee
meeting to order at 9:14:06 AM. Representatives Gruenberg,
Dahlstrom (via teleconference), Holmes, and Ramras were present
at the call to order. Representative Coghill arrived as the
meeting was in progress.
^Overview(s): Matters pertaining to the high gas and heating
oil prices in Alaska
9:15:29 AM
CHAIR RAMRAS announced that the only order of business would be
consideration of matters pertaining to the high gas and heating
oil prices in Alaska and why gas prices have fallen in the Lower
48 but not in Alaska.
CHAIR RAMRAS relayed that he and Representative Harris have
discussed the issue of rising retail gasoline prices and whether
they are the result of "pricing power" in the market or of
inefficiencies in the market due to volume issues - consumption
[volume] or production [volume]. He offered his recollection
that antitrust issues were investigated during the Knowles
Administration, and the Department of Law (DOL) concluded that
the pricing situation at that time was not due to antitrust
behavior but was simply the result of the market. He mentioned
that the hearing today would be largely informational; that Mr.
Sniffen from the DOL would be providing an overview of the
State's current ongoing inquiry into these matters; that a
follow-up hearing would be held in about a month; that the House
Judiciary Standing Committee will be producing a report for the
legislature; and that energy issues and the cost of fuel oil,
gasoline, and natural gas are of importance to constituents.
9:21:32 AM
LOIS HEIN, Co-Owner, Riverview Quick Stop, Inc., relayed that a
couple of weeks ago she'd called for delivery of gasoline but
couldn't get it because of a slow-down in production, and
therefore had to "bag off" the pumps at her station. Upon
contacting Alaska Petroleum Distributing Inc. and Big State
Logistics, Inc., she discovered that "if we couldn't get gas
through the refinery, we were going to have to ship it in by
rail car," which would result in increased cost to consumers at
the pump. Not having gas at the pumps during bad times, she
remarked, makes things even worse, and these are very difficult
times right now. She noted that her customers have signed a
petition against the high price of fuel in Fairbanks; they are
distressed that gasoline prices across the nation are going down
as is the price per barrel of oil and yet those decreases aren't
reflected in the price they are paying at the pump.
MS. HEIN noted that there had been a $.20 decrease in the price
of [gasoline] a couple of weeks ago, as well as an $.08 decrease
when the governor's legislation repealing the State's motor fuel
tax took effect. She expressed favor with the investigatory
efforts being undertaken, adding that many people feel that they
have no recourse, and that she is seeing a lot of people who are
going to have to move. In response to questions, she indicated
that many people signed the aforementioned petition, and that
she would be providing the signed petition to the committee and
to Governor Palin.
CHAIR RAMRAS said the committee would include a copy in its
forthcoming report and forward a copy to the "appropriate state
agencies."
MS. HEIN relayed her comfort with that proposal, adding, "I
would like to be able tell the people, who are asking daily,
that they do have a voice, [that] ... the State works for them -
... we aren't forgotten little people." In response to
questions, she explained that her company buys gasoline from
Alaska Petroleum Distributing Inc, the vendor from the refinery,
and that there have been no previous problems getting gasoline.
9:25:42 AM
REPRESENTATIVE GRUENBERG noted that his research indicates that
other states are considering "anti-gouging" legislation, though
the protections in a number of those pieces of legislation are
only triggered by the declaration of a state of emergency. One
state, however, has considered broadening the definition of a
"state of emergency" to include an "economic emergency". He
asked Ms. Hein whether she thinks it would be appropriate for
Alaska to do something similar.
MS. HEIN indicated that she thinks that the current situation
could be considered an economic emergency, adding that she is
aware of people who are not able to pay their utility bill and
their fuel bill and their rent. Furthermore, prices in the
grocery store are rising, and vendors are raising their prices
three to four times a year as well. "It's affecting everything
right down the chain," she remarked, adding that people just
can't afford "to live here." In response to further questions,
she said that every week the price of gasoline has been going
up; that her company has been having difficulty buying product
because she couldn't afford to pay that much more to the
gasoline company every week; that in the last year, for example,
the cost of gasoline has risen close to $1/gallon; and that
currently the price of gasoline at her pumps is $4.38/gallon.
CHAIR RAMRAS asked Ms. Hein what her "margin is" per gallon,
what the fees currently are for credit card users compared to a
year ago, and what volume of gasoline she sells compared to
other retail gas stations associated with large stores.
MS. HEIN said that her company has a markup of $.20/gallon; pays
[$.05/gallon] on credit card purchases; and used to sell about
700 gallons/day but now only sells about 300 gallons/day. She
said she assumes that this drop is due to people driving less.
She noted that she charges about $.20 more per gallon than some
gas stations located in town, such as "Fred Meyer," "Safeway,"
and "Holiday."
9:30:35 AM
REPRESENTATIVE DAVID GUTTENBERG, Alaska State Legislature, asked
Ms. Hein whether, when her distributors told her that gasoline
was not available, she was given a reason why production was
down.
MS. HEIN said she was simply told that there was a problem at
the refinery, and only discovered later that production had
stopped.
REPRESENTATIVE GUTTENBERG asked whether that was due to the
refinery making less gasoline in favor of making more jet fuel.
MS. HEIN said she was not given that information.
REPRESENTATIVE GRUENBERG offered his understanding that Section
3 of North Carolina's proposed House Bill 653 expands the
definition of "disaster" to include "economic well-being".
CHAIR RAMRAS indicated that the committee would be pursuing
these issues well into October and on into the next legislative
session.
9:34:52 AM
CLYDE (ED) SNIFFEN, JR., Senior Assistant Attorney General,
Commercial/Fair Business Section, Civil Division (Anchorage),
Department of Law (DOL), relayed that he focuses on enforcing
Alaska's consumer protection and antitrust statutes, and that
although he was not in that position when the aforementioned
previous gasoline-pricing investigation occurred, he was when
the final report was issued. That investigation, which looked
at gasoline pricing in Alaska from the mid-1990s to 2000,
focused on whether there was anything illegal about the pricing,
and the report concluded that there was not. The attorney
general is now again looking at those issues.
MR. SNIFFEN relayed that although he is sympathetic to concerns
that the high price of gasoline is causing people to think about
leaving Alaska, it also raises the questions of, "What do we
want to do about it?" and "What can we do about it, from a legal
perspective?" For the most part, [the State] doesn't control
what prices businesses set for their goods and services; there
is no law that says businesses can only sell their products at
cost plus a certain amount of profit. Instead, [the State]
relies on the market to set prices; businesses sell their
products for whatever consumers are willing to pay for them.
One of the unfortunate aspects of gasoline is that the demand
for it is relatively inelastic regardless of price. Lacking an
[adequate] public transportation system in Alaska, people have
to buy gasoline in order to travel to and from work, for
example, particularly in the winter months. This inelasticity
regarding demand seems to have a huge impact on pricing.
MR. SNIFFEN suggested that one way to help the market drive
prices down would be to lower the demand for it, though that
could prove to be difficult. Another thing to consider is
whether there is anything illegal going on with regard to
gasoline pricing. Alaska currently doesn't have a "price-
gouging" statute - the State can't simply tell a business that
it is charging too much for a product. Furthermore, price-
gouging statutes in other states are all triggered by a declared
state of emergency - when Hurricane Katrina hit, for example,
there was a declared state of emergency, and [Louisiana's]
price-gouging statute prohibited businesses from raising prices
during that state of emergency and thereby taking advantage of
consumer fears - so even if Alaska did have a similar statute,
it probably wouldn't apply under the current circumstances.
MR. SNIFFEN relayed that although a price-gouging statute
triggered by economic strife of some kind might be warranted in
Alaska, he is leery about having legislation interfere with
market forces. He acknowledged, though, that such would be a
policy call for the legislature to make. Alaska's antitrust
laws, on the other hand, also help to control pricing in a
peripheral manner, and are aimed at keeping the market
competitive. The State doesn't want competitors colluding with
each other or doing things that disrupt the normal operation of
the market. Fair competition drives prices down, and benefits
consumers. Alaska's antitrust laws are limited in scope in that
they target exclusionary conduct and conduct that suggests that
price fixing or coordinated activity has occurred. From an
antitrust perspective, the DOL will look to see whether
businesses are colluding with each other in some way to keep the
price of gasoline at a certain level, or whether individual
businesses are attempting to exercise market power in an illegal
fashion in order to keep gasoline prices high.
9:41:22 AM
MR. SNIFFEN said that when it comes to the pricing of goods and
services, the legal remedies are narrow and few. When there is
no collusion or other illegal antitrust conduct occurring, and
the market is operating competitively, then prices are simply
what prices are; it's really just a supply-and-demand world, and
supply and demand affects prices. One reason for the recent
shortage of gasoline in the Fairbanks area, he surmised,
pertained to an operational issue at the refinery - some
components required in the manufacture of gasoline had to be
repaired and it took several weeks for that to occur. Such
operational issues can account for spikes [in supply and
therefore price].
CHAIR RAMRAS offered his understanding that Tesoro Corporation,
as a publicly traded company, lost 75 percent of its market
value over the last year; and that research indicates that
that's due to a lack of pricing power at the refinery level -
that as the price of gas goes up, consumption goes down, and so
refiners lose their margin. He said he's heard arguments that
had the price of gasoline truly followed the price of a barrel
of oil, the price of gasoline might have gone as high as
$6.00/gallon. Consumers, he surmised, related the price of
gasoline to the price of a barrel of oil and thus assumed that
there should now be a correlating decrease in price. After
referring to the Healy Clean Coal Plant (HCCP), Chair Ramras
said that he'd met with the CEO of Golden Valley Electric
Association (GVEA), and offered his understanding that GVEA
estimates the price of oil going forward 90 days, missed a
"radical" move in the market and so lost over $25 million, and
has since only been able to recapture $2.5 million of that loss
every month and thus it will take GVEA 10 months of price
correction to recoup the total $25 million. Consumers, on the
other hand, see only that the price they are paying has not
correspondingly dropped with the drop in the price of a barrel
of oil. He relayed that GVEA has indicated that it will have to
recoup the aforementioned $25 million loss before it can "re-
price" [its rates] to correlate with the [current] cost of
diesel, which generates the majority of [GVEA's electric]
kilowatts.
