HOUSE SPECIAL COMMITTEE ON ECONOMIC DEVELOPMENT March 19, 1998 5:10 p.m. COMMITTEE CALENDAR FUEL COSTS AND THE EFFECT ON THE ECONOMY TAPE(S) 98-2, SIDE(S) A & B 98-3, SIDE(S) A CALL TO ORDER Representative Jerry Sanders, Chairman, convened the House Special Committee on Economic Development meeting at 5:10 p.m. PRESENT Committee members present at the call to order were Representatives Sanders, Ivan, Williams, Kemplen, Hodgins, Berkowitz, Croft and Austerman. Also Attending: Representative Vic Kohring and Senator Jerry Ward also attended the meeting. SUMMARY OF INFORMATION Representative Sanders introduced people standing by on-line to testify via teleconference. On-line was Anchorage, Fairbanks, Kenai, Gakona, Kodiak and Glennallen. Representative Sanders asked for their testimony on the effect of high fuel prices in their area of the Alaskan economy. FRANK DILLON, Executive Vice President, Alaska Trucking Association, stated that the trucking industry's lifeblood is diesel fuel. His company has noticed that the cost of diesel fuel remains higher in Alaska then outside of Alaska. He also stated that the added out-of-state fuel tax is about .20 cents a gallon compared with the Alaska fuel tax of .08 cents a gallon, you come up with a fuel differential of about 92 cents per gallon outside of Alaska for self serve verses $1.25 in the state. He believes that competition is an effective way for the market to respond to pricing. Anytime there is a reduction in the price of fuel, that reduction is passed on to the consumer and everybody in Alaska. It definitely has a positive effect on the general quality of life. He is pleased to see this committee inquiring into this matter. LARRY KORDECKI once tried to institute a class action suit against Mapco and Tesoro regarding gasoline and diesel fuel prices. Nothing came of it. Since then, he had given up on it until Representative Sanders brought attention to the issue. He stated that he would have liked to have had Representative Sanders around four years ago when the Governor or the legislature would not even talk to him about this issue. He doesn't feel that the market will take care of itself. It is time for the legislature to really do something. DANIEL J. MAY, Polar Mining Company, did not attend but submitted a letter into public testimony. The letter dealt with the large difference in prices of fuel refined in North Pole and available to consumers there. The same fuel, which is available to consumers in Washington State, is less by 27 cents per gallon. Mr. May believes consumers in Fairbanks are being gouged. Legislative Assistant Patricia Everson read the testimony which is on file. CHRIS BERNS, Commercial Fisherman, Kodiak, stated that he has a small fishing vessel and his fuel costs are about 10 percent of his boatload. Everything that is done in the fishing industry is driven by diesel - the boats and the processing plants. All this adds up to making an already strapped industry that more burdened. He applauds the investigation into this matter by the Representative Sanders and the legislature. ALAN LEMASTER, Texaco Dealer, Glennallen, stated that he would be available to answer questions or help in any way. RICH CLINE, Owner, Clines Tesoro, Anchorage, stated that he is a retailer that has been in Alaska since 1964. He must maintain a certain margin of markup to make a living and pay his expenses, such as tank insurance, taxes, and workmen's compensation and garage insurance. When he buys his fuel, there is an amount of mark up that he has to have to pay his expenses. The price of fuel at his station today is $1.11 a gallon. At Mapco in Anchorage gasoline is $1.15 a gallon on one side of town and as high as $1.22 a gallon on the other side of town. They seem to have a .07 to .08 cent difference in prices depending where they are located. MR. LEMASTER stated that it costs him a quarter of a million dollars to replace on pump that has six hoses. He is a very small station in rural Alaska. He doesn't have the number of gallons pumping out of his station per day that other stations do in Anchorage or Fairbanks. Therefore, his cost is much higher being that his volume is so much less. As a result of where he lives, he is stuck with raising his prices more per gallon than what you would pay in Anchorage. If he dropped his prices even a penny or so it would cost him to run the station. BILL JEFRESS, representing Gold Mining in Fairbanks said his company uses approximately 310,000 gallons of diesel fuel per month. He stated that oil prices are at a 10-year low but gold prices are at an 18-year low. He feels that there is preferential charging. It seems that a lower price is being charged to the international freight haulers in Anchorage for fuel that is actually refined 16 