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Providing coverage of Alaska and northern Canada's oil and gas industry
November 2010

Vol. 15, No. 46 Week of November 14, 2010

GVEA looking to increase pipeline rates

Fairbanks electric utility operates crude oil pipeline that feeds two Interior refineries, Flint Hills is challenging the increase

Eric Lidji

For Petroleum News

Golden Valley Electric Association is looking to increase the rates it charges to ship oil on a small pipeline in North Pole, but its main customer is challenging the request.

The Regulatory Commission of Alaska recently allowed GVEA, the electric cooperative for Interior Alaska, to temporarily increase rates nearly 25 percent on a refundable basis.

GVEA operates a 5.4-mile crude oil pipeline that connects the trans-Alaska oil pipeline to two oil refineries and GVEA’s power plant in North Pole, three neighboring facilities.

GVEA said it has lost money on the pipeline two years in a row. It said that those losses came from higher operating costs, but also because a fund set up several years ago to pay for investment projects didn’t work out as planned. As a result, GVEA said, it now has more than $3.1 million in unreimbursed expenses for “necessary capital improvements.”

“Over the past few years, GVEA has not been achieving the level of margins from its Pipeline operations that the Commission authorized GVEA to earn,” Thomas K. Hartnell, vice president of administrative services for GVEA, wrote in testimony to the RCA.

GVEA is proposing one of two rate structures, a flat rate or a more traditional per barrel rate. GVEA prefers the flat rate, but offered the more traditional rate as an alternative.

The pipeline only serves two customers: Flint Hills Resources and Petro Star Inc., the owners and operators of the two oil refineries in North Pole. Flint Hills is by far the larger customer, though, accounting for more than 90 percent of the shipments on the pipeline.

Flint Hills claims that the increase is merely a way for GVEA to increase its operating margins, or the “profits” that a nonprofit cooperative collects to prove financial health.

Several tariff structures

GVEA built the pipeline in the mid-1970s as a way to take advantage of the trans-Alaska oil pipeline coming through the Interior and a new oil refinery planned for North Pole.

The cooperative, which is primarily an electric utility, saw the pipeline as a way to connect to a long-term lower cost fuel supply and to reduce fuel storage at its facilities.

Over the 33 years since GVEA began operating the pipeline, its customers have changed.

Earth Resources brought the 25,000 barrel per day refinery online in 1977, expanded its capacity to 45,000 bpd in 1980 and then sold control of the plant to Mapco Alaska Petroleum Inc. Mapco doubled capacity to 90,000 bpd in 1985 to accommodate more products and eventually expanded twice more, to an ultimate capacity of 215,000 bpd.

Williams Companies Inc. bought Mapco in 1998, but Flint Hill Resources Alaska, the current owner, bought the entire refining operation from Williams in July 2004.

In 1984, GVEA got a second customer when Petro Star Inc. built a second refinery, also in North Pole, to produce a different selection of petroleum-based products.

For the first 22 years of its operation, GVEA billed its customers under a special contract, charging an estimated monthly per-barrel rate that it trued-up at the end of the year.

In 1999, RCA required GVEA to set up a tariff, but the tariff resembled the contract, allowing GVEA to collect its costs and a margin each year from its two customers.

New method in 2003-04

Because of the difficulty predicting costs and throughput that system led to large payment swings, especially in the first quarter of the year, during the true up. Plus, GVEA expected the aging pipeline would soon need investment that wouldn’t be covered under the tariff. So in 2003-04, GVEA and its shippers agreed on a new method.

In addition to the traditional per-barrel shipping rate, the new tariff included a capital improvement program. Under the program, the two shippers would approve the costs for capital projects and split up the payment based on their percentage of throughput. GVEA didn’t worry about not getting approval “because of the cooperative nature of GVEA’s dealings with the Shippers throughout the history of Pipeline operations,” Hartnell wrote.

But shortly after implementing the program, Williams sold the facility to Flint Hills.

“Flint Hills has refused to enter into the agreements necessary to accommodate the Capital Investment Program,” Hartnell wrote. This became a problem in 2008, when GVEA began two capital projects it saw as “necessary for proper Pipeline operation.”

Hartnell wrote that discussions among GVEA, Petro Star and Flint Hills began in early 2008 and continued until GVEA filed its most recent tariff in September. While Petro Star agreed to move forward, Flint Hills did not, according to Hartnell.

So now, GVEA is proposing a rate structure similar to its original system: a flat monthly rate divvied up between the two shippers based on historic use, and adjusted annually.

Alternatively, GVEA is proposing a shipping rate of 3.54 cents per barrel, up nearly 25 percent from its current rate of 2.85 cents per barrel plus a capital improvement rider.

The RCA approved the 3.54-cent rate on a temporary basis while it studies the case.

The temporary rate goes into effect on Jan. 1.

Flint Hills challenges TIER

GVEA claims that the new rates would allow it to collect the margin that the RCA approved during its last rate case, but Flint Hills challenges that assumption. Flint Hills believes the “attempt to lock in a fixed dollar margin” at $934,370 would lead to a higher TIER for GVEA. A TIER, or times interest earned ratio, measures the ability of earnings to cover the interest owed on debt, and is a common metric in Alaska utility rate cases.

Flint Hills believes an “appropriate” TIER for GVEA’s pipeline operations should be no higher than the TIER for its electric utility operations, and possibly much lower.

Because throughput is not expected to increase, Flint Hills believes it will end up paying more and more each year, as each barrel constitutes a larger share of the fixed margin.

GVEA is also concerned about throughput, saying that the lower temperature that accompanies the declining volumes of oil could lead to increased operations costs.

Capital improvement projects an issue

Flint Hills is also questioning the two capital improvement projects from 2008.

Although Flint Hills did not own the refinery in 2003, when GVEA and the shippers implemented the capital improvement program, Flint Hills said it doesn’t know of any proof that its predecessor Williams “may have made any commitments to pay for any and all facilities that GVEA may construct on its own without prior agreement.”

GVEA believes the capital projects undertaken in 2008 help both shippers. One project upgraded a connection to support capacity improvements to the Petro Star facility, while the other is a new metering station. GVEA expects both projects to be finished in 2011.

Flint Hills doesn’t believe it should have to pay 90 percent of the cost of the projects.

“The new pipeline connects to the Petro Star refinery and is utilized primarily to serve the Petro Star refinery,” Flint Hills wrote in filings with RCA. “Similarly, the new meter station is utilized to measure the quantity and quality of the petroleum stream leaving the Petro Star refinery. While Flint Hills appreciates that it benefits to some degree from accurate measurements of Petro Star’s petroleum from an allocation standpoint, any such benefits do not justify charging Flint Hills for 90 percent of the cost of such meter.”

Flint Hills and Petro Star have both asked to be party to the upcoming rate case.

Flint Hills is owned by Koch Industries, which also owns a stake in the trans-Alaska oil pipeline. The refinery has been struggling with poor economics in recent years.






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