HB 166-BULK FUEL REVOLVING LOAN FUND  10:13:21 AM CO-CHAIR NAGEAK announced that the final order of business would be HOUSE BILL NO. 166, "An Act relating to the bulk fuel revolving loan fund." 10:13:31 AM REPRESENTATIVE FOSTER, speaking as the sponsor of HB 166, began by informing the committee that Nome receives its fuel via the barge, which substantially adds to its energy costs. Currently, the bulk fuel revolving loan fund covers communities with a population of 2,000 or less. The legislation recognizes there are hub communities [with a population larger than 2,000] not on the road system that receive their fuel via the barge as well. Therefore, HB 166 proposes to expand the bulk fuel revolving loan fund to serve more communities. 10:14:56 AM PAUL LABOLLE, Staff, Representative Foster, Alaska State Legislature, explained that small isolated communities located off the road system that are frozen in most of the year have to order fuel in the fall and have enough on hand for the entire winter. The aforementioned is a large capital outlay for small communities. Therefore, the bulk fuel revolving loan fund offers reasonable interest and time to pay the cost. He noted that in many cases these small communities are unable to even get a loan of the amount necessary from a bank. Furthermore, it's not uncommon for them to incorrectly estimate how much fuel they will need for the winter. For instance, Teller frequently runs out of fuel and Nome has to provide the fuel. Therefore, the ability for the hub communities to have excess fuel is helpful to the smaller communities. However, the current population limits in statute don't allow hub communities to participate in the bulk fuel revolving loan fund. The legislation before the committee proposes to change that. Although on page 2, line 5, the 2,000 population limit is maintained, language is added such that communities located off the interconnected state road system with a population of 4,000 can qualify for the bulk fuel revolving loan fund. The legislation also changes the top end loan amount from $750,000 to $1,500,000 in order to mirror the increased population [of the hub communities]. Echoing his comments at a prior hearing, Mr. LaBolle emphasized that the population threshold of 4,000 was simply a starting point. He then pointed out that the committee packet includes a list of communities, noting the communities that would be included and those that would not. The communities highlighted in green are included because of population, but may not qualify for the bulk fuel revolving loan fund if they are located on the state road system. Furthermore, highlighted green communities such as Cordova would qualify for the fund, but don't have the need for shipping the fuel all at once since they have an open port year-round. Mr. LaBolle pointed out that Barrow doesn't qualify because its population is over 4,000. Bethel isn't on the list at all because the list is of communities with a population under 5,000. He suggested that the committee may want to consider what population and loan amounts to target. Mr. LaBolle then reminded the committee of the department's testimony that since the bulk fuel revolving loan fund is a pre-capitalized fund, it doesn't go through the appropriation process. Therefore, it would be a first come first serve process such that new entrants would be involved in an existing fund and when the fund is all loaned no more entrants are included. The department suggested that the bulk fuel revolving loan fund be capitalized with approximately $10 million to address the demand HB 166 would create. 10:20:16 AM CO-CHAIR LEDOUX asked whether HB 166 would've addressed the situation with the [Russian tanker] Renda. REPRESENTATIVE FOSTER related his understanding that issue is in litigation. The supplier says it was a force majeure situation in which a storm made [the tanker] unable to deliver, but the local fuel vendor disagrees. Either way, the situation isn't related to what this legislation would address. In further response to Co-Chair LeDoux, Representative Foster confirmed that money had nothing to do with the situation. 10:21:17 AM REPRESENTATIVE DRUMMOND related her understanding that the department's presentation is a document entitled "Effects of HB 166 on Bulk Fuel Loan Account." She then related that she learned from Meera Kohler's presentation at the Pacific NorthWest Economic Region (PNWER) this week that the Alaska Village Electric Cooperative (AVEC) ensures that its participating communities have 14 months of fuel available to avoid running out. The AVEC communities, she noted, wouldn't necessarily be able to participate in the bulk fuel revolving loan fund. Representative Drummond agreed with earlier statements regarding the need to ensure all citizens are kept safe in terms of access to fuel, regardless of the population size. MR. LABOLLE explained that the change to $1.5 million in the