CHAIR RAMRAS, remarking that the state is somewhat responsible
for the high price of oil because it's selling its royalty oil
at the premium price that the market will bear, asked Mr.
Sniffen to speak about "pricing for retail customers ... and the
disconnect that may exist between [the] price of a barrel of
oil, the relationship to refining, and how long consumers have
to wait until that relationship is restored."
MR. SNIFFEN, suggesting that representatives from the refineries
might be better able to respond to those points, relayed that
the administration has retained the services of a petroleum
economist - Barry Pulliam, senior economist at Econ One
Research, Inc. - and that he and Mr. Pulliam have discussed the
fact that the retail price of gasoline did not correspondingly
go as high as the price of a barrel of oil, thus resulting in a
deficit for some refineries, which in turn have delayed
decreasing their prices until they can recoup their loses.
Historical data regarding the price of gasoline in Alaska's
Railbelt communities - Anchorage, Fairbanks, Kenai - illustrates
a trend for the price of gasoline to lag a bit behind "what the
market has done." Even Seattle, for example, lags behind the
national market, and Alaska lags even a bit further behind.
MR. SNIFFEN remarked that the current lag has been particularly
long, and that even when the prices elsewhere started to fall,
the prices in Alaska still have not, even a month later. Mr.
Pulliam, Mr. Sniffen relayed, has indicated that perhaps some
other operational issues in Alaska have been a factor in keeping
prices in Alaska up. Mr. Sniffen said that [he and Mr. Pulliam]
will be investigating that point further. Mr. Sniffen suggested
that the fast and dramatic increases in the price of a barrel of
oil caught everybody off guard, and so it may be awhile before
prices come down further, though the suspension of the State's
motor fuel tax has resulted in a bit of a decrease.
9:49:19 AM
CHAIR RAMRAS referred to a chart in members' packets which
illustrates average gasoline prices, gasoline prices a month
ago, and gasoline prices a year ago, in Alaska, Idaho, Montana,
North Dakota, South Dakota, Washington, and the U.S. as a whole.
He remarked that North Dakota is similar to Alaska in that the
population is small, it's rural in nature, there's no population
density, it's an oil exporter and an oil producer, and has one
refinery. Consumers in Alaska, he remarked, have put forth the
argument that since the state owns the oil, they ought to be
able to purchase it for less. Chair Ramras expressed interest
in having Mr. Pulliam testify during the next hearing on these
issues, as well as in obtaining information from states with
characteristics similar to those of Alaska.
MR. SNIFFEN, in response to a question, proffered that the
current high cost of gasoline in Alaska might be causing some
people to purchase their gasoline at stations that have cheaper
prices. So although the volume of gasoline sold at Ms. Hein's
station, for example, has decreased, he doesn't know whether the
total volume of gasoline sold in the Fairbanks area has
necessarily decreased. He surmised that in some communities
where residents have the ability to cut down on consumption,
there has been a decrease in consumption. Consumption has gone
down even in Anchorage, for example, but only by a small
fraction, nothing large enough to have affected [retailers']
pricing decisions.
REPRESENTATIVE GRUENBERG asked whether Alaska has developed any
common law that would remedy "this."
MR. SNIFFEN offered his understanding that if prices rose to an
unconscionable level, that there is a "rule of equity" which
might allow the argument to be made that a business's pricing is
so outrageous that it's unfair and thus shouldn't be allowed.
He added, however, that he hasn't ever seen that [argument]
successfully applied to the price of gasoline. In response to a
question, he indicated that in cases where that theory has been
raised, there has almost always been a better theory raised as
well - such as that fraud or a consumer protection violation
occurred that resulted in the unconscionable price - and so the
fact of a high price alone has not been the focus [of any
subsequent investigation]. In response to another question, he
observed that almost all consumer protection statutes are code-
based.
9:54:59 AM
REPRESENTATIVE MIKE HAWKER, Alaska State Legislature, remarked
that there is precedent for the state to regulate the price of
essential life services via the Regulatory Commission of Alaska
(RCA), so the state could simply regulate all refining and
distribution of petroleum products. Should something like that
occur, he asked, would that result in consumers having to absorb
the entirety of such losses as those mentioned earlier? In
other words, would the price of petroleum products simply go up
even higher under a regulated environment?
MR. SNIFFEN surmised that that could be a possibility. He noted
that when Hawaii put its refineries under regulatory control a
few years ago, prices went up right away to the maximum allowed
by statute and then never came down. Doing something similar in
Alaska would be very difficult, he opined, and mentioned that
Mr. Pulliam had been involved in coming up with Hawaii's
regulatory framework. Under Alaska's current regulatory regime,
if a utility company wants to set a price for delivery of its
gas, it has to go before the RCA for a rate hearing. So if the
refineries in Alaska had their rates set by the RCA, and
something happened whereby they incurred a lot of costs, they
would either have to seek some emergency relief from the RCA or
wait until their next regular rate hearing before adjusting
their rates and trying to recover their loses. This would be
difficult, he again opined, because crude oil markets move far
more dynamically than those associated with other types of
energy utilities that the state already regulates.
REPRESENTATIVE HAWKER asked whether the courts have ruled that
the state may not sell its royalty oil below market price.
MR. SNIFFEN said yes, adding that there is also a constitutional
requirement for the state to sell its royalty oil at market
rates so as to maximize the state's resources for the benefit of
the people, and companies like Tesoro Corporation and Flint
Hills Resources must pay the price set in the world market.
REPRESENTATIVE HAWKER, referring to the aforementioned chart,
asked whether the column listing taxes includes excise taxes.
10:01:41 AM
JANE W. PIERSON, Staff to Representative Jay Ramras, Alaska
State Legislature, said that that column just lists sales taxes.
MR. SNIFFEN, in response to comments and a question, offered his
understanding that when a refinery manufactures a gasoline
product, it goes to various types of gas stations in a variety
of ways. For example, there are company-owned gas stations that
are affiliated with the refinery in some way - they may be
leased through the company that owns the refinery, or they may
be "branded" stations, which have to comply with certain
requirements - and then there are some independent gas stations
that use various distributors to transport fuel to them from the
refinery. Furthermore, some independent gas stations might have
the resources to buy their own fuel trucks, and so will just go
pick up their own fuel.
MR. SNIFFEN indicated that most gas stations, though, have some
kind of a relationship with a refinery - via some kind of
agreement, which might include a reduction from the "rack rate"
- and have gas delivered through various types of transportation
companies. Pricing decisions are primarily left to the retail
stations, and are clearly driven by the refinery's price for
gasoline at the rack, which is the term used for the outlet at
the refinery where the gasoline is sold and picked up by the
fuel trucks. A rack rate is what the refinery is selling its
gas for at the rack, various services track rack rate
information for refineries around the world, and the
administration is using Oil Price Information Service (OPIS) to
track rack rates as part of its investigation.
MR. SNIFFEN explained that jobbers are entities that transport
fuel from the rack to the different stations, and are related to
the gas stations owners and the refineries in some way. There
are also independent distributors that own fuel trucks and
transport fuel to anyone who needs it, charging so much per
gallon for that service.
REPRESENTATIVE COGHILL, remarking that his father worked as a
jobber, offered his belief that jobbers have "brand loyalty."
MR. SNIFFEN concurred.
10:09:30 AM
REPRESENTATIVE BOB ROSES, Alaska State Legislature, asked Mr.
Sniffen whether he was familiar with "the antitrust prosecution
that occurred against independent service station owners back in
the '70s."
MR. SNIFFEN said he is familiar with that prosecution as well as
with an investigation that occurred in the early or mid-'90s in
which it was found that there was some collusion occurring,
though he is not sure whether the subject of that investigation
was indicted or subjected to criminal penalties.
REPRESENTATIVE ROSES, referring to the [prosecution] that
occurred in the '70s, explained that the State brought a lawsuit
against 18 different service station owners and that there were
about 30 stations involved because some of the people under
investigation owned several stations. This occurred back when
there were gas shortages all over the country, and [as one of
those service station owners, he'd] get calls from his
distributor five times a day saying that the price of gasoline
had changed again. During those times, if a service station
owner was lucky enough to buy 10,000 gallons of gasoline at one
of the day's low prices, then he/she could actually make a
profit, but if not, then he/she would end up "giving it away" in
order to stay competitive with other service stations.
Representative Roses explained that he was one of the
aforementioned 18 service station owners.
10:12:33 AM
JEFF COOK, Director, External Affairs, Flint Hills Resources,
paraphrased from his written testimony, which in part read
[original punctuation provided]:
Our Company has more than 60 years of experience in
the refining business. Along with the North Pole
Refinery, which we have owned since 2004, we also own
and operate refineries in Minnesota and Texas.
The North Pole Refinery began operating in 1977,
shortly after the TransAlaska Pipeline System was
completed. The facility has gone through various
modifications over the years, but its basic
configuration has remained unchanged. Our refinery is
a topping plant meaning it lacks the sophisticated
processing capability to turn all of the crude oil
that comes into the plant into refined products.
The North Pole Refinery takes in between 180,000 to
220,000 barrels per day of crude oil. We heat that
crude oil to distill it into a few basic products
which we retain to sell. The rest of the stream is
then returned to TAPS. As a result, we keep only
about 50,000 barrels a day of saleable products, the
majority of which is jet fuel. In addition, we keep a
quantity of fuel that is used to heat the crude oil in
the refining process.
