Newsletter: July 25, 2011 

    Recent developments concerning the Trans Alaska Pipeline System (“TAPS”) indicate that TAPS rates will continue to rise.

    The Federal Energy Regulatory Commission (“FERC”) regulates interstate transportation of crude oil by pipeline, including TAPS shipments that are exported from Valdez, Alaska. 49 U.S.C. App. § 1, et seq. (1988). The Regulatory Commission of Alaska (“RCA”) regulates in-state shipments that move on TAPS but are not exported from Alaska. Alaska Pipeline Act, AS 42.06.140, 42.06.410(a). TAPS is a common carrier pipeline owned by affiliates (the TAPS Carriers) of five oil companies that produce oil from Alaska’s North Slope. With the inception of TAPS service in the 1970s, transportation rates were calculated using the TAPS Settlement Methodology (“TSM”), and each individual TAPS Carrier filed its own set of rates and tariffs for shipments on TAPS based on the TSM. TSM rates were front loaded to recover investment costs in the early stages of pipeline operation, and were revised annually pursuant to a formula set forth in the TSM. While disputes over the rates between the Carriers and the State of Alaska developed over time, for the years 1993 through 1997 they were resolved by settlements approved by the FERC that reaffirmed the TSM.

    After 2001, things began to change. The intrastate rates filed for 1997-2000 at the RCA were protested by Tesoro Alaska Petroleum Company, and subsequent annual filings of intrastate rates were suspended and accepted as temporary rates pending resolution of the 1997-2000 rates. In 2002, the RCA issued Order No. 151, which declared the TSM-based rates to be unjust and unreasonable and adopted replacement rates for 1997-2000 and also for subsequent years using traditional public utility cost concepts. RCA’s Order No. 151 was upheld by the Alaska courts. Amerada Hess Pipeline Corp. v. Regulatory Comm'n of Alaska, 176 P.3d 667 (Alaska 2008).

    Success on the in-state rates led to action on the federally regulated rates. The 2005 interstate TAPS rates filed at FERC were protested by Anadarko Petroleum Co., Tesoro Petroleum Co., and the State of Alaska, and the FERC suspended the rates for 2005 and subsequent years subject to refund. On May 17, 2007, a FERC Administrative Law Judge issued an Initial Decision holding that the TSM did not establish just and reasonable rates and required instead that the Carriers develop rates on the basis of FERC Opinion No. 154-B. The Initial Decision was affirmed by FERC on June 20, 2008, in BP Pipelines (Alaska) Inc., Opinion No. 502, 123 FERC ¶ 61,287 (2008). The Carriers were instructed to replace their individual rates with a single unitary rate and to issue refunds for the suspended rates. To accomplish this, the Carriers were directed to include a pooling agreement in their tariff. BP Pipelines (Alaska) Inc., 125 FERC ¶ 61,215, reh’g denied, BP Pipelines (Alaska) Inc., 127 FERC ¶ 61,317 (2009). Opinion No. 502 is currently on appeal to the U.S. Court of Appeals for the D.C. Circuit.

    The suspended FERC rates for 2005 ranged from $3.52 to $3.97 per barrel, and for 2006 ranged from $3.78 to $4.41 per barrel. The per-barrel rates approved by Opinion No. 502 were $1.92 for 2005 and $2.02 for 2006. Similarly, the rate approved by the RCA for 2001 and subsequent years was $1.96 per barrel. Thus, the effect of the two decisions was essentially to cut transportation rates in half.

    Approximately a year after FERC Opinion No. 502 was issued, the Carriers made filings that essentially returned rates to their former levels. The Carriers’ filings have been accepted subject to refund and consolidated for hearings on whether the new rates are just and reasonable. BP Pipelines (Alaska) Inc., 127 FERC ¶ 61,316 (2009). The rates and their effective dates that are at issue in the consolidated proceedings are as follows: (There are two columns because some Carriers have filed twice).

Also at issue in the consolidated FERC proceeding is a uniform cost-of-service, pooling agreement, and single unitary tariff submitted by BP Pipelines (Alaska), Inc., one of the TAPS Carriers. 

    An Initial Decision of the Presiding Administrative Law Judge was issued on March 10, 2011.  BP Pipelines (Alaska), Inc., 34 FERC ¶ 63,020 (2011).  The Initial Decision resolved three contested issues: cost of capital, pooling issues, and uniform rates.   The essential ruling of the case reaffirms the Commission’s directives in Opinion 502, and allows individual Carriers to publish separate rates using an analysis of the total-systemwide cost of service and throughput (as the TAPS Carriers assert they did in their 2009 and 2010 filings).  The case is pending on exceptions to the full Commission.

    The TAPS Carriers filed new rates in 2010 that were consolidated with or made subject to the proceedings in IS09-348-000.  The FERC TAPS rates in effect for 2010 were:   

    The litigation over TAPS rates is unlikely to produce any substantial reduction of the rates filed by the Carriers and allowed to take effect pending resolution of the litigation.  TAPS rates will ontinue to increase as production from the North Slope fields and TAPS throughout continues to decline, leaving fewer barrels in the pipeline among which to spread the transportation costs.