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Vol. 13, No. 30 Week of July 27, 2008
Providing coverage of Alaska and northern Canada's oil and gas industry

Williams seeks rehearing; says FERC overlooked inequitable dismantlement fees collected from shippers by TAPS owners

Williams Alaska Petroleum Inc. is asking the Federal Energy Regulatory Commission to take another look at one aspect of its June 19 decision overturning interstate rates charged on the Trans-Alaska Pipeline System in 2005 and 2006.

The commission upheld a FERC administrative law judge’s May 17, 2007, ruling that the tariffs charged shippers on the trans-Alaska oil pipeline “were not just and reasonable” and ordered limited refunds to shippers who had overpaid.

Williams, a shipper on the pipeline for 26 years, formerly owned a major Alaska refinery in North Pole. In 2004, the company sold the refinery to Flint Hills Resources Alaska LLC, another party in the tariffs case.

Williams filed a request for rehearing with the commission July 21, asking the five-member panel to reconsider its rejection of a request for a refund of one-half of the fees, plus interest, that the pipeline owners have already collected from shippers to cover the cost of removing the line when it becomes obsolete.

The 800-mile pipeline began transporting oil in 1977 and is expected to continue operating until 2034, about 25 years longer than originally envisioned. The line extends from the North Slope to an ice-free port in Valdez, and is owned by five companies, BP Exploration (Alaska) Inc., ConocoPhillips Alaska, ExxonMobil Production Co., Unocal Pipeline Co. and Koch Alaska Pipeline Co. LLC.

Williams’ successor, Flint Hills, had sought a refund of $750 million, plus interest, or half of the $1.5 billion in dismantlement, removal and restoration fees, plus accrued interest, that the pipeline’s owners have already collected.

The commission supported the law judge’s opinion that refunds of DR&R fees would be premature, since the ultimate cost of DR&R for the pipeline hasn’t been determined.

Flint Hills had argued that refunds be given to past shippers in the interest of intergenerational equity.

In a 23-page filing, Williams asked the FERC to address the principle of intergenerational equity as a basis of just and reasonable rates.

Williams also asked the commission to recognize that the Flint Hills’ proposal is not really a refund as that word is generally used with respect to pipeline rates; and to realize that it isn’t necessary to know the precise amount of the DR&R costs at the end of the life of the line in order to ensure equitable treatment of all of the shippers throughout the life of the pipeline.

“Unless $750 million, plus interest, is returned to shippers who paid DR&R fees during the first half of the pipeline’s economic life, they will, in effect, end up subsidizing use of the pipeline by shippers during the second half,” wrote Randolph L. Jones Jr. an attorney with Conner & Winters of Jackson, Wyo.

Intergenerational equity is important

To make its case for a rehearing, Williams first reminded the commission that it had upheld the law judge’s finding that “the TAPS Owners have not cost justified additional collections of DR&R expense through future rates and that the DR&R expense should not be collected in the 2005 and 2006 ‘cost-based’ rates.”

“In other words, (the law judge) and the Commission have found that sufficient DR&R funds have already been collected. Accordingly, the Flint Hills proposal would not alter this finding at all by the time the TAPS (owners) have to meet their TAPS’ end-of-life DR&R obligation,” wrote Jones, who is counsel for Williams Alaska Petroleum.

With all of the DR&R funds already collected, and thus paid by shippers on the pipeline during the first half of its economic life, shippers during the second half of the line’s economic life will not have to pay for any DR&R costs in their rates, Jones observed.

“In other words, shippers during the second half of TAPS’ economic life will in effect be subsidized by shippers during the first half of TAPS’ economic life,” he wrote.

Williams contends that the situation violates intergenerational equity, which the commission has recognized as an important principle. Citing a 1999 FERC decision in Iroquois Gas Transmission System, Williams said the commission determined that “decommissioning costs for nuclear power plants must be reasonable based on present and reasonably foreseeable circumstances and conditions and that recovery of costs be spread equitably over today’s and tomorrow’s customers.”

Williams also cited Boston Edison Co., a 1986 decision in which the Commission recognized “the need to levelize among generations of customers the decommissioning costs related to Commission-regulated nuclear power plants.”

Such decommissioning costs for nuclear power plants are directly analogous to DR&R costs for oil pipelines, Jones wrote.

Williams paid some $50 million

As for the trans-Alaska oil pipeline, it is indisputable that the bulk of the DR&R funds were collected during the period 1984 through 1999. Since 2000, the amount of DR&R expense collected in rates has been miniscule, only about 2.4 percent of the total amount collected since 1984, according to Williams.

