Legislature(2003 - 2004)
05/01/2003 03:26 PM House O&G
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
May 1, 2003
3:26 p.m.
MEMBERS PRESENT
Representative Vic Kohring, Chair
Representative Hugh Fate
Representative Jim Holm
Representative Lesil McGuire
Representative Norman Rokeberg
Representative Harry Crawford
Representative Beth Kerttula
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Mike Chenault
COMMITTEE CALENDAR
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."
- MOVED CSHB 277(O&G) OUT OF COMMITTEE
PREVIOUS ACTION
BILL: HB 277
SHORT TITLE:PIPELINE UTILITIES REGULATION
SPONSOR(S): REPRESENTATIVE(S)DAHLSTROM
Jrn-Date Jrn-Page Action
04/17/03 1026 (H) READ THE FIRST TIME -
REFERRALS
04/17/03 1026 (H) O&G, L&C
04/22/03 (H) O&G AT 3:15 PM CAPITOL 124
04/22/03 (H) -- Meeting Canceled --
04/23/03 1081 (H) COSPONSOR(S): KOHRING
04/24/03 1108 (H) RES REFERRAL ADDED AFTER O&G
04/24/03 (H) O&G AT 3:15 PM CAPITOL 124
04/24/03 (H) Heard & Held
04/24/03 (H) MINUTE(O&G)
04/29/03 (H) O&G AT 3:15 PM CAPITOL 124
04/29/03 (H) Scheduled But Not Heard
05/01/03 (H) O&G AT 3:15 PM CAPITOL 124
WITNESS REGISTER
REPRESENTATIVE NANCY DAHLSTROM
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Testified as sponsor of HB 277; presented
Amendment 1.
AL BOLEA, President
BP Pipelines (Alaska) Inc.
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 277.
MARK HANLEY, Public Affairs Manager, Alaska
Anadarko Petroleum Corporation
Anchorage, Alaska
POSITION STATEMENT: Testified that significant problems exist
with HB 277 even after Amendment 1; said it will create more
uncertainty for some, that the Regulatory Commission of Alaska
(RCA) is necessary, and that the existing process is fair.
GENE BURDEN, Senior Vice President for Government Relations
Tesoro Petroleum Corporation
Anchorage, Alaska
POSITION STATEMENT: Testified that his company has significant
issues with HB 277, although glad for Amendment 1.
ROBIN O. BRENA, Attorney at Law
Brena, Bell & Clarkson
Anchorage, Alaska
POSITION STATEMENT: Testified in opposition to HB 277 as
attorney who represents Tesoro before RCA; said the RCA process
is working; asked that facilities regulation not be removed from
the Alaska Pipeline Act and that options not be taken away from
the state; answered questions.
GREGG D. RENKES, Attorney General
Department of Law
Juneau, Alaska
POSITION STATEMENT: Testified on HB 277, specifying that he was
speaking on behalf of the Department of Law, the Department of
Natural Resources, the Department of Revenue, the governor, and
the administration; said the bill was acceptable as amended, but
suggested possible areas of improvement.
DAVE HARBOUR, Chairman
Regulatory Commission of Alaska (RCA)
Department of Community and Economic Development (DCED)
Anchorage, Alaska
POSITION STATEMENT: Expressed concerns that HB 277 will erode
the regulatory scheme; suggested following the money; answered
questions.
JEFF COOK, Vice President of External Affairs
Williams Alaska Petroleum, Inc.
North Pole, Alaska
POSITION STATEMENT: Testified on HB 277, saying Amendment 1
helps but that concerns remain; emphasized need for an ability
to appeal rates.
MARGARET A. YAEGE, Vice President for Prudhoe Bay
ConocoPhillips Alaska, Inc.;
President, PHILLIPS Alaska Pipelines
Anchorage, Alaska
POSITION STATEMENT: During hearing on HB 277, emphasized the
desire for certainty.
RANDAL G. BUCKENDORF, Counsel
Anchorage Legal Department
ConocoPhillips Alaska, Inc.
Anchorage, Alaska
POSITION STATEMENT: Testified in support of moving HB 277 from
committee, but suggested the need for clarifying amendments.
ACTION NARRATIVE
TAPE 03-20, SIDE A
Number 0001
CHAIR VIC KOHRING called the House Special Committee on Oil and
Gas meeting to order at 3:26 p.m. Representatives Kohring,
Holm, and Fate were present at the call to order;
Representatives Kerttula and Crawford arrived immediately
thereafter. Representatives McGuire and Rokeberg arrived as the
meeting was in progress. Also present was Representative
Chenault.
HB 277-PIPELINE UTILITIES REGULATION
Number 0047
CHAIR KOHRING announced that the committee would hear 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."
Number 0081
REPRESENTATIVE NANCY DAHLSTROM, Alaska State Legislature,
sponsor of HB 277, brought attention to Amendment 1, labeled 23-
LS0980\D.1, Craver, 5/1/03, which read:
Page 1, lines 5 - 8:
Delete "; 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"
Page 4, lines 11 - 24:
Delete all material.
Renumber the following bill sections accordingly.
Page 6, line 7:
Delete "Sections 1 - 7 and 9 of this Act apply"
Insert "This Act applies"
Page 6, line 9:
Delete "of secs. 1 - 7 and 9"
Page 6, lines 10 - 19:
Delete all material.
Number 0160
REPRESENTATIVE DAHLSTROM, noting that she'd met with
stakeholders, indicated her goal is to have legislation
acceptable to all parties, and thus the amendment removes some
of the more contentious bill sections.
The committee took an at-ease from 3:27 p.m. to 3:28 p.m. to
distribute copies of the amendment, which had just been
provided.
REPRESENTATIVE DAHLSTROM explained that Amendment 1 removes
Sections 5 and 9.
CHAIR KOHRING suggested adopting it before the public hearing.
Number 0602
REPRESENTATIVE HOLM moved to adopt Amendment 1 [text provided
previously]. There being no objection, it was so ordered.
Number 0668
AL BOLEA, President, BP Pipelines (Alaska) Inc., noted that he
is the performance unit leader for his company's midstream
assets in Alaska, which includes all its interests in the Trans-
Alaska Pipeline System (TAPS) and the ships that carry Alaska's
crude oil to West Coast markets. He thanked the chair and
members for meeting with him during the past couple of weeks to
discuss this bill. He then told the committee:
As you know, BP strongly supports HB 277 and
encourages this committee to facilitate its movement
through the legislative process. ... We support the
bill because it helps to correct many serious flaws
that currently exist in the Alaska Pipeline Act [APA].
These flaws create uncertainty for current and
potential future investments, and must be rectified to
ensure a healthy oil and gas industry in Alaska. In
fact, these flaws are so significant, they need to be
addressed to ensure investment in risky ... projects
like the Alaska natural gas pipeline.
While I will not cover all of the deficiencies nor all
the recommended changes in the pipeline Act, I would
like to touch on just a few key points. The current
language in the pipeline Act creates uncertainty over
jurisdictional issues, creating unnecessary overlap
between regulatory agencies. This has allowed special
interests to push the Regulatory Commission of Alaska
onto a path of what I call "jurisdictional creep" into
areas [for] which other agencies are responsible.
This "creep" has created an awkward situation, it
seems to us, in which the RCA is creating public
policy by undoing the actions of other agencies that
are implementing their regulatory responsibilities.
We had always operated on the assumption that the
legislature and administration create public policy,
not the regulators.
House Bill 277 goes a long way toward fixing such ...
problems in that, ... first, it clarifies that RCA's
jurisdiction is limited to intrastate transportation,
with the FERC [Federal Energy Regulatory Commission]
having jurisdiction over interstate matters including
interstate dismantlement, removal, and restoration -
DR&R - expenditures. Second, it eliminates the RCA's
jurisdiction over state right-of-way leases and oil
and gas leases, and clarifies their authority over
DR&R. The Department of Natural Resources [DNR] has
jurisdiction ... over these matters and serves to
protect public interest.