There were many topping plants operating in the United
States when the North Pole Refinery opened for
business in 1977. Now, there are just a few.
Increased environmental emissions regulations caused
many topping plants to shut down and increasingly
stringent federal requirements on the type of fuels
produced forced others to close.
The North Pole Refinery was able to keep pace with new
environmental regulations but the changes in the type
of fuels required has impacted the amount of gasoline
that can be produced at our North Pole plant.
Since federally mandated decreases in sulfur content
for gasoline and diesel fuel came into effect in the
last few years, our ability to produce those two fuels
has been substantially diminished. While the refinery
still produces some gasoline and off-road diesel, we
now buy gasoline and diesel fuel from other sources in
order to meet the full needs of our customers.
We are not in the crude production business nor do we
own retail stations and all of our products are sold
on the wholesale market.
It's also important to note that we provide less than
one-fifth of the gasoline used in Alaska and only a
third of the heating fuel in the Fairbanks area.
10:16:17 AM
CHAIR RAMRAS offered his understanding that Flint Hills
Resources is contemplating taking "draconian measures" because
it is having a difficult time staying in business and has
ongoing tension with the State; that most refineries are able to
use natural gas to refine their products into gasoline; that the
price of natural gas is equivalent to oil at about $45 per
barrel; and that Flint Hills Resources is still using oil to
refine its products into gasoline, resulting in more cost
compared to the refinery at Nikiski, which, he said he assumes,
uses natural gas.
MR. COOK relayed that Flint Hills Resources has to refine its
crude oil into the product - basically, gasoline - it uses to
run its refinery in North Pole, so the high prices of crude oil
have definitely impacted the company. Most refineries in the
country do run on natural gas, and this puts the North Pole
refinery at a competitive disadvantage. It costs about
$21/MMBtu (million British thermal units) to run that refinery.
CHAIR RAMRAS offered his belief that "usually the energy
equivalent between natural gas and oil is six to one"; that the
current price of natural gas at the Henry Hub is about $7; and
that the current price of Alaska North Slope (ANS) crude oil
will be about $100 per barrel. If there was natural gas in
Fairbanks, would Flint Hills Resources be able to refine its
product for less, he asked. And, if so, would Flint Hills
Resources pass that savings on to the consumer?
MR. COOK said that if that natural gas were to be priced similar
to what it's priced in the Anchorage area, it would certainly
reduce his company's costs significantly, though long-term
market forces are what define price.
CHAIR RAMRAS surmised that if Flint Hills Resources were to
change the type of fuel it uses to refine its product, it would
result in future savings for consumers. He offered his
understanding that 1 Bcf/year would supply the Fairbanks market,
and that Flint Hills Resources would use about 5 Bcf "in order
to swap natural gas for the function that oil is playing in
refining products at the topping plant."
MR. COOK, in response to questions, indicated that some of his
company's proprietary information could be provided to the
legislature as long as confidentiality agreements were signed.
10:22:06 AM
REPRESENTATIVE HAWKER asked what it would cost to convert the
North Pole refinery so that it could use natural gas to refine
its products.
MR. COOK said he would try to provide that information to the
committee.
REPRESENTATIVE GRUENBERG raised the issue of "zone pricing," and
noted that proposed legislation in New York would make such
illegal; that legislation - NY A 2641 - in part reads: "PRICES
SET PURSUANT TO THE PRACTICE OF ZONE PRICING, WHEREBY A
WHOLESALE OR RETAIL DISTRIBUTOR OF MOTOR FUELS SETS PRICES ON
THE BASIS OF GEOGRAPHIC REGIONS, SHALL BE DEEMED TO BE
UNCONSCIONABLY EXCESSIVE AND SUCH PRACTICE OF ZONE PRICING SHALL
BE PROHIBITED." Representative Gruenberg asked Mr. Cook whether
he's heard of zone pricing taking place in Alaska.
MR. COOK said he has not.
10:24:23 AM
REPRESENTATIVE SCOTT KAWASAKI, Alaska State Legislature, asked
how Flint Hills Resources determines what its rack price for
heating fuel will be.
MR. COOK said that there is no specific formula that's used, and
that market forces set the price and Flint Hills Resources must
remain competitive in order to stay in business.
REPRESENTATIVE ROSES offered his understanding that zone pricing
pertains to businesses that can access refineries in more than
one state, and is therefore not an issue in Alaska.
10:27:11 AM
DOUG CHAPADOS, President, Petro Star Inc. (PSI), paraphrased
from his written testimony, which in part read [original
punctuation provided]:
Petro Star was incorporated in 1984 and became a
wholly owned subsidiary of Arctic Slope Regional
Corporation (ASRC) in 1987. In terms of companywide
refining capacity, Petro Star is, by a wide margin,
the smallest in-state refiner and the only one that is
owned and controlled by Alaskans. ...
Today Petro Star operates two refineries. North Pole
is our original plant and has a crude oil processing
capacity of 20,000 barrels/day. Our second plant is
located in Valdez and has a crude oil processing
capacity of 48,000 barrels/day. These very simple
topping units produce military and commercial jet fuel
and, with increasing restrictions, home heating oil
and diesel fuels.
In addition to refining, Petro Star also markets fuel
to end users in Interior, South Central, and Western
Alaska through our North Pacific and Sourdough Fuel
divisions. It is important to note that while we
refine crude oil, we do not produce gasoline. The
gasoline sold at the eleven convenience stores we
operate statewide is purchased from third parties.
For this reason, Petro Star is just like any other
gasoline retailer. ...
It is part of Petro Star's culture to be good
corporate citizens. We employ approximately 290
Alaskans, more than half of whom reside here in the
Fairbanks area. Our remaining employees can be found
in the other communities where we do business -
Kodiak, Unalaska, Valdez and Anchorage. Almost all of
ASRC's 9,600 shareholders - our owners - live and work
in Alaska. We provide economic benefits in the form
of employment opportunities which positively impact
Alaska's economy, and by acting as a good community
partner.
Petro Star is very aware of, and sensitive to, the
negative impacts of high fuel costs on Alaskans. A
large majority of our employees and their families
live in areas where energy costs are extremely high.
It is mostly out of necessity that Alaskans live
energy intensive lifestyles, and we recognize that
high energy costs fall especially hard on the
residents of this state. High costs have also opened
the fuel industry to criticism, but we consider it a
privilege to provide this essential service,
especially in the more isolated regions of Alaska. ...
The challenges facing refiners across the country are
growing and this is especially true for small refiners
like Petro Star. Increasing environmental
regulations, such as the proposed carbon tax and the
ongoing implementation of low sulfur fuel standards to
name but two, pose significant economic challenges for
our company and undoubtedly will impact the prices
Alaskans pay for fuel in the future.
Modifying just one of our small refineries to produce
ultra-low sulfur diesel is estimated to cost
substantially more that it did to build the refineries
in the first place and we are now in the process of
deciding whether this huge investment can be justified
and what our options are if it can't. ...
Record high crude oil costs are a mixed blessing; on
one hand they provide substantial revenue to the state
treasury and help grow the Permanent Fund, yet these
same high crude oil prices also create very real
hardships for Alaskan families and businesses, and
impose drag on our nation's economy.
Though admittedly a short term solution, Petro Star
views the Resource Rebate as a positive step and can
report that we immediately implemented another
provision of this legislation by passing along the
savings from suspension of the State Motor Vehicle
Fuel Tax to our customers.
While the last few years have been good for Petro
Star, our business is volatile and good years are
often offset by bad ones. Being small, Petro Star
does not have the same economies of scale enjoyed by
our larger competitors, and while we always price our
products to be competitive, we are not in a position
to dictate the prices we pay for fuel or the market
prices of the products we produce.
Petro Star has deep roots in the state of Alaska and
we are committed to providing superior and competitive
services to our customers. We take pride in our
ability to successfully compete in the Alaska
marketplace and look forward to a continued positive
relationship with our customers, the communities in
which we do business, and the State of Alaska.
10:32:19 AM
CHAIR RAMRAS asked whether having access to natural gas in
Fairbanks would reduce Petro Star's production costs, and
whether the same would be true if there was natural gas
available in Valdez.
MR. CHAPADOS said natural gas would be cheaper than the fuels
Petro Star currently burns at its refineries, but pointed out
that there is some limit with regard to how much natural gas
could be used to supplant the existing fuels. For example,
there are components in the crude oil stream - when crude is
processed in the refinery - that are not practical to return to
the pipeline, and so those components are burned as refinery
fuel. Petro Star could take advantage of natural gas prices,
but not to the extent that it might at first appear. In
response to a question, he explained that low-sulfur fuel
standards are part of the Clean Air Act, began taking effect in
Alaska June 1, 2006, and address the sulfur content of diesel
fuels and gasoline. In response to another question, he
concurred that refined fuel is a value-added product, and
characterized it as a significant contributor to the state's
economy.
MR. CHAPADOS, in response to other questions, explained that
fuel-quality standards are set at the federal level; that Petro
Star has been designated by the Environmental Protection Agency
(EPA) as a small refiner; that that designation allows Petro
Star to delay complying with federal low-sulfur fuel standards
for roughly four years, but limits the volume of high-sulfur
fuels - such as diesel for off-road use and heating oil - that
it can sell from its two refineries; that the volume caps that
were imposed on Petro Star were based on years when the company
sold less volume; and that as a consequence, Petro Star must now
truck product from its refinery in the Interior down to
Southcentral Alaska, and truck product from it's refinery in
Southcentral up to the Interior, thus incurring greater cost,
which it must recoup. He mentioned that it is far more
efficient and cost effective to transport fuel by barge than by
truck. In response to another question, he indicated that the
aforementioned delay in having to comply with the federal low-
sulfur fuel standards was the result of input from the state
regarding the distinction between urban and rural areas of the
state.
