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Vol. 13, No. 25 Week of June 22, 2008
Providing coverage of Alaska and northern Canada's oil and gas industry

FERC lowers tariff

Commission upholds ’07 TAPS ruling; outlines basis for reasonable rates

Rose Ragsdale

For Petroleum News

The Federal Energy Regulatory Commission June 19 affirmed a May 2007 administrative law judge ruling that interstate rates charged on the Trans-Alaska Pipeline System in 2005 and 2006 were not just and reasonable and ordered limited refunds to shippers who had overpaid. The order, which the five-member commission approved without comment, establishes the basis for new just and reasonable rates that will go into effect on a prospective basis.

FERC said the order affirms, clarifies and modifies an initial decision that Judge Carmen A. Cintron issued May 17, 2007, regarding the pipeline carriers’ 2005 and 2006 interstate rate filings. The order affirms Cintron’s finding that pipeline owners BP Exploration (Alaska) Inc., ConocoPhillips Alaska, ExxonMobil Production Co, Unocal Pipeline Co. and Koch Alaska Pipeline Co. LLC failed to prove the proposed rate increases in their 2005 and 2006 tariffs were just and reasonable, and ordered limited refunds to all trans-Alaska oil pipeline shippers.

The order also clarifies provisions in Cintron’s order regarding the appropriate dismantlement, removal and restoration expenses and modifies the return on equity component of the capital structure, consistent with FERC’s new policy on proxy groups for pipelines.

The new rate, based on FERC Opinion No. 154-B methodology, is prospective, and will be determined after the TAPS carriers make a compliance filing. The refunds for 2005 and 2006 are limited to the difference between the 2005-06 proposed rates and the 2004 rate, the commission said.

FERC decision culminates prolonged dispute

The Commission’s order had not been released to the public by press time June 19.

But news of the decision comes more than a year after Cintron’s ruling and three and a half years after both sides began arguing the case. Over time, proposed 2006 and 2007 tariffs were added to the case, along with numerous ancillary questions.

Initially, the shippers challenged the carriers’ 2005 interstate tariffs, but every conceivable aspect of the issue was soon drawn into the proceedings.

The State of Alaska protested the 2005 interstate tariffs, charging discrimination based on provisions of the Interstate Commerce Act, after the Regulatory Commission of Alaska reduced in-state tariffs for the pipeline by more than 50 percent.

The carriers countered with a defense that relied on the strength of a settlement agreement reached with the State of Alaska in 1985 that established a method for calculating tariffs for the pipeline. They also asked FERC to overturn the RCA ruling, claiming the lower in-state rates and subsequent attempts to block increases in interstate tariffs contradicted terms of the 1985 pact and violated provisions of the ICA.

Law judge: Tariffs were ‘excessive’

The FERC law judge concluded that Anadarko Petroleum Corp., Tesoro Alaska Co. and the State of Alaska, essentially got it right when they argued the tariffs were “excessive.”

The judge outlined her reasoning in more than 250 separate points, starting with which side must prove its case and ending with whether RCA’s lower rates violated the Interstate Commerce Act.

“The crux of the matter,” wrote Cintron, “is that the carriers must recognize the previous recoveries of their investment, otherwise there will be an unjust and unreasonable double recovery,” she wrote. “The carriers have presented no fact in the case that calls for an opposite conclusion.”

She noted that there was considerable difference between the pipeline owners’ $1,751.18 million revenue requirement for computing the tariffs and Anadarko-Tesoro’s revenue requirement of $647.32 million.

The judge further endorsed the argument of FERC’s trial staff that “just and reasonable rates cannot result where any double recovery is allowed,” calling the reasoning “commonsensical” and impossible to ignore.

Cintron found that actual amounts collected by the carriers must be used to calculate the tariffs, saying the approach is consistent with a FERC precedent that disallows double recovery of investment.

She said Anadarko and Tesoro’s calculations would be the basis for her ruling, with minor variations in return on equity and tax.

Decision will bring refunds to state coffers

Reaction to Cintron’s ruling in May 2007 was favorable from the shippers and Alaska officials. They have hailed Cintron’s decision to lower tariffs for the trans-Alaska oil pipeline as “important” and beneficial.

Gov. Sarah Palin praised the law judge’s ruling, saying it “reaffirms the need to ensure low tariffs on oil and gas lines.”

“This is why we spent a great deal of time working on structuring the Alaska Gasline Inducement Act to maximize value for the state and ensure low tariffs. We’re pleased with the FERC decision, and we look forward to continued progress on this issue,” Palin said.

The Division of Tax at the Alaska Department of Revenue estimated that the State will collect about $500 million in refunds and some $100 million in interest based on final resolution of the case in 2010.

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