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 reasonableThe 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.