Trans-Alaska Pipeline System: Economics
(Archived June 17, 2005)
The most recent RCA order is the focus of the following two articles from the Ancorage Daily News.
News: Anchorage Daily News (July 3, 2004, p. A-1)
Oil firms overcharge, agency says
State utility regulators say oil companies are overcharging customers for moving crude oil down the trans-Alaska pipeline, a decision that raises the question of whether the state is being shortchanged on oil revenue collections.
The five oil companies that own the 800-mile pipeline this year are charging about $3.02 per barrel to carry the bulk of North Slope crude oil from the giant Prudhoe Bay oil field to the tanker dock at Valdez.
This is more than $1 more than the Regulatory Commission of Alaska said in a recent decision the companies should charge to cover the costs of running the pipeline plus a decent profit.
The decision is important for Alaska refinery operators, who have long argued that the pipeline owners were overcharging them for moving the crude oil down the line.
But pipeline transportation costs are also vitally important to the state, which relies heavily on taxes and royalties on oil pumped from beneath state land. It's to the state's advantage if pipeline transportation costs are as low as possible, because the oil companies can deduct those costs from the market price of oil to determine the wellhead price -- the critical point at which the enormous taxes and royalties are calculated.
Bottom line: Each additional dollar in pipeline transportation costs means about $65 million less in annual oil revenue for the state, said Chuck Logsdon, the state's chief petroleum economist.
Richard Fineberg, a Fairbanks economist who has testified before the RCA as a state-hired consumer advocate, said the agency's latest decision indicates the oil companies are cheating Alaska crude oil buyers as well as the state.
"Absolutely! Yes!" Fineberg said. "There's no question about it and how many times does the commission have to say it?"
He noted that the RCA made a similar finding of pipeline overcharges in 2002, a decision that's now tangled up in court.
Daren Beaudo, spokesman for British oil giant BP, the biggest owner of the pipeline at 47 percent, vehemently denied that his company is taking advantage of any oil customers or the state.Rather, BP is simply following an agreement on pipeline fees that took effect in 1986 between oil companies and state politicians and regulators, he said.
That settlement set out a fair method for determining pipeline transportation rates, settled endless court fights, and resulted in a square deal and reliable oil delivery for everybody, Beaudo said. Now the 1986 agreement is "under attack" by the RCA, and that could be a disincentive for further oil company investment in risky pipelines or other projects in Alaska, he said.
Beaudo vowed that BP would fight the RCA's June 10 ruling, which sets out a transportation rate of $1.96 per barrel for oil piped to Valdez and orders the oil companies to make refunds to Alaska crude buyers that likely will total tens of millions of dollars.
The RCA decision affects rates just for oil delivered to in-state users including the Flint Hills refinery at North Pole, the Petro Star refinery at Valdez and the Tesoro refinery at Nikiski. This oil accounts for only about 10 percent of all oil moved down the pipeline.
But the lower rates the RCA ordered could be a factor in determining federally regulated interstate rates for oil shipped Outside.
The oil companies late this year must propose rates to the Federal Energy Regulatory Commission, and conceivably two things could happen: The state could use the RCA's findings to argue the federal rates are too high, or the oil companies could seek higher transportation fees to offset the lower in-state rates.
But whether the state would make such an argument is in question. In the past, state officials have said they were bound to defend the 1986 agreement.
In January, Attorney General Gregg Renkes said the state and the pipeline owners were to begin early negotiations for a new agreement on pipeline rates. The current agreement doesn't end until 2011.
The RCA ruling says the pipeline owners "failed to adequately support cost of service for their business operations" and wanted to charge too much to carry oil. Commissioners faulted the oil companies for factoring in "unusual costs" that are not likely to recur, such as the $17.5 million paid to repair the pipeline after a gunman fired a bullet through the pipe wall in 2001.
Robin Brena, an attorney for Tesoro, said his and other Alaska companies have been "overcharged tens of millions of dollars," and they're ecstatic about the RCA decision.He added that the ruling is "nothing but good for the state.
But Beaudo said BP and the other oil companies are being unfairly accused.
"If this is such an outrageously lucrative business, why didn't Tesoro or others try to buy a share of the pipeline?" he said, noting a number of shares have come available since the pipeline's startup in 1977.
Daily News reporter Wesley Loy can be reached at email@example.com or 257-4590.
Commentary: Anchorage Daily News (July 15, 2004, p.
attorney general says TAPS owners have agreed to talk about changing the tariff
formula, but when they will talk and what they will talk about are undisclosed.
Closed-door negotiations 20 years ago led to today's tariff problems. An administration
serious about reducing TAPS tariffs could find more efficient ways to resolve
the issue. After all, lawyers frequently need to extricate clients from agreements
when circumstances change.
Richard A. Fineberg, a research analyst from Ester, presented testimony on TAPS tariff issues to the Regulatory Commission of Alaska in 2001 on behalf of the commission's former Public Advocacy Section. He recently completed a report on the dismantling, removal and restoration component of the TAPS tariff for the Prince William Sound Regional Citizens' Advisory Council.
(Also published in the Fairbanks Daily News-Miner, July 10, 2004, “TAPS tariffs are too high,” p. A-4)
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