Legislature(2003 - 2004)
05/09/2003 08:10 AM House RES
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
HB 277-PIPELINE UTILITIES REGULATION Number 0108 CHAIR FATE announced that the first order of business would be HOUSE BILL NO. 277, "An Act relating to the powers of the Regulatory Commission of Alaska in regard to intrastate pipeline transportation services and pipeline facilities, to the rate of interest for funds to be paid by pipeline shippers or carriers at the end of a suspension of tariff filing, and to the prospective application of increased standards on regulated pipeline utilities; allowing the commission to accept rates set in conformity with a settlement agreement between the state and one or more pipeline carriers and to enforce the terms of a settlement agreement in regard to intrastate rates; and providing for an effective date." [Before the committee, adopted as a work draft on May 7, 2003, was a proposed committee substitute (CS) labeled CSHB 277(RES) bil.doc, 5/6/2003.] CHAIR FATE informed members of his intention to try to perform some cleanup based on testimony heard from both sides of the issue. Number 0280 LARRY HOULE, General Manager, Alaska Support Industry Alliance ("the Alliance"), began by explaining that the Alliance is a statewide nonprofit trade association with chapters in Fairbanks, Anchorage, and Kenai. He paraphrased the following written testimony: The Alliance trade association membership is comprised of 420 member companies that provide support services and products to Alaska's oil and gas industry. Our member companies employ over 25,000 Alaskans working in Alaska's oil patch. In short, Alliance member companies perform contract services and sell products to the entire oil patch from the exploration phase through to the refining industry. Initially, my 21-member board of directors looked at HB 277 and reached no consensus in the position we should take. However, now that the original bill has been appropriately amended by the bill's sponsor, Representative Dahlstrom, and the administration has submitted their amendments, the 21-member board of the Alliance, by majority vote, has elected to support the amended version [Version CSHB 277(RES) bil.doc, 5/6/2003]. We believe the current CS provides clarity in the regulatory arena. This legislation defines the jurisdictional boundaries with regard to intrastate transportation that is long overdue. The role of DNR as the landowner is defined. The bill confirms the jurisdiction of the FERC over interstate matters and finally clarifies and defines the RCA's jurisdiction over intrastate services rendered by common carrier pipelines. In summary, the bill tells us who the rule makers are. It defines the rule makers' jurisdiction, which brings the much needed certainty to the private sector, certainty that is essential when making the huge long- term capital investments required by oil and gas companies to develop Alaska's natural resources for the benefit of Alaskans. MR. HOULE concluded by asking the committee to move the bill forward. Number 0643 ROBIN O. BRENA, Attorney at Law; Brena, Bell & Clarkson, PC, explained that he had been retained by both Tesoro Alaska Company ("Tesoro") and Anadarko Petroleum Corporation ("Anadarko") to assist them in reviewing HB 277. He began by respectfully disagreeing with most of the testimony from the proponents of HB 277. Mr. Brena said, "We are not here today because the Alaska Pipeline Act is broken; we are here today because the Alaska Pipeline Act worked exactly as it is supposed to work and they would like to change that now." MR. BRENA told members that for the past 25 years there has been no economic regulation of the Trans-Alaska Pipeline System (TAPS) by any regulatory body. Furthermore, there hasn't been a just and reasonable rate on TAPS prior to the Regulatory Commission of Alaska's (RCA's) Order 151. It's the first time in 25 years that standard ratemaking practices and law have been applied to set a just and reasonable rate. He said RCA determined that in the past 25 years the TAPS owners have overcharged their ratepayers $10 billion. The state's interest in those overcharges is 25 percent. To date, the state has forgone $2.5 billion and will forgo an additional $2.5 billion between now and 2011. MR. BRENA pointed out that RCA lowered the rate from Pump Station No. 1 to Valdez by 70 percent, a large decline. Thus TAPS owners were allowed to recover 100 percent of their investment and every operating cost incurred, and earned a 14 percent return on their investment. Currently, the State of Alaska is losing $120 million to 150 million a year due to excessive charges. Mr. Brena highlighted that the Alaska Pipeline Act is not about overlapping jurisdiction among state agencies or regulatory certainty; rather, it's about excessive rates. These are rates that the RCA has finally decided to set. Number 1011 MR. BRENA noted that members' packets should contain his written remarks and a sectional analysis. He emphasized that limiting RCA's authority regarding intrastate matters isn't in the [state's] interest. As the Act is currently written, there is seamless jurisdictional authority between the state and federal regulatory regimes. The Act currently says, "To the extent not preempted by federal law, the state has the authority to regulate." However, this legislation includes several provisions that intend to pull back that authority. MR. BRENA drew attention to the last page of his written testimony, a chart entitled "Jurisdictional Gap." The top bar graph illustrates seamless jurisdiction under the existing Act. However, HB 277 redefines the RCA's authority to entail intrastate matters only. He explained that the Act was written to ensure proper resource development. The federal Acts don't have certification facilities or abandonment jurisdiction. Under the federal regime, [a