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No more retroactive quality bank changes Alaska’s senators introduce bill to make future FERC oil valuation rulings prospective only; last year’s ruling goes back 12 years Kristen Nelson Petroleum News Editor-in-Chief
Alaska’s U.S. senators want to prevent the Federal Energy Regulatory Commission from making future oil valuation rulings for the trans-Alaska pipeline retroactive. An August administrative law judge ruling, now being considered by the full commission, is retroactive for 12 years.
Alaska Sens. Lisa Murkowski and Ted Stevens, both Republicans, said April 15 they have introduced legislation which would make future federal oil valuation rulings apply only prospectively, preventing huge retroactive charges in the future. The legislation would limit the future ability of FERC to assess retroactive penalties on either the oil producers or oil refiners utilizing the trans-Alaska oil pipeline to move oil to market, but would not change an August FERC ruling that made changes effective back to 1993.
In an April 14 letter to FERC Chairman Patrick Wood, Alaska’s entire congressional delegation, Murkowski, Stevens and Congressman Don Young, R-Alaska, said they were concerned with the impact of the August initial decision if FERC “approves it in its current form.” The delegation said they were particularly concerned because of the impact of the decision on Alaska’s two refineries. “The decision could have the unintended effect of forcing the closure of in-state refineries, costing hundreds of jobs and placing the state once again in the position of relying on deliveries of refined product from West Coast refineries, several thousand miles away.”
The refineries at North Pole and Valdez take crude oil from the trans-Alaska pipeline. At the end of the refining process, they put back into the pipeline the portions of the oil they cannot use, the “resid.” Resid has less value than crude oil and dilutes the value of the oil for the producers. The refiners pay into the Quality Bank to compensate for this reduction in value.
The congressional delegation told Wood “the necessity of paying Quality Bank assessments is an integral part” of the business of the two refiners, who “must make both long- and short-term business decisions while taking the Quality Bank into account.”
The result of the proposed decision, however, is to make their Quality Bank assessments “subject to substantial increases long after the fact,” and the refineries “have no way to make rational business decisions” on that basis.
When the current methodology became effective Dec. 1, 1993, the delegation said, “nothing like the currently proposed methodology was even on the table. Even if refiners had been able to perceive that retroactive increases were likely, the refiners would have had no way to estimate the magnitude of the increases that they would face” if FERC approves the August 2004 initial decision.
Bill would prevent retroactivity Murkowski and Stevens said in an April 14 press release that their bill “is a response to the complex legal battle over the TAPS Quality Bank, the mechanism that compensates individual oil producers for the effects of commingling their crude oil with that of different quality oil generated by other North Slope producers and to compensate them for changes in the oil stream caused when refineries take oil out of the pipeline to make in-state products such as gasoline, diesel and jet fuel.”
The senators said they never want a repeat of the current 12-year “legal wrangle” over valuation of North Slope oil.
“Clearly companies should have the right to seek changes in the value of oil flowing through the pipeline and changes in future tariffs, but any changes in valuation methodologies should be levied prospectively, not over long periods retroactively. No business can exist if they buy raw product, manufacture it into finished goods, sell them and then are told 12 years later that they should in effect have paid far more for their raw materials,” Murkowski said in a statement.
Stevens said the methodology used to determine Quality Bank payments “has been the subject of dispute since the bank’s inception, creating uncertainty in the market and a chilling effect on business investment in Alaska.” Valuation method changed by FERC In 1993 the FERC switched from a “gravity” method of valuing oil arriving in Valdez to a new “distillation” methodology which, the senators said, values oil based on the market price of products that can be refined from the oil. An administrative law judge ruled in August 2004 in a suit arising out of that 1993 change and said his rulings should apply back to 1993.
The bill would not affect the existing legal dispute, but beginning Dec. 31, 2005, it would prevent FERC from assessing monetary adjustments retroactively against any parties involved in the Quality Bank process. The senators said the bill protects North Slope producers, the state of Alaska and the state’s two in-state refineries, Petro Star and Flint Hills, “from facing huge retroactive liabilities should FERC-issued valuation methodologies be changed in the future.”
Murkowski said the goal of the legislation “is to eliminate the risk and uncertainty associated with unlimited retroactive application of Quality Bank rules,” allow Quality Bank participants to be able to conduct business without the possibility of having prices changed down the road and “should discourage all sides from engaging in endless litigation in hopes of gaining windfall profits.”
Murkowski said Alaskans are the losers in “the current litigation lottery” because the health of both in-state refineries is threatened by unpredictable liabilities arising out of current Quality Bank rules.
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