10:39:27 AM
REPRESENTATIVE HAWKER questioned whether low-sulfur standards
are really necessary in Alaska or whether it's just a case of
Alaska getting swept up in the national trend.
MR. CHAPADOS indicated that those standards should be applied in
Alaska because modern vehicles that are designed to burn ultra-
low-sulfur diesel cannot burn high-sulfur diesel. In response
to comments and a question, he explained that prior to
implementation of low-sulfur diesel standards, all refiners in
Alaska could produce "highway diesel fuel," but now the only in-
state refinery that is now capable of producing ultra-low-sulfur
diesel fuel is the one owned by Tesoro, and that [conversion]
did not come cheap to Tesoro. In contrast, Petro Star has a
limited ability to produce what is known as low-sulfur diesel
fuel, but, again, Petro Star is also limited with regard to the
volume it may sell.
CHAIR RAMRAS asked Mr. Chapados what Petro Star's profit margin
is with regard to the sale of gasoline at its 11 convenience
stores.
MR. CHAPADOS declined to provide that specific information. He
added that in general, Petro Star is seeking to be competitive
with other gas stations near its retail locations and at least
break even on its "gasoline volumes"; Petro Star makes more
money on the other products it sells at its convenience stores
that it does on gasoline sales.
10:45:23 AM
REPRESENTATIVE KAWASAKI asked how Petro Star calculates its rack
rates.
MR. CHAPADOS said Petro Star is seeking to be competitive,
adding that his company won't sell heating oil to other
distributors, for example, if its prices aren't competitive.
REPRESENTATIVE KAWASAKI asked Mr. Chapados if he could prove
that Petro Star is passing on to consumers the $.08 savings
resulting from the repeal of the State's motor fuel tax.
MR. CHAPADOS agreed to get that information to the committee.
REPRESENTATIVE KAWASAKI expressed concern that because gasoline
goes from a refiner to a distributor and then to a retailer,
that that savings has not been passed on to consumers and is
instead simply being absorbed somewhere.
MR. CHAPADOS indicated that he would be providing information
which illustrates that his company's prices dropped by $.08 as
of September 1, 2008. In response to comments and questions, he
explained that jet fuel is typically sold to large commercial or
military entities and so retail prices are tied to published
indices regardless of what a barrel of crude oil is selling for
on the global market. He relayed that during that period when
the cost of a barrel of oil increased so dramatically, Petro
Star did not pass on that increase to its heating fuel
customers.
CHAIR RAMRAS offered his belief that the public perception is
that "everybody in the chain" did exceedingly well during that
time period and engaged in bad behavior and took advantage of
the situation. The goal of the committee, he relayed, is to
determine why, as the price of a barrel of oil comes down, there
is not a commensurate decrease in the retail price of gasoline.
MR. CHAPADOS said his sense is that that increase in the price
of crude oil was not passed on in its entirety. In response to
a question, he explained that heating oil makes up the smallest
part of Petro Star's sales.
REPRESENTATIVE COGHILL questioned whether Petro Star, if it no
longer had the military bases in the Interior as customers, it
could start selling more heating fuel to people in the Fairbanks
area.
MR. CHAPADOS said it could not because of the aforementioned
volume caps pertaining to high-sulfur diesel; the only other
outlet for that product would be to truck it all down to
Anchorage as jet fuel.
CHAIR RAMRAS remarked that Alaska's fuel market is fragile and
tied to the military, and noted that when he'd spoken of the
problems facing Flint Hills Resources to someone in the
administration, that person indicated that Petro Star would
simply buy Flint Hills Resources. All refineries have a fragile
nature, he concluded, and are not making vast amounts of profit
as is assumed by the public.
REPRESENTATIVE COGHILL asked what the state's gasoline needs are
and whether it is necessary to import gasoline into Alaska to
meet those needs.
CHAIR RAMRAS offered his understanding that Southeast Alaska
must get its gasoline from Seattle.
10:54:49 AM
REPRESENTATIVE HAWKER asked whether the commitment from the U.S.
Department of Defense (DOD) to require a conversion from regular
diesel fuel to synthetic fuel at Alaska's military basis will
threaten the fuel industry's stability in the state.
MR. CHAPADOS said it is a threat.
REPRESENTATIVE HAWKER surmised that the state would have to
build new refineries to accommodate such a conversion, and that
the resulting costs being passed onto retail consumers will get
even worse.
CHAIR RAMRAS indicated that an example of a synthetic fuel would
involve converting "coal to liquids." He surmised that a
closure of Eielson Air Force Base would also pose a threat to
Petro Star.
MR. CHAPADOS concurred.
CHAIR RAMRAS relayed that he would like to hear comments
regarding a proposal to limit the price of crude oil for in-
state use, and what effect that would have on the prices of
gasoline and home-heating oil.
10:58:23 AM
KIP KNUDSON, Manager, External Affairs, Tesoro Alaska Company,
referring to his PowerPoint presentation, said that Tesoro's
Kenai refinery [in Nikiski] was first started in 1969 and is now
heavily integrated with the community, and suggested that
members should look at the refining industry as the most
successful value-added industry that the state has ever had. He
relayed that Tesoro Corporation is an independent refiner and
marketer - with the Kenai refinery remaining what he called the
legacy asset - and is publicly traded as TSO on the New York
Stock Exchange (NYSE).
MR. KNUDSON indicated that Tesoro Alaska Company has three major
elements: the refinery, a distribution network, and its retail
sites. The Kenai refinery's "nameplate" capacity is 72,000
barrels per day, though it never operates at that capacity, and
it has over 200 employees and an award-winning safety record
recognized nationwide. The Kenai refinery is what he called a
"medium-complexity refinery"; it makes several different
products, and production volume is increased via the addition of
catalysts. Of the seven products that the Kenai refinery
produces, there are three - heavy vacuum gas oil, fuel
oil/bunker, and road asphalt - that don't really have any market
in Alaska, and thus one-third of the plant's production has to
be exported. About 50 percent of the Kenai refinery's crude oil
supply comes from the North Slope, about 25 percent comes from
Cook Inlet, and about 25 percent comes from foreign sources -
illustrated on slide 6 of his PowerPoint presentation - because
the refinery can't currently buy enough crude from Alaska
sources to satisfy its demands.
MR. KNUDSON relayed that Tesoro was the first company hauling
crude oil and refined products into the state to use double-
hulled tankers, currently charters two tankers with a capacity
of roughly 500,000 barrels each, and has exceeded regulatory
requirements by stationing a chartered "assist tug" at its
Nikiski dock to help tankers on and off the dock. He indicated
that slide 9 of his PowerPoint presentation illustrates the
paths that the Kenai refinery's product takes in terms of supply
and distribution. The Kenai refinery has racks at Nikiski for
asphalt, propane, butane, gasoline, and diesel, and has a 70-
mile, 10-inch, "clean products only" pipeline that runs from
Nikiski up to the port of Anchorage and - via a spur line - the
Anchorage airport.
11:06:14 AM
CHAIR RAMRAS asked whether Tesoro sells product only to Tesoro
distributors.
MR. KNUDSON said Tesoro will sell product to anyone who will buy
it. After noting that Tesoro has two terminals at the port of
Anchorage, he indicated that slide 12 of his PowerPoint
presentation references the 31 convenience stores owned by
Tesoro - 29 of which sell fuel under the "2go" logo - and
Tesoro's 58-plus branded dealers. Acknowledging that consumers
are extremely frustrated with the high price [of gasoline], he
offered the following contributing factors: the cost of the raw
crude oil, the cost to refine that product, the cost to
distribute that refined product, the cost of marketing, taxes,
and [the influence of] competition. Furthermore, there will be
fluctuation daily with regard to which of those factors is
contributing most heavily to the retail price, though the cost
of crude oil constitutes "the lion's share" of costs to the
company.
MR. KNUDSON observed that Tesoro is in a commodity business; it
buys a commodity, that being crude oil, and sells a commodity,
that being gasoline and heating oil, both of which are traded on
the mercantile exchanges, which in turn - to a large extent -
have some influence over what retail consumers are paying.
Tesoro, he assured the committee, is not "in a cost plus
business"; just because the company has costs doesn't mean that
those costs will ultimately be recouped via sales. Several
[global] factors influence the price of crude oil, and thus it
is hard to predict what that price will be from month to month.
MR. KNUDSON explained that refining and distribution costs are
based on global and regional factors: regional factors within
the state, regional factors in the state "writ large," West
Coast factors, and world factors. On the issue of environmental
regulations, he relayed that Tesoro invested $60 million in the
sulfur-stripping process at the Nikiski refinery just to
essentially stay in the diesel business, and this investment
won't be increasing production amounts at all. That same
investment had to be made just to stay in the gasoline business;
furthermore, an additional capital investment will have to be
made in the future in order to meet [forthcoming] new
requirements regarding benzene levels. These are all external
forces influencing the retail price of the product.
11:11:06 AM
MR. KNUDSON offered his belief that as the state's natural gas
pipeline moves forward, it will be difficult to keep [employees
at the refinery]. The market sets the price, he went on to say,
and referred to slide 15 of his PowerPoint presentation as
illustrative of those things that influence the market. In
response to a question, he said that the graph on slide 16 shows
that Alaska has a very small market for motor fuel [compared to
some other western states].
CHAIR RAMRAS asked that the committee be provided a similar
chart with comparisons between Alaska and Idaho, Montana, North
Dakota, and South Dakota.
MR. KNUDSON agreed to do that, adding that Alaska's small market
is a contributing factor with regard to how the market performs.
He explained that jet fuel "is king in Alaska"; that's what the
refineries in Alaska were built to produce in order to satisfy
the international jet fuel trade at the Anchorage and Fairbanks
airports. Gasoline and diesel fuel, to a certain extent, are
simply byproducts of those refineries. Additionally, the Alaska
market shows more "seasonality" even when compared with the West
Coast. The times when one wouldn't want to be either a refiner
or gas station owner are February, April, and November.