Number 0827
MR. BOLEA, noting that Amendment 1 removed Section 5, addressed
remaining changes proposed in the bill. He said one is to
clarify that the interest rate applicable to RCA-ordered refunds
is "consistent with the main body of Alaska law and is not ...
the punitive rate of 10.5 percent being sought by Tesoro and
Williams." Finally, the Act, as amended, clarifies that the RCA
has jurisdiction over intrastate transportation services; he
said other regulatory bodies have jurisdiction over physical
components of the pipeline system. He told members:
Together, the amended Act helps to reduce uncertainty
in a way that will encourage, rather than reduce,
investment in Alaska. You will, no doubt, hear
negative ... testimony that encourages you to maintain
the existing language. Those special-interest voices
are not the ones spending hundreds of millions of
dollars on capital projects every year. But BP is -
$750 million this year on capital alone. They are not
the largest private industry investor in Alaska. BP
is. We invest in Alaska because it makes sense for
our business, and [it] has been done in a way that has
made mutual benefits for the residents of this state
and our shareholders.
In closing my testimony, we believe those mutual
benefits can and should continue. Your support of
House Bill 277 will help the state move forward in a
very positive way. It is a bill vital to the future
of this state, a bill that is one of the essential
ingredients that can support an Alaska [gas] pipeline
becoming a reality.
MR. BOLEA told members that because of current litigation on
pipeline issues, he'd asked the company's attorney, Jim Decker,
to join him in handling any questions.
Number 1046
REPRESENTATIVE CRAWFORD asked Mr. Bolea how he proposed to make
the interest rate fair and equitable.
MR. BOLEA recommended that the Alaska Pipeline Act adopt the
same rates as "all the other main body of the Alaska ...
legislation adopted in 1997, which is a floating rate." He said
those floating rates are public information.
Number 1181
MARK HANLEY, Public Affairs Manager, Alaska, Anadarko Petroleum
Corporation, indicated his company is one of the so-called
special interests [referred to by Mr. Bolea]. He told members:
We're one of the world's largest independent
exploration companies, and we are very interested in
the exploration potential in Alaska. We're investing
more all the time. We do not invest the kinds of
dollars yet that BP and others do. We're actually
partners with some of the people, and actually
ConocoPhillips is one of our good partners in
exploring for oil and gas in Alaska. But at times you
have differences with your partners.
Number 1245
MR. HANLEY called attention to a complicated, 486-page RCA
decision issued last December, noting that tens of millions of
dollars were spent in five years trying to determine what is a
just and reasonable rate for shipping oil down this pipeline.
He told members:
Let me just summarize ... what they found, what I
think the real issue here is. ... And the real issue
is that rates in Alaska are ... substantially too
high. And according to the RCA, the carriers in this
state have collected from the shippers almost $10
billion in excess of what is a reasonable rate of
return. That allows them to collect their capital
investment, their operating costs, and a reasonable
rate of return - and, on top of that, they've got
another $10 billion.
That's what this is about - it's a lot of money. And
people are trying to protect that money, and I can't
say as I blame them. On the other hand, companies
like ours, if we're forced to pay $1.00 or $1.50 a
barrel too much in transportation costs, it really
affects the economics of our projects.
Now, companies that are integrated - that own both the
exploration side and the transportation side - they
can take the profit on either side. And, in fact,
every dollar in excess of transportation costs above a
reasonable rate costs the state 25 cents. They get to
deduct their transportation costs before they have to
pay royalties and severances. So there is an
incentive for companies who are carriers to shift
costs to a pipeline.
The way we are protected, both in-state refiners,
exploration companies - both independents and majors
that do not own part of the pipeline - [is] through
the regulation of that pipeline. And for the first
time since 1977, someone - the FERC or the RCA, and in
this case the RCA - made a judgment call that those
rates were excessive. ... To be very clear, that's
exactly what this bill is about, in most cases.
Number 1402
MR. HANLEY thanked Representative Dahlstrom for Amendment 1,
which removed sections he believed to be onerous and thereby
improved the bill. He said, however, that the company has
significant problems with the rest of the bill as well. He
explained, "It continually pecks away at the authority of the
RCA to effectively determine whether or not rates are just and
reasonable. And I think for people that come in the future,
exploration companies and others, it's critical that they have
that authority."
MR. HANLEY referred to written testimony submitted by Dave
Harbour, chair of RCA, and said:
He goes through section by section, not just the
sections that were removed, and explains the problems
or concerns, I guess, from his perspective, with the
bill, suggesting that it does undo several recent RCA
decisions and ... makes significant changes to the
RCA's role in regulating all pipelines, in response to
one or two [what] he calls "special interest parties"
attempting to reverse an RCA order only affecting
TAPS.
So I just want to say that we would agree with a lot
of the things that he has said here. I will say that
there are people following me who have an awful lot of
expertise ... in these fields. It's very complex.
There are integrated pieces of this program.
There's a report from ... a professor of law from the
University of Texas who helped write the pipeline Act,
and it talks about the nature and constitutional basis
and explanation of the proposed pipeline legislation.
And as you go through here - this is from 1972 - it
was the basis for how this was put together. And they
are very linked pieces.
MR. HANLEY suggested reading the foregoing because it describes
exactly why this was put together the way it was. He added, "I
would suggest that they would not claim it's duplicative. It
protects the state's rights in many instances."
Number 1556
MR. HANLEY referred to reasons for the original pipeline Act and
read from a report titled The Politics of Oil:
The independent producer's oil is frequently
discriminated against through a range of practices and
in effect flows only at the direction of the pipeline
company. The pipelines serve to limit the
marketability of crude oil produced by nonintegrated
companies, forcing them to sell at the wellhead. They
also block the purchases of independent refiners
located ... away from the fields, while giving
advantage to the integrated company that may build its
refineries near consumer centers.
MR. HANLEY said that 86-page report from 1967 anticipates what
will happen in the future for carriers, "exploration folks," and
refiners. He cautioned about removing pieces from RCA that were
put together as part of this package in a comprehensive fashion.
He urged thorough evaluation and said:
We feel pretty strongly that some of the pieces being
pulled out of here are going to make it more
difficult; they're going create more uncertainty for
us. They may create more certainty for some of the
other players, but I can tell you, for people like us
that don't own the pipe, it's going to create more
uncertainty.
MR. HANLEY again encouraged members to spend time reviewing the
issues and listening to experts who would testify after him.
Number 1667
CHAIR KOHRING, acknowledging that opinions differ among
committee members as to what RCA's role should be, opined that
perhaps RCA over the years had become onerous and controlling of
the marketplace. He offered his belief that government's
involvement should be as little as possible, removing obstacles
but not guaranteeing any market share or providing any special
considerations for participants.
Number 1736
MR. HANLEY responded that when there is a monopoly, there is a
reason for regulation. He said his company would agree with
wanting the minimal regulation possible, but emphasized the
desire to have reasonable rates. He added that some sections
removed by Amendment 1 would have made Alaska unique in the U.S.
in how rates are set, and suggested Alaska doesn't want to be
known as the state that is unable to review whether rates are
just and reasonable. Noting that there is an ability to shift
rates up and down and thus recover costs, he went on to say:
We're just looking for reasonable rates. That's a
standard process around the country. ... The
interesting thing is, I haven't heard the other
companies suggest that the decision has been wrong
that was made out there, that suggested that the rates
were excessive. ... The state is losing potentially
billions of dollars, companies like ours are being
affected, and future exploration is being affected.
So I would agree with you that we're not looking for
excessive regulation. But at some point you need
somebody, on a regulated monopoly, to determine what a
fair rate is.
CHAIR KOHRING said he disagreed in large part but respected
Mr. Hanley's opinion.
Number 1834
REPRESENTATIVE HOLM asked whether, without RCA in place, there
would be very little regulation of what is charged on the
pipeline with regard to transportation costs.
MR. HANLEY replied that it is RCA's job to set rates on the
intrastate portion. It evaluates costs that need to be
recovered as well as the operating costs, the capital costs that
have been invested, and amounts for DR&R.
Number 1874
REPRESENTATIVE HOLM asked Mr. Hanley whether he believes RCA is
necessary to the state in order to have this process.
REPRESENTATIVE HANLEY said yes, he absolutely believes it is a
necessity, unless it is replaced and called something different.
Number 1902
REPRESENTATIVE HOLM asked where FERC fits in and how Mr. Hanley
would like to see the process be more fair to people who don't
own the pipeline with regard to developing the rates.
