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Vol. 11, No. 4 Week of January 22, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Judge backs RCA on tariff

Ruling rejects arguments against agency-imposed rates by TAPS owners, state

Rose Ragsdale

For Petroleum News

An Alaska Superior Court judge upheld a 2002 decision by the Regulatory Commission of Alaska that rejected tariff rates set for in-state shippers by owners of the trans-Alaska pipeline system as being “excessive.”

In a decision issued Jan. 18, the court also endorsed the RCA’s further rejection of rate-setting methodology adopted by the eight companies that originally owned the 800-mile trans-Alaska oil pipeline system. That formula resulted from a settlement with the State of Alaska in 1985. The RCA said the in-state TAPS rates were not “just and reasonable” under Alaska’s Pipeline Act.

In its place, the RCA imposed its own ratemaking formula, a methodology based on straight-line depreciation of TAPS assets, rather than accelerated depreciation the commission said TAPS’ owners used in their TSM rate-setting.

For example, the RCA calculated the owners’ un-recovered investment, or rate base, in TAPS at year-end 1996 as being $669 million using the straight-line formula. By contrast, the owners calculated their 1996 rate base as being $3.2 billion based on the 1985 settlement formula.

Potential $9.9 billion windfall

Notably, the RCA observed that under the TSM methodology, the TAPS owners potentially collected a $9.9 billion windfall through excessive rates. However, the agency’s rules prohibit retroactive ratemaking for past-year under-or over-collections.

The case originated from a protest by Tesoro Alaska Co. and Williams Alaska Petroleum Inc., two in-state shippers, in 1997 to RCA’s predecessor agency, the Alaska Public Utilities Commission. Five years later after extensive administrative proceedings, the RCA issued Order 151 in November 2002. A month later, the TAPS owners — now reduced to five companies through mergers and acquisitions — and the State of Alaska appealed the order in Alaska Superior Court in Anchorage.

The pipeline owners challenged Order 151 on procedural grounds, claiming APUC’s refusal to remove from the case staff economist Antony Scott, who allegedly had demonstrated a bias against the TAPS owners in the text of his masters’ thesis and may have unduly influenced the APUC’s three commissioners.

Court issues lengthy decision

Alaska Superior Court Judge John Suddock rejected the argument in a lengthy decision.

“The TAPS Carriers urge that the unusual fact of Scott’s on-point graduate thesis creates an appearance of agency prejudgment that should offend Alaska due process. They characterize the thesis as instinct with fact-finding. But graduate student Scott did not decide the butler killed the cook with a candlestick in the library. Rather, he took publicly available data regarding pipeline costs, revenues, taxes, capital structures, and rates to return, plugged them into standard ratemaking methodology and concluded that TSM-generated revenues exceeded the standard regulatory paradigm. His thesis was primarily an exercise in analysis, not fact-finding,” Suddock wrote.

The TAPS owners also complained that RCA abandoned precedent in establishing its own rate-setting formula and improperly treated risk factors and calculated rates of return and amounts of presumed equity and debt that financed pipeline construction. The State of Alaska joined the pipeline owners in appealing some points but not others.

Judge denies all complaints

Suddock denied all of the complaints in a 51-page decision as well as any other points cited in the appeal but not specifically addressed as lacking merit. Among his conclusions:

The TAPS owners complained that the hypothetical capital structure adopted by the RCA and based on Tesoro’s model for the years 1997-2000 included too much debt and too little equity. Since TAPS has no capital assets aside from the pipeline system, the owners argued that a composite of the capital structures of their parent oil-producing companies should be used, resulting in presumed owner equity in the pipeline of 75-77 percent from 1997-2000, or on average 68 percent from 1968-2000. Tesoro’s model was based on a proxy group of standalone oil and gas pipeline companies operating in other states, which averaged 50.5 percent equity. The court concluded that the RCA made a plausible decision to use operating pipeline companies rather than oil-producing and refining companies in its calculations.

On the charge that the RCA considered some components of the tariffs in isolation rather than in the TSM context, the court said the commission acted properly to guard against the danger of forcing shippers to twice compensate the TAPS owners for their investment in the pipeline. The owners and the state argued that RCA’s factual finding that TAPS actually collected TSM depreciation over a 20-year period violated a public policy against use of settlement negotiations in subsequent proceedings involving settling parties. The court agreed with Tesoro and Williams that the rule is irrelevant. “By way of analogy, if two competitors settle a dispute by agreeing to fix prices, a victimized consumer is not precluded from proving the bargain to establish damages,” Suddock wrote.

Project risky only in planning stage

As for assessing a risk premium in TAPS tariffs, the court agreed with the RCA that the risk factor was relevant in the pipeline’s planning stage only. In other respects, the RCA found TAPS less risky than an average pipeline. The court said the RCA’s risk analysis was extraordinarily thoughtful and complete, and merits the deference courts must apply when reviewing complex decisions implicating agency expertise.

Finally, on complaints about the RCA’s imposition of a unitary rate and interest and its order of refunds to shippers, the TAPS owners and the state argued that the regulators departed from precedent and imposed unfair restrictions on rate-setting. The RCA invited the TAPS owners to supply cost data to support their contention that higher tariffs were appropriate. The owners persisted with theoretical arguments and provided no cost data to support their contentions. The court concluded that it should defer to the RCA’s expertise in interpreting state laws governing the setting of tariffs and interest rates.

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