# Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Prepared for the 

# Alaska Department of Environmental Conservation, Division of Air Quality

December 2007

880 H Street, Suite 210, Anchorage, AK 99501

T: 907.274.5600 F: 907.274.5601 1108 11 t h Street, Suite 305 Bellingham, WA 98225

T: 360.715.1808 F: 360.715.3588

W: www.northerneconomics.com E: mail@norecon.com Prepared by In association with 

### Alaska Map Company Mark A. Foster and Associates Science Applications International Corporation (SAIC) Sierra Research

## Preparers

Team Member Project Role Company Pat Burden, CEO Project Director Northern Economics, Inc. Cal Kerr, MBA Project Manager Northern Economics, Inc. Leah Cuyno, PhD Economist No rthern Economics, Inc. Kent Kovacs, PhD Economist Northern Economics, Inc. Mike Fisher, MBA Analyst Northern Economics, Inc. Nancy Mundy, PhD Policy Speciali st Northern Economics, Inc. Don Schug, PhD Analyst Northern Economics, Inc. Gary Greenberg, MBA GIS Specialist Alaska Map Company Mark A. Foster, PE Engineer, Utility An alyst Mark A. Foster Associates Charles Thomas, PhD Policy Analyst, Oil and Gas SAIC Jim Hemsath, PE Engineer, Oil and Gas SAIC, iTegrity Associates Robert Dulla, PhD Emission Specialist Sierra Research, Inc.

Please cite as: Northern Economics, Inc. Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities . Prepared for the Alaska Department of Environmental Conservation, Division of Air Quality. December 2007.

# Contents

Section Page

Abbreviations ........................................................................................................................................ vii Executive Summary.............................................................................................................. ............... ES-1

1 Introduction............................................................................................................................. 1
1.1 Purpose of the Study: Develop Economic Costs for Implementation of New Federal Fuel Requirements ..................................................................................................................... 2 1.2 Project Area Description.....................................................................................................2 1.3 EPA Rules for Rural Alaska ..................................................................................................5 1.3.1 Rules for Mobile Sources ....................................................................................................5 1.3.2 Rules for Stationary Sources................................................................................................ 6 1.3.3 Potential Changes in Fuel Dema nd Due to New EPA Rules................................................. 6
1.4 Current Fuel Supply Chain and Future Challenges in Rural Alaska....................................... 7 1.5 Technical Reports, Report Organization.............................................................................. 8



### 2 Refining, Fuel, and Fu el Transportation................................................................................. 11
2.1 Refining Process ............................................................................................................... 11
2.2 Fuel Types..................................................................................................................... ...12 2.2.1 Gasoline....................................................................................................................... ....12
2.2.2 Diesel......................................................................................................................... ......12 2.2.3 Heating Oil.................................................................................................................... ...13
2.2.4 Jet Fuel....................................................................................................................... ......14 2.2.5 Liquefied Petroleum Gas (LPG)......................................................................................... 14
2.2.6 Other Energy Fuels and Sources........................................................................................ 14
2.3 Alaska Refineries.............................................................................................................. . 15
2.4 Washington Refineries ......................................................................................................16
2.5 Canadian Refineries..........................................................................................................17
2.6 West Coast Refining Capacity ...........................................................................................17
2.7 Fuel Transportation and Distribution................................................................................. 18
2.7.1 Transportation Routes and Terminals ................................................................................ 20
2.7.2 Tug and Barge .................................................................................................................. 21 2.7.3 Air.................................................................................................................................... 22
2.7.4 Road or Overland.............................................................................................................22
2.8 Aggregated Fuel Purchasing ..............................................................................................22 2.8.1 Volume Benefits ...............................................................................................................2 2 2.8.2 Price Benefits................................................................................................................. ...23 2.9 Purchasing Organizations..................................................................................................25 2.9.1 Alaska Village Electric Cooperative (AVEC) ........................................................................ 25
2.9.2 Western Alaska Fuel Group (WAFG) ................................................................................. 25
2.9.3 North Slope Borough........................................................................................................25

iCost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

2.9.4 Northstar Gas/Wave Fuels and Transportation...................................................................25



### 3 Alaska Fuel Demand............................................................................................................. ..27 3.1 Statewide Fuel Demand....................................................................................................27
3.2 Project Area Fuel Demand................................................................................................31 3.2.1 Storage Capacity Usage in the Study Area .........................................................................31
3.2.2 Estimated Community Fuel Demand in Study Area Communities, 2006............................33
3.2.3 Estimated Industrial and Construc tion Demand in Study Area ...........................................34
3.3 Future Demand for Distillate Fuels in the State of Alaska and Study Area...........................35 3.3.1 Population Change and Household Size............................................................................36
3.3.2 Technological Change.......................................................................................................38
3.3.3 Response of Consumers to Price Change s of Heating Fuels and Electricity .........................41



### 4 Fuel Costs and Electric Power Generation..............................................................................47
4.1 Fuel Costs..................................................................................................................... ....47 4.1.1 Fuel Cost Trending............................................................................................................4 8 4.1.2 Diesel Fuel Differentials (ULSD vs. High Sulfur).................................................................53 4.1.3 Distillate Pricing Indices ....................................................................................................5 6 4.2 Electric Power Generation.................................................................................................61
4.2.1 A Description of Typical Features in Utility Generation and Fuel Use ................................62
4.2.2 Average Fuel Prices per Gallon and Volume of Fuel Consumed by PCE Utilities ................62



### 5 Storage and Distribu tion Costs ..............................................................................................67
5.1 Storage Facilities ............................................................................................................. ..67 5.1.1 Capital and Operating Costs..............................................................................................67 5.1.2 New Steel Fuel Tanks........................................................................................................67 5.1.5 ISO Tanks...................................................................................................................... ...69 5.1.6 55-Gallon Fuel Barrels (Drums) .........................................................................................71
5.2 Distribution and Cleaning Costs ........................................................................................71 5.2.1 Steel Tanks .................................................................................................................... ...71 5.2.2 Barge Shipping................................................................................................................. .71 5.2.3 ISO Tanks an d Drums.......................................................................................................72
5.2.4 Air Transport.................................................................................................................. ...73 5.2.5 Road and Overland ..........................................................................................................73
5.2.6 Rail and pipeline.............................................................................................................. .74



### 6 Ultra Low-Sulfur Diesel Fuel Transition Scenarios..................................................................75
6.1 Scenario 1: The Warranty Scenario...................................................................................77
6.2 Scenario 2: The Compliance Scenario...............................................................................78
6.3 Scenario 3: The Full Conversion Scenario .........................................................................79



### 7 Scenario Costs................................................................................................................. .......81 7.1 Scenario 1: ULSD Fuel for New Engine Warranty Requirements........................................81 7.1.1 End-User Infrastructu re Considerations .............................................................................82
7.1.2 Fuel Supply Chain Considerations.....................................................................................84

iiCost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

7.2 Scenario 2: ULSD Fuel for Mobile Sources + New Stationary Power Ge nerating Units ULSD Fuel for All Diesel Engines.................................................................................................84
7.2.1 End-User Infrastructu re Considerations .............................................................................85
7.2.2 Fuel Supply Chain Considerations..................................................................................... 86
7.3 Scenario 3: ULSD Fuel for Diesel Engines and Heating Oil................................................ 86 7.3.1 End-User Infrastructu re Considerations .............................................................................87
7.3.2 Fuel Supply Chain Considerations..................................................................................... 87
7.3.3 ULSD Demand Side Scenario Summary............................................................................88
7.4 Potential Changes in Fuel Supply Chain ............................................................................ 88
7.4.1 Potential Changes in the Fuel Supply Ch ain with the Introduction of ULSD....................... 88
7.4.2 Incremental Cost of Potential Changes in Fuel Supply Chain Infrastructure........................ 88
7.4.3 Basic Remote Rural Fuel Supply Alternatives..................................................................... 89



### 8 Incremental Household Cost s: Fuel and Power ...................................................................... 97
8.1 Fuel Supply Chain & Associated Costs...............................................................................97
8.2 Cost Centers................................................................................................................... ..99 8.2.1 Crude oil ...................................................................................................................... ....99 8.3 Cost Model..................................................................................................................... 101 8.3.1 Fuel Supply Chain Focus.................................................................................................102
8.3.2 Assumptions ...................................................................................................................1 02 8.3.3 Basic Electrical and Heating Demand..............................................................................103
8.4 Results........................................................................................................................ ....103 8.5 Sensitivity Analysis ..........................................................................................................1 05 8.5.1 Basic Testing of Key Variables .........................................................................................105
8.5.2 Probability Weighted Monte Carlo Simulation ................................................................ 106



### 9 Potential Environmental Justice Effects of ULSD Transition ................................................. 109
9.1 Environmental Justice Populations in Project Area........................................................... 109 9.1.1 Minority Populations in Project Area...............................................................................109 9.1.2 Low-Income Populations in Project Area......................................................................... 110 9.1.3 Conclusion ..................................................................................................................... 111 9.2 Disproportionately High and Adve rse Impacts in Project Area.........................................111 9.2.1 Adverse Economic Effects on Households .......................................................................111
9.2.2 Community Characteristics That Co uld Amplify Adverse Effects....................................... 113
9.2.3 Conclusion ..................................................................................................................... 115 9.3 Mitigation of Disproportionately High and Adverse Impacts in Project Area..................... 115



### 10 References..................................................................................................................... ...... 117

11 Appendices ..................................................................................................................... ..... 121

Table Page Table ES-1. Summary of EPA Fuel Rules on Mobile Source engines for Urban and Rural Alaska..... ES-1 Table ES-2. Estimated Annual Household Incremental Costs, by Category ..................................... ES-3 Table ES-3. Project Area Population, Growth, and Size, 2000 and 2006 ....................................... ES-3

iiiCost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Table ES-4. Estimated Fuel Consumption by Use in Study Area Co mmunities, 2006......................ES-4 Table ES-5. Estimated incremental cost of ULSD compared to Jet A for rural Alaska households – Selected Scenarios............................................................................................................. .....ES-5 Table 1. Project Area Population, Growth, and Size, 2000 and 2006. ................................................4 Table 2. Summary of EPA Fuel Rules on Mobile Source engines for Urban and Rural Alaska...............6 Table 3. Diesel Fuel, Sulfur Parts Per Million, and Percentage by Mass. ............................................13 Table 4. Unit Fuel Costs, Per Dollar, 2007. .................................................................................... ..15 Table 5. Alaska Oil Refineries by Name, Locati on, Daily Capacity in Barrels and Percent of Alaska’s Daily Capacity, 2007. ................................................................................................. ..16 Table 6. Number of Operable Refineries, Total Capacity, Average Capacity and Utilization on the West Coast ................................................................................................................. .........18 Table 7. Representative Fuel Barge Sizes and Capacities...................................................................21 Table 8. Typical Volume Discounts for Fuel Barge Delivery ..............................................................23 Table 9. Comparison of Average Prices of Fuel per Gallon paid by Utilities by Category, FY 2006.....24 Table 10. Comparison of Average Prices of Fuel per Gallon paid by Utilit ies Region by Category, FY 2006.....................................................................................................................................24 Table 11. Estimated Distillate Consumption, Excluding Jet Fuel, in Study Area, 2006........................31 Table 12. 2006 Population and Per Capita Tank Farm Capacity Usage in Study Area Communities..32 Table 13. Total Tank Farm Capacity Usage in Study Area Communities, 2006..................................33 Table 14. Estimated Fuel Consumption by Use in Study Area Communities, 2006............................34 Table 15. Population Projections for the State and Boroughs and Census Areas in the Study Area, 2006 through 2030 ....................................................................................................... ..36 Table 16. Estimated Population, Average Hous ehold Size, and Households in Study Area, 2006-2030 ................................................................................................................................37 Table 17. Project Area Population Chan ge by Community Type, 2000 and 2006. ............................37 Table 18. Current and Projected Distillate and Kerosene Fuel Consumption in Alaska, 2005-2030 ................................................................................................................................44 Table 19. Projected Petroleum Fuels Consumption in the Study Area, 2006-2030............................45 Table 20. Anchorage Pricing Differential per Gallon. ........................................................................49 Table 21. Fairbanks Pricing Differential per Gallon...........................................................................5 1 Table 22. Anacortes Pricing Differential per Gallon ..........................................................................53 Table 23. Summary of 2006 PCE Data for Selected Northern and Western Communities Served by the PCE Program............................................................................................................. ......62 Table 24. Estimated Average Capital Costs for Any Required New Tanks by Community Type..........68 Table 25. Amortization of One Steel Tank, over 40 Years, with Annual Capital and Operating Costs. ........................................................................................................................................69 Table 26. Amortization of an ISO Tank, over 20 Ye ars, with Annual Capital and Operating Costs. ....70 Table 27. ULSD Fuel Demand as a Function of Engine Turnover......................................................81 Table 28. Diesel Fuel Requirements under Scenario 1......................................................................82 Table 29. Electric Utility Options – Partial vs. Full conversion to ULSD for a Coastal Hub .................83 Table 30. Electric Utility Options – Partial vs. Full conversion to ULSD for an Upriver Community ...............................................................................................................................83 Table 31. Diesel Fuel Requirements Under Scenario 2: Convert all Mobile Source + Regulated Stationary Source Engines to ULSD............................................................................................85

ivCost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Table 32. Diesel Fuel Requirements under Scenario 3 ..................................................................... 87 Table 33. ULSD No. 1 vs. Jet A Price Premium at Anchorage Rack................................................... 89 Table 34. Three Turns of Inve ntory to Blend Down to 15 ppm ULSD specification .......................... 91 Table 35. Projected Long Term Fuel Prices of Crude Oil, Jet A, ULSD, and the Price Premiums in Anchorage, Coastal Hub, and Upriver Locations, 2008-2030, in 2006$............................... 100 Table 36. Estimated incremental cost of ULSD co mpared to Jet A for rural Alaska households – Selected Scenarios............................................................................................................. ......103 Table 37. Sensitivity of Input Variab les for Total Household NPV Cost ........................................... 107 Table 38. Simulation Results for Total Household NPV Cost........................................................... 108 Table 39. Minority Populations in Proj ect Area and State of Alaska, 2000 ...................................... 110 Table 40. Low-Income Populations in Proj ect Area and State of Alaska, 2000 ................................110 Table 41. Median Annual Household Income in Project Area by Community Type, 2006.............. 111 Table 42. Number of Distressed Communities in Project Area by Community Type, 2007 ............. 111 Table 43. Estimated Annual Household Incremental Costs, by Category......................................... 112 Table 44. Average Electric Prices Per kWh, 1999 and 2005 ........................................................... 114



### Figure Page Figure ES-1. Northern and Wester n Alaska Rural Communities ..................................................... ES-2 Figure 1. Northern and Wester n Alaska Rural Communities ...............................................................3 Figure 2. Percent of Project Area Po pulation by Community Type, 2006............................................ 4 Figure 3. Crude Oil Refining Process........................................................................................... .....11 Figure 4. Products Made from a Ba rrel of Crude Oil, in Gallons. ......................................................12 Figure 5. Illustrative Diesel and Ultra Low-Sulfur Diesel Transportation Routes.................................19 Figure 6. Annual Sales of Petroleum Produc ts in Alaska, 2006 (Mi llions of Gallons) ..........................27 Figure 7. Distillate and Kerosene Fuel Sales by End Use, 2005 ......................................................... 28 Figure 8. Distillate and Kerosene Fuel Sales by Major End Use Category, 2000-2005 ....................... 29 Figure 9. Distillate and Kerosene Fuel Sa les by Other End Use Categories, 2000-2005..................... 30 Figure 10. Project Area Communities, by Ca tegory, Average 2007 Household Income and 2007 Fuel Cost...................................................................................................................................38 Figure 11. Average Kilowatt Hours per Gallon of Fuel, 1991-2006 ................................................... 39 Figure 12. Average Kilowatt Hours per Residential Customer, 1991-2006 ........................................ 40 Figure 13. Average Gallons of Fuel Consumed per Residential Customer for PCE Utilities, 1991-2006................................................................................................................................ 41 Figure 14. Distillate Prices to Residential Consumers in Alaska and Residential Consumption ........... 43 Figure 15. Diesel Fuel Prices follow Crude Oil Prices, Dollars per Gallon.......................................... 47 Figure 16. Anchorage Distillate Cost Comparison.............................................................................48 Figure 17. Fairbanks Distillate Cost Comparison............................................................................... 5 0 Figure 18. Anacortes Distillate Cost Comparison ..............................................................................52 Figure 19. Price Differential of Anchorage ULSD No. 1 and HS No. 2 Diesel ................................... 54 Figure 20. Fairbanks ULSD No. 1/HS No. 2 Dies el and ULSD No. 1/HS No. 1 Differential............... 55 Figure 21. Alaskan Market ULSD Pricing......................................................................................... . 56 Figure 22. Anchorage Distillate Cost Multipliers/Anacortes Base Price............................................... 57 Figure 23. Fairbanks Distillate Cost Multipliers/Anacortes Base Price ................................................58

vCost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

vi Figure 24. ULSD Prices, Anchorage and Anacor tes, No. 1 and No. 2, June 2006 to November 2007. ........................................................................................................................................59 Figure 25. Anchorage Distillate Fuel Multipliers (indexed to Jet A) ....................................................60 Figure 26. Fairbanks Distillate Fuel Multipliers (indexed to Jet A) ......................................................61 Figure 27. Average Price of Fuel per Gallon in Selected PCE Communities in Northern and Western Alaska, 2006........................................................................................................... .....63 Figure 28. Total Fuel Used by Electric Util ities for Power Generation in Selected PCE Communities in Northern and Western Alaska, 2006.................................................................64 Figure 29. Average Fuel Prices Reported by Selected PCE Utilities, 2006..........................................65 Figure 30. Remote Rural Alaska Community ULSD Transition Scenarios...........................................76 Figure 31. Ultra Low Sulfur Diesel (ULSD) Transi tion in Remote Rural Alaska Communities..............92 Figure 32. Total Cost of ULSD Fuel Delivery Options (River transport and local storage) ...................94 Figure 33. Total Cost of ULSD Fuel Supply Options (River transport and local storage) Illustrative Rural Village Example Comparing Blend-Down to ISO Containers or New Fuel Headers and Tanks ........................................................................................................................................95 Figure 34. Fuel Supply Chain ................................................................................................... ........98 Figure 35. EIA AEO 2008 (early release Dece mber 2007) Crude Oil Price Projection .......................99 Figure 36. Long Term Fuel Price Forecast – Alaska Distillate Fuel Prices (2006$).............................101 Figure 37. Cost Model Flow Chart............................................................................................... ...102 Figure 38. Breakdown of Incremental Costs to Supply ULSD to Upriver Community compared to Jet A ....................................................................................................................................105 Figure 39. Sensitivity Analysis of ULSD Costs – Upriver Community ...............................................106 Figure 40. Share of Alaska Households Using Various Energy Sources for Heating, 2000.................112 Figure 41. Utility Net Generati on (MWh) by Fuel Type, 2001.........................................................113 Figure 42. Comparison of Heating Costs of Natural Gas and Diesel Fuel, 2007...............................114

# Abbreviations

ADEC Alaska Department of Environmental Conservation ADOT&PF Alaska Department of Tran sportation and Public Facilities AEA Alaska Energy Authority AEB Aleutians East Borough
AIDEA Alaska Industrial Deve lopment and Export Authority AMHS Alaska Marine Highway System ARECA Alaska Rural Electric Cooperative ARRC Alaska Railroad Corporation ASTM American Society fo r Testing and Materials AVEC Alaska Village Electric Cooperative
BTU British thermal unit CAGR Compound Annual Growth Rate
CFEC Alaska Commercial Fi sheries Entry Commission DCCED Department of Commerce, Co mmunity and Economic Development
DMV Alaska Division of Motor Vehicles DOE Department of Energy

EIA US Energy Information Agency EPA Federal Environmental Protection Agency FHWA Federal Highway Administration HS High Sulphur
ISER Institute of Social and Economic Research
ISO International Standards Organization
kWh Kilowatt-hour LPG Liquefied Petroleum Gas
MAFA Mark A. Foster and Associates

NEI Northern Economics, Inc.
NPV Net Present Value NSB North Slope Borough
OPIS Oil Price Information Service PCE Power Cost Equalization ppm Parts per million

PV Present Value

viiCost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

viii RCA Regulatory Commission of Alaska RFP Request for Proposals SAIC Science Applications International Corporation ULS Ultra Low Sulphur
ULSD Ultra Low Sulfur Diesel USDOT Federal Department of Transportation WAFG Western Alaska Fuel Group

# Executive Summary

In July 2007, the Alaska Department of Environmen tal Conservation (ADEC) contracted with Northern Economics, Inc. and its team of experts to deve lop economic and financial information about the impacts and costs that would accr ue to rural Alaska communities and households as they make the required transition to ultra low-sulfur diesel (ULSD).



### Air Quality In response to health concerns related to chemical and particulate matter in diesel exhaust, the Environmental Protection Agency (EPA) enacted string ent standards for new diesel engines and fuels. EPA rules currently mandate the use of ultra-low su lfur diesel (ULSD) in on-highway mobile sources with diesel engines such as auto mobiles, which will reduce harmful emissions by 90 percent or more (EPA 2007). Similar rules will take effect for construc tion equipment, locomoti ve, boats and ships, and similar off-highway equipment in 2010. The rule for stationary engine s applies to new, modified, or reconstructed internal combustion engines used fo r power generation and industrial pumps starting with model year 2011 (EPA 2007) . Rules are summarized in Table ES-1 below.

Table ES-1. Summary of EPA Fuel Rules on Mobile Source engines for Urban and Rural Alaska

2006 2007 to 2009 2010 to 2011 2012 Region Engine Type Parts per Million Highway > 500 > 500 15 15
Non-road > 500 > 500 15 15 Rural Alaska
Locomotive and Marine > 500 > 500 15 15 Highway 15 15 15 15
Non-road > 500 500 15 15 Urban Alaska
Locomotive and Marine > 500 500 500 15 Source: Alaska Department of Environmental Conservation (ADEC).



### Western and Northern Alaska Approximately 61,000 people live in western and northern Alaska (an area about the size of Texas) spread across 151 communities that range in size from 2 residents to appr oximately 6,000 people. Approximately 15 percent of thes e residents live in 100 villages with fewer than 400 residents. Neither roads nor power lines connect these communiti es in almost all cases. The survival of rural Alaska residents and comm unities depends on their continued ability to gene rate electricity and heat from hundreds of continuously operating diesel engines and burners. Figure ES-1 illustrates western and northern Alaska.

ES-1Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Figure ES-1. Northern and Western Alaska Rural Communities

Source: Map developed by Alaska Map Company with data from USGS and Alaska DNR.

The EPA acknowledged the difficulties of implementi ng new standards in west ern and northern Alaska because of the area’s unique “geographical, metrological, air quality, and economic characteristics.” Unlike other parts of the country, the majority of fu el consumption in the stud y area is for stationary sources rather than mobile uses . None of the 151 project area co mmunities connects to the Federal Aid Highway System in Alaska.



### EPA Transition Plan for Alaska In May 2006, the EPA finalized an alternative low sulf ur-diesel fuel transition plan for Alaska. Under the EPA rules for Alaska, rural areas can continue to use uncontrolled sulfur content diesel for all uses and are not required to carry multiple grades of fuel until 2010. However, as of June 1, 2010 all areas of Alaska, rural and urban, will begin the transition of both highway and non-road, locomotive, and marine dies el fuel to 15 parts per million (ppm) sulfur content diesel fuel with ULSD available in retail facilities by December 1, 2010. The transition is likely to be mo re costly and challenging in rural Alaska because of the logistics of distributing and storing multiple petroleum products. ADEC wants to know what the transition to ultra-low sulfur is going to cost and who will bear those costs. Rural residents currently pay some of the highes t diesel prices nationwi de—recently over $7 per gallon. Electricity generated from diesel can cost as much as 50 cents per kilowatt hour (kWh).

ES-2Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities



### Household Cost Impacts
Table ES-2 summarizes estimated annual household cost increases, by catego ry. Electrical cost increases are projected at $61 per year, with fuel tr ansportation and storage system costs estimated at $99 per year. ULSD costs more to refi ne than competing fuels, such as Jet A, and that cost, delivered and paid at rural households, is estimated at $49 per year.

Table ES-2. Estimated Annual Household Incremental Costs, by Category
Cost Category $/Year Percent Cost of modifications to electric utility diesel generating systems $61 29.2% ULSD refinery premium over Jet A $49 23.4% Cost of modifications to fuel trans portation and storage systems $99 47.4% Total $209 100.0% Source: Northern Economics, MAFA



### Results in Brief
Results are listed below as a series of bulleted comments:

• The project area, consisting of northern and west ern Alaska that is not connected to the road or ferry system has 151 communities categori zed as hubs, subregional hubs, towns, and villages. The number of communiti es in these categories and t heir population statistics are shown in Table ES-3

.
Table ES-3. Project Area Populati on, Growth, and Size, 2000 and 2006

Community, Type 2000 Population 2006 Population 2000-2006 CAGR (%) Community Count % of Total 2000 Population % of Total 2006 Population
Hubs 19,105 18,91 8 -0.16 5 31.42 31.04 Sub-regional Hubs 4, 975 5,028 0.18 9 8.18 8.25
Towns 20,620 21,64 2 0.81 37 33.91 35.51 Villages 16,105 15,35 7 -0.79 100 26.49 25.20
Total 60,805 60,945 0.04 151 100.00 100.00 Source: Northern Economics, Census 2000, Departmen t of Community, Commerce and Economic Development, 2007. Note: CAGR refers to compound annual growth rate.

• There are six refineries in Alaska and one, at Nikiski, produces ULSD. Other sources of fuel include some of the 35 refineries in the State of Washington.

• Typical fuels consumed in the project area are Jet A (both as a heating fuel and for certain aircraft), diesel No. 1 and No. 2 (sometime with additives for the Arctic), aviation gasoline, and unleaded gasoline.

• Communities in the area have increased their bulk fuel capacity since the Denali Commission and Alaska Energy Authority began a rural bulk fuel program in the late 1990s and early 2000. Of the total 186 projects statewide, 58 completed or near-complete projects within the project area provided current cost data for the project.

ES-3Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

• Statewide fuel demand is estimated at 1.7 billi on gallons (in 2006) with 1.1 billion of that amount consumed as Jet A fuel. Gasoline and a ssociated fuels were approximately 0.3 billion gallons and regulated distillates were about the same, at 0.3 billion gallons. Distillates are liquid by-products generated from crude oil refi ning including gasoline, kerosene and diesel.

• Estimated fuel demand in t he project area is shown in Table ES-4

.
Table ES-4. Estimated Fuel Consumption by Use in Study Area Communities, 2006

Hubs Sub-regional Hubs Village and Towns Totals Storage Use (Millions of Gallons)
Total Petroleum Products 34.6 6.8 29.8 71.2 Motor Gasoline 6.6 1.3 5.7 13.6 Electricity 9. 9 1.9 7.2 19.1
Residential Heati ng 4.9 1.1 8.2 14.1
Marine 3.4 0.7 0.0 4.1
Aviation 6.6 1.0 0.0 7.6 Off-Road 1.0 0.2 1.0 2.1 Other 3.3 0.8 6.5 10.5

All Distillates, excl. Jet 21.2 4.5 24.4 50.0 Regulated Distillates 13.8 2.8 11.3 27.9 Source: Estimates by Northern Economics, Inc. Notes: The volumes shown for all dist illates, excluding jet fuel, represent the maximum amount of ULSD that might be required in the study area if all uses except those needing jet fuel switched to ULSD. Regulated distillates are a portion of total distillates and indicate the volumes of ULSD that might be required if only regulated sources, including all power generation equipment, switched to ULSD.

• Cost differences between ULSD and Jet A (the main fuel consumed in the project area) are estimated at 1.32 percent in Anchorage, 3.3 percent in Fairbanks, and 1.4 percent at Anacortes, Washington, which is representative of the refineries located in northern Puget Sound that supply fuel to Alaska. Cost differenc es between these fuels are getting smaller as ULSD volumes increase.

• Anchorage cost differences per gallon ranged from a low of 0.6 cents to a high of 13.2 cents, averaging 9.1 cents for the peri od from mid-2006 to the present. These costs are for the fuel only and do not reflect additives for pour point adjustment or lubricity.

• Anacortes price differences were approximately 2.7 cents for the same period, on the same basis.

• Storage and distribution costs will vary with community size and location. The least cost option appears to be a blen d-down approach with ULSD shipped in 2008, 2009, and 2010, with the final tank filling achieving a 15 parts per million sulfur level (or less).

• Electric power costs in the 151 communities range from less than $0.20 per kWh to near $1.00 per kWh, excluding any household cost adjustments for the Power Cost Equalization program.

ES-4Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

• Three scenarios were used to analyze two main cost centers (storage and distribution, and heat and electrical power). Scenario 1 was la beled the Warranty scenario, reflecting just enough shipment of ULSD to meet 2007 and newer engine requirements. Scenario 2 was termed the Compliance scenario with more consumption of ULSD to meet EPA-mandated timelines. Scenario 3 was labeled the Full Conv ersion scenario, with ULSD shipped for all purposes (heating, engines, and power plants) except aircraft Jet A needs. Table ES-5 summarizes results by household costs, in the year 2010, by Scenario. Note that a rapid transition is less expensive than a gradual process.

Table ES-5. Estimated Incremental Cost of ULSD compared to Jet A for rural Alaska households – Selected Scenarios

Units Scenario 2A: Gradual Transition to ULSD (excluding heating oil) Scenario 2B: Rapid Transition (excluding heating oil) with blend down Scenario 3: Rapid Transition (including heating oil) with blend down Household Cost 2010 $/household/year $300 $278 $189

Household Cost (2008-2030) $/household (NPV 2006$) $2,902 $2,361 $2,091

Households Number of households in Study Area 14,700 14,700 14,700

Source: ULSD Economic Model. The household costs r epresent an aggregate weighted average of coastal hub and upriver community costs.

• Environmental justice factors are an issue in the project area. Demographic data suggest the area’s population is 84 percent minority, exceeding the 50 percent threshold level set by the federal government. An estimated 19.6 percent of the area’s population is low-income, using Census 2000 figures, while Alaska as a state had a poverty rate of 9.4 percent (in 2000).