MR. HANLEY replied that he believes the basic process that
exists is appropriate. He explained:
If we see an unjust rate, we are able to go to the
Regulatory Commission of Alaska for intrastate rates
and appeal it on that basis. If we feel there's [an]
inappropriate rate on an interstate rate, we can go to
the FERC and appeal it ... at that place. So ... I
guess I would say the system, as it exists, gives us
the ability and gives those agencies the ability and
the authority to review rates to determine if they are
just and reasonable. And I think that's what we would
support.
REPRESENTATIVE HOLM said he wasn't sure he agreed.
Number 1983
GENE BURDEN, Senior Vice President for Government Relations,
Tesoro Petroleum Corporation, requested that Robin Brena join
him at the witness table. Referring to Mr. Hanley's testimony,
he agreed that Amendment 1 helps but that significant issues
remain with the rest of the bill. He told members:
Tesoro is an operator of a refinery, a small pipeline,
[and] service stations in Alaska - about 600 employees
in the state. And we are very much dependent on the
intrastate shipment of crude oil from both the North
Slope and from the Cook Inlet area to our refinery;
that's what we operate with. And over the years,
going back to the early days, transportation of crude
oil on the trans-Alaska pipeline, we bought a
considerable amount of royalty crude oil and oil from
some of the producers ... on the Slope. Over those
same years, we became increasingly concerned that the
rates that were being charged on the line were worthy
of investigation because, as was previously indicated,
there never had been a determination of what a just
and reasonable rate is for the trans-Alaska pipeline
until this decision that recently was issued by RCA.
MR. BURDEN said he wouldn't cover points just covered by Mr.
Hanley, who did a great job, but would relay a couple of points
before deferring to Mr. Brena. He told members:
This issue has tremendous financial implications for
independent refiners and for independent exploration
and production companies in the state. And, just as
importantly, it's got tremendous economic implications
to the State of Alaska. Even taking Section 5 out,
the issues dealing with ... DR&R ... are [of] enormous
potential to the coffers of the State of Alaska, as
well as to the future of the operation of that line.
Number 2133
MR. BURDEN said he'd spoken with some legislators and received
the impression that there'd been a misunderstanding. He
explained:
A lot of the incentive towards moving forward
initially with this bill was based on a comment that
was in a letter dated March ... 26, 2003, from
Mr. Gallagher of ConocoPhillips to Representative
Anderson, seeking rate certainty for all shippers and
... essentially indicating that the Regulatory
Commission of Alaska had overturned a 1986 agreement
with the state that ended seven years of litigation.
And that's just not the case. The decision of RCA did
not overturn the agreement between the state and the
TAPS owners. The decision was exactly within the
provisions that the TAPS owners expressly acknowledged
at the time that settlement was reached.
Number 2203
MR. BURDEN reported that he'd looked at the record from the time
of that agreement, both written and [recorded] testimony from
the State of Alaska and the TAPS owners. He said the record has
abundant occasions when there were statements such as one made
in a brief from the State of Alaska in support of commission
approval of the TAPS settlement agreement: "Alaska and the TAPS
carriers have explicitly asked the commission to approve the
settlement on the basis that Petro Star, AEC [Alberta Energy
Company Ltd.], and future shippers not be bound by the
agreement's terms." Mr. Burden went on to say:
The TAPS carriers repeatedly expressed the same thing,
both in writing and in testimony before the
commission, as this was being approved. Counsel for
the TAPS carriers, I quote: "Nothing in the agreement
deprives the commission of its jurisdiction to look in
the future at whether the TSM [TAPS settlement
methodology] rates are unreasonably high." That's
exactly what took place.
When we talk about deals, this was part of the deal.
And in retrospect, ... we can look back and we can be
critical of the deal the state reached and say the
state left a lot of money on the table. That's for
somebody else to determine. That was part of the
deal. The fact is, having the ability of shippers
that were not signatory to the deal raise questions as
to "just and reasonable rates" was also part of the
deal.
... We have taken exception through the last few weeks
as we've heard representations to the fact that this
is something needed in reaction to a decision by RCA
that interfered with or reversed the deal. It just
didn't do that.
Number 2339
ROBIN O. BRENA, Attorney at Law; Brena, Bell & Clarkson,
speaking as the attorney for Tesoro Alaska Company on matters
before the Regulatory Commission of Alaska (RCA), noted that
he'd distributed his testimony and bullet points. He told
members:
Where I think we would all agree ... is that Alaska's
natural resources should be developed efficiently and
fairly. ... I think we'd all agree that the refinery
infrastructure should be viable within the state. In
order to accomplish those goals, the transportation
rates on the Trans-Alaska Pipeline System have to be
fair. If they're not fair, then independent producers
will be forced off the Slope because they have to pay
too much money to transport their crude oil off the
Slope.
It wasn't that many years ago, members of the
committee will remember, when Conoco was explaining
why they left Milne Point and sold it. And their
explanation was simple: "The transportation rates on
TAPS are too high for us to develop the Milne Point
field." Conoco was an independent producer at that
time and had no interest in the Trans-Alaska Pipeline
System, and they were forced out of Alaska because the
TAPS rates were too high. If the TAPS rates are too
high, the state doesn't get its fair share of revenue.
... For every dollar that the transportation rate is
too high, there's 25 percent of that that is royalty
and severance taxes due the state, so the state
doesn't get its fair share if the TAPS rates are too
high. And, in fact, the current rates on TAPS are
costing the State of Alaska between $120 and $150
million each year because of the current settlement
that the state is in. So if the rates are too high,
it's not fair to the state.
Finally, if the rates are too high, it's not fair to
the refiners and the shippers who are the ratepayers
on this system. We pay these rates. I am the person
who filed the protest on behalf of Tesoro to get a
fair rate for my client in late 1996. We protested
the 1997 rates.
For the five years prior to that protest, the TAPS
carriers had recovered between 102 and 134 percent
return on their investment per year. Their entire
remaining investment on the Trans-Alaska Pipeline
System was recovered every year for five years before
we filed our protest.
Number 2476
MR. BRENA called RCA's Order 151 an historic decision because
it's the first time standard ratemaking practices have been
applied to TAPS in 25 years of operation; it determined that the
TAPS carriers have overcollected to date about $10 billion. He
said it has cost the state $2.5 billion to date; if it goes on
for another 10 years, it will cost the state another $2.5
billion. He told members transportation rates are a real issue
and that Order 151 set a just and reasonable rate. Referring to
Chair Kohring's remarks earlier, he added:
No, I do not believe that the RCA was too onerous.
It's the first time that a fair rate got set on this
line in 25 years. It's what its statutory authority
was to do. And what did it do? It allowed the TAPS
carriers to collect 100 percent of their investment
... without any reduction whatsoever - 100 percent of
every penny of their operating costs - and allowed
them a 14-percent return. And the amount that they
collected above that was $10 billion. That is what a
"just and reasonable" rate is. The rates on this line
are way excessive. They hurt production on the Slope.
They hurt the state's revenues. They hurt the
viability of the refining industry within ... Alaska.
Without regulation, there's nothing preventing them
from charging $100 a barrel and completely eliminating
all revenue from royalty and severance taxes. ... They
would have the complete ... ability, without a rate-
setting process, to force every independent off the
Slope and to close down the viability of the refining
industry in Alaska. These are very important issues.
What ... House Bill 277 ... is about is that they lost
a rate case and a rate got set that was fair. And
they don't like that. And so they're here to try to
undo that.
Number 2602
MR. BRENA addressed questions that had come up with regard to
individual provisions. With respect to facilities regulation
and whether it is duplicative, he told members:
Let me say that what the entire debate over facilities
regulation truly is, is the fact that they have
overcollected DR&R by over $10 billion today. Why
should the RCA have authority over DR&R? Because it's
paid by the ratepayer; it's the ratepayer's money.
And so what ... they're attempting to do through this
legislation is - after they've overcollected $10
billion from the ratepayer - they're trying to
foreclose the ratepayer from receiving refunds of any
of those overcollections. And the vehicle that
they're using is this bill.
... If you eliminate facilities regulation from this
line, you eliminate access. The RCA economically
regulates the line. That isn't duplicative with what
DNR does with regard with ... what you can do with
pumps and what the right-of-way terms are. It's
economic regulation of the facilities and carriers.
