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Providing coverage of Alaska and northern Canada's oil and gas industry
May 2011

Vol. 16, No. 19 Week of May 08, 2011

TAPS tariff dispute flares up

Smallest trans-Alaska oil pipeline carrier, Unocal Pipeline Co., charts middle course in response to latest ruling by FERC judge

Rose Ragsdale

For Petroleum News

Unocal Pipeline Co., the carrier with the smallest ownership share of the trans-Alaska oil pipeline, weighed in with its opinion in the latest proceedings of a long-running dispute before the Federal Energy Regulatory Commission between the line’s owners and shippers over interstate tariffs dating back to 2005.

In a succinct 39-page filing May 2, Unocal offered its support for many provisions of a ruling issued March 10 by the commission’s presiding administrative law judge on certain aspects of the case and explained its opposition to exceptions raised by most of the other parties in the case.

The ruling by Judge Michael J. Cianci Jr. is an initial decision aimed at resolving several issues related to rate filings by the pipeline’s owners that were set for hearing in the proceedings. The issues are cost of capital, implementation of a “uniform rate” requirement for the pipeline established by the FERC in Opinion No. 502 in June 2008, and resolution of the details for the pooling mechanism required by the commission along with the uniform rate.

Unocal owns 1.3867 percent of the 34-year-old pipeline, the smallest share held by the five companies that own the transportation system which moves nearly 700,000 barrels per day of petroleum, primarily crude, more than 800 miles across Alaska, from oil fields near the Arctic Ocean to a tanker terminal on Prince William Sound near Valdez. The other four carriers are BP Pipelines (Alaska) Inc., ConocoPhillips Transportation Alaska Inc., ExxonMobil Pipeline Co. and Koch Alaska Pipeline Co. L.L.C.

In light of its small stake in the pipeline and related interests in minimizing costs, Unocal said it limited its participation in the long-running tariffs case and did not present any witnesses in the recent proceedings.

In its view, the judge’s initial decision “provides a just and reasonable resolution of the difficult and contentious issues presented here,” Unocal wrote.

The company also attempted to poke holes in objections raised by other parties in the case, including carriers ConocoPhillips and Koch, shipper Anadarko Petroleum Corp. and the commission’s own trial staff.

Pooling hotly disputed

ConocoPhillips and Anadarko challenged the commission’s legal authority to order the pooling of costs for rate-setting purposes.

Unocal observed that the commission had rejected this same challenge in its 2008 Rehearing Order and 2009 Rehearing Order, and the question was not set for hearing in the latest proceeding

ConocoPhillips and Koch also argued that the judge erred by ruling that the pooling mechanism should become effective starting Jan. 1, 2009.

Unocal said a later starting date would not be consistent with the commission’s repeated statements that pooling is necessary to obtain a just and reasonable rate for the pipeline and that pooling should “continue” after the TAPS Settlement Agreement expired Dec. 31, 2008.

“The argument by (ConocoPhillips) and (Koch) that the Jan. 1, 2009 effective date would constitute a ‘retroactive’ ruling, attempts to ignore the Commission’s prior orders that clearly established that pooling would be required to continue after the expiration of the TSA,” Unocal wrote.

The company also countered objections raised by other parties concerning the types of costs that should be included in the pooling mechanism.

Assuming pooling exists, all the participants agreed that certain costs such as fixed operating expenses incurred by the pipeline carriers’ agent, Alyeska Pipeline Service Co., depreciation (i.e., return on investment) and Alaska ad valorem taxes should be included.

However all of the parties in the case, except Unocal, raised objections to the judge’s handling of the pooling of one or more of the following elements: return on investment, including the cost of debt, the allowance for funds used during construction (AFUDC), return on equity and the associated allowance for income taxes, “Carrier Direct” costs (i.e., costs incurred by the individual pipeline owners themselves, as distinct from costs incurred by Alyeska and then allocated among the owners) other than ad valorem taxes and fuel and power costs, and the costs related to providing intrastate transportation service.

Seeking middle ground

Unocal endorsed Judge Cianci’s “middle-ground compromise approach” that fully pooled cost of debt and AFUDC elements, but adopted a sliding scale approach for equity return related elements (including deferred return, return on equity and income tax allowance) with 50 percent of these costs pooled at present, with the possibility of future adjustments if circumstances change.