• The analysis suggests that the household costs of transitioning to ULSD fuel are highest for the regions of the state with the highest concentrat ions of minority and low-income populations. This disproportionate im pact is due to the greater reliance of project area communities on diesel for heating and power generation in comp arison to the rest of Alaska. The analysis further indicates that several characteristics of project area communities would exacerbate this disproportionate adverse economic effect.



### Blend-down Transition Process Thus, at least over the next severa l years, the primary driver to impo rt ULSD into rural Alaskan villages will likely be the desire to respon sibly transition to the new fuel and not the growth in the number of new diesel engines. By starting to burn ULSD in 2008, villages could benefi t from a process called “blend-down”, where average sulfur concentrations decline, over three years, to less than the mandated 15 ppm. Subsequent repo rt sections address each of t hese factors and suggest the blenddown approach is a low-cost alternative to new ta nks, cleaning and waste disposal, or temporary drum use.

ES-5Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

ES-6

# 1 Introduction

The regulation of diesel fuel has become a major environmental policy issue in the United States because of health concerns related to the particulate matter in diesel exhaus t. Until recently, diesel fueled engines faced less stringent em ission standards than gasoline engi nes. As the greatest source of mobile source pollution, the U.S. government target ed gasoline engines first. However, as emissions from gasoline engines grew cleaner, the federal government, through the Environmental Protection Agency (EPA) increased its focus on removing emissions from diesel engines, especially through the use of ultra low sulfur diesel (ULSD) fuels. In January 2001 and June 2004, the U.S. Environm ental Protection Agency (EPA) finalized the Highway Diesel and Nonroad Diesel Rules, respectively, which implemented stringent standards for new diesel engines and fuels. The rules mandated the use of ultra low-sulfur fuels (less than 15 parts per million) in diesel engines beginning in 2006 for highway diesel fuel and in 2007 for nonroad diesel fuel.



### Alaska Rule Adoption Alaska adopted EPA regulations for urban parts of the state, however, the state requested and the EPA granted the state’s request for more lead time to implement the use of ULSD fuel in rural Alaska because of the area’s unique geographical, meteorolog ical, air quality, and econ omic characteristics. In May 2006, the EPA finalized an alternative ULSD fuel transition program for Alaska—modifying the diesel fuel regulations “t o apply an effective date of June 1, 2010 for implementation of the 15 parts per million (ppm) sulfur requirements for highway, non-road, locomotive, and marine diesel fuel produced or imported for, distributed to, or used in the rural areas of Alaska.” A copy of this regulation is attached as Appe ndix A. Beginning with the 2011 mo del year, new diesel engines at stationary sources (for example, diesel engines that power electrical generation equipment), will also be required to use ULSD. The EPA regulations do not apply to kerosene or jet fuel used to power aircraft or fuels used for heating or use in industrial boilers. Implementation of the EPA rules in rural Alaska requires the cooperation of a wide variety of stakeholders and will impact reside nts, businesses, and government agencies in northern and western parts of the state. The rest of this chapter discusses the purpose of the study and provides background information for the reader. This report is a synt hesis and compilation of technical reports from numerous experts in economics, finance, and energy issues. The goal of this report is to pr ovide information in an accessible fo rmat for decision makers and other stakeholders on the complex issues related to tran sitioning to ULSD. The questions addressed are, “What are the costs of the transition to ULSD and who will bear these costs?” The goal of this first chapter is to introduce the purpose of the study, define and describe the rural project area in western and northern Alaska, and provide contextual information needed to understand the analysis that occurs in the report. The project team assumed early on in the study that impacts to local communities would vary by comm unity based on several factors. The following factors are discussed in this report:

• Community location

• Population and demographic characteristics

1Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

• Local fuel requirements, including substitutability

• Existing fuel storage and transfer infrastructure

• Refinery location and transportation corridors



## 1.1 Purpose of the Study: Develop Econom ic Costs for Implementation of New Federal Fuel Requirements The purpose of the study is to develop economic information that will help affected communities and the state plan to efficiently and e ffectively convert to ULSD by 2010. The geographic focus of this cost assessment is western and northern Alas ka, particularly those locations without road, ferry, or rail systems. Specification of the study area is an important component of this report because the results of th is study will be used to inform ADEC’s final recommendation for the transition to ULSD of diesel burning stationa ry internal combustion engines, such as rural power utilities. The state will submit recommendations to EPA in early 2008. Communities in the study area are considered rural for the purposes of complying with federal fuel rules.



## 1.2 Project Area Description

Alaska’s Transition Plan to Ultra Low Sulfur Diese l (see Appendix B) was submitted to the EPA on April 1, 2002 and differentiated between urban and rural communities. One of the major distinctions defined in the state’s plan is the way fuel is distributed. As noted in the request for proposal (RFP) that init iated this project, the fuel distribution system for rural communities is simple and efficient, but at th e same time poses an obst acle to transitioning to ULSD. Urban communities were categorized as communities that are serviced directly from the road system connected to Canada (and the rest of the U.S.) and communities serviced by the Alaska Marine Highway. In contrast, rural communities were defined as communities not on the contiguous road system or with periodic and minimal ferry service. As a result of this differentiation, the scope of this study provides for analysis of the most remote an d logistically challenging areas in Alaska—northern and western Alaskan communities that are not served by the road, railroad, or ferry systems (Figure 1).

2Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Figure 1. Northern and Western Alaska Rural Communities

Source: Map developed by Alaska Map Company with data from USGS and Alaska DNR. Project staff identified 151 communiti es within the project area, base d on the Alaska Department of Commerce, Community, and Economic Developm ent’s Division of Community Advocacy Community Database (DCCED, 2007a). Team member s added additional information to the study database for analytic purposes including:

• Denali Commission bulk fuel pr ojects (Denali Commission, 2007a)

• Power Cost Equalization informatio n (Alaska Energy Authority, 2007)

• Climatic data related to degree days. (U niversity of Alaska, Anchorage, 2007) In 2006, the population within the 151 communiti es was estimated at 60,945 residents. These communities were grouped into four categories using the following criteria:

• Hubs. There are five communities co nsidered as regional hubs. These places range in size from 1,000 to 6,000 residents. Hubs have larg er bulk fuel tank farms and may serve local communities as a fuel source for almost all types of fuel, from diesel to jet fuel (commonly referred to as Jet A) to gasoline and lubricants . All of these hubs have tidewater access and are supplied by ocean-going fuel barges. Hub popu lation is estimated in 2006 as 18,918 residents and accounts for 31 percent of total project area population.

• Sub-regional Hubs and Towns. These two categories have population estimates between 400 and 1,000 residents. Of these 46 places, 9 are considered as sub-regional hubs that have an ongoing demand for Jet A as aviation fuel. The other 37 towns may use Jet A for heating, but there are no known uses that mandate Jet A or separate Jet A fuel ta nks. Population of the

3Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

sub-region hubs is estimated at 5,028 residents (8 percent of the project area) and towns have 21,642residents (36 percent of the project area).

• Villages. There are 100 villages with popu lations that range from 2 to 400 residents. Most of these villages are accessible only by air or water, depending on weather and ice conditions. Population is estimated at 15,357 reside nts or 25 percent of the project area.
Table 1 illustrates population in the project area, in 2000 and 2006, while Figure 2 shows relative size of each segment.

Table 1. Project Area Population, Growth, and Size, 2000 and 2006.

Community, Type 2000 Population 2006 Population 2000-2006 CAGR (%) Community Count % of Total 2000 Population % of Total 2006 Population
Hubs 19,105 18,91 8 -0.16 5 31.42 31.04 Sub-regional Hubs 4, 975 5,028 0.18 9 8.18 8.25
Towns 20,620 21,64 2 0.81 37 33.91 35.51 Villages 16,105 15,35 7 -0.79 100 26.49 25.20
Total 60,805 60,945 0.04 151 100.00 100.00 Source: Northern Economics, Census 2000, Departmen t of Community, Commerce and Economic Development, 2007. Note: CAGR refers to compound annual growth rate.

Figure 2. Percent of Project Area Population by Community Type, 2006.



### Hubs 31%

Sub-regional Hubs

8% Towns

36% Villages

25%

Source: Northern Economics, from Alaska Departmen t of Community, Commerce and Economic Development, 2007.

4Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities



## 1.3 EPA Rules for Rural Alaska Alaska’s unique geographic circumstances have crea ted a rural fuel supply chai n that is more complex than those experienced by Alaska’s urban centers such as Anchorage, Fairbanks, and Juneau. For example, ULSD fuel from Tesoro’s Nikiski refinery flows via pipeline to Anchorage where it is stored in terminals near Ship Creek. Fuel is distributed via truck to many reta il and wholesale users, while rail tanker cars are loaded at Ship Creek and hauled no rth to Fairbanks. The suppl y chain is short, simple, and direct. Fuel transported to the project area, by contrast, may be stored in tanks at Nikiski, pumped into fuel barges, and hauled to hubs over seas that can be diffi cult to navigate. Barged fu el is then pumped into regional storage tanks where it is held until weather and ice permits transport to villages. It is once again pumped into transport vessels and hauled to village sites, weathe r and water conditions permitting. Finally, fuel is pumped from storage tank s into day tanks and hauled via pumper trucks to end-users, where it is once again pumped and stored in home-based fuel tanks, or retail tanks. The supply chain to the project area is long, involves se veral transfers, each to a smaller storage area, and involves more time and more companies, when comp ared to southcentral Alaska’s fuel situation. As a result of these challenges, implementation of EPA’s rules for transition to ULSD is different for rural Alaska when compared to urban Alaska and the rest of the United States. The schedule for transitioning to ULSD in rural Alaska was designed to reflect a simplified distribution process by allowing all fuels to transition or conv ert to ULSD at the same time in 2010. Cost impacts of the EPA rules on fuel use will depend on factors such as the number of engines that will be impacted by the rules over the years, potent ial changes in fuel prices, the demand response to these price changes, and also the flexibility or lack thereof in the fuel distribution system and storage infrastructure in certain rural communities. One of the major challenges as noted throughout this document is related to the current ability of local rural communities to readily and easily substitute one type of distillate fuel for anot her without significant consequences.



### 1.3.1 Rules for Mobile Sources
Table 2 summarizes the EPA fuel rules for mobile source s by both of Alaska’s regions and by engine type. Mobile engines include highway vehicles, all te rrain vehicles with diesel engines, and non-road diesel engines that move or are portable but not certified for highway use. These can include construction, farm, and mining equipm ent as well as portable generators.

5Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

6 Table 2. Summary of EPA Fuel Rules on Mobile Source engines for Urban and Rural Alaska

2006 2007 to 2009 2010 to 2011 2012 Region Engine Type Parts per Million Highway > 500 > 500 15 15
Non-road > 500 > 500 15 15 Rural Alaska
Locomotive and Marine > 500 > 500 15 15 Highway 15 15 15 15
Non-road > 500 500 15 15 Urban Alaska
Locomotive and Marine > 500 500 500 15 Source: Alaska Department of Environmental Conservation (ADEC). Highway engine type specifically refers to heavy duty on-highway diesel engines. Non-road engines are diesels that move or are portable, but are not certified for highway use. Non-road engines include construction, farm, and mining eq uipment, as well as portable generators. Low sulfur diesel has no more than 500 ppm. Ultra low sulfur diesel has no more than 15 ppm sulfur.



### 1.3.2 Rules for Stationary Sources The EPA fuel rules for stationary so urces are different from mobile sour ce rules. They apply to internal combustion engines for power generation and in dustrial pumps—the rule only applies to new engines, or engines that have been modified, constructed or reconstructed. Model year 2011 and later engines in this category must use ultra low sulfur diesel. A modification is defined as any ch ange to a source which increases the emission rate of any pollutant to which a standard applies. The term reconstructi on applies to the replacement of source parts to such an extent that the cost of the new parts exc eeds 50 percent of the cost to construct an entirely

new source. Currently, the majority of fuel cons umption in the study area is for st ationary sources, such as power generation and uses such as home heating, based on consumption estimates. Electricity is generated by small local “systems” (generation an d distribution) using diesel fuel at a cost that is three to five times higher than urban costs. In many rura l communities, the tribal government, the city government, the electric utility, the store, the school, or the Alaska Native village corporation operate their own generators to produce electricity and heat.



### 1.3.3 Potential Changes in Fuel Demand Due to New EPA Rules With the requirements for most new diesel engines to burn ULSD, there is a need to provide rural Alaska communities with ULSD in order to meet diesel engine manufacturer fuel specifications and environmental regulations. 1 Due to their small size and remote location off road networks, many rural Alaska villages may not have a new diesel engine th at requires ULSD until a few years in the future. There is no need for ULSD in communities that will have no model year 2007 or later diesel vehicles or engines, and therefore there will be no need fo r infrastructure changes in these communities until 2010.

1 New engines that are designed for ULSD have or will have additional pollution control devices that could fail if

higher sulfur fuel is used. If the pollution control dev ice fails and creates excessive backpressure in the exhaust system, the engine itself could suffer significant damag e resulting in the need to replace the entire engine. (AEA, 2007b). Thus, ULSD must be segregated from other di stillate fuels to avoid potential engine failures.Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

7 Communities that have new model year engines will need to ship ULSD to consumers. ULSD can be shipped in 55-gallon drums or larger portable tank s built to the specifications of the International Standards Organization (ISO) and commonly referre d to as ISO tanks. Depending on the volumes required. If the community’s fuel storage and transf er infrastructure is flexible enough to handle another grade of fuel, there will be no significant cost impacts to the community; dedicating tankage for ULSD will just be a matter of flushing or clea ning existing tanks. In these villages, current environmental regulations will drive the need for UL SD for highway, non-road equipment, stationary diesel power, locomotive an d marine engine types by 2010. 2 In larger rural communities and regional hubs, ne w diesel engines that require ULSD in order to function correctly are expected to arrive over the next few years. However, the rate at which engine stock is turned over, even in the regional hubs, te nds to be low because mode st rural cash resources favor keeping old equipment running rather than buying expensive new equipment.



## 1.4 Current Fuel Supply Chain and Futu re Challenges in Rural Alaska This section briefly descri bes fuel distribution to rural Alaska and introduces some of the challenges facing the transition to ULSD. The current fuel suppl y chain, which starts when crude oil is delivered to refineries in Nikiski, Alaska or Anacortes, Washin gton, ends when fuel is converted to electricity or heat for a village household. In the study area, almost all fuel is delivered by barge, except for some small amounts that are delivered by air or moved overland on ice roads. Fu el is typically supplied to these communities once a year via ocean or river fuel barges as weather and river water levels permit. 3 To be in compliance, some comm unities will need ULSD for new di esel power generators (engine model year 2011 or later) and all other mobile source engines, but they will not necessarily need it for older power generators or for home heating. If t here is a substantial price differential between unregulated diesel fuel (assuming this will still be available for sale to communities) and ULSD, communities are likely to continue using unregulated diesel fuel (greater than 15 ppm sulfur content) for older power generators and for home heating. Bulk fuel tank farms are a major component of the basic infrastructure of rural communities and are necessary for their survival. Fuel stored in these ta nks is used to heat homes and other buildings and to generate electricity for local use. Of the 151 rural communities in the study area, approximately half are served by cooperatives or another form of utility that has a well-established organization. Others are served by very small entities, many of which experience technical and administrative problems due to lack of economies of scale, the lack of specialized skills in the community, or both. In the early 1990s, many rural communities faced the very real threat that th ey would no longer be allowed to take delivery of fuel in bulk quantities because of the condition of their bulk fuel storage tank farms. The State of Alaska, relying heavily on federal funds, has conducted a program over the past several years to replace and consolidate these ta nk farms with new or refurbished facilities that meet all applicable safety and environmental codes. The Alaska Energy Authority’s best estimate of the total cost to upgrade and replace tank farms throughout rural Alaska is $450 million (AEA, 2007).

2 Alaska ULSD Transition Plan (Appendix B)

3 Exceptions include delivery via truck to villages on or near the road system and delivery via air for more remote villages.Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities



## 1.5 Technical Reports, Report Organization This report is a synthesis and an alysis of 11 individual technical reports (or memos) prepared by project team members to address a wide range of questions and concerns as specified by ADEC related to the transition to ULSD in the project area. The study design includes both quantitative and qu alitative methods including an extensive literature review, development of a database for communities in the study area, interviews with key informants on a variety of topics, and creation of several demand and cost models. The next eight chapters present project results an d continue our efforts to define the fundamental issues, identify alternative courses of action , and forecast and syst ematically compare the consequences in terms of costs and impa cts of the alternatives for stakeholders. Chapter 2 identifies current and potential future suppl iers of ULSD for the study area. The chapter begins with a diagram that introduces the process us ed for refining crude oil followed by identification of the types of fuel typically refined from a barrel of crude oil. A discussion and analysis of refinery capacity in Alaska, Washington and across the West Coast is next, along with a description of the fuel transportation and distribution system used to transport fuel from the refinery to the study area. The chapter concludes with a discussion of the volume and price benefits of aggregated fuel purchasing and a list of cooperatives and other organizations in the study area that consolidate fuel purchases. Chapter 3 presents estimates of current statewide and project area sales and demand for distillate and kerosene fuels. Changes in statewide fuel sales between 2000 an d 2005 are identified for distillates and kerosene fuel by major end-use categories. Estimates for current use include total petroleum products fuel demand for hubs, sub-regional hubs, villages and towns, and in dustry within the study area including per capita tank farm capacity usage an d tank farm capacity in the study area for various petroleum products. The chapter concludes with estima tes of future demand for distillate fuels in the both the State of Alaska and the study area and identifies anticipated changes in demand due to technological improvements and the response of customers to price changes. Chapter 4 assesses the price differentials between variou s types of distillate fuels and describes the effects of changes in fuel costs on electric powe r generation. The chapter begins with a review of current pricing based on data for Anacortes, Washington and Fairba nks and Anchorage, Alaska. Price differentials between ULSD and hi gh sulfur fuels are identified. The second half of the chapter addresses cost issues related to generation of power in rural Alaska focusing on communities served by the Power Cost Equalization program, which su bsidized power costs in 85 of the communities in the study area in 2006. The chapter concludes with di scussion of the average price of fuel per gallon and total fuel usage in PCE communities. Chapter 5 discusses various issues and costs related to storage and distribution of fuels in the study area. The chapter includes capital and operating costs for communities that may require new steel fuel tanks and ISO containers in order to accommo date ULSD. The chapter uses a spreadsheet cost model based on 58 Denali Commission bulk fuel proj ects in the study area to determine potential capital, operating, and maintenance costs for storag e and distribution by various shipping methods. Chapter 6 introduces the characteristics and basic assu mptions of three fuel transition scenarios developed by project staff in consultation with AD EC that reflect alternativ e ways of implementing rural Alaska’s transition to ULSD. Delivery of sma ll amounts of ULSD to rural communities on an asneeded basis occurs under Scenario 1. Delivery of enough ULSD to comply with EPA rules for the 2010 switch for affected engines occu rs in Scenario 2. Scenario 3 covers a full conversion of all distillate fuels to ULSD except Jet A.

8Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Chapter 7 discusses the capital and operational costs a ssociated with ULSD transition in a typical village under the three scenarios de veloped in Chapter 6. The cost review includes end-user and fuel supply chain considerations and changes to infrastructure requ ired under each scenario. Chapter 8 specifies incremental household costs for fuel and power through information on cost flows and the incremental costs differences for ULSD fuel s. The model developed for this chapter estimates the economic impacts of the transition to ULSD and incremental costs in the fuel supply chain for rural Alaska. The chapter concludes with a sensitivity analysis of specific cost variables such as Jet A fuel, incremental costs of ULSD, gallons of fuel consumer per household, and the cost of a new bulk fuel tank system. Chapter 9 addresses the potential environmental justice e ffects of the transition to ULSD in the study area. Affected populations in the study area are id entified along with potential adverse effects on individual households and local community characteri stics that could amplify any adverse effects. The chapter concludes with a discussion of possible mitigation measures.

9Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

10

# 2 Refining, Fuel, and Fuel Transportation

This chapter identifies the current and potential future suppliers of ULSD for western and northern Alaska. First, the concept of refining crude oil is br iefly discussed to illustrate the number of products that can be generated from a barrel of crude oil. Se cond, a discussion of refinery capacity in Alaska, Washington, and across the West Coast provides back ground on where Alaska’s fuels are refined and how they are transported to Alaska. The purpose of this chapter is to inform the read er about how and where Alaska gets its distillate products and the implications of these systems on impl ementation of the EPA rules. Of note is that in Alaska only one refinery, Tesoro’s refinery in Ni kiski on the Kenai Peninsula, currently produces ULSD.



## 2.1 Refining Process
Figure 3 illustrates the crude oil refining process. Gaso line, kerosene, and diesel (and heating oil) are distillates; note that product blending is a part of the refining process. Alaska ’s six refineries have the potential to generate all of these products, but not all refineries generate all products, as some are specialized and lack the equipment to process certain products.

Figure 3. Crude Oil Refining Process

Source: DOE/EIA-X063, April 2007.

11Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities



## 2.2 Fuel Types There are a number of fuels used in the project ar ea for home heating, ranging from Diesel No. 1 and Diesel No. 2 to kerosene and Jet A fuel. As shown in Figure 4 there are many products that are refined from a barrel of crude oil. Diesel fuel is one of a group of fuels known as distillates. Other distillates include kerosene, jet fuel , and fuel oil (heating oil). Each has its own American Society for Testing and Materials (A STM) specification.

Figure 4. Products Made from a Barrel of Crude Oil, in Gallons.

Source: Energy Information Administration, EIA-X063, April 2007. Note: Gallons round to greater than 42 gallons due to gains in the refining process.



### 2.2.1 Gasoline Gasoline is consumed in the project area in two forms: aviation gasoline and unleaded gasoline. Aviation fuel, in particular, must be stored and us ed without contamination due to potential problems with aircraft engines. Unleaded gasoline is used in the project area for outboard motors, all terrain vehicles, trucks and cars (in those areas with ro ads), chain saws, and smaller generator sets (home sized).



### 2.2.2 Diesel
Petroleum diesel is the common name for the fuel oil used in compression ignition engines. Diesel is generally cheaper to refine than ga soline and often costs less than ga soline. However, due to its high level of impurities diesel fuel must undergo addi tional filtration, which sometimes contributes to higher costs. Generally, diesel-powered automobiles have better fuel economy than a comparative

12Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

13 gasoline powered automobile becaus e of the higher energy content of diesel fuel and the inherent efficiencies of the diesel engine. Diesel fuel quality in the United States is regulate d at the state level and most states have adopted the latest version of ASTM D 975 Standard Specification for Diesel Fuel as their standard. This standard essentially divides diesel fuel into grades No. 1 and No. 2. Each diesel fuel grade is split into three sulfur le vels, S5000, S500, and S15. The “S” stands for sulfur and the number refers to the maximum amount of sulfur allowed in parts per million (ppm). The highest level, 5,000 ppm, is equivalent to 0.5 perc ent by mass while S5000 is known as high sulfur (HS); S500 is low sulfur (LS) and S15 is ultra-low su lfur (ULS). These three fu el grades are summarized as shown in Table 3

.
Table 3. Diesel Fuel, Sulfur Parts Per Million, and Percentage by Mass.

Name Parts per Million Percentage S5000 5,000 0.5 S500 500 0.05 S15 15 0.0015
Source: Northern Economics

A refinery can produce No. 2 and No. 1 fuels at va rious levels and it is common for one refined product to be sold as multiple retail products pr ovided the applicable American Society for Testing and Materials specs are met. However, in order to meet a particular specification, special testing or additives may be required. For example, a low sulfur No. 1 fuel may be sold from a single tank as Jet A, K-1 Kerosene, diesel and fuel oil, but this does n’t mean that they are interchangeable. Kerosene and jet fuel require certific ation testing and so me fuels require additives before use. 4



### 2.2.3 Heating Oil
Diesel No. 1 fuels are similar but less dense than No . 2 fuels, and they have lower Btu’s per gallon of product. They also have lower viscosity, lower bo iling points, lower flash points and typically have better cold-flow properties. No. 1 fuels are typically us ed in cold climates and are widely used in rural Alaska, especially during the arctic winter. No. 1 fu els tend to cost more and have lower heating value per gallon than No. 2 fuels. Most of the remote rural Alaska electric utilities in the study area appear to use a No. 1 fuel, commonly Jet A, marketed as a diesel “arctic blend” for winter operations. In general, No. 1 fuels tend to have less smoke, noise, and vibration. It is also common to blend a No. 1 fuel and a No. 2 fuel in order to get adequate flow in winter conditions without losing as much fuel economy from use of 100 percent No. 1 fuel.
Some rural Alaska electric utilities use waste heat from their diesel engines to heat fuel systems in order to maintain sufficient viscosity in No. 2 fuels to be able to use them year round or to at least extend the season over which the No. 2 fuels can be effectively used.

4 For example, indoor space heaters require ASTM D 3699 K-1 kerosene to limit exposure to undesirable indoor emissions.Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities



### 2.2.4 Jet Fuel Jet fuel is refined in much the same process as diesel and ULSD; however, when directed towards aircraft use, it must be clean and not contaminated with additives, water, or dirt. Jet A is used in many project area households for home heating. Costs are addressed in more detail in section 8 of this report.



### 2.2.5 Liquefied Petroleum Gas (LPG) LPG is not refined in the same manner as liquid fuels, but it is consumed in the project area. It is most often used for cooking and, occasionally, for clothes driers. The conventional delivery method is a 100-pound bottle (steel) that is usually consumed in pairs, with one bottle serving as a reserve while the primary bottle is being used. LPG is a competing fuel for certain types of liquid fu el in the project area but is not available in the same quantity that home heating fuels are.



### 2.2.6 Other Energy Fuels and Sources Heavy fuel oils from the refining process, often called residual fuel oil, have limited markets in Alaska. These fuels can be used to make asphalt and are us ed in very large diesel engines in ocean going vessels and power plants. Asphalt is the primary us e of these fuels in Alaska. Very few ocean-going vessels take on residual fuel oil in Alaska, and air qu ality issues restrict their use in power plants in the state. Much of the product is exported to customers in the lower 48 states or exported internationally. Other power and heating fuels in the project area include wood and other biomass fuels where they can be gathered, cut, and stored. The main river syst ems, in particular, provide firewood during spring break-up. At Tanana in September 2007, approximat ely 30 tree-length stems were observed on the banks of the Yukon River. Most were tied to wire, cable, and earth anchors along the shore; they were cut into four-foot lengths on an as-needed basis. Wind power is another competing energy source in those areas with sufficient market and sufficient wind. Kotzebue is a good example of an area wi th plentiful wind and 22 wind generators. Local power staff suggested, in the spring of 2007, fuel oil savings of approximately 90,000 gallons per year or $270,000 at an estimated $3.00 per gallon. As fuel oil costs have risen in rural Alaska, resident s have investigated the use of energy alternatives, including wood (if available), propane, and in a very few cases, coal. There is increasing interest in wood pellet production at Fairbanks, Delta Junction, and on the Kenai Peninsula, as well as wood chips for fuel.
Table 4 illustrates unit fuel costs base d on alternative fuels, units, heat or energy value per unit and average efficiency; it is adapted from a Universi ty of Alaska, Cooperativ e Extension, publication originally developed in 1977 by Axel Carlson, en gineer. Average plant effi ciencies range from 45 percent for low-efficiency wood stoves to near 88 pe rcent for the very efficient Toyo and Monitor oil
stoves.

14Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Table 4. Unit Fuel Costs, Per Dollar, 2007.

Net Heat, BTU/Dollar Fuel oil, $/gallon Nat Gas $/CCF Propane, $/gallon Coal $/ton Spruce $/cord Wood pellets $/bag Wood chips $/ton 242,052 $0.50 $0.36 $0.35 $38. 63 $31.81 $1.02 $21.27 121,026 $1.00 $0.72 $0.71 $77. 26 $63.62 $2.04 $42.54

80,684 $1.50 $1.08 $1.06 $11 5.88 $95.43 $3.05 $63.80 60,513 $2.00 $1.45 $1.41 $15 4.51 $127.25 $4.07 $85.07 48,410 $2.50 $1.81 $1.76 $19 3.14 $159.06 $5.09 $106.34 40,342 $3.00 $2.17 $2.12 $23 1.77 $190.87 $6.11 $127.61 34,579 $3.50 $2.53 $2.47 $27 0.40 $222.68 $7.13 $148.88 30,257 $4.00 $2.89 $2.82 $30 9.02 $254.49 $8.14 $170.15 26,895 $4.50 $3.25 $3.17 $34 7.65 $286.30 $9.16 $191.41 24,205 $5.00 $3.61 $3.53 $38 6.28 $318.11 $10.18 $212.68 22,005 $5.50 $3.98 $3.88 $42 4.91 $349.92 $11.20 $233.95 20,171 $6.00 $4.34 $4.23 $46 3.54 $381.74 $12.22 $255.22 18,619 $6.50 $4.70 $4.59 $50 2.16 $413.55 $13.23 $276.49 17,289 $7.00 $5.06 $4.94 $54 0.79 $445.36 $14.25 $297.75 16,137 $7.50 $5.42 $5.29 $57 9.42 $477.17 $15.27 $319.02 15,128 $8.00 $5.78 $5.64 $61 8.05 $508.98 $16.29 $340.29 14,238 $8.50 $6.15 $6.00 $65 6.68 $540.79 $17.31 $361.56 Source: Northern Economics, adapted from U of Alaska Cooperative Extension, Unit Fuel Costs, 1977, Axel Carlson. Re-issued as Cooperative Extension, Comparat ive Unit Fuel Costs for Equivalent Dollar Net Heat Output, EEM-01152, April 2007.

As an example, fuel oil at $5.00 per gallon ge nerates about 24,205 net BT Us per dollar and is approximately the same heat value as natural gas at $3.61 per CCF (hundred cubic feet), propane at $3.53 per gallon, or a cord of spruce firewood at $318. Wood moisture contents are assumed at 45 percent on an original (delivered) weight basis. In project-area communities, fuel oil can cost $5. 00 or more per gallon at retail and there are generally few alternative fuels, with firewood considered the most common. Firewood costs vary depending on supply, distance, moisture content, size, and species and demand. Wood cost in Tanana was cited at $200 per cord in November 2007 at the Alaska Wood Energy Conference, 2007, as an example, and at that price, it is appr oximately equal to fuel oil at $3.25 per gallon. Toyo fuel oil stoves are very efficient and can gene rate more net heat per dollar than older fuel oil systems. Also, wood combustion effi ciencies are tied to capital cost s; a 55-gallon barrel conversion kit has a lower efficiency than a $2,000 “airtight” wood stove.



