State settles over TAPS rate caseSettlement resolves issues over strategic reconfiguration costs and deferred property tax recovery through rates for oil pipeline Alan Bailey Petroleum News
The state of Alaska has agreed to a settlement with the owners of the trans-Alaska pipeline system in a long-standing dispute revolving around the recovery from pipeline rates of the cost of strategic reconfiguration, a major upgrade to the system. The settlement also resolves an issue about the retrospective recovery from pipeline rates of property taxes incurred in an earlier year.
According to the Alaska Department of Law, the settlement will result in the state collecting $165 million in revenue, in addition to $224 million already collected as a consequence of the rate challenge.
Critical to economics The pipeline rates are critical to the economics of North Slope oil production. Moreover, by impacting oil transportation costs and hence the value of the oil on the North Slope, the rates impact state oil royalties and production taxes - the higher the rates, the lower the state revenues. The rates also impact the cost of transporting the state’s royalty oil, obtained from North Slope oil producers.
“This settlement is a great result for the state,” said Alaska Attorney General Jahna Lindemuth. “It creates certainty going forward, avoids future litigation, and will provide additional taxes and royalties - bringing needed money to the state treasury.”
Regulation of TAPS is the responsibility of both the Federal Energy Regulatory Commission and the Regulatory Commission of Alaska. FERC regulates the carriage of interstate oil, oil that is exported from Alaska; the RCA regulates intrastate oil, oil for delivery to in-state businesses. The Department of Law said that settlement documents would be delivered to FERC and the RCA on Dec. 15 for approval. According to the terms of the settlement, the settlement will be declared void if the regulatory agencies do not approve the settlement by May 1.
Strategic reconfiguration The strategic reconfiguration project involved the replacement of the original turbine-powered pumps that drove oil through the trans-Alaska pipeline with electrically powered pumps, together with the implementation of a more automated pipeline control system. Alyeska Pipeline Service Co., the company that operates the pipeline on behalf of its owners, has said that the electric pumps enable efficient operation over a wide range of pipeline throughputs, thus better accommodating the low flow rates of oil through the line as North Slope oil production declines.
However, the project took much longer to execute than had been planned and suffered from major cost overruns.
Following a massive investigation over the extent to which the project costs could reasonably be recovered from pipeline rates, in November 2015 FERC issued a ruling stating that the project had been imprudent. The agency cited poor project planning and management, while also concluding that the pipeline pump system upgrade had not actually been necessary. The Regulatory Commission of Alaska concurred with FERC’s findings.
The pipeline owners challenged the FERC findings in an appeal case that has ended up in the U.S. Court of Appeals for the D.C. Circuit. In October the parties in the case requested a suspension of court proceedings, pending regulatory approval of a settlement. This was presumably the settlement that the state has now agreed to.
There are actually three documents involved: the settlement agreement itself; an agreement for a new methodology for determining rates in the future; and a settlement for intrastate rates. The first two documents will require FERC approval while the third document is directed at the RCA. Intrastate rates are particularly important for the state’s royalty oil, since this oil is typically sold to in-state refineries.
Interstate tariffs The first document sets out a table of agreed pipeline interstate tariff rates that apply during a tariff refund period starting at the end of May 2011 and continuing to the end of December 2015. There is a table of tariffs to be applied during this period, together with procedures under which the pipeline owners will issue refunds for fees charged in excess of these tariffs. These refunds presumably reflect agreed overcharging as a consequence of strategic reconfiguration. There are also rules for how to recover the cost of pipeline system property tax payments relating to years prior to a current tariff.
The second document specifies the variable tariff methodology, or VTM, that will be used for determining interstate pipeline tariffs, starting July 1, 2018. Under this agreement, each pipeline owner will determine a maximum allowable rate, based on actual pipeline costs and pipeline throughput for the preceding calendar year. Eac
The tariffs and throughput for TAPS, although it is a single pipeline, are managed as if there is a separate line for each TAPS owner, with each owner’s “line” scaled in proportion that owner’s interest in the complete pipeline. Thus, each owner can compete on price for use of its portion of the line, a situation that could presumably provide an incentive for setting a tariff below the maximum permitted amount.
The VTM allows $300 million of the $707 million cost of the strategic reconfiguration project to be amortized as a component of the pipeline operating costs, when calculating the maximum tariff. However, the owners are not allowed to add any of the strategic reconfiguration costs to the pipeline’s rate base that is used to determine the return on the owners’ investment in the line. The originally estimated cost of strategic reconfiguration was $242 million.h owner may assess a tariff at or below that maximum level. During the period Jan. 1, 2016, to June 30, 2018, after which the VTM goes into effect, the pipeline owners will pay refunds on rates charged in excess of maximum tariffs calculated from costs of service in 2016 and 2017.
Intrastate rates The third document, the document relating to intrastate rates, sets out specific per barrel refunds to be paid to shippers for the transportation of oil by the various pipeline owners to specific in-state locations over various date ranges in the period June 2011 through December 2016. The document specifies rules for maximum rates that can be applied from Jan. 1, 2017, and financial parameters for determining subsequent rates. As in the interstate settlement, the pipeline owners, when determining rates, will be able to amortize $300 million in strategic reconfiguration costs as part of their costs of service but the strategic reconfiguration costs cannot be added to the pipeline rate base.
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