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RCA lowers trans-Alaska pipeline tariffs for 2001-2003, sets permanent, lower rate
Kay Cashman Petroleum News publisher & managing editor
The Regulatory Commission of Alaska has ruled against the owners of the trans-Alaska pipeline system, finding their intrastate rates for shipping oil from 2001 through 2003 to be unreasonably high.
In its June 10 order RCA also established lower, permanent post-2000 intrastate rates and ordered the TAPS carriers to refund the difference to shippers for the years 2001-2003.
The order, which can be found online at http://www.state.ak.us/rca/orders/2004/p03004_34.pdf, was in response to a June 3, 2003 rate filing by the TAPS carriers that used a methodology established in a 1986 settlement between the carriers and state and federal regulators.
The commission, which is mandated by state statute to keep oil and gas transportation rates “just and reasonable” for both the owners and the shippers, ruled in November 2002 that the 1986 TAPS settlement methodology allowed for excessively high rates. RCA said that rates charged between just 1977 and 1996 provided TAPS carriers “with the opportunity to recover $9.9 billion more than the reasonable cost of providing service.”
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.
In its June 10 order, RCA said that the current rates “will be permanent for 2001, 2002, 2003, 2004 and the future until we approve revised rates pursuant to AS 42.06.” Those rates are: GVEA $1.25, Petro Star $1.96, and Valdez $1.96.
In comparison, the highest rates charged by any carrier came from BP: $1.56 (GVEA) $2.45 (Petro Star) $2.46 (Valdez). And the lowest rates came from Unocal: $1.18 (GVEA) $1.87 (Petro Star) $1.88 (Valdez). Unacceptable methods used for test year In its order the commission said the carriers’ filings do not justify their proposed rates and that most of the carriers used “unacceptable methods to normalize the test year we directed them to use.”
The order said the carriers had averaged costs over “selected years … not a reasonable method for normalizing the test year.” It also noted that the carriers included recoverable costs that were “not likely to recur annually” and should instead be “amortized over a reasonable period.”
For example, the TAPS carriers paid $7.7 million to repair damage to the pipeline caused by the 2002 Denali earthquake. The carriers included that amount in the test year rather than amortizing the costs associated with repairs, despite the fact that a carrier witness confirms that the pipeline is designed to withstand this type of earthquake and that over the last 23 years only three other earthquakes between 6.7 and 7.3 have occurred.
The carriers also paid $4.3 million to resolve a civil suit related to a pipeline visitor center and included it in the cost of service.
The commission concluded that while this may be a “cost of doing business that management might approve, it is not reasonably necessary to the shipment of oil on TAPS and should not be included in cost of service.”
RCA’s order also said, among other things, that the carriers “failed to meet the standard of proof for affiliated transactions,” including not adequately supporting Alyeska affiliate costs and owner direct affiliate costs.
“When affiliated companies providing services to pipeline carriers are also producing companies that pay royalties and taxes, public policy considerations require that we closely examine affiliated costs,” the commission said. “Higher pipeline transportation costs on TAPS result in lower taxes and royalties for the TAPS carriers’ affiliates and also may create an economic barrier for shipping by unaffiliated shippers who cannot reap these ancillary benefits. The TAPS carriers therefore may lack incentives to insure that affiliated costs are reasonable.”
The TAPS carrier-owners named in RCA’s order are Amerada Hess Pipeline, BP Pipelines (Alaska), ExxonMobil Pipeline, Phillips Transportation (Alaska), Unocal Pipeline and Williams Alaska Pipeline.
Since the June 3, 2003 filing ownership has changed. Current owners are: BP Pipeline (Alaska), Phillips Transportation Alaska, ExxonMobil Pipeline, Koch Alaska Pipeline and Unocal Pipeline.
The pipeline owners are appealing the November 2002 order in state Superior court.
Williams and Tesoro Alaska Co. started the case when they filed a complaint with the RCA in 1997, alleging they were charged too much to move oil to their Alaska refineries.
Pipeline owners collect about $1 billion a year in tariffs on North Slope oil, more than 90 percent of which is shipped aboard tankers to West Coast refineries. The rest is processed instate and subject to RCA rulings.
The average tariff for interstate shipments in the past fiscal year was about $3.25 per barrel.
Prompted by RCA’s 2002 ruling, Alaska Attorney General Greg Renkes and the pipeline owners signed a memorandum of understanding Jan. 22-23, calling for negotiations to renegotiate the tariff structure, starting this past February. They said the talks could take as long as two years.
The memorandum says negotiations will cover the tariff structure for interstate and intrastate shipment of North Slope oil.
Any reduction in pipeline tariffs could be a plus to the state treasury, with lower transportation costs resulting in higher wellhead values and larger production tax and royalty payments to the state based on those higher values.
Advocates of lower tariffs also say it could encourage additional oil development by lowering the cost for new entrants on the North Slope.
“Tariffs have been a controversial and litigated topic throughout the (pipeline’s) life,” the memorandum says, explaining that a negotiated settlement is preferable to fighting the issue before regulatory agencies and eventually in court.
The state and pipeline owners will not negotiate an actual tariff but rather a method for calculating the tariff, which would then be subject to approval by the Federal Energy Regulatory Commission, which regulates interstate oil pipeline tariffs, and RCA for in-state deliveries of oil.
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