MR. KNUDSON, referring to slide 18 of his PowerPoint
presentation, emphasized that retail prices are set by retail
station owners, and Tesoro only controls retail pricing at its
29 convenience stores that sell gasoline, and has no influence
over the prices at any of the other stations in the state.
Retail prices also respond to differing local conditions.
Again, the Alaska market is very small and very seasonal. He
relayed that Tesoro, under confidentiality agreements, will be
working with Mr. Sniffen to provide him the information he is
seeking.
REPRESENTATIVE ROSES asked how Tesoro's price structure changed
after the adoption of Alaska's Clear and Equitable Share (ACES)
legislation.
MR. KNUDSON said passage of that legislation didn't affect what
Tesoro is paying for its crude oil because that price is based
on the global price, and the tax rate that producers pay is
independent of that price. He indicated that after the recent
repeal of the State's motor fuel tax, some retailers relayed to
him that they were concerned that that repeal didn't take into
account that they purchased their product when the tax was still
owed but then didn't sell it until after that tax was repealed.
11:16:12 AM
REPRESENTATIVE HAWKER asked whether, when Tesoro buys a barrel
of crude oil, Tesoro must then use all of it because it can't be
put back into the pipeline.
MR. KNUDSON said yes, and reiterated that roughly a third of
Tesoro's refined products must be exported to markets outside of
Alaska; furthermore, those products generally sell at or below
the price of the raw crude oil used to make them. In response
to questions, he relayed that the percentage of foreign oil that
Tesoro buys will be going up as production in Alaska declines;
that the "crude buyers" at his company would love to be able to
purchase more Alaska crude oil; and that up until the late '90s,
Tesoro was a big purchaser of the state's royalty oil, but
doesn't purchase such oil now.
MR. KNUDSON, in response to further questions, relayed that the
tankers which Tesoro contracts operate under the Jones Act; that
Tesoro does receive shipments from foreign vessels; and that
Cook Inlet is limited with regard to the number of barrels that
can be onboard a vessel because of spill response requirements.
He noted also that Tesoro has to use crude with a chemical
signature similar to that found at the North Slope because it
was around that signature that the refinery was built. In
response to still further questions, he said that Tesoro uses
natural gas in its refining process, and that each refinery has
its own advantages and disadvantages in the market.
REPRESENTATIVE KAWASAKI asked how Tesoro's rack price is
determined.
MR. KNUDSON said he doesn't know, but surmised that such
information would be proprietary in nature and that Mr. Sniffen
would be investigating Tesoro's rack pricing processing.
Pricing is a market-driven opportunity, he added.
REPRESENTATIVE KAWASAKI, referring to slide 15, asked how the
large spot market price in Seattle, San Francisco, and Los
Angeles factors into Tesoro's pricing decisions.
MR. KNUDSON explained that those spot market prices are
guidelines and are unbelievably fluid compared to market prices
in Alaska; that those markets take in product from tens if not
hundreds of refineries; and that the characteristics and swings
in those markets don't always apply to Alaska, but are always
taken into consideration.
11:25:26 AM
REPRESENTATIVE HAWKER asked how much of Alaska's demand for
motor fuel Tesoro supplies.
MR. KNUDSON said he is not sure, and is also not sure that
anyone at Tesoro is keeping track of those statistics. He
offered his guess that Tesoro is a large player in satisfying
Alaska's demand for motor fuel, but noted that imports can also
have influence on retail price.
REPRESENTATIVE HAWKER surmised that it would be hard for someone
to buy gasoline in Washington, ship it to Anchorage, and then be
competitive with Tesoro.
MR. KNUDSON said he doesn't know that to be the case,
particularly given that at some point, other refineries will
also be producing ultra-low-sulfur diesel.
REPRESENTATIVE KAWASAKI asked Mr. Knudson to provide the
committee with proof that the repeal of the $.08 motor fuel tax
is being passed on to Tesoro's consumers.
MR. KNUDSON agreed to do so for Tesoro's 29 convenience stores
that sell gasoline.
CHAIR RAMRAS - referring to the aforementioned chart which
illustrates average gasoline prices, gasoline prices a month
ago, and gasoline prices a year ago, in Alaska, Idaho, Montana,
North Dakota, South Dakota, Washington, and the U.S. as a whole
- questioned why there is such a great disparity in pricing
between Alaska and other rural states with small populations.
MR. KNUDSON surmised that in that chart, Alaska's average price
was calculated using the retail gasoline prices in both urban
and rural communities - for example, averaging the retail price
in Fairbanks with the retail price in Bethel.
CHAIR RAMRAS offered his understanding that instead the average
prices for Alaska were calculated using only retail gasoline
prices in Alaska's Railbelt communities.
MR. KNUDSON said, "It's market forces that have ... produced
these prices, [for both] the price one year ago and the ...
current [price]." He mentioned that he has a newspaper clipping
stating that in March 2007, Anchorage had the nation's lowest
gasoline prices.
REPRESENTATIVE HAWKER asked why Alaskans haven't seen a
reduction in retail motor fuel prices similar to what occurred
with the price of a barrel of crude oil over the last three
months - a 46 percent reduction.
MR. COOK, reiterating that Flint Hills Resources provides less
than one-fifth of the gasoline used in Alaska, concurred with an
earlier statement that had the retail price of gasoline kept up
with the price of crude oil, gasoline prices would have been
closer to $6/gallon, or certainly a lot higher than they did
get. Because the retail price of gasoline did not keep up with
the price of a barrel of crude oil, he explained, Flint Hills
Resources lost money during the majority of the last 12 months.
Furthermore, even though the price of crude oil has dropped
recently, it is still at an unprecedentedly high price, and so
in order to stay in business, Flint Hills Resources can't afford
to continue to lose money, particularly given that the costs of
operating its refinery are also unprecedentedly high. He
assured members that Flint Hills Resources would be providing,
under confidentiality agreements, proprietary information to the
DOL.
11:36:15 AM
REPRESENTATIVE HOLMES pointed out, though, that retail prices of
gasoline have already come down everywhere else in the country,
and they never got up to $6/gallon in those locations either.
MR. KNUDSON mentioned that over a year ago, he'd participated in
an inquiry conducted in the state of Washington, wherein
investigators went county by county, looking at the variability
in retail gasoline prices within the state of Washington, and
every county had different reasons for charging a particular
price, and every county had finished product from a variety of
different sources. Mr. Knudson surmised that Mr. Pulliam, when
looking at Alaska's data, will be able to glean answers from the
data, but he doesn't have the ability to do so. In conclusion,
Mr. Knudson said it seems like the market is currently working
the way it always has.
CHAIR RAMRAS remarked, "Certainly not for the benefit of the
consumers." He asked what percentage of the state's motor fuel
needs is being satisfied by Tesoro.
MR. KNUDSON said he doesn't know, and, even if he did, he
wouldn't be able to divulge that proprietary information in this
venue. In response to a question, he said that although one
might be able to find out who is producing gasoline in the
state, one wouldn't be able to find out who is importing it into
the state, particularly given that there is nothing preventing
someone from importing gasoline to any tidewater port in the
state.
CHAIR RAMRAS questioned what would occur if a constitutional
amendment were introduced [and passed by the voters] to put a
cap on how much crude oil was sold for - from the state's
royalty share - to [in-state] refiners for the production of
gasoline and heating oil [for in-state use].
MR. KNUDSON said it would be difficult to predict what the
results would be until such an amendment was actually passed.
CHAIR RAMRAS countered, "We certainly couldn't do it until you
predicted what it would do."
REPRESENTATIVE COGHILL surmised that market dynamics, whether
Alaska has the ability to sell [enough royalty oil to meet in-
state demands], and the constitutionality of such a cap would
all have to be considered.
11:42:12 AM
CHAIR RAMRAS asked at what point will the state itself have to
buy oil from the producers in order to meet its contractual
obligations.
MR. COOK pointed out that Flint Hills Resources is only allowed
to have 85 percent of what it buys be royalty oil, with no more
than 95 percent of that coming from any given field. Today,
with the reduction in the Trans-Alaska Pipeline System (TAPS),
and the aforementioned restrictions, if Flint Hills Resources
were to demand the maximum amount of royalty oil it could, the
state would be hard pressed to meet that demand; Flint Hills
Resources is taking far less than its maximum allowable amount
of 77,000 barrels per day.
MR. CHAPADOS, in response to a question, said that Petro Star
gets its crude oil supply from one of the major producers.
MR. COOK, in response to a question, said that Flint Hills
Resources takes in as much royalty oil as it has product demand
to sell, and, because of the aforementioned federal
restrictions, is at maximum capacity with regard to gasoline
[production].
MR. KNUDSON said the production rate [at his company] is geared
to meet market demand, and so [his company] doesn't want to make
25 percent more, for example, than there is demand for, one,
because there isn't any place to store it and, two, that's just
not good business. Furthermore, production [demand] changes
daily and monthly.
11:45:11 AM
MR. CHAPADOS said that Petro Star's Valdez refinery runs very
near capacity, and is doing some expansion in order to be able
to process more crude oil. The North Pole refinery, because of
the aforementioned federal restriction, doesn't run at capacity
at all times. Petro Star is having to anticipate what its
volumes of high-sulfur diesel and heating oil products will be,
and so may have to either forego some sales or transport product
down to Anchorage. "That has cut into our crude oil runs at
that North Pole ... [refinery]," he added.
MR. KNUDSON, in response to questions, reiterated that Tesoro's
Kenai refinery never runs at maximum capacity, but also doesn't
want to have idle equipment, because a lot of plants don't run
well when operating under capacity. He indicated that details
with regard to Tesoro's output rates will be provided to Mr.
