Thesixth meeting of the Interim Joint Committee on Transportation was held on<Day> Monday, November 17, 2003, at 1:00 PM, in Room 149 of the Capitol Annex. Representative Hubert Collins and Senator Moore co-chaired the meeting. Chairman Collins called the meeting to order, and the secretary called the roll.
Members:Senator Virgil Moore, Co-Chair; Representative Hubert Collins, Co-Chair; Senators Paul Herron Jr., Ray Jones II, Albert Robinson, Ernesto Scorsone, Gary Tapp, and Johnny Ray Turner; Representatives Eddie Ballard, Carolyn Belcher, Denver Butler, Howard Cornett, Mike Denham, Keith Hall, Jimmie Lee, Paul Marcotte, Charles Miller, Russ Mobley, Lonnie Napier, Rick Nelson, Don Pasley, Marie Rader, Rick Rand, Ancel Smith, Jim Stewart, Jim Thompson, Tommy Turner, John Vincent, and Mike Weaver. Legislative Guests: Representatives Rocky Adkins and Fred Nesler.
Guests Appearing Before the Committee: Steve Wilborn, Executive Director, Kentucky Petroleum Council; John C. Felmy, Chief Economist and Director, Policy Analysis and Statistics, American Petroleum Institute; Mike Helton, Government Relations, Kentucky Petroleum Marketers Association; Steve Harper, President, Harper Oil Company; Immediate Past-President of Kentucky Petroleum Marketers Association; Todd Leatherman, Director, Consumer Protection Division, Office of the Attorney General; Roger Boyd, Director of Public Affairs AAA of Kentucky; Jim Cooper, Jim Carter, and Don Keller, owners, Truck America Truck Driving School; Dr. Keith Bird, Chancellor, Ms. Nellene J. New, Mr. Jamie Justice, and Mr. David Friendly, Kentucky Community and Technical College System (KCTCS); and Nancy Black, State Board for Proprietary Education.
LRC Staff: Kathy, Jones, John Snyder, Barry Boardman, Geri Grigsby, Bart Hardin, Bryan Sunderland, Tim Ferkins, Sheila Hardy, and Linda Hughes.
Senator Herron moved to approve the Committee’s October 7, 2003 minutes, as submitted. Representative Cornett seconded the motion, which passed by voice vote.
The first item on the Committee’s agenda was a discussion of gasoline pricing and price gouging. Chairman Collins said citizens are concerned about sudden, unexplained price spikes that send gasoline costs up 20 or 30 cents a gallon in one day. And, he said, citizens wonder why gas stations seem to raise their prices in unison.
Mr. John Felmy, Chief Economist and Director, Policy Analysis and Statistics, American Petroleum Institute, said that the American Petroleum Institute represented more than 400 companies from all sectors of the U.S. oil and natural gas industry. He said that gasoline prices shot up dramatically starting in March and later in August of this year because of supply and demand. World crude oil supplies tightened because of problems in Venezuela, labor unrest in Nigeria, the war in Iraq, and the pipeline problems in Phoenix. Refiners had to pay substantially more for crude oil and that affected gasoline and all product prices.
Mr. Felmy explained that there were lower-than-usual inventories of gasoline in the spring due to a previous colder winter. He noted that when refineries are producing larger amounts of heating fuel then they produce less gasoline. The refinery system has both produced and imported more gasoline and distillate fuel this year than any other year.
Mr. Felmy said that the prices of regular gasoline hit $1.75 per gallon on average in late August, but was still $1 less per gallon than in 1981. He said that when measured in today’s dollars, the average price of a gallon of gasoline in 1981 was $2.75 and the price of a barrel of crude oil was about $72. During that same year, the refineries produced 45 percent more petroleum and consumed 20 percent less than we presently do. As a result, the United States imported only 36 percent of its petroleum compared to the 60 percent we now get from other producing nations. The real cost of a gallon of gasoline is now 40 percent lower than it was in 1981.
