HOUSE TRANSPORTATION STANDING COMMITTEE February 24, 1997 1:27 p.m. MEMBERS PRESENT Representative Bill Williams, Chairman Representative Beverly Masek, Vice Chairman Representative Jerry Sanders Representative Kim Elton Representative John Cowdery Representative Bill Hudson MEMBERS ABSENT Representative Al Kookesh COMMITTEE CALENDAR HOUSE BILL NO. 55 "An Act relating to the fiscal operations of the Alaska Railroad Corporation and to land acquired by the State of Alaska under the Alaska Railroad Transfer Act of 1982 or otherwise acquired for railroad purposes; and providing for an effective date." - MOVED CSHB 55(TRA) OUT OF COMMITTEE HOUSE BILL NO. 63 "An Act extending the motor fuel tax exemption for fuel sold for use in jet propulsion aircraft to fuel used in those aircraft for flights that continue from a foreign country; and providing for an effective date." - HEARD AND HELD (* First public hearing) PREVIOUS ACTION BILL: HB 55 SHORT TITLE: ALASKA RR BUDGET AND LAND SPONSOR(S): RULES BY REQUEST OF LEGISLATIVE BUDGET AND AUDIT JRN-DATE JRN-PG ACTION 01/13/97 42 (H) READ THE FIRST TIME - REFERRAL(S) 01/13/97 42 (H) TRANSPORTATION, FINANCE 01/15/97 78 (H) STA REFERRAL ADDED 02/05/97 (H) TRA AT 1:00 PM CAPITOL 17 02/05/97 (H) MINUTE(TRA) 02/10/97 (H) TRA AT 1:00 PM CAPITOL 17 02/10/97 (H) MINUTE(TRA) 02/17/97 (H) TRA AT 1:00 PM CAPITOL 17 02/17/97 (H) MINUTE(TRA) 02/19/97 (H) TRA AT 1:00 PM CAPITOL 17 02/19/97 (H) MINUTE(TRA) 02/24/97 (H) TRA AT 1:00 PM CAPITOL 17 BILL: HB 63 SHORT TITLE: AVIATION FUEL TAX EXEMPTION SPONSOR(S): REPRESENTATIVE(S) THERRIAULT, Davies, Kelly, Brice JRN-DATE JRN-PG ACTION 01/13/97 48 (H) READ THE FIRST TIME - REFERRAL(S) 01/13/97 48 (H) TRANSPORTATION, FINANCE 01/22/97 126 (H) COSPONSOR(S): DAVIES 02/12/97 (H) TRA AT 1:00 PM CAPITOL 17 02/12/97 (H) MINUTE(TRA) 02/12/97 325 (H) COSPONSOR(S): KELLY 02/17/97 (H) TRA AT 1:00 PM CAPITOL 17 02/17/97 (H) MINUTE(TRA) 02/18/97 388 (H) COSPONSOR(S): BRICE 02/24/97 (H) TRA AT 1:00 PM CAPITOL 17 WITNESS REGISTER BILL SHEFFIELD, Former Governor Chairman, Board of Directors Alaska Railroad Corporation P.O. Box 107500 Anchorage, Alaska 99510 Telephone: (907) 265-2414 POSITION STATEMENT: Testified against HB 55. PATRICIA DUNN, Vice President Finance and Administration Alaska Railroad Corporation P.O. Box 107500 Anchorage, Alaska 99510 Telephone: (907) 265-2516 POSITION STATEMENT: Testified on HB 55. RICHARD CURTIN, General Counsel Petrostar, Inc. 201 Arctic Slope Avenue Anchorage, Alaska 99518 Telephone: (907) 344-2661 POSITION STATEMENT: Testified on HB 63. TRENT CARBAUGH, Director Aviation Marketing Petrostar, Inc. 201 Arctic Slope Avenue Anchorage, Alaska 99518 Telephone: (907) 344-2661 POSITION STATEMENT: Testified on HB 63. ACTION NARRATIVE TAPE 97-11, SIDE A Number 001 CHAIRMAN BILL WILLIAMS called the House Transportation Standing Committee to order at 1:27 p.m. Members present at the call to order were Representatives Masek, Hudson, Elton, Sanders and Williams. Representative Cowdery arrived at 1:35 p.m. Representative Kookesh was absent. HB 55 - THE ALASKA RAILROAD AND THE EXECUTIVE BUDGET ACT Number 025 CHAIRMAN WILLIAMS announced the committee would hear House Bill No. 55, "An Act relating to the fiscal operations of the Alaska Railroad Corporation and to land acquired by the State of Alaska under the Alaska Railroad Transfer Act of 1982 or otherwise acquired for railroad purposes; and providing for an effective date." The committee has heard HB 55 three times now. Chairman Williams stated it was his intent to adopt and move the bill out of committee. Number 099 FORMER GOVERNOR BILL SHEFFIELD, Chairman, Board of Directors, Alaska Railroad Corporation, testified via teleconference from Anchorage. Governor Sheffield stated that he had already testified in the first committee meeting on why the railroad should not be under the Executive Budget Act (EBA), and why they should not take half the railroad lands away. Either one of these would cause the railroad to lose money and would eventually go broke. To put railroad under the EBA would limit its ability to run the business for profit. To take away the land which the railroad uses in its profit picture would be just a way to start to lose money, go broke, and lose your value of your asset. In addition, Governor Sheffield wanted to address a couple of things brought up at the last meeting by Representative Cowdery, regarding the issue of liability to the state or to the railroad. He stated that the railroad has a $5 million deductible policy insurance for liability to third parties with $75 million in coverage after the deductible is met. The railroad is self-insured up to $5 million for liabilities to third parties. He stated that there is insurance for damage to railroad property, $10 million deductible, self- insured with $5 million in coverage after the deductible. The deductibles are covered by a $10 million line of credit carried at the Alaska Bank, and renewed annually. He stated that the limit of liability is in AS 42.40.500: "A liability incurred by the corporation shall be satisfied exclusively from the assets or revenue of the corporation and no creditor or other person has a right of action against the state because of a debt, obligation, or liability of its corporation." Governor Sheffield stated that it is not true that without the $10 million subsidy grant, that the railroad received from the federal government, the railroad would have lost money last year. The $10 million goes in and is expensed right out and has nothing to do with the balance sheet of the railroad operation. He referred to a letter to Representative Martin from Pat Dunn, Chief Financial Officer of the railroad corporation explaining that very position. Governor Sheffield requested that Ms. Dunn be allowed to testify on the accounting of the railroad. Number 548 PATRICIA DUNN, Vice President, Finance and Administration, Alaska Railroad Corporation testified via teleconference from Anchorage, at the request of Governor Sheffield. She said, "We receive the funds and it's initially recorded as cash and deferred revenue. We have not earned that money yet. As we incur expenses that are related to that revenue, we incur an equal amount of revenue. So, in the first year, we had over a million dollars worth of expense and we had depreciation related to capital assets, which is also expense, and we had an equal amount of revenue that offset that, so the net effect, the net income is zero. The $8 million that you saw as net income on the financials this year, is as a result purely of the railroad and real estate operation." Number 632 GOVERNOR SHEFFIELD restated that to put the railroad under the EBA would be bad for business. He stated that both Alaska Housing Finance Corporation (AHFC) and Alaska Industrial Development and Export Authority (AIDEA) were placed under the EBA, but the railroad is different. The railroad is "rolling company and we're moving freight." The railroad needs to be flexible enough to run a business and be responsive to the customers. He stated that the other part of the bill was to take away the land which would take away half the profit. In the five year projection, the income is projected to increase every year from freight and passenger revenue on the transportation side as well as the real estate. He stated that they work hand and hand, without one you don't have the other. The railroad needs all the land to make this work and all the land is not being used right now. He stated that although the railroad has an aggressive program to lease out the land not all of it is leased. We have about $700,000 worth of income to municipalities of land yet to lease out. He said we have some land up around Hurricane, up north about 10,000 acres which may not be leased for a long time because there is not a lot going on up there. The railroad needs to protect itself regarding these lands. He stated that the railroad is very benevolent to municipalities. Governor Sheffield spoke further of the status of the land and the fact that the railroad is able to give land away for $1 a year to parks and do things with it that the private sector is not able to do. The railroad is not subsidized by state government. A month ago, in a joint meeting of the House Transportation Standing Committee and the Senate Finance Standing Committee, the Speaker of the House stated that the Railroad is subsidized because the railroad does not pay corporate taxes, doesn't pay property taxes on land, and doesn't pay for the licenses. He stated that the railroad does pay for half the licenses. Governor Sheffield stated that the railroad does a lot of benevolent things around the state. The railroad has a strategic outlook and he will bring copies after being approved by the board of directors. The railroad is regulated by performance audits yearly, financial audits yearly, annual statements, five year capital budget, five year operational budget, and projections. All of this is reported to the board. He stated that the railroad is run well and is responsive to Alaskans and will continue to improve the asset. The railroad put over $120 million back into the assets since it was purchased by state. He stated that the railroad has made money 9 years out of the last 12 years and is now making record earnings. He stated that there is a long range plan to buy locomotives. A couple years ago the railroad bought and paid off hopper cars and passenger cars. Governor Sheffield stated that the railroad has remodeled and rehabilitated locomotives. He stated that this year, the railroad is putting in state of art communications systems with Global Positioning System (GPS), a new microwave relay which helps the state in its communication efforts on the railbelt from Anchorage to Fairbanks. The railroad will be the first railroad in the country to be upgraded to the new standards of the Federal Railroad Administration (FRA). He stated that the railroad has good management people, 500 employees, is not state subsidized, does not have state employees, and is not under the state retirement program. The legislature and the administration in 1984 and 1985 went to a lot of trouble and money to make sure the railroad would turn a profit and be responsible to Alaskans and keep it state owned. He stated that the railroad is run like a business and is profitable. The railroad is able to respond to customer needs. The railroad is a real part of the economic picture of the state. Governor Sheffield then asked how the railroad could be more responsive to the legislature without putting the railroad under the EBA or without taking away its land. Number 1246 REPRESENTATIVE KIM