CPAI requesting in-state tariff hike

Third rate increase in 21 months would increase shipping rates within Alaska by 130% above most recently approved rates

By Eric Lidji

For Petroleum News

ConocoPhillips wants to increase shipping rates on the trans-Alaska oil pipeline for the third time in three years. The company is asking state regulators for permission to increase the tariff on North Slope oil bound for markets within Alaska by 12 percent.

ConocoPhillips said the increase is needed because throughput on the pipeline continues to fall while costs continue to rise, the same reasons cited for increases requested in 2008 and 2009, but also because of “another substantial increase” in property tax valuations, a new reason offered this year in the wake of a May 2010 ruling by an Alaska Superior Court judge more than doubling the assessed value of the trans-Alaska pipeline system.

The proposed increase would bring the cost to ship a barrel of oil from the North Slope to North Pole to $2.86, up from $2.55, while shipping to locations in Valdez would increase to about $4.48, depending on final destination, up from the previous rate of $3.98.

ConocoPhillips wants the increase to go into effect on Aug. 22.

A triple-layer rate case

The request is ConocoPhillips’ third over the past 21 months. If approved, it would represent a 130 percent jump in shipping rates since October 2008. At that time, the company asked for a 57 percent increase in rates that had been in place since 2002.

That request was unique.

In 1986, the state and the five owners of the pipeline reached a settlement on how to set shipping rates, ending a decade of litigation. A subsequent ruling in 2002, though, changed the system for calculating rates in the future. Between 2002 and 2008, ConocoPhillips and the other owners kept filing rate increases using the original 1986 system. The Regulatory Commission of Alaska, in turn, rejected each of those filings.

In 2008, four of the owners again asked for rate increases using the new formula, saying shipping rates needed to increase to make up for falling throughput and rising costs.

The RCA approved those requests on a refundable basis while it investigated whether the increases were justified. In July 2009, with that investigation still under way, the four companies requested additional 29 percent increases on top of the 57 percent jump.

The RCA also approved that second round of increases on a refundable basis.

The newest increases, if approved, would create three levels of potentially refundable rates for ConocoPhillips. The last permanent rates, set in 2002, charge $1.25 to ship a barrel of oil from the North Slope to North Pole and $1.96 to ship to points in Valdez.

The newest request represents an additional 12 percent increase over the 2009 rates.

If the RCA ultimately rejected the temporary rate increases from 2008 and 2009, ConocoPhillips would be forced to refund millions of dollars to in-state shippers.

Additional complexities

If history is a guide, three other owners of the pipeline will submit identical rate increases in the near future. ConocoPhillips, ExxonMobil, Union Oil Company of California and Koch have been generally moving in lockstep on rate increases since late 2008.

The fifth owner, BP, which owns nearly half of the pipeline, has not been requesting rate increases. Each of the five companies owns an undivided share of the pipeline and sets its own rates, so long as the five rates combined stay below a predetermined limit.

Another twist is that those four companies are also asking the Federal Energy Regulatory Commission to increase shipping rates on Alaska oil bound for West Coast markets.

In an effort to reduce some of that complexity, the RCA is looking into merging the three cases on in-state shipping rates, and is considering holding a joint hearing with FERC.

That hearing would cover overlapping issues, such as whether and how to include costs of Strategic Reconfiguration in shipping rates. Strategic Reconfiguration is a multiyear effort to upgrade pipeline operations that is costing more and taking longer than expected.

By bringing the property tax valuation into the rate case, ConocoPhillips is adding another layer of complexity. In her May ruling, Superior Court Judge Sharon Gleason put the value of the pipeline system at $9.98 billion for 2006. The state Assessment Review Board previously put the value of the pipeline system at $4.3 billion for 2006.

Independent oil producers like Anadarko Petroleum and third-party refiners like Tesoro follow rate cases because higher shipping rates increase operating costs and reduce profits. The state also follows rate cases because royalties are based on the value of oil after tariffs, meaning the rate directly impacts the amount coming into the state treasury.