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RCA: Intrastate oil pipeline tariff too high
Kristen Nelson PNA Editor-in-Chief
The Regulatory Commission of Alaska has found intrastate rates charged by the trans-Alaska pipeline system for 1997 to 2000 to be excessive, has set new rates and ordered the carriers to refund the difference. It noted that this is the first time in 20 years that a regulatory agency has reviewed rates charged for consistency with statutory standards. Rates before 1996 were determined according to a settlement methodology and based on confidential reports.
The commission said in a statement about its Nov. 27 order that rates charged between 1977 and 1996 provided carriers “with the opportunity to recover $9.9 billion more than the reasonable cost of providing service.”
The commission set 1997-2000 rates based on costs reported to the Federal Energy Regulatory Commission annually and depreciation recovered through the end of 1996. The commission said maximum rates filed by the carriers for intrastate service from 1997 through 2000 exceeded cost based rates by an average of 57 percent.
Rates charged by the companies for intrastate shipment to the Petro Star terminal in Valdez ranged from $2.60 to $2.92 for 1997. The commission set the tariff for that year at $1.55. For 2000, carrier tariffs to Petro Star ranged from $2.54 to $3.20. The commission set the 2000 tariff at $1.96.
Issue brought by Tesoro and Williams Tesoro Alaska Co. and Williams Alaska Petroleum Co. claimed the 1997 rates to transport oil to their Alaska refineries exceeded the reasonable costs of transportation and the commission suspended intrastate rates and held a hearing.
After review of the record, the commission said, it concluded that 1997-2000 intrastate rates do not satisfy the statutory requirement “that pipeline rates be just and reasonable.” The commission has set new 1997-2000 rates and ordered filings so that it can set rates for 2001 and subsequent years.
More than 90 percent of the oil produced in Alaska goes by tanker to the West Coast and rates for those interstate shipments are set by FERC. The Regulatory Commission of Alaska (until July 1, 1999, the Alaska Public Utilities Commission) sets intrastate rates.
Tariff rates were litigated until 1986, when a settlement was reached — between the carriers and both state and federal regulators — which established a method for calculating rates.
The Alaska Public Utilities Commission accepted the intrastate portion of the settlement, the RCA said, “because all affected supported it.” But the APUC did not make a determination that the settlement produced just and reasonable rates, the RCA said, it just “deferred the issue of whether TSM (Taps settlement methodology) produced just and reasonable rates until a shipper protested the rates. The 1997 Tesoro and Williams protests put that issue before us for the first time in this pipeline’s twenty-year history,” RCA said.
Carriers defended TSM The commission said the carriers did not support their rates with evidence but asserted that because the rates set according to the Taps settlement methodology, TSM, are below a benchmark, that the rates are therefore just and reasonable.
RCA said the carriers use a rate base that assumes straight-line depreciation from pipeline startup to calculate the benchmark rates, and a life for the trans-Alaska pipeline, until 2011, predicted at the time of the settlement. The carriers asked the commission to permanently approved the filed 1997-2000 rates and continue the settlement’s effect.
The state of Alaska supported the carriers’ position, asserting “that public policy concerns also support preserving the settlement.” RCA said the state described its position as “ensuring that this case does not affect the validity or enforceability of the settlement,” while protecting the state’s ability to make oil pipeline settlements within the jurisdiction of the RCA and protecting the state’s economic interests.
Tesoro and Williams Tesoro calculated a much lower 1996 rate base than the carriers because it used the depreciation amounts used to calculate Taps settlement methodology ceiling rates, RCA said, and the TSM depreciation schedule is much more accelerated than the straight-line depreciation used by the carriers.
RCA said that Williams found the carriers’ year-end 1996 benchmark rate base too high. “Williams contends,” the RCA said, “that Taps is nearly fully depreciated but proposes that the basic framework of the settlement should continue to be used to calculate rates.”
The RCA’s Public Advocacy Section, established in 1999 by the Legislature to operate independently from the commission and represent the public interest, supported the Tesoro and Williams arguments. RCA said the Public Advocacy Section asserted “that the filed rates are not just and reasonable and that we should set new rates using the accelerated depreciation schedule employed in TSM rates, a longer TAPS life, and an adjustment for over collection for dismantling, removal and restoration (DR&R).”
Establishing a base rate The RCA said carriers have filed the maximum rates allowed by the settlement during most of the operational history of the line, and filed the cost information used to calculate rates confidentially under the terms of the settlement.
“Requiring shippers to pay rates based on cost data to which they do not have access is unusual,” the commission said.
“The policy concerns favoring settlements do not outweigh our statutory obligation to set just and reasonable rates or the policy favoring shipper and public access to the cost data used to calculate those rates.”
Because its regulatory predecessors did not decide whether the settlement methodology produced just and reasonable rates, the RCA said, it determined carrier investment and the amount they had the opportunity to recover by year-end 1996. It found a year-end 1996 rate base of $669 million, and determined “that by 1997 TSM provided the carriers an opportunity to earn over $9.9 million more than the cost of providing service.”
RCA calculated “just and reasonable” rates for 1997-2000 to the instate delivery points at GVEA, Petro Star and Valdez, compared those rates with the carriers’ filed rates and found the carriers’ rates exceed those set by RCA by an average of 57 percent. “Fifty-seven percent above costs is well outside the zone of reasonableness standard that reviewing courts apply. We, therefore, find that the 1997-2000 files rates are not just and reasonable,” the commission said.
The carriers are ordered to calculate and pay appropriate refunds.
The commission will determine intrastate rates for years beyond 2000 and is requiring carriers to make supporting documentation available for review by its staff.
It will also investigate DR&R funds, estimated at more than $1.5 billion from 1977-1996. The commission said that in phase II of this case it will “determine the size of the existing (DR&R) fund, the rate at which it will continue to grow and clarify if there will be a process for refunds or additional collections at the end of the pipeline’s life.”
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