Attorney General and ISER Release Reports on Rural Fuel Prices
February 18, 2010
Anchorage, Alaska - Independent reports on the pricing of fuel in rural Alaska were released today by the Alaska Department of Law and the Institute of Social and Economic Research (ISER) at the University of Alaska Anchorage.
The reports, while based on separate investigations, agree upon some underlying causes of the high prices of gasoline and heating fuel, particularly in regions off of the road system.
Pursuant to the administrative order creating the Rural Action Subcabinet, the Department of Law followed up on its 2008 study of gasoline prices in the Railbelt. ISER's study was commissioned by the Senate Finance Committee last fall.
"One of the challenges of being the largest, most geographically diverse state in the union is the logistical cost of transporting fuel to all of our communities, which leads to high prices," said Attorney General Sullivan. "We believe that this report and the ISER study provide useful information for policy-makers as they work to address the significant challenges of the high costs of fuel in rural Alaska."
The attorney general's key findings:
- Wholesale delivery costs to most parts of rural Alaska are high as a result of complicated scheduling, challenging geography, very small volumes over which to spread costs, and regulatory requirements for delivery.
- Based on the information provided for the period under review, high wholesale prices in rural Alaska appear to be driven by high delivery, storage, and logistical costs.
- Taking into account these high delivery, storage, and logistical costs, the average rate of return on invested capital for wholesale suppliers was unremarkable.
- The wide disparity in fuel prices within certain regions across rural Alaska is primarily the result of pricing differences among local retailers.
- Retail margins are the result of conditions that vary among communities. Retail operations in rural Alaska are of a significantly smaller scale than they are in more urban areas. Accordingly, costs associated with these operations must be spread over smaller volumes, which contribute to higher prices.
- Bringing down the high cost of fuel in rural Alaska will be a challenge, but continued efforts in conservation, education, alternative energy development and infrastructure upgrades might produce positive results.
- While this study does not categorically conclude there have been no illegal practices in rural wholesale and retail fuel pricing, investigators found no evidence of such illegal activity.
The attorney general's study noted similarities between pricing dynamics in Alaska villages and those in remote Hawaiian islands, which depend upon barge-delivered fuel in small volumes.
"Alaska presents unique competitive challenges when it comes to pricing goods and services in remote locations," said Senior Assistant Attorney General Ed Sniffen. "We regularly monitor fuel-pricing activity for evidence of illegal conduct, and we will continue to explore options that will have positive effects on competition."
ISER's study contains a detailed analysis of the components that make up the costs to deliver fuel to rural Alaska.
"Our economic analysis of the rural fuel price situation found that the high costs of transporting fuel long distances to remote and challenging locations that require large storage facilities in isolated communities results in high prices," said ISER economist Ginny Fay.
The ISER study also found that recent high prices in Western Alaska are due in part to a convergence of factors including:
- Higher crude oil prices;
- Price recovery among fuel distributors, after earlier competition for market share pushed prices below sustainable levels;
- Repair and replacement of aging tugs and barges, including federally required use of double-hulled tankers; and
- Construction of new fuel tank farms in many communities, with business plans that require pricing to include costs of tank repair and replacement.
Many legislators have been focused on this issue and have requested these studies, including Representative Jay Ramras, chairman of the House Judiciary Committee, who has held several hearings on rural fuel pricing.
- Rural Fuel Pricing in Alaska: A Supplement to the 2008 Attorney General's Gasoline Pricing Information
For further information on the attorney general's report, contact Ed Sniffen, (907)269-5220.
For further information on the ISER report, contact Ginny Fay, (907)786-5402.
For copies of the ISER report, go to: www.iser.uaa.alaska.edu.
# # #