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Vol. 12, No. 13 Week of April 01, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

Petro Star argues view of TAPS tariffs

Minor player supports RCA’s in-state rates, urges damages instead of refunds if 2005 and 2006 interstate rates are ruled excessive

Rose Ragsdale

For Petroleum News

Petro Star Inc., a minor player in the drama unfolding in Washington, D.C., over tariffs charged by owners of the Trans-Alaska Pipeline System, offered a somewhat different take on how federal regulators should resolve the dispute.

The owner of two small refineries in North Pole and Valdez, Petro Star opposes the TAPS carriers’ bid to get federal regulators to overturn lower in-state tariffs set by the Regulatory Commission of Alaska. The refiner also wants TAPS shippers Anadarko Petroleum Corp. and Tesoro Alaska Co. to receive damages instead of rate refunds if they should win their complaint that the proposed 2005 and 2006 TAPS interstate rates are excessive.

Petro Star is a subsidiary of Alaska Native regional corporation Arctic Slope Regional Corp. The company’s refineries receive petroleum from TAPS, distill the oil, retain part of it to use as refinery fuels or to manufacture fuel for sale, and return the remaining oil to TAPS.

In a reply brief filed March 21 with the Federal Energy Regulatory Commission, Petro Star addressed two issues in the case, and offered its somewhat different perspective on the dispute.

The rate increases proposed by the TAPS carriers for 2005 and 2006 are based on a 1985 settlement between the carriers and the State of Alaska, which established a method for determining shipper charges for transporting crude on the 800-mile trans-Alaska oil pipeline.

The FERC suspended the proposed 2005 and 2006 rate increases, but allowed them to go into effect subject to refund.

Petro Star argued that federal law does not allow the FERC to prescribe “just and reasonable” rates for 2005 and 2006. Instead, the FERC may conduct a hearing and suspend a proposed increase for up to seven months. After that, pipeline carriers bear the burden of proving that their increases are just and reasonable.

If the carriers fail to make their case, then the FERC has the authority to order a refund and to reinstate the unchallenged 2004 rates, wrote Petro Star’s Washington, D.C., attorneys, Patricia F. Godley and Jonathan D. Simon and their legal counsel in Anchorage, Richard A. Curtin.

“Thus, in this case, if the commission determines that the rate increases in the 2005 and 2006 TAPS rates as filed by the carriers are unjust or unreasonable, any refunds ordered by the commission under (the Interstate Commerce Act section 15(7)) may not exceed the difference between the newly filed increased rates and the 2004 rates that they were proposed to replace,” Petro Star wrote.

Refunds would favor Tesoro

More importantly, argued the refiner, FERC should not order refunds if it decides the rate increases were excessive, but instead should grant damages to the two shippers.

Why?

Because FERC would undermine its own strong policy favoring settlement, and granting refunds would give Tesoro an unfair competitive advantage over other Alaska refiners, Petro Star claimed.

“The 2005 and 2006 rate increases filed by the carriers did not come out of the blue. Rather, they were the unsurprising products of a straightforward application of the TAPS Settlement Methodology. The commission approved the TSM as “fair and reasonable and in the public interest” as a method for establishing TAPS rates through 2011,” the attorneys argued.

Significant benefits would accrue to the public if the settlement runs its full term, especially resolution of the carriers’ dismantling, removal, and restoration obligations — whereas prematurely ending the settlement could compromise the availability of these benefits, according to Petro Star.

Moreover, damages are available to Anadarko and Tesoro if they prove that the proposed 2005 and 2006 TAPS rates are unjust and unreasonable, the attorneys wrote.

Using generalized refunds rather than damages or reparations to make Anadarko and Tesoro whole would have very different collateral effects, Petro Star contended.

Citing the economic importance of TAPS and Alaska North Slope crude, particularly in Alaska, Petro Star argued that Alaska refiners — in contrast to typical practice elsewhere — frequently purchase crude oil under netback contracts, such that interstate TAPS rates are subtracted (along with other transportation adjustments) from reference prices based on crude oils available for sale outside of Alaska.