ELTON referred to page 2, line 3, which deletes the word "exclusively". He asked if the state would incur liabilities by moving the railroad corporation under the EBA by eliminating the word exclusively. Number 1285 GOVERNOR SHEFFIELD replied yes, more control equals more liability, in a general sense. Number 1339 REPRESENTATIVE BILL HUDSON made a motion to adopt CSHB 55(TRA) dated 2/12/97, H version, officially before this committee. Number 1359 CHAIRMAN WILLIAMS asked if there were any objections, hearing none, CSHB 55(TRA) was adopted. Number 1371 REPRESENTATIVE HUDSON stated his belief that the railroad is a more dynamic system than is normally handled within the EBA. He believes that this bill is wrong headed because the railroad unlike the Marine Highway System is a far more dynamic system and he stated that he is convinced that the EBA could drag the railroad system down to the point where it wouldn't be able to operate efficiently. Representative Hudson wondered if there wasn't some way to make certain that the legislature has a better handle on the total expenditures without putting this entity within the EBA. Number 1458 GOVERNOR SHEFFIELD answered a question posed at an earlier meeting regarding the contractual obligation for freight to the tune of $200 million for new barges and tugs. He stated that this is not true, the railroad currently contracts with Crowley to haul freight from Seattle to Whittier every seven days. The contract with Crowley will expire next year and the railroad is contemplating a new contract with a new company. He stated that as Representative Hudson just pointed out we wouldn't be flexible to do this under the EBA. The railroad contracts with Crowley now and if we started with a new company we would have to contract for 5, 10 or 12 years to get the proper price. That would essentially be obligating the railroad for $130 million over a 12 year period but the railroad would make about $60 million. Governor Sheffield stated that these are the kind of things the railroad does and under the EBA this type of contract would be hard to do. If the railroad went to borrow money Governor Sheffield was doubtful the bank would loan them money. These are the kind of comparisons that are part of the reason the EBA wouldn't work for the railroad. Number 1585 REPRESENTATIVE HUDSON made a motion to move CSHB 55(TRA), H version, out of committee, with individual recommendations, with zero fiscal notes and asked unanimous consent. Number 1597 CHAIRMAN WILLIAMS asked if there were any objections. Number 1606 REPRESENTATIVE ELTON objected and stated that the hottest political theory of the last decade has been reinventing government. He stated that the bill "takes away flexibility of the managers, the bureaucratic equivalent of the medical term "hardening of the arteries. Its makes accomplishing the mission much much more difficult. And what I find even more frightening is the impetus for this isn't from the people that are being served, it is not from the private sector people that are being served, it is not from the communities that are being served, what I find frightening about this is that the impetus is from the politicians. And the more we mix politics into this operation, I think the more dangerous the operation becomes so I encourage people to do what I am going to do and just say no. Number 1664 REPRESENTATIVE MASEK stated it is important to scrutinize agencies such as the railroad. She stated that "it is all through public funding and of course gets federal dollars but currently the way its set up there is no real across the board scrutiny where you can get in to have a check and balance system and basically I believe this bill here is just trying to get that, get more direction as to where the railroad is going and if they're not doing anything terribly wrong then they shouldn't be so worried about this bill because we all talk about accountability and credibility and that's exactly what I see this bill is doing." Number 1705 CHAIRMAN WILLIAMS hearing no other comments asked for a roll call vote. Representative Elton voted against the motion. Representatives Cowdery, Hudson, Sanders, Masek and Williams voted in favor of the motion. Chairman Williams stated that the motion carried. CSHB 55(TRA), H version, was moved out of the House Transportation Standing Committee, with zero fiscal notes. HB 63 - AVIATION FUEL TAX EXEMPTION Number 1743 CHAIRMAN WILLIAMS said the committee would hear HB 63, "An Act extending the motor fuel tax exemption for fuel sold for use in jet propulsion aircraft to fuel used in those aircraft for flights that continue from a foreign country; and providing for an effective date." He stated that it was not his intention to move this bill out of committee today. Number 1763 RICHARD CURTIN, General Counsel, Petrostar, Inc., stated that probably the committee is familiar with the issues that this bill seeks to address. There are major changes from last year. The first and most important was that last year, Trent Carbaugh, the Director of Jet Fuel Sales, forecast that there would be a steady and significant movement from air carriers towards buying foreign manufactured fuel and away from buying fuel manufactured in Alaska. Half a year later, he stated they are in a position to see that this has happened and approximately