state] with a pipeline in service is only told how much can be charged. Therefore, all of the things necessary for Alaska to control its future with regard to its transportation infrastructure would fall in that gap. Included in that gap are all interstate matters not subject to federal regulation, which encompasses a lot. MR. BRENA posed a situation in which [a company] discovers oil in a new North Slope field and wants to transport it to the Lower 48 market, where over 90 percent of the oil goes today. He asked how [the company] would connect to the pipeline system, because it would have no right to connect to existing pipeline systems if HB 277 were passed. Under federal law, the Federal Energy Regulatory Commission (FERC) has no authority to require a connection. However, under existing state law, the RCA can require a connection. Under HB 277, however, RCA couldn't because it would be an interstate movement of oil, and HB 277 restricts the RCA's authority to intrastate matters only. Therefore, passing HB 277 would result in the state's forgoing the power to require common carriers to connect to new fields. Number 1308 MR. BRENA discussed a situation in which a producer discovers oil but one of the common carriers needs to expand its capacity in order to efficiently develop the resource. The federal law doesn't require the carrier to expand capacity; under existing state law, however, the state, through the RCA, could require expanded capacity. Under HB 277, the state would forgo its authority to order a common carrier pipeline to expand its capacity to transport oil that's going to be transported out of Alaska, which is where most of Alaska's resources go. MR. BRENA turned to efficiency improvement. He pointed out that RCA has the authority to require that the pipeline facilities operate efficiently and at the lowest cost. However, FERC doesn't have that authority. If HB 277 passes, the State of Alaska will be forgoing its jurisdictional authority to require a common carrier pipeline to operate efficiently. MR. BRENA addressed abandonment. Under federal law, he said, the federal government could turn off the spigot on TAPS today and FERC would have no recourse. He emphasized that there is no federal abandonment authority. If RCA's authority is restricted to intrastate matters only, the state will be forgoing the ability to require them to continue to operate facilities that are necessary for interstate commerce. Number 1421 MR. BRENA suggested HB 277 is really about money, specifically, DR&R [dismantlement, removal, and restoration] money. Herein lies the problem, he said; there hasn't been an explanation of why this legislation should start to delve into the jurisdictional limits of the RCA, and there hasn't been a single example of abuse. MR. BRENA turned attention to the page of his testimony entitled "Jurisdictional Changes in HB 277." In the upper left box, a portion of the quoted material reads, "No federal law, federal regulation or federal order exists addressing post-collection treatment of interstate DR&R allowances on TAPS." He explained that DR&R funds will be overcollected. Originally, the life of TAPS was projected to be to 2011. On the $1.6 billion collected to date, such an amount has been earned that by 2011 there will have been an overcollection for DR&R of $30 billion. If the overcollections are refunded to ratepayers, the state should gain 25 percent of $30 billion, which amounts to $7.5 billion. The RCA's order said those funds could be required to be escrowed, which is why HB 277 is before the committee with all of its jurisdictional changes. "They" don't want the RCA to exercise its intended authority, he said, which is to protect the state's interest in the facilities, whether the oil flows in interstate or intrastate commerce. Again, the commission held that no federal regulation or order exists to address post- collection treatment, he noted. MR. BRENA then fast-forwarded to 2011, when TAPS carriers will have collected $40 billion and it will cost $10 billion to clean up. The question becomes where the state is going to get the refunds. He related his understanding that the state agrees overcollections are refundable. Furthermore, the state agrees that 25 percent of those overcollections would come into the state's treasury through additional royalty and severance taxes. If one assumes the above and assumes that $7.5 billion is on the table, he questioned where the money would come from. Number 1715 MR. BRENA asserted that this legislation eliminates what may be the only effective mechanism to ensure that the state has paid that money. The changes made by this legislation have a direct correlation [between the statutes]; rather than jurisdictional overlap, HB 277 has to do with excessive collections that TAPS carriers are trying to keep, while he is trying to obtain his clients' share. MR. BRENA continued with the possibilities of where the money could come from. If RCA is taken out of the equation as specified under HB 277, the $3.5-billion problem becomes a $3.2- billion problem. He pointed out that FERC may or may not have regulatory authority to order refunds or order those refunds to be escrowed. The [RCA] held that there is no federal law, order, or regulation that addresses that issue. MR. BRENA questioned how the refund would occur, even if FERC could order those refunds, because DR&R doesn't occur until after the pipeline is out of service. Before DR&R is complete, the pipeline is out of service for four years; therefore, the pipeline carriers have no money or reserves because they have been out of business for four years. Collecting from a company that has been out of business for a while doesn't work. Furthermore, the parent guarantees don't go to overcollection. He emphasized that there is no collection mechanism possible, that he is aware of, under federal law. If