Sniffen under confidentiality agreements. In response to a
further question, he said he doesn't know how Tesoro's average
refineries compare with other refineries in the U.S. with regard
to unit costs.
REPRESENTATIVE HAWKER opined that such information is relevant.
He indicated that he is questioning whether some of Alaska's
costs are driven by a unit cost differential inherent in smaller
refineries. He asked whether Tesoro's unit costs are consistent
at all its refineries.
MR. KNUDSON said he would research that issue further.
REPRESENTATIVE HAWKER - referring to the aforementioned chart
which illustrates average gasoline prices, gasoline prices a
month ago, and gasoline prices a year ago, in Alaska, Idaho,
Montana, North Dakota, South Dakota, Washington, and the U.S. as
a whole - pointed out that a year ago, the price of regular
gasoline less taxes in Alaska was about the same as it was in
North Dakota, where Tesoro owns the only refinery, whereas a
month ago, the price of regular gasoline less taxes in Alaska
was about a dollar more than it was in North Dakota.
11:50:47 AM
MR. KNUDSON said he doesn't know why that is.
CHAIR RAMRAS noted that with the recent decrease in the price of
a barrel of oil, the retail price of heating oil has dropped in
his area, but, again, a similar decrease in the price of
gasoline has not occurred. He questioned what the difference is
between those two types of fuel that would account for such a
discrepancy.
MR. KNUDSON relayed that heating oil is a high-sulfur product
whereas highway fuel is an ultra-low-sulfur product, so they are
really two different products these days.
CHAIR RAMRAS clarified that his point is that market forces
appear to have affected the price of heating fuel but don't
appear to have affected the price of gasoline.
REPRESENTATIVE COGHILL asked how, if companies spent the capital
to upgrade their refineries so as to be able to produce ultra-
low-sulfur fuel, that cost would be passed on to the consumers.
MR. KNUDSON said he couldn't answer that question accurately
today, but surmised that Mr. Sniffen would be investigating that
issue in the near future. He remarked, however, that just
because his company makes a capital investment, that doesn't
mean that it will be able to just raise the price of fuel in
order to recapture that investment - there is no connection
between the two. In response to comments, he indicated that he
wouldn't be able to say whether Tesoro Corporation tries to
recoup costs incurred at its refineries in competitive areas of
the nation through its prices in Alaska, where competition is
not so stiff.
REPRESENTATIVE GRUENBERG offered his understanding that some
other states have authorized - and provided funding for - their
attorneys general to investigate these types of issues, and
opined that the legislature would be well advised to try and get
a handle on what the causes [of continued high retail fuel
prices] are in Alaska, and investigate whether anything can be
done to help keep costs down. He remarked that if they could
figure out why [in March 2007] gasoline prices in Anchorage were
the lowest in the nation, it could perhaps provide some clues as
to how to make it happen again.
11:59:00 AM
MR. KNUDSON suggested that perhaps some Internet sites could
provide some pricing data from that time. He remarked that
although prices in the Lower 48 tend to go up and down much more
sharply than they do in Alaska, "they always intersect over the
long term - always."
REPRESENTATIVE GRUENBERG asked whether pricing is entirely
random.
MR. KNUDSON offered his belief that to a very great extent,
pricing is based on local market conditions, such as the number
of retail sites, wholesalers, trucks, pipelines, and refineries
there are in a particular local. In response to a question, he
surmised that attempting to explain what the retail price of
gasoline will be is the same as attempting to predict what the
price of a barrel of oil will be. They are both a commodity and
therefore subject to all kinds of market influences and factors
only some of which can be charted, studied, estimated, and
projected over the years.
REPRESENTATIVE GRUENBERG suggested that even a little bit more
information would be helpful in attempting to solve the problem.
MR. KNUDSON predicted that when the DOL's investigation is
concluded, it will show that there isn't really a problem;
consumers may not like the price, but the market is performing
as it should. He then referred to the aforementioned Washington
investigation, and noted that although an unbelievable amount of
data was analyzed, the conclusion was that the markets were
operating as expected, regardless that they weren't predictable
or understandable at every point in time.
REPRESENTATIVE ROSES relayed that back when he was a gas station
owner, the prices were so volatile that a group of service
station owners in Anchorage decided to form a gasoline retailers
association. That group would meet to talk about what was
occurring in the market, but didn't discuss price fixing.
Representative Roses said he went to one meeting, and when he
was asked at that meeting how he determined what price to
charge, he said he simply looked to see what his nearby
competition was charging, and when asked what he did about his
signs, he said he stopped displaying prices because he was tired
of having to change his signs several times a day. He indicated
that his refusal to post prices was considered to be price
fixing. Those of that group who were successfully prosecuted
were required to lower their gasoline prices for the next six
months. Representative Roses said that during that time, when
he was competing with those stations that had had to lower their
prices, he was selling his gas for $.04/gallon less than he paid
for it.
The committee took a recess from 12:07 p.m. to 1:59 p.m.
CHAIR RAMRAS - after stating the committee's goal and recapping
what transpired earlier in the meeting for the representatives
from Safeway, Inc. - asked who provides Safeway stores in Alaska
with gasoline products; in other words, which refiner do those
products come from and what distribution source does Safeway
use.
2:04:37 PM
RAY WEST, Senior Corporate Counsel, Safeway, Inc., said that
some of the company's gasoline products come from out of state,
and offered to research that issue further.
2:05:05 PM
GLENDA WOOD, Director, Pricing and Promotion, Safeway, Inc.,
relayed that in Alaska, Safeway gets most of its gasoline from
either Flint Hills Resources or [Tesoro Alaska Company].
2:05:23 PM
JOE GULLEY, Manager, Denali District, Safeway, Inc., added that
because of logistics, gasoline for the Safeway stores in
Southeast Alaska - Juneau and Ketchikan - comes through the
Seattle distribution link.
MS. WOOD relayed also that in Southwest Alaska, Safeway stores
get their gasoline through a couple of different brokers in
Alaska.
MR. GULLEY, in response to a question, listed the Safeway stores
in Alaska.
MS. WOOD, in response to questions, said that Safeway also
operates gasoline stations in Washington, Oregon, California,
Colorado, Arizona, Texas, Illinois, on the East Coast, and in
Canada; that in general, the percentage that Safeway's retail
gasoline prices rise or fall is similar in all of its retail
markets; that in the last five years, market volatility has
increased, and thus Safeway has had difficulty in all of its
markets dealing with high costs while still pricing its gasoline
competitively; and that Safeway prices its gasoline as a whole
and doesn't differentiate price according to which state the
gasoline will be sold in - but the company has seen the rapid
cost increases along with the not-so-rapid cost decreases at all
of its stations.
2:13:47 PM
CHAIR RAMRAS, in response to a question, relayed that for its
chart that illustrates average gasoline prices, gasoline prices
a month ago, and gasoline prices a year ago, in Alaska, Idaho,
Montana, North Dakota, South Dakota, Washington, and the U.S. as
a whole, the committee used information from the American
Automobile Association (AAA) web site. That chart illustrates
quite a difference in pricing in Alaska compared to other states
in the [Pacific Northwest].
MR. WEST questioned whether the recent troubles at the Flint
Hills Resources refinery might have had an impact on Alaska's
prices.
CHAIR RAMRAS said the committee is specifically interested in
the apparent lag in which prices in Alaska - compared to prices
elsewhere in the country - are dropping back down to something
considered normal. He asked for information about Safeway's
"pricing power."
MR. WEST said he is not sure that Safeway considers itself to
have much pricing power; instead, generally, Safeway simply
surveys its competitors to determine how to price its product.
MS. WOOD added that Safeway also factors in the substantially
higher wholesale costs in Alaska. In Alaska, Safeway purchases
product from independent refiners who in turn have had to buy
product from the secondary market; Safeway buys its product at
the best possible prices from the independent refiners - though
those prices are higher in Alaska than they are in other states
- and then prices its retail product accordingly. In response
to a question, she proffered that wholesale prices in Alaska are
higher because of the state's limited refining capacity. The
few refiners there are in Alaska are small and have to buy their
raw crude from one of the major companies and then mark up their
prices accordingly. Safeway buys refined products at contracted
rates, but must then transport those products to its retail
sites, thus incurring transportation costs. And when Safeway
has to import its gasoline from out of state, Safeway's retail
prices reflects those higher transportation costs. Most of the
gasoline used in Alaska is not refined in Alaska, she noted.
MR. WEST, in response to a comment, reiterated that for its
Ketchikan and Juneau stores, Safeway transports gasoline up from
Washington. He remarked that in Alaska, there isn't a lot of
competition among refiners, and that those refiners, just like
refiners everywhere else, are subject to the "spot crude oil
markets."
REPRESENTATIVE GRUENBERG said that if it were true that the
transportation costs of Safeway's gasoline products are what
results in higher retail prices, then those same transportation
costs should also be affecting the prices of Safeway's other
products, but that doesn't seem to be the case - the price of
Safeway's gasoline is higher, proportionally, than the price of
its other products.
MR. WEST offered his belief that most products that Safeway
cannot source in Alaska do include a premium for transportation,
though he is not sure how big that premium is or how it compares
to [the one associated with Safeway's retail gasoline],
particularly given that gasoline must be shipped differently due
to regulatory requirements and other issues.
2:25:00 PM
REPRESENTATIVE GRUENBERG noted that the committee is questioning
whether the increase in gasoline price is due to those in the
petroleum industry or due to those in the transportation
industry.
MR. WEST said:
The fact that we are able to ship gas from the ...
state of Washington economically points to the fact
that the ... refiner's price in Alaska is relatively
high. Were that not the case, I think it's obvious
that we could ship the product from Alaska,
economically, rather than having to go to Seattle to
get it. Which doesn't necessarily mean that ...
transportation cost is solely to blame for higher
prices in Alaska; we think also that limited refining
capacity there is part of the problem.