legislation is the result of taking an existing program and scaling up to a larger population. He stressed that it's possible that the numbers aren't where they should be in which case the numbers should be decoupled if the desire is to ensure that communities have 14 months of fuel available. REPRESENTATIVE DRUMMOND suggested that it's a matter of communication with Ms. Kohler regarding how AVEC came to its number and ensures that 14 months of fuel is in its communities prior to the end of the barge season. MR. LABOLLE added that currently AVEC doesn't use the existing bulk fuel revolving loan fund program, although it does qualify for it. 10:24:10 AM REPRESENTATIVE HERRON commented that AVEC doesn't need the program rather the "mom and pop" communities need the program. He then inquired as to the price of fuel when the current loan threshold of $750,000 was established. He suggested that the [loan thresholds] should be based on the current price of oil. MR. LABOLLE informed the committee that the existing $750,000 loan threshold was established in the oil hike of 2008 and prices are essentially the same now. In 2008 heating fuel was set at $6.05 per gallon and as of March 2012 it was $5.83 per gallon. The price of gasoline in 2008 was $5.36 per gallon and now it's $6.11 per gallon. 10:25:23 AM REPRESENTATIVE FOSTER informed the committee that in Nome today diesel is $6.39 per gallon. MR. LABOLLE, in response to Representative Foster, further explained that there have been numerous increases to the cap of this the program. For instance, in 2002 the cap was increased to $200,000 and in 2003 it was increased to $300,000 and in 2006 it was increased to $400,000. In 2008 the program cap was increased twice to $500,000 during the regular session and then to $750,000 during the special session in Senate Bill 4002. 10:26:38 AM CO-CHAIR LEDOUX suggested that perhaps an automatic adjustable arm tied to the price of fuel should be included in the legislation, which would alleviate the need to have legislation to address it. MR. LABOLLE explained that the state does that to a certain extent in the operating budget with the fuel trigger for departments. Through the fuel trigger when the price of oil is over a certain amount, funds are automatically released. The aforementioned meets the needs of the departments while maintaining some budgetary control such that funds aren't over- appropriated when they aren't needed. A complicating factor in this situation is that since [the bulk fuel revolving loan fund] is a capitalized fund not an appropriation, there isn't a way in which to ensure there are sufficient funds within the capitalized fund to meet a potential drain in funds if there was a significant spike in price. 10:28:15 AM REPRESENTATIVE FOSTER opined that although the increase in loan amount from $750,000 to $1.5 million is large, it's a small number in terms of the [cost of the fuel communities use]. For example, the amount of fuel the small community of Unalakleet uses in a year far exceeds $1.5 million, he suggested. 10:29:06 AM CO-CHAIR NAGEAK opened public testimony. 10:29:42 AM JOHN HANDELAND, General Manager, Nome Joint Utility System, City of Nome, informed the committee that for Nome the price difference in fuel as of June 1 and today is $.31. For the order of 2.4 million gallons on the way to Nome that amounts to a $749,520 increase. 10:31:32 AM MR. HANDELAND, in response to Co-Chair LeDoux, stated that the City of Nome purchases on an annual basis 2.4 million gallons of fuel for the operation of its power utility and the heating of its school district. The Nome City Council directed that the fuel for the school district should be purchased with the annual fuel purchase for the utility as it can result in a more favorable rate. The school district contracts with a local company to have the fuel brought to its facilities. The aforementioned significantly reduces the cost of school operations as well as the contribution the city makes directly, he highlighted. Fuel can arrive in Nome once the port is ice free, which can occur as early as the end of May. This year, however, the port wasn't ice free until June 10. Some years, he noted, fuel has been able to be delivered as late as the middle of October. He lauded the valiant efforts of the U.S. Coast Guard last year in assisting the Renda to Nome for a fuel delivery in January. In response directly to Co-Chair LeDoux regarding the purchase of fuel, Mr. Handeland explained that the City of Nome contracts the purchase of fuel in January for delivery during a delivery window. The contract includes a known component for the transportation, which includes some profit for the vendor. However, the price of the fuel is unknown until delivery. The City of Nome uses a 30-day average for the price of fuel in the month in which it's lifted. The upcoming fuel will be lifted around August 2nd and thus the fuel price will be based upon an average of the price of fuel in August. Presently, the purchase price is estimated to be $8.5 million, although based on the June 1 price and the price Friday the estimate will increase to about $9.3 million. 