Mr. Felmy said that the industry’s improved efficiency has been good for consumers, but still has a petroleum supply straining to meet consumer needs. Since 1985, demand for petroleum products has exceeded the refinery capacity, even though refineries are bigger and more efficient than ever. Storage facilities for crude oil and refined products continue to shrink due to government regulations. Mr. Felmy said that America now imports about 2.5 million barrels of refined petroleum products each day, which represents 12 percent of the demand. According to the Department of Energy Information Administration, these imports are predicted to grow by 140 percent over the next 20 years.
Mr. Felmy said that other countries require different gasoline recipes than America and different U.S. jurisdictions – federal, state and local – require different kinds of fuels to meet their own environmental needs. The existing refinery, pipeline, and terminal systems must supply 20 different types of gasoline. These fuels have hamstrung the delivery system, increasing the possibility that any small change in demand or interruption in supply will set off another explosion of price increases, like those America experienced over the last four years. He said, in other words, when one part of the system suffers a glitch, it’s harder to redirect supplies from other places, which may have different fuel specifications.
Mr. Felmy said that America has reached an important crossroad in its ability to supply consumers with the required fuel. Two decades of regulation has put a tremendous strain on the system. He said the price spikes for heating oil and gasoline over the last four years are manifestations of the underlying problems that America faces. Mr. Felmy said that America is now lurching from season to season, unable to build up sufficient inventories to provide a comfortable supply buffer.
The situation could get worse if still other new regulations are not carefully implemented, according to Mr. Felmy. New rules lowering sulfur content in gasoline and diesel fuel will limit the availability of imported fuel because most foreign refiners do not yet produce the kind of low sulfur fuel that will be required in the U.S. Many states are banning the use of an important gasoline additive required under the Clean air Act, Methyl Tertiary Butyl Ether (MTBE). This further complicates the gasoline distribution system and raises cost.
Mr. Felmy noted that the big oil companies represent about 12 percent of the industry. Each barrel of crude oil represents 42 gallons of gasoline and that the profit margin for a business averages only around 6.5 to 5.3 cents on the dollar.
Chairman Collins asked for the current wholesale price. Mr. Felmy said that he did not have that information with him but would send that information to him once he was back in his office in Washington D.C. Chairman Collins noted that the consumers were tired of seeing the price of gasoline go up before holiday weekends.
Representative Mobley asked why there could be a $.30 difference in price from one city to another. Mr. Felmy stated that the price difference would be a factor of the cost at the time of delivery, as well as the delivery charge, and employment and overhead costs such as property tax. He noted that service stations are free enterprises, and like other type of businesses, the owners are in the business for making money, so a profit margin would also be factored into the total cost.
Representative Denham said that small, privately owned businesses, are being put out of business by the larger companies who have the luxury of lowering the cost of their gasoline below that day’s market price. He said that he thought that that was unfair. Representative Marcotte commented that there was probably little the legislature could do to control or regulation competition. And that on the whole, competition was good.
Representative Miller questioned why the price of gasoline in Louisville sells for 10 to 15 cents higher than in surrounding towns and according to his calculations, lowers an automobile’s mileage by around three miles per gallon. Mr. Felmy noted that Louisville must sell reformulated gasoline to comply with clean air standards and that requires special clean air additives be added to the fuel, which of course, raises the price as well as lowers an automobile’s mileage.
Senator Tapp stated that most retailers rely upon distributors to tell them the day’s cost of gasoline, thus it could be construed that it is the distributors who determined the price of gasoline. Mr. Felmy disagreed with that statement because gasoline is a commodity trading on international markets which affects the daily price, although he understood where Senator Tapp was coming from.
Mr. Mike Helton, Government Relations, Kentucky Petroleum Marketers Association and Mr. Steve Harper, President, Harper Oil Company, and immediate past-president of Kentucky Petroleum Marketers Association next testified on this subject.
Mr. Helton said that the gasoline industry is a competitive market. He stated that he has seen where some individuals will actually mark their fuel several cents below the current market price. He said that this is done to bring the customers into their establishment to, hopefully, buy other commodities that have a higher profit mark up. Mr. Helton commented that $1.069 of gasoline represents about $.939 for the crude oil, $.348 for state and federal taxes, which leaves a $.15 profit margin. He stated that the $.15 profit is barely enough for the establishment’s overhead.
