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Vol. 12, No. 1 Week of January 07, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

RCA rejects TAPS rate hike

Alaska oil pipeline owners seek to recoup rising costs in higher tariff

Rose Ragsdale

For Petroleum News

The Regulatory Commission of Alaska rejected Dec. 28 revisions to tariffs filed by owners of the trans-Alaska oil pipeline that would more than double the carrier’s 2007 transportation rates for North Slope crude used within the state.

In filings at both the state and federal level in November and December, the pipeline’s owners, BP Pipelines (Alaska) Inc., ConocoPhillips Transportation Alaska Inc., ExxonMobil Pipeline Co., Unocal Pipeline Co. and Koch Alaska Pipeline Co. LLC, cited higher operating costs due to declining oil production on the slope as well as recent pricey changes to TAPS to accommodate lower throughput levels as reasons for the stiff rate hikes.

BP owns a 46.93 percent share of TAPS, while ConocoPhillips holds a 28.29 percent stake and ExxonMobil has 20.34 percent interest. Minority owners Unocal and Koch own 1.36 percent and 3.08 percent, respectively.

The TAPS owners sought to boost tariffs for 2007 to rates ranging from $4.63 a barrel to $5.29 a barrel.

RCA established in-state tariffs at about $1.96 a barrel in 2002, and determined that the lower rate was just and reasonable for the years 2001, 2002, 2003, and beyond until different rates are established by tariff filing or commission action. That decision was upheld by the Alaska Superior Court in 2006 and is currently on appeal to the Alaska Supreme Court.

Tesoro protested in-state revisions

RCA said it reviewed the latest tariff revisions in response to a petition from Tesoro Alaska Co. and found that the TAPS owners did not include in the filings supporting information required by state regulations.

Instead, the owners relied on TAPS Settlement Methodology dating back to 1986 to justify the revisions. However, RCA tossed out the TSM approach in the early 1990s, saying it does not produce just and reasonable in-state tariffs.

Since then, the RCA has switched to using a depreciated original cost method to determine in-state TAPS tariffs.

In the Dec. 28 order, the RCA said it rejected the 2007 tariff revisions just as it has rejected tariff revisions from the TAPS owners for 2004, 2005 and 2006 and for the same reason — lack of supporting information.

Interstate tariff revisions draw protests

The TAPS owners, meanwhile, filed for similar revisions in their 2007 interstate tariffs with the Federal Energy Regulatory Commission, drawing nearly immediate protests from the State of Alaska, TAPS shippers Anadarko Petroleum Corp. and Tesoro Alaska Petroleum and the RCA.

Conoco Phillips, BP and Exxon Mobil told FERC in Washington, D.C., in December that they would start charging $5.29, $5.10 and $4.95, respectively, Jan. 1 to transport from Prudhoe Bay to Valdez a barrel of oil headed for the Lower 48.

The current respective interstate tariffs are $3.78, $4.08 and $3.93 per barrel.

Koch, which also owns the Flint Hills Resources refinery in North Pole, would boost interstate rates to $4.75 from $4.41. Unocal, now a part of Chevron, would increase its tariff to $4.63 from $3.92.

In objecting to the tariff increases, the State of Alaska claimed the interstate tariff revisions violated provisions of the Interstate Commerce Act, which prohibits unjust discrimination and undue disadvantage in rates, were inconsistent with terms of the Interstate Settlement Agreement and included expenses caused by imprudent planning, approval and management of a “strategic reconfiguration” program that the owners undertook. That program, projected to cost about $250 million, racked up a total price tag of $500 million.

Higher costs justified

But the pipeline’s owners countered with their own argument that not only did they not discriminate in revising the tariffs, they also were justified in including the cost of projects completed under the strategic reconfiguration program. These projects include pipeline electrification, supervisory control and data acquisition upgrades, revisions to oil spill contingency plans and a preliminary study of possible changes at the Valdez Marine Terminal.

Pipeline electrification — the largest strategic reconfiguration project and the largest individual investment in TAPS since the initial TAPS construction — will result in the electrification and automation of Pump Stations 1, 3, 4 and 9, and the automation of Pump Station 5.

Strategic reconfiguration will provide significant operational, environmental and cost savings benefits to TAPS, according to the owners. Pumping and instrumentation technologies have improved significantly since the mid-1970s when the TAPS pump stations were installed, and these technological advances, which will now be incorporated into TAPS, offer considerable cost savings. “Additionally, because some TAPS equipment is approaching the end of its useful life, the installation of newer equipment will result in lower maintenance costs. In recognition of these facts, and given the decline in TAPS throughput, the TAPS carriers concluded that the strategic reconfiguration initiative described above would constitute the most cost-effective way of operating TAPS in the future,” the TAPS owners said in FERC filings.

As for the higher costs, the TAPS owners said challenges inevitably arise with a huge program like strategic reconfiguration, and the commission has held that the prudence of management decisions is judged on the basis of what a reasonable pipeline manager would do.

All eyes on pending 2005, 2006 tariffs case

The State of Alaska further asked FERC to investigate the 2007 tariff revisions, noting that its objections mirrored those cited when the TAPS owners filed revisions to their 2005 and 2006 rates. In both 2005 and 2006, the FERC ordered investigations, suspended the tariffs for one day and imposed refund conditions.

TAPS tariffs have been the subject of disputes at both the state and federal levels for years.

The TAPS owners are currently arguing for revisions that they made to their interstate tariffs for 2005 and 2006 before a FERC administrative law judge.

Initial briefs are due in that case Feb. 2.

Shippers Tesoro and Anadarko also protested the 2007 revisions to the interstate tariffs and asked FERC to suspend them pending the outcome of the 2005 and 2006 tariff cases.

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