there is a collection mechanism, the state hasn't exercised it or made it clear. Therefore, Mr. Brena said he believes HB 277 will foreclose the only mechanism possible for the state to collect $7.5 billion. MR. BRENA pointed out that HB 277 changes the concept of retroactive ratemaking, the idea that rates can't be determined and applied backwards. Retroactive ratemaking is a very well established doctrine of law. This legislation changes the law such that one can't obtain any reparations from the point of the protest backwards. Mr. Brena requested, "If you're going to change the rules of how to go back, please don't apply them going back, because you foreclose people's rights." Number 2094 MR. BRENA directed the committee to Section 7 of the legislation, which correlates to page 11 of his written analysis. The new language under Section 7 is, "An order setting rates under this subsection may not affect rates in effect before the date the protest or complaint was filed, or the date of the commission action that initiated the investigation or hearing, whichever is earliest." The aforementioned is a redefinition of retroactive ratemaking. Mr. Brena posed a situation in which a company doesn't comply with its own tariff that specifies everyone will be charged $1; however, the company charges affiliated shippers $.50 and nonaffiliated shippers $1.50. This practice goes on for five years, at which time the discovery of this noncompliance leads to a investigation. MR. BRENA questioned whether the foregoing company should be able to keep the money if it had violated the terms of its own tariff. This legislation says yes, no matter how the money is obtained. Therefore, this legislation allows this company to keep the money from discriminatory practices until caught. He likened this to allowing a bank robber to keep all the money until caught. MR. BRENA informed the committee that RCA has 40 pending cases. No one has analyzed the impact that Section 9 of HB 277, the applicability provision, would have on all of the pending cases. There are two problems, he said. If substantive rights of ratepayers are going to be changed, do it so that there is an opportunity to protect them. Hence he suggested that [changes be implemented for the future as opposed to retroactively]. Mr. Brena encouraged the committee to read through his written remarks. He informed the committee that [his clients] have problems with virtually every section of HB 277. This legislation is poorly drafted, he said. He requested that the committee not pass this legislation and hold it to more carefully consider its impacts. [There was an announcement that the previously recessed meeting was adjourned and that the May 9 meeting was beginning; all members were present. However, these minutes treat it as one meeting, which is how it was scheduled.] Number 2510 REPRESENTATIVE HEINZE explained that she is looking at the larger picture and the future of this state. She related her belief that the future of the [oil] industry could be riding on this. "It seems to me that we made a deal, and that we've broken that deal," she said. She suggested that a large "producer" thinking about building a pipeline in Alaska would have to wonder whether it would stay connected with the state or even engage in a pipeline. She asked if Mr. Brena's clients would have the $20 billion to build a pipeline if one of the large producers didn't do so. MR. BRENA agreed that the state made a deal. The deal agreed upon was that the state wouldn't contest a rate set at or below a ceiling rate. The deal also specified that ratepayers had the right to request that fair rates be set, and if that was done, the RCA would have the right to set a fair rate. Mr. Brena pointed out that his written remarks include a quotation from the TAPS carriers and the state, in which those two represented that the deal allowed that any ratepayer in the future could file a protest and have a just and reasonable rate set. By the terms of the agreement, it only applied to the signatory parties. MR. BRENA said HB 277 breaks the deal because it changes the deal for the ratepayers. The only party that hasn't received the deal is the ratepayers, who were told that they could file a protest and receive a fair rate, a rate under the ceiling rate. Mr. Brena explained that he's asking the legislature to keep the deal made to the ratepayers when the deal between the state and TAPS owners was passed. MR. BRENA noted that regulatory certainty is very important for everyone involved. Regulatory certainty is linked to the concept that rates will be just and reasonable, and will allow the collection of the investment and operating cost along with a fair return. The aforementioned is all the ratepayers have requested, and that's all RCA has done, he said. Mr. Brena added that the deal [proposed in HB 277] is structured such that it discourages investment in Alaska because it allows return on a per-barrel basis, rather than on actual investment. Mr. Brena concluded by requesting that the legislature honor the deal. REPRESENTATIVE HEINZE requested clarification about the original deal. Number 2753 BONNIE ROBSON, Deputy Director, Division of Oil & Gas, Department of Natural Resources, said the Department of Law would be a more appropriate agency to answer. However, she related her understanding that the original settlement agreement between the State of Alaska and the pipeline owners allowed for other parties that didn't participate in the settlement to, at a later time, raise an issue about whether the tariff rates were just and reasonable. She offered her understanding that this is what happened with Tesoro and Williams in the proceedings before the RCA. MR. BRENA pointed out that committee packets contain eight pages of quotations from the TAPS carriers' briefs and presentations to the RCA. Number 2833 JANICE GREGG LEVY, Assistant