## 2.3 Alaska Refineries Alaska’s six refineries, their location, and daily capa city in barrels, as well as their percentage of Alaska’s daily production, are shown in Table 5 . While Alaska has six refineries, at the present time, distillate products for western and northern Alaska communities ar e supplied by both Alaska and Washington state sources: refine ries located in northern Puget Sound, Washington, the Tesoro refinery in Nikiski, fuel storage facilities in An chorage, and the Flint Hills refinery in North Pole.

15Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

16 Table 5. Alaska Oil Refineries by Name, Location, Daily Capacity in Barrels and Percent of Alaska’s Daily Capacity, 2007.

Refinery Location Capacity Percent ConocoPhillips Kuparuk 15,000 4.0
BP Prudhoe Bay 12,500 3.3 Petro Star North Pole 17,500 4.7 Petro Star Valdez 48,000 12.8
Tesoro Nikiski 72,000 19.2
Flint Hills North Pole 210,000 56.0
Total 375,000 100.0 Source: U.S. EIA, Refinery Capacity Report, January 2007. URL: http://www.eia.doe.gov/pub/oil_gas/p etroleum/data_publicati ons/refinery_capacity_ data/current/table3.pdf
, accessed October 2007.

As shown in Table 5 the two largest refineries in Alaska ar e Flint Hills, located at North Pole, and Tesoro, at Nikiski. Their combined capacity is appr oximately 75 percent of Alaska’s refining capacity. Petro Star Inc. operates two refineries in Alaska in North Pole and Valdez. The North Pole refinery has been in operation since 1958, while the Valdez refinery was built in 1993 (Petro Star, Inc. 2007). Petro Star has indicated that its two refine ries in the state will not produce ULSD. Flint Hills made a business arrangemen t with Tesoro to centralize in-sta te ULSD at the Nikiski refinery. ULSD capital investments at Nikiski were approxim ately $45 million and Flint Hills paid $15 million of that amount, in exchange for pr iority on the first 6,000 barrels pe r day of production. In addition, Flint Hills spent another $8 million to upgrade its terminal and shipping faci lities (Petroleum News, November 27 2005). ULSD is shipped via pipeline from Nikiski to Flint Hills’ terminal in Anchorage. Storage tanks hold the fuels until dedicated rail cars are available and the product is shipped north to Flint Hills’ terminals at North Pole. Tesoro designed the facility for potential expansion to 14,000 barrels per day of ULSD (Petroleum News, July 15, 2007). The Tesoro refinery at Nikiski produces ULSD No. 1 and has sold ULSD 1 and ULSD 2 since 2006. Tesoro has said it does not plan to use additive s to depress the pour point of ULSD, leaving that option up to down-stream transporters and retailers. ConocoPhillips’ refinery at Kuparuk was scheduled to produce ULSD but a decision in December 2007 indicated ULSD fuel would be trucked, not refined. 5



## 2.4 Washington Refineries Four refineries in Washington State produce ULSD. The Shell Oil Company refinery in Anacortes Washington has a capacity of 44,000 barrels per day of ULSD, followed by BP’s refinery at Cherry Point (31,000 bpd), ConocoPhillips (25,000 bpd) in Ferndale (EIA, 2007a), and Tesoro’s refinery in Anacortes (25,000 bpd). The more limited number of refineries producing ULSD does raise a concern about the competitiveness of ULSD production.

5 Alaska Journal of Commerce: Plant death means more trucks on roads. December 2, 2007.Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Based on correspondence with the Shell refinery in Anacortes (Sible y, 2007) and the BP refinery at Cherry Point (Fridrich, 2007), neither refinery market s No. 1 diesel (for extremely cold conditions) in Alaska. The Shell refinery produces No. 1 diesel, but only ma rkets it for Canada, and the BP refinery does not produce or have any plans to produce No. 1 diesel. The BP refinery indicated that they believe some of their diesel production (perhaps their No. 2 ULSD) sold at t he Seattle Terminal is used in Alaska, but there is no marketing of the diesel product for Alaska. Information for the other two refineries was not available.



## 2.5 Canadian Refineries Canadian refineries have the capacity to support Alaska markets. Northern Transportation Company Ltd., based in Hay River in the Northwest Territories , can deliver ULSD to the North Slope. The fuel moves from Edmonton refineries to Hay River via rail car and then is barged down the Mackenzie River to the Beaufort Sea and then to Alaska. However, fuel delivered in the past has had jelling problems and has failed to meet arctic grade sp ecifications (Olemaun, 2007). This issue can be addressed with additives, careful product specificat ion, and quality control. In any case, Canadian suppliers have not established any market presence in the project area and, therefore, this analysis is primarily concerned with do mestic refineries as po tential fuel sources.



## 2.6 West Coast Refining Capacity
Since the mid-1990s, West Coast refi ning capacity has increased as a result of growing demand for petroleum products. Utilization wa s at a record level in 1998, eased somewhat at the turn of the century, and has risen slightly in re cent years. Utilization is the percent of the total industry capacity of petroleum refineries that is in use. For example, if utilization is 100%, then all refineries are operating at full capacity to meet the demand for petroleum products. In response to the growing demand and higher utilization, total capacity of the industry ha s risen, and the average size and sophistication of West Coast refineries has increased.
Table 6 shows the number of refineries declined from a high of forty-two in 1995 to a low of thirtyfive since 2003. On the other hand, the total capacity of the industry had risen by nearly 0.35 million barrels from 1995 to 2003. This suggests that the a dditions of industry capacity have occurred at existing refineries, not through t he construction of new refineries. Utilization on the West Coast has been stable since the year 2000 but has risen slightly in recent years (EIA 2007d). The decline in the number of refineries and the recent rise in utiliz ation suggest that refineries represent a potential bottleneck in the process of bringing fuels, including ULSD, to the pump. Nonetheless, the steady rise in the total capacity of the industry continues to ease that bottleneck.

17Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Table 6. Number of Operable Refineries, Total Capacity , Average Capacity and Utilization on the West Coast

Year Number Total Capacity (Million Barrels per Day) Average Capacity (Thousand Barrels per Day) Utilization (%)
1995 42 2.83 65.81 88.6
1996 NA 2.84 NA 89.2
1997 40 2.87 70.00 90.4
1998 NA 2.89 NA 92.6
1999 39 2.99 74.75 87.0
2000 39 3.01 75.25 87.4
2001 38 3.03 77.69 89.0
2002 37 3.09 81.32 89.9
2003 35 3.10 86.11 91.2
2004 35 3.10 86.11 90.4
2005 35 3.11 86.39 91.6
2006 35 3.14 87.22 90.5
2007 35 3.17 87.78 85.1 Source: EIA, Petroleum Supply Annual, 1995-2007. Note: The west coast is represented by the Petroleum Ar ea Defense District (PADD) V that comprises the states of Alaska, Washington, Oregon, California, Hawaii, and Nevada. Year 2007 estimates are from January 1, 2007 data.



## 2.7 Fuel Transportation and Distribution Transportation of diesel from refineries to communi ties in western and northern Alaska primarily takes place via ocean and river barges. However, communiti es that are not accessible by barge receive fuel by air or (in isolated instances) by vehicles approved for tundra travel in the winter. As noted in prior se ctions, ULSD supplied by Flint Hills comes from the Tesoro refinery at Nikiski and is moved via pipeline to Anchorage and from ther e to North Pole in dedi cated rail tank cars. Communities that receive ULSD from Flint Hills wi ll incur additional rail transportation costs. The subsections below discuss transport of fuel in Alaska and the general transportation routes used during delivery. Figure 5 shows the illustrative transportation routes used to service western and northern Alaska. Barge routes are shown to some of the major hubs and down the Yukon River, while air transport is shown to Anaktuvuk Pass, which is only accessible by air, and to other communities that may only be accessible by air during pe riods of low water conditions. There are other communities in the state that are only accessibl e by air that are not shown on this map.

18Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Figure 5. Illustrative Diesel and Ultra Low-Sulfur Diesel Transportation Routes

Source: Alaska Map Company LLC.

19Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities



### 2.7.1 Transportation Routes and Terminals
Most fuel delivered to northern an d western Alaska comes from the Tesoro refinery in Nikiski or refineries in the Puget Sound area. Much of the fuel destined for communities on the upper Yukon River is supplied by Flint Hills, wi th delivery in Nenana for barge haul along the Yukon, Tanana, and Nenana river systems. There are two main fuel di stributors in the project area: Crowley Marine and Delta Western. At Nenana, Ruby Marine provides barg e service, including delivery of liquid fuels and propane (LPG).



### Crowley Marine Crowley sells and delivers heating fuel, diesel fuel , unleaded gasoline, jet fuel, aviation gasoline, propane, packaged petroleum products, lubricants and oil spill cleanup products from the north Arctic Slope to Southcentral Alaska, coastal commu nities, and inland commun ities, including those along the Kuskokwim and Yukon rivers. Crowley Mari time Corporation and its subsidiaries are the primary fuel suppliers to western and northern Alaska. The Crowley tank farm in Bethel serves the Bethel , Kuskokwim River and Bristol Bay regions. Shallow draft combination fuel and freight li ghterage barges are loaded at the terminal for delivery to other locations. From Bethel, barges go as far up the river as McGrath and Nikolai. The amount delivered varies from year to year, depending on weather , river and water conditions, and fuel prices. The Crowley facility in Nenana is the primary term inal and tank farm serving the upper Yukon River. The marine/fuel terminal receives bulk petroleu m products, packaged petroleum products, and general cargo via truck, barge, and rail, and consolidates the cargo for delivery through the Yukon River basin. Crowley’s Fort Yukon terminal and tank farm provides petroleum products to Fort Yukon and further up the Yukon River toward Canada’s Yukon Territory. In Kotzebue, Crowley’s tank farm serves the people of Kotzebue and Kotzebue Sound, selling and delivering petroleum products locally through their Kotzebue facility. The mari ne/fuel terminal serves as a logistics center for bulk petroleum products, packaged petroleum products, and general cargo. In Nome, Crowley’s tank farm serves the Nome and the Norton Sound region with petroleum products. Like Kotzebue, the Nome marine/fuel termin al serves as a regional logistic center where bulk and packaged petroleum products and general cargo are consolidated and loaded for shipments to remote sites and vi llages in the region. Other Crowley marine/fuel terminals are located in Aniak, St. Mary’s, Galena, Hooper Bay, Kenai, McGrath, Iliamna, and St. Michael. In 2005 Crowley purchased Yukon Fuel Company. Since Yukon Fuel Company was Crowley’s only competitor in parts of western Alaska, there were concerns that Crowley would be left with monopoly power over fuel prices in these areas.



### Delta Western As part of a consent decree between the state and Crowley, Crowley was required to sell parts of its acquired assets to Delta Western, including several tugs and barges for shallow coastal and up-river waters in western Alaska, fuel storage capacity in Bethel, options to lease certain property Crowley owns in Bethel, and to allow access to fuel storag e facilities in Nome, Kotz ebue, and St. Michael. Delta Western transports fuel from Puget Sound re fineries direct to southerly regional hubs and communities in the study area; including Dillingha m, Naknek, Bethel, St. George, and St. Paul. The

20Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

21 company also delivers fuel and lubr icants with barges to coastal citi es, towns and villages, as well as marine vessels and remote logging and mining facili ties. Delta Western has a major terminal and tank farm in Dutch Harbor that supplies other communities and services a number of the larger fishing and processing vessels operating in the Bering Sea.



### Other Ruby Marine in Nenana provides fuel barge se rvice on the Nenana and Yukon Rivers. Sorenson Lighterage Services in Dillingham also has fuel ba rges that the company operates in western Alaska.



### 2.7.2 Tug and Barge Ocean-going (or line haul) barges can hold one to si x million gallons of fuel depending on their size (See Table 7 ). Actual capacity will vary depending on the dimensions of the tank barge. Some communities are accessible by line haul barges, while for other communities fuel must first be transferred from the line haul barge to a shallow dr aft barge, and then delivered to the community. At some regional hubs, the fuel is transferred to stor age tanks for future delivery to smaller communities in the region. For navigating shallow coastal and up-river locations, shallow draft tugs and barges are necessary. The barges can be only partially loaded to achieve mi nimal draft when low water conditions are present, although partial loading increases the transportation cost per gallon.

Table 7. Representative Fuel Barge Sizes and Capacities

Length (feet) Width Depth Gallons
400 100 25 5,922,000
360 70 25 3,570,000
260 60 19 1,680,000
250 50 16 1,260,000
175 44 7 285,000
150 50 7 200,000
100 32 7 120,000

80 30 6.5 63,000 Sources: Crowley Maritime Corporation, 2007. We st Coast & Alaska Ocean Barge Fleet. Accessed on September 27, 2007 at http://www.crowley.com/fuel-sales -distribution/oc eanbarge-fleet.asp . Lighterage Barge Fleet. Accessed on September 27, 2007 at http://www.crowley.com/fuel-sales-distribution/lighterage-fleet.asp

In 2007, the cost for delivery via river fuel barge is about $0.007 per gallon pe r map mile of transport from the fuel hub. 6 Thus, for a village that is 100 map miles upriver from a regional fuel hub, the cost to deliver fuel is around 70¢ per gallon.

6 MAFA Analysis of Crowley Marine Services invoices. To simplify the analysis, a map-mile is adopted rather

than a river-mile.Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities



### 2.7.3 Air Some communities, such as Anaktuvuk Pass or Lime Village, are not accessible by barge, and are too remote for overland transport so air delivery is t he only option for supplying fuel. Other communities such as Buckland on the Buckland River or Ni kolai on the Kuskokwim River may experience low water conditions that preclude barge service at time s. When this happens, air transport is necessary. At other times a community may not have purchased sufficient volumes in the prior summer. If fuel inventories reach critically low levels before the ice conditions permit water delivery, air transport is the only option. Evert’s Air delivers fuel to a large number of Al aska communities. The comp any operates DC-6 and C46 aircrafts that can carry 2,000 and 5,000 gallons of fuel, respectively. These planes have a number of internal fuel tanks, from 2 to 16 per aircraft. Currently, Evert’s states they are not flying ULSD to Alaska villages, but foresee extra costs and challenges when they start. To deliver ULSD under current regulations, they will need to clean each tank before pumping ULSD. Dave Adams with Evert’ s Air in Fairbanks estimates that this will cost about $200 to $300 for each plane every time they change fuels (Adams, 2007).



### 2.7.4 Road or Overland Few communities are connected by road in wester n or northern Alaska and very minor amounts of fuel move between communities by this mode. There are dedicated fuel trucks in larger communities for household heating fuel delivery.
Bonanza Fuel in Nome has a contract to deliver fuel to Teller in addition to Nome residents. Typically, air transport is used to supply Atqasuk bu t fuel deliveries from Barrow to Atqasuk have occasionally been made in winter using rolligons or similar equipment for tundra travel, often towing sled-mounted fuel tanks.
Bonanza Fuel also has a state cont ract to deliver fuel to Nome an d Teller. The company has a fuel tank farm and a fuel tanker truck fleet with three 2,500 gallon and one 2,600 gallon fuel tankers. They also own a Tesoro ga s station in Nome. In some regions, frozen rivers become major arte rials during winter months. After freeze-up, fuel deliveries from Bethel are made to villages up an d down the Kuskokwim River. Village residents also tow sleds behind their snow ma chines with mounted drums.



## 2.8 Aggregated Fuel Purchasing Some project-area communities have formed groups to consolidate fuel purchases and obtain volume discounts at lower prices, when compared to independent purchases. The question at hand is if certain communities no lo nger used the same diesel fuel as the rest of the group because of differences in fuel requirements, would there be an erosion of the benefits from volume discounts?



### 2.8.1 Volume Benefits Fuel suppliers in rural Alaska offer volume disc ounts. In theory, when a company uses a volumepricing objective it is seeking sales maximization within predetermined profit guidelines. A company using this objective prices a product lower than no rmal but expects to make up the difference with a

22Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

higher sales volume. Volume pricing can be benefi cial to a company becaus e its products are being purchased on a large scale, and large-scale product distribution helps to reinforce a company’s name as well as to increase its customer loyalty. Based on interviews with fuel suppliers in rural Alaska, volume discounts generally follow the schedule shown in Table 8 . This schedule of volume discounts generally apply across product lines.

Table 8. Typical Volume Discounts for Fuel Barge Delivery

Volume Range (in Gall ons) Price Differential 100,000 and up base price 50,000 to 99,999 plus 5 cents 20,000 to 49,999 plus 10 cents 5,000 to 19,999 plus 15 cents 1,000 to 4,999 plus 25 cents
Source: Information obtained from Northern Economics’ interviews.

Actual fuel price is based on posted base prices. The volume discounts are ba sed on total volume of all purchased products and not necessarily given on a per product basis. Fuel purchasers in rural Alaska that form cooperatives and organized grou ps to consolidate fuel purchases to gain some “leverage” on the fuel suppliers and haulers by ma king large single product volume purchases will be affected by the per gallon price differentials on th e products and increase in price differentials by volume class. According to Crowley, the additional cost of a separate ULSD supply ch ain will manifest itself in larger differentials by quantity and per gallon prices for pr oducts. Hence, if single product orders of jet fuel or diesel fuel No. 1 are replaced by orders of so me amount of jet fuel and some amount of ULSD, differentials will apply where they may have not be fore. These differentials are likely to increase (Personal communication with Roya l Harris, Crowley Marine, 2007). According to a sales manager at Delta Western, in the short-term, volume discounts or price differentials will be affected, due to the changes necessary to accommodate another grade of fuel, but in the long-term, volume discount s would approximate current levels. Consolidating fuel purchases allows more efficien t use of barge capacity and that reduces fuel handling and transportation costs. The effects of t he EPA fuel rules therefore will depend on whether the delivery infrastructure would lose this efficiency.



### 2.8.2 Price Benefits To assess the current benefits gene rally enjoyed by communities that consolidate fuel purchases, a comparison was done of the average fuel prices paid by groups of utilities that consolidated purchases versus the utilities that purchase d fuel independently. Analysts us ed data from the 2006 PCE reports submitted by various utilities (but only for communities within the study area).
Table 9 shows the price differential between the two catego ries of fuel purchasers: 1) utilities that do not consolidate fuel purchases; and 2) groups that consolidate fuel purchases. In fiscal year 2006, the prices of fuel per gallon paid by utilities that consolidated purcha ses were on the average 67 cents lower than prices paid by utilities th at purchased their fuel independently.

23Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Table 10 shows the differences in average fuel prices paid by the two different categories of fuel purchasers by region. Average fuel prices paid by utilities that consolidated purchases were lower than those paid by utilities that do not consolidate purchases in all regions except the Northwest Arctic Borough.

Table 9. Comparison of Average Prices of Fuel per Gallon paid by Utilities by Category, FY 2006

Category Average Price of Fuel per Gallon ($)
Utilities That Do Not Consolidate Purchases 2.79 Groups That Consolidated Purchases

WAFG 2.02 AVEC 2.09 NSB 2.43 Sub-category average 2.12
Source: Northern Economics estimates based on FY 2006 PCE data.

Table 10. Comparison of Average Prices of Fuel per Gallon paid by Utilities Region by Category, FY 2006

Region Utilities That Did Not Consolidate Purchases ($) Groups That Consolidated Purchases ($)
Aleutians 3.05 NA Bethel CA-- Aniak 2.98 NA Bethel CA--Lower Kuskokwim 2.53 1.82 Dillingham CA 3.32 2.15
Kodiak Island 2.18 NA
Lake and Peninsula 3.20 2.15
Nome 2.25 1.86 Northwest Arctic Borough 2.44 2.57 North Slope Borough NA 2.43 Wade Hampton 2.43 1.85 Yukon-Koyukuk CA 2.82 2.40 Source: Northern Economics estimates based on FY 2006 PCE data. NA: Not applicable

It should be noted that these price benefits result from a number of factors besides volume discounts. The fuel prices are negotiated pric es that result from competitive bidding. Cooperatives and organized groups that are consolidating fuel purchases and ha ve larger fuel orders are generally successful in promoting competition by creating more interest among potential fuel supply competitors and in seeking cost-effective pricing with the use of multiple fuel price indexes, and, finally, taking advantage of seasonal fuel price changes. Groups such as AVEC, WAFG, and the North Slope Borough issue requests for proposals (RFP) for the purchase and delivery of fuel. The RFP process al lows competitive forces to work and each group selects the best price. Volume pricing and discounts and th e potential effects of EPA fuel ru les are further discussed in the following section.

24Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities



## 2.9 Purchasing Organizations The organizations and cooperatives within the stud y area that consolidate fuel purchases include those discussed in the following sections.



### 2.9.1 Alaska Village Electric Cooperative (AVEC) AVEC is a non-profit electric utility that serves 52 vi llages in the Interior and western Alaska, covering villages from as far north as Kivali na to Old Harbor on Kodiak Island in the south, and from Gambell on St. Lawrence Island in the west to Minto in the east. Minto is the only AVEC community accessible by road. All other AVEC communities are acce ssible by airplane or marine vessel only. AVEC purchases about five million gallons of fuel annu ally. The fuel is stored in AVEC’s bulk fuel tank farm facilities, many of which have be en upgraded or completely rebuilt.



### 2.9.2 Western Alaska Fuel Group (WAFG) WAFG is composed of seven electric utilities: 1) City of Buckland; 2) I-N-N Electric Cooperative, Inc. (INNEC); 3) Kotzebue Electric Associ ation (KEA); 4) Naknek Electric Association (NEA); 5) Nome Joint Utility Systems (NJUS); 6) Nushagak Electric and Telephone and Telephone Cooperative, Inc. (NETC); and 7) Unalakleet Valley Electric Cooperative, Inc. (UVEC); all located in Bristol Bay, the Seward Peninsula or on Kotzebue Sound, Alaska. For fiscal year 2008, the fuel grou p sent out a request for proposals for purchase and delivery of approximately 5.9 to 7.3 million gallons of diesel engine fuel for use in electrical generation.



### 2.9.3 North Slope Borough The North Slope Borough consolidates fuel purc hases for all its communities including Barrow, Nuiqsut, Point Lay, Point Hope, Wainwright, Atqasuk, Anaktuvuk Pass, and Kaktovik. In the past five years, annual purchases have been between 4.6 million (FY06) and 5.7 million (FY03) gallons of fuel The Borough also combines its fuel purchases with SKW/Eskimos Inc., a firm that provides industrial, earthwork, paving, and oil field services in the Nort h Slope, making the total volume of fuel procured for the North Slope region even larger.



### 2.9.4 Northstar Gas/Wave Fuels and Transportation Northstar Gas, formerly WAVE Fuels and Transporta tion, is a subsidiary of Western Alaska Village Enterprise. WAVE Fuels and Transp ortation was started in 1996 when eight villages along the Lower Kuskokwim River got together to consolidate fuel purchases and save money on fuel and transportation costs. After two ye ars, the organization was serving 100 customers in 56 villages with almost five million gallons of fuel purchases year ly. Through competitive bidding and volume buying, this organization has lowered fuel prices for its customers. (WAVE, 2007)

25Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

26

# 3 Alaska Fuel Demand

The consultant team developed two estimates of fu el demand; first, a statewide demand estimate provided the overall quantity of fuels consumed in Alaska and, second, a project area demand estimate provided specific estimates of fuel for northern and western Alaska.



## 3.1 Statewide Fuel Demand
Figure 6 shows the estimated sales of petr oleum products within the State of Alaska as reported by the Energy Information Administration (EIA) in their report entitled Prime Supplier Sales Volumes . The total volume of petroleum products sold in 2006 is estimated at almost 1.7 billion gallons. Jet fuel accounts for the largest portion, accounting for about 1.1 billi on gallons (66.2 percent). Motor gasoline sold was 284 million gallons (16.7 percent), which is a slightly smaller quantity than dist illates and kerosene at about 290 million gallons (17.1 percent). In terms of distillate-like products, jet fuel accounts for 79.5 percent and distillates and kerosene account for 21.5 percent.

Figure 6. Annual Sales of Petroleum Products in Alaska, 2006 (Millions of Gallons)

1,124.5 289.8 284.3

Jet Fuel Distillate & Kerosene Motor Gasoline

Source: EIA, 2007a. Prime Supplier Sales Volumes . Accessed at http://tonto.eia.doe.gov/dnav/ pet/pet_cons_prim_dcu_SAK_a.ht m on October 24 2007.

The EIA also provides information on the end uses of distillates and kerosene. The latest data available for end uses are for 2005 and show consumption of approximately 564.4 million gallons of distillates and kerosene, compared to the 2006 sales estimates of 289.8 million gallons. Providers of the end use data are instructed to “report all volumes in accord ance with what the product was sold as, regardless of the actual specifications of that product.” (EIA, 2007b)

27Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Anecdotal information obtained duri ng the interviews for this repo rt suggested that much of the distillate fuel shipped into rural Alaska was jet fuel , or jet fuel that did not meet Jet A specifications. The data from the two EIA sources suggest that ro ughly half of the distillate fuel and kerosene consumed in Alaska may have been refined as jet fuel but sold as another product. Sales information by end use for Alaska (2005) is presented in Figure 7 . On-highway use and vessel bunkering account for more than half of all distillate and kerosene use in the state. Traditional fueling or “bunkering” of deep-draft ocean-going vessels seldom occurs in Alaska, and this term primarily applies to the sale of diesel to the Alaska and Beri ng Sea fishing fleets. The co mmercial definition used by EIA includes local, state, and federal governments, and other public and private organizations.

Figure 7. Distillate and Kerosene Fuel Sales by End Use, 2005

On-Highway 32% Vessel Bunkering 21% Railroad 1% Off-Highway 3%

Military

3%

Oil Company 3%

Electric Power 10%

Farm 0%

Industrial 8% Commercial 7% Residential 12%

Source: EIA, 2007b. Distillat e Fuel Oil and Kerosene Sales by End Use. Accessed at http://tonto.eia.doe.gov/ dnav/pet/pet_cons_821 use_dcu_nus_a.htm on October 24, 2007.

Figure 8 shows the statewide change in consumption of distillates and kero sene from 2000 through 2005. Vessel bunkering has changed over time but consumption in this sector in 2005 is approximately the same as it was in 2000. On-highway use ranged between about 90 million gallons and 110 million gallons per year until 2004, when it jumped to over 200 million gallons, an d then declined to about 175 million gallons in 2005. This dramatic change is thou ght to be due to reporting change s since there is no supporting evidence to suggest that on-highway users increased their activities to the degree that fuel consumption would more than double. The Federal Highway Admini stration (FHWA) provides the on-highway data to EIA. In their Highway Statis tics 2003 publication (FHWA 2003) the FHWA notes:

28Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

The records of State agencies that administer the State taxes on motor fuel are the underlying source for most of the data presented in th ese tables. The FHWA es timates highway use of gasoline by subtracting estimated non highway us e from the total use reported by the States. Over the last several years, there have been numerous changes in State fuel tax laws and procedures that have resulted in improved fuel tax compliance, especially for diesel fuel. The improved compliance has resulted in increased fuel volumes being reported by the States to FHWA. The trends shown in the tables reflect both improvements in tax compliance and changes in consumption. The Alaska Department of Labor and Workforce De velopment data on industry employment shows that the average annual employment in the trucki ng industry in 2003 was about 2,800 persons. This estimate increased to 3,000 in 2004 and 3,100 in 2005 (ADOL&WD, 2007). The increase to 3,100 persons would be a 10.7 percent in crease in employment, which does not suggest that the industry doubled its fuel consumption. Consumption by the other end use sectors has declined since 2000. Additional detail for these other end use sectors is shown in Figure 9

.
Figure 8. Distillate and Kerosene Fuel Sales by Major End Use Category, 2000-2005

0 50 100 150 200 250 300 350

2000 2001 2002 2003 2004 2005
YearMillions of Gallons

Vessel Bunkering On-Highway Other

Source: EIA, 2007b. Distillat e Fuel Oil and Kerosene Sales by End Use. Accessed at http://tonto.eia.doe.gov/ dnav/pet/pet_cons_821 use_dcu_nus_a.htm on October 24, 2007.

Over the 2000 to 2005 time period, only three end use sectors experienced increases in annual distillate and kerosene consumption. These included electric utilities, which had the largest increase

29Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

of approximately 11.2 million gallons over the five years, the industrial use segment, which increased by about 7.1 million gallons, and the military , which increased about 4.9 million gallons. The other five sectors declined, with the oil co mpany sector experiencing a 23.3 million gallon decline. Pipeline companie s are included in the EIA’s oil company definition so some of this decrease is due to switching pump stations on the Trans Alaska Pipeline System to the electric grid instead of burning jet fuel in turbine engines, which power the pipeline pumps. The commercial sector decreased its consumption by about 8.6 million gallons and the residential sector declined by about 7.5 mi llion gallons. The off-highway sect or was about 3.2 million gallons below the 2000 consumption level, although 2004 and 2005 were above the levels experienced in 2001 through 2003. The farm sector was down slightly from its very low levels of consumption. Note that most sectors were down or flat in 2005 when prices for distillates and kerosene increased significantly. Total distillate and kerosene consumptio n in the state declined from 282.9 million gallons in 2000 to 263.6 million gallons in 2005. This was a reduction of 19.3 million gallons or a 6.8 percent decrease.

Figure 9. Distillate and Kerosene Fuel Sa les by Other End Use Categories, 2000-2005

0 10 20 30 40 50 60 70 80 90

2000 2001 2002 2003 2004 2005
YearMillions of Gallons

Residential Commercial Industrial Electric Utility Oil Company Military Off-Highway Farm and Other

Source: EIA, 2007b. Distillat e Fuel Oil and Kerosene Sales by End Use. Accessed at http://tonto.eia.doe.gov/ dnav/pet/pet_cons_821 use_dcu_nus_a.htm on October 24, 2007.

30Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities



## 3.2 Project Area Fuel Demand Total distillate fuel consumption in the study area , excluding jet fuel, is estimated at 75.2 million gallons in 2006. This volume includes jet fuel sold as other products but excludes jet fuel sold and consumed as jet fuel. This volume estimate is shown in Table 11 . The study area accounts for approximately 13.3 percent (75.2/564.4) of the tota l kerosene and distillates, excluding jet fuel, consumed in the state.

