My Turn: Throwing good money after bad

Stop hemorrhaging of revenues caused by excessive oil tariffs

Posted: Thursday, April 26, 2007

Everybody knows that throwing good money after bad isn't smart, but state bureaucracy seems to operate on different rules.

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Consider the continued failure to stop the massive, ongoing hemorrhage of state revenue caused by excessive trans-Alaska oil pipeline shipping charges (tariffs).

Every dollar of overcharges reduces state royalty and tax revenue by approximately 25 cents. The principal beneficiaries are BP, ConocoPhillips and ExxonMobil, who own approximately 96 percent of the pipeline and control a similar portion of North Slope production. The prospect of paying those overcharges out of pocket also curbs interest in North Slope exploration by independent developers.

The root of the problem is the complex and controversial 1985 settlement agreement between the pipeline owners and the state, represented by the Department of Law and its highly paid consultants.

In 2002, the Regulatory Commission of Alaska determined that the owners were charging far too much for transporting oil from the North Slope to Valdez under the terms of the settlement. Based on the commission's data, I estimate that since 1977 overcharges have enabled the pipeline owners to pocket, at state expense, at least $4.5 billion more in 2007 dollars than the amount necessary to repay all costs, plus a reasonable return on their investment. Today, excessive tariffs continue to cost the state treasury approximately $400 per minute - more than $500,000 per day.

The Regulatory Commission of Alaska, a quasi-independent state agency, only has authority over oil destined for in-state refiners, approximately 11 percent of total shipments through the pipeline. Tariffs on 89 percent of pipeline oil fall under the jurisdiction of the Federal Energy Regulatory Commission, which still uses the 1985 settlement to set tariffs.

The pipeline owners went to court to appeal the commission's 2002 order. In 2006, a Superior Court judge rejected the owners' arguments, upholding the commission's decision "in all respects." The owners continued their protest to the Alaska Supreme Court, where a decision is still months away. Meanwhile, for most of the oil regulated by the federal government, the owners have dramatically increased tariffs.

Two companies with no ownership interest in the pipeline -Anadarko, the North Slope's largest independent producer, and Tesoro, an independent refiner - now joined by the Department of Law, have protested the increased tariffs at the Federal Energy Regulatory Commission. The commission's staff recently weighed in on the side of the protesters, describing the owners' defense of their tariffs as "silly," "obfuscating" and contrary to commission precedent. The staff brief is the latest confirmation that the owners have used everything but the kitchen sink and meaningful rate-making data to justify unreasonably high tariffs.

For most of the decade since Tesoro launched its Regulatory Commission of Alaska tariff protest in 1996, the Department of Law case managers, hamstrung by legal conundrums their predecessors helped create, sided with the owners. Now, as the weight of the decisions against the 1985 settlement accumulates, the Department of Law has belatedly changed course. But its arguments for lower tariffs seem muted, convoluted and tenuous. Instead of aggressively seeking lower tariffs with the federal government, the Department of Law appears to be paddling in the wake of the protesting shippers. Meanwhile, high tariffs continue to thwart the potential developers the state now courts for gas line development while the state treasury quietly continues to bleed.

The period for renegotiation of tariff terms officially began Jan. 1. This is not an issue the state can afford to continue to talk to death. If the state really wants to assure just and reasonable tariffs that will encourage potential developers to come north to explore for oil and gas on the North Slope, pipeline tariff case management requires immediate attention.

By funding the Department of Law's feckless tariff maneuvers without rigorous oversight and clear policy guidance, the administration and the Legislature are simply throwing good money after bad, to the detriment of the public interest. I believe careful review of the pipeline's tariff history and analysis of recent developments demonstrate that the primary responsibility for formulating and executing tariff policy should be transferred from the Department of Law and its consultants to the state's resource management agencies.

• Richard A. Fineberg, an independent oil and gas analyst from Ester, served as senior policy advisor to the governor on oil and gas policy between 1987 and 1989.

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