one-half of the fuel that's being sold to these foreign originated continuing flights is refined outside of the United States. He stated that the source of the problem, the Foreign Trade Zone (FTZ), established in Anchorage, made it possible for carriers to buy fuel tax free. This action created a choice that hadn't existed before. Fuel can be bought that doesn't have a tax on it or fuel can be bought that does have a 3.2 cent tax on it. He stated that this is the discrimination that Petrostar is fighting against because as things stand now and as they will stand in the future, fuel made in the United States is subject to the tax, while fuel not made in the United States is not. He stated that this is discrimination. It's discrimination that's unfair and unwise, as a matter of policy, for a state to discriminate against its own industry. The second part of the equation is that, besides being unfair, it is unwise, but also pointless. Its only impact is that people will go elsewhere and all three of the Alaskan refiners will be seriously injured. He indicated his belief that everybody in Alaska, save for a few, are optimistic about the future of the Anchorage airport developing as an industrial hub. He stated that the market for foreign originated fuel is going to grow. Leaving this tax on the books discriminates against Alaskan industry. It means that the industry will grow but that we as Alaskan refiners will be shut out from the growth. Number 1963 REPRESENTATIVE COWDERY asked who they look at as the other suppliers of jet fuel in the state as major competitors. Number 1983 TRENT CARBAUGH, Director, Aviation Marketing, Petrostar, Inc. stated major competitors are Mapco and Tesoro. Number 1994 REPRESENTATIVE COWDERY asked if it was his opinion that MAPCO and Tesoro would want this market without the forgiveness of the tax. Number 2024 MR. CARBAUGH stated that he couldn't speak for other refineries but for Petrostar he stated that the tax was something they couldn't pass through because it is an immense expense from their point of view. Number 2040 REPRESENTATIVE COWDERY asked if the shipping fees of the foreign refiners are comparable to Petrostar's shipping fees from Fairbanks down. Number 2063 MR. CARBAUGH replied that with all of their costs including shipping, refining costs, labor costs, capital costs of building their plants, crude oil costs that they are able to beat Petrostar out of the market with this tax in place. Because that is what's happened. Number 2076 REPRESENTATIVE COWDERY asked about the costs of crude oil and the theory that crude costs the same all over the world. MR. CARBAUGH stated that there has been no answer even in litigation to that question. Number 2083 REPRESENTATIVE COWDERY asked what impact would this have on the landing fees if the state decided to forgive the tax. Number 2104 MR. CARBAUGH explained that it was his understanding that it would have no affect. Mr. Carbaugh stated that his hope was the same and that Petrostar would be willing to stand shoulder to shoulder with the Alaska Air Carriers Association to fight it. There shouldn't be any affect. If there is going to be one it should occur just by the revenue going away which is going to happen in any event. He stated that it would be total injustice to penalize the air carriers as we are being penalized because of the existence of the FTZ. Number 2127 REPRESENTATIVE HUDSON asked if we took no action and didn't consider this at all, would we see a continued growth of the importation of foreign produced oil, in their capacity, in their production, in jobs and wherever they're coming from. He stated that since this is such a large part of Petrostar's market, no action, would portend less production but not only no growth in your operations but perhaps a decline, affecting jobs and associated transport jobs and things of that nature. Representative Hudson asked is this was a fair assessment. Number 2158 MR. CARBAUGH stated yes, that was true. Number 2163 REPRESENTATIVE HUDSON further asked if we do agree to the elimination or the reduction of a tax we may be encouraging expanded growth, because you may have a greater share of the market and maybe stem some of the foreign oil, you may be able to compete effectively with the foreign produced oil. He asked if that was a fair assessment. Number 2178 MR. CARBAUGH stated yes, what that would mean is that as the market grows, we, rather than the foreign refiners, would participate in that growth. Number 2184 REPRESENTATIVE HUDSON then stated that he assumed that it probably would have some bearing on jobs, the economy and money washed into the Alaska economy. Number 2189 MR. CARBAUGH agreed. Number 2192 CHAIRMAN WILLIAMS asked how many tankers had Petrostar brought into the FTZ last year and this year. Number 2203 MR. CARBAUGH responded that Petrostar has not brought in tankers with foreign fuel. Petrostar's barge arrives at the port of Anchorage at least twice every month. Sometimes, they, as well as Mapco and Tesoro, in order to meet the influx, do bring in product from outside the state, many times from the lower 48. He stated that at this time, Petrostar does not participate in bringing in foreign fuel into the port of Anchorage. ADJOURNMENT CHAIRMAN WILLIAMS adjourned the House Transportation Standing Committee meeting at 2:10 p.m.