Attorney General; Oil, Gas & Mining Section; Civil Division (Juneau), Department of Law, responded to Representative Heinze's question. She said from the administration's standpoint, the representation that the state will get billions of dollars if HB 277 doesn't pass isn't accurate; the RCA isn't in a position to refund any money to the state. Furthermore, this legislation doesn't prohibit any shipper from seeking refunds from the RCA or the FERC for overcollections of DR&R. Therefore, Ms. Levy said she believes this is an attempt to shift the focus to another arena. She said nothing in this bill, from her legal standpoint and the policy standpoint, would preclude the determination of just and reasonable rates, which is what she believes the legislature created the RCA to do. REPRESENTATIVE WOLF asked if there is a sunset date for this agreement. MS. LEVY answered that the TAPS settlement agreement will expire by its own terms in 2011 if no party makes any changes. A provision allows the parties to begin to renegotiate after December 31, 2006. TAPE 03-40, SIDE B REPRESENTATIVE KERTTULA asked how, under the jurisdiction of both FERC and RCA, the [state] can ensure the ability to fairly allow access so as to ensure the [state's] independence while maintaining a vital oil industry. She asked about the impacts of this legislation. Number 2879 MR. BRENA explained that under existing state law, the state's power to regulate and manage facilities has two pillars: the inherent police power of the state to regulate common carriers, and the state's power to contract and develop its proprietary resources. Mr. Brena pointed out that this legislation eliminates the RCA's authority to exercise its power under the contract power of the state because it deletes the phrase "relating to leases". Furthermore, it eliminates all regulatory power of the state to ensure access, sufficient capacity, and nonpremature abandonment of the common carrier infrastructure that's necessary for the interstate transportation of oil, which is the vast majority of the oil today and into the future. REPRESENTATIVE KERTTULA noted that the legislature doesn't have authority over FERC or the federal government, and therefore [HB 277] only affects the RCA. She inquired as to Tesoro's and Anadarko's rights because they'd be the entities going to FERC requesting access. MR. BRENA replied, "None. The ... federal regulatory regime is extremely limited. It doesn't require certification." The federal regime is entirely silent on all of those infrastructure-related questions; it only says those entities that build a line have to charge a just and reasonable nondiscriminatory rate. The federal regime doesn't specify that the entity would have to provide capacity, allow connections, and so forth. He said this legislation limits the state's authority through the RCA to fill that regulatory gap because of the state's concern. He pointed out that the Act was drafted the way it was because the state was concerned with development of its natural resources, while the federal regime isn't at all concerned with that. Therefore, HB 277 would eliminate the state's ability, through the RCA. MR. BRENA pointed out that no other regulatory agency addresses any of these issues to ensure sufficient infrastructure to transport oil in interstate commerce out of Alaska. He reiterated that the existing Act is seamless and says, "To the degree not preempted by federal law, or to the degree that federal law doesn't do it and preempt us, the state exercises its full authority." As soon as [the state] backs off from that, a gap is created that undermines the state's ability to ensure that infrastructure is in place and adequate for the development of the state's own natural resources. Mr. Brena asked why one would delete the language which says that state authority goes all the way up to federal authority. Number 2681 REPRESENTATIVE GUTTENBERG turned attention to the RCA Order 116 [docket P-977] and inquired as to the situation that brought this legislation to the table. MR. BRENA answered that in 1977 Tesoro filed a protest requesting that the commission initiate an investigation into DR&R because it had been so dramatically overcollected. He pointed out that DR&R is unique as a rate element because it's collected today, but isn't spent for 40 or 50 years. Typically, the regulatory contract is such that the DR&R money is collected today and if there's money left over, it is returned to the ratepayers. In Tesoro's calculation, $10 billion has been overcollected. Therefore, Tesoro would like the RCA to establish how much money has been collected and earned on what's collected; how much DR&R is going to cost; what the life of the line is; and if there are overcollections, how those are going to be refunded. Tesoro does not want to leave [open] those mechanisms until the last four years after the pipeline is out of business. "They just collected too much from us, and we want our money back," he concluded. Number 2594 CHAIR FATE asked what RCA's Order 151 specified. MR. BRENA explained that Order 151 determined how just and reasonable rates should be set on TAPS, and then set those rates for 1997 through 2000. Order 151 determined that the ceiling rate methodology that the TAPS carriers proposed for setting their rates, and had been charging, resulted in excessive rates. Therefore, the commission adopted a different methodology, set just and reasonable rates, and ordered refunds of the overcollections to the shippers. Number 2520 REPRESENTATIVE KERTTULA related her understanding that [the state] can require DR&R, and hopefully obtain the overpayments, if there are any, at the end. She asked if [the state] can require that the interest [on those overpayments be repaid]. In terms of the right-of-way agreements, it's more about the fact that everything gets cleaned up at the end [that