miles from Fairbanks. His company would like to buy locally, but they are forced to go outside. JERRY MCCUNE, President, Cordova District Fisherman United, stated that fuel prices for fisherman have been high. The lack of competition is part of the problem in some of the rural areas. We should find a way to refine some of our heating fuel here. Heating fuel costs are a big part of people's income in this state, even more so if you live somewhere like Fairbanks. Every penny or two that is saved on fuel means thousands of dollars for communities, fishermen, processing plants and workers. EDDY BURKE, Anchorage Resident, stated he was a Texaco dealer for four years and a Chevron dealer for ten years. He has been out of the gasoline retail business for one year. From his standpoint the environment has changed so much in the last 15 years or so. When he started his business in 1984, most gas stations were all mom and pop owned, they were your neighbors. It seems when Mapco came to town all that seemed to change - some changes for the good and some for the bad. The service station business has changed dramatically. We have stations, such as Chevron, owning their own facilities across the state. It is not the independent dealers that are holding the profits. Station owner profits have done nothing but decrease. We have oil companies getting rid of independent mom and pop dealers. It seems three big oil companies are controlling the whole market. He believes Mapco dictates the prices and the other stations follow suit. RON KOVALIK, Fairbanks, said he has been retired for the last twenty years. He asked why only one representative in all this time has brought this issue up. It almost seems as if the attorney general is in engaged in selective enforcement. You don't need collusion to have price gouging; all you need is deaf and blind enforcement. The state ought to get a little tighter about their royalty oil sales and tie it to the sale price of Alaska oil in the Lower 48. Mr. Kovalik stated that he would like to see some of these antitrust laws discussed. This government appears to be bought off. Commissioner Shively is doing the bidding if the governor; he can't make these decisions on his own. MR. BURKE referred to a Los Angeles news article stating that San Diego has passed legislation banning oil companies from owning stations. He thinks something along those lines should be done here. STEVE WORMINGTON, Vice President, Tesoro, Anchorage, started his testimony by stating that he would like to dispel the concept that Tesoro is making millions. He gave an example of a $300 million investment that only profited $700,000. He went on to say that in 1996, Tesoro did have an improvement of $2 million, 2 percent pretax profit and in 1997, we more than tripled to a 7 percent return on our investment, for a total of $20 million. Tesoro is extremely dollar limited. We currently have 170 branded locations in the state of Alaska and he would like to state that those are not concentrated in the Anchorage area, as most other companies are. Tesoro is throughout the state. The majority are 35 companies owned and operated locations that we set the price on. The remainders of stations are independent dealers. He told us of one of his dealers, who works about 16 hours a day, 7 days a week, stated If you look at his location, he is not getting rich. Basically, it's a tough business. It's predicated on what the dealer can sell his product for. Their profits are based upon margin and how many gallons they sell. The more gallons, the lower the margin. He stated that generally most dealers are operating stations that sell well less than 100,000 gallons per month, compared to the average Mapco station, per their last report that I saw was 177,000 gallons per month. They are basically three times the size. He stated that it does get to the point where it is extremely difficult for an independent to operate his station as efficiently as someone who is pumping three times as much gasoline as he is. He went on to state that he does believe that Mapco a certainly built some very nice locations, they have put a lot of dollars back into the economy and I think that is what the general public is wanting. When asked about collusion among oil companies, he stated that he personally didn't want to wear a striped suit, so he can assure us that there is no way he is talking to anybody about collusion in oil prices. It's very clear what the impact of that is and I don't quite make enough money to justify wanting to do that to myself. He stated that he had just come from the Department of Natural Resources and said we were looking at talking to them about our royalty contract, which comes up next year. The price is going to be the same as what is being offered to