If somebody wants to connect to this line, that is an
issue for economic regulation. And without facilities
regulation, ... someone can be denied access to a
common-carrier line. It goes to [whether] the capacity
is insufficient to provide the service. With
facilities regulation today, the TAPS carriers can be
ordered to expand capacity to meet the service that's
necessary.
Number 2685
MR. BRENA continued:
And abandonment - you can't shut the line down until
there's a determination that it's in the public
interest to do so. What they are effectively
proposing is the federal regulatory regime with the
Alaska Pipeline Act with regard to facilities - which
is to say, FERC has no authority over facilities.
They ... can't say who comes into business. They
can't say who connects. They can't force the TAPS
carriers to expand. And ... whenever they want to go
out of business, they can go out of business ... and
the FERC has no authority whatsoever to have a public-
interest hearing to determine whether or not to permit
that.
So please don't take the word "facilities" out of the
Alaska Pipeline Act. I have a memo ... I'll make
available to the committee. It was done by Professor
Witherspoon; he was a professor of law at the
University of Texas. He drafted both the [Alaska]
Right-of-Way Leasing Act and ... the Alaska Pipeline
Act. He drafted them so that the state would maximize
its power over its common-carrier facilities. ... It's
an 80-page report, and it explains ... that ... the
basis for this authority is what's necessary. And in
a large part why the pipeline Act is written the way
it is, is to solve the failure of the federal regime.
So you've got a good Act here that's better than the
federal Act; you've got the person that drafted it
that made it stronger, that gave this state more
options. And you're talking about taking those
options away from the state. Please don't do that.
Number 2759
MR. BRENA turned attention to the interest rate and said:
We looked at this issue. I had a rate-of-return
person take a look at a 10-year period to see what the
internal rate of return on capital for the TAPS owners
was. It was 16.5 percent interest.
So bear in mind that the only reason that they'll ever
have to pay a penny of interest ... is if ... they
file a rate they can't support. If they file a rate
they can't support and they overcollect from their
ratepayers, then they have to pay the money back; they
make 16.5 percent on that money that they take that
they can't support. And they have to pay it back
currently at 10.5 [percent].
To make them pay it back at 4 [percent] gives them an
opportunity to file whatever rate they want, collect
it in the three years that it takes to resolve it,
make 16.5 percent - and that's on our money - and then
pay us back 4 [percent]. The interest rate in the
statute today is too low and creates an incentive for
the TAPS owners to charge rates that they can't
support.
Number 2817
MR. BRENA urged care with regard to these issues. Acknowledging
that he hadn't had time to analyze [the amendment], he also said
the bill is a little confusing with the amendment. He
explained:
It didn't change that orders go forward, prospective
only. That isn't even what the FERC does. Let me
give a hypothetical. Let's say they come in tomorrow
and raise their rate 1,000 percent and they ...
eliminate the economic viability of the refining
industry in Alaska completely, and they collect that
rate. And we go ask the commission to set a fair
rate, and they do, five years from now. We don't get
any refund - we don't get any money back. I believe,
the way ... this is read, they get to keep all that
money; ... they have the complete authority over ...
what they charge.
MR. BRENA, mentioning the possibility of overcharging a
tremendous amount, referred to page 6, lines 1-4, and requested
clarification by the sponsor. He said, "What that provides now
is, if you determine a rate's unjust and unreasonable, you
determine a 'just and reasonable' by order. But in the future
language that's added, it eliminates the opportunity to go back
and ... get the money back."
Number 2900
MR. BRENA told members the process is working before the RCA.
He explained:
I understand the RCA isn't the favorite agency all the
time with the legislature, and I appreciate the
legislature's attempt to make it run more efficiently.
But when they finally start doing something right and
set fair rates on TAPS for the first time in 25 years,
that's not the time to go take their authority away to
do what they're supposed to be doing. So I would ask
you not to do that.
MR. BRENA also asked the sponsor to clarify whether the bill is
intended to determine all the pending litigation before the
commission currently. He added:
We won a rate case and got a fair rate, and we're
entitled to some refunds. And their rates are open
for a while. And if what they're trying to do is keep
the money that they weren't entitled to collect from
us ... through this [legislation], I'd like that
clearly stated.
MR. BRENA noted that he has done rate litigation for 20 years
before FERC and before RCA and other state agencies.
Number 2968
REPRESENTATIVE McGUIRE referred to a document mentioned by Mr.
Brena from a professor in Texas.
MR. BRENA said it explains the constitutional basis and thinking
behind the way he'd drafted the Alaska Right-of-Way Leasing Act.
TAPE 03-20, SIDE B
Number 2966
[Mr. Brena handed out copies of the 80-page document to
members.]
MR. BRENA noted that it explains the way the author set things
up and all the good reasons for doing it, which [this bill
contradicts].
Number 2955
REPRESENTATIVE HOLM said:
I'm not sure I quite understand why the rate ... was
wrong for 25 years and then all of a sudden the rate
is right. I know when I contract and want rates with
my oil company, I pay them based ... on the dollars
per gallon that I pay. And when I make a deal with
them, they have to inform me when it changes or so
forth and so on. Where was RCA in the past 25 years?
And ... to go along with that, why did it take you 5
years to file ... a complaint when you knew there was
a problem?
MR. BRENA replied:
First, to the degree there is blame to an agency, it
was the APUC [Alaska Public Utilities Commission, the
predecessor of RCA], and the RCA is relatively new.
And since the RCA has been there, to its credit, it's
taken this issue on and set a fair rate. ...
Let me explain that, in just trying to set this one
rate, the TAPS owners spent $15 million in litigation
expenses against us. So, it's not something done
lightly. Tesoro's crude supply is by some of these
people. The ... regulatory system doesn't work very
well if the regulator isn't engaged in protecting the
rights of the ratepayer. If it relies on the
ratepayers who have business relationships with
others, it just doesn't work very well.
But let me say that, ... depending on your
perspective, perhaps, and I won't ask the people that
pay the bill, ... but they had to file cost reports
against us. And when BP and ConocoPhillips and Exxon
decide they do not want to be subject to economic
regulation by this state, this state spent $35 million
trying to get a just and reasonable rate before FERC
and was unable to do so, and settled on rates that are
$150 million higher than standard ratemaking practices
would allow. ... And the state has the hugest interest
in all these issues.
So why does a small guy -- you know, there's a million
barrels a day going through, and there's not very many
of them that are ours. And they put huge resources to
avoid the economic regulation, and they've done it for
years so. So we were the first to challenge this
rate, ... but it didn't come lightly. The decision
didn't come lightly, sir.
Number 2822
MR. BRENA, in reply to questions from Representative Kerttula
with regard to the intrastate-versus-interstate aspects, said:
Where should the RCA's authority end and ... the
FERC's begin? Under the current law, the state
regulatory agency has all authority that isn't
preempted by federal law; it's a clear line. If
there's federal preemption, the commission doesn't
have authority; if there's not, they do have
authority. I absolutely know where that line is.
There is no federal preemption with regard to
facilities regulation. There is no federal preemption
with regards to abandonment. There is no federal
preemption with regard to many DR&R issues. ... The
federal regime fails in all of those areas.
So the state authority is quite broad in those areas.
I know where that line is, and it needs to be drawn
between intrastate and interstate. ... If you change
the jurisdictional provisions of the Alaska Pipeline
Act, I do not know where the jurisdictional line will
be drawn, but I can guarantee that it'll be drawn
after millions of dollars of effort to try to find the
line that's being redrawn in a couple of days that got
drawn by a professor after months of research.
Number 2722
MR. BRENA continued:
I believe the other question went ... to the state's
TAPS settlement agreement. So let me paraphrase that
entire settlement agreement in a sentence. ... The
TAPS carriers agreed to charge rates at or below a
ceiling rate in exchange for the State of Alaska's
agreement not to protest rates set at the ceiling or
lower rate. That's it. ... You get into the
methodology of determining ... that ceiling rate -
doesn't matter. That is the whole deal.
The deal was also that it only bound them. And [Mr.
Burden's] comments and, earlier, Section 5 - what
Section 5 does is forces the ceiling rate in this deal
on nonsignatory parties. It forces us to pay rates.