is important], she suggested. MR. BRENA first agreed [DR&R] and the right-of-way agreement have nothing whatsoever to do with the issue of overcollections; so that just specifies what needs to be cleaned up with regard to state lands, excluding Native lands, private lands, and federal lands. MR. BRENA then pointed out that [the issue of overcollections] isn't addressed any other place. Furthermore, other pipelines do have escrow accounts and funds. If the escrow of funds is required, one can set them up so that there is no charge for taxes. Therefore, one can actually collect about 40 percent less from the ratepayers. MR. BRENA related his belief that the correct calculation of DR&R collection should be how much was collected. If [DR&R collections] were escrowed, [then the calculation should be with regard] to how much was earned on those escrowed funds. If [DR&R collections] weren't escrowed, the internal rate of return on the capital for which it was used [should be included in the calculation]. MR. BRENA explained that in the case of TAPS, the internal rate of return for a 10-year period for the TAPS owners was 16.5 percent. He views DR&R as a fund of money that is the ratepayers' money until spent. If the [TAPS owners] use that money and earn 16.5 percent on it, those are the earnings for which the they should ultimately be responsible because those earnings are based on the ratepayers' funds. Mr. Brena agreed that earnings on DR&R is a major issue. Number 2362 REPRESENTATIVE KERTTULA turned to the issue of retroactivity and the impact it would have on the 40 pending cases. She asked if the concern is as follows: if the rules change, the change should be [effective] after those cases are finished; thus no one would enter the game and then have it changed midstream. MR. BRENA replied yes. He specified that the concern is twofold: substantive and procedural. If this legislation passes as it stands, it would affect both the substantive and procedural rights of ratepayers and existing clients in existing claims, and in some cases perhaps foreclose them altogether. Mr. Brena added: If you're going to change the rules on people, or if you're going to change rights between stakeholders, it hurts regulatory certainty to go backwards and do that. It should only be done going forwards. And so it should only be done with regard to new matters that are filed before the commission. MR. BRENA related that [retroactivity] goes to the constitutional bar on ex post facto laws. Agreeing with Representative Heinze that it isn't fair to change deals, he said, "If you pass House Bill 277, it not only changes the deals as they were represented to the commissions, but it also changes them going backwards, and ... that just isn't fair. Number 2226 DAVE HARBOUR, Commissioner, Chair, Regulatory Commission of Alaska, Department of Community & Economic Development (DCED), highlighted that the RCA is virtually always the lone decision maker that bases decisions solely on the merits of the case, as the legislature specifies. Therefore, he characterized the RCA as more like the legislature's advisors and the governor's advisors than one of two sides of an issue. MR. HARBOUR turned to concerns raised regarding Section 9, which addresses the applicability of pending matters. He related his belief that every single one of the pipeline dockets now before the RCA would be affected in either the DR&R, the interest rate, or the facility issues. He clarified that there are about 30 [open] dockets, not 40, because some dockets have been combined. MR. HARBOUR pointed out that the predecessors of this legislature 30 years ago envisioned what has been discussed here today: state regulatory jurisdiction would flow out to meet the regulatory jurisdiction of the federal government, and thus there would be no regulatory void. However, this legislation creates a number of voids, specifically, at the end of Section 4 on page 5 of [the proposed CS dated 5/6/2003], the deletion of the language, "except to the extent they are preempted by federal law." He said the meaning is almost reversed. Although he acknowledged that the aforementioned is within the purview of the legislature to do, he suggested that the legislature would want to do this mindfully. CHAIR FATE turned to an earlier statement that [the TAPS owners] have received a 14 percent return on investment. Recalling testimony from the industry that around 13 percent is not high because of the risk incurred by the companies, he inquired as to Mr. Bolea's thoughts. Number 2008 AL BOLEA, President, BP Pipelines Alaska, explained that the rate of return when regulatory agencies review pipeline investments is a judgment of the amount of risk undertaken by the investor. He informed the committee that back in 1976, when the $9-billion pipeline investment was being made, it was the single largest private investment in the history of the United States; furthermore, it was viewed as the highest-risk investment ever made in the United States. During the negotiations with the [Alaska] attorney general and the Department of Law, he said, the appropriate rate of return was a key issue. He explained that the TAPS [tariff] settlement methodology (TSM) was structured in such a way to generate a rate of return. He further explained that the rate of return was generated by all the investment being recovered in the front end. All costs [of the TAPS carriers], the $9 billion for the pipeline, an estimate of DR&R, was all front-end-loaded. Furthermore, TAPS carriers earned a rate of return as a level amount over the entire life of the pipeline. MR. BOLEA suggested that Mr. Brena is choosing a rate and applying it to an amount of the asset that hasn't been recovered. Moreover, the recovery in any year has declined. Mr. Bolea said one can't choose a single number in a year, take 14 percent, for example, multiply it