10:36:01 AM REPRESENTATIVE DRUMMOND inquired as to the definition of "lifted." MR. HANDELAND answered that "lifted" refers to the date on which the hose is connected to the header [on the barge at the departure point]. Usually, it takes 10 days from the time the fuel is lifted to its arrival in Nome because of other stops along the way. Nome Utilities is part of the Western Alaska Fuel Group, which is a group of communities that band together to receive volume discounts in the purchase of bulk fuel. The Norton Sound Economic Development Corporation (NSEDC) has a program through which it attempts to assist communities with fuel purchases. The assistance from NSEDC isn't limited to a utility or city but rather can include a store, a church, or other entity that has a large volume fuel purchase. Mr. Handeland highlighted that Nome has had a great relationship with Wells Fargo Bank over the last 25 years; money hasn't been the problem, but Nome is looking for ways to cut costs where it can in order to avoid utility rate increases. He informed the committee that Nome pays a rate of 5 percent on its fuel currently. If Nome were able to participate in the [bulk fuel revolving loan] program, it appears Nome could have a rate of 3 percent. 10:39:30 AM MR. HANDELAND, speaking specifically to HB 166, suggested that there would have to be significant adjustments made to HB 166 in order for Nome to participate. The placeholder numbers in HB 166 are a good start as they would likely address many of the smaller communities, but Nome is considering $8-$10 million in purchases. Since the fund only has $20 million if no one else borrows from it, there wouldn't be room for Nome, he pointed out. 10:40:38 AM MR. HANDELAND highlighted the city's suggestions to increase the cap and adjust the repayment as mentioned by AVEC, which has a 14-month supply of fuel on hand. Since it's unknown when the ocean will be [free of ice], the desire would be to have more than a year's worth of fuel available. With regard to the reference that loans must be payable in nine equal monthly payments, the City of Nome makes payments on cargo over the course of 12-16 monthly payments, depending upon the quantity. He explained that they're attempting to match the [city's] revenue stream to the actual fuel cost. Therefore, he suggested that the repayment period language on page 1, line 11, of HB 166 be adjusted. MR. HANDELAND then turned his comments to energy costs generally. As has been mentioned communities in rural Alaska are locked into a season when they can receive fuel as they don't have the opportunity to avail themselves of the fluctuation in the market. At one point there was discussion of the option of purchasing fuel in advance and storing it at Adak, but that results in double shipping costs and there continue to be storage and financing costs as well as costs related to the oil spill pollution requirement. Therefore, that option includes additional costs. He informed the committee that the City of Nome has considered purchasing futures in order to have the opportunity to hedge market fluctuations. However, that proposal initially ran into a snag with the power cost equalization (PCE) program because with futures sometimes one wins and sometimes one loses. Furthermore, the hedging costs when the futures were higher were considered ineligible. Mr. Handeland suggested addressing this issue on a statewide basis by having economists in the permanent fund determining how to reduce fuel costs such that communities have some certainty in terms of fuel costs. 10:46:54 AM REPRESENTATIVE FOSTER characterized Mr. Handeland's suggestion as a great idea. Although Representative Foster acknowledged that the futures market is volatile, he pointed out that over the course of a year it's the same in terms of communities being unable to purchase [when the fuel is cheaper]. 10:47:37 AM CO-CHAIR NAGEAK suggested opening the rest of Alaska to what the rest of the state enjoys whether it is by a rail system or road system that at least reaches the regional centers. Such action would open markets for rare earth minerals and other things that would drive up the economy of the state, help the communities in those regions, and reduce costs for the communities in the regions. MR. HANDELAND remarked that the City of Nome appreciates Co- Chair Nageak's efforts. 10:50:49 AM CO-CHAIR NAGEAK, upon determining no one else wished to testify, closed public testimony. 10:51:27 AM MR. LABOLLE pointed out that one of the benefits of including larger entrants in the bulk fuel revolving loan program is that they are more reliable. He explained that the more people paying the fund on time, the better off the fund is in general.