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Vol. 21, No. 39 Week of September 25, 2016
Providing coverage of Alaska and northern Canada's oil and gas industry

FERC responds to appeal

Companies challenge strategic reconfiguration ruling in DC Circuit Court

ALAN BAILEY

Petroleum News

In a Sept. 15 court filing the Federal Energy Regulatory Commission has asked the U.S. Court of Appeals for the D.C. Circuit to turn down an appeal by the owners of the trans-Alaska pipeline against a November 2015 FERC order disallowing the recovery through oil shipping rates of a substantial portion of the cost of the pipeline strategic reconfiguration project.

Strategic reconfiguration involved the replacement of the original turbine-powered pumps that drove oil through the pipeline by electrically powered pumps, together with the implementation of a more automated pipeline control system. FERC objected to the full cost recovery on the grounds that the project had been imprudent, with major cost and schedule overruns.

At the time of the strategic reconfiguration project five companies owned the pipeline: BP Pipelines (Alaska) Inc., ConocoPhillips Transportation Alaska Inc., ExxonMobil Pipeline Co., Koch Alaska Pipeline Co. LLC and Unocal Pipeline Co.

In appealing the FERC order, the five companies have argued that, by concluding in hindsight that the strategic reconfiguration project had been imprudent, FERC had deviated from a long-standing no-hindsight rule. The agency has long held that basing its determinations on hindsight, on reasoning backwards from how a project turned out, chills managerial discretion, to the detriment of facility ratepayers, the companies argued.

Prior to sanctioning the project, the owner companies had “engaged in an extensive development and approval process based on engineering designs and cost estimates from experienced outside engineering firms, independent review by specialized outside consultants and comprehensive economic analyses performed by the project management team,” the companies told the court. Only when the project moved through detailed engineering and initial construction did scheduling and cost overrun issues emerge. Following approval of cost increases, and with confirmation of the continuing viability of the project, the project moved ahead but subsequently encountered further challenges necessitating a change in the project design to a more sequential approach. This sequential approach involved the individual funding and implementation of each pump station conversion, with additional funding also being required, the companies said.

Pump station 1 costs

At the time that the FERC strategic reconfiguration case began, pump station 1 at the northern end of the pipeline had not yet been upgraded. Although the cost of the pump station 1 upgrade had not yet been incurred and had not, therefore, at that point been included in pipeline oil shipping rates that were under challenge, FERC determined that its order declaring the imprudence of the project would apply to the pump station, the owners commented. But, in making this ruling, FERC pre-judged an issue that at that point had not been properly put before it, thus denying the pipeline owners their due process rights to a fair hearing and “departing without a reasoned basis from FERC’s own precedents,” the owners wrote.

The owners are also challenging a FERC ruling that bars the recovery from pipeline rates of a $113 million property tax bill resulting from a 2010 court decision relating to a 2006 property tax liability. The ruling would impermissibly bar the owners from recovering some of its legitimate costs, the owners say. FERC had argued that this particular tax payment constituted a non-recurring cost involving retroactive ratemaking and resulted from inaccurate tax estimating.

FERC response

In its Sept. 15 response to the pipeline owners’ appeal, FERC has said that, rather than the owners only being aware of flaws in the strategic reconfiguration project in hindsight, the owners should have recognized flaws in the project plan through the exercise of due diligence at the time of project approval. The owners had, for example, retained an engineering firm that lacked Alaska or Arctic experience and a project manager whose previous experience only related to much smaller projects, FERC said. FERC also commented that the companies had ignored concerns raised by employees and had made fundamental errors in project design.

The owner companies, being subsidiaries of major international energy companies, knew or should have known that their cost and benefit estimates for the project were flawed prior to project approval, FERC argued.

FERC also said that it had reversed an initial determination to preclude the owner companies from seeking the future recovery of costs relating to the upgrade of pump station 1. The owners’ claim that the pump station 1 ruling had denied the owners their due process is, thus, premature, FERC said.

The recovery of the $113 million tax liability for 2006 from 2010 pipeline rates would violate the commission’s retroactive ratemaking policy, FERC said. Moreover, as a non-recurring expense, the additional 2006 tax should not have been included in the 2010 cost of pipeline service projections, FERC argued.



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