“This practice means that a decrease in the interstate TAPS rates may raise the price that an Alaska refiner must pay at Pump Station No. 1 for ANS crude oil,” the refiner wrote.

Generalized refunds to all TAPS shippers — as opposed to reparations or damages remedies awarded specifically to Anadarko and Tesoro — may thus retroactively raise the prices that Tesoro’s competitors in Alaska paid for ANS crude oil in 2005 and 2006, the attorneys warned.

To the extent that those refiners are exposed to retroactive crude oil price increases if refunds are ordered, and Tesoro has made special arrangements with Anadarko to protect itself from TAPS’ rate impacts, Tesoro would reap an unfair competitive advantage if refunds are ordered, according to Petro Star. In contrast, damages would provide Tesoro with that relief to which it may be entitled without collateral impacts on Tesoro’s competitors, it further argued.

Lower in-state rates are lawful

Petro Star disagreed with the carriers’ contention that the in-state rates for TAPS established by the RCA violate federal law.

The TAPS carriers base their entire argument for this claim on a legally flawed assertion that they provide exactly the same service on a length-of-haul basis to both interstate and intrastate shippers and that there are no underlying economic or cost justifications for a disparity between interstate and intrastate rates on TAPS, the refiner said.

The settlement agreement, of which TSM is a central component, is properly recognized as a contract, and abiding by and upholding long-term contracts are the indispensable cornerstones of capitalism, Petro Star argued.

“Simply put, TSM was a unique methodology carefully crafted to accommodate the long-term goals of the carriers and the state. That accommodation in itself is a significant underlying economic justification for the divergence of interstate rates from intrastate rates that may have been established by using a traditional cost methodology.

“In contrast, the RCA established rates based on a straightforward trended original cost methodology, rather than shaping the long-term rate profile for policy reasons as did the Commission-approved TSM.

Different rates are not surprising and “there certainly is no justification for the carriers’ attempt to bootstrap that difference into commission preemption of Alaska’s sovereign right to regulate its intrastate commerce,” Petro Star argued.

The carriers’ contention that, because they presumably always provide exactly the same service to both interstate and intrastate shippers, also is insufficient to justify commission preemption of state ratemaking under federal statute, the refiner added.

TAPS owners fail to prove discrimination

The fact that in-state rates may lawfully vary from interstate rates does not, of course, dispose completely of the carriers’ arguments that lower in-state rates unduly, unreasonably or unjustly discriminate against out-of-state refiners in crude oil or product markets, the attorneys noted.

Though the TAPS owners acknowledge that they must prove discrimination, Petro Star said their very testimony actually undermines their own argument.

The carriers contend that Anadarko’s crude oil marketing manager confirmed that “(t)he lower in-state rates set by the RCA give in-state refiners an advantage in competing with West Coast refiners to acquire ANS crude, the attorneys argued.

“If anything, however, is to be learned from this scenario, it is that all things are not equal. Tesoro purchases crude oil at Pump Station No. 1 and pays TAPS tariffs. West Coast refiners — those that are not affiliated with the TAPS Carriers — more typically purchase crude oil and pay delivered, West Coast market-based prices,” they wrote.

ANS crude destined for West Coast refiners travels directly to the West Coast from Valdez on large tankers. ANS crude destined for Tesoro’s Alaska refinery travels from Valdez to Nikiski by tanker, as does vacuum gas oil made in Nikiski and then transported to the West Coast.

“These somewhat convoluted operations undoubtedly allow Tesoro to use its scattered refining resources synergistically, but to conclude that Tesoro’s strategy transforms in-state tariffs into an undue competitive advantage vis-ŕ-vis West Coast refiners requires a leap of faith as well as the bizarre assumption that refiners’ costs rather than the market determine West Coast gasoline prices, Petro Star wrote.

The carriers’ jet fuel argument similarly is based on unsupported assumptions, including the assumption that jet fuel would likely be brought into Alaska from the West Coast if in-state TAPS rates weren’t so low, according to Petro Star.

In fact, Energy Information Administration statistics show the West Coast and Alaska consistently are net importers of “kerosene-type jet fuel” from foreign countries,” the refiner added.



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