times the remaining rate base, and say that's the appropriate amount of money TAPS carriers should be earning, given the TSM model. Rather, one must look over the entire life of the transaction and determine whether the rate of return was excessive or not. Furthermore, 14 percent as a rate of return over the entire life of TAPS falls within the range of reason relative to the risk, he opined. He said, "We would've argued back in 1976 that a higher rate of return was justified, and the state would've argued a lower rate of return. But a 14 percent rate of return, within the 14, 15, 16 range, would be reasonable." Number 1820 CHAIR FATE turned to the issue of capacity and noted that the oil pipeline is running half full. He asked how big an issue capacity is in the future, relative not only to filling the pipe, but also to the pump stations, the upgrading of the pipeline, and new technologies. He asked Mr. Bolea if he could foresee a situation in which the TAPS carriers could add capacity to the present TAPS pipeline. Although gas is another matter, one would begin to infringe on the Stranded Gas Act, which moves into the area of capacity, he suggested. MR. BOLEA informed the committee that currently the pipeline's physical capacity is 2 million barrels a day. The pipeline is running at about a million barrels a day; in order to do this efficiently, many of the pump stations are shut down. The cost of maintaining shutdown pump stations is incredibly high. Therefore, [TAPS carriers] are incurring costs to hold capacity in place, and all those costs are bearing on the rate that everyone pays to move their barrels [of oil] through the line. Furthermore, these pump stations are effectively 30 years old. The opportunity to replace these old pump stations with new pump stations is being evaluated. Although the TAPS owners haven't decided what the right investment will be, they are generally committed to trying to make the pipeline more efficient and to last for a longer period of time. MR. BOLEA said the intention of the TAPS owners is to use a technology that is more modular, with smaller electric motor units that can stack easily. For example, six units could be stacked next to each other and connected to a header, and there would be enough hydraulic capacity for 1.1 million to 1.3 million barrels a day, to four pump stations. If more capacity is needed, given that this technology is largely off the shelf, it's easy to order more pumping units and stack the units. The intention, he explained, is to leave the manifolds in place on the pump stations that are removed and have the flexibility within perhaps 36 months, if another Prudhoe Bay is discovered, to bring the pipeline capacity back up to 2 million barrels a day. "It's ... in our best interests to move as many barrels as possible. It's not in our intention to shut in barrels on the North Slope," he said. Number 1646 RANDAL BUCKENDORF, Counsel, Anchorage Legal Department, ConocoPhillips Alaska, Inc., returned to Chair Fate's question regarding the 14 percent rate of return. Mr. Buckendorf said: I presume that from portions of the testimony that I was not present at - but I have heard that figure before - the number that's used is used very specifically, and it is a 14 percent return on equity, which is different than the average weighted return. You earn a different interest on equity versus debt, so there's a weighted average. So they use that very carefully. It's not the weighted average that was earned. There's a big difference. MR. BUCKENDORF said the actual rate of return in the TAPS settlement agreement for those earlier years was 6.1 percent, which was negotiated carefully by the state and the justice department. Beyond those early years, an incentive-based return was negotiated. He said no guaranteed return was even in the settlement agreement; rather, as an incentive for the affiliates of the pipeline owners to explore for and produce more oil, there was essentially a zero return and an incentive-based per- barrel allowance. MR. BUCKENDORF turned to the issue of capacity and recalled that Mr. Bolea has discussed "strategic reconfiguration," which will be going through review. He noted that there have been many meetings with the Joint Pipeline Office, including several meetings with RCA. That process is underway and will [be available] for approval in the near future, he said. However, Mr. Buckendorf said he wasn't sure how this legislation will come into play with that. Number 1495 REPRESENTATIVE KERTTULA asked if this legislation keeps [smaller] companies like Tesoro and Williams from being able to connect or use the facilities or to use TAPS in the future. MR. BOLEA replied, "It is not our intent and it is completely out of line with our economic interests to restrict access to the TAPS line. The more barrels flowing through the line, it averages down the cost, which benefits everybody." MR. BUCKENDORF turned to the legal perspective. He said every pipeline on the North Slope is jointly regulated under federal and state law, and therefore subject to intra- and interstate regulation; every pipeline is subject to being a common carrier, since state and federal right-of-way leases require common carriage; and [TAPS owners] are required to accept, as long as there is capacity, every barrel that comes there. In the event a barrel cannot be accepted, regardless of who brings it, [TAPS] has to prorate every entity that's bringing those barrels. MR. BUCKENDORF recalled that a lot of information has been given regarding what HB 277 will or will not do regarding the ability to force connections. Although Mr. Buckendorf said he hadn't had time to fully analyze all that, at first glance he disagreed with every statement. He related his understanding that Chair Fate intends to hold this bill until Monday, and he offered to go through the various statements made this