Mapco. The problem is the quality isn't going to be the same. When asked about prices being so high when we are so close to the source, he responded that he believes having two refineries in the state for gasoline has lowered the overall cost to the Alaska consumer. He stated that Tesoro supplies approximately 60 percent of the state's gasoline requirements, but of that, that is heavily weighted towards outside the Anchorage area. When asked when will we, the citizens of Alaska, actually see competition occur in the price of gasoline and when will we see the benefits of the market place at work, he replied, "If you haven't seen a drop in gasoline prices, then you and I are living in different places." REPRESENTATIVE ALLEN KEMPLEN asked if Tesoro made a fairly sizeable profit amount from the sale of gasoline here in the state. MR. WORMINGTON answered that it is certainly much more profitable then selling residue fuel in Los Angeles. CHAIRMAN SANDERS asked do you produce more gas than you can sell in the state. Do you produce any home heating fuel? MR. WORMINGTON answered that they do to a limited degree. Diesel and home heating fuel are very similar products, so he would have a hard time telling us if someone was using it for home heating oil. CHAIRMAN SANDERS asked if Tesoro sells any diesel or very much diesel fuel to Petro Marine or Delta Western. MR. WORMINGTON answered that Petro Marine was previously purchased from Tesoro until about 2 years ago. They started purchasing the majority of their product from Mapco and they formed a deal in Southeast, where Petro Marine has built a service station where they make Petro Express. We have sold large amounts of product to Delta Western. Delta Western is currently experiencing some financial difficulties and we have not made sales to them recently. CHAIRMAN SANDERS asked if the Alaska public would be better served if you kept that gasoline in the state of Alaska and lowered your price and got a bigger share then the 60 percent that you currently have. MR. WORMINGTON answered that the problem is that Tesoro makes more then the state of Alaska uses. So it really won't make much difference what the price was. He stated he would have to say that he has a good idea that we will trade the gasoline that we're shipping outside the state for crude oil and let the state sell that then. He stated that he was being facetious. We would like very much to sell our entire product in state and that is what we have started to press, we have stated that. REPRESENTATIVE KEMPLEN stated that when you have an excess supply, prices drop and demand picks up correspondingly and if your saying that you have excess supply of gasoline, he would expect based upon economics, that the price would drop and so then demand would pick up. He asked why that didn't that work in this case. MR. WORMINGTON answered that he thinks the point earlier that Mapco is basically the leader of pricing and he won't tell us that it's a matter of collusion, but when we make a price move, Mapco is going to be moving to. He further stated that if Tesoro drops prices 10 cents a gallon, that Mapco will drop it that much more. CHAIRMAN SANDERS asked, "So you are telling me this whole me this whole thing hinges on Mapco. If we can get a grip on Mapco, everything will come down?" MR. WORMINGTON answered, No sir, he was not saying that. It hinges on the free market place and that he believe the price of gasoline does change over a period of time. One item he would like to mention here, and he apologized that he failed to mention earlier, everyone wants to talk about the price of crude and why we don't have an immediate drop in the price of gasoline. As of the end of February, Tesoro had 4.2 million barrels of crude and products in storage, now since we have to transport the crude to the refinery by vessel and the associate is somewhat of an unstable means of transport sometimes, we have about 1.5 million barrels of stored crude oil. That's a months supply. He stated that Tesoro's prices in March, 1997, were $1.35, they are now in the $1.15 range. He refereed to an article from the American Petroleum Institute that stated that October, 1997, through early March, 1998, the average price of gasoline throughout the United States fell from 1.254 a gallon to 1.075 a gallon. We have a lag, now we could sit there and say the refinery on the pipeline doesn't have a lag because they have no inventory. Of course, on the other side, we'll tell you when prices go back up and he can assure us it is when, not if, we will have lower cost crude in our tanks then our competition do, when Mapco does, so it will average out over a period of time. CHAIRMAN SANDERS asked if they would keep the prices down for three months when it goes back up. MR. WORMINGTON