|
Twin reports examine rural fuel pricing ISER and AG find no signs of illegal activity, but see areas where lack of transparency makes solutions difficult to find Eric Lidji For Petroleum News
Fuel prices in rural Alaska seem to play by the rules of the market, but the market in rural Alaska is so unusual it makes fuel prices hard to decipher, according to two new reports.
Factors ranging from obvious — the challenges of getting fuel to remote corners of the state — to quaint — the need for better accounting practices — inform fuel prices in rural Alaska, but “little is publicly known about the actual structure of Alaska’s rural fuel markets and what drives prices at the community level,” according to a report from the Institute of Social and Economic Research at the University of Alaska Anchorage.
The state Attorney General, in an investigation privy to proprietary data, concluded “wholesale prices, although certainly high, appear primarily driven by high delivery, storage and other logistical costs” and that considering these factors “the average rate of return on these capital invested by wholesale fuel marketers was unremarkable.”
Neither report found evidence that illegal conduct among fuel distributors influenced pricing. However, Alaska statute does not limit the price a seller can set for goods and services, but does narrow the definition of “illegal” activity to collusion and price fixing.
Two distinct rural markets Fuel prices vary greatly not only between Alaska and the Lower 48, but also between urban and rural communities in Alaska and among rural communities within the state.
In the broad swath of western Alaska communities from the North Aleutians to Kotzebue Sound, ISER concluded, “Most of the variation in fuel prices appears to be variations in retail price-setting practices at the community level,” pointing to differing operating costs, safety and environmental standards, maintenance practices and retail markups.
Fuel suppliers in rural Alaska are transportation companies. In western Alaska, those companies are Crowley Marine Services, Yukon Fuel Co. and Delta Western.
Over the past 15 years, these companies have jockeyed for position, often buying or attempting to buy competitors and instituting aggressive pricing to expand their market share. As a result, prices sometimes didn’t reflect costs, leading to low profits and little reinvestment. Since 2005, when Crowley bought Yukon Fuel, fuel prices have increased in western Alaska, a trend that also tracks with a multiyear run up in world oil prices.
The path from refinery to household burners changes from one community to the next, but can involve planes, trucks or barges, regional tank farms or community tank farms, individual pickup or door-to-door deliveries. Each factor can change the end price.
The markets in Southcentral and Southeast, which ISER groups together as the Ice-Free Coastal Market, have an entirely different structure than those in western Alaska.
Ice-free ports allow for year-round access and reduce the need for local storage. Fuel distributors often also operate retail stores, but face less competition than retailers on the road system. When distributers sell to independent retailers, as is common practice in western Alaska, they are less likely to set prices based on a predetermined formula.
Those latter two factors don’t necessarily increase prices, but by reducing transparency they make it hard to understand how exactly fuel gets priced, according to ISER.
Fuel prices in the Ice-Free Coastal Market are typically lower than in western Alaska, but higher than on the road system, and operating costs tend to follow a similar trend. ISER said the vertical integration in the region makes it hard to determine pricing points.
While Harbor Enterprises, Delta Western and Petro Star distribute most of the fuel sold in this market, all but the largest communities are supplied by just one of these companies.
Suggestions hard to come by Although the investigations came about because state lawmakers wanted to know why fuel is so expensive in rural Alaska, neither report offers simple policy solutions.
“The conventional interventions are unlikely to produce optimal results,” ISER noted.
Regulation could increase prices because distributors could replace aging infrastructure with a guaranteed rate of return, and subsidies could promote inefficient fuel use.
However, ISER recommends maintaining funds like the Low Income Home Energy Assistance Program, the bulk fuel loan, municipal assistance and weatherization grants.
The Attorney General said larger storage capacity in some communities might stabilize prices by decreasing the number of trips needed to bring in fuel. The report also suggested that communities coordinate better to consolidate buying power for better economies of scale.
The Attorney General said regulation could decrease prices in some communities, but could increase it in others and didn’t seem to be worth the increase administrative burden.
The report said statutory requirements to promote transparency could drive down prices.
| 