Table 11. Estimated Distillate Consumption, Excluding Jet Fuel, in Study Area, 2006

Community Category Amoun t(Millions of Gallons)
Hubs 22.2 Sub-regional hubs 4.7 Villages and towns 24.3

Subtotal 51.2
Industrial 24
Total 75.2 Source: Estimate by Northern Economics, Inc.

Additional information on the derivation of these es timates is presented in the following subsections.



### 3.2.1 Storage Capacity Usage in the Study Area Fuel sales are considered proprietary informat ion and are not available from the major fuel distributors. Fuel taxes in the state are not reported by geographic location, so there are no secondary data that can be used to estimate fuel consumpt ion in the project area. However, data of varying quality do exist for bulk fuel tank farms and st orage capacity by community in the state. The information presented in this se ction for tank farms provides a preliminary estimate for fuel consumption in the study area. Adjustments to this tank farm data are described later in this section to arrive at estimated distillate and kerosene fuel consumption in the study area and the amount of regulated fuels.



### Rural Bulk Fuel Tank Farms Bulk fuel tank farm information from business pl ans submitted to the Alaska Energy Authority and attachments provided in the Denali Commission database (Denali Commission project database, 2007) indicates planned capacity a dditions average 850 gallons of pe troleum products per person for communities of 100 to 1,000 persons. The capacity pe r capita is larger for communities of less than 100 persons because the standard tank design used in most villages may be oversized for communities of less than 100 person but smaller tanks would cost almost as much as a larger standard tank. A larger, standard tank may be more cost effective. Further, tank additions are sized to meet requirements 10 years in the future. Current consumption of all petroleum products is approximately 750 gallons per capita per year based on a review of available tank farm business plans for villages and towns. The same sources provide an average of approximately 1,700 gallons of storage capacity for hubs and 1,250 for sub-regional hubs (See Table 12 ).

31Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

A review of these business plans and the DCCED co mmunity database informat ion for bulk fuel tank storage indicates that approximately 20 percent of the tank farm capacity is used by gasoline, leaving 80 percent of the capacity for distillate fuels. Tank farm business plans and other sources also indicate that electr ic utilities in villages and towns require approximately 25 percent of the total capaci ty, while utilities in hubs and sub-regional hubs consume about 30 percent of total capacity. Aviation is estimated to require about 20 percent of tank farm capacity in hubs and about 15 percent in subr egional hubs. Villages and towns in the study area do not typically store aviation fuels or distillate marine fuels. The tota l volume of ULSD per capita that might be required if regulated so urces, including all power generati on equipment, switched to ULSD is shown in the row titled Regulated Distillates. Regulated distillates exclude gasoline, aviation gasoline, jet fuel, and heating fuel. Separate tank s are not required for each use shown below but separate tanks would be required for ce rtain fuels (e.g., ULSD and Jet A).

Table 12. 2006 Population and Per Capita Tank Farm Capacity Usage in Study Area Communities

Population/Storage Use Hubs Sub- regional Hubs Village and Towns Population 18,918 5,028 36,999 Gallons per Capita
1. Total Petroleum Products 1,700 1,250 750 2. Motor Gasoline 340 250 150 3. Total Distillate Products (1-2) 1,360 1,000 600 4. Electricity 510 375 190 5. Residential Heating 250 215 215
6. Marine 40 30 0
7. Aviation 340 190 0 8. Off-Road 50 40 25 9. Other 170 150 170

10. All Distillates, excl. Jet (3-7) 1,020 810 600 11. Regulated Distillates (10- 5+(0.25*9)) 640 480 260

Source: Estimates by Northern Economics, Inc. Notes: The volumes shown for all dist illates, excluding jet fuel, represent the maximum amount of ULSD that might be required in the study area if all uses except those needing jet fuel switched to ULSD. Regulated distillates are a portion of total distillates and indicate the volumes of ULSD that might be required if only regulated sources, including all power generation equipment, switched to ULSD. Gallons are rounded to nearest ten gallons in most instances, five gallons for certain uses. Approximately 25 percent of the Other category is anticipated to use ULSD.

As noted in the prior section, EI A estimates that off-road equipment consumes about three percent of total distillate and kerosene fuels in the state. A review of typical equipment found at the village level and a review of fuel consumption data for diesel engines employed in heavy equipment suggests that off-road equipment in villages woul d likely consume about the same percentage, so three percent is used in these estimates. The Other category includes commercial, government, schools, and other organizations both public and private and is calculated as the balance be tween the total storage capacity and the volume required for the other uses. Approximately 75 percen t of the fuel consumed in this category is

32Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

considered to be heating fuel. Total distillates exclude gasoline, aviation gasoline, and jet fuel. Regulated distillates exclude gasoline, avia tion gasoline, jet fuel, and heating fuel.
Table 13 is the result of multiplying the 2006 population for each community category by the estimated per capita storage capacity by use shown in Table 12

. Table 13 indicates that total tank farm capacity in the study area is approximately 66. 2 million gallons, and the to tal storage capacity for all distillates is approximately 53 million gallons. Excluding aviation fuels and gasoline approximately 45.6 million gallons of storage is required for distillates per year. The 45. 6 million gallon estimate represents the maximum storage needed for ULSD if a ll uses of distillate fuels except those requiring jet fuels convert to ULSD. The regulated distillate estimate represents the storage capacity required for ULSD if only regulated uses made the transition.

Table 13. Total Tank Farm Capacity Usage in Study Area Communities, 2006

Hubs Sub-regional Hubs Village and Towns Totals Storage Use Millions of Gallons
1. Total Petroleum Pr oducts 32.2 6.3 27.7 66.2 2. Motor Gasoline 6.4 1.3 5.5 13.2 3. Total Distillate Products (1-2) 25.8 5.0 22.2 53.0 4. Electricity 9.6 1.9 7.0 18.6 5. Residential Heat ing 4.7 1.1 8.0 13.8 6. Marine 0.8 0.2 0.0 0.9
7. Aviation 6.4 1.0 0.0 7.4 8. Off-Road 0.9 0.2 0.9 2.1 9. Other 3. 2 0.8 6.3 10.3

10. All Distillates, excl. Jet (3-7) 19.3 4.1 22.2 45.6 11. Regulated Distillates (10- 5+(0.25*9)) 12.2 2.4 9.5 24.1

Source: Estimates by Northern Economics, Inc. Notes: The volumes shown for all dist illates, excluding jet fuel, represent the maximum amount of ULSD that might be required in the study area if all uses except those requiring jet fuels switched to ULSD. Regulated distillates are a portion of total distillates and indicate the volumes of ULSD that might be required if only regulated sources, including all power generation equipm ent, switched to ULSD. Approximately 25 percent of the Other category is anticipated to use ULSD.

It should be noted that the effective working storage capacity is about five to eight percent lower than the stated storage capacity. This situation is consid ered in the fuel demand estimates presented in the following subsection using a mid-point of 6.5 perc ent to account for the difference between stated capacity and working capacity.



### 3.2.2 Estimated Community Fuel Demand in Study Area Communities, 2006 As noted previously, some communiti es may have several fuel deliveries per year so an estimate of total bulk fuel tank capacity will underestimate the total fuel consumed in the study area. For example, Table 13 indicates that marine fuels may acco unt for approximately 900,000 gallons of stated storage capacity in the study area, even th ough the estimated consumption for this sector is approximately 4.1 million gallons. Mo st of the marine distillate fuels are consumed in areas where the

33Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

shipping season can extend from May until late Oc tober or early November and can receive multiple fuel deliveries, in comparison to other areas in the study area where the shipping season is from early to mid-July through earl y to mid-September. The total estimated fuel consumption in the study ar ea is considered to be about 15 percent greater than the working storage capacity in the study area . Of the approximately 9 mi llion additional gallons of fuels due to multiple deliveries, about one-third, 3. 2 million gallons, is associated with marine fuels. The balance of 5.8 million gallons is distributed eq ually between the other uses in accordance with their storage capacity. Table 14 shows the distribution of the estimated 71 million gallons of petroleum products and their distribution among co mmunity types and uses. The distribution of total distillates, approximately 50 milli on gallons, and regulated distilla tes, approximately 27.9 million gallons, among community types is also shown.

Table 14. Estimated Fuel Consumption by Use in Study Area Communities, 2006

Hubs Sub-regional Hubs Village and Towns Totals Storage Use (Millions of Gallons)
1. Total Petroleum Pr oducts 34.6 6.8 29.8 71.2 2. Motor Gasoline 6.6 1.3 5.7 13.6 3. Total Distillate Products (1-2) 28.0 5.5 24.1 57.6 4. Electricity 9.9 1.9 7.2 19.1
5. Residential Heat ing 4.9 1.1 8.2 14.1
6. Marine 3.4 0.7 0.0 4.1
7. Aviation 6.6 1.0 0.0 7.6
8. Off-Road 1.0 0.2 1.0 2.1 9. Other 3. 3 0.8 6.5 10.5

10. All Distillates, excl. Jet (3-7) 22.5 4.7 22.8 50.0 11. Regulated Distillates (10- 5+(0.25*9)) 15.1 3.0 9.8 27.9

Source: Estimates by Northern Economics, Inc. Notes: The volumes shown for all dist illates, excluding jet fuel, represent the maximum amount of ULSD that might be required in the study area if all uses except those needing jet fuel switched to ULSD. Regulated distillates are a portion of total distillates and indicate the volumes of ULSD that might be required if only regulated sources, including all power generation equipm ent, switched to ULSD. Approximately 25 percent of the Other category is anticipated to use ULSD.



### 3.2.3 Estimated Industrial and Construction Demand in Study Area
In addition to fuel consumed in the communities within the study area, there are remote industrial enclaves that are major consumers of distillate prod ucts. The largest industrial enclave in the state is the oil industry and its operations at Prudhoe Ba y and surrounding fields. This enclave is not addressed in this report. Other indust rial enclaves are discussed below.

34Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities



### Red Dog Mine The next largest industrial consumer is the Red Do g Mine, located north of Kotzebue in the Northwest Arctic Borough. The mine has a bulk fuel tank farm with approximately 15 million gallons of capacity located at the port site on the Chukchi Sea coas t south of the village of Kivalina. Total fuel consumption is estimated at 16.8 million gallons per year. The mine is supplied by fuel barges direct from Puget Sound or Cook Inlet refineries and does not utilize any community-based storage facilities in the region. There are no other mines of this scale operating in the study area. There are a number of small gold mines in the study area as well as a number of mi ning exploration camps that function during the summer and early fall months. The smaller operations and mining camps typicall y obtain fuel from the nearest hub or sub-regional hub and these volumes are captured in the estimates for the communities, but larger exploration operations are su pplied by the major fuel distributors in the study

area.



### Donlin Creek, Pebble Mine The proposed Donlin Creek mine located near the village of Crooked Creek on the Kuskokwim River is a large minerals exploration effort in the stud y area and is estimated to use between one and two million gallons of fuel per year during exploration. The proposed Pebble mine located near Iliamna is a much larger deposit and is esti mated to use between two and four million gallons of fuel per year for exploration activities. Total fuel consumption for all mining activity in the study area, including Red Dog, which is not supplied from local communities, is es timated at approximatel y 21 million gallons.



### Construction Industry In addition to the mining sector, construction firms will often mobili ze fuel supplies into communities for major construction projects since the fuel cost will be lower than purchasing from local suppliers. The construction sector, which is included in EIA’ s off-highway sector and a ccounts for approximately 75 percent of the off-highway use in the state, is estimated to use about four percent of the total fuel demand in the study area or about 3 million gallons of fuel per year.



## 3.3 Future Demand for Distillate Fuels in the State of Alaska and Study Area

There are a number of factors that will influence fu ture demand for distillates in the state and the study area. This report considers the following factors in estimating future demand:

• Population change and household size

• Technological change

• Change in the use of electric appliances and equipment

• Price changes in heating fuel and electricity

• The response of consumers to this change Each of these items is addressed in the following subsections.

35Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities



### 3.3.1 Population Change and Household Size The Alaska Department of Labor and Workforc e Development recently published population projections for the state, boroughs, and census ar eas from 2006 to 2030 (Alaska Department of Labor and Workforce Development, 2007). Table 15 shows the Department’s projections at five-year intervals through 2030 for the state and the major bo roughs or census areas within the study area. There are distinct differences between regions within the study area with some anticipated to have substantial increases in population and some expe cted to lose population over the period. The compound annual growth rate between 2006 an d 2030 for these boroughs and census areas combined is 0.84 percent.

Table 15. Population Projections for the State an d Boroughs and Census Areas in the Study Area, 2006 through 2030

2006 2010 2015 2020 2025 2030
State of Alaska 670,053 698,573 734,999 771,465 806,113 838,676 Borough or Census Area

Yukon-Koyukuk Census Area 5,860 5,899 5,766 5,595 5,362 5,111 Nome Census Area 9,535 9,902 10,412 10,908 11,405 12,024 North Slope Borough 6, 807 7,291 7,722 8, 095 8,433 8,867 Northwest Arctic Borough 7,334 7,711 8,165 8,604 9,016 9,481 Bethel Census Area 17,031 17, 774 18,590 19,457 20,333 21,354 Bristol Bay Borough 1, 060 1,169 1,153 1, 152 1,133 1,120 Dillingham Census Area 4, 796 4,897 5,044 5, 181 5,293 5,408 Lake & Peninsula Borough 1,557 1,586 1,560 1,510 1,443 1,364 Wade Hampton Census Area 7,553 7,910 8,455 9, 069 9,709 10,427 Total for the Project Area 61,53 3 64,139 66,867 69, 571 72,127 75,156 Source: Alaska Department of Labor and Workforce Development, 2007. Alaska Population by Area: 2006 to 2030. Excel files accessed at http://www.labor.state.ak.us/research/pop/ projections/AkSubStatePopProj.xls on October 25 , 2007.

The 2006 population es timate shown in Table 15 is slightly larger than the population estimate of 60,945 in the study area communities because so me communities in the Lake and Peninsula Borough, for example, have ferry service and year-round fuel deliveries, and one community in the Aleutians East Borough (AEB) is in the study area although most of the AEB’s communities also have ferry service and year-round fuel deliveries. Comm unities with ferry servic e and year-round fuel delivery were not included in the study area communities. The AEB and the Lake and Peninsula Borough are considered rural under the federal rules for ULSD. Household size is an important factor to consider because with a given population, the smaller the household size, the greater the number of househo lds, and the number of households is a key element in energy consumption. Household size in the U.S. and the State of Alaska has been decreasing over time and this trend is expected to continue. The study area boroughs and census areas had an average household size of about 3.63 persons in 1990 and about 3.59 in 2000, a decrease of about 0.04 persons over the 10-year period. Assuming that this same rate of decrease continues into the future, the average household size will be approximately 3.48 persons in 2030.

36Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

The average household size and the resultin g number of households are presented in Table 16

. Population is projected to increase approximat ely 22.1 percent between 2006 and 2030, while the number of households is projected to increase approximately 25.3 percent. If all other factors remained the same, fuel consumption in the commun ities within the study (p roject) area could be expected to increase by approximately 25 percent.

Table 16. Estimated Population, Average Househol d Size, and Households in Study Area, 2006-2030

Year Population Average Household Size Households
2006 60,945 3.57 17,086
2010 63,526 3.55 17,885
2015 66,228 3.53 18,744
2020 68,906 3.51 19,605
2025 71,438 3.50 20,433
2030 74,438 3.48 21,405 Source: Northern Economics Inc.

As shown in Table 17 , there has been an outmigration from many rural communities during years from 2000 to 2006. There appears to more outmigration, amounting to 1 person in 5, in small villages less than 100 residents in size.

Table 17. Project Area Population Ch ange by Community Ty pe, 2000 and 2006.

Community Type 2000 2006 Loss/Gain % of 2000 Villages
Less than 100 2,958 2,370 -588 -19.9 Population 101 to 200 4,061 3,630 -431 -10.6 Population 201 to 300 5,603 5,565 -38 -0.7 Population 301 to 400 3,986 4,195 209 5.2 Sub-regional Hubs and Towns Population 401 to 500 5,808 6,190 382 6.6 Population 501 to 600 5,448 5,534 86 1.6 Population 601 to 1000 13,836 14,543 707 5.1 Villages, Sub-regional Hubs and Towns Subtotal 41,700 42,027 -327 -0.8
Hubs Dillingham 2,466 2,397 -69 -2.8
Kotzebue 3,082 3,104 22 0.7
Nome 3,505 3,540 35 1.0
Barrow 4,581 4,065 -516 -11.3
Bethel 5,471 5,812 341 6.2 Hubs Subtotal 19,105 18,918 -187 -1.0
Total 60,805 60,945 140 0.2 Source: U.S. Census Bureau, Census 2000, Census 2000 Summary File 1 (SF 1); Alaska Department of Community, Commerce and Economic Development, 2007.

37Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Figure 10 shows estimated average househo ld income in 2007 (on the left vertical axis) and 2007 fuel cost per gallon (on the right vertical axis) for pr oject areas communities, by size. Smaller communities have lower average household incomes and somewh at increased fuel prices, especially when compared to regional hubs.

Figure 10. Project Area Communities, by Category, Av erage 2007 Household Income and 2007 Fuel Cost.

- 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000

Regional Hubs SubRegional Hubs Towns Villages

Community TypeAverage Household Income

0.00 1.00 2.00 3.00 4.00 5.00 6.00Fuel Cost ($) per Gallon

Household Income Fuel Cost

Source: Fuel costs from Current Community Conditions: Fu el Prices Across Alaska June 2007 Update. Alaska Department of Commerce, Community, and Economic Development. Accessed at http://www.commerce.state.ak.us/dca/pub/F uelSurveyJune07Web.pdf on December 13 , 2007.

Household income data are from the 2000 Census (U.S. Bureau of the Census) and increased according to the Bureau of Economic Analysis data on changes in per capita personal income for the boroughs and census areas in the study area as ca lculated by Northern Economics. The data were accessed on December 14, 2007 and are available at http://www.bea.gov/regional/reis/drill.cfm . The estimate for 2006 was increased by the annual percenta ge increase in per capi ta income for the State of Alaska since 2006 local area data are not yet available.



### 3.3.2 Technological Change Over time it is anticipated that technological impr ovements will continue and the efficiency of space heating equipment, electric appliances, electric generating equipment, and similar elements will improve. These improvements will contribute to incr emental reductions in fuel demand over time. In addition to this equipment, continued technological improvements are anticipated for alternative energy projects in rural Alaska, which could further reduce petroleum demand.

38Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Figure 11 shows the change in average electrical generation efficiency reported by utilities participating in the PCE program that has occu rred over the 1991 to 2006 time frame. The average kilowatt hours per gallon of fuel have increased from slightly over 12 kWh per gallon to about 15 kWh per gallon.

Figure 11. Average Kilowatt Hour s per Gallon of Fuel, 1991-2006

0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00

19

9

1 19 92 19 93 19 94 19 95 19 9

6 19 97 19 98 19 99 20 00 2 0

01 20 02 20 03 20 04 20 05 2 0

06

YearKilowatt Hours per Gallon

Source: Calculations by Northern Economics, Inc. Data fr om Alaska Energy Authority, 2007. Statistical Report of the Power Cost Equalization Program , Fiscal Year 2006. Accessed at http://www.aidea.org/aea/PDF%20files/2007P CEStatisticsFY06.pdf on October 27,2007

.
To some extent, increased efficienci es in electrical appliances are ex pected to be offset by a number of factors. These include the continuing increase in the number of electric appliances and equipment used in homes in rural Alaska, and the increasing si ze of homes and number of community facilities in most villages. Figure 12 shows the average kilowatt hours per residential custom er for utilities participating in the PCE program. Since the mid-1990s the trend is for slightly higher electrical consumption per residential customer.

39Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Figure 12. Average Kilowatt Hours pe r Residential Customer, 1991-2006

13,500 14,000 14,500 15,000 15,500 16,000 16,500

19

91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06

YearTotal Kilowatt Hours per Residential Customer

Source: Calculations by Northern Economics, Inc. Data fr om Alaska Energy Authority, 2007. Statistical Report of the Power Cost Equalization Program , Fiscal Year 2006. Accessed at http://www.aidea.org/aea/PDF%20files/2007P CEStatisticsFY06.pdf on October 27,2007

.
The net effect of these factors is presented in Figure 13 , which shows the average gallons consumed per residential customer for utilit ies participating in th e PCE program. This estimate uses the total gallons consumed to produce electricity for all residential and commercial customers, as well as community facilities. The averag e gallons consumed has decrease d from a peak of about 1,250 gallons per residential customer in 1995 to 1,050 gallons in 2005, with a slight increase to about 1,090 gallons in 2006. The trend suggests lower fuel consumption per reside ntial customer in the future although possibly decreasing at a slower rate. Similar trends are thought to exist for space heating use in the study area as fuel efficient Toyo and Monitor stoves and similar equipment have replaced older oil furnaces, but data are not available to document this opinion. Benefits of using these stoves for space heating ma y have already been captured as many homes havealready converted to the more fuel-efficient equipment. However, boilers and other commerciallysized heating equipment can last for 20 years or mo re so the response to higher prices may extend over a long period of time. The trend of lower fuel consumptions for residential heating is likely to continue lower but at a decreasing rate.

40Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Figure 13. Average Gallons of Fuel Consumed per Residential Customer for PCE Utilities, 1991-2006

950 1,000 1,050 1,100 1,150 1,200 1,250 1,300

1 99

1 1 992 1 993 1 994 1 995 1 996 1 9

97 1 9

98 1 999 2 000 2 001 2 002 2 003 2004 2005 2 006

Year
Gallons per Customer

Source: Calculations by Northern Economics, Inc. Data fr om Alaska Energy Authority, 2007. Statistical Report of the Power Cost Equalization Program , Fiscal Year 2006. Accessed at http://www.aidea.org/aea/PDF%20files/2007P CEStatisticsFY06.pdf on October 27,2007

.
Alternative energy options are increasing in the study area. Wind energy is being developed in a number of coastal communities where the wind resource is abundant. Interior villages have traditionally used wood for heating their residences or for supplementing oil-fired stoves. Wood and other types of biomass are being investigated for co mmercial scale heating and even gasification. High fuel and electricity prices have made these alternatives viable and the technologies are improving and becoming more efficient and cost-effective each year.



### 3.3.3 Response of Consumers to Price Changes of Heating Fuels and Electricity Crude oil prices are at historic peaks at the time this report is being prepared. These prices have translated into substantial price in creases for petroleum products and electricity in the study area. The future prices for crude oil are unknown but the EIA has developed scenarios of possible crude oil prices in the future. The price of crude oil could range from $40 per barrel to over $100 per barrel in 2005 dollars (EIA, 2007). Current prices are reaching new records but they are not expected to hold this extremely high level over the study period (See EIA’s A nnual Energy Outlook 2008 [Early Release]
at http://www.eia.doe.gov/oiaf/aeo/prices.html ).

41Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

The response of consumers to increases in prices for heating fuels or electricity is influenced by:

• Availability of substitutes

• Proportion of income spent

• Time period considered (i.e., time to adjust)

• Perceived permanency of price change

• Degree of necessity (versus luxury) The EIA (Wade, 2007) estimated that the price response of resident ial consumers in the U.S. to a doubling of electricity prices (100 percent increase) would result in a short term response of a 20 percent decline in electricity consumption. The commercial sector would experience a 10 percent decline with the same cost increase. An analysis of electricity consumption in Bethel found that electricity consumption declines about 17 percent for every $1 increase in the price of fuel used for electrical generation (Northern Economics, Inc., 2007). This result suggests that the response of residents and businesses in the study may be similar to the U.S. data. The response of consumers to high prices over a long period of time results in greater reductions in electricity or heating fuel consumption than short term increases as higher efficiency equipment is purchased and other improvements are made to redu ce consumption. The EIA estimates that a long term, large increase in electricity prices will result in U.S. electricity consumption being reduced by almost half, and a long term, large increase in heati ng fuel prices will result in a 60 percent reduction in heating fuel consumption (Wade 2007). The high prices for heating fuel have begun to reduce fuel consumption in the study area. For example, the community of Tanana is converting its washeteria to use wood for heating water and the building to replace as much fuel oil as possible, and residents are beginning to burn more wood to reduce heating fuel consumption. However, many communities in the study area do no t have access to major wood resources or to cost effective alternative energy sources (e.g., geotherma l, conventional natural gas, coal bed methane, wind). As a result, it is not anticipated that commu nities heating with diesel will be able to reduce consumption of heating fuels as mu ch as estimated by the EIA. Anec dotally, the consultant team has heard of young adults in rural Alaska moving back to live with their parents because of the difficulty in paying utility bills for both households. Figure 14 shows the average annual prices in cents per gallon that Alaska residential consumers have paid for distillate fuels from 2000 through July of 2007. This price curve is compared with the residential consumption data that are only available through 2005. Pric es in the study area are notably higher than the average statewide prices shown here. It is anticipated that the high prices in 2006 and 2007 will be reflected in lower consumption when the consumption data are reported.

42Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Figure 14. Distillate Prices to Residential Consumers in Alaska and Residential Consumption

0 50 100 150 200 250 300

2000 2001 2002 2003 2004 2005 2006 2007Cents per Gallon

0 10 20 30 40 50 60 70 80 90Residential Consumption(Millions of Gallons)

Cents per Gallon Millions of Gallons

Sources: EIA, 2007b. Distillate Fuel Oil an d Kerosene Sales by End Use. Accessed at http://tonto.eia.doe.gov/ dnav/pet/pet_cons_821 use_dcu_nus_a.htm on October 24, 2007. EIA, 2007c. October 2007 Monthly Energy Review, Table 9.8c. No. 2 Distillate Prices to Residences: Selected Western States and U.S. Average. Accessed at http://tonto.eia.doe. gov/merquery/mer_dat a.asp?tab le=T09.08c on October 28, 2007.

Future consumption of distillates and kerosene in the state and the study area will be influenced by two major drivers that are opposing forces. First, population growth and the resulting increase in households will result in greater demand for these fuels. Second, the response of consumers to the substantial increase in high fuel prices is reduci ng demand. Over the long run, we anticipate that reductions will occur in the consumption of electricity but because the PCE program subsidizes electricity rates in rural Alaska, the response will be substantially lower than the EIA analysis would suggest.
Reductions in household heatin g fuel consumption may decline about 35 percent from 2001 levels, which is approximately the same as EIA’s three-year short term price elasti city estimate. We also anticipate that distillate demand for on-highway us e will increase as vehicles with more fuel-efficient diesel engines replace gasoline-p owered engines in the future. The change in industrial demand in the study area could be significantly larger than the changes in community demand. The Donlin Creek mine could po tentially use 50 to 60 million gallons annually, and demand at the Pebble mine, which is a vastly larger deposit, could approach 80 to 100 million gallons annually. Neither of these projects has been approved for production and there is a great deal of uncertainty regarding their development. The esti mates shown for industrial represent the midpoint of a wide range of potential consumption by the industrial sector (See Table 18 ). It is anticipated that the Red Dog mine will continue to operate through 2030.

43Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Table 18. Current and Projected Distillate and Kerosene Fuel Consumption in Alaska, 2005-2030

2005 2010 2015 2020 2025 2030 End-Use Category (Millions of Gallons)
Residential 69.3 61. 4 60.6 59.4 57.7 55.4 Commercial 42.2 37. 4 37.0 36.3 35.2 33.8
Industrial 44.9 50.0 87.5 112.5 138.5 150.0 Farm and Other 0.0 0. 1 0.1 0.1 0.1 0.1
Electric Power 57.5 57.5 58.5 60.5 62.2 63.6 Oil Company 17.5 20. 0 25.0 30.0 35.0 40.0
Railroad 6.9 7.5 8.0 8.5 9.0 9.5 Vessel Bunkering 121.2 125.0 125.0 125. 0 125.0 125.0 On-Highway 172.6 186. 7 198.7 206.5 210.1 211.2 Military 14.4 15.0 15.0 15.0 15.0 15.0 Off-Highway 17.9 17.9 17.9 17.9 17.9 17.9
Total 564.4 578.4 633. 2 671.6 705.5 721.3 Source: Estimates by Northern Economics, Inc.

The estimate for Alaska’s oil company sector increase s to reflect the potential construction of a natural gas pipeline as well as the expans ion of exploration and production activities to the Chukchi Sea and other frontier areas. Railroad consumption has been increasing over time and this is anticipated to continue through 2030. Vessel fueling is down from historic peaks and is anticipated to re main at approximately the same level as in 2005. The number of vessels participating in the state’s fisheries has declined over time but further consolidation is expected to be minimal. On-highway consumption is expected to increase over time in line with expansion of the truck transportation industry and the conversion of vehicles to diesel engines in the future. Consum ption by the military has increased slightly in the past few years in response to the expansion of the milita ry’s presence in the state. It is anticipated to increase slightly by 2010 and is then expected to remain stable. Off-highway consumption in the state has varied greatly over the years with no discernible trend and this es timate is a continuation of the latest EIA data.
Table 19 shows the projected fuel consumption in the study area through 2030 and the 2006 consumption estimate. Total community consumption of petroleum products and distillates is expected to remain near current levels or decline slightly over the next few years in response to substantially higher prices. Total di stillate and kerosene consumption in the study area is expected to increase over time with anticipati on that one or more major mineral deposits will be developed in the region.

44Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Table 19. Projected Petroleum Fuels Co nsumption in the Study Area, 2006-2030

2006 2010 2015 2020 2025 2030 Use (Millions of Gallons) 1. Total Community Petroleum Pr oducts 71.2 70.9 73. 1 76.4 80.3 85.3

2. Motor Gasoline 13.6 13.5 13.4 13.2 12.9 12.6 3. Total Community Distillate Produc ts (1-2) 57.6 57.3 59.7 63.2 67.4 72.8

4. Electricity 19.1 19.2 19.4 20.0 20.6 21.2 5. Residential 14.1 12.5 12.3 12.1 11.7 11.3
6. Marine 4.1 4.1 4.1 4.1 4.1 4.1
7. Aviation 6.4 6. 6 6.9 7.1 7.4 7.7 8. Off-Road 2.1 2.2 2.3 2.4 2.5 2.6 9. Other 11.7 12. 7 14.6 17.4 21.2 26.0

10. Distillates for Communities, Excluding Jet (3-7) 51.1 50.7 52.8 56.0 60.0 65.1

11. Industrial 24 30. 0 87.5 112.5 137.5 150.0 12. All Distillates, excluding Jet (10+11) 75.1 80.7 140.3 168.5 197.5 215.1

13. Regulated Distillates (4+6+8+ 11+.25*9) 52.2 58.7 117.0 143.4 170.0 184.3 Source: Estimates by Northern Economics, Inc. Notes: The volumes shown for all dist illates, excluding jet fuel, represent the maximum amount of ULSD that might be required in the study area if all uses except those needing jet fuels switched to ULSD. Regulated distillates are a portion of total distillates and indicate the volumes of ULSD that might be required if only regulated sources, including all power generation equipm ent, switched to ULSD. Approximately 25 percent of the Other category is anticipated to use ULSD.

45Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

46

# 4 Fuel Costs and Electric Power Generation

The objective of this subsection is to assess t he potential price differences between the various distillate fuels and to describe the effect of fuel costs on electric power generation. Rural communities across the state and in the study area rely heavily on distillate fuels to generate electricity and to heat their homes and buildings. While costs vary by re gion across the state, ru ral Alaska communities typically pay some of th e highest energy costs in the U.S. In a 2007 survey of rural Alaska communities, western Alaska communiti es reported the highest average heating fuel retail price while residents in the northern Alaska in the North Slope Borough reported the lowest. Note the North Slope Borough subsidizes heating fuel for residential use.



## 4.1 Fuel Costs One of the goals of this study is to assess the co sts of transitioning to ULSD in rural western and northern Alaska. The development of a pricing estima te for ULSD prices starts with a review of the current pricing structures for distillate fuels. In analyzing pricing data for various distillate products, it is important to note that the prices of distillate fuels generally follow the price of crude (see Figure 15 ). However, as demonstrated in this chapter, market pressures can distort those prices. The next subsections review the pricing structure and comp are pricing differentials for various distillate products for Anacortes, Washington, and Fairbanks and Anchorage.

Figure 15. Diesel Fuel Prices follow Crude Oil Prices, Dollars per Gallon

Source: Source: Energy Information Administration, EIA-X063, April 2007.

47Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities



### 4.1.1 Fuel Cost Trending The development of a pricing estimate for ULSD pric es starts with a review of the current pricing. Data were collected for fuel prices over the last 16 months in Alaska (Fairbanks and Anchorage) and Anacortes, Washington. These data have been collected from the OPIS (Oil Price Information Service) and represent wholesale prices. Figure 16 through Figure 18 are a compilation of distillate prices for these three regions. What is most important about t hese curves is the shape. The variety of distillate product pricing for each region tend s to move together and in some ca ses, the ULSD products tend to converge over time. There are no significant outliers in the data set.
Table 20 and Table 21 provide a price differential by month between USL No. 1 and Jet A, the two most likely fuels in a two-fuel sc enario. Both are required fuels—ULSD is currently mandated by the EPA for on-highway vehicles and will apply to stationary engines in the future. (EPA, 2004) Jet A is necessary for any location that services jet or turboprop aircraft, and can also be used for home heating fuel oil. Therefore, the spread indicates the maximum cost differential for fuel to be used specifically for stationary power plants, diesel automotive, and diesel marine. Table 22 provides a pricing spread between high sulfur No. 2 and ULSD No. 2 with an average differential of 1.44 percent.

Figure 16. Anchorage Distillate Cost Comparison



### $1.00 $1.50 $2.00 $2.50 $3.00 $3.50

May-0 6 J ul-

0

6 Sep- 0

6 No v

- 0

6 Jan-0 7 Mar-0 7 Ma y -07 Jul-07 Se p

- 0

7 Nov - 07Dollars/Gallon

ULS #1 ULS #2 HS #2 HS #1 Jet A Unleaded Regular US Crude Oil Comp. Acq. Cost by Refiners

Source: OPIS Data, December 2007.

48Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Table 20. Anchorage Pricing Differential per Gallon.

Month ULS No. 1 ($) Jet A ($) Price Spread ($) Pricing Spread (%)
June 2006 2.5588 2.3308 0.2280 9.78 July 2006 2.5189 2.3354 0.1835 7.86 August 2006 2.5754 2.3744 0.2010 8.47 September 2006 2.470 4 2.2877 0.1827 7.99 October 2006 2.1763 2.0561 0.1202 5.85
November 2006 2.1547 2.0694 0.0853 4.12 December 2006 2.2400 2.1950 0.0450 2.05 January 2007 2.2178 2.0910 0.1268 6.06 February 2007 2.1468 2.0221 0.1247 6.17 March 2007 2.1722 2.0611 0.1111 5.39 April 2007 2.2670 2.1856 0.0814 3.72 May 2007 2.3320 2.2491 0.0829 3.69 June 2007 2.3767 2.2919 0.0848 3.70 July 2007 2.3569 2.3287 0.0282 1.21 August 2007 2.4179 2.3841 0.0338 1.42 September 2007 2.451 5 2.3993 0.0522 2.18 October 2007 2.6218 2.5737 0.0481 1.87 November 2007 2.9405 2.9346 0.0059 0.20 Average 0.1014 5.06 Source: Northern Economics, OPIS.

49Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Figure 17. Fairbanks Distillate Cost Comparison

$1.00 $1.50 $2.00 $2.50 $3.00 $3.50May-06Jun-06Jul-06Aug-06Sep-06Oct-06Nov-06Dec-06Jan-07Feb-07Mar-07Apr-07May-07Jun-07Jul-07Aug-07Sep-07Oct-07Nov-07$/Gallon

ULS #1 ULS #2 HS #2 HS #1 Jet A Unleaded Regular US Crude Oil Comp. Acq. Cost by Refiners

Source: OPIS data, November 2007.

50Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Table 21. Fairbanks Pricing Differential per Gallon

Month ULS No. 1 ($) Jet A ($) Price Spread ($) Pricing Spread (%)
June 2006 2.5286 2.3315 0.1971 8.45 July 2006 2.5112 2.3523 0.1589 6.76 August 2006 2.5754 2.3822 0.1932 8.11 September 2006 2.509 4 2.2796 0.2298 10.08 October 2006 2.2369 2.0577 0.1792 8.71 November 2006 2.2144 2.0631 0.1513 7.33 December 2006 2.3000 2.2019 0.0981 4.46 January 2007 2.2763 2.0663 0.2100 10.16 February 2007 2.2002 1.9983 0.2019 10.10 March-2007 2.2256 2.0278 0.1978 9.75 April 2007 2.3159 2.1380 0.1779 8.32 May 2007 2.3772 2.1878 0.1894 8.66 June 2007 2.4233 2.2300 0.1933 8.67 July 2007 2.4196 2.3054 0.1142 4.95 August 2007 2.4931 2.4141 0.0790 3.27 September 2007 2.510 5 2.3884 0.1221 5.11 October 2007 2.6731 2.5652 0.1079 4.21 November 2007 2.9890 2.8727 0.1163 4.05 Average 0.1621 7.85 Source: OPIS, December 2007.

51Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Figure 18. Anacortes Distillate Cost Comparison

$1.00 $1.20 $1.40 $1.60 $1.80 $2.00 $2.20 $2.40 $2.60 $2.80Jan-06Feb-06Mar-06Apr-06May-06Jun-06Jul-06Aug-06Sep-06Oct-06Nov-06Dec-06Jan-07Feb-07Mar-07Apr-07May-07Jun-07Jul-07Aug-07Sep-07$/Gallon

ULS#2 HS #2 U.S. Crude Oil Composite Acquisition Cost by Refiners

Source: OPIS data, November 2007.

52Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Table 22. Anacortes Pricing Differential per Gallon

Month ULS No. 2 ($) HS No. 2 ($) Pr ice Spread ($) Pricing Spread (%) January 2006 1.8366 1.7855 0.0511 2.86 February 2006 1.8325
March 2006 1.9480 April 2006 2.1437 May 2006 2.3604
June 2006 2.2614 July 2006 2.2624 2.2883 -0.0259 -1.13 August 2006 2.5292 September 2006 1.9127 October 2006 1.7710
November 2006 2.0975
December 2006 2.0809 January 2007 1.7982 1.7599 0.0383 2.18 February 2007 1.9534 1.9171 0.0363 1.89
March 2007 2.0041 1.9723 0.0318 1.61 April 2007 2.1499 2.1115 0.0384 1.82 May 2007 2.1487 2.1289 0.0198 0.93
June 2007 2.1193 2.0842 0.0351 1.68 July 2007 2.1344 2.1114 0.0230 1.09 August 2007 2.2895 2.2534 0.0361 1.60 September 2007 2.1894 2.1506 0.0388 1.80 October 2007 2.3904 2.3439 0.0465 1.99 Average 0.0308 1.53 Source: OPIS, November 2007.



### 4.1.2 Diesel Fuel Differentials (ULSD vs. High Sulfur) The data indicate that the local price differential between Jet A and ULSD No. 1 is between five and eight percent. Costs for ULSD are higher in Fa irbanks because that product is shipped from Anchorage. In this section, we examine the different ials between ULSD products and High Sulfur (HS) products, especially No. 2 HS Diesel, which is used for home heating and can be used in stationary engines until mandated by the EPA regulations. Thes e differentials indicate one of the cost impacts that the sulfur regulations would have on rural Alaska.

53Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Figure 19. Price Differential of Anch orage ULSD No. 1 and HS No. 2 Diesel

-$0.10 -$0.05 $0.00 $0.05 $0.10 $0.15

Jun-06 J

u l-06

Aug-06 S

ep

-06

Oc

t

- 06

Nov - 06

Dec-06
J

a

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F

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7 M

a r-07 A

pr-07 M

a

y

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Jun- 0

7

Ju

l -07

A

u g-07 Sep-07 O

ct-07 Nov-07$/Gallon

ULSD #1 - HS #2 Differential

Source: OPIS data, August 2007.

Price differences range from -0.06 cents/gallon to a high of 13.2 cents/gallon with an average difference of approximately 9.1 cents/gallon. The July and August prices had a significant decrease in the spread between ULSD No. 1 and HS No. 2 diesel. The September and October prices varied considerably and may reflect reporting, rather than actual differences. The percent difference between ULSD and HS No. 2 was four percent, sl ightly less than the difference between ULSD and Jet A. In Fairbanks, the difference between ULSD No. 1 and HS No. 2 is significantly higher than for Anchorage (see Figure 20 ). The explanation for this is that all ULSD products are shipped by rail from Anchorage to Fairbanks, while the HS product is ob tained from local refiners. The end result is an average pricing premium of 21.6 cents/gallon over HS No. 2, or a 10 percent premium.

54Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Figure 20. Fairbanks ULSD No. 1/HS No. 2 Diesel and ULSD No. 1/HS No. 1 Differential

$0.00 $0.05 $0.10 $0.15 $0.20 $0.25 $0.30 $0.35Jun-06Jul-06Aug-06Sep-06Oct-06Nov-06Dec-06Jan-07Feb-07Mar-07Apr-07May-07Jun-07Jul-07Aug-07Sep-07Oct-07Nov-07$/Gallon

ULSD #1/HS #2 ULSD #1/HS #1

Source: OPIS data, December 2007.

In the Northwest, as evidenced by the distillate prices in Anacortes ( Figure 18 ), there is very little differential between ULSD No. 2 and HS No. 2, on the order of 2.7 cents per gallon and a 1.44 percent premium for ULSD. In Fairbanks there is a significant price differenc e between the ULSD and high sulfur products. The high sulfur products currently being refined in No rth Pole are significantly less expensive than the ULSD product that is shipped from Anchorage. Th ose portions of western Alaska served from the Fairbanks area would incur fuel costs for ULSD pr oducts that are 4.5 percent more expensive than Anchorage ULSD. Transportation costs may change that percentage differential. Figure 21 places the Alaskan ULSD market in perspectiv e. The Alaskan fuels are very tightly grouped with the Anacortes product being 20 to 25 cents/ga llon lower in price. There are some indications that this price differential is clos ing. In identifying fuel costs for northern and western Alaska, shipping will be a dominant factor in pricing.

55Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Figure 21. Alaskan Market ULSD Pricing

$1.00 $1.50 $2.00 $2.50 $3.00 $3.50

M

a y-

0 6 Jun-06 Jul- 0

6 A

u g-06 Sep-06 Oct -06

Nov - 06

Dec-06 Jan-07 F eb - 07

M

a

r -07

Apr-07 M

a y-

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7 Ju

n-07 Jul

-07

A

ug

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S

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N

ov-07Dollars/Gallon

Fairbanks ULS #1 Fairbanks ULS #2 Anchorage ULS #1 Anchorage ULS #2 Anacortes ULS #2

Source: OPIS data, August 2007.



### 4.1.3 Distillate Pricing Indices In analyzing the pricing data for the various distillate products, it is important to note that while the prices of distillate fuels generally fo llow the price of crude as shown in Figure 15 , market pressures will distort those prices. Market fluctuations can be best demonstrated by indexing the price for distillates of interest to the price of another distillate. Fairba nks and Anchorage distillate costs were compared to Anacortes High Sulfur No. 2 Fuel Oil. Results are shown in Figure 22 and Figure 23 below. For both the cost index was calculated by dividing the OPIS market price of the respective fuel to the OPIS market price of HS No. 2 for that time period.

56Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Figure 22. Anchorage Distillate Cost Multipliers/Anacortes Base Price

0.90 1.00 1.10 1.20 1.30Jan-06Feb-06Mar-06Apr-06May-06Jun-06Jul-06Aug-06Sep-06Oct-06Nov-06Dec-06Jan-07Feb-07Mar-07Apr-07May-07Jun-07Jul-07Aug-07Sep-07Cost Index

Anacortes HS #2 Index Anacortes ULS #2 Anchorage HS #2 Anchorage HS #1 Anchorage ULS #1 Anchorage ULS #2 Anchorage Jet A

Source: OPIS data, November 2007

57Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Figure 23. Fairbanks Distillate Cost Multipliers/Anacortes Base Price

0.90 1.00 1.10 1.20 1.30

J

a n-0

6 Feb-06 Mar-06 A

p r- 06 M

a y-06

Jun-06 Jul-06 Aug-06 Sep- 0 6 Oc

t -0

6 Nov-06 D

e c -06

J

a n-0

7 Feb- 0 7 Mar - 07

Ap r -07

May-07
J

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7 J ul-07 Aug- 0 7 Sep -0

7 Oc

t -0

7Cost Index

Anacortes HS #2 Index Anacortes ULS #2 Fairbanks HS #2 Fairbanks HS #1 Fairbanks ULS #1 Fairbanks ULS #2 Fairbanks Jet A

Source: OPIS, November 2007.

The Alaskan distillate prices trac k well together and were both subject to price spikes relative to Anacortes HS No. 2. There appear s to be an adjustment towards a 10 percent premium (Alaska) for ULSD fuels over HS #2 in Anacortes. These data were further refined to look at Alaskan fuel prices indexed to Jet A (the high sulfur fuel in a two fu el scenario). Composite crude prices were also indexed to allow for futu re price predictions. Figure 24 illustrates price differences between Anchor age and Anacortes, for ULSD No. 1 and No. 2 for the period June 2006 to November of 2007. Anacortes’ prices are for ULSD No. 2, while Anchorage prices reflect both ULSD No. 1 and ULSD No. 2. ULSD No. 2 has only been reported for Anchorage since May 2007. The average price difference between Anc horage and Anacortes is $0.30 per gallon.

58Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Figure 24. ULSD Prices ($/gallon), Anchorage and Anac ortes, No. 1 and No. 2, June 2006 to November 2007.

$0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50

J

u

n

- 0

6 A u

g

- 0

6 O c t - 0

6 D e

c

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6 F e

b

- 0

7 A p

r - 0

7 J u

n

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7 A u

g

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7 O c t - 0

7

ULS 1 Anchorage ULS 2 Anchorage ULS 2 Anacortes A nchorage: ULSD No. 1

A nacortes: ULSD No. 2 A nchorage: ULSD No. 2

Source: OPIS, December 2007.

59Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Figure 25. Anchorage Distillate Fuel Multipliers (indexed to Jet A)

0.50 0.60 0.70 0.80 0.90 1.00 1.10 1.20

May-0 6 Ju

n -06 J

ul-06 Aug-06 S

e p-06 Oct-06 N

ov

-06

Dec-06 Ja

n -07

Feb-07 Mar-07 Apr-07 May - 07

J

u n-07 Jul-07 Aug-07 Sep-0 7 O

c t-07 N

ov

-0

7Cost Index vs. Jet A

Jet A Base HS #2 HS #1 ULS #1 ULS #2 Crude

Source: OPIS, December 2007.

The data in Figure 25 indicate that in a two-fuel case, ULSD No. 1 would incur an approximate five percent premium over Jet A, based on Anchorage ra ck prices, though they are converging. Similar data for Fairbanks rack prices are shown in Figure 26 . From a strictly Fairbank s perspective, the cost premium of ULSD No. 1 over Jet A is 7.85 percent.

60Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

61 Figure 26. Fairbanks Distillate Fuel Multipliers (indexed to Jet A)

0.50 0.60 0.70 0.80 0.90 1.00 1.10 1.20

May - 06

J

un-

06

Jul-06 Aug- 06

Sep-06 O

ct-0 6 Nov - 06

Dec-06
J

an-

07

Feb-07 Mar-07 Apr - 07

May-07
J

un-

07

Jul-07 Aug- 07

Sep-07 Oc

t-

07

Nov-07Cost Index vs. Jet A

Jet A Base HS #2 HS #1 ULS #1 ULS #2 Crude

Source: OPIS data, December 2007.

It is important to note in all these analyses that the population samples are very small. Pricing is consistent with the EPA prediction that the market will absorb any additional manufacturing costs and that any ULSD premium will be small. The Tesoro Refinery in Nikiski has commissioned their ULSD facilities and is capable of producing 10,000 barrels per day of ULSD product (No. 1 or No. 2). The Flint Hills refinery has opted to buy USLD on a wh olesale basis from Tesoro, and the future of the proposed North Slope ULSD refinery appears doubtful 7

.



## 4.2 Electric Power Generation

The State of Alaska has addressed the issue of high energy costs in rural Alaska by implementing energy assistance funding programs. One of these programs serves as an excellent surrogate in describing the costs and characterist ics of generating electricity in ru ral Alaska. Collecting data from all the utilities in the state would be a time consuming and costly project. Instead, we use data from the Power Cost Equalization (PCE) program, which provid ed subsidies in 2006 to 85 participating utilities covering 181 rural communities. The program has co llected an extensive database of information submitted by participating electric utilities. The PCE program (under Alaska Statute 42.45.100) pays a portion of electric bills for consumers served by util ities participating in the program. State and federal

7 Alaska Journal of Commerce: Plant death equals more trucks on roads, December 2, 2007.Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

offices/facilities, commercial custom ers and public schools are excluded from PCE. Participation in the PCE program was limited by statute to utilities meeting certain requirements as part of the programs enabling legislation:

• The utility provided electric service to the public for compensation

• During calendar year 1983, the utility had less than 7,500 megawatt hours of residential consumption or less than 15,000 megawatt hours if two or more communities were served

• During calendar year 1984, the utility used di esel-fired generators to produce more than 75 percent of its electrical consumption Other criteria may be applied unde r provisions of the PCE program. For the purpose of this study, communities in the PCE list that are on the road, ferry, or railroad system or located in southcentral and southeast Alaska were excluded from this re view. A total of 122 communities were included in this analysis The following section provides a summary of the PCE data and discusses the typical features of a rural community/utility in terms of variables like popula tion, number of residential customers, total fuel used, total cost of fuel, average price of fuel pe r gallon, and total diesel-generated kilowatt-hours.



### 4.2.1 A Description of Typical Features in Utility Generation and Fuel Use
Table 23 shows the average, minimum, and maximum va lues for different variables based on PCE information on selected communities that are within our project area. The summary statistics under the column “Selected PCE Communities” do not include data on the following large/hub communities (with population of over 1,000): 1) Naknek; 2) H ooper Bay; 3) Dillingham; 4) Kotzebue; 5) Nome; and 6) Bethel. Also provided in the table are data for typical towns and hubs in the Project Area, including non-PCE communities.

Table 23. Summary of 2006 PCE Data for Selected Northern and Western Communities Served by the PCE Program

Selected PCE Communities (Population <1000) Variable Average Minimum Maximum Typical Town Typical Hub Population 329 26 899 437 5,888 Number of Residential Cu stomers 98 15 272 84 1,620 Number of Community Facilities 9 2 31 6 16 Total kWh Sold 1,248,180 90,09 6 5,423,106 1,235, 124 40,532,907 Total Fuel Used (gallons) 108, 426 1,926 666,692 104,853 3,167,728 Total Cost of Fuel ($) 258,8 81 4,815 2,042,100 256, 022 10,398,885 Average Price of Fuel/Gallon ($) 2.46 1.51 4.73 2.44 3.28 Total Diesel-Generated kWh 1,473,002 28,840 8,826,194 1, 497,970 43,385,600 Source: 2006 PCE Data, Alaska Energy Authority. Average refers to an arithmetic mean. Typical town refers to those Project Area communities that are smaller than hubs.



### 4.2.2 Average Fuel Prices per Gallon and Volume of Fuel Consumed by PCE Utilities To assess if there are geographic differences in fuel prices and consumption, we developed maps showing the average price of fuel per gallon (see Figure 27 ) and the total fuel volume used (see Figure

62Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

28 ) for the selected PCE communities. The data re flect 2006 information provided to the Alaska Energy Authority under the PCE program by electric utilities. Communities that paid higher av erage prices per gallon of fuel in 2006 (ranging between $3.00 to $4.73 per gallon) include Twin Hills ($3.00), Nikola i, Galena, Shungnak, Atqasuk, Bethel, Kokhanok, Port Heiden, Platinum , Allakaket, Alatna, Igiugig, Cold Bay, Noatak, Koliganek, Pilot Point, Hughes, Port Alsworth, and Lime Village ($4.73). There is not really any obvious regional pattern in the average fuel price distribution. The map does show, however, that most of the communities that paid higher prices for fuel are inland communities, and the coastal communities paid relatively lower fuel prices. Lime Village requires air de livery of its fuel supplies, which accounts for a major portion of the fuel cost in the community. In terms of total fuel used for power generation, utilities in the larger hub communities naturally reported the highest fuel consumption—Bethel, Kotzebue, Nome, Dillingham, and Naknek. All the rest of the utilities reported less than one million gallons of fuel consumption for generating power (see Figure 28 ).

Figure 27. Average Price of Fuel per Gallon in Selected PCE Communities in Northern and Western Alaska, 2006

Source: Map developed by Alaska Map Company with 2006 PCE information on utility fuel consumption.

63Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Figure 28. Total Fuel Used by Electric Utilities for Power Generation in Selected PCE Communities in Northern and Western Alaska, 2006

Source: Map developed by Alaska Map Company with 2006 PCE information on utility fuel consumption.

Figure 29 is another illustration of average fuel prices per gallon paid by selected PCE communities (the solid dark bar) and the typical small village an d typical hub communities selected for this study (along the horizontal axis). Costs ranged from $1.50 per gallon (Newtok) on the left to approximately $3.75 per gallon on the far right (Lime Village). Bethel, which reported the highest volume of fuel us ed for electric generation, had a relatively high average price of $3.28 per gallon of fuel in 2006. Other large-volume purcha sers, however, do show lower average fuel prices, under $2 per gallon. Bethel fuels prices are higher than would be expect ed given the size of the utility because it relies upon fuel distributors in the community to provide and maintain the fuel tanks necessary to hold a year’s worth of fuel inventory. The utility believ es that reduced capital expenditures and reduced maintenance and operating costs associated with this strategy more than offset higher fuel prices. Figure 29 also shows the cost per kWh (on the right vert ical axis) in project-area communities with available data. The figure shows a weak correlation between the cost per kWh and fuel prices per gallon shown on the left vertical axis. There is a sign ificant variation indicating that the cost per kWh is to a great degree determined by other factors than reported fuel costs.

64Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Figure 29. Average Fuel Prices Rep orted by Selected PCE Utilities, 2006

$- $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.00 $4.50 $5.00NewtokShishmarefGambellRussian MissionAlakanukSt. MichaelBettles, EvansvilleNaukatiCentralManleyKakeGolovinHoonahNulatoKongiganakAkiachakPoint HopeNapaskiakCrooked CreekLevelockTatitlekTwin HillsKokhanokCold BayLime Village

Community$/gallons

$0.00 $0.20 $0.40 $0.60 $0.80 $1.00 $1.20$/kWhs

Average price of fuel Cost per kWh Bethel

Source: 2006 PCE Data, Alaska Energy Authority

65Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

66

# 5 Storage and Distribution Costs

This section provides info rmation on capital costs, based on 58 Denali Commission bulk fuel projects in the study area along with other information collected by the project team. Annual costs of operations and maintenance, includ ing repair and replacement, are presented, based on the same 58 projects with a summary of amortized and annual op erating costs. Distributio n and cleaning costs are discussed later in this section.



## 5.1 Storage Facilities Storage facilities are either perman ent or temporary, and the size an d type of storag e faciliti es will depend on location, current tank farm capacity , community demand, and whether fuels must be segregated (i.e., Jet A used for aircraft cannot be contaminated). ISO tanks and 55-gallon fuel drums would generally be regarded as temporary storage while traditional steel tanks would be permanent. The selection of an appropriate storage facility is an important decision for a community due to the high capital costs of larger tanks, the operational issues associated with transporting large numbers of drums, and the fact that smaller capacity storage may not be sufficient to last until the next fuel delivery.



### 5.1.1 Capital and Operating Costs The hubs and sub-regional hubs ar e well-equipped to manage the tr ansition to ULSD. Hubs and subregional hubs typically have sufficient tank capacity and the necessary number of tanks to accept and store Jet A, other high sulfur dist illates, gasoline products, and fu el for newer engines that require ULSD. However, it will take tank cleaning or several year s of inventory turnover (blend down) for existing tanks with high sulfur fuels to achieve compliance with the ULSD requirements. If the blend-down approach is used, it may be necessary to supply and store fuel with ULSD specifications at hubs and subregional hubs that have a sm all number of engines that require ULSD fuels. In 2007 Crowley shipped (on speculation) 55-gallon drums of ULSD in containers to its hub communities in the event that ULSD might be required in a region. As 2010 approaches, towns and villages may require one or more ISO tanks and/or 55-gallon fuel shipments to meet the need for ULSD fuels before the blend-down approach has achieved necessary sulfur levels. The number of sm aller communities and villages, ou t of 151 total communities in the project area, that would require drums and ISO tanks, is unknown. A few villages may require new steel fuel tanks if they do not have the number and size of tanks required to segregate ULSD and still meet the requirements for other fuels. The number of such communities is also unknown. The costs of a new steel fuel tank are discussed in the next section.



### 5.1.2 New Steel Fuel Tanks Average capital costs for new tanks, based on Denali Commission projects, are shown in Table 24 for the 146 communities in the project area that are outs ide of regional hubs. Size and costs are based on 58 projects that are completed or near completion.

67Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Table 24. Estimated Average Capital Costs for Any Required New Tanks by Community Type

Category Number in Area Average Population Average Project Gallons Average Capital

Cost $/gallon Estimated Cost, Tank

23,000 gallon Cost Ratio (%) Cost Per Capita

($) Sub-Regional Hubs 9 559 870,000 7.39 $169,970 100 304 Communities 37 585 404,000 10.50 $241,500 142 413 Villages 100 154 156,000 17.80 $409,400 241 2,658
Total 146 Source: Northern Economics, Inc. Denali Commission, Alaska Energy Authority. Note: capital costs are based on projects from the perio d 2002 to 2006. Nominal dollars are shown. The five regional hubs are excluded.

As expected, smaller villages need less storage capa city, while capital costs expressed on a per gallon basis are higher. Costs for a standard 23,000 ga llon tank range from $170,000 (rounded) in subregional hubs to $409,000 (rounded) in villages. Aver age costs of installing a new tank in villages are 2.4 times more expensive than sub- regional hubs. Costs per tank will decline if more than one is installed, with an estimated $280,000 per tank for more than one. Even more significant is the average capital cost pe r resident. Costs per capita in sub-regional hubs and towns are approximately $300 and $400, respective ly, but increase to al most $2,700 per resident in villages. A key assumption in the cost estimates presented her e is that tank farm facilities have adequate foundations to add a single additional tank; design requirements from the Denali Commission state a 10-year growth period should be factored into si te engineering and development of a tank farm.



### Single steel tank cost estimate A single steel tank in a village is estimated to cost $420,000 (rounded) each, based on Denali Commission capital costs per gallon of $17.80 for vi llage-size projects. In a ddition, each new 23,000 gallon tank would require a marine header and pipe s, estimated at $80,000 by professional cost estimators based on their experience in rural Alaska. The total of the two costs is rounded to $500,000. Again, this is for a single tank that may be considered under scen arios listed in report sections 6, 7, and 8. Selection of an additional tank will be driven by specific assumptions noted on each scenario. For purposes of this analysis, the $500,000 in-place co st of an additional steel tank with headers and piping is amortized over a 40-year period. At 5.5 percent interest , and 100 percent debt financing, annual payments are $31,160. Operations costs, including main tenance (O&M) and repair and replacement (R&R) estimates, are an additional $8,050 per year; insurance, at $0.10 per gallon, is another $2,300. The total is $41,510 or $1.80 per gallon, for a single season’s fill and dra w-down. The cost of a new steel tank is likely prohibitive.
Table 25 illustrates the amortization of a steel tank, over 40 years, with project area operations and maintenance percentages (percent of capital costs). No te that only the first an d last five-year payment schedules are shown.

68Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Table 25. Amortization of One Steel Tank, over 40 Years, with Annual Capital and Operating Costs.

