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State, feds mum on TAPS tariff issue Attorney Robin Brena lays out refiner’s side of dispute over appropriate transportation rate; says state of Alaska stands to gain $2.5 billion-plus Ellen Lockyer PNA Contributing Writer
Federal Energy Commission Chairman Patrick Wood III met with Regulatory Commission of Alaska Chair Nan Thompson in late January during a brief visit to Alaska. Wood afterward spoke to an audience of oil and gas industry leaders.
“She and I (just a few moment’s ago) commemorated on paper a memorandum of understanding between our agencies to in fact codify — for the days after I’ve moved on and the days after she’s moved on — that our agencies, regardless of who’s running them … regardless of the fact that they’re good friends or not, can in fact continue to have the joint operational relationship over the pipeline industry that Alaska and the federal government are uniquely situated to do.”
Wood said it’s ‘real important’ to “make sure that in trying to keep transaction costs, i.e., netback or customer costs down in this industry that we want to make sure that the role of government is appropriate but is as efficient as it can be.” He said FERC is committed to working closely with the state of Alaska and the RCA to make sure that in their joint oversight of the oil business as well as other energy producers that ‘we work together as friends.’
Given FERC’s general goals — promoting a secure, high quality infrastructure for the energy industry; fostering nationwide competitive energy markets and protecting customers and the market through vigilant and fair oversight of transitioning energy markets — Wood’s words could apply to any number of issues, although all ears present were waiting to catch the least intimation toward FERC involvement in the on-going dispute between Trans-Alaska Pipeline System owners and two Alaska refiners.
“We’ll see …we’ll see where it ends up. I’m just gonna keep real neutral on that one, I’ll just tell ya,” Wood told reporters in a good-natured Texas twang after his talk. “We haven’t been asked to and so I am not going to opine an opinion. … We haven’t gotten any filings or anything. I’ve just read the recent decision from the RCA, but I haven’t really heard anything subsequent to that about what’s going on here on the state level. I know it’s in court right now.”
Who’s blaming who The dispute hinges on the amount TAPS owners charge for transporting crude oil from Prudhoe Bay to in-state refineries. The matter is before the courts, and a decision could revamp state oil revenues. About 10 percent of North Slope crude is delivered to refineries in Alaska. The rate for intrastate shipment of this oil was set in the mid-eighties in an agreement between the state and the TAPS owners. But times have changed, and Williams Alaska Petroleum Co. and Tesoro Alaska Co. filed a complaint in 1997, alleging TAPS owners were charging them too much.
Anchorage attorney Robin Brena represents Tesoro in regulatory matters. He took the matter to the RCA in the first place.
“Tesoro thought they were paying greater than a just and reasonable rate and so went before the commission and asked the commission to set a just and reasonable rate under the Alaska Pipeline Act,” Brena said recently.
Late last year, the RCA agreed that TAPS owners had overcharged in-state refiners from 1997 through 2000, and told the owners to drop tariffs for shipping crude within the state by 57 percent. And the RCA ordered pipeline owners to refund Tesoro and Williams billions of dollars in overcharges. The TAPS owners initially set the rate, under terms negotiated with the state in 1986. Brena says the overcharge is between $1.00 and $1.50 a barrel — accumulating over the years from 1977 through 1996 to a total of $9.9 billion.
State would be loser And, he says, if the shipping rates are not renegotiated, the state will be the loser. The state loses about one quarter of every dollar of overcharges under the federal rate in oil and severance taxes, Brena insists. He points to the TAPS owners. “We’ve run numbers to take a look at if they continue to establish rates in the same way in the future as they have in the past they will also overcharge an additional $14.1 billion from 2001 through 2034, the current expected end of the life of the line.”
Brena says the state could gain by renegotiating the current agreement with TAPS owners. “To put this in some perspective, the overcharges to date, the roughly $9.9 billion of overcharges, to date the state has forgone $2.5 billion, and if the methodology for establishing rates continues in effect through the expected end of the life of the line today, then the state will have a $3.5 billion interest in the over collections of $14 billion.”