morning. However, he said he doesn't believe HB 277 will impact the ability of anyone to connect to any of the pipelines in the state. Number 1283 REPRESENTATIVE GATTO remarked that although Mr. Buckendorf mentioned that it's not in the best interest of [TAPS owners] to deny someone's putting oil in the pipeline, it wouldn't be in the their best interest if it didn't produce more income than needed to make the bottom line. Therefore, Representative Gatto asked what would keep [TAPS owners] from gouging, since there are no other pipelines. MR. BOLEA answered that it's against the law; [TAPS owners] aren't allowed to discriminate and every shipper must pay the same rate. REPRESENTATIVE GATTO asked if this would be so even if the entity only had a hundred barrels a day. He asked if the entity would have to deliver it to the pipeline or just tell the pipeline that it had oil which [TAPS] should get and put into the big line from the little line. MR. BOLEA explained that the system works in such a way that those who want to make a connection to TAPS, for example, have to meet the standards prescribed in the TAPS agreement: they have to meet certain pressure, temperature, safety, and integrity standards. He noted that those who want to connect to TAPS bear the cost to get connected to the line. Once connected, they pay the same rate as everyone else on the line. The common carrier can't discriminate in any way, shape, or form among the carriers. Number 1137 REPRESENTATIVE KERTTULA returned to DR&R, the interest rate, and whether [the state] has the right to expect any certain rate of return. MR. BOLEA said he was going to answer from the TSM methodology negotiated with the state. He explained that the state and TAPS carriers in 1976 had to develop a methodology to define how the costs and rate of return were going to be recovered, which is the TSM. The methodology is fixed; it's just a formula. Every year the actual numbers for the year or estimates for the subsequent year are loaded into the formula, and the product of that formula is the tariff. MR. BOLEA said although the methodology is fixed, the tariff is a function of actual costs during a year. At the time of the settlement, no one knew what it was going to cost to dismantle, recover, and restore TAPS. Furthermore, no one knows that now. Although engineers do estimates, he said, "The reality is, what it's going to cost is an enormous risk." He noted that there isn't even a prescribed standard that the state and federal government will define, a standard that they want to recover at the time. Therefore, the TAPS owners have taken on the entire risk of what it's going to cost to abandon, recover, and restore TAPS. That is, as part of the negotiation, what the state wanted; the state wanted certainty because it wanted some predictable revenues. MR. BOLEA said a fixed amount of money, $1,549,000,000, is prescribed in the agreement; each year the TAPS owners were permitted to recover a piece of that $1,549,000,000. He related his belief that the TAPS owners are one or two years away from recovering the balance of the $1,549,000,000. "Subsequent to that, it is completely our risk," he said. Whatever happens with rates of return and rates of inflation, the actual scope of work is completely the TAPS owners' risk. Under the settlement agreement, there is no prescribed rate of return, and there are no refunds. "It was a settlement, deliberately, with the intent of ensuring that the state had no exposure," he added. Number 0889 REPRESENTATIVE KERTTULA noted that the shippers have the right to challenge these rates. She asked if that's part of what's happening in docket [Order] 116. MR. BUCKENDORF answered, "That is correct." Over the past month, a lot of the testimony here has focused on the TAPS settlement agreement and methodology, and what this legislation will or will not do. Mr. Buckendorf related his belief that needed clarifications are in the current CS. This legislation doesn't validate or invalidate that agreement, he asserted; all those rights still exist. However, the TAPS owners will be dealing with Mr. Brena, on appeal or before the commission, for a long time in the future. With regard to the current docket on DR&R for the rates at issue in Order 151 for the years 1997-2000 and 2001 forward, that docket is in brief before the RCA. MR. BUCKENDORF noted that a week ago Thursday the TAPS carriers agreed to forgo those intrastate rates for DR&R under the agreement for the years 1997 forward, simply to save the cost. Basically, the TAPS owners will spend more litigating this than they will collect. Yesterday the RCA requested further verification and briefing around those questions in order to determine whether or not that docket can be closed. Number 0628 REPRESENTATIVE KERTTULA asked if Ms. Levy had anything to add. MS. LEVY turned to access and capacity. She said the state would agree with the testimony of Mr. Buckendorf and Mr. Bolea that there is a mechanism already in place that requires the pipelines to have a certificate of public convenience and necessity to operate a pipeline in the state. The RCA issues that certificate, and one condition of the certificate is that the [pipeline] be a common carrier. Furthermore, [one condition is] to permit interconnections when another explorer or shipper desires to connect to the main line. There could be additional interconnection even with a feeder pipeline. Therefore, she didn't believe there would be a regulatory gap there, she said; furthermore, she didn't believe there would be any situation in which there would be the inability to ship the state's resources, which is what everyone here is concerned about. REPRESENTATIVE KERTTULA directed attention to Section 5, page 5, of the proposed CS. She asked if that language is intended to support the right to go to the RCA in terms of not allowing the reduction