Mr. Helton stated that gasoline prices are influence strongly by market competition. He said Louisville has as many as five markets, with prices generally higher in the West End and lower in the South End.
Mr. Helton noted that after September 11, 2001, several stations did sell their gasoline for a little over $2.00 a gallon, however, that price dropped within two days when others did not follow. He said that that situation was unfortunate.
Mr. Harper, who is considered a jobber, buys gasoline from a refinery and then sells the product to service stations. He noted that in the Covington area gasoline is currently sold at the refinery for $1.069, added to that price is 13 cents state tax, 16.4 cents federal tax, and a 2 cents delivery charge, which leaves the gasoline costing $1.386 before the profit mark up.
Representative Cornett stated that he once owned a convenient type store and he called his distributor every day to determine that day’s market price and then he would sell his gasoline for that price on that day. He noted that his profit margin was in the range of 7 cents a gallon.
Mr. Todd Leatherman, Director, Consumer Protection Division, Office of the Attorney General, addressed the Committee at this time. He said that the Attorney General’s Office believes there are two types of price gouging, i.e., raising prices due to a disaster and price fixing or collusion.
Mr. Leatherman stated that Kentucky does not have a specific law that prohibits price gouging. Prosecutors must prove a violation of the Kentucky Consumer Protection Act or state or federal antitrust laws. The standard that must be met is “what is an unfair trade practice?”
Mr. Leatherman said that it is a very broad standard and very difficult to define. Federal courts have generally held that if consumers have another source for a product or commodity at a reasonable price, then there is no violation and no unfair trade practice. And it is even harder to prove collusion among a group of individuals to regulate prices. He said a person would almost have to find written evidence to prove a violation had occurred.
After September 11, 2001, Mr. Leatherman said the Attorney General’s Office received 447 complaints involving 147 gas stations across the state. Collusion could not be proved in a single complaint. He stated that the inspectors found no evidence of collusion. He inform the Committee that collusion is very hard to prove; for instance, if another supplier is selling the gasoline for the same price as the one being investigated, it tends to lead to a market price increase rather than a concerted effort to fix prices.
Mr. Leatherman noted that several of the Louisville gas stations that charged over $2.00 a gallon right after the 9/11 disaster offered refunds to their customers. He said some of the stations required customers to produce a receipt, while others did not.
Mr. Roger Boyd, Director of Public Affairs, AAA of Kentucky, was the last individual to testify on this subject. He said that gasoline is a commodity and the public does understand that price increases are based on production problems or crude oil cuts announced by OPEC. However it is widely recognized that motorists are discontent with gasoline price fluctuations. He said that on October 30th of this year (Thursday), he noted that the price of regular gasoline at one station cost $1.299 at 10:00 a.m. and by early afternoon that same station’s gasoline cost was $1.599. He said it is now usual to see these types of fluctuations occurring in Louisville on a regular basis.
Mr. Boyd said that he has monitored gasoline prices for AAA in Kentucky for the past 10 years and that throughout 2003, motorists have had to tolerate an unprecedented frequency of severity in price increases and suddenness of price changes. Historically, he said the dramatic 20 and 30 cent spikes in prices only occurred during holidays, now they occur regularly. And he commented that these dramatic spikes don’t seem to been associated with market conditions, that would warrant such increases.
Mr. Boyd said that several gas station managers have told him that they keep an eye on nearby stations or they are given routes to drive and stations to identify as a means to set their prices. He said that if this were true, it is distressing because it is not price fixing, but it verifies that price increases have little or no relation to the expense of the fuel in the pumps. Mr. Boyd offered a chart that showed while Kentucky was below the national average in their price for gasoline, its prices fluctuated on daily bases, while the national average remained somewhat constant. He noted that he has yet to find a local industry representative that could justify a particular increase.
