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What Other Say About TAPS Tariff Issues:

". . .[T]he state is not bound to strictly adhere to the 'duty to defend' provisions when doing so is in conflict with overriding state interests."
........................ -- Attorney Peter Van Tuyn (legal opinion, June 5, 2007)

.... " Fairbanks oil analyst Richard Fineberg . . . posed 20 pertinent questions about the state's handling of tariff matters.
.... "Reps. Carl Gatto and David Guttenberg submitted those to the Palin administration last month, but Senior Assistant Attorney General Philip Reeves declined to answer many of them in a June 28 letter.
.... "This should be unacceptable to legislators seeking a basic understanding of the legal and regulatory morass concerning the price of shipping oil through the pipeline."
............-- Fairbanks Daily News-Miner columnist Dermot Cole (July 8, 2007)

Legal Opinion Challenges
TAPS Tariff Settlement Terms

Policy Shift Has Cost State
More Than $1 Billion Since 1997

By Richard Fineberg
July 11, 2007

The Alaska Department of Law maintains that the state is obligated to "support and defend" shipping charges filed by the owners of the Trans-Alaska Pipeline System (TAPS) under the 1985 tariff settlement agreement between the pipeline owners and the State. But a legal opinion requested from a knowledgeable attorney in private practice suggests the state may have more leeway to fight its bad deal with the TAPS owners than indicated by the state.

The importance of assuring low pipeline tariffs to maximize state revenue and encourage petroleum development is frequently overlooked in petroleum policy discussions. But the tariff issue pushed its way to the public attention again May 17 with a decision by the Federal Energy Regulatory Commission (FERC) Administrative Law Judge (ALJ) supporting independent shippers in their quest to reduce TAPS tariffs for oil under federal tariff jurisdiction - approximately 89% of the oil shipped on TAPS. In her May 17 decision on TAPS tariffs, FERC ALJ Carmen Cintron adopted the numbers presented by independent shippers Anadarko and Tesoro Petroleum, recommending that the commission lower the current TAPS tariffs from a present average of about 5.11 per barrel to $2.04 per barrel. (1) Informed observers say the adoption of one party's numbers is unusual; the five commissioners are expected to issue the FERC's final decision in six to nine months; the agency's final decision will probably be contested in court.

In response to a tariff protest first filed by Tesoro in 1996, in 2002 the Regulatory Commission of Alaska (RCA) lowered the in-state TAPS tariff for oil that goes to in-state refineries - the remaining 11% of TAPS oil - to $1.96 per barrel in 2002. State Superior Court Judge John Suddock upheld that decision "in all respects" in 2006. A state Supreme Court decision is pending.

Making sure that pipeline shipping charges are fair is particularly critical to North Slope oil and gas development because BP, ConocoPhillips and ExxonMobil own 95% of TAPS and a similar share of North Slope production. For these companies, excess tariff payments on their own oil are internal transfers, not cash outlays. But for non-owner (independent) shippers, who pay the entire tariff in hard cash, excess charges paid to the pipeline owners are real outlays.

The state's royalty and tax payments are similarly reduced by excess transportation charges. If and when the federal tariff finally comes down, the state stands to gain more than $0.75 per barrel on current shipments; that would add up to more than half a million dollars daily in additional royalty and tax payments.

When it submitted theTAPS tariff settlement agreement to FERC for approval in 1985, the state assured the regulators that "Alaska stands in the shoes of both past and future shippers . . . . Alaska's interests are coextensive with shippers." (2) But for more than two decades, the state has left independent shippers to fend for themselves. And between 1996 and 2006, the state actively opposed the interests of independent shippers on TAPS.

One reason for this policy reversal is a clause in the settlement agreement that limits the state's ability to support shipper interests by requiring the state to "cooperate . . . in defending against any litigation affecting the validity and enforceability of this Agreement, or any provision thereof." (3) According to the Department of Law, this clause means that as long as tariffs filed at FERC comply with the 1985 settlement terms, the state cannot say straight-out those tariffs are excessive, or that the state is a victim of a big-time rip-off that enables the TAPS owners to enrich themselves at the expense of the state and independent shippers. Instead, the state must count on the independent shippers to make the critical substantive arguments about rates.

In the current FERC tariff case, the state did not attempt to prove that the TAPS owners charge shippers too much; rather, the state urged that if the shippers prevail, then the tariff should be lowered because different rates would be discriminatory and therefore illegal. In other words, the state left the heavy lifting on the dollars at issue to Anadarko and Tesoro. In her May 17 decision, the FERC judge dismissed the Department of Law's main argument as moot because her decision would reduce TAPS tariffs under federal jurisdiction to a level very near that already mandated by the RCA. She devoted just six paragraphs of her 277-paragraph decision to the state's principal argument.

