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Vol. 12, No. 21 Week of May 27, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

TAPS rates too high

FERC judge says Alaska pipeline owners double-dipped to justify tariffs

Rose Ragsdale

For Petroleum News

A federal judge May 17 ordered owners of the trans-Alaska oil pipeline to slash nearly in half tariffs they propose to charge for crude shipments, a move likely to generate substantially higher revenues for the State of Alaska and spur oil and gas activity on the North Slope.

The ruling by Administrative Law Judge Carmen Cintron of the Federal Energy Regulatory Commission affects tariffs proposed by the five owners of the 800-mile pipeline from 2005 forward. FERC’s five commissioners are expected to review the case and render a final opinion by year’s end or in early 2008.

The state, Anadarko Petroleum Corp. and Tesoro Alaska Co. asked FERC to require the pipeline owners, referred to in the FERC proceedings as the “carriers,” to reduce rates for oil shipments to about $2 a barrel from rates of about $3.71 in 2005 and $3.97 in 2006.

The major owners of the pipeline also own the three North Slope oil producers, BP Exploration (Alaska) Inc., ConocoPhillips Alaska and ExxonMobil Production Co. Unocal Pipeline Co. and Koch Alaska Pipeline Co. LLC also control minority interests in the line, which supplies about 17 percent of the nation’s crude supplies.

During the past two and a half years, both sides have argued the case with the help of a small army of lawyers.

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.

As time passed, proposed 2006 and 2007 tariffs have been added to the case.

Cintron agrees tariffs ‘excessive’

In a detailed, 116-page decision, Cintron concluded that Anadarko, Tesoro and the state 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 their case and ending with whether RCA’s lower rates violated the ICA.

“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.

Cintron said the carriers’ contention that they have to start from the beginning of the trans-Alaska oil pipeline and that revenues they have already recovered don’t count in calculating future tariffs “is not given any weight.”

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 the 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.

Judge finds carriers haven’t proved line ‘riskier’

A key difference was Cintron’s rejection of the carriers’ argument that a risk premium of 2 percent, or 200 basis points, should be added to their return on equity because the trans-Alaska pipeline is “riskier than any Lower-48 oil pipeline.”

“The Carriers have failed to prove that operating TAPS is riskier than the operations of other oil pipelines,” Cintron wrote.

The Carriers also asserted that the risks the pipeline faced during construction merits a 2 percent risk premium since the challenges and risks that TAPS faced in the past are relevant in the present.

Cintron rejected this argument, noting that case law indicates a “risk premium inquiry is forward-looking.”

Cintron also said the carriers gave no reasonable explanation as to why their rates should vary significantly when their costs are virtually identical. She agreed with FERC’s staff that a uniform rate is more reflective of the cost to ship a barrel of oil on the pipeline, and is in line with the RCA’s single rates for shipments on the line. The staff also argued that a uniform tariff would help alleviate frequent problems with over and under recoveries by the carriers.

Cintron ordered the carriers to adopt a single, uniform tariff.

DR&R: weighted average nominal after-tax cost of capital most reasonable

The judge differed with Anadarko and Tesoro’s calculation of funds, plus earnings, that the carriers have collected to pay for dismantling and removing the pipeline when it is no longer operational. The useful life of the pipeline recently was extended by the owners from 2011 to 2034.

Cintron noted that the owners commingled the so-called “DR&R” monies with other corporate funds and freely invested them as they saw fit. The shippers said the DR&R funds, plus interest totaled about $17.2 billion, based on their parent companies’ ROE rates. However, the owners argued the total is closer to $2.5 billion, based on earnings from U.S. securities. A State of Alaska witness also presented an estimate of $5.64 billion, based on a weighted cost of capital.

Cintron said the federal rate wasn’t credible since the owners did not invest the DR&R funds in government securities and the evidence showed the weighted average nominal after-tax cost of capital was the most reasonable rate for reflecting future earnings on DR&R monies already collected.

She also ordered the carriers to give a full accounting of the DR&R funds, plus their past earnings and to keep that accounting up to date going forward.

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Shippers, state praise ‘first step’

Alaska officials and shippers Anadarko Petroleum Corp. and Tesoro Alaska Co. have hailed a federal judge’s decision to lower tariffs for the trans-Alaska oil pipeline as “important” and beneficial.

But the ruling by Administrative Law Judge Carmen Cintron of the Federal Energy Regulatory Commission “is nonbinding and reflects her opinion only,” said Daren Beaudo, a spokesman for BP Exploration (Alaska) Inc., which owns slightly more than 50 percent of the pipeline.

“The commission has yet to decide the case. This is still in the early stages, and the decision when it comes likely will be appealed by one or more of the parties,” Beaudo said May 23.

“It is an important issue, and we are confident that we’ve complied with our agreement with the state and that we’ve followed the law,” he added.

FERC’s five commissioners are expected to review the case and render a final opinion by year’s end or in early 2008.

Gov. Sarah Palin immediately praised the ruling May 17, saying that 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.

State could collect $600 million

“It’s certainly a good thing, both in terms of moving forward with AGIA and oil revenues for the state,” said John Iverson, director of the Division of Tax at the Alaska Department of Revenue.

If Cintron’s ruling prevails, state auditors estimate Alaska will collect millions.

“We’re looking at the assumption that the case will be resolved in 2010,” Iverson said. “The refund amount, itself, to the state would be around $500 million, with about $100 million more in interest.”

The figures are based on state auditors’ estimates of tariff overcharges from 2005 through 2008.

For non-owner oil shippers on the pipeline, the judge’s decision will significantly improve the economics of doing business in Alaska, and in turn, significantly improve the state’s oil and gas investment climate,” said Antony Scott of the Alaska Department of Natural Resources Division of Oil and Gas.

“The difference is on the order of $3 a barrel. It’s the equivalent of raising a company’s stress price for making investment decisions. If a company decides to do business based on a stress price of $30, then $3 would be 10 percent. And that’s a big deal!” he said. Scott recalled Conoco Inc.’s chairman and CEO complaining in the mid-1990s about the TAPS tariffs before that company pulled out of Alaska after developing the Milne Point field.

Conoco sued the pipeline owners over the tariffs, and did not return to Alaska until it merged with Phillips Petroleum Co. and became one of the pipeline’s owners.

Scott said industry executives often question him “intensely” about the tariffs and their future direction.

Shippers make their point

“Judge Cintron’s ruling supported our contention that the TAPS rates were excessive,” said Mark Hanley, a spokesman for Anadarko. “Compared to this year’s (tariff), which on average is $5.11 a barrel, that’s a considerable difference. It’s a big first step.

The ruling also reinforces the Regulatory Commission of Alaska’s decision several years ago to lower in-state tariffs to the $2 a barrel range, Hanley said May 22.

The five pipeline owners appealed the RCA decision, which was upheld in a lower court and now awaits a decision by the Alaska Supreme Court.

—Rose Ragsdale