And the deal at the time was -- I offered testimony in
support of the TAPS settlement in 1986 when it was
offered, so Tesoro supported that. But it only bound
the state and TAPS owners, and they told us in return,
if Tesoro disagrees with ... the ceiling rate that's
set or any rate that's set, they can go to the RCA and
set a fair rate.
We've done that. And now they're coming at us with
[HB] 277 to try and take back what they offered us,
but still keep the benefit of the deal. They have the
benefit of their deal because the state's not
protesting their rates; the state has the benefits of
its deal ... because the TAPS carriers are filing at
or below the ceiling rate. We're the ones being left
out in the cold here.
Number 2634
REPRESENTATIVE KERTTULA acknowledged that Mr. Brena hadn't had
time to reanalyze the effect now that Section 5 has been removed
by Amendment 1. She then asked how DR&R is impacted by this
bill. She offered her understanding that although RCA has the
right to deal with the rates, it would be up to the Department
of Natural Resources (DNR) and possibly the Department of
Environmental Conservation (DEC) to ensure that cleanup,
removal, and dismantling happen. She requested confirmation.
MR. BRENA replied in the affirmative and said:
In talking about DR&R, let's break it into two
categories: the money that's collected from the
shippers that needs to be collected through rate
regulation ... from either jurisdiction, and then
DNR's authority, ... my understanding of it is exactly
how you stated it - they have the right of lease; they
say what needs to come out. ... Let me give you an
example. Let's say they collect $20 billion of DR&R.
They collect and earn. They have collected from the
ratepayers $1.6 billion ... of DR&R, and they've
earned an average of 16.5 percent return on [those]
funds ever since, ... starting in 1977 forward. ...
The economic regulation is not duplicative. What
about overcharges? What about refunds? What about if
they charge too much? That - the economic regulation
aspect - has nothing whatsoever to do with ... DNR.
... And the reason that this bill has provisions in it
to take ... DR&R authority away from the commission is
because it is in the middle of a docket addressing
what to do, how to calculate the total amount that's
been collected to date, and what to do ... to be sure
that those funds are available to conduct the work.
Number 2514
REPRESENTATIVE KERTTULA asked whether the settlement actually
envisions setting up a fund. She added:
Doesn't the RCA's ability really go more toward the
rate itself? Now, I'm not saying that was a great
idea or a great plan; it's just that the way that I've
always understood it was that it was the rate, and
that - fortunate or unfortunate for the state - there
doesn't have to be any fund, that there has to be the
absolute cleanup, and that it absolutely has to be
taken care of, but there's sort of that missing piece
in the middle, which ... the state may be bound by.
I'm not sure how the effect goes, on you.
MR. BRENA responded:
The settlement is silent on the most important DR&R
term, which is whether overcollections are or are not
refundable. If they are refundable, then the state
will recover another $3 billion as of today, and ...
that amount rose substantially. The settlement
doesn't address the issue either way.
I understand the state's position to be that they are
refundable and the TAPS owners' position to say
they're not refundable. With regard to the separate
fund, ... again, this is a ceiling-rate methodology.
The RCA has not ordered a separate fund. Either way,
if they do order a separate fund -- I mean, the
problem is, where's the money going to come from to
conduct the DR&R?
Number 2444
MR. BRENA continued:
And from the state's perspective, they have two
problems: where's the money going to come from - and
their answer is "parent guarantee" - but, then, where
are the overcollections going to come from, because
the parent guarantees only cover the work and don't
ever cover the refund of the overcollection.
So, let's fast-forward. We're at the end of the line.
The TAPS has been out of service for four years.
There's $10 billion of DR&R that's been done. There's
$10 billion left over. How can the state get that
money? The guarantees don't cover it. It's not in
the fund. ...
To answer your question as directly as I can, the
settlement's silent on these terms, and they're within
the regulatory authority ... of the commission to
address them. And they're in the process of
addressing them, and I would encourage you to allow
that process to go forward and see what comes out of
it, and see to what degree the state's interest is
preserved.
Number 2390
CHAIR KOHRING reiterated concern about RCA's being a tool for
players in the industry to gain access to the pipeline and to
get the rates they'd like. He also reiterated his desire for
less regulation and greater ease in permitting so that the
marketplace can control the situation. He suggested it should
cut both ways and asked what happens if rates go in the opposite
direction and the pipeline owners believe rates are too low, go
to RCA, and demand a refund from [companies like Tesoro].
MR. BRENA agreed government should be efficient, but replied:
They monitor their rates. And this is the same with
your electric utility, with your water and sewer
utility, with everybody else. If they undercollect
the amount that they think they're entitled to,
they're entitled to go in and ask for a rate increase.
So it does work both ways - they can. ...
And I would love to be in a situation ... where they
had a viable case ... that they were underrecovering
on this line, when they're, in fact, recovering 100
percent per year. ... If that were the scenario, then
it does work both ways, and they can go file a rate
case in a heartbeat and get back every penny they're
entitled to. ... And if we get to escrow it, if we get
a temporary rate lower than the rate that's ultimately
deemed to be fair, then it is.
And, if I may just make one brief comment: we didn't
get the rate we wanted to see. We got a rate higher
... than we wanted to see. But the commission issued
the order. ... How much more should someone be
entitled to than 100 percent of their investment,
100 percent of their costs, and a 14-percent return?
... Your telephone company doesn't get that; your
electric utility doesn't get that; your water and
sewer doesn't get that. ... That's a fair rate, if
you're going to set rates.
CHAIR KOHRING voiced appreciation for the company's investment
in Alaska but also concern about excesses in government.
Number 2203
GREGG D. RENKES, Attorney General, Department of Law, informed
members that he'd been asked by the governor at the last minute
to attend, since Commissioner Irwin of DNR was in Anchorage.
Attorney General Renkes said he was speaking for DNR, the
Department of Revenue, the Department of Law, the governor, and
the administration. He told the committee:
It's been difficult. The agencies have worked hard
over the last week to look at this from a number of
different directions. We think that there's a lot of
positive things and a lot of positive concepts in this
bill, and we'd like to see it move forward; we support
it.
We do recognize, however, that there are concerns with
Sections 5 and 9; those are particularly
controversial, and we would support the amendment
that's been offered here today ... and moving this
bill forward in the legislative process.
ATTORNEY GENERAL RENKES said while some concepts in Section 5
may have merit, he wanted to look at it over time with regard to
providing some regulatory certainty, to allow all parties'
interests to be heard and considered, but in a way that achieves
more finality than traditional ratemaking provides with respect
to tariffs now. Noting that Section 9 would make the interest
provision retroactive to 1997, he told members:
Some have said that ... the provision is
unconstitutional. We don't think that that's correct,
but we do believe that at this time we can't support
it as a matter of fairness.
We think the place ... to address ... Order 151, which
we were just discussing, is in the appeal process and
not through this legislation. With the amendment
today on Sections 5 and 9, ... we think that maybe we
can make some further improvements in the language ...
during the legislative process.
Number 2071
ATTORNEY GENERAL RENKES continued:
But we do think the bill could help the state with
some improvements in three important areas, and I hope
that the committee will keep these areas in mind as
you consider this. One is the strategic
reconfiguration of the Trans-Alaska Pipeline System
that Alyeska [Pipeline Service Company] is involved
in. It's a $400-million investment. It's going to
upgrade 20-year-old technology. It's going to improve
efficiency and safety ... and reduce cost of the
transportation of oil in the pipeline - so very, very
important.
The estimates that we've been briefed on it [suggest]
that it will reduce the cost of transporting oil in
the pipeline 60 cents a barrel; that's a significant
reduction ... in the cost of transporting oil. This
could help us develop our heavy oil fields on the
North Slope. So anything we can do to streamline the
permitting process - reduce the amount of time and
cost involved in reconfiguring the trans-Alaska
pipeline, updating it, making it modern, reducing the
cost of the transportation of our oil - is in the
interest of the State of Alaska.
I think that there are elements of this bill that
could help with that process - could reduce the time,
the regulation, and cost of reconfiguration of the
TAPS line. And that's something to look closely at.
It's an important objective for the administration.