Year 40 Full Loan - Single 23,000 gallon tank

Principal $500,000 O&M % 0.95%
Term 40 Years R&R % 0.66%
Rate 5.5% Total 1.61% Payment $(31,160.17) Inflation 1.50%

Year Beginning Balance Interest Payment Principal Payment Ending Balance O&M + R&R Total Annual
1 $500,000 $27,500 -$31,160 $3, 660 $496,340 $8,050 $39,210
2 $496,340 $27,299 -$31,160 $3, 861 $492,478 $8,171 $39,331
3 $492,478 $27,086 -$31,160 $4, 074 $488,404 $8,293 $39,453
4 $488,404 $26,862 -$31,160 $4, 298 $484,107 $8,418 $39,578
5 $484,107 $26,626 -$31,160 $4, 534 $479,572 $8,544 $39,704

35 $155,662 $8,561 -$31,160 $22, 599 $133,063 $13,355 $44,515
36 $133,063 $7,318 -$31,160 $23, 842 $109,221 $13,555 $44,715
37 $109,221 $6,007 -$31,160 $25, 153 $84,068 $13,759 $44,919
38 $84,068 $4,624 -$31,160 $26, 536 $57,532 $13,965 $45,125
39 $57,532 $3,164 -$31,160 $27, 996 $29,536 $14,174 $45,335
40 $29,536 $1,624 -$31,160 $29,536 $0 $14,387 $45,547 Source: Northern Economics; Denali Commission, Alas ka Energy Authority, Business Plan Worksheets

To establish typical operating and maintenance cost s for steel tanks, a sample was drawn from six completed bulk fuel projects within the project ar ea, totaling $22 million of capital cost. Average projected operations and maintenance (O&M) costs were 0.95 percent of total capital costs, while repair and replacement (R&R) costs averaged 0.66 pe rcent for the same projects, for a total annual cost of 1.61 percent on the average. In dollars, projected O&M cost s were $23,985 per year, with R&R costs of $21,934 for total estimated annual costs of $45,919. These costs will vary with the size of the installed tanks. On a per gallon basis, O&M costs averaged $0.196 per gallon, with R&R costs of $0.1743 for a total of $0.37 per gallon. In addition, $0.10 per ga llon is required for insurance purposes. Total average O&M and insurance costs per gallon were $0.47 for the six projects; this is lower than the $1.80 per gallon estimated earlier and reflects t he size (i.e. demand capacity) of the samples. Data on O&M costs for ISO tanks are not available, so these steel tank costs were also used for ISO tanks.



### 5.1.5 ISO Tanks Once communities require sufficient fuel volumes to use ISO containers, these containers would need to be purchased or leased for each community. The point at which communities would be better served by ISO containers than by fuel drums appears to be at an annual fuel consumption rate in excess of 2,200 gallons or about 40 drums.
ISO containers are the same dimens ions as a 20-foot van and have a net capacity of around 5,000 gallons. New ISO containers cost around $50,000 each . Crowley recently purchased a used ISO tank

69Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

and delivered it to Seattle for a total cost of around $15,000 to $16,000. These amounts represent costs of about $3.00 to $3.20 per gallon of capacity for a used ISO container and $10.00 per gallon of capacity for a new ISO container. Total ISO tank capital costs are estimated at $110,000 (rounded). This cost is based on a purchase quote of $50,000 per tank in Seattle, $8,500 of tran sportation costs by truck and barge (to a point mid-way on Alaska’s west coast) and on to each village by barge. Engineering, permitting, civil construction, and general overhead to insta ll the ISO tank are estimated at $50,000. These engineering, siting, permi tting, and surveying costs, along with environmental costs, do not include foundation costs—the most expensive sing le cost in the Denali Commission’s bulk fuel program experience. For purposes of this analysis, the $110,000 in place cost of an ISO tank is amortized over a 20-year period, half of the projected 40 years used for larg er, fixed, steel tanks. This amortization period reflects the shorter life expectancy of ISO tank s. At 5.5 percent interest, and 100 percent loan financing, annual payments are $9,200. Operations costs, including maintenance and repair and replacemen t estimates, are an additional $1,800 per year. Insurance, at $0.10 per gallon, is another $500. The total oper ations cost is about $11,500 or $2.30 per gallon for a single season’s fill and draw-down. The actual cost to consumers would likely be greater to refl ect differences between wholesale and retail operations costs.
Table 26 illustrates the amortization of an in-place ISO tank, over 20 years, with project area operations and maintenance percentages (percent of capital costs). Note that only the first and last five-year payments are shown.

Table 26. Amortization of an ISO Tank, over 20 Years, with Annual Capital and Operating Costs.

Year 20 Full Loan - ISO Tank Principal $110,000 O&M % 0.95%
Term 20 Years R&R % 0.66%
Rate 5.5% Total 1.61% Payment $(9,204.73) Inflation 1.50%

Year Beginning Balance Interest Payment Principal Payment Ending Balance O&M + R&R Total Annual
1 $110,000 $6,050 -$9,205 $3, 155 $106,845 $1,771 $10,976
2 $106,845 $5,876 -$9,205 $3, 328 $103,517 $1,798 $11,002
3 $103,517 $5,693 -$9,205 $3, 511 $100,006 $1,825 $11,029
4 $100,006 $5,500 -$9,205 $3, 704 $96,301 $1,852 $11,057
5 $96,301 $5,297 -$9,205 $3, 908 $92,393 $1,880 $11,084

15 $45,982 $2,529 -$9,205 $6, 676 $39,307 $2,181 $11,386
16 $39,307 $2,162 -$9,205 $7, 043 $32,264 $2,214 $11,419
17 $32,264 $1,775 -$9,205 $7, 430 $24,834 $2,247 $11,452
18 $24,834 $1,366 -$9,205 $7, 839 $16,995 $2,281 $11,486
19 $16,995 $935 -$9,205 $8, 270 $8,725 $2,315 $11,520
20 $8,725 $480 -$9,205 $8, 725 $0 $2,350 $11,555 Source: Northern Economics; Denali Commission, Alas ka Energy Authority, Business Plan Worksheets

70Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities



### 5.1.6 55-Gallon Fuel Barrels (Drums) Re-usable steel drums would need to be purchased or leased for use. A 55-gallon round steel drum could cost around $50 to $70, depending on the quanti ty purchased, according to a recent price list from a manufacturer in Connecticut (Yankee Containers, 2007). This represents a cost of $0.91 to $1.27 per gallon of capacity. Vendors usually require a drum deposit, reflected in the total delivered fuel cost, to assure drums are returned in good ph ysical condition. The actu al number of drums that are returned is unknown, as is the cost of backhaul, cleaning, and inspection . In many cases, steel drums are not returned for fuel use and may be placed in a landfill, crushed and returned for recycling, or simply left in place. The latter can result in spills of hazardous materials, depending on care and attention of consumers.



## 5.2 Distribution and Cleaning Costs The following sections address the distribution and cleaning costs that could occur as part of the transition.



### 5.2.1 Steel Tanks Tank cleaning costs obtained from the North Slope Borough suggest that cleaning of community tanks in a remote area could cost $28,000 for three tank s with a capacity of 780,000 gallons. This rough estimate does not include sludge disposal or mobili zation costs, but it does provide an estimate of cleaning costs. Airfare for personnel and air freigh t shipment of the necessary equipment could cost an additional $7,000 to $9,500, though these costs co uld be much higher in more remote locations. Disposal of sludge would also need to be factored into the cost. Tank cleaning and waste disposal are operating costs that will likely affect an y shipper using its tanks for multiple fuels since mistakes will be made an d fuels will become contam inated and not meet the necessary specifications. Because of the cost of cleaning, individual shippers will need to determine the most cost-effective way of handling the different types of fuels.



### 5.2.2 Barge Shipping Diesel and gasoline products are transported in multiple compartment barges. Larger “line haul” barges going to hub communities have separate piping and pumpin g systems to keep gasoline and diesel products separate. Barges delivering fuel to smaller villages might not have sufficient piping and compartments to accommodate current products and ULSD and therefore changes would be required to barge piping and pumping systems to keep ULSD segregated, or tanks would have to be cleaned and additional fuel deliveries made. Currently, fuel barges, hub fuel tank depots, river barges, local dock fuel headers, and local fuel tanks may mix minor amounts of the three diesel fuel spec ifications (No. 2, No.2/No. 1 blends, No. 1, and Jet A) since minor amounts of mixing of multiple spec ifications of diesel fuel do not have a material impact on fuel performance in engines and heating units. However, relatively small amounts of ULSD can contaminate Jet A due to additive s, and conversely relatively small amounts of Jet A or other high sulfur distillates can contaminate ULSD. While th e contaminated fuel could be used for heating purposes or possibly power generation, the contam inated barge tanks would likely need to be cleaned.

71Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities



### Barge cleaning costs Emerald Services is the contractor Crowley currently uses for environmental services such as barge cleaning. Emerald recently clea ned one of Crowley’s 360-foot, 80, 000-barrel, 14-compartment barges to a military specification for between $25,000 and $30,000 (Crowley, 2007) . This cost covered cleaning only and did not include disposal costs or lost revenues from the barge not being available for other work. Hoses from the barges to headers or storage tanks also require cleaning before and possibly after they are used to ship ULSD to prevent product cont amination. This could be done with a pigging operation and manual cleaning of other affected area s of the system that are unreachable by the pigs. These barges hold 3,360,000 gallons (80,000 barrels) and, at $30,000 per cleaning, costs are approximately $0.009 per gallon.



### 5.2.3 ISO Tanks and Drums
The cost of fuel in ISO tanks is estimated to cost about $0.90 to $1.00 more th an bulk delivery so the cost in regional hubs might average $5.40 to $5.50 per gallon if delivered in ISO tanks, to the hubs, and $1.20 to $1.50 more per gallon ($5.70 to $6.00) delivered into other communities from the hubs. Cost estimates for cleaning ISO tanks were not avai lable from organizations that were contacted by the consultant team. Old fuel drums have littered the landscape in rura l Alaska for decades and on ly in the recent past have efforts been made to collect these drums, dispose of their contents in a safe manner, and remove them from rural Alaska. There is reluctance on the part of many in rural Alaska to see drums become a new standard for shipping petroleum prod ucts because of the fear that they will not be properly disposed of. Drums may be delivered by barge or cargo plane; they usually require a deposit and empty drums may be back-hauled by barges to a collection poin t. As delivered fuel, these extra drum costs are included in the price per gallon. Collection and backhaul costs may be partially paid by drum deposits, but areas without barge service ha ve much more difficulty returning drums. It is anticipated that ULSD deliveries could be made with 55-gallon drums. If a community’s annual consumption of ULSD is less than 1,650 gallons, drums are the most cost-effective means of transport. Using 55-gallon drums to transport sm all quantities of fuel might be the most feasible way to serve smaller communities, especially with the price of fu el constraining communities’ ability to purchase large quantities. However, the drums would require special handling to load and unload them from a barge. The labor and equipment costs associated with this additional handling would be incurred at each port or community. In larger volumes, drums can be shipped in side a container van. Drums could likely be reused as long as they are clean. The potential for contamination of fuel drums and the associated fines may discourage carriers from reusing drums that have been kept out of their control, without cleaning them first. If several dr ums were cleaned at a time , the cost per drum would likely be small. One alternative to hauling empty drums out of the community is to refill them onsite. In August 2007, Crowley representative s stated that the cost of a drum of ULSD in their regional hub communities would be $350 per drum or about $6. 36 per gallon to the fuel supplier. The average cost of heating and diesel fuel in these communiti es was about $4.50 per gallon, so the delivered cost

72Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

73 per gallon for drums was approximately $1.80 to $1.90 higher than bulk delivery. Actual costs to the consumer would reflect profit and risk margins over and above delivered costs. This range of costs is anticipated to be higher in smaller villages if drums ar e shipped by fuel barge. However, individual barrels can be shipped as deck cargo on freight barges, which have lower transportation rates. In 2006, Galena was able to obtain fuel in drums at a lower price than bulk delivery. Small volumes of ULSD could be accommod ated this way with perh aps minimal, if any, price impacts. It is unlikely regular shipments of fuel would be sent as individual barrels due to increased handling and storage (tie-downs, for example) that would be needed.



### 5.2.4 Air Transport If weather is problematic, river wate r levels are low, or a cold winter results in fuel use that exceeds local supply, fuel deliveries may be made by air, ty pically via a DC-6 fuel tanker with a capacity of 4,750 gallons. In 2007, the cost for de livery via air is estimated to be 1.0-1.4 cents per gallon per map mile of air transport from the fuel hub or up to $1.40 per gallon air delivery of 100 miles. 8 Evert’s Air is a major shipper of fuels throughout Al aska. The company uses two types of fuel planes, with capacities of about 2,000 gallons an d 5,000 gallons, to deliver fuel (Adams, 2007). Due to the diverse fuel needs across the state, it is unlikely that an ai r transport company would emerge to supply only ULSD. Instead, companies flying fuel to communities are likely to carry most types of fuel on an alternating basis. Rather than incurring an upfront cost associated with tank cleaning, it is much more likely that air transport compan ies would clean tanks as a regular, recurring expense. These costs would be integrated in to the rates charged to their customers. Only four communities (Alatna, Arctic Village , Hughes, Atqasuk) reported, in the June 2007 community heating fuel and gasoline survey (DCCED, 2007), 100 percent air delivery. Other communities reported a combination of air and barge or air and truck, but 92 percent of reporting communities indicated barge service ( 83 percent) or truck transport (9 percent) were the main stays of fuel transport to their community.



### 5.2.5 Road and Overland Transportation of ULSD on the few rural Alaska roads or on frozen rivers would likely be with fuel trucks. Prior to shipping ULSD in fuel trucks, v ehicle tanks would need to be cleaned and the waste properly disposed of. As an alternative, if there is enough volume in a community, a dedicated fuel truck could be purchased to handle ULSD. A used fuel truck would cost approximately $30,000 and up, depending on the age of the truck and the capacity (Trucker.com, 2007). Shipment of t he truck from the purcha se location to the community in which it is used would add to the cost . A dedicated ULSD fuel truck is likely an option only in regional hubs. If fuel trucks are used for multiple types of fuel, their tanks would need to be cleaned prior to loading ULSD or Jet A to prevent contamination. Otherwise, if the trucks are used solely for ULSD, the operating costs would be in line with existing diesel operations.

8 MAFA Analysis of Small Air Fuel Delivery Service Cost Estimates.Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

74 A complete switch to ULSD in a community would allow fuel trucks to use ULSD to gradually flush (blend) the tanks down to required sulfur levels over time. This would avoid any upfront costs to manage the transition.



### 5.2.6 Rail and pipeline Rail tank cars move distillates between Anchorag e, Fairbanks, and North Pole, and ULSD will be transported this way between Anchorage and North Pole. Pipelines presently move ULSD and other fuels from Nikiski to Anchorage. These facilities ar e not located within the study area. However, some of the fuel that is later delivered in western and northern Alaska communities will be transported through pipeline or in a rail tank car. Since this transportation will incur co sts which would be covered in the price of fuel, this section presents some information about these fuel transportation modes. The Alaska Railroad Corporation (ARRC) accommoda tes 20,000-gallon tank cars for transporting fuel (ARRC, 2007). Flint Hills has purchased tank cars that are dedicated to moving the ULSD from Anchorage to Fairbanks and they are empty on the return. The cost of the rail equipment and the ARRC’s charge for transporting the fuel are covere d in the OPIS price differential between ULSD at Anchorage and Fairbanks noted earlier in this report. The pipeline could also require cleaning before or after it is used to ship ULSD but Tesoro moves sufficient volume and types of products through the pipeline that it can use other products to avoid contamination. For example, it could move motor gasoline, which has very low sulfur content, through the pipeline prior to shipping ULSD to reduce sulfur levels. It can also move Diesel No. 1 and other products after the ULSD to remove the l ubricity agent and avoid contaminating Jet A.

# 6 Ultra Low-Sulfur Diesel Fu el Transition Scenarios

For this project, three fuel transition scenarios we re developed to reflect different ways rural Alaska may transition to ULSD. These scenarios provide decision makers and other stakeholders a tool for evaluating the impacts and outcomes of alternativ e courses of action. The scenarios help articulate different views of the future and were develope d by project staff in consultation with ADEC. The three fuel scenarios provide a broad spectrum of potential response, from just the minimal amount of ULSD that is needed for new engines (Sce nario 1) to full conversion (Scenario 3). These are designed to reflect alternative courses of action—a lternative ways of implementing rural Alaska’s transition to ULSD. They are not necessarily represen tative of a specific community or regional hub; each of the 151 communities in the project ar ea will have a unique set of fuel needs.
Scenario 1 is described as the Warranty Scenario , Scenario 2 is described as the Compliance Scenario
, and Scenario 3 is described as the Full Conversion Scenario

. Figure 30 summarizes all three fuel transition scenarios and impacts on existing fuel distribution and storage infrastructure. The figure illustrates the transition peri od from now until 2014 and beyond. Figure 30 also outlines the differences in timing for ea ch scenario with respect to ULSD distribution and storage requirements for the different fuel uses (i.e. highway diesel fuel, non-road equipment, stationary diesel power, locomotive and marine, home heating, and Jet A).

75Cost Assessment for Diesel FuelTransition in Western and Northern Alaska CommunitiesFigure 30. Remote Rural Alaska Community ULSD Transition Scenarios.76Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

The following sections describe the scenarios in mo re detail. The first two scenarios involve the degree to which a two-grade diesel fuel infrastructure system is put into place and the third scenario involves a full conversion to ultra low sulfur diesel.



## 6.1 Scenario 1: The Warranty Scenario This scenario represents the likely first step in the transition to ULSD in rura l Alaska communities. This scenario is characterized by delive ry to communities of relatively small amounts of ULSD on an “as needed basis,” just enough to serve only those en gines requiring use of ULSD to meet new engine emission and warranty requirements. Under this scenario, comm unities will initially receive multiple distillate product deliveries:
1) ULSD for new (2007) heavy duty on-highway diesel engines;
2) non-ULSD for unregulated uses; and
3) Jet A fuel for aircraft in regi onal (hubs) and sub-regional cent ers. In addition, communities would also receive aviation gas and unleaded gasoline, but this description only addresses distillate fuels. Under this scenario, the timing for transition of t he different fuel uses for the years from 2007 through 2009 is:

• ULSD will be transported in 55-gallon drums by barge in volumes that meet the fuel requirements for 2007 model year trucks (highway diesel fuel). Drums could be shipped individually, in small batches, or in co ntainers if larger volumes are needed.

• Non-ULSD fuel will be shipped to communiti es in amounts required for all non-road equipment, stationary diesel power, locomoti ve and marine, and home heating. There are no modifications in the fuel storage and handling system for non-ULSD fuel.

• Jet A will continue to be shipped to hubs and s ub-regional hubs where jet fuel is required for aviation purposes and there are no modifications in the infrastructure system to handle this fuel. Under this scenario, the timing for transition of the different fuel us es for the years from 2010 until the end of 2011:

• For highway diesel engines, some communities like the regional transportation hubs would start transitioning from deliveries of ULSD in ba rrels to higher volume deliveries contained in ISO tanks. An ISO tank has a maximum capacity of 5,900 gallons. Smaller volumes of ULSD may still be shipped in barrels from majo r hubs (i.e., Barrow, Kotzebue) to smaller communities to meet needs of mobile engines that require ULSD.

• ULSD will be shipped in ISO tanks to meet fu el requirements of new non-road equipment engines, new stationary diesel power engines, and for locomotive and ma rine diesel engines.

• Home heating fuel will continue to be sh ipped in similar volumes as before and no modifications in the fuel storage and handling system will be required.

• Jet A will continue to be shipped to hubs and s ub-regional hubs where jet fuel is required for aviation purposes and there will be no mo difications in the infrastructure system.

77Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Under this scenario, timing for tran sition of the different fuel uses for the years from 2012 to 2030 is:

• Communities will continue to tr ansition over time to shipments and storage of ULSD from barrels to ISO tanks to meet fuel requiremen ts of all new mobile and stationary source engines. At some point it may be cost-effect ive to convert existing steel tanks for ULSD storage and use ISO tanks for non-ULSD fuels.

• Home heating fuel would not switch to ULSD. Depending on the storage requirements for ULSD and for non-ULSD fuel, home heating fuel co uld either be stored in existing steel tanks or ISO tanks.

• Jet A will continue to be shipped to hubs and s ub-regional hubs where jet fuel is required for aviation purposes; storage and handling of Je t A will have to be separated from the ULSD
stream.
Based on data from the Oil Price Information Servic e (OPIS), a company that tracks fuel prices in various fuel market centers, ULSD has been availa ble in the Anchorage and Fairbanks racks since June of 2006. Currently, ULSD in 55-gallon drums is avai lable in several regional hubs (Bethel, Nome, and Kotzebue) to serve fuel requirements of new diesel trucks. This ULSD was deli vered by barge in steelwalled containers. Teck-Cominco, operator of the Red Dog Mine in the Northwest Arctic Borough, has also received shipments of ULSD containe d in ISO tanks for their new diesel engines.



## 6.2 Scenario 2: The Compliance Scenario

This scenario is characterized by shipment of higher volumes of ULSD, enough to cover all “impacted” engines that have to switch by 2010 to be in compliance with the EPA fuel rules. This includes all mobile sources (on-hi ghway, non-road, locomotive, mari ne) regardless of model year, and “impacted” stationary source en gines—this includes new power generation diesel engines (2011 model year engines). Given the EPA rules, starting in 2010, distributors would need to transport (and communities would have to store) adequate volumes of ULSD to serve fuel demand for the engines that by law need to switch to ULSD. In this case, due to larger volumes, there will be a need for dedicated ULSD tanks in many communities. Since EPA rules do not apply to home heating and jet fuel, there will be no switch from these fuels to ULSD under this scenario. It is an ticipated that residents will resist switching to ULSD if there is a price differential in the cost of currently used hea ting fuel (typically downgraded Jet A) and ULSD. Therefore, separate storage and transfer system s will have to be available for non-ULSD use. The potential timing of th e transition under this scenario is as follows:

• From 2007 to the end of 2008, ULSD will be shippe d in barrels to supply fuel requirements of new on-highway diesel engines. The fuel di stribution, storage, and handling system will continue to handle non-ULSD fuel for non-road , stationary diesel power, locomotive, marine, home heating, and jet engine requirements.

• From 2008 to 2010, some operator s will begin flushing tanks with ULSD. By the end of 2010, the tanks will be fully flushed of high sulfur fuel and ready for ULSD. This is important because in 2010, ULSD will be required for use in all mobile source engines and new stationary source engines. Some tanks will remain dedicated to non-ULSD use for home heating and jet requirements. After 2010, a grea ter proportion of the fuel inventory in the

78Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

communities will need to meet the 15 ppm stan dard, as the number of model year 2011 and later stationary, non-road, an d marine engines increase.

• After 2010, there will be a gradual flushing and turn over of existing tanks for stationary diesel power, as old engines for power generators get replaced with new engines. Home heating fuel would not switch to ULSD; however, depending on the storage requirements for ULSD and for non-ULSD fuel, home heating fuel could ei ther be stored in existing steel tanks or ISO tanks. Likewise, Jet A will contin ue to be shipped to hubs an d sub-regional hubs where jet fuel is required for aviation purposes; storage and handling of Jet A will have to be separated from ULSD, due to the lubricity additive in ULSD and the high sulfur content of Jet A.



## 6.3 Scenario 3: The Full Conversion Scenario With the exception of Jet A, this scenario represents the full conversion of all distillate fuels to ULSD to serve all engines whether regulated or not, including home heating. In this case, the existing distribution and storage in frastructure systems will be converted to ULSD use and if needed, new infrastructure will be added to ha ndle Jet A fuel. For full conversion (and to be in compliance by 2010) flushing of storage and transfer systems would start in 2008. The following sections briefly discuss some of the im plications of the rules on different categories of communities.

79Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

80

# 7 Scenario Costs

This section discusses the capital and operational costs associated wi th ULSD transition in a typical village under the three scenario s described in Section 6.



## 7.1 Scenario 1: ULSD Fuel for New Engine Warranty Requirements This scenario could occur in a community where loca l diesel fuel can be reliably segregated between high sulfur fuel and ULSD fuel. Only those diesel engines that require ULSD would use it, while older diesel engines would continue to burn other fuels, assumed here to be Jet A. The key parameters driving fuel demand under this sc enario include the initial demand for each diesel end-use market, and the speed at which old engines are replaced by new ones. Volumetric requirements for ULSD would grow over decades as new diesel engines are introduced to the village. In reality, new diesel engines are likely to arrive in groups or batches, but to simplify the analysis it is assumed that the transition will be slow and steady.
Table 27 shows ULSD demand as a function of engine tu rnover. As an example, a remote rural village has an assumed total diesel demand of 300,000 gallons a year. Approximately 200,000 gallons a year is associated with internal combus tion diesel engines; of that tota l, half (100,000 gallons) is used to generate power and the other half (100,000 gallons) is used in local mobile engines like trucks and construction equipment. The remaining 100,000 gallons a year is used as heating oil. If the entire local diesel engine stock turns over roughly every 30 years, the demand for ULSD fuel might increase on the order of 6,700 gallons per year.

Table 27. ULSD Fuel Demand as a Function of Engine Turnover

Engine Turnover Average ULSD Fuel Demand Growth ULSD Fuel Demand in Year 10 40-year engine turnover 5,000 ga llons per year 50,000 gallons 30-year engine turnover 6,667 ga llons per year 66,667 gallons 20-year engine turnover 10,000 gal lons per year 100,000 gallons 10-year engine turnover 20,000 gal lons per year 200,000 gallons Source: MAFA Seed Values for Economic Model assuming an annual village demand of 200,000 gallons a year for diesel engines (including highway diesel, non-road equipment, stationary diesel power and marine engines). Note: Fuel efficiency is assumed constant.

Table 28 illustrates diesel fuel requir ements projected under scenario 1. The 300,000 gallon total is used as an input factor for the cost model discussed later in this report.

81Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Table 28. Diesel Fuel Requirements under Scenario 1

Total Diesel Engine Demand (gallons per year) New Engine ULSD Warranty Requirements Growth Rate (gallons per year) Highway diesels 5,000 167 Non-road equipment 50,000 1,667 Stationary diesel power 100,000 3,333 Locomotive, marine 45,000 1,500 Home heating 100,000 0 Jet A aircraft engine 0 a 0
Total 300,000 10,000 gallons per year or 100,000 gallons at Year 10 of ULSD or 200,000 gallons at Year 10 of high sulfur diesel

a The aviation fuel market in small villages tends to be served by aviation gasoline. Turboprop aircraft and jets that require Jet A fuel typically operate only in larger sub-regional hubs and regional hubs. Source: MAFA Seed Values for Economic Model (subject to revision in consultation with other team member technical memos)



### 7.1.1 End-User Infrastructure Considerations One challenge under this scenario concerns the case where a new ULSD-specifica tion diesel engine is installed at a power plant where two or three ol der engines remain to provide swing or back-up power. The local power plant operator could either reconfigure the fuel systems to keep feeding traditional diesel fuel to the old engines and ULSD to the new engine, or convert all of the fuel systems to ULSD to simplify field operations (see Scenario 2). The cost savings of creating and sustaining a dual fuel system at the electric utility level would have to outweigh both the costs of segregating the power plan t day tank fuel systems and the risk of catalytic converter failure and premature engine failure if high sulfur diesel fuel is mixed with ULSD. Assuming that the cost differential between high sulfur diesel fuel an d ULSD is six cents a gallon based on the most recent OPIS data (November 2007), the potential annual cost savings of Scenario 1 are summarized in Table 29 (for partial versus full co nversion, coastal hub) and Table 30 (for partial versus full conversion, upriver community).

82Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Table 29. Electric Utility Options – Partial vs. Full conversion to ULSD for a Coastal Hub

Partial Conversion Equipment/Storage & Transfer Infrastructure Fuel Annualized Cost ($)

Prime Mover (1 unit) ULSD – 75,000 gallons/year X $3.56/gallon $267,000

Secondary/back-up Units (2 each) Jet A – 25,000 gallons/year X $3.50/gallon $87,500

Design and install dual fuel systems (piping, day tanks, monitoring systems) ($20,000) (5 year amortization) $4,000

TOTAL Direct Cost $358,500 + Heightened Risk of Jet A fuel mix-up getting into Prime Mover requiring ULSD
Full Conversion
Prime Mover + Secondary/Backup Units ULSD – 100,000 gallons/year X $3.56/year $356,000

Finding: The full conversion option may cost slightly less than a partial conversion (356,000/358,500 = 99.3%). Conclusion: Even though the partial conversion may pr ovide some short term savings for Jet A fuel burned in the older units due to the lower cost of Jet A compare to ULSD (Coastal hub premium for ULSD ~ 6¢/gallon), the cost of new dual f uel systems combined with the heightened risk of a local fuel mix-up favors converting all units over to ULSD Source: MAFA, 2007

Table 30. Electric Utility Options – Partial vs. Fu ll conversion to ULSD for an Upriver Community

Partial Conversion Equipment/Storage & Transfer Infrastructure Fuel Annualized Cost ($)

Prime Mover (1 unit) ULSD – 75,000 gallons/year X $3.62/gallon $271,500

Secondary/back-up Units (2 each) Jet A – 25,000 gallons/year X $3.50/gallon $87,500

Design and install dual fuel systems (piping, day tanks, monitoring systems) ($20,000) (5 year amortization) $4,000

TOTAL Direct Cost $363,000 + Heightened Risk of Jet A fuel mix-up getting into Prime Mover requiring ULSD
Full Conversion
Prime Mover + Secondary/Backup Units ULSD – 100,000 gallons/year X $3.62/year $362,000

Finding: The full conversion option may cost about the same as a partial conversion (362,000/363,000 = 99.7%). Conclusion: Even though the partial conversion may pr ovide some short term savings for Jet A fuel burned in the older units due to the lower cost of Jet A co mpared to ULSD (Upriver ULSD premium ~ 12¢/gallon), the cost of new dual fuel systems combined wi th the heightened risk of a local fuel mix-up favors converting all units over to ULSD Source: MAFA, 2007

83Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities



### 7.1.2 Fuel Supply Chain Considerations Under this scenario, the volumes of ULSD required ar e relatively low and grow as the stock of diesel engines turns over. The annual volumes of ULSD re lative to the overall diesel market could range from a few thousand gallons in any given year for new diesel vehicles, equipment, or engines to roughly 100,000 gallons a year for a new electric utility prime mover diesel engine (7,600 hours x 200kW ÷ 15 kWh/gallon). Consequently, in the absence of a large construction project requiring new equipment or the installation of a new electric utility prime mover, the ULSD volume requirements might be a few thousand gallons a year. These sma ll ULSD volume circumstances raise a number of questions, including:

• What are the economic options to supply and store low volumes of ULSD to the remote rural village?

