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Vol. 15, No. 50 Week of December 12, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

No relief for pipeline owners

DC court rejects challenges to FERC orders for lower trans-Alaska pipeline rates

Rose Ragsdale

For Petroleum News

A federal appeals court has soundly rebuffed efforts by owners of the trans-Alaska oil pipeline to overturn a regulatory decision that rolled back increases in their interstate shipping rates.

In a Dec. 3 ruling, United States Court of Appeals for the District of Columbia Circuit said the Federal Energy Regulatory Commission was correct in finding pipeline rate increases in 2005 and 2006 were “unjust and unreasonable” and in ordering limited refunds.

The case stemmed from a 2008 challenge to FERC’s decisions by Flint Hills Resources Alaska LLC on behalf of Koch Industries, which owns 3 percent of the pipeline that moves oil from fields near the Arctic Ocean 800 miles south to a tanker-loading terminal near Valdez, Alaska. The four other owners of the pipeline — BP, Exxon Mobil, ConocoPhillips and Unocal Pipeline — also joined in the appeal.

The State of Alaska, challenging a different aspect of the FERC ruling, intervened in the case, as did shippers Anadarko Petroleum and Tesoro, which originally protested the 2005 and 2006 rate hikes before the commission.

Senior Circuit Judge Stephen Williams upheld the FERC decision, finding it to be neither arbitrary nor capricious.

The commission found the pipeline’s interstate rates filed for 2005 and 2006 to be unjust and unreasonable, but not discriminatory or unduly preferential. Though deciding that the just and reasonable rates would be less than the 2004 rates, the agency limited refunds, in accordance with § 15(7) of the Interstate Commerce Act, to the difference between the 2005 and 2006 filed rates and the prior unchallenged (2004) rate, according to the court.

Unpersuasive arguments

“The carriers assert a host of methodological errors in these decisions; we are unpersuaded,” Williams wrote for the court.

Among the owners’ argued:

• The commission improperly used rate base balances from the TAPS Settlement Methodology era — an earlier period when the pipeline owners and Alaska had agreed on a method for calculating interstate tariffs. “Since 1985, the carriers have justified the rates that they charged shippers based on an accelerated depreciation schedule. It makes no difference what the cause of the carriers’ having characterized a portion of their rates in this manner may have been — the TSA, the tax implications, rolling dice, arm-wrestling, etc. The past is what it was,” Williams wrote. “For the Commission to rely on those justifications to determine how much of the rate base has been recovered is not arbitrary and capricious.”

• Starting rate base write-up was not allowed. The owners also argued that as part of using Opinion No. 154-B methodology, they are entitled to a one-time “write-up” of their rate base. But the court said neither the need for a transition nor an interest in protecting investor expectations called for a rate base write up.

• Treatment of 2005 depreciation in rate base calculation for 2006 was improper. The owners claimed that the commission’s calculation of unrecovered rate base for 2006 was inaccurate and arbitrary. The court said the alleged miscalculation had no impact on the rates and refunds at issue in the case.

• Use of a “new” methodology as a basis for ordering refunds under ICA § 15(7) was incorrect. The court said the pipeline owners incorrectly invoked its decision in Sea Robin Pipeline Co. v. FERC, 795 F.2d 182 (D.C. Cir. 1986), for the proposition that in a proceeding under ICA § 15(7) the commission cannot order refunds when its calculation of the just and reasonable rates depends on a methodology different from the one employed for the pre-existing pipeline-filed rate.

No harm, no foul

The appeals court also rejected the State of Alaska’s argument that the FERC refused to provide remedies for alleged price discrimination in its decision.

“We find that even if there was discrimination, Alaska has not made the showing necessary to justify reparations. … We are not sure how a non-shipper complainant, with interests such as those of the state of Alaska, would show competitive injury; after all, it is not in the business of making sales of oil transported on the pipeline,” Williams wrote.

The D.C. court further found that a number of complaints about the commission’s orders related to the interstate rate hikes to be “unripe” for review because they either have not jelled in clear enough form for judicial review or present an undue likelihood of piecemeal review.

“Delaying review will not only avoid our becoming entangled in the meaning and validity of as yet inchoate rules, see Abbott Laboratories, 387 U.S. at 148-49, but will give FERC “an opportunity to correct its own mistakes and to apply its expertise,” Williams wrote.

Unless the pipeline owners appeal the D.C. court’s ruling to the U.S. Supreme Court, no further action is required by the FERC before the companies must comply with the agency’s orders, Commission spokeswoman Tamara Young-Allen said Dec. 8.

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