Number 1979
ATTORNEY GENERAL RENKES continued:
The second thing that I want to address is the
Stranded Gas Act that you passed, a very important
piece of legislation. We want to start the process to
negotiate - and we're working with the legislature
closely in that regard - ... the Stranded Gas Act ...
fiscal package. We think that there are elements of
this legislation that could help us, in those
negotiations, provide ... fiscal certainty, which is
the objective of the Stranded Gas Act negotiations.
So we want to look at this legislation with that in
mind: how can ... we improve the process and
strengthen the ability of the state to work with ...
the project sponsors for the pipeline to produce a
fiscal package that provides fiscal certainty for
those people who are going to invest up to $20 billion
in the project, and the state in the future.
Number 1948
ATTORNEY GENERAL RENKES continued:
And then the third thing I have on my mind when I look
at this legislation is our current effort to
renegotiate the TAPS settlement agreement. We've
heard a lot of testimony about "the tariff's too
high." ... Listening to Mr. Brena's testimony, he
thinks that the state negotiated just a terribly
rotten deal in 1986. I don't think necessarily they
see it that way. I think it's in the eye of the
beholder. ... Some people would say that we saved
ourselves $23 billion in the settlement; other people
think that we cost ourselves $10 billion.
We certainly ended 10 years of litigation. I think it
was probably an important settlement. And you can
always "Monday morning quarterback" these things, but
... what is important is that we're going to have 30
more years of pipeline use, we've got new rights-of-
way agreements in place, ... we're going to put more
oil through the pipeline than was anticipated in 1986,
[and] we're going to get a longer life out of the
pipeline than we anticipated in 1986.
Conditions have changed, and ... we think it's
appropriate to renegotiate the TAPS settlement
agreement. Perhaps we can achieve lower tariffs; I
think we should be able to. But, under the agreement,
there's no responsibility to renegotiate until a call
for renegotiations, 2006, that can be completed in
2009, and the agreement's in place till 2011. So, if
we want to have earlier renegotiations, to know what
the tariff's going to look like, 2011 or beyond, or
maybe - and, of course, no one's agreed to this, but
maybe even implement tariffs at an earlier date -
we're going to have to be able to provide some
certainty as part of that agreement.
Number 1841
ATTORNEY GENERAL RENKES continued:
So ... elements of this bill that will help us and
give the state more leverage - give the state more
tools to work with in renegotiating the TAPS
settlement agreement, help bring the owners of the
pipeline to the table to create an interest for them
in renegotiating the TAPS settlement agreement - are
important policy objectives for the state.
So I think those three things, which are really, I
think, legacy issues - reconfiguration of the TAPS
line after 20 years, renegotiating the TAPS settlement
agreement, and negotiating a stranded gas fiscal
package - these are very, very important items for the
state. I think this legislation bears on those
efforts that are currently underway, and we think that
this legislation can help in that regard.
Number 1787
ATTORNEY GENERAL RENKES reported that there are some ambiguities
in existing statute regarding who has jurisdiction over DR&R and
whether RCA has jurisdiction beyond intrastate transportation
services. He suggested it would be beneficial to provide
clarity with regard to what the responsibility of the DNR and
its commissioner is under the right-of-way lease terms, and what
RCA's responsibility is. He also highlighted the importance of
clarifying RCA's jurisdiction and that it is limited to
intrastate matters, even when it comes to DR&R.
Number 1741
ATTORNEY GENERAL RENKES, in response to a question from
Representative Fate, indicated the interstate rates were
negotiated through a settlement agreement in 1986; that was
reviewed by FERC. However, there was no settlement agreement
with respect to intrastate shipment of oil.
Number 1676
REPRESENTATIVE KERTTULA referred to Section 7 and Mr. Brena's
comments. Noting that the last sentence on line 4 says an order
may not be retrospective in its application, she asked whether
the attorney general thought it might be better to have it read,
"prior to whatever it is being challenged". She said the
language appears to be a possible bar to being able to properly
recover under an order.
ATTORNEY GENERAL RENKES inquired whether she was asking if the
language could be read to suggest that companies could keep
overcollections accrued during the time of a proceeding.
REPRESENTATIVE KERTTULA added, "You might have a proper order
that might not be able to be implemented." She suggested that
probably wasn't intended.
ATTORNEY GENERAL RENKES replied, "I'm not sure that was the
intent. And when I said we could work with the language to
improve it in sections, that's one area that we flagged for
improvement."
Number 1607
CHAIR KOHRING asked whether HB 277, as amended, is acceptable to
the administration.
ATTORNEY GENERAL RENKES answered in the affirmative but added,
"We'd like to reserve the opportunity in the legislative process
to make some tweaks on this for issues like technical issues -
that we can improve the language."
CHAIR KOHRING asked whether the attorney general sees the
amended legislation as a hindrance to the negotiation process
relating to the Stranded Gas Act that now is law.
ATTORNEY GENERAL RENKES replied no.
Number 1525
DAVE HARBOUR, Chairman, Regulatory Commission of Alaska (RCA),
Department of Community and Economic Development (DCED), asked
that his earlier written response to HB 277 be included in the
record with the following correction: on pages 1 and 4, the
reference to "TAPS between 1996 and 2000" should specify "TAPS
between year-end 1996 and 2000". He then told members:
Mr. Chairman, I know that you're sensitive to the fact
that ... I represent a party that is appointed by you
and the governor to be an unbiased ratemaking entity
to look after the just and reasonable rates that
pipelines and utilities operate under, and to care
equally for the consumers, ratepayers, as well as for
the good health of the utilities. And I join the
chairman and members in being obviously highly
supportive of private enterprise.
And I just have to say, after listening to the
articulate speakers that precede me, Mr. Chairman,
welcome to my world. You are listening, as we do on a
weekly basis, to some of the most well-schooled, well-
thought, well-spoken advocates for their companies
that are seen in Alaska. And oft times they are
joined by colleagues - that is, attorneys from around
the country - to present their cases to the
commission. I'm appreciative of that opportunity as
well.
But the job that we have ... is to carefully analyze
all of the input that's given after reading thousands
of pages of testimony and expert-witness material,
listening to oral ... argument, questions, cross-
examination, and then, based on the merit of the case
by statute, are led to make a decision based on that
record. And frequently there is at least one unhappy
party.
The legislature wisely set us apart from political
influence and directed that we protect ratepayers
while giving companies the opportunity to make a fair
return on their investments. And ... after only about
three months on the job, I am absolutely delighted to
report to you that the commission is executing its
appointed tasks in a way that would make you proud,
and will be happy at any time to give you the details
that fill in behind that broad statement.
Number 1301
MR. HARBOUR suggested that this year some companies in various
industries have come before the legislature using phrases like
"fiscal clarity" and "improved investment climate" to justify
circumventing the regulatory decisions RCA has been set up by
the legislature to make; he said he'd seen those companies argue
their best cases before the commission. Concurring with Chair
Kohring about the desire for minimal regulation, he said,
however:
At the end of the 19th century, early 20th century,
when utilities were in their infancy -- ... you've
heard of water being carried in wood pipelines and
you've heard about the ... beginning of electricity
and how it began to grow slowly. And in the early
days of those utilities, the complaints from
customers, as well as the entreaties from the
utilities themselves, went to their state
legislatures. And after they began to grow in
complexity and sophistication and their arguments
began to grow more voluminous, state by state by state
- until now all 50 states - concluded that they needed
regulatory commissions to handle the very difficult,
quasi-judicial, quasi-legislative adjudication that
accompanied all these myriad requests to the
legislature. And here we are today.
Number 1116
MR. HARBOUR continued:
I am going to suggest to you that all the people
appearing before you today are representing their
companies well. I will also suggest to you the old
theme of "follow the money." ... You've set us up to
be unbiased. You've built statutes up to assure that
the regulatory commission will not take consideration
from the people it regulates. And, when you think
about it, the only incentive that we have for doing a
good job is to make you proud, and also to survive
appeals from the court system. And we do very well at
that: 2,000 orders over the last three years; only 16
have even been appealed.
So, I do suggest that we look at incentives. And I'm
not going to get into detail, and I think you don't
want me to, over open issues that we have before the
regulated companies, that we do our best to understand
and make wise decisions about.
