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Vol. 14, No. 1 Week of January 04, 2009
Providing coverage of Alaska and northern Canada's oil and gas industry

No interstate rate hikes

Carriers propose no ’09 TAPS rate increases; FERC rejects rehearing arguments

Rose Ragsdale

For Petroleum News

As the dispute over interstate shipping rates for the Trans Alaska Pipeline System before the Federal Energy Regulatory Commission heads into a fifth year of contention, attorneys for the owners and shippers continue to challenge, defend and respond to various aspects of the case, with no sign yet of a final resolution.

The trans-Alaska oil 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.

Koch Pipelines (Alaska) LLC was the only one of five owners of the 800-mile conduit that asked FERC for a 2009 interstate rate increase, submitting an application Dec. 1 to boost its rates to $6.36 per barrel.

The Kansas-based carrier, which owns a small percentage of the pipeline, subsequently withdrew the rate increase request Dec. 10, but not before shipper Anadarko Petroleum Corp. filed a strenuous protest, noting that Koch’s rate request amounted to more than three times the $2.02 per bbl rate that FERC deemed “just and reasonable” in its Opinion No. 502 issued June 20.

BP Pipelines (Alaska) Inc. submitted an informational filing Dec. 1 regarding its 2009 interstate tariff, but it and the other three carriers, ConocoPhillips Alaska, ExxonMobil Production Co. and Unocal Pipeline Co., wrote letters to the Commission, saying they would not seek rate increases in the new year.

FERC responds to rehearing requests

In Opinion No. 502, FERC upheld an initial decision issued by the federal agency’s presiding administrative law judge in May 2007 concerning the 2005 and 2006 interstate rate filings by owners of pipeline. The FERC judge found that the proposed interstate tariffs for 2005 and 2006 are “not just and reasonable,” determined the components for establishing the rates for 2005 and 2006 and ordered limited refunds.

The five-member commission affirmed the judge’s ruling in Opinion No. 502 on all issues, but clarified and modified the decision on certain points. It also directed the pipeline owners to make a compliance filing establishing just and reasonable rates for 2005 and 2006.

In response to objections and protests from the owners, FERC issued another order Nov. 20 in which it rejected most of the arguments raised by the carriers and responded to the carriers’ compliance filing and objections by the shippers.

The commission summarized the actions as follows: The carriers, as well as BP and Williams (now Koch), “... filed requests for rehearing of Opinion No. 502. On August 5, Anadarko filed an answer to the carriers’ and BP’s rehearing requests. On August 14, BP filed a reply to Anadarko’s answer. On August 15, the carriers filed a response in opposition to Anadarko’s answer.”

Generally, the parties requested rehearing of the commission’s failure to grant refunds for Dismantlement, Removal & Restoration expenditures; imposition of a uniform rate; use of the property balances and deferred return balances from the TAPS Carriers’ December 2005 (TAPS Settlement Methodology, or TSM) filings; and approval of the proxy group used for the return on equity, or ROE, determinations.

DR&R costs are speculative

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

The commission initially 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.

In its latest order, the commission reaffirmed that ruling, saying the DR&R costs “are speculative” and to order refunds would be “premature,” but also noted that the finding does not preclude the possibility of the federal agency issuing refunds when such collections of DR&R are realized and quantified.

Uniform rate works with pooling

The commission rejected the carriers’ numerous arguments that a uniform rate, among other things, violates the Interstate Commerce Act. Shipper Anadarko also presented several arguments refuting the carriers’ contentions.

FERC noted that nothing in the statute prevents the federal agency from setting a uniform rate for identical service, as long as the uniform rate is just and reasonable. The panel also recognized BP’s concerns that there may be under-recovery associated with a uniform rate, and concluded that a pooling mechanism outlined in an earlier rate agreement among the carriers could address these concerns.

The commission ordered the pipeline’s owners to modify their governing operating agreement to include an all-inclusive pooling mechanism in determining uniform rates aimed at remedying chronic under-recovery of costs by BP.

FERC then ordered the carriers to refund to shippers the difference between their 2004 interstate rates and the tariffs they charged in 2005 and 2006, within 30 days of its order, and to file a refund report within 30 days thereafter.

A subsequent request for rehearing, filed by three of the carriers on Dec. 22, effectively stopped the clock on the refunds, according to FERC spokeswoman Tamara Young-Allen.

Refunds will not be issued “until all parties have exhausted their appeals,” she told Petroleum News Dec. 29.

Property calculations are just

In defense of its use of the property balances and deferred return balances from the TAPS Carriers’ December 2005 (TAPS Settlement Methodology, or TSM) filings, FERC said it disagreed with the carriers’ argument that the commission erred in calculating TAPS rates for 2006 using the property balances and deferred return balances derived from the TAPS Carriers’ December 2005 TSM filings, despite the fact that the 2005 rates set by the commission were determined under Opinion No. 154-B and not under the TSM.

No merit in proxy arguments

Lastly, on the approval of the proxy group used by the administrative law judge for the return on equity, or ROE determinations, FERC said it found no merit in the carriers’ argument that because the panel’s policy statement was issued after the selection of the proxy group, the commission should hold a paper hearing to select a new proxy group consistent with the policy statement’s mandates.

In affirming the judge’s capital structure, ROE and cost of debt findings, the commission approved the judge’s use of a proxy group consisting entirely of master limited partnerships for the purposes of determining the carriers’ ROE.

The commission said the law judge’s determinations are appropriate to the carriers’ risk.

FERC rejects Exhibit 2

The pipeline owners submitted a compliance filing July 21 with two exhibits. The filing drew protests from shippers Anadarko and the State of Alaska for several reasons and a motion for clarification from Flint Hills.

The commission accepted the rates in Exhibit 1 of the carriers’ filing, saying they complied with Opinion No. 502. However, the panel rejected the proposals in Exhibit 2 because they are based on “actual” data that is not in the record.

“We agree with Anadarko that it is not appropriate to use the actual data reported in the TAPS Carriers’ 2006 Form 6 reports because this data has not been subject to review or challenge by other parties. Additionally, as Flint Hills points out, which data the TAPS Carriers use to calculate the rates for 2005 and 2006 is ‘moot’ because both calculations produce rates for 2005 and 2006 that are below the 2004 rate refund floor,” the commission said.

2007 and 2008 rates pending

In response to Flint Hills’ request, FERC also clarified that the carriers’ compliance filing calculates rates for 2005 and 2006 and prospectively thereafter, but did not calculate rates for the 2007 and 2008 rate periods.

The TAPS Carriers’ 2007 and 2008 rates are pending in separate dockets held in abeyance pending the outcome of this proceeding.

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