• At what point does it become economical to reuse the existing bulk fuel tanks for ULSD? There are five basic supply and storage options to consider for low volumes of ULSD fuel:

• 55 gallon drums shipped as deck freight

• 55 gallon drums shipped as packaged cargo or containerized freight

• 5,000 gallon ISO container fuel tanks (used or new)

• Convert existing bulk fuel tank(s) to ULSD by running fuel volumes down and filling with ULSD for three inventory turns in order to ac hieve the 15 ppm sulfur specification (blend down in existing tanks)

• Convert existing bulk fuel tank(s) to ULSD by running fuel volumes down prior to draining and cleaning the tank in order to achieve the 15 ppm sulfur specification with first fill of ULSD (clean existing tanks)
Cost estimates and results for each of these alternat ives in a typical remote rural Alaska village are reviewed in detail in Section 7.4.3 below. Under the given assumption s, for annual volumes less than 1,100 gallons (20 drums) a year, the delivery and st orage of ULSD in drums appears to be a costeffective approach. For annual volumes from 1,100 gallons up to 1,650 gallons a year, taking the time to package the 55-gallon ULSD drums for containerize d cargo appears to be a low cost alternative. As annual ULSD requirements grow above 1,650 gallon s (40 drums) a year, the conversion of existing bulk fuel tanks to ULSD and allowing for three inventory turns in order to achieve a 15 ppm specification appears to be a low co st alternative. If existing bulk fuel tanks cannot be converted to exclusive ULSD fuel storage, used ISO container fuel tanks are less costly than 55-gallon drums for annual volumes above 1,650 gallons (40 drums). New ISO container fuel tanks are less costly than 55- gallon drums for annual volumes above 3,850 gallons (70 drums).



## 7.2 Scenario 2: ULSD Fuel for Mobile Sources + New Stationary Power Generating Units ULSD Fuel for All Diesel Engines In contrast to the end-use fuel market split betw een old and new diesel engines as described above, this fuel supply scenario assumes that ULSD fuel ( 15 ppm) will be supplied for all mobile source diesel engines and regulated stationary source engines by December, 2010. It envisions a rapid transition from high sulfur fuel to ULSD for between one-third and two-thirds of the total diesel fuel demand in a village depending upon when new stationary power generating units (2007 model year+) are added. For the example provided, this amounts to 100,000 to 200,000 gallons of fuel per year.

84Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

85 The balance of diesel demand in the village typically comes from hea ting oil for space heating. The rapid transition could occur in 2010 with the use of new tanks or reus e of newly cleaned existing bulk fuel tanks. Alternatively, the ra pid transition could occur in 2008 by reusing existing bulk fuel tanks and running three turns of ULSD inventory through them (2008, 2009, 2010) with the goal of meeting the 15 ppm specification by December, 2010. Table 31 illustrates demand under this scenario. The table shows two cases: 1) old stationa ry diesel units are retained and will continue to run on unregulated diesel or Jet A (2A); and 2) old stationary diesel power units are replaced with new units that require ULSD (2B).

Table 31. Diesel Fuel Requirements Under Scenario 2: Convert all Mobile Source + Regulated Stationary Source Engines to ULSD

Total Diesel Demand (gallons per year) ULSD Demand All Diesel Engines – Retain old stationary diesel power units (2A) (gallons per year) ULSD Demand All Diesel Engines – Replace old stationary diesel power units with new units requiring ULSD (2B) (gallons per year) Highway Diesels 5,000 5,000 5,000 Non-road equipment 50,000 50,000 50,000 Stationary Diesel Power 100,000 0 100,000 9
Locomotive, marine 45,000 45,000 45,000 Heating Oil 100,000 0 0 Jet A Aircraft Engines 0 0 0
Total 300,000 100,000 200,000
Source: MAFA Illustrative Values for Economic Model



### 7.2.1 End-User Infrastructure Considerations The scenario where ULSD is provided for all dies el engines would appear to simplify operational considerations compared to a dual fuel system for old and new engines. While ULSD is expected to provide adequate performance for old engines, there are some operational risks during the transition period. The blending down of small amounts of high sulfur fuel with the new ULSD fuel may stir up sediment or pull a higher than average concentration of waxes and trace organic molecules from the existing system into the new fuel, which could lead to the need for more frequent changes of fuel filters in both old and new engines. In addition, it may contribute to loss of a positive seal around older seals and gaskets. To the extent that operators of existing diesel engi nes maintain or anticipate the need for additional fuel filter changes and a new set of seals, there may be a slight increase in maintenance requirements. If operators do not anticipate the potential need for additional filters and seals, the transition to ULSD presents a risk that filters will clog and seals wi ll leak, leading at a minimum to poor performance.

9 Based on analysis presented in Table 29, assume that the electr ic utility converts all units to ULSD once it has

a need to convert one unit to ULSD.Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities



### 7.2.2 Fuel Supply Chain Considerations
Under this scenario, the volumes of ULSD required could range from 33 percent to 67 percent of the total diesel fuel requirements for a typical villa ge. That represents from 100,000 to 200,000 gallons a year. These large volumes raise a number of questions, including:

• What are the economic options to supply/store large volumes of ULSD to the remote rural village?

• How do the costs of reusing existing bulk fuel tanks compare to building new tanks? There are four basic supply and storage options to consider for high volumes of ULSD fuel:

• 5,000 gallon ISO container fuel tanks (used or new)

• Convert existing bulk fuel tank(s) to ULSD by running fuel volumes down and filling with ULSD for three inventory turns in order to achieve the 15 ppm sulfur specification (“blend down in existing tanks”)

• Convert existing bulk fuel tank(s) to ULSD by running fuel volumes down prior to draining and cleaning the tank in order to achieve the 15 ppm sulfur specification with first fill of ULSD (“clean existing tanks”)

• Build new fuel headers and bulk fuel tank(s) for ULSD
Cost estimates and results for each of these alternat ives in a typical remote rural Alaska village are reviewed in detail in the following section. Give n an annual volume of 200,000 gallons, conversion of existing bulk fuel tanks to ULSD with a three inventory blend down approach beginning in the summer of 2008 appears to be the most economical alternative. The blend down approach is less expensive than cl eaning due the small incremental cost of buying ULSD fuel sooner compared to the additional cost of mobilizing specialize d crews and equipment to drain and clean tanks in remote rural villages. Because of their relatively small size and the incremental need to purchase containers, the ISO co ntainer tanks alternative is more expensive than reuse of existing tanks. The most expensive approach is to build a separate new bulk fuel system exclusively dedicated to ULSD. To the extent that existing tanks cannot be reused for ULSD, the use of ISO container tanks merits cons ideration before building a separate new bulk fuel tank system due to potential cost savings.



## 7.3 Scenario 3: ULSD Fuel for Di esel Engines and Heating Oil In contrast to the diesel engine s scenarios described above, this fuel supply scenario assumes that ULSD will be supplied for all diesel engines plus the heating oil market by December 2010. It envisions a rapid transition from high sulfur fuel to ULSD for the total diesel fuel demand in a village. For the example provided, this amounts to 300,000 gallo ns of fuel per year. The rapid transition could occur in 2010 with the use of new tanks or reuse of newly cleaned existing bulk fuel tanks. Alternatively, the rapid transition could occur in 2008 by reusing existing bulk fuel tanks and running three turns of ULSD inventory through them (2008, 2009, 2010) with the goal of meeting the 15 ppm specification by December, 2010. This scenario would simplify operat ional considerations, especially for many rural villages served by ga soline powered aircraft, since a fu ll transition eliminates the need to consider a separate fuel delivery and storage system for Jet A to accommo date smaller volumes for non-ULSD specified usage contemplated in Scenarios 1 and 2. In sub-regional hubs and regional hubs served by turboprop and jet aircraft, the ongoing ne ed for Jet A fuel to serve jet and turboprop needs

86Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

requires at a minimum the designation and ongoing separation and maintenance of a dual-fuel system (one for ULSD and a smaller one for Jet A). Table 32 illustrates results for this scenario.

Table 32. Diesel Fuel Requirements under Scenario 3

ULSD Demand for Old + New Engines (gallons per year) Highway diesels 5,000 Non-road equipment 50,000 Stationary diesel power 100,000 Locomotive, marine 45,000 Home heating 100,000 Jet A aircraft engine 0
Total 300,000

a The aviation fuel market in small villages tends to be served by aviation gasoline. Turboprop aircraft and jets that require Jet A fuel typically operate only in larger sub-regional hubs and regional hubs. Source: MAFA Illustrative Values for Economic Model



### 7.3.1 End-User Infrastructure Considerations While ULSD is expected to provide adequate pe rformance for old engines and existing heating appliances, there are some operational risks during the transition period. The blending down of small amounts of high sulfur fuel with the new ULSD fuel may stir up sediment or pull a higher than average concentration of waxes and trace or ganic molecules from the existing system into the new fuel, which could lead to the need for more frequent changes of fuel filters in both old and new engines. In addition, it may contribute to loss of a positi ve seal around older seals and gaskets. To the extent that operators of existing diesel engi nes maintain or anticipate the need for additional fuel filter changes and a new set of seals, there may be a slight increase in maintenance requirements. If operators do not anticipate the potential need for additional filters and seals, the transition to ULSD presents a risk that filters will clog and seals wi ll leak, leading at a minimum to poor performance Similarly, to the extent that home and building owners maintain or anticipate the need for additional fuel filter changes, there may be a slight increase in maintenance requirements. If home and building owners do not anticipate the need for additional maintenance, the tran sition to ULSD presents a risk that filters may clog more frequently leading, at a minimum, to poor performance of heating equipment.



### 7.3.2 Fuel Supply Chain Considerations Given an annual volume of 300,000 gallons, conversion of existing bulk fuel tanks to ULSD with a three inventory blend down approach beginning in the summer of 2008 ap pears to be the most economical alternative. The blend down is less expensive than tank cleaning due the small incremental cost of buying ULSD fuel sooner co mpared to the additional cost of mobilizing specialized crews and equipment to drain and clean tanks in remote rural villages. The possibility of a price spike for cleaning services becomes a particular possibility if a large demand for cleaning emerges in 2010. Conversely, given the transition of refinery markets to ULSD in Seattle/Port Angeles and Alaska, the potential for a price spik e for ULSD fuel beginning in 2008 and extending through 2010 appears modest (com pared to high sulfur diesel fuel).

87Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Because of their relatively small size and the in cremental need to purchase containers, the ISO container tanks alternative is mo re expensive than reuse of exis ting tanks. The most expensive approach is to build a separate new bulk fuel syst em exclusively dedicated to ULSD. To the extent that existing tanks cannot be reused for ULSD, t he use of ISO container tanks merits consideration before building a separate new bulk fuel tank system due to potential cost savings.



### 7.3.3 ULSD Demand Side Scenario Summary For small volumes (<1650 gallons per year) delivery and storage of ULSD via 55-gallon drums appears to be an economical alternative. As volumes increase above 1,650 gallons per year, reuse of existing bulk fuel storage tanks with a three-inventory bl end down beginning in the summer of 2008 is the most cost-effective approach. At hi gh volumes (200,000+ gallons per year), the reuse of existing bulk fuel storage tanks with a three-inventory blend do wn beginning in the summer of 2008 remains a cost effective approach.



## 7.4 Potential Changes in Fuel Supply Chain Costs of potential changes in the fuel supply chain are listed in this section.



### 7.4.1 Potential Changes in the Fuel Supply Chain with the Introduction of ULSD In remote rural villages where Jet A is not required on an ongoing basis since aviation needs are met by aviation gasoline, the least-co st transition to ULSD involves:

• Drain down of excess Jet A inventory at the end of a heating season in the spring of 2008 and subsequent use of drained fu el as a local heating oil

• Refill of re-designated bulk fuel tank with ULSD over the course of a three season, minimum three inventory blend down to achieve a 15 ppm specification In remote rural sub-regional hubs or regional hubs where Jet A is required for turboprop and jet aviation needs, the least-cost transition to ULSD involves:

• Drain down of excess Jet A inventory at the end of a heating season in the spring of 2008 and subsequent use of the Jet A fuel for aviation requirement or home heating fuel

• Refill of re-designated bulk fuel tank with ULSD over the course of a three season, minimum three inventory blend down to achieve a 15 ppm specification

• Designation of bulk fuel tanks for Jet A



### 7.4.2 Incremental Cost of Potential Changes in Fuel Supply Chain Infrastructure
Table 33 shows current and future price differentials fo r ULSD No. 1 (new cold weather fuel regime) versus Jet A blends (current fuel regime) at the An chorage OPIS rack (which appears to largely be a reflection of the rack prices of the Tesoro refinery).

88Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

89 Table 33. ULSD No. 1 vs. Jet A Price Premium at Anchorage Rack

Price Premium (ULSD No. 1 vs. Jet A) Long Term Price Premium (ULSD No. 1 w/lubricity vs. Jet A) $ per gallon 4 cents per gallon 5 cents per gallon $ per MMBtu 30 cents per MMBtu 38 cents per MMBtu
Source: MAFA Illustrative Values for Economic Model



### 7.4.3 Basic Remote Rural Fuel Supply Alternatives There are several remote rural fuel supply altern atives, including 55-gallon drums, 5,000-gallon ISO container tanks (used or new), reuse of existing bulk fuel storage tanks using a blend down approach, reuse of existing bulk fuel storage tanks after drai ning and cleaning, and building a separate new bulk fuel storage system. The following is a list of the a ssumptions used to illustrate the differences between these alternatives. 10

• ULSD No. 1 Density = 6.76 lb/gallon

• 55-gallon drum dry weight = 24 poun ds, 4.16 per hundred weight (cwt)

• $3 per cwt wharfage fee

• River barge deck freight = $0.208 per cwt per one-way map-mile

• River barge containerized freight = $0.134 per cwt per one-way map-mile

• River fuel barge freight cost componen t = $0.112 per cwt per one-way map-mile

• Real discount rate = 5 percent, use in net present value calculation for 2008-2030



### Low Volume 55-gallon drums as deck freight on river barge Fifty-five-gallon drums as deck frei ght on a river barge appear to be the least-cost alternative for small volumes of fuel since there are little or no fixed costs to amortize over the volume of fuel. Local delivery may consist of local labor and household sc ale equipment (four wheelers, trailers, trucks) to transport the drums. An average cost of $20 per drum is assumed to cover loca l reuse and backhaul to the refinery for reuse/refurbishment.



### Medium low volume 55-gallon drums as package/container freight on river barge Fifty-five-gallon drums as package (hi cube) or other ISO containerized freight on a river barge appear to be a least-cost alternative for modest volumes of fuel (30-50 drums) since there are a few set-up costs to amortize over the volume of fuel. Loca l delivery may require larger scale equipment to transport the packaged/containerized drums. An av erage cost of $20 per dr um is assumed to cover local reuse and backhaul to the refinery for reuse/refurbishment.

10 MAFA developed assumptions from review of Crowley Maritime Invoices and Alaska Fuel Supplier price

quotes for ULSD in 55-gallon drums delivered to a shipping wharf.Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

90 

### Medium low volume 5000-gallon ISO cont ainer fuel tanks on river barge
The estimated cost of ISO container fu el tanks (international standard 8’ x 20’ shipping container) is as follows:

• Used – $16,000 in Alaska in slow market

• Used – $24,000 in Alaska in higher demand, limited supply market

• New – $50,000 in Alaska ISO container fuel tank tare weight is 64 cwt. Depending upon the local availability of heavy equipment, the ISO container fuel tank may need to be delivered empty to enable its safe placement on shore where it can be filled from a river fuel barge or intermediate fuel pumping operation. Transportation, engineering, permitting, and installa tion costs to meet regulatory requirements for longer term storage in a communi ty could increase the total cost s to an estimated $110,000 in a remote village.



### Barge Modifications and Other Equipment Ocean-going and river barges have multiple compar tments to carry several products on a voyage. Modifications may be necessary to further compartmen talize a barge in order to carry an additional product. Additional piping and asso ciated labeling and instrumentation is likely going to be necessary to separate ULSD from other fuels. In the absence of additional compartments, cleaning of selected tanks to carry ULSD will be necessary. On average, th ese costs are estimated to be on the order of 1.2 cents/gallon for ocean barges and 4.2 cents/ gallon for much smaller scale river barges. 11 Refiners have indicated that they will not add lubric ity additives to barge shipments to avoid potential contamination issues. Villages and towns are unli kely to have adequate equipment or trained personnel to add lubricity additives so it is anticipated that the fuel distributors will put equipment on some ocean-going barges to add lubricity agents. A rough order-of-magnitude cost estimate for this equipment is $50,000. The amortized cost of the equipment per each gallon of ULSD delivered in a year by a barge would be on the order of 1 cent per gallon.



### Use Line Cleaning In Between Fuel Types vs. New Separate Fuel Header Crowley reports that it is cleaning marine header fuel lines by pigging and by sequencing delivery of gasoline after delivering Jet A and before it switches to ULSD fuel delivery to reduce the potential for sulfur contamination. The estimated cost for the setting up the new procedure combined with the ongoing change in operations appears to be on the order of 1 to 2 cents per gallon. Alternatively, if the fuel sequencing and pigging to keep the marine fuel header clean for ULSD deliveries is not found to yield co nsistent results (there is no evidence that this approach does not work), a new separate marine header and pumping sy stem for ULSD could be installed to maintain a separate fuel system that reduces the risk of ULSD contamination. The incremental cost for a separate

11 See Appendix C Excel Workbook “ULSD_Cost Estimate ”, tabs “Ocean Barge Fleet” and “Lighterage Barge

Fleet” for detailed supporting calculations.Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

91 project to design, engineer, mobilize/demobilize, install, inspect, and te st a new separate ULSD marine header, pumps and piping for a rural remo te village appears to be on the order of $80,000. 12



### Reuse Existing Bulk Fuel tanks vs. Build New Bulk Fuel Tanks To the extent that ULSD is a substitute fuel for existing diesel fuel supplies, the reuse of existing bulk fuel tank storage capacity merits consideration as an alternative to the high cost of constructing new bulk fuel tanks in remote rural villages. One approach to reuse the existing bulk fuel tank capacity is to begin running ULSD through the tanks three seasons in advance of when the 15 ppm specification is required in order to provide adequate dilution of residual higher sulfur fu el over the course of three inventory turns. Assuming the fuel in the diesel tank delive red in the summer of 2007 was 3,000 ppm Jet A, Table 34 provides an example of how subsequent deliveries of ULSD could be used to blend down to a 15 ppm specification by December 2010.

Table 34. Three Turns of Inventory to Blend Down to 15 ppm ULSD specification

Tank Product Date Delivery Volume (g) Sulfur (ppm) Remaining Volume (g) Tank Starting Sulfur (ppm) Tank Ending Sulfur (ppm)
Diesel Jet A July-07 3,000.0 ULSD July-08 22,000 14.0 1,650 3,000.0 222.3 ULSD July-09 22,00 0 14.0 1,650 222.3 28.5 ULSD July-10 22,00 0 14.0 1,650 28.5 15.0
Source: MAFA Calculations

This example requires that the amount of fuel left in the tank from the prior heating season is roughly 7.5 percent of the annual fuel delivery tank capacity. In order to consistently achieve this in the field, a fuel tank is required to receive the amount of prior year’s fuel that exceeds the maximum tank inventory (1,650 gallons) before the new ULSD delive ry. The fuel from this tank can be used as a source for heating oil in the next heating season . An example of this approach is schematically described in Figure 31 . This transition re-uses existing fuel tanks, with a blend down technique, instead of adding new and costly steel tanks.

12 MAFA Analysis of Estimations Inc. and HMS bulk fuel tank farm estimates. The average cost for all of the

components in the marine header, pumps and piping for a typical remote rural tank farm is on the order of $60,000 installed as part of a larger bulk fuel tank farm project with a total cost on the order of millions of dollars. As a stand-alone project not associated with a larger tank farm project, the marine header and one or two smaller tanks will have to absorb design, engineering associated with a retrofit, contractor mobilization and demobilization, contractor overhead an d profit (risk) on a small job—leading to a rough estimate of $80,000 for a complete new separate header system.Cost Assessment for Diesel FuelTransition in Western and Northern Alaska CommunitiesFigure 31. Ultra Low Sulfur Diesel (ULSD) Transition in Remote Rural Alaska Communities3000 ppmTank filledwith Jet A insummer2007Tankrunning lowjust beforenext deliveryin summer2008If tank levelis above7.5% ofcapacity,drain excessgallonageExtra Jet Ais stored insmaller tankand isavailable foruse asheating oilFill withULSD insummer2008 andbegin blenddown222 ppmTankrunning lowjust beforenext deliveryin summer2009If tank levelis above7.5% ofcapacity,drain excessgallonageExtra Jet Ais stored insmaller tankand isavailable foruse asheating oilFill withULSD insummer2009 andcontinueblend down29 ppmTankrunning lowjust beforenext deliveryin summer2010If tank levelis above7.5% ofcapacity,drain excessgallonageExtra Jet Ais stored insmaller tankand isavailable foruse asheating oilFill withULSD insummer2010 tomeet spec15 ppmSource: MAFA, 2007.92Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

An alternative approach to the blend down with ULSD is to drain and clean piping and tanks prior to filling with ULSD with the goal of removing suffici ent sulfur that whatever sulfur remains after the cleaning is insufficient to raise the sulfur concentration of the fuel above 15 ppm. The blend down is less expensive than tank cleaning due the small incremental cost of buying ULSD fuel sooner compared to the additional cost of mobilizing specialized crews and equipment to drain and clean tanks in remote rural villages. Especially if a la rge demand for cleaning emerges in 2009-2010, a price spike for cleaning services becomes a distinct possibility. Conversely, given the transition of refinery markets to ULSD in Seattle/Port Angeles and Alaska, the potential for a price spike for ULSD fuel beginning in 2008 and extending through 2010 appears mo dest (compared to high sulfur diesel fuel). If the existing tank farm owner is unable or unwi lling to reuse their tanks and new bulk fuel storage tanks need to be built, the cost for a new 23,000-gallo n tank in a remote rural village of 400 residents would be on the order of $280,000 up to $409,000, depending on location, foundation work, and other cost factors. The marine fuel header would co st on the order of $80,000. Thus, a separate fuel loading, pumping, piping, and storage system coul d cost on the order of $360,000. For a village of 150 households, this amounts to an incr emental cost of $2,400 per household.



### Medium low volume 4750-gallon load on DC-6 airplane fuel tanker Finally, in some remote rural communities, river ba rge deliveries may not be an option due to low water or lack of adequate river access. In these cases, diesel fuel may need to be flown in via air fuel tanker. Based on project interviews and cost estimates from 2007, the estimated cost of fuel delivered by DC-6 is somewhere in the range of 1.5 cents per one-way map mile. A 200-mile one-way delivery (400-mile round trip) would cost about $3.00 per gallo n for air delivery on top of the price of fuel delivered to the air tanker. Based on the cost development described above, the prices per gallon for small and large volume deliveries are summarized in the figures below.

93Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities



### Small Volumes – (New Engine Warranties Scenario) Figure 32 illustrates the cost of fuel delivery to a rura l village, using river transport and local storage, over a range of approximately 500 to 5,000 gallons. At low use levels, 55-gallon drums, delivered as deck cargo, are the most cost effective. At higher use levels, the blend down process is most cost effective.
Figure 32. Total Cost of ULSD Fuel Delivery Options (River transport and local storage)

$0.00 $2.00 $4.00 $6.00 $8.00 $10.00 $12.00

550 1100 1650 2200 2750 3300 3850 4400 Gallons per Year$ per Gallon 55 gal drum, deck freight 55 gal drum, package cargo ISO Container Tanks (Used) Blend Down Existing Tanks w/ULSD Clean Existing Tanks for ULSD ISO Container Tanks (New)

Source: MAFA, 2007

94Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities



### Larger Volumes – (All Engines, All Engines + Heating Oil Scenarios) Figure 33 shows cost curves for larger volumes, from approximately 5,000 gallons to 70,000 gallons. Again, the blend down process is most cost effective over all volu mes, followed by ISO tanks and, most costly, construction of a new steel tank and header.
Figure 33. Total Cost of ULSD Fuel Supply Options (River transport and local storage) Illustrative Rural Village Example Comparing Blend-Down to ISO Containers or New Fuel Headers and Tanks

$0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 $7.00 $8.00 $9.00 $10.00

5500 11000 16500 22000 27500 33000 38500 44000 49500 55000 60500 66000
Gallons Per Year$ per Gallon ISO Container Used Fuel Tanks

Blend Down Existing Tanks w/ULSD

New Separate Fuel Header & Tank(s)

Source: MAFA 2007.

95Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

9697 

# 8 Incremental Household Costs: Fuel and Power

This section provides information on cost flows, from defi ned cost centers, and uses a detailed cost model to develop cost impacts to households for the years 2008 to 2030.



## 8.1 Fuel Supply Chain & Associated Costs The incremental cost differences for ULSD fuels in rural Alaska begin at the source: crude oil. Figure 34 illustrates the fuel supply chain from crude oi l to the end-product consumer. The schematic is illustrative and shows major cost ce nters in the fuel supply chain; there are other fuel supply activities, not specifically delineated, such as trucks hauling fuel from distribution tanks to local residential tanks which are included in the cost model as an individual line item within the local delivery category. 13

13 See Appendix C.Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Figure 34. Fuel Supply Chain

Source: MAFA, Northern Economics.

98Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities



## 8.2 Cost Centers For purposes of this study, Anchorage was used as the pricing base rather than Fairbanks. This was done for two reasons: First, the Tesoro refinery ex pansion is not sized to meet total ULSD demand in the state through the year 2030, so pr ices for distillate fuel from Te soro will be constrained by Puget Sound refinery prices plus shipping to Alaska. Seco nd, the OPIS data set for Anchorage fuel prices is somewhat more complete than Fair banks, providing slightly more confidence in the averaging of
costs.



### 8.2.1 Crude oil The base case fuel price projection for the ULSD cost model begins with the EIA Annual Energy Outlook 2008 (December 2007 early release) price for crude oil and adds the costs to refine, transport, store and deliver fuel products to end-users. The EIA Annual Energy Outlook 2008 long –term price projections for crude oil appear in Figure 35

. Figure 35. EIA AEO 2008 (early release De cember 2007) Crude Oil Price Projection

$0.00 $10.00 $20.00 $30.00 $40.00 $50.00 $60.00 $70.00 $80.00 $90.00 $100.00

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Year$/bbl (2006$)

Low High

Mid

Low High

Mid

Source: MAFA. EIA 2008, Early Release.

The use of ULSD fuel does require additional addi tives. Most important is the use of a lubricity additive for use in diesel engines; it would not be necessary for use in fuel oil but those costs will be included in all ULSD costs. Pour point depressants can be used to create an arctic grade product and that cost would be added to all No. 2 fuel prices.
These costs for additives have not been included in any of the above cost predictions, which are driven by crude oil prices. The reason for this is that the additives’ cost will be added to the final price, usually at time of delivery.

99Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

The type and amount of fuel additives used to trea t ULSD is crude and process specific, so a range of numbers is presented below. These costs are ba sed on information received from additive manufacturers. At the refinery, and with microbial testing (there is only one set of test equipment in the state), the cost of lubricity additives may a pproach one-half cent ($0.005) per gallon. Without testing equipment, and to ensure that the fuel meets the lubricity spec ification, the costs for in jecting additives from a barge into the fuel stream are estimated at $0.01 per gallon.

Table 35. Projected Long Term Fuel Prices of Crude Oil, Jet A, ULSD, and the Price Premiums in Anchorage, Coastal Hub, and Upriver Loca tions, 2008-2030, in 2006$.

Fuel Units 2010 2015 2020 2025 2030
Crude Oil $/bbl $66.89 $59.70 $61.05 $66.11 $71.87
Crude Oil $/gallon $1.59 $1.42 $1.45 $1.57 $1.71 Jet A – Anchorage $/gallon $2.44 $2.22 $2.32 $2.49 $2.64 ULSD – Anchorage $/gallon $2.48 $2.26 $2.36 $2.53 $2.68 ULSD - Anchorage Premium $/gallon $0.04 $0.04 $0.04 $0.04 $0.04 Jet A - Coastal Hub Heating Oil $/gallon $3.15 $2.93 $3.03 $3.20 $3.35 ULSD - Coastal Hub Heating Oil $/gallon $3.23 $2.99 $3.09 $3.26 $3.41
ULSD - Coastal Hub Premium $/gallon $0.07 $0.06 $0.06 $0.06 $0.06 Jet A - Upriver Heating Oil $/ gallon $3.95 $3.73 $3. 83 $4.00 $4.15 ULSD - Upriver Heating Oil $/ gallon $4.08 $3.84 $3. 94 $4.11 $4.26 ULSD - Upriver Premium $/gallon $0.13 $0.12 $0.12 $0.12 $0.12 Source: SAIC, MAFA, Northern Economics A nalysis, adopted from EIA, AEO, 2008.

100Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Figure 36. Long Term Fuel Price Forecast – Alaska Distillate Fuel Prices (2006$)

$0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.00 $4.50

2 0 08

2 0 09

2 010

2 01

1 2 0 12

2013 2 014

2 01

5 2 0 16

2017 2 018

2 0 19

2 0 20

2021 2 02

2

2 0 23

2024 2 025

2 02

6 2 0 27

2028 2 029

2 03

0$/gallon (2006$) Crude Oil Jet A - Anchorage ULSD - Anchorage Jet A - Coastal Hub Heating Oil ULSD - Coastal Hub Heating Oil Jet A - Upriver Heating Oil ULSD - Upriver Heating Oil 4 c/gal ULSD price premium in Anchorage 6 c/gal ULSD price premium in Coastal Hub 12 c/gal ULSD price premium Upriver

Source: MAFA, 2007.

However, at any given time a market shortage can have a significant impact on the prices shown. These shortages could be the result of a loss of crude supply (pipeline shutdown), a refinery disruption, or problems in the delivery supply chain.



## 8.3 Cost Model Project requirements included de velopment of a cost model, usin g forecasts to 2030, to estimate economic impacts on communities in the project area. The model, developed by Mark A. Foster Associates is shown as a flow chart in Figure 37

101Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

102 Figure 37. Cost Model Flow Chart. 14

Source: Northern Economics adapt ation, MAFA source data.