But I will suggest that you follow the money. I will
suggest that when it is claimed that "we are a big
company and therefore the amendments we propose are
valid and those who oppose them are special
interests," ... at the end of the session, if such
legislation is passed, follow the money. I would
suggest that if those same interests say that the
justification is to correct flaws, but the only flaws
that were corrected result in a flow of money to that
advocate, that that be seriously questioned.
Number 0983
MR. HARBOUR addressed questions posed earlier by committee
members, as follows:
I believe it was Representative Holm asked about "why
so long." The regulatory commission and its
predecessor [APUC] did not set out to hear these
matters. The regulatory commission, as is the role
you gave to it, was available when ratepayers wished
to have a forum for requesting investigation. And
that was done responsibly. And, as you know, there's
not been an outpouring of compliments for taking on
the tough jobs, which this agency does and does right,
per the incentives that I discussed with you just a
minute ago.
I believe it was Representative Chenault ... talking
about the difference between the regulatory
jurisdiction of FERC ... and this state commission.
And I will remind you that when the Alaska Pipeline
Act was being created in committee, ... some of us
have an old friend named Senator Cliff Groh who was
serving on that committee, and he said, ... on the
record, that the objective should be [basically] - I
can't remember the exact quote - but to fill the
regulatory void between the federal and state
jurisdiction in these matters. The FERC, ... I think
you would find, would accept uncontested settlements,
but does not set intrastate rates, and only deals with
interstate issues.
Number 0862
MR. HARBOUR highlighted natural tension among state departments
and remarked:
You have me here today as your, hopefully, most
unbiased counselor, because the RCA is set out to hear
the record on these issues. The State of Alaska,
represented by the distinguished attorney general
today, represents one party ... in the issues that
we've been discussing. And it has an interest in
that, and a valid interest.
And I'm just going to suggest to you that over a
period of time, legislators who hear from different
departments know that there's always a natural,
flowing tension between departments like natural
resources - seeking to maximize use of the land ...
under certain conditions including protection of the
environment - and the Department of Revenue, which
seeks other objectives - or may in a given situation.
And today the attorney general spoke on behalf of them
all. I'm not so sure that all of the departments of
state would reflect the same opinion ... if asked to
give them independently. But that's the prerogative
of an administration to form a position and advocate
it.
Number 0761
MR. HARBOUR cautioned that if this bill moves forward, a
regulatory regime that properly represents Alaska and also fills
the void between state and federal regulation would be seriously
eroded within a week's consideration. He cautioned that its
rapid passage isn't in the interest of the people and added, "At
the end of the day, I will just offer to you that because of the
incentives that I've just discussed, the RCA is your last forum
for independent counsel to you."
CHAIR KOHRING thanked Mr. Harbour for the RCA's work, doing what
the commission has been asked to do through legislation enacted
over the years.
Number 0520
JEFF COOK, Vice President of External Affairs, Williams Alaska
Petroleum, Inc., told members:
We operate the state's largest refinery, at North
Pole, refining some 70,000 barrels per day of Alaska
North Slope crude into products consumed by
businesses, industry, and individuals in Alaska. We
employ 500 people in our refinery, at our two product
terminals - one in Anchorage and one in Fairbanks -
and our 29 convenience stores. We also own a 3
percent interest in the Trans-Alaska Pipeline System
that was purchased in June of 2000, which is probably
a significant date, and the percentage is significant
also - or insignificant, as the case may be.
I am at a disadvantage in not having the amendments at
hand. The amendments certainly do help. ... However,
as others have said, there are remaining concerns with
the bill. Our main concern is that we have an ability
to appeal rates, including issues such as DR&R that
impact those rates. As the major shipper other than
the producers, we feel our interest in rates
[parallels] those of the State of Alaska and the
Alaska consumers.
MR. COOK concluded by saying although there have been
significant improvements in the bill, his company still has
concerns that parallel those discussed by the other refiners and
independents. In response to Representative Rokeberg, he
emphasized the need to have input and impact, through the appeal
process, on anything that affects shippers' rates. He noted
that certainly the issues with regard to DR&R affect rates.
Number 0250
MARGARET A. YAEGE, Vice President for Prudhoe Bay,
ConocoPhillips Alaska, Inc.; President, PHILLIPS Alaska
Pipelines, told members that she has responsibility for "our
interests in all pipelines in Alaska as well as some other
important assets." Noting that Mr. Buckendorf would provide
more detail, she said:
Contrary to much of the testimony you've heard, we do
not believe this is about the recent decision that was
made. This is not about undoing Order 151. This is
not about asking for legislative approval ... of TSM.
And it's not about eliminating the Regulatory
Commission of Alaska. And it's not about eliminating
rate regulation. None of those things are what we're
about here today.
What we're about here is certainty and the future. We
need certainty in rate regulation, just as we need
certainty in all of the other areas that you ... hear
us talk about with regard to fiscal certainty. And
... we are investing a lot of money in ... Alaska; we
are going to continue investing a lot of money in ...
Alaska. And our appetite for investment is linked to
the certainty of the environment in which we operate.
And it's very important to us that we get clarity from
the legislature about these issues that we believe are
vague in the pipeline Act, and that we believe the
Regulatory Commission of Alaska has been interpreting
much more broadly than the legislature intended - much
more broadly than we read or the Department of Law
reads the current regulation, the current pipeline
Act.
Number 0086
RANDAL G. BUCKENDORF, Counsel, Anchorage Legal Department,
ConocoPhillips Alaska, Inc., noted that he handles the company's
environmental legal work and its pipeline regulatory legal work.
He told members:
As Ms. Yaege has explained and as the attorney general
opined upon, the changes we have advocated for, and as
put forth by the bill's sponsor, are important for
future certainty. You have heard testimony that this
bill was designed to, and intended to, overturn recent
RCA decisions. As Ms. Yaege explained, that was not
the intent. ... Especially with the elimination of
Section 5, ... although I will discuss that a little
bit further, a lot of the testimony and discussion you
heard about that agreement are fine from a historical
perspective, but they're not at issue in this bill.
[Not on tape, but in the witness's written testimony, was that
this bill is about regulatory clarity and certainty and creating
an atmosphere for the future whereby explorers like
ConocoPhillips want to continue investing, exploring for new
fields, and building pipelines.]
TAPE 03-21, SIDE A
Number 0001
MR. BUCKENDORF continued, "To that end, we have worked
diligently in the last week, at the request of the sponsor, to
work with other companies toward some compromise language." He
expressed pleasure at the amendments proposed by the sponsor,
that the attorney general was interested in some further
clarifying amendments, and that Representative Kerttula had
brought up one that his company also views as critical.
Advocating for moving the bill out of committee, he offered the
following analysis:
Essentially, Sections 1 and 3 provide clarity of
jurisdiction. Sections 1 and 2 provide clarity of
jurisdiction with respect to the Department of Natural
Resources and right-of-ways. In contradiction to
[RCA] Chairman Harbour's statement in his letter of
last week, the changes to 1 and 2 would not remove RCA
authority to oversee money collected on intrastate
rates for DR&R. What it does is clarify, ... as
Representative Kerttula pointed to, what jurisdiction
the RCA properly has with respect to pipeline right-
of-way leases.
Pipeline right-of-way leases are contractual
arrangements between each pipeline owner and either
the Department of Natural Resources, the Bureau of
Land Management, or, in some case, private parties.
Any implication that the RCA can attempt to insert
itself into these leases - almost as if they were a
signatory party, when clearly they are not - is
unacceptable both from a contractual and a regulatory
point of view. Jurisdiction is a fundamental premise
of being a regulated entity, and it needs to be clear.
The administration, through Attorney General Renkes,
also believes that to be the case. HB 277 provides
that clarity in Sections 1, 2, and 3.
Number 0248
MR. BUCKENDORF continued:
Equal treatment in Section 6: the same interest rate
that applies to judgments under the pipeline Act has
always been the same interest rate that applies to
other judgments; that was the legislative intent in
1978 when it wrote this section of the Act. And we
believe the 1997 tort-reform amendments that pulled it
back from what was termed "the usury statute" to a
market-based rate - in response to Representative
Crawford's question - that is based upon a market-
based rate, the 12th Circuit [Court of Appeals] rate
plus 3 percent interest. It fluctuates with the
market.
