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January 2010

Vol. 15, No. 1 Week of January 03, 2010

RCA approves Cook Inlet line rate hike

Cook Inlet Pipe Line’s 259 percent increase subject to refund; firm rips objector; RCA invites oil producers, others, to challenge

Wesley Loy

For Petroleum News

The Regulatory Commission of Alaska has approved Cook Inlet Pipe Line Co.’s controversial 259 percent rate increase, at least temporarily, and invited oil producers or others to challenge it and possibly win refunds.

The RCA, in a 12-page order issued Dec. 28, said although the rate hike is “significant,” it appears CIPL calculated it “in accordance with” a methodology established in a 2001 state settlement the commission accepted.

“The increase appears to be the result of a large revenue deficiency in 2009 mainly attributable to CIPL’s net-carryover adjustment in 2010 rates, coupled with a significant decline in anticipated 2010 throughput,” the order said. “The substantial net carryover appears to be the result of damage, service disruptions, and transportation curtailments resulting from a string of volcanic activity at Mount Redoubt in 2009.”

The order defines net carryover as “a true-up mechanism that ensures that over time CIPL collects its exact annual revenue requirements, no more and no less. In the event of a revenue shortfall in a given year, the amount of the shortfall plus interest is added to the revenue requirement for the following year.”

The RCA said it was allowing CIPL to start collecting its higher rate of $14.57 per barrel of oil effective Jan. 1. That’s a 259 percent increase over the previous rate of $4.06.

The increased rate, however, is temporary and subject to possible refund once a final rate is determined, the RCA said, noting it has opened a new docket to consider the matter.

“We will allow interested persons the opportunity to formally intervene in this proceeding to challenge the justness and reasonableness of the proposed rates,” the order said.

Producer protest

CIPL operates a 20-inch pipeline that runs 42 miles from Granite Point southwest along the western shore of Cook Inlet to the Drift River Oil Terminal, which also belongs to CIPL. The pipeline was installed in 1966.

Chevron subsidiary Unocal owns half of CIPL, while Pacific Energy Resources Ltd. holds the other half.

After CIPL filed its new rate, or tariff, on Nov. 27, a small oil producer, Cook Inlet Energy, lodged an objection with the RCA. The company recently bought oil and gas assets on the west side of Cook Inlet from Pacific Energy, which is liquidating in bankruptcy court, and will need the pipeline to move its production to market.

Cook Inlet Energy’s chief executive, David Hall, said CIPL’s tariff increase appears to be based on “inaccurate” assumptions, that the pipeline operator is pursuing “unduly speedy recovery of expenses,” and that it failed to inform shippers of its long-term tariff plans.

‘Complete incomprehensibility’

CIPL fired back in an answer filed with the RCA on Dec. 18, using terms such as “entirely unsupported,” “baseless,” “mysterious,” “devoid of any meaningful content,” and “complete incomprehensibility” to describe Hall’s filing.

J. Patrick Nevins, a lawyer for CIPL, wrote that the volcanic eruptions caused extensive damage, idled the pipeline for much of 2009, and forced costly measures to protect the Drift River Oil Terminal and the crude oil that was stored there.

Nevins said CIPL calculated the new annual tariff according to the methodology in the state settlement, and the rate is “entirely reasonable.” He said CIPL is amortizing the volcano-related expenses over four years.

“The proposed rate simply provides CIPL the opportunity to recover its actual costs and a reasonable return,” Nevins wrote.

He added that CIPL “has no responsibility to subsidize the recent investment” Hall’s company made in Cook Inlet oil and gas assets.






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