He says this ought to be great news for a state that has been wrestling with dwindling income in recent years. Why didn’t a hungering Legislature notice the pizza on the doorstep? “Tesoro monitors the rates that it pays and thought that these rates got too far out of line. The methodology that was established front end loaded a lot of the capture of the investment up front, and as time went along the rates should of went down and they did not, and so Tesoro brought the protest.”
He says the pipeline owners failed to establish standard rate making practices. “They’ve overcharged from the get-go,” Brena says.
Pipeline owners fighting decision The oil producers are fighting the RCA decision. BP spokesman Daren Beaudo says the methodology used when the original rates were set was agreed on by all parties.
“There’s no refund due,” Beaudo says, refusing to go into further detail.
ConocoPhillips Alaska President Kevin Meyers calls the RCA decision ‘disappointing’. “The industry and the state had an agreement on how we would do TAPS tariffs,” Meyers said Jan. 27. “That agreement has been in place since, I think, 1984. … All parties were equally satisfied or dissatisfied when the deal was put in place. It has several years to run and we believe that’s a fair deal for the state, and a fair deal for Alaska. And we have appealed the decision and I believe that, at the end of
the day, we will be found correct.”
Decision may take years Attorney Brena says it may take three years of appeals to state Superior Court before the case in all likelihood reaches the Alaska Supreme Court for a decision. The in-state shippers who have a financial stake in the issue probably won’t see any refunds before then. The current agreement between the state and the TAPS owners continues through 2011, but Brena says there is an opportunity in 2006 for the state to initiate renegotiation of the deal. “And it’s important to know that that (TAPS Settlement Methodology) methodology establishes a ceiling rate and the TAPS carriers are obligated to charge a rate less than that.” He says rate payers are by statute allowed to pay lower tariffs.
The Interstate Commerce Act and the Alaska Pipeline Act to pay what is considered a just and reasonable rate. “And a just and reasonable rate is a rate that allows someone who builds a pipeline the opportunity to recover their investment, to recover their reasonably incurred operating costs, and to make a reasonable return. And so we have asked on the state side for the RCA to set a just and reasonable rate.”
Brena: no rate competition Brena says the intrastate shipping rates have not been adjusted in years, and that they are not in sync with more competitive interstate rates, which are regulated by FERC. It’s the federal shipping rate which is used to calculate the state’s oil royalty and severance taxes so a re-negotiation could result in more money for the state. There’s only one way for oil to leave the North Slope, Brena says, and the lack of competition has broken down the dynamic between shippers and owners.
“There is no rate competition, so the competitive market doesn’t set a lower rate. … Prior to the RCA’s decision in 25 years of operation there’s never been any rate regulation that’s determined a just and reasonable rate. The reason that there has been a failure of rate regulation on the federal side is because the major shippers are also the owners of the pipeline. And what you have is a tremendous financial incentive on the part of an integrated company to make its profit on transportation rather than on production. If it makes its money on transportation, it doesn’t owe royalty and severance taxes to the state. If it makes its money on production, it will owe royalty and severance taxes to the state. So in essence, for each dollar that is overcharged on a federal level, the state loses 25 cents in royalty and severance tax.” It only works if you pay the dollar from your production company to your transportation company. So there is a tremendous financial incentive for most of the shippers on TAPS to have higher rates so that the state will realize less in royalty and severance taxes, Brena says.
State mum So far, Alaska Attorney General Gregg Renkes is mum on the subject, although the state is expected to file an appeal within a few days. Just which side of the fray the state will come down on is uncertain.
“The state should be collecting between $100 million and $150 million in additional royalties and severance taxes per year if the rates on the TAPS line on the federal level were set based on standard rate making practices instead of being set at the maximum rate level allowed under their prior settlement agreement.” I think the issue gets almost as simple as saying, do Alaskans want to pay a state income tax or do they want the TAPS owners to charge fair rates to their shippers, Brena says.
Lower shipping rates could spur development on the North Slope, he says, because for every dollar the federal rate is reduced the value of the state’s oil and gas resources is increased by one dollar per barrel of oil. So if you take the marginal economics of a hundred million barrel field, and you lower the federal rate by a dollar you add a $100 million in value to that field.
And third party producers would be encouraged to invest in the development of marginal fields. The TAPS rate is a barrier to those new producers, and lowering it would be an incentive for them to explore.”
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