Despite the fact that FERC ALJ Cintron did not pay much attention to the state's discrimination argument, Senior Assistant Attorney General Philip Reeves, the state's tariff case manager, says the Department of Law might use the same argument again to challenge the judge's decision to allow only partial refunds. Reeves points out that even if future tariffs were equalized under her decision, partial refunds on past tariffs would not cure discrimination for 2005, 2006 and 2007 (the years at issue in the FERC proceeding). Neither would the discrimination argument resuscitate refunds for 2004 because shippers did not file protests that year.

The Department of Law's current strategy for pursuing refunds makes sense under the circumstances, but what about the lost years between 1997 and the present? The Department of Law loftily declines to discus its underlying policy and strategy during the first three decades of TAPS operation. Meanwhile, as the department and its consultants try to dig their way out from under problems they helped create in 1985, the pipeline owners continue to make TAPS shippers pay the higher tariff on shipments regulated by FERC. And refund collection, as Judge Cintron's decision indicates, is not a sure thing.

Could the state have done something more to further its interests in this important case? According to Anchorage attorney Peter Van Tuyn, who reviewed the state's obligation to defend the 1985 settlement at the request of this writer:

The state has interests that can override contractual provisions, such as the constitutionally-based policy that it maximize revenue from its resources. Moreover, through its own actions the state has recognized that the TSM 'duty to defend' is not absolute. Consequently, the state is not bound to strictly adhere to the 'duty to defend' provisions when doing so is in conflict with overriding state interests. (4)

In his legal analysis, Van Tuyn observes that the limits to the "duty to defend" provision became apparent in February 2006, when the state dropped its opposition to the RCA's 2002 decision lowering in-state TAPS tariffs by serving notice that the state would not join the TAPS owners when they appealed the Superior Court's 2006 decision in the RCA case to the state Supreme Court. Additionally, Van Tuyn writes, "[t]he state's position in the FERC protest, where it argued against curing the difference between RCA and FERC tariffs by raising the RCA tariff to the same level as the interstate rate, also supports the view that the provision is not absolute."

Continued Below (Click Here)

Tariff Links

Here are links to materials providing additional information and comment on information generated by the author of this web site regarding current TAPS tariff economic and management issues:

Attorney Peter Van Tuyn's June 5, 2007 memorandum on the "duty to defend" clause of the 1985 TAPS tariff settlement agreement

Richard Fineberg's prepared testimony for the June 7 House Resources Committee hearing (addressing questions on 20 tariff-related subjects to the Department of Law)

The Department of Law's June 28 response to Representatives Carl Gatto and David Guttenberg (answering selected questions posed in this writer's June 7 testimony)

Fineberg's July 2 response to the Department of Law's June 28 letter;

Fineberg's April 20 and May 27, 2007 guest editorials

discussion of tariff issues by Fairbanks Daily News-Miner staff columnist Dermot Cole

For reports and articles on TAPS tariffs posted by this writer earlier this year, see:

Feb. 28 report on impacts of excessive TAPS tariffs on state and independent shippers

Mar. 2 commentary on Department of Law handling of TAPS tariff issues

Mar. 10 commentary on Mar. 5 state House Resources Committee hearing.

(These reports contain citations and links to key tariff documents.)

Legal Opinion Challenges TAPS Tariff Settlement Terms
(Continued)

While the state cannot arbitrarily disregard its contractual obligations, Van Tuyn notes that the Alaska Constitution's stated principle of making resources available for maximum use consistent with public interest "may be violated by a contract provision that forces the state to blindly defend a methodology that produces unreasonably high tariffs." Moreover, he says, "[i]t is well-settled law that provisions of a contract that violate public policy are void."

When asked about the Department of Law's decision not to join the TAPS owners' appeal to the state Supreme Court, Reeves acknowledged that the state "went to the mat" on behalf of the TAPS owners for years prior to dropping out of that case. But, he added that the state's duty to defend the settlement has limits. For failure to explore those limits in a timely manner, the state played an active role in contributing to its loss of over $1.0 billion for most of the decade between 1997 and 2006.

