KPL rates to stay for another year

RCA gives state, Anadarko and Kuparuk Transportation Co. another year to work out a schedule for hearings to resolve rate case

Eric Lidji

For Petroleum News

The shipping rates on the Kuparuk Pipeline will remain in limbo for at least another year.

The Regulatory Commission of Alaska in early November decided to keep the temporary and refundable rates on the North Slope pipeline in place until Nov. 12, 2011, to give the various parties to the case more time to work out a schedule for hearings and testimony.

At issue is whether the rates charged by Kuparuk Transportation Co., the owner and operator of the pipeline and its nine-mile extension, represent the cost to run the pipeline.

The State of Alaska and Anadarko Petroleum believe so, but the Kuparuk Transportation Co. argues that higher rates are needed to pay for multimillion-dollar upgrade projects on the pipeline at a time when throughput is declining and litigation costs are on the rise.

The RCA gave the three parties until Dec. 6, 2010, to agree on a timetable for hearings.

KTC is a partnership between subsidiaries of ConocoPhillips, BP and Chevron.

The Kuparuk Pipeline moved more than 102 million barrels of oil in 2009.

Rate based on inflation

The existing Kuparuk Pipeline went online in 1984. The state quickly challenged the shipping rates KTC set for pipeline. The state and KTC reached a settlement in 1991, setting the rate at 21 cents per barrel, a price adjusted every three years according to the Consumer Price Index. However, they didn’t set an underlying formula for future rates.

The RCA most recently approved a change at the end of 2005, setting rates of 19.8 cents per barrel for the entire pipeline, and 14.2 cents per barrel from the Milne Point tie-in.

Following that approval, the state and KTC took another look at the settlement, but couldn’t agree to new terms. In 2008, the state took advantage of a provision allowing it to terminate the settlement, and asked the RCA to investigate the rates on the pipeline.

The state claimed that the rates on the Kuparuk Pipeline did not represent the cost to run the pipeline plus a small return, the typical ratemaking metric. Rather than continuing to update the settlement rate, the state wanted to use a traditional ratemaking formula, which it estimated would cut the in-state shipping rates on the pipeline at least in half.

Anadarko Petroleum soon joined the case. The state and Anadarko both have an incentive to keep shipping rates low. The state calculates royalties on the value of oil after transportation. Anadarko doesn’t earn a profit until after it pays shipping fees.

Although the projected “windfall” that the state accused KTC of collecting was relatively small, around $6 million a year, the state argued that the increased rates discouraged independent and third-party explorers that would need to rent space on the pipeline.

In March 2009, the three parties reached an agreement for moving forward.

The agreement allowed KTC to keep the 2006 rates in place while the company kicked off a traditional ratemaking process with the RCA, one based on actual operation costs.

KTC filed its new rates in April 2010, asking for a roughly 35 percent increase.

The RCA approved those rates on refundable basis in May, allowing them to remain in effect through November 2010 while the parties organized a hearing schedule. The current rates are now 26.4 cents per barrel to ship through the entire pipeline and 19.3 cents per barrel to ship from the Milne Point tie-in to the terminus at Pump Station 1.

KTC argued that it needed higher rates to help pay for about $75 million in upgrades needed to accommodate smart pigging technology to monitor pipeline integrity. It noted that these costs needed to be spread over fewer barrels because of declining throughput.

The state and Anadarko both challenged the method KTC used to formulate its new rates, but “because the parties have not filed a proposed procedural schedule or requested a prehearing conference, no progress has been made toward determining whether rates are just and reasonable,” the RCA noted in a Nov. 4 order. As a result, the RCA agreed to let the temporary and refundable rates remain in effect on the pipeline for another year.