In an April 11 filing, BP, which holds the biggest ownership share of the pipeline at nearly 47 percent, argued that the judge erred by including only 50 percent of the return on equity components, while ConocoPhillips, Anadarko and the commission’s trial staff, in April 11, April 15, and April 11 filings, respectively, asserted that all return elements should be excluded from the pooling mechanism.

Calling the inclusion of 50 percent of the return elements “simply wrong”, the trial staff wrote that “the Commission’s policy is to give a pipeline an opportunity to earn its allowed return, not to guarantee it.”

ConocoPhillips cited numerous reasons why the judge should not have included return elements in the pooling mechanism, including that he misconstrued the commission’s pooling orders.

Anadarko also listed numerous objections, including that the judge failed to apply or even recognize the governing legal standards of Interstate Commerce Act Section 5(1), which are applicable to the evaluation and approval of pooling arrangements. Anadarko also called BP’s proposed pooling mechanism “overly-complex and flawed.”

“To the extent that BP believes its ‘split the baby’ proposal represents a compromise, it is cold comfort to shippers that benefit from competitive discounting, which may be substantially curtailed or eliminated by increasing the level of costs in the pooling mechanism,” Anadarko said.

Unocal, however, said its own experience, which included attempting to compete by offering lower volume incentive rates during 2009, shows that the possibility of one of the pipeline carriers attracting significant volumes with lower rates “is minimal to non-existent.”

While it supports the pooling of all return-related elements for the reasons offered by BP’s witnesses — “especially for the period from 2009 through the present, when the desire to promote possible future competition has no relevance,” Unocal said it believes the judge’s 50 percent compromise is reasonable, if the commission seeks to promote competition.

However, the goal of preserving the possibility of competition in the pipeline’s current circumstances is of insufficient importance to require certain carriers to under-recover even more of their actual costs, while permitting other carriers to over-recover, as advocated by ConocoPhillips, Anadarko and the trial staff, Unocal added.

Pooling costs

ConocoPhillips, Anadarko, Koch and the trial staff also said the judge erred in the initial decision by providing for the pooling of the (owners’) direct costs.

In a July 21, 2008, request for rehearing of Opinion No. 502, all the pipeline’s owners explained that, under uniform rates, carriers with below-average carrier direct costs will necessarily over-recover their costs while carriers with above-average costs would under-recover their costs. All of the owners further explained that because a significant portion of the “baseline” costs associated with ownership of the pipeline do not vary by throughput or ownership share, uniform rates will “unreasonably penalize” the smaller carriers. Unocal advanced this issue at the hearing, developing detailed evidence concerning the impact on it as the smallest TAPS carrier if these costs are not included in the pooling mechanism.

Unocal said the March 10 initial decision correctly held that including carrier direct costs in the pooling mechanism is necessary to prevent cost under- and over-recovery and to ensure that the uniform rate is just and reasonable, for all the carriers.

Anadarko, however, claimed that Unocal supports the pooling of direct costs because its costs are “excessively high” and said the company should not be rewarded for its inability to control its costs.

Unocal also endorsed the inclusion of intrastate transportation costs in the pooling mechanism.

In addition to promoting efficiency and ease of administration, pooling costs related to intrastate service will prevent the over- and under-recovery of costs by individual pipeline carriers that led the commission to mandate pooling, the company wrote.

Excluding intrastate costs from the pooling mechanism would significantly skew the results because of the different portions of intrastate and interstate service provided by various carriers, the company added.

Anadarko and the commission’s trial staff disagreed.

“Clearly, there is no reason to pool intrastate costs, return, and volumes to set just and reasonable interstate rates,” wrote Anadarko, after observing that doing so goes beyond the scope of the Commission’s orders and its legal authority.

Unocal said Anadarko’s argument against pooling the intrastate costs (which was largely echoed by the trial staff) “is intended simply to increase the likelihood that BP will continue to offer an intrastate rate below the just and reasonable level,” and this interest is insufficient to justify excluding intrastate costs from the pooling mechanism.






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