On June 7, the state House Resources Committee held a follow-up to its March 5 hearing on TAPS tariff developments. At that hearing and in a follow-up letter, the Department of Law's Reeves emphasized the importance of the 1985 contractual requirement, which he described as the duty to "support and defend" TAPS tariffs filed by the TAPS owners in accord with that settlement. But in discussing that clause, the state attorney departed from the actual language of the settlement. In the follow-up letter, Reeves wrote:

The TAPS settlement generally imposes a contractual duty on the State that in essence requires the State to support and defend TAPS rates filed in conformance with the TAPS settlement agreement. If the State had protested rates that conformed to the TAPS settlement at the FERC (or at the RCA in 1996), the TAPS carriers would have sought dismissal of the State for breaching the duty to defend and thus of breaching the settlement contract. (5)

The settlement does not define these terms and it is not clear why Reeves omitted the term "cooperate" and added the word "support" in both his written and spoken presentations. In its entirety, the settlement language reads as follows:

Section I-3. Duty to Defend This Agreement
State and TAPS Carriers shall cooperate, each at its own expense, in securing all necessary governmental approvals for this Agreement and in defending against any litigation affecting the validity and enforceability of this Agreement, or any provision thereof. (Note: bold-faced headers, included for convenience, are not part of the settlement agreement.)

Beyond reference to the obligations imposed in the 1985 settlement agreement, the Department of Law steadfastly refuses to discuss past policy decisions, such as the reasons for its opposition to the independent shippers' plea for lower tariffs at the RCA between 1997 and 2006, or the consequences of that policy. During this period, the state gave up more than $1.0 billion in reduced oil royalty and tax payments, based on the difference between the tariff ordered by the RCA in 2002 and the higher tariffs permitted under the 1985 settlement agreement. (6)

This writer prepared a checklist of 20 questions regarding TAPS tariffs for the state House Resources Committee June 7 hearing. The questions covered subjects ranging from the "duty to defend" clause to the amounts the Department of Law has paid the associates of its long-standing principal consultants on tariff issues, the Washington, DC office of the Morrison & Foerster law firm. Committee Chairman Carl Gatto and Rep. David Guttenberg forwarded those questions to the Department of Law for response; the department's June 28 response provided partial answers to five of the questions, leaving 15 of the 20 questions unanswered.

These questions need answering for the three reasons stated in this writer's March 10 analysis and comment on the House Resource Committee's first attempt to find out what the state is doing at FERC:

.... " 1. Excess TAPS tariffs inhibit independent development on the North Slope - a serious and ironic problem when the state is offering inducements to potential petroleum explorers in hopes that they will come north and find the additional gas necessary to ensure the economic viability of a natural gas pipeline from the North Slope.
.... " 2. State revenue from North Slope natural gas development depends heavily on the appropriate design and structure of the natural gas pipeline tariff. The a challenge perhaps even more daunting than that of the oil pipeline tariff.
.... " 3. Under the 1985 TAPS settlement agreement, the period for renegotiation of TAPS tariff terms quietly began January 1 of this year. In view of the failed TSM negotiations in 2004, the estimated historical loss to the state treasury of more than $3.0 billion due to excess TAPS tariffs ($4.5 billion in 2007 dollars) and a current estimated loss of $404 per minute (more than half a million dollars per day), this is not a problem the state can afford to bungle or continue to talk to death."

It appears that the Department of Law finally understands the maxim sometimes called the Law of Holes: When you're in a hole, stop digging. But the department's refusal to discuss how the state got into this pit in the first place should not be allowed to prevent policy makers from getting to the root of this problem. Three decades of lost revenue stem from a policy that appears to have inhibited rather than encouraged North Slope development ; this experience suggests the need for review and revision of the state's petroleum pipeline tariff apparatus. Until responsibility for tariff policy is vested with a line agency, this horseman will remain headless.

...............________________

Endnotes

(1) Carmen A. Cintron (Presiding Administrative Law Judge), Initial Decision (Federall Energy Regulatory Commission Docket No. 1S05-82-002, etc.), May 17, 2007.

(2) State of Alaska and United States Department of Justice, Explanatory Statement of the State of Alaska and the United States Department of Justice in support of Settlement Offer (submitted to the Federal Energy Regulatory Commission with TAPS settlement offer), June 28, 1985, p. 18.

(3) "Settlement Agreement Between the State of Alaska and ARCO Pipe Line Company [et al.] with respect to the Trans Alaska Pipeline System," June 28, 1985. (Note: The bold-faced headers are included in the settlement for convenience only and are not part of the settlement agreement.)

(4) Memo from Peter Van Tuyn to Richard Fineberg, "TAPS Tariff Settlement and the State of Alaska's "Duty to Defend," June 5, 2007.

(5) Letter from Philip A. Reeves (Senior Assistant Attorney General, Alaska Dept. of Law) to Representative Carl Gatto and Rep. David Guttenberg (Alaska State House of Representatives), June 28, 2007.

(6) See: Richard A. Fineberg, Historical and Current State Revenue Loss Quantified: Difference Between RCA's 2002 TAPS Tariff Order And State's 1985 Pipeline Tariff Agreement Costs State More than $400 per Minute (prepared for the Alaska Budget Report), Feb. 28, 2007.