The company shipped petroleum products via the pipeline from 1978 through March 31, 2004, when it sold the refinery and other North Pole assets to Flint Hills, and that company became a shipper on the pipeline.

It was not until 2000 that Alpine ANS crude oil owned by Anadarko Petroleum Corp. was produced and shipped through the pipeline.

At a FERC hearing earlier, a witness for the pipeline owners estimated that the total amount of DR&R funds collected by the owners attributable to Anadarko’s Alpine crude oil was about $325,000, according to Williams. By comparison, a witness for Anadarko-Tesoro testified that a rough estimate of the amount of DR&R funds collected by the pipeline owners from Williams was $50 million, the company said.

It is also obvious that the amount of DR&R funds collected by the TAPS Owners from Flint Hills during the last nine months of 2004 would be negligible, Williams added.

“Therefore, absent implementing Flint Hills’ proposal, the shippers, including Williams, through 2004 have paid all of the DR&R expenses and, consequently, shippers on TAPS starting in 2005 will not have to pay any of the TAPS Owners’ DR&R costs."

“This subsidization of shippers starting in 2005 is exactly what the principle of intergenerational equity is intended to prevent, a fact and result which the Commission overlooked because it never addresses this principle in (its decision),” Jones argued.

Returning fees no true refund

Lastly, Williams argued that returning half the DR&R funds to the early shippers would not be a true refund because the pipeline owners would not be economically affected and the amount of DR&R funds needed to be collected for DR&R obligations at the end of TAPS’ economic life would not be compromised.

“It does not reduce the amount of money that the TAPS (owners) ultimately will have collected in their rates prior to their incurring their DR&R obligations at the end of TAPS’ life in 2034. Rather, it simply changes the time period during which the second approximately $750 million is collected,” the attorney argued.

As a result, knowing the final amount of the owners’ DR&R expense will not alter the facts presently known, which existing facts constitute all of the facts necessary to address the existing law judge- and Commission-proposed “intergenerational inequity,” he reasoned.

“… This condition (that the amount of DR&R expense funds collected is known) will be met at the latest when the TAPS Owners file their FERC Form 6s in 2009. Therefore, there should be no regulatory or Commission impediment to the Williams’ proposal being implemented in 2009 at the latest,” Jones added.

The Williams attorney also proposed the following remedy:

*“Once the TAPS Owners provide the required DR&R information, all that has to be done is to take the amount of DR&R funds collected during the period 1977-2004, plus the interest deemed accrued on those funds through 2006 and divide the resulting sum by two. That resulting number of dollars represents the amount that is to be returned to the TAPS shippers during the period 1977-2006.

*“The TAPS Owners can determine the shippers on TAPS during the period 1977-2006; the total volumes shipped by each shipper and then, for each shipper, calculate the percentage of the total volume for all shippers during the period volumes represents. Each shipper would receive its percentage of the returned amount.

*“Likewise, the TAPS Owners can calculate the amount of DR&R expenses to be calculated in their tariffs during the period 2007-2034.”

A FERC spokeswoman said July 22 that the commissioners are not required to act on the rehearing request within a certain time frame. Also, they can vote individually and issue an order based on the outcome or they can wait to vote together at a future meeting, she said.

—Rose Ragsdale

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Pipeline owners ask FERC for rehearing

Owners of the trans-Alaska Pipeline System filed documents July 21-22 outlining plans to comply with a Federal Energy Regulatory Commission decision overturning interstate rates charged to shippers in 2005 and 2006.

The five owners, BP Exploration (Alaska) Inc., ConocoPhillips Alaska, ExxonMobil Production Co., Unocal Pipeline Co. and Koch Alaska Pipeline Co. LLC, also filed a rehearing request, asking the commission to reconsider three separate parts of its June 19 decision that they said raised new issues or concerns in the case.

BP Pipelines also petitioned the commission separately for a rehearing of one part of the decision.

The owners’ objections center on the commission’s directions to the pipeline owners to use a uniform method to establish new shipping rates. Specifically, the owners asked the commission to consider whether it made mistakes:

• By imposing a uniform rate on the owners for 2005 and 2006;

• In calculating TAPS rates for 2006 using the property balances and deferred return balances derived from the TAPS owners’ December 2005 (TAPS Settlement Methodology) filings; and,

• In failing to apply the Proxy Group Policy Statement to the TAPS owners’ compliance filing.

Though they complied with FERC’s order, the owners said they reserved the right to object to various issues raised during the proceedings going forward.

—Rose Ragsdale