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How ‘not’ to do an Alaska gas pipeline Legislative pipeline hearings begin with lessons learned from the state’s experience with oil taxation, trans-Alaska oil pipeline tariff Kristen Nelson Petroleum News Editor-in-Chief
Alaska legislators got something of a history lesson in mid-June at the first of three hearings on issues surrounding a proposed natural gas pipeline to take Alaska North Slope gas to market.
Although natural gas tariff issues were the focus of this hearing, royalty value and tax rates were also discussed at the June 16-17 Anchorage hearing by the Legislative Budget and Audit Committee and the Senate Resources Committee.
There was considerable interest expressed in avoiding the royalty, tax and tariff problems the state faced around oil shipment.
Sen. Scott Ogan, R-Palmer, chair of Senate Resources, asked Dan Dickinson, the state’s Tax Division director, about the long-running Amerada Hess case, in which the state and North Slope producers litigated the value of the state’s royalty oil.
Dickinson said that while the Amerada Hess case was about royalties, “there were parallel tax cases that touched many of the same issues.”
The fundamental issues, he said, were value and transportation cost. In the period the case covered, “there was no transparent market for oil.” Today, he said, you can get oil prices from the newspaper, so there would never be a case with “two experts coming in and one saying this oil was worth $22, and the other expert coming in and saying, no, it was worth $35.”
And “those transparent markets already exist for gas,” he said. There will be “conflicts around the margin” about gas, he said, but a case like Amerada Hess over the value of the resource wouldn’t occur: “I think transparent markets have cleared the way for us.”
Transportation costs were the other major item in the case, he said, and the problem there was that specifics hadn’t been set out in advance. “I think the one thing that we’ve learned from that is it’s better to figure that stuff out beforehand, if we can, than it is afterwards.”
The problem arose from the language in the state’s leases, which only laid out “a very general statement of principle, if you will, and both sides were arguing that they had met that.”
With large amounts of money involved, and trying to project out into the future, “I don’t think you can ever do a perfect job of it,” Dickinson said, but he also said the goal is to winnow down the amount of conflict you have so that it’s in the $10 million to $30 million range, not in the $100 million to billion-dollar range issues the state faced over oil. Oil pipeline tariff issues The long-standing dispute over the oil pipeline tariff also got a review.
Nan Thompson, out-going commissioner at the Regulatory Commission of Alaska, told legislators that beginning during pipeline construction there “was a lot of dispute about what rates would be charged for shipment” on the trans-Alaska pipeline. There was fact-finding before the Alaska Public Utilities Commission (the predecessor of the Regulatory Commission of Alaska) and there was some 10 years of litigation.
Then the parties settled, and the settlement was presented to the commission, which accepted it, but without reviewing it. The commission did say that if there was ever a protest it would revisit the settlement.
One of the shippers protested in 1997, and in 2002, after lengthy hearings, the commission ruled that the rates were too high.
The difficulty in the case, Thompson said, “was that when the original settlement was approved, they never had clear pegs for some of the numbers.” The commission “had not made a finding that, for example, the amount of depreciation … was just and reasonable. Nobody knew.”
The parties to the settlement agreed on the numbers, she said, “but the agency hadn’t done what it was supposed to do under statute and made a just and reasonable finding.”
The commission did a finding on just and reasonable numbers beginning in 1997, she said, with the biggest adjustment in the rate of depreciation. She noted that the commission’s decision is under appeal. Don’t go there again Thompson said she thought the lesson learned from evaluating 20-year old rates, “and I think probably even the carriers would agree, (is) that going through that process is something they would want to avoid a second time.”
Information was stale by the time the commission looked at the issue beginning in the late 1990s, she said, noting that when the settlement was accepted, the commission was “under enormous pressure at the time from folks who had been litigating for 10 years and said look, we agree it’s all over, don’t look at this.”
That, she said, created a problem which took twice as long to wind up.
What the commission found when the rates were appealed, she said, was that when cost-based rates were compared to the settlement rates, “the cost basis was significantly lower.”
When the commission heard the rate appeal, they didn’t find that numbers presented by the pipeline owners were supported, and the numbers didn’t provide the basis for the “just and reasonable” rates required under state statute for shipment of the oil that is moved within Alaska, she said.
Thompson said that in hindsight, had she been a commissioner when the settlement was presented, she “would have argued that the commission should have looked at that under those same standards of just and reasonable at the time,” and not just accepted it “because everybody agreed.”
Transparency, she said, is important in rates, and that wasn’t available in the settlement.
So is rate adjustment over time. In a normal utility or pipeline setting, “you come in and adjust your rates every four or five years,” she said, and not try to guess what rates should be 20 years in the future. Brena: ownership the problem Robin Brena, a partner in Brena Bell & Clarkson, and the attorney who appealed the oil tariff on behalf of Tesoro Petroleum, had a somewhat different take on what should have been done when the parties, including the state of Alaska, agreed to the settlement in the 1980s.
Brena said the fact that pipeline shippers owned the trans-Alaska oil pipeline was the problem: “If you have an alignment of ownership between production and transportation so that people are paying themselves the tariff rate, then they will charge the highest possible tariff rate they can, because they save a quarter in royalty and severance taxes on every dollar they overcharge themselves,” he said.
High rates are also a benefit to the owners because they profit from non-pipeline owners “that need to use this monopoly infrastructure.”
Brena said alignment of production and ownership is “the game that’s afoot” and he said it is “the game that we haven’t figured out yet well enough.”
On the other hand, “if the rates are just and reasonable, if regulation works, ownership doesn’t matter,” because then the return the owners get will be fair,” he said. “It only matters who owns it if there’s an opportunity for excessive return.” State should have litigated The state should have litigated, Brena told the legislators. It had already spent $35 million when it settled, he said, and it should have litigated the tariff, not agreed to the settlement.
He also noted that there was no re-opener in the settlement, no opportunity to go back in “if any of the assumptions in the settlement proved wrong.”
So how should the state get rates right in the future?
The state needs to make sure there is “a transparent and informed process among all financially impacted participants,” he said. Rates should be cost-based, just and reasonable, he said, and need to be predictable, “in link with the actual costs.”
He noted that independents were recently asked if they wouldn’t prefer certainty over predictability. To a company, he said, the independents active in Alaska said “no, we want predictability. We know how to run our models. We know what the costs of providing service are. We do this all over the United States.
“We don’t want the certainty of a bad deal; we want the predictability of cost-based rates.”
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