CHAIR RAMRAS pondered whether refiners in Alaska set their
prices based on what it would cost an outside refiner to ship
petroleum products to Alaska from the Lower 48.
MR. WEST said that from an economic standpoint, it's hard to
imagine how the wholesale price in Seattle and the cost of
shipping wouldn't, to some extent, influence and perhaps
discipline the price that refineries in Alaska are charging.
2:33:30 PM
CHAIR RAMRAS asked how Safeway views its gasoline sales.
MS. WOOD indicated that because Safeway is primarily in the
business of selling groceries, it views its gasoline sales as a
customer convenience. Particularly as gasoline prices escalate,
selling gasoline at lower prices provides Safeway's customers
with another form of a reward for shopping there, and Safeway
has found that providing discounts for gasoline is viewed by its
customers as a more meaningful reward than providing discounts
for grocery items.
MR. WEST added, though, that Safeway still expects its fuel
department to show a profit at the end of the year and certainly
not to lose money.
CHAIR RAMRAS surmised that the assumption of Safeway's customers
is that Safeway's posted retail gasoline prices - before any
reward discounts are applied - really are comparables with those
of nearby competitors.
MS. WOOD, in response to comments and questions, relayed that
Safeway's divisions are looked at as a whole, and that Safeway's
costs are reflected in its retail prices.
MR. WEST, in response to comments and questions regarding
Safeway's profit margins and costs in the different states in
which it operates, declined to answer on the basis that that
information is proprietary.
MS. WOOD added that research of rack price data would reveal
whether, in each state in which it operates, Safeway's retail
prices are a consistent percentage higher than its wholesale
costs.
2:43:25 PM
REPRESENTATIVE ROSES relayed that back when he owned two car
washes that also sold gasoline, it was not his intention to make
money on his gasoline sales, and, in fact, he occasionally sold
gasoline for less than he bought it for because his goal was to
encourage customers to use his car wash services. Back then, he
noted, his average price markup was $.05/gallon, and almost all
gasoline stations were full service stations, and a lot were
owned by mechanics who also happened to sell gasoline. Back
then, the retail market was extremely competitive, and one of
the advantages he obtained when he became a branded retailer for
Union 76 gasoline products was that he didn't have to pay a fee
on any sales paid for with a Union 76 credit card, whereas the
fee he was charged for all other credit card sales was about 2
percent. He then reiterated some of his comments from earlier
in the meeting, and indicated that even when he was able to buy
gasoline products for a lower price from his distributor, he
still had to mark up his retail prices such that he could afford
to pay the [potentially] higher cost of his next purchase.
[The chairing site muted audio due to teleconference
interference; therefore, no audio is available for that
timeframe.]
2:51:23 PM
REPRESENTATIVE ROSES provided anecdotal information about his
experience as a gas station owner, and recalled how state and
federal taxes were simply included as part of the price he paid
for a load of fuel; therefore, when he was also charged a
corporate tax, it was based on his gross sales, which included
federal and state taxes, and so he was taxed on the money he was
paying for taxes. He remarked that gasoline is not a product
upon which to make money, because the retail gasoline industry
is too competitive, too regulated, and too restrictive.
CHAIR RAMRAS surmised that retailers aren't making a profit, and
therefore any profit to be made in this industry must be being
made by either the distributors or the refiners, though the
latter only with difficulty.
REPRESENTATIVE ROSES pointed out that transportation costs must
also be factored in.
CHAIR RAMRAS suggested, though, that some retailers are very
close to a refinery and so therefore don't bear much in the way
of transportation costs but still charge retail prices
competitive with those stations that have to have their fuel
transported in from further away.
REPRESENTATIVE HAWKER noted, though, that some of those stations
are located in areas that have a sales tax.
REPRESENTATIVE ROSES indicated that depending on what a refinery
is charging, a retail station owner might be able to purchase
gasoline from further away and have it shipped for less cost
than he/she could buy it for from a nearby refinery.
3:01:21 PM
LISA SUNDBORG, Office Manager, Alaska Petroleum Distributing
Inc., relayed that her company delivers fuel, both wholesale and
retail; that it purchases fuel from the two refineries in North
Pole - the one owned by Flint Hills Resources, and the one owned
by Petro Star Inc. (PSI); that it purchases all its ultra-low-
sulfur diesel and all of its gasoline products from Flint Hills
Resources, as well as some home heating oil - both number 1 and
number 2; that it primarily purchases its home heating oil -
both number 1 and number 2 - from PSI; that it doesn't have any
storage facilities; that it has about 17 trucks; and that it
goes to the refinery, loads the fuel, and then delivers the
fuel, and then - hopefully - collects payment for it. She noted
that at one point her company had two gasoline stations but had
closed one of them because it couldn't compete with any of the
"box stores," since they could buy and then sell fuel at the
pump cheaper than her company could buy it from the refinery.
In response to a question, she said the company's trucks, in
addition to hauling home heating oil, haul gasoline to its
remaining station and bulk [amounts of gasoline] to Prudhoe Bay
and other locations.
CHAIR RAMRAS asked whether it would be easy to buy trucks and go
into the business of hauling fuel.
MS. SUNDBORG said permits would have to be acquired, and one
would have to have enough funds to buy the product to begin
with. For example, the majority of the cost her company
contends with is the cost of the product itself, and the company
generally sells its product for about 14 percent more than it
paid for it. In response to a question, she said her company
really only delivers gasoline to two gasoline stations - the one
owned by the company and another one - and although it had
delivered to other gasoline stations in the past, it isn't now
because that's such a hard market; a station has to able to pay
for product up front before her company will deliver it.
CHAIR RAMRAS offered his understanding that the markup for
distributing fuel is not extraordinary.
MS. SUNDBORG concurred, adding that at the company's gasoline
station, the pump price is $4.20, but the company is purchasing
product for $3.77 and then paying federal tax of approximately
$.18, thus resulting in a markup of only $.25. And although her
company doesn't charge itself to deliver that fuel, it still
costs the company something to deliver it. Again, on most days,
box stores in the area are selling gasoline cheaper than her
company can buy it for. In response to a question, she
indicated that all of her company's costs are significantly
higher now than they used to be. In response to comments, she
relayed that when the gasoline stations near her company's
station decide to drop their retail prices, the company's
station must also drop its prices, even if it means losing
money, or it won't have any customers.
3:10:39 PM
MR. SNIFFEN said he thought he'd heard Ms. Sundborg say that her
company purchases ultra-low-sulfur fuel from Flint Hills
Resources, but had heard someone else say earlier that Tesoro
owns the only refinery in Alaska that can produce ultra-low-
sulfur fuel.
MR. COOK explained that Flint Hills Resources purchases ultra-
low-sulfur fuel from that Tesoro refinery and then resells it at
its own rack.
MR. SNIFFEN asked Ms. Sundborg whether Flint Hills Resources and
PSI have different prices for home heating oil.
MS. SUNDBORG said no, their prices are pretty much the same; the
difference is that PSI provides a different payment option,
which her company prefers.
MR. SNIFFEN asked Ms. Sundborg whether she perceives competition
occurring between PSI and Flint Hills Resources.
MS. SUNDBORG said that credit terms are the driving factor for
her company. In addition, though, PSI neither makes nor
distributes ultra-low-sulfur fuel, so her company doesn't have a
choice in where to obtain that product - it must get it from
Flint Hills Resources. She noted that her company also delivers
fuel to Flint Hills Resources, which prefers to use its own
product. In response to a question, she clarified that her
company also delivers gasoline in bulk to some commercial
enterprises that aren't gas stations. In response to a further
question, she surmised that a couple of reasons why her company
doesn't have many gasoline stations as customers is because,
one, most stations are branded stations and thus purchase only
branded fuel, and, two, her company demands payment on delivery,
which might not suit most independent stations.
3:15:35 PM
MR. SNIFFEN relayed that about a month ago, his office was
directed to start investigating "these issues," and so started
by requesting information from the refineries, the retailers,
and the distributors, and has since received only cooperation
from everyone. His office has also requested information from
"Chevron" to try to find out why other gasoline retailers don't
obtain product from the Lower 48, and what some of the barriers
to that process might be. This information will be helpful in
considering what he termed import parity, particularly as it
pertains to Southcentral Alaska. Import parity illustrates the
difference in what it would cost to bring fuel up from the Lower
48 and then sell it in Alaska's market, as opposed to simply
getting fuel directly from one of Alaska's refineries. Import
parity could illustrate, for example, whether Alaska's
refineries are colluding with each other - he added, though,
that at this point his office has no reason to believe that
that's what's occurring.
MR. SNIFFEN said that if prices at Alaska's refineries get high
enough, competitors might decide to just barge product up from
the Lower 48. Mr. Sniffen indicated that Mr. Pulliam has
relayed that import parity somewhat drives some of the pricing
decisions being made by Alaska's refineries. Refiners must
ensure that their prices stay at or below a certain level so as
not to encourage the aforementioned type of competition.
Knowing what it would really cost for someone to import fuel
from the Lower 48 would assist the DOL in determining whether
prices in Alaska are [significantly] above what one would expect
in a market that's operating in a rational and normal manner.
MR. SNIFFEN referred to a pair of graphs in members' packets
illustrating regular unleaded retail gasoline prices after taxes
in Anchorage, Fairbanks, and Seattle between January 2002 and
August 2008. The first graph illustrates absolute prices in
those locations, and the second graph compares the prices in
Anchorage and Fairbanks with those in Seattle. He explained
that the prices in Seattle are used in calculating import
parity. Generally, absolute prices in Anchorage and Fairbanks
have pretty much paralleled the absolute prices in Seattle. He
mentioned that there is another pair of graphs that illustrate
these same things but include a national average price. He
pointed out that all the issues which some have argued are
responsible for increasing retail gasoline prices in Alaska -
refining costs, labor costs, transportation costs, fuel costs,
operating costs - are not new; those issues have been around for
the last decade and have not changed significantly. These
graphs show what the trends have been. He noted that in the
aforementioned second graph, one can see that in 2007, the
prices in Anchorage and Fairbanks were quite a bit lower than
they were elsewhere in the country.