We believe that the legislature intended that to apply
to the pipeline Act, but it has been questioned about
whether or not that is correct. As Chair Harbour
pointed out in his testimony, this is a decision that
the legislature can make and, we believe, should
make. The removal of Section 9 would apply this
decision point forward. We also agree with the
attorney general's analysis that it can make that
retroactive back to 1997; it would not be a
constitutional violation. That's a decision for the
legislature to make.
Third, retroactive ratemaking in Section 7, which also
addresses a question that Representative Kerttula had:
it's a common principle of regulated utilities that an
agency like the commission cannot bypass a term that's
called the "rule against retroactive ratemaking."
Essentially, Section 7 was intended to make this
clear.
Number 0399
MR. BUCKENDORF continued with Section 7:
However, just as Chair Harbour pointed out in his
testimony and sectional analysis, our suggested change
to this section ... was mutated by legislative
drafting, to say the least. ... Essentially, we
suggested a change to this section that would make it
clear that an order setting rates shall not affect
rates in effect before the date of the protest,
complaint, or commission action that initiated the
investigation or hearing.
Essentially, this is the same as Chair Harbour pointed
out in his sectional analysis. And that's the way ...
the commission - the APUC and the RCA - have always
interpreted that. However, they have been questioned
recently to reinterpret that in a different manner.
We believe that there should be clarification made to
the bill in its current form because it does not do
what was intended.
Finally, business certainty: as we've already
explained, we are neither asking you to overturn the
recent RCA decision in Order 151 on TAPS rates nor to
legislatively validate the TAPS settlement agreement.
Number 0490
MR. BUCKENDORF addressed Representative Fate's earlier question
about interstate-versus-intrastate agreements, saying:
There technically is an intrastate agreement. It is
essentially ... to close out ... eight years of
litigation and to cease what was anticipated to be ten
years of additional litigation. The State of Alaska,
through the Office of the Attorney General - in
coordination with the U.S. Department of Justice,
[which] wasn't a signatory; ... they agreed with it -
entered into the interstate agreement. That agreement
was, in fact, brought into and is, in effect, a nearly
identical agreement on intrastate rates. And I do
want to make that clarification regarding that
agreement.
Number 0573
MR. BUCKENDORF referred to Representative Holm's question about
where the RCA was for 25 years and the response that if there
was any blame, it was to the APUC. He said:
The blame that was stated was incorrect. Where was
the APUC? In 1986 the APUC approved that agreement
for rates in effect ... prior to 1986. Again, in
1993, they approved that agreement for years prior to
that time. They did not set just and reasonable rates
under it - that is correct - but they did approve it.
In 1993, that approval was subject to ... correct
calculations and an evaluation of the input; ... that
has yet to be done. But technically, even though ...
the APUC at that time approved those rates, they are
still open. And it is being argued that the recent
order should be applied back to those rates - in the
words of the State of Alaska in a recent briefing,
applied back in time 17 years, back into the past
century.
Number 0690
MR. BUCKENDORF provided further comment relating to the
Witherspoon memorandum:
Professor Witherspoon was a brilliant oil and gas
attorney, and he was hired for a reason. ... He came
in and ... looked at statutory authority, and he
created two Acts. Since that time, the [Alaska]
Right-of-Way Leasing Act has been amended many, many
times. Amendments need to happen. And it's the
legislature that should decide the policy about when
those should be made.
It's also interesting to note that the quote that
Mr. Hanley made regarding Mr. Witherspoon at the time
-- Professor Witherspoon wanted a futuristic look, and
it's that same look regarding protection of rates in
the future that ultimately led to the State of Alaska
and the [U.S.] Department of Justice looking at - when
they were entering into the settlement agreement -
what they wanted. They knew that Prudhoe Bay - the
... owners of Prudhoe Bay - there was going to be a
lot of oil coming through. And they knew that it was
going to be a very profitable point in time. So what
they wanted was to front-end load those rates, front-
end load as many costs as possible ... to the
profitable timeframe, because, essentially, if you
have a flat rate base [and] you recover a flat period
of time, that's allocated out amongst the barrels that
are shipped. The more barrels, the lower the rate.
But what would happen in the future? What would
happen now? In 2011? ... We have [lower] rates. If
they have to share the same costs, the rate per barrel
goes up. ... And the reason they did that was based on
... Professor Witherspoon's analysis. They front-end
loaded it so that [for] explorers currently - ... or
the latecomers, for example, Anadarko - coming in now,
it would be more profitable in the future to explore
for and seek natural resources in this state. ... We
would like to see this bill moved out of committee.
Number 0865
The committee took an at-ease from 5:11 p.m. to 5:12 p.m. [There
is some blank tape from that time; nothing is missing.] The
committee took a second at-ease from 5:12 p.m. to 5:15 p.m.
[A motion to move the bill out of committee was made but
withdrawn in order to take up an amendment.]
Number 1001
REPRESENTATIVE KERTTULA moved to adopt Conceptual Amendment 2.
Noting that it was Mr. Buckendorf's language and related to the
area in which the attorney general had suggested some
clarification was needed, she specified the following:
In Section 7, ... in the second-to-last sentence,
delete the words "in the future" and change the last
sentence to read, "An order setting rates under this
section shall not affect rates in effect before the
date of the protest, complaint, or commission action
that initiated the investigation and hearing."
REPRESENTATIVE KERTTULA offered that it would be the normal
process, in line with what courts and regulatory agencies would
order, and wouldn't preclude someone who won a case from being
able to get a recovery.
Number 1132
CHAIR KOHRING asked whether there was any objection to adopting
Conceptual Amendment 2. There being no objection, it was so
ordered.
CHAIR KOHRING apologized for not recognizing Representative
Crawford earlier so he could ask [Mr. Brena before he left]
about a $3-billion DR&R overcharge dispute and how would that be
adjudicated if it were removed from RCA oversight. He announced
that he would request a written response. He asked whether Mr.
Burden could respond.
Number 1250
MR. BURDEN said he wasn't able to answer and that it's one of
the "question marks." He said, however:
If you take it out of the independent review of RCA,
how do those matters get handled? ... With the
jurisdictional gap on the trans-Alaska pipeline that
exists on the FERC side, about half the line, I
understand, is on state lands, even though it only
carries about 10 percent of the oil - that you've got
a jurisdictional gap if you implement this provision
over the state lands and ... over the components of a
tariff related to DR&R. ...
One of the issues you run into is that, with about 10
percent of the oil being intrastate and 90 percent or
so being interstate, ... you would think maybe the
DR&R issue is a 10-and-90-percent issue, as well, but
it doesn't sort of work out that way. ... I don't know
that ... we're prepared to go into details that Mr.
Brena could if he were still here. But we'll be happy
to get you a response.
Number 1361
MR. HARBOUR added:
One of the policy decisions that's being made now is
to that point. In addition to interests of the State
of Alaska and federal lands, also the legislature, I
know, is mindful of the interests of Native Alaskans
and, therefore, Native lands and private lands that
pipelines cross. So that is a policy consideration
that this legislation is undertaking.
Number 1394
REPRESENTATIVE KERTTULA noted that Mr. Harbour's section-by-
section analysis said removal of RCA authority over DR&R would
mean that there would be no regulatory authority over portions
of a pipeline that didn't cross state land. She expressed
concern about this.
MR. HARBOUR referred to the Alaska Pipeline Act and noted that
in its formation, the objective was to have state jurisdiction
where there was no federal jurisdiction. Noting that there are
current issues pending [before the RCA] and that he therefore
couldn't provide detail, he added, "I just think that if you ask
legal advisors to analyze that section-by-section analysis I
did, you will get the advice you need."
REPRESENTATIVE McGUIRE acknowledged that hint.
Number 1480
REPRESENTATIVE HOLM moved to report HB 277, as amended, out of
committee with individual recommendations and the accompanying
fiscal note(s).
REPRESENTATIVE FATE reminded members that the bill will be heard
in the House Resources Standing Committee, which he chairs.
Number 1515
CHAIR KOHRING noted that no objection had been stated. He
announced that CSHB 277(O&G) was reported from the House Special
Committee on Oil and Gas.
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at
5:25 p.m.
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