Representative Hall commented that Georgia has laws prohibiting price gouging and price fixing and their gasoline is cheaper to purchase than Kentucky’s. He asked if similar legislation would help lower Kentucky’s gasoline prices. Mr. Helton said that Georgia’s cheaper gasoline prices might be due to Georgia’s lower excise tax rather than its regulations. Mr. Helton said that Georgia’s state tax is 7 cents lower than Kentucky’s.
Senator Tapp cautioned the Committee about trying to regulate gasoline prices, and said that fluctuating prices reflect companies struggling to stay on top of a volatile market. He said that if those companies didn’t protect themselves on the downside, they were likely to loose in the long run.
The next item on the agenda was testing procedures for CDL’s. Testifying before the Committee was Mr. Don Keller, Jim Cooper, and Jim Carter, owners of Truck America Truck Driving School. Mr. Keller stated that KRS 281A.160 (4) states The State Police shall promulgate administrative regulations under KRS Chapter 13A that establish procedures that ensure an arms-length relationship is maintained between a third-part tester and any owner, officer, or employee of any program offering commercial truck driving under KCTCS or a proprietary school licensed under KRS Chapter 165A. He questioned how KCTCS was awarded the contract to be the state’s 3rd party examiner and still maintain an “arms-length” approach. He stated that while he was not indicating there is collusion, there is that appearance, nonetheless. He said he just wanted to see an even playing field.
Mr. Keller questioned why the various truck schools throughout the state were not involved in the drafting of legislation relating to CDL truck schools and when new curriculum is established for CDL schools why KCTCS is the only one involved in the decision making. Mr. Keller also questioned what the guidelines were for becoming a 3rd party licensed examiner and who established those guidelines.
Mr. Carter question why it was that if one of his students flunked the test that that student had to wait a week before retaking the test, when a student who flunks in Mr. Cooper’s area can retake the test the next day. Mr. Carter stated there needed to be more uniformity in the system.
Representative Weaver stated that he was unaware that KCTCS was carrying its logo on the side of the testing trucks and said that that should be changed immediately to reflect the community colleges doing the teaching and testing.
Senator Moore asked how many schools KCTCS operated as opposed to the State Board for Proprietary Education. Mr. Keller said that each organization operated eight schools.
Dr. Keith Bird, Chancellor, KCTCS, testified that last year his agency tested approximately 866 students and of that number 267 students had to be re-tested. He also commented that of the 866 students tested, only 129 had come from the KCTCS schools.
Ms. Nancy Black, Executive Director, State Board for Proprietary Education, corrected Mr. Keller’s response to Senator Moore and stated there are eighteen privately owned licensed driving schools throughout Kentucky, including one proprietary school that contracts with several colleges and technical schools within KCTCS to operate commercial truck driving programs.
Ms. Black noted that in fact, KCTCS had only one school in its entire system that offers its own truck driving program and does not contract with a proprietary school to perform the service. Ms. Black concluded that given those circumstances, she could not understand how Mr. Keller felt that KCTCS was unfairly competing with proprietary truck driving schools.
Senator Tapp stated that there seems to be a lack of communication between the two parties and suggested that the individuals get together and try and resolve any misconception or misunderstanding and report back to the Committee sometime in January.
At this time Chairman Collins turned the chairmanship over to Senator Moore.
The next item on the Committee’s agenda was a review of Executive Reorganization order 2003-1076. Mr. Chuck Knowles, with the Transportation Cabinet, addressed this issue with the Committee. He said that presently the Division of Traffic and the Division of Operations are performing functions related to the preservation and maintenance of the state’s highway system, as well as traffic operations. The reorganization plan would eliminate the duplicity between the two divisions by combining functions relating to traffic under the new Division of Traffic Operations and highway preservation and maintenance functions under the new Division of Maintenance. Mr. Knowles said there is no money involved is this reorganization.
Representative Collins moved to accept Executive Reorganization Order 2003-1076, as submitted. Representative Pasley seconded the motion, which passed by voice vote.
In closing, Senator Moore thanked everyone for their participation during the interim and wished everyone a Merry Christmas and a Happy New Year.
With no further business before the committee, the meeting adjourned at 3:45 p.m.