offered his apology and stated that he wants to be sure that we understand that he does not set the price on the street at any location other then the ones that we own and operate. MR. LEMASTER asked if he could throw another factor into the equation. If I'm a Tesoro dealer and I'm paying the distributor $1 a gallon and I mark my gas up 10 cents a gallon. Where as the cost of gasoline goes down considerable, it's going to go down 20 cents, I'm still making my 10 cents a gallon, but my profit margin, my percentage of profit to my investment is considerably greater. If his price goes from $1 to $1.50, and I still have to charge my 10 cents a gallon to be competitive, then my percentage of profit goes down. AN UNIDENTIFIED SPEAKER replied, "You're making the same number of dollars but you are right, your percentage of profit is different." CHAIRMAN SANDERS stated that he thought that Mr. Wormington was going to be here for the meeting, so he prepared a beautiful chart for him, showing the prices in Anchorage, Juneau, Fairbanks and California. REPRESENTATIVE VIC KOHRING stated that he is not member of this committee but would like to have a minute to offer some remarks. First of all, he stated that he would like to let Representative Sanders know that he appreciates him scheduling this hearing and bringing forth this issue. He needs to study this issue a little more before He can come to any definitive conclusion, but what he did deduce from this is that his constituents are being gouged. However being the pure, free market purist that he is, he really doesn't think that government ought to be dictating the process here. He stated he doesn't think the government ought to be coming in and implementing laws, regulations, whatever, to control the free market process out there and he really thinks that it should be run on a supply and demand basis. He thinks perhaps there is a role that the legislature can play. If there is a problem it is the legislatures duty to expose it. REPRESENTATIVE IVAN IVAN stated that this has been a learning experience for him. Gasoline in his community is about $2.30 a gallon and heating fuel is around $2 but he understands that that might be part of the shipping cost. He would like to call on someone to explain, the effective commissioners, whoever they are, that are involved in the execution of regulations are statutes that pertain to this. He certainly believes in the free enterprise system and that's what makes the world go round. This certainly has an impact on the cost of living where he comes from. He said he looks forward to more meetings. Hopefully, something will come out of this. REPRESENTATIVE KEMPLEN stated that he is certainly concerned by what he has heard at this meeting. He is concerned that Tesoro is not dropping prices even though they have extra supply and Ron Kovalik he made the statement that Tesoro will charge what the market will bare. It seems to him that there is something not quite kosher. Government does have a legitimate roll to play in enforcing the rules of the market place. When we cut government budgets just for the sake of cutting government budgets we are shooting ourselves in the foot and were doing a disservice to the citizens of Alaska, because here it seems to me is an example of why we have government, to enforce the rules of the game, so that the citizens of Alaska get a fair deal. CHAIRMAN SANDERS stated that he would wind it up by saying that his primary interest is not in the price of the crude today or the fluctuation from last week or the relationship between crude in the last month and the price. His question is to the price of fuel in Alaska over the last 25 years. When the refineries were built in Alaska and the royalty crude was sold to them, the idea was that their was to be price benefits to the citizens of Alaska and I don't see where those benefits are coming to Alaska. Least of all where Representative Ivan comes from. He questioned what he getting out of his royalty oil and what are his constituents getting out of their royalty oil. He thinks that's the question here. We are going to keep working on it and we will have the Administration in and at some point we will have all the oil companies or refineries here. We will sit down and talk to them, someone is going to explain this to us. ADJOURNMENT The meeting was adjourned at 7:10 p.m. COMMITTEE ACTION The committee took no action. NOTE: The meeting was recorded and handwritten log notes were taken. A copy of the tape(s) and log notes may be obtained by contacting the House Records Office at 130 Seward Street, Suite 211, Juneau, Alaska 99801-1182, (907) 465-2214, and after adjournment of the second session of the Twentieth Alaska State Legislature, in the Legislative Reference Library.