of capacity or the reduction in transportation services. Or is it just to deal with DR&R instead? MS. LEVY explained that the new language - "reduced capacity" and "reduction in transportation services" - was inserted to assure people that the deleted language - "discontinue use of all or any portion of a pipeline"- wouldn't permanently reduce capacity or transportation services. She explained that the deleted language is deleted to assure that the pipeline owner, whether it be TAPS or any other pipeline in the state, retains some flexibility in equipment used to provide efficient, cost- effective transportation. This was addressed by Mr. Bolea during his testimony regarding the need to reconfigure in a circumstance where there is 30-year-old equipment, she noted. Number 0330 REPRESENTATIVE GUTTENBERG drew attention to the new language, "or reduction of transportation services", and inquired as to the meaning of "services". MS. LEVY answered that "services" isn't defined in the statute, although it's used regularly within the statutes and the regulations. Therefore, a definition certainly can be understood from the language that's there, she said. The transportation service is the function of the pipeline; it's to transport the resource. MS. LEVY moved to the topic of interest rates. She pointed out that [the interest rates] are an issue that remains available for litigation before the RCA or the FERC, and she didn't believe the bill eliminated that concern. She recalled that Mr. Brena had a concern that the FERC might not have jurisdiction by the time the shipper got around to seeking refunds. However, she said the administration would submit that these are sophisticated entities that are already litigating that issue before the RCA. Furthermore, nothing stops them from going to the FERC today, next year, or in 10 years when TAPS is still in full swing, and discussing the issue of whether too much has been collected for DR&R. Therefore, she said, she didn't believe the legislation prohibited any such action or left a regulatory gap in that regard. REPRESENTATIVE KERTTULA related her understanding that someone has to look at the life of the rates to be able to determine whether the 14 percent is correct. Yet protests must be filed within a certain amount of time. She asked how that can be done properly. MS. LEVY remarked that DR&R is a unique subset of costs collected through the rates. As illustrated by decisions from FERC and RCA, she said DR&R costs are viewed a little differently from others. Thus it's always possible to go in and discuss that component for which nothing has yet been spent. TAPE 03-41, SIDE A Number 0001 REPRESENTATIVE KERTTULA turned to retroactivity. She asked, if this legislation will impact [30 RCA] cases, whether it would be better to specify that it's prospective only. MS. LEVY characterized the issue of retroactivity as a policy question for the legislature to consider. From the administration's perspective, she said, one should keep in mind that rate proceedings go on for a long time. For example, there are open dockets dating back to 1986. Therefore, if someone wants to look prospectively, this action may not affect cases for another 20 years. MS. LEVY pointed out that on a regular basis, the legislature passes laws that affect proceedings. She explained that the administration was concerned about the original legislation's having a retroactive provision with regard to the interest rate; there was concern that it would affect potential refunds if Order 151 were upheld by the courts. Although it wasn't improper from a legal perspective, she said, from a fairness standpoint the administration supported removing that retroactive provision. She characterized the remaining provisions as more "policy" because, in the administration's view, they don't change the course of anything, but clarify and provide guidance. Number 0297 REPRESENTATIVE GUTTENBERG pointed out that page 7, line 25, seems to give the authority for tariffs and other things affecting the state to the attorney general. Therefore, he inquired as to how big a shift in policy that would be from the RCA to the attorney general. MS. LEVY replied that this isn't a significant shift at all, but a clarification of what has been in practice ever since there have been pipelines in this state. Years ago, she said, the legislature made it clear in a pipeline Act that the attorney general - the Department of Law, as the agency - was to handle pipeline matters before the FERC. The aforementioned is also the intent with regard to pipeline matters before the RCA, although it's not as express, and this legislation would clarify that. Additionally, the administration would submit that, in any event, the authority over pipeline matters resides with the attorney general because there is a statute that specifies that when the authority isn't expressly given to other agencies, it falls to the most logical agency. In the case of pipeline matters, this has been the Department of Law in conjunction with any of the affected agencies. Number 0454 REPRESENTATIVE HEINZE asked if the language "just and reasonable" is a binding term. MS. LEVY replied that it's a legal term of art defined through court decisions and the regulatory bodies. Nothing in this bill would change the RCA's ability to determine what just and reasonable rates are on the pipelines it regulates, she said. Number 0515 CHAIR FATE, upon determining there were no other questions, closed public testimony. CHAIR FATE indicated the committee would continue with HB 277 on [May 12, 2003]. He said the next meeting will be for questions only, and thus the Department of Law, the Division of Oil and Gas, the industry, the Alliance, and others with expertise in these matters may want to be available for questions. [HB 277 was held over.]
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