### 8.3.1 Fuel Supply Chain Focus The model attempts to mimic the fuel supply chain and capture the cost to delivery refined fuel to end-users from the acquisition of crude oil through refining, transportation, storage, ocean transport, lightering, regional fuel terminals, lightering, river ba rge, delivery to upriver bulk fuel storage facilities, local storage, and final delivery to local end-users, including resident ial heating oil, diesel generating unit day tanks, and vehicles and marine engine dispensing.



### 8.3.2 Assumptions Project scenarios were used to develop four key assumptions, listed below:

• Scenario 1 – ULSD fuels would be required to meet new engine requirements from 2007 on, representing a gradual growth in ULSD n eeds as new engines with ULSD warranty requirements come into the market.

14 See Appendix C.Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

• Scenario 2A – Mobile Sources + Stationary Powe r adding a new unit engine-generator set in 2013.

• Scenario 2B – Mobile Sources + Statio nary Power + Begin Blend Down in 2008

• Scenario 3A – Mobile Sources + Stationary Power + Heating Oil + Begin Blend Down in 2008. The cost of each scenario is analyzed over the time period 2008 to 2030, and the results are discounted back to the present using a 5.0 percent discount factor, based on Alaska Municipal Bond Bank rates over the past several years. The discount factor is a variable input to the model and may be varied to test impacts of changing interest rates. Basic fuel demand per year was projected at 300,00 0 gallons for a typical upriver village community, with a projected 75,000 gallons of ULSD required for each new power generator (per year).



### 8.3.3 Basic Electrical and Heating Demand The cost model assumes an average of 5,400 kWh per household, 800 gallons per year of heating oil, and a nominal amount of diesel transportation fuel s for upriver communities. The model also assumes an average of 6,000 kWh per household per year, 1,000 gallons per year of heating oil, and a slightly larger, but likewise nominal amount of diesel transportation fuels for coastal hub communities.



## 8.4 Results

Table 36 summarizes results for each scenario.

Table 36. Estimated incremental cost of ULSD compared to Jet A for rural Alaska households – Selected Scenarios

Units Scenario 2A: Gradual Transition to ULSD (excluding heating oil) Scenario 2B: Rapid Transition (excluding heating oil) with blend down Scenario 3: Rapid Transition (including heating oil)

with blend down Household Cost 2010 $/household/year $300 $278 $189

Household Cost (2008-2030) $/household (NPV 2006$) $2,902 $2,361 $2,091

Households Number of households in Study Area 14,700 14,700 14,700

Aggregate Household Cost $ (2008-2030, NPV 2006$) $42,666,368 $34,713, 598 $30,744,452

Source: ULSD Economic Model. The household costs r epresent an aggregate weighted average of coastal hub and upriver community costs.



### Net Present Value NPV stands for Net Present Value, an economic and financial technique that refl ects the time value of money, also referred to as compound interest calculations. NPV is a useful way to compare alternatives with differe nt cash flows at diffe rent time periods.

103Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

104 A key factor for calculating the time value of money is the discount rate (i.e. interest rate) used for calculating the current or present value (PV) of future cash flows. Future cash flows can be positive or negative, reflecting income or expe nse; when these cash flows are calc ulated at the present time (i.e. present value) they are termed “net” present value to reflect the difference between cash inflows and outflows. For example, if the presen t value (PV) of a series of future cash flows is $250 and the PV of cash outflows is $100, the net amount of $150 ($250 - $100 = $150) is termed the Net Present Value. The estimated cost of using ULSD instead of Jet A in the study area households averages between $189 and $300 a year per household with an aggregat e household cost over the study period (2008 to 2030) of $30 to $40 million (2006$). A rapid transition from Jet A to ULSD that includ es heating oil appears to be the least expensive transition to ULSD due to:
1) Economies of scale: higher volumes decrease the unit cost of delivering fuel (e.g., it is cheaper to deliver fuel in larger barges than in 55 gallon drums);
2) Less need for transitional storage (e.g., 55 gallon drums and ISO containers); and
3) More efficient use of existing infrastructure (e.g., a rapid transition using a blend-down approach makes the best use of existing bulk fuel tank farms by reducing the risk of un-used capacity in existing tanks). Even an efficient rapid transition to ULSD will incu r significant costs for rural households in the study area—on the order of $190 per household per year—r oughly $16 per month. This reflects the costs associated with:
1) The price premium for ULSD over Jet A;
2) The costs associated with changes in fuel filters, fuel pump seal s, finding a new way to dispose of used oil, and a slight loss in fuel economy at the electric utility using diesel generating units; and
3) The costs associated with modifi cations to ocean barges and river barges to segregate, label, and operate the new ULSD fuel stream includin g a new lubricity additive system. Due to the smaller scale and additional lightering associated with fuel deliveries to upriver communities, households in upriver communities may pay on the order of 20 percent more for the transition to ULSD than househ olds in coastal hub communities. 15 The relative proportion of the incremental costs for th e delivery of ULSD fuel compared to Jet A to an upriver community breaks down roughly along the lines described in Figure 38

.

15 See Appendix C, tab “Household Impact.”Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Figure 38. Breakdown of Incremental Costs to Supply ULSD to Upriver Community compared to Jet A

$49

$99 $61

ULSD refinery premium over Jet A Cost of modifications to fuel transportation and storage systems Cost of modifications to Electric Utility diesel generating systems

Source: MAFA, 2007.



## 8.5 Sensitivity Analysis The sensitivity analysis consists of two parts: 1) basic sensitivity testing of key variables and 2) probability weighted Monte Carlo simulation.



### 8.5.1 Basic Testing of Key Variables Two key assumptions with the greatest uncertainty (r efinery premium and electric utility costs) were varied to analyze their relative importance on the cost analysis from the perspective of upriver households. The results of varying the refinery premium and the electric utility costs compared to the base case are presented below in Figure 39 on a cost per household per year basis.

105Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Figure 39. Sensitivity Analysis of ULSD Costs – Upriver Community

$209

$184 $253

$179

$0 $50 $100 $150 $200 $250 $300

ULSD Base Case Reduce Refinery Rack Premium by 50% Increase Refinery Rack Premium to 8 c/gallon Reduce Electric Utility Costs by 50% Base Case & Sensitivity Analysis$/household per year

Source: MAFA, 2007.



### 8.5.2 Probability Weighted Monte Carlo Simulation Specific cost variables were set to vary in a spreadsheet simulation:

• Jet A fuel

• the incremental cost of ULSD

• gallons of fuel consumed per household for heating

• the cost of a new bulk fuel tank system
The simulation was used to determine which variable has the greatest effect on the NPV of total cost to each household for the four scenarios used by MAFA (note Scenario 1 had two slightly different variations in ULSD fuel quantity and t he timing for new engines—2008 versus 2010). For this analysis, the price of Jet A fuel was varied using a triangular distribution with a minimum of $2.5985 per gallon ($70 per barrel crude) to a maximum value of $3.7121 per gallon ($100 per barrel crude) with an expected value increasing each year based on estimated fuel costs at the Anchorage Rack. The incremental difference in price between Jet A fu el and ULSD No. 1 with lubricity additive was varied using a normal distributio n with a mean of 1.0516 and a stan dard deviation of 0.0236 resulting

106Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

107 in the value being between 1.0083 and 1.0949 over 90 percent of the time ba sed on a statistical evaluation of indexing information (Anchorage) 16

. The number of gallons of fuel consumed per household for household heating was varied using a triangular distribution from a mi nimum value of 700 gallons per year to a maximum value of 1,100 gallons per year with an expected value of 1,000 ga llons per year. The cost of a new bulk fuel tank system was varied using a triangular distribut ion from a minimum value of $280,000 to a maximum value of $410,000 with an expected value of $380,000. These variables were the basis for Northern Economics’ analysis. Northern Economics performed the se nsitivity analysis by running th e model for 5,000 iterations using @RISK software and monitored the NPV sensitivity of total cost by household for the four scenarios (outputs). The sensitivity of an output to the variab le input is measured on scale from zero to one, with one indicating the stro ngest possible sensitivity.
Table 37 shows the sensitivity of the Total Household NPV Cost for the full engine conversion by 2010 scenario to the four input variab les. The simulation indicated that the each of the four scenarios were extremely sensitive to the incremental cost difference between Jet A fuel and ULSD with the sensitivity at one. The cost of Jet A fuel showed a sensitivity of 0.013 indicating a very small effect on the output. The average household use variables showed a sensitivit y of 0.002 indicating virtually no effect. Finally, the cost of Bulk Fuel Tank Systems showed no effect on the outputs.

Table 37. Sensitivity of Input Variables for Total Household NPV Cost

Input Variable Input Range Sensitivity for Full Conversion by 2010 Scenario
Incremental ULSD Cost Difference 1. 0083 to 1.0949 factor per gallon 1 Jet Fuel Cost $2.5985 to $3.7121 per gallon 0.013 Household Heating Oil Consumption 700 to 1,100 gallons per year 0.002 New Bulk Fuel Tank System $280,000 to $410,000 per tank system 0 Source: MAFA, Northern Economics

Table 38 shows the statistical results for the Total Ho usehold Cost NPV of the @RISK simulation for each of the four conversion scenarios. The second column shows the most likely or mean value of the simulation and the third column shows the boun ds of the simulation results at a 90 percent confidence interval. These results indicate that t he New Engine Warranty in 2008 has the lowest cost per household and the Diesel Engi ne and Heating Oil conversion in 2010 scenario has the highest cost per household. A prudent conversion appears to be the blend-down process, delivering ULSD in 2008 and reducing average sulfur ppm ov er three years to the end of 2010.

16 The cost of the lubricity additive was added afte r the incremental difference between Jet A and ULSD was

sampled.Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

108 Table 38. Simulation Results for Total Household NPV Cost

Output Mean Value ($) 90% Confidence Range ($) New Engine Warranty – 2008 456 375 - 535 New Engine Warranty – 2010 523 432 - 615 All Diesel Engines converted in 2010 523 402 - 643 Diesel Engines and Heating Oil c onverted in 2010 2,605 854 - 4,373 Source: MAFA, Northern Economics

# 9 Potential Environmental Justice Effects of ULSD Transition

Executive Order 12898, “Federal Actions to Address Environmental Justice in Minority Populations and Low-Income Populations,” issued in 1994, directs federal agencies to make achieving environmental justice part of their mission by identifying and addressing, as appropriate, disproportionately high and adverse human health or environmental effects of their programs, policies and activities on minority and low-income popula tions. This analysis examines the potential environmental justice implications of transi tioning to ULSD fuel in the project area. The analysis is divided into thr ee parts. The first part describes the project area in terms of its race/ethnicity and poverty ch aracteristics. Data collected by the U.S. Bureau of the Census are used to determine the number and proportion of individu als residing in the area who are members of a minority group or who have incomes falling below the federal government’s poverty threshold. A demographic comparison to Alaska’s entire population is presented to place the race/ethnicity and poverty characteristics of western and northern Alaska in context. The second part of the analysis examines the po tential for communities in the project area to experience a disproportionately high and adverse impa ct by a transition to ULSD fuel. In addition, the analysis determines whether characteristics of project area communities could amplify possible adverse economic effects of transitioning to ULSD fuel. In the final part of the analysis, various mitigation measures are discussed, should disproportionately high and adverse impacts occur.



## 9.1 Environmental Justice Popula tions in Project Area To sufficiently provide environmental justice to mi nority and low-income co mmunities that may be disproportionately impacted by a transition to ULSD fu el, it is critical to defi ne affected populations. Standard definitions related to su ch terms as minority, low-income, and minority population have been provided by the Council on Environmental Quality (1997): Minority : Individual(s) who are members of the followi ng population groups: American Indian or Alaskan Native; Asian or Pacifi c Islander; Black, not of Hispanic origin; or Hispanic. Low-income population : Low-income populations in an affected area should be identified with the annual statistical poverty thresholds from the Bu reau of the Census’ Current Population Reports, Series P-60 on Income and Poverty. Minority population : Minority populations should be iden tified where either: (a) the minority population of the affected area exceeds 50 percent or (b) the minority population percentage of the affected area is meaningfully greater than the minority population percentage in the general population or other appropriate unit of geographic analysis. The Council on Environmental Quality notes that a mi nority population also exists if there is more than one minority group present and the minority percentage, as calculated by aggregating all minority persons, meets one of the above-stated thresholds.



### 9.1.1 Minority Populations in Project Area Demographic data for the project area were evalua ted to determine whether the minority population percentages are greater than th e State of Alaska average. According to the 2000 U.S. Census,

109Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

minorities account for 85 percent of the project ar ea population, with Amer ican Indian and Alaska Native constituting the largest minority group ( Table 39 ). Consequently, the Council on Environmental Qual ity’s threshold of 50 percent is exceeded. In addition, the total minority popula tion percentage of the project ar ea is greater than the minority population percentage in the ge neral population of the state. The difference was calculated by subtracting the state percentage from the project area percentage. The Council on Environmental Quality does not define the term “meaningfully greater,” but a difference of 53 percent would appear to meet this threshold.

Table 39. Minority Populations in Project Area and State of Alaska, 2000

Minority Group Project Area (%) St ate of Alaska (%) Difference (%)
American Indian and Alaska Native alone or in combination with one or more other races, not Hispanic or Latino 84.0 18.6 65.4

Asian alone or in combination with one or more other races, not Hispanic or Latino 0.4 5.2 -4.8

Native Hawaiian and Other Pacific Islander alone or in combination with one or more other races, not Hispanic or Latino 0.1 0.7 -0.6

Black or African American alone or in combination with one or more other races, not Hispanic or Latino 0.2 4.1 -3.9

Hispanic or Latino (of any race) 0.8 4.1 -3.3 Total minority popul ation 85.5 32.7 52.8 Source: U.S. Census Bureau, Census 2000 Summary Fi le 4 (SF 4) - Sample Data and Census 2000 Summary File 1 (SF 1) 100-Percent Data.



### 9.1.2 Low-Income Populations in Project Area The second criterion for environmental justice anal ysis is income. As in the case of minority populations, demographic data for the project area were evaluated to determine the percentage of individuals with incomes below t he poverty threshold. These data were then compared to the percentage of individuals with incomes below the po verty threshold in the general population of the
state. Table 40 shows that the low-income population percen tage of the project area is greater than the low-income population percentage in the gene ral population, with a level approximately twice the statewide figure.

Table 40. Low-Income Populations in Project Area and State of Alaska, 2000

Project Area (%) State of Alaska (%) Difference (%) Income in 1999 below the poverty level 19.6 9.4 10.2 Source: U.S. Census Bureau, Census 2000 Summary Fi le 3 (SF 3) - Sample Data and US Census Bureau, Census 2000 Summary File 4 (SF 4) - Sample Data.

Table 41 shows the estimated median household income in the project area for 2006. The median income in project area villages is about 59 percent of the statewide median income.

110Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Table 41. Median Annual Household Income in Project Area by Community Type, 2006

Regional Hubs Sub-Regi onal Hubs Towns Villages State of Alaska $63,954 $45,829 $37,7 61 $33,083 $56,390 Source: Northern Economics, Inc. from U.S. Census Bureau, Census 2000 Summary File 3 (SF 3) - Sample Data.
Another indicator of the income status of hous eholds in the project area is the number of communities considered “distressed” by the Dena li Commission based on employment and earnings information. The Commission uses distressed community criteria to guide economic development assistance. As shown in Table 42 , a substantial proportion of the pr oject area sub-regional hubs, towns and villages meet the Commissi on’s distressed criteria.

Table 42. Number of Distressed Communities in Project Area by Community Type, 2007

Regional Hubs Sub-Regiona l Hubs Towns Villages
Number Percent Number Percent Number Percent Number Percent
0 0 4 44 29 78 51 51 Source: Denali Commission, 2007



### 9.1.3 Conclusion Based on this screening analysis, it is concluded that the project area contains a high minority population and low-income population relative to the state as a whole. It is important to note that high concentration “pockets” of low-income and/or minority populations are evidenced in specific parts of the project area; these pockets have minority or low-income populations considerably higher than the regional av erages. For example, the population of Karluk is entirely minority, and 64 percent of the residents of Grayling have incomes below the poverty level.



## 9.2 Disproportionately High and Adverse Impacts in Project Area The prior analysis demonstrates that the project ar ea contains a significant minority and low-income population, but the existence of an environmen tal justice impact has not yet been shown. A determination of an environmenta l justice impact would be made if the economic effects of transitioning to ULSD fuel are especially high and adverse in areas where there is a substantial presence of low-income or minority residents, ba sed on proportionality, and no reasonable and feasible mitigation for these effects is available.



### 9.2.1 Adverse Economic Effects on Households In order to probe for the presence of an environmental justice impact, interrelationships between the identified concentrations of minority and low-income individuals and the household economic effects of transitioning to ULSD fuel, as identified th rough the other analyses of this document, were assessed. The major impacts on rural villages and households in the overall project area will be in the areas of home heating and cost-to-consumers for electricity. With respect to electricity price effects, the Alaska Department of Environmental Conservation (2007a) notes that power system s in rural Alaska are operated as non-profits by city governments or regional cooperatives. Remote local economies

111Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

generate little cash to support utility operations, and many, if not most, of these power systems are not self supporting (Colt et al. 2003). Revenue is sl im and operations are tigh tly controlled for costs. There is little revenue cushion to shield customers from increased operating costs like a rise in fuel prices (DCCED, 2007c). As discussed in prior report sections, residents of larger population centers in the project area, such as the regional hubs of Dillingham, Nome, Kotzebue, Bethel and Barrow, may see little, if any, change in heating or power costs as a result of the transition to ULSD fuel. However, the 100 villages within the project area will see more impact due to their di stance from hubs, smalle r market size and fewer deliveries per year.
Table 43 indicates households in rural villages may expe rience up to $209 of increased cost due to ULSD requirements, within the three categories shown.

Table 43. Estimated Annual Household Incremental Costs, by Category

Cost Category $/Year Percent
Cost of modifications to electric ut ility diesel generating systems $61 29.2 ULSD refinery premium over Jet A $49 23.4 Cost of modifications to fuel trans portation and storage systems $99 47.4
Total $209 100.0 Source: Northern Economics, MAFA

It would appear that comm unities in the project area would be disproportionately affected by these ULSD transition costs due to their greater reliance on diesel for heating and power generation in comparison to the rest of Alaska. As shown in Figure 40 , the large majority of households in Anchorage and many residences in other large or road-system communities have access to natural gas for space and water heat. A negligible proportion of Anchorage households rely on diesel fuel, while an estimated 57 percent of households in other large or road-system communities use this fuel source for heating. In contrast, more than three-quarters of the residences in remote rural communities depend on diesel fuel.

Figure 40. Share of Alaska Households Using Various Energy Sources for Heating, 2000.

Anchorage Other Large or Road-System Communities Remote Rural Communities

Electricity

13%

Natural Gas 84% Other a 3% Wood 5%

Electricity 9%

Natural Gas 22% Diesel Fuel 57% Other a 7%

Diesel Fuel 79% Natural Gas b 5% Other a

8% Wood 8%

a Other = any fuel type not specified. Sp ecific sources of heat include natural gas, propane, electricity, diesel fuel, coal, wood, and solar energy.
b Barrow has access to natural gas from local wells. Source: Saylor and Haley, 2007.

112Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Figure 41 shows that most electricity for Anchorage an d other road-system communities is generated from natural gas or with hydro-power. In comparison, 60 percent of the electricity produced in remote rural communities is fr om diesel-powered generators.

Figure 41. Utility Net Generation (MWh) by Fuel Type, 2001

Anchorage Road-System Communities Remote Rural Communities

Natural Gas 93% Hydro

7%

Hydro 57% Oil a 35%

Natural Gas 8% Oil 60% Coal 32%

Natural Gas b 8%

a Fairbanks and North Pole use No. 5 and No. 6 Fuel Oils and Bunker C Fuel Oil.
b Barrow has access to natural gas from local wells. Source: Institute of Social and Economic Research, 2003.



### 9.2.2 Community Characteristics That Could Amplify Adverse Effects
There are distinct economic characteristics of commu nities in the project area that could amplify the adverse economic effects of transitioning to ULSD fuel. Firstly, the unemployment rate in the project area is relatively high. According to Alaska Department of Labor and Workforce Development employment data, an estimated 11.1 percent of t he civilian labor force in the project area was unemployed in 2006; in comparison, the unemployment rate for the enti re state was 6.7 percent. It is important to note that the official unemployment rate may underestimate the full extent of employment difficulties in rural Alaska by excludin g those who have given up looking for work. With the high unemployment in the project area, many households are struggling for basic needs. Population changes in the project area reflect the lack of employment opportunities in the area. As discussed in Section 3 , communities in the project area with a population of less than 1,000, which represents 97 percent of all project area communiti es, experienced an overall population decline of 0.8 percent between 2000 and 2006. The populati on decline in villages with less than 100 inhabitants was more dramatic; they saw an overa ll outward migration of almost 20 percent between 2000 and 2006. In contrast, the state population incr eased by 7 percent during that time period. A second characteristic of project area communities that could magnify the adverse economic effects of transitioning to ULSD is that fuel utility costs are higher to start with in rural Alaska communities because they rely mostly on diesel for heating houses and generating power (Saylor and Haley 2007). Both diesel and natural gas prices have increa sed sharply in recent ye ars. Between 2000 and 2007, the cost of diesel for home heating in the proj ect area increased an estimated 80 percent, while residential natural gas prices in Alaska increase d 144 percent. Nevertheless, diesel is still more expensive when measured by heat or energy content. Assuming that natural gas and oil furnaces have the same seasonal heating efficiencies, households in the project area that use diesel fuel for heating pay on average about three and a half times more than Alaska households that use natural gas ( Figure 42 ).

113Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

Figure 42. Comparison of Heating Costs of Natural Gas and Diesel Fuel, 2007

Source: Northern Economics, Inc., fr om AIDEA, 2007; Larsen et al., 2006.

Because most of the electric generators in rural Alaska run on diesel, escalating diesel prices have also resulted in substantial electric rate increases. Table 44 shows population-weighted averages of price per kilowatt-hour. Electric rates have increased th roughout Alaska, but especially in remote rural places. Many remote communities receive Power Co st Equalization (PCE), a state program that subsidizes electricity cost in places that generate electricity mainly with diesel.

Table 44. Average Electric Prices Per kWh, 1999 and 2005

Region 1999 ($) 2005 ($) Increase (%) Anchorage (based on cost of 1000 kWh) 0.092 0.116 26 Kenai & Mat-Su (based on co st of 1000 kWh) 0.111 0.129 16 Mid-Size & Roaded (based on cost of 1000 kWh) 0.113 0.152 34 Remote Rural (based on PCE effective rates) 0.172 0.237 38 Source: Saylor and Haley (2007)

As a result of the relatively high utility costs an d low incomes in rural Alas ka, utilities take a much larger share of income among households. Saylor and Haley (2007) estimated that remote households paid a median of nearly 10 percent of their income on utilities, more th an triple the share of Anchorage households. Utility costs amount to more than a third of income among low-income households in remote places. These figures take into account the PCE program subsidy. The aforemention ed high out-migration from small villages in the project area is particular ly significant with respect to these disproportionate energy costs, as there are fewer people to pay ongoing capital and operating costs. Another consideration is that utility costs are not only higher in the project area than in other areas of Alaska because of a greater dependence on diesel fu el, they are also more variable. Saylor and Haley (2007) note that the high volatility of diesel oil prices transfers over to heating oil costs and electric rates. Volatility and unpredictability in heating oi l costs and electric rates is a problem for budgeting and planning for households. The problem is compounded when household incomes also vary month to month and year to year, as they do in seasonal and highly variab le industries such as fishing, tourism, and construction—industr ies that dominate the economies of many areas of rural Alaska. A fourth factor that could amplify the adverse economic effects on project area communities of transitioning to ULSD is the high cost of living in these communities. High fuel prices not only affect heating and electricity costs in the project area; they also indirectly affect many other costs. The high

114Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

cost of living in rural Alaska is largely due to the absence of low cost transportation links to the outside world or between communities. Air transportation and summer barge service represent the only transportation options for bringing goods to most re sidents. Few goods or services escape a substantial transportation premium. For example, food costs in rural Alaska are twice those in the state’s more urban and accessible areas (Fried and Robinson 2007) . Moreover, the rural/urban differential in food costs appears to be increasing. In 1997, for instance, food costs for a week for a family of four in Bethel were 147 percent of Anchorage costs (Bou cher 1999); a decade later Bethel costs are 192 percent of Anchorage costs (Fried and Robinson 2007). Finally, it is important to note the effects of the im portance of subsistence activities for rural Alaskans. Harvesting and consuming fish, game and other natura l foods for subsistence is the cornerstone of life in rural Alaska (Colt et al. 2003). These resources ha ve considerable nutritio nal, economic, cultural and spiritual importance. Rural Alaskans often face difficult trade-offs between the need for cash income and the need to participate in subsistence. This trade-off means that rural villages may not wish to generate as much cash income as they could, because their scarce time is better spent on subsistence. With less cash income, customers have a harder time payi ng utility bills (Colt et al. 2003).



### 9.2.3 Conclusion In summary, the present analysis suggests that the household costs of transitioning to ULSD fuel are highest for the regions of the state with the high est concentrations of mi nority and low-income populations. This disproportionate impact is due to the greater reliance of project area communities on diesel for heating and power generation in compar ison to the rest of Alaska. The analysis further indicates that several characteristics of project area communities would exacerbate this disproportionate adverse economic effect.



## 9.3 Mitigation of Disproportionately Hi gh and Adverse Impacts in Project Area

If it is demonstrated that a transition to ULSD fuel will have a disproportionately high and adverse effect on a minority or low-inc ome population, Executive Order 12898 requires that measures be developed in consultation with affected communities to mitigate these effect s. Mitigation measures include steps to avoid, mitigate, minimize, rectify, reduce, or eliminate the impact associated with a proposed agency action (Council on Environmen tal Quality 1997). For example, among the potential mitigation measures the EPA identifies in its en vironmental justice guidance for Clean Air Act 309 Reviews are the following:

• Planning for and addressing indirect impacts prior to project initiation

• Providing assistance to an affe cted community to ensure that it receives at least its fair (i.e., proportional) share of the anticipated benefits of the proposed action

• Changing the timing of impact-causing actions to reduce effects on minority communities and low-income communities It is beyond the scope of this analysis to determine the practicability of a mi tigation measure in terms of the social, economic (including costs) and envi ronmental effects of avoiding or mitigating the adverse economic effects of a transition to ULSD fu el. However, it is instru ctive to briefly describe possible mitigation measures an d constraints in the implementation of those measures.

115Cost Assessment for Diesel Fuel Transition in Western and Northern Alaska Communities

116 EPA’s rules for fuel sulfur levels in rural Alaska require a transition of new, modified, or reconstructed stationary diesel internal combustion engines to ULSD fuel by 2010. One possible mitigation measure would be to extend the target date for implementation of the new fuel requirements in order to give affected communities, organizations, and other grou ps’ additional time to upgrade fuel distribution and storage facilities. A drawback of this mitigation measur e is the potential health impact of the air pollution caused by continued use of conventional diesel fuel for power generation. Attempts to study the health implications of dies el use in Alaskan villages have not been successful (Alaska Department of Environmental Conser vation 2007b). However, adverse health impacts associated with diesel exhaust ex posure is well established. The current rules require use of ultra low sulfur diesel in 2011 and later model year stationary source engines. If the state stays with the current recommendation, rural power generators will come under the same rules as the diesel internal combustion engines in the rest of the nation. Thus the state does not currently recommend pursuing further health studies. In the event of an extended targ et date for the transition of stationary sources to ULSD, the Alaska Department of Environmental Conservation recommends further study to determine health effects of long term exposure to large stationary source diesel exhaust. Another possible mitigation measure would be the development and application of a new energy assistance program or expansion of an existing one. Saylor and Hale y (2007) list a variety of state, federal, and private programs that currently prov ide energy assistance to Alaska households and communities. These programs include the Low Income Energy Assistance program, which provides grants to qualifying households to assist with wint er home heating costs; the Power Cost Equalization Program, which subsidizes electric costs for rura l Alaska; and the RuralCAP’ s weatherization program, which helps poor households conserve home heating. Energy assistance programs have substantially reduce d energy costs in some ru ral Alaska villages. For example, North Slope communities report the lowest average heating fuel retail price ($1.64 per gallon) in the state because the North Slope Boroug h provides free heating fuel for residential use through village corporations who distribute fuel to borough community residents, charging only a delivery fee on a per gallon basis (Alaska Department of Commerce, Community and Economic Development 2005). Subsidies provided through energy assistance programs could assist in updating village infrastructure to accommodate ULSD (Alaska Department of Enviro nmental Conservation 2002). This may include new tanks, cleaning of existing tanks, barge modifi cations, engine overhauls, and other activities. The mitigation levels of energy assistance programs are dependent on the funding allocated to the programs. Funding levels, in turn, are at least partia lly dependent on the fiscal situation of the federal and State of Alaska governments. Funding for fe deral programs such as the Low Income Energy Assistance program have faced increasing pressure in recent years as the wars in Afghanistan and Iraq continue, the current administration cuts taxes, an d social programs such as Medicare, Medicaid, and Social Security grow with an aging population. Wi th respect to funding for state energy assistance programs, high oil prices have temporarily restocke d the state treasury and re moved fiscal pressures; however, the state’s long-term fiscal situation is highly uncertain. A third possible mitigation measure is to develo p alternative energy sources for rural Alaska communities and thereby reduce their dependence on diesel fuel to generate electricity and to heat homes and buildings (Alaska Department of Envi ronmental Conservation 2002). Saylor and Haley (2007) indicate that there are many promising altern ative energy projects in progress or under study, drawing on wind, hydroelectric, geothermal, biom ass, and tidal resources. The author’s note, however, that many of these alternative technologies depend on location, and none are likely to occur on a large enough scale over the next decade to displace natural gas in urban Alaska or diesel fuel in rural Alaska as the primary energy sources.

# 10 References

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# 11 Appendices

Appendix A – EPA Regulatory Announcement May 2006 Appendix B – ADEC, air Non-Poin t and Mobile Sources, April 2002 Appendix C – ULSD Cost Model, Mark A. Foster Associates

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