3:21:29 PM
MR. SNIFFEN referred to another pair of graphs that illustrate
regular unleaded gasoline prices in Anchorage and Seattle in
comparison with the price of ANS crude between January 2002 and
August 2008 before taxes. The graph illustrating absolute
prices indicates that although Alaska's prices are higher, they
have generally followed the trend of ANS crude prices. This
rules out any argument that the percentage of how much higher
Alaska's prices are has increased recently.
MR. SNIFFEN referred to another graph illustrating rack prices
compared to retail regular unleaded gasoline prices in
Anchorage, Fairbanks, Seattle, and the U.S. - on average -
between January 2002 and August 2008 before taxes. This graph
illustrates what the retail margins are, with the "zero line"
illustrating the [rack rate]. Seattle's prices are always above
the rack rate and spike much more drastically and more often
than do the prices in Anchorage and Fairbanks; furthermore, the
prices in Anchorage and Fairbanks have occasionally dropped
below the rack rate. In 2008, the prices in Anchorage and
Fairbanks had started to rise from the rack rate, with the rise
in the price in Fairbanks paralleling the rise in the national
average price, with the rise in the price in Anchorage being
much less dramatic than either of those two, and with an
incredible rise in the price in Seattle.
MR. SNIFFEN said this latter graph indicates that the current
price increase is not due to retail or distribution pricing;
instead, it seems to be the rack rate that drives price. For
example, in August, the average rack rate in Alaska for Tesoro
gasoline was $4.02, whereas in Seattle it was around $3.10; this
approximate $.90 difference is high, he remarked, and should
instead be around $.20-$.40. He said he is not so concerned
that retailers are colluding to keep prices high, or that
distributors are making a lot of profit; the data just doesn't
support either of those things as the cause of Alaska's high
prices. Therefore, the DOL will instead be focusing on refining
issues and on why rack rates are what they are; they don't seem
to be moving nearly as much [as they should].
3:26:08 PM
MR. SNIFFEN, referring to the arguments put forth earlier by the
refiners that regulatory requirements and changes in fuel
consumption have increased their costs, pointed out that those
factors have also been present for the last decade. He
indicated that his office, therefore, is questioning why the lag
in a corresponding decrease in Alaska's retail prices has drug
out for three or four months. He added, "It can't be an
operational issue - ... we would have seen that kind of stuff
happen before - so there is something else going on, ...
[though] I'm not suggesting it's something that's illegal or
violates any of our laws." If that lag is really due to the
rapid increase in the price of crude oil, a similar lag would be
taking place everywhere else in the country and it's not. Once
the DOL receives the requested information from the refiners, it
will have a better sense of what might be occurring.
MR. SNIFFEN indicated that it is important to know the causes so
as to be able to take appropriate steps now and in the future
should something similar occur again. He referred to the
earlier discussion about possibly making changes to the
restrictions regarding how much the state must sell its royalty
oil for, though noted that such changes would raise other issues
which would have to be addressed. In conclusion, he remarked
that other graphs in members' packets detail information similar
to that which the graphs that were discussed detailed - and all
illustrate that Alaska's prices somewhat intersect with prices
elsewhere up until June of this year, after which the
differences in prices became more dramatic and the lag in any
corresponding price decrease has been long.
CHAIR RAMRAS surmised that constituents would concur.
REPRESENTATIVE COGHILL said he was surprised to learn that one
of the refiners has to import 25 percent of its crude oil in
order to meet its demands. He indicated that he still has
questions that remain unanswered such as whether there is some
finished product being imported into Alaska that's affecting the
retail price.
MR. SNIFFEN relayed that at the end of the aforementioned
previous gasoline-pricing investigation, it was determined that
Alaska was a net exporter of refined products. Alaska could
refine all the fuel needed in the Railbelt, and have an excess
supply of gasoline to sell outside of Alaska. He offered his
belief that that is still true today, and that Alaska has the
capacity to refine all the gasoline products that are used in
Alaska. Usage in Anchorage and Fairbanks make up 70 percent of
the state's total gasoline usage, with about 60 percent being
used in Anchorage and about 10-20 percent being used in
Fairbanks.
3:32:21 PM
CHAIR RAMRAS said he intends to hold monthly meetings on this
topic until such time as there is no longer a disparity between
prices in Alaska compared with other states, and reiterated that
the committee would be producing a report. He predicted that if
someone undertook to import inexpensive gasoline to the state,
the refineries' prices would snap back to something more
conventional.
REPRESENTATIVE COGHILL indicated agreement with the intention of
holding meetings until something can be resolved.
REPRESENTATIVE GRUENBERG asked Mr. Sniffen whether he could
suggest a possible legislative solution.
MR. SNIFFEN said he is not sure that a "price gouging" statute
would really resolve the issue, though it wouldn't be a bad idea
for the state to have one. The question of when such a statute
would be triggered should be considered. If it were triggered
upon a declared state of emergency, for example, merely having
high gas prices wouldn't reach that level even in times of
economic distress. He indicated that the DOL has drafted such
legislation in the past, though it never made it though the
process, and he would be happy to share it with the committee.
He also noted that currently, Alaska's antitrust law has no
penalty provisions, though those of other states do, as does
federal law. Under federal law, a violation carries with it a
maximum penalty of $100 million for a corporation and $1 million
for an individual; under Alaska law, a violation is merely a
misdemeanor. The DOL prosecutes all antitrust violations
occurring in the state, and "this" would be included as a
consumer protection Act violation as well.
3:37:28 PM
REPRESENTATIVE GRUENBERG expressed interest in pursuing a
statutory solution.
[Following was a brief discussion regarding how the committee
might be proceeding.]
REPRESENTATIVE COGHILL pointed out that although there is a
refinery in his district, his constituents pay some of the
highest prices [for gasoline and home heating oil].
REPRESENTATIVE GRUENBERG expressed disfavor with the fact that
Alaska does not have what he characterized as a better antitrust
law.
CHAIR RAMRAS expressed concern that the high retail prices of
petroleum products are already causing damage to constituents.
[Following was another brief discussion regarding how the
committee might be proceeding.]
MR. SNIFFEN, in response to a question, explained that Alaska's
antitrust statute is patterned after federal law, but, again, is
lacking penalty provisions. Although some issues regarding
competition have been raised over the last few years, the DOL
has not yet had a chance to focus on the state's antitrust law.
3:49:00 PM
REPRESENTATIVE KAWASAKI offered his understanding that an
article in the Anchorage Daily News indicates that 95 percent of
all the gasoline used in the state is refined in Alaska. He
asked when the DOL will be able to release its findings
regarding the current investigation.
MR. SNIFFEN said he hopes to be able to share some preliminary
findings before the end of the year.
REPRESENTATIVE KAWASAKI asked how the DOL will determine the
veracity of the argument that rack prices are driven by market
forces.
MR. SNIFFEN said that the DOL is asking refiners how much it
costs to produce "a unit," what those costs consist of, and what
costs are variable from year to year. He surmised that many of
those costs won't have actually changed. He went on to say:
Based on that information, I can get a good idea of
why [the rack price] ... should change - other than
the crude price - and what's going into that decision.
And so we'll have some economic answers [to the
question of] ... what are the stimuli that would cause
a [gasoline] producer to change their prices at the
rack. ... We're going to try and dissect it out, to
all its component parts as much as we can, and come up
with how it is they're justifying their rack rates.
MR. SNIFFEN, in response to a question, said he doesn't think
that this type of information was sought during the last
investigation, and the report that was made public was just a
summary of the DOL's confidential report. He mentioned that his
office will also be seeking the aforementioned information from
refiners outside of Alaska.
REPRESENTATIVE KAWASAKI - paraphrasing from the findings'
portion of a document titled, "Alaska Petroleum Products Pricing
Investigation Closing Report, Prepared by the Alaska Department
of Law November 21, 2002", and noting its use of the term
"parallel pricing" - asked for more information about parallel
pricing.
MR. SNIFFEN explained that parallel pricing is what occurs when
a person can see what a competitor is charging for a product or
service and then sets the same price for his/her product or
service. The existence of parallel pricing does not necessarily
mean that collusion is occurring; it is simply that someone has
matched an advertized price, and in the retail gasoline
business, prices are displayed for everyone to see. The same
can be said to some extent with regard to rack rates because
there are services that track rack rates. He said that when
considering the question of why retail prices are quick to
increase and slow to decrease, one must realize that when the
cost of fuel rises, there is an immediate economic incentive to
raise retail prices, but when the cost of fuel decreases, there
is no economic incentive to lower prices until the competition
does so. The same is true of rack rates. One possible reason
to lower one's rack rates before the competition does so would
be to obtain more of the market share, but in Alaska, the market
share for the refiners is pretty much already divided up due to
the geographic locations of the refineries, and so not much
change is going to occur. And given that, it's simply just
easier for the refiners to maintain similar [high] rack rates.
3:57:37 PM
CHAIR RAMRAS characterized the current situation regarding the
refiners as a duopoly, and again predicted that if someone
undertook to import inexpensive gasoline to the state, the
refiners' rack rates would immediately drop.
MR. SNIFFEN concurred.
REPRESENTATIVE GRUENBERG posited that the aforementioned
forthcoming committee report could provide guidance to the next
legislature.
ADJOURNMENT
There being no further business before the committee, the House
Judiciary Standing Committee meeting was adjourned at 4:01 p.m.
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