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Legislators look at costs, cures of energy woes

Small market, distance drives up prices, but solutions may be possible, committee told

Posted: July 11, 2012 - 11:10pm  |  Updated: July 12, 2012 - 12:54pm
A bicycle commuter rides by the Tesoro Alaska Valley station on Tuesday.  Senators held a hearing to discuss ways to address high fuel and heating oil prices in Alaska in Anchorage on Wednesday.  Michael Penn / Juneau Empire
Michael Penn / Juneau Empire
A bicycle commuter rides by the Tesoro Alaska Valley station on Tuesday. Senators held a hearing to discuss ways to address high fuel and heating oil prices in Alaska in Anchorage on Wednesday.

Alaska legislators heard Wednesday some of the reasons for the state’s high gasoline fuel oil prices, and learned that they face difficult challenges in reducing costs for Alaskans.

Some of the high prices are due to the state’s small population and lack of the kind of competition that can mean lower prices.

“When you have these small markets here there just aren’t a lot of competitors and that kind of oligopoly behavior happens,” said Ed Sniffen of the Alaska Department of Law.

An oligopoly, which is a market dominated by just a few players, isn’t illegal, Sniffen said.

“We have a lot of monopolies in Alaska, monopoly pricing isn’t necessarily illegal,” he said.

It is only if a monopoly is created or maintained by illegal means that there would be a problem, he said.

Sniffen was testifying at Anchorage’s Legislative Information Office as part of an informal committee hearing into the state’s high energy prices and what might be done about it.

Economist Barry Pulliam of Econ One, an economic consulting firm, said that ‘small market’ is a big problem for Alaska.

In bigger markets with more players outside Alaska, the benefits of competition are more likely to be felt.

“There’s always someone out there who is trying to gain a little bit of an advantage by competing on price,” Pulliam said.

“The fewer number of competitors, the less that can happen.”

Alaska, at least in the cities, may have multiple fuel retailers, but they are all supplied by the state’s handful of refineries, only two of which produce gasoline, Sniffen said.

Sen. Fred Dyson, R-Eagle River, asked Sniffen to explain the situation in Southeast, where gasoline and heating oil doesn’t come from the state’s refineries but is barged up from Down South.

Sniffen said the lack of competition was the same.

“In Juneau there are only a couple of barge companies that barge fuel up from the Northwest,” he said.

Western Alaska, where fuel is also delivered by barge, has similar issues, he said.

Sniffen said that one of the ways to improve things for consumers in Alaska would be to bring more players into the market.

“I subscribe to the fact that more competition will lead to better prices,” he said. “Lets see if there’s a way we can make competition better.

Alaska is also hampered by a lack of fuel storage, Sniffen said.

Some of the state’s largest gasoline retailers might want to buy lower-priced gasoline in the Lower 48 and ship it to Alaska, but there’s not the tank capacity for a full barge load.

“That seems to be one of the bottlenecks that prevents a Fred Meyer, Costco or Safeway from getting a better deal,” he said.

Also, “you’ve got to have sufficient volume for a full barge, you are not going to send half a barge to Alaska,” he said.

The Alaska Industrial Economic Development Authority said it has looked into developing its own open-access fuel storage facility but hasn’t yet done all the analysis needed.

“The problem is we can’t simply build the tanks and hope someone comes and uses them,” said Jim Hemsath, the agency’s deputy director.

“We must have a finance plan, moving fuel through them to pay off our obligations,” he said.

Alaska has the smallest demand for gasoline of any state in the nation, with the refineries focusing more of their attention on producing the more in demand jet fuel.

In jet fuel the state has a thriving market, largely due to Anchorage International Airport’s key location in world markets, but also thanks to military purchases.

The jet fuel market is much different than the gasoline market, the key factor being that its customers are big, sophisticated players that have the ability barge up their own fuel.

Even if they don’t do so, that keeps Alaska jet fuel prices in check, Sniffen said.

Pulliam said it appears that’s why refinery margins on jet fuel were well below those they earn for gasoline.

“One thing that’s different, we do see that there is this extra piece of competition, the ability of buyers to access supplies from outside the state,” he said.

The committee also discussed the possibility of fuel price regulation.

The Regulatory Commission of Alaska, which controls what monopoly utilities in Alaska can charge, said that no one in the United States or Western Europe does that, and that an attempt to do so in another isolated market, Hawaii, was quickly abandoned.

“Historically, that has almost always been a bad idea,” Sniffen said.

RCA Chair T.W. Patch told the legislators that if they are given that task they would want a clear directive and goals from the Legislature.

The policy decision is up to the Legislature, he said, but told the committee “if you determine that direct regulation is the way to go I ask that you provide us with a clear expressing of purpose and authority.”

Sen. Bill Wielechowski, D-Anchorage, chairing the meeting, said that Tesoro Corp., which owns the big Nikiski refinery, had been invited to the meeting but was unable to attend.

The Senate Finance Committee has decided to hire expert consultants to recommend ways of lowering the state’s energy prices, and the committee will meet again later this summer to review proposals to do that.

• Contact reporter Pat Forgey at 523-2250 or patrick.forgey@juneauempire.com

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