My Turn: Alaska is losing $400 per minute

Little attention paid to fact state is hemorrhaging revenue because of a difference in oil shipping charges

Posted: Wednesday, May 30, 2007

Every minute of the day, while high-paid attorneys and accountants pepper each other and regulators with obscure and sometimes ridiculous legal arguments, the state treasury loses another $400 in excess trans-Alaska pipeline system shipping charges, or tariffs.

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Most of that money goes directly into the pockets of BP, ConocoPhillips and Exxon Mobil, which control more than 19 out of 20 barrels of North Slope crude oil and own a similar share of the pipeline.

This revenue hemorrhage stems from the difference between the tariffs for in-state oil, set by the Regulatory Commission of Alaska (about 11 percent of pipeline oil) and the much higher tariff the oil companies charge for transporting the remaining 89 percent of the shipments bound for the Lower 48.

Except for four recent columns by Dermot Cole in the Fairbanks Daily News-Miner, the press has not explored this problem. Worse yet, when this story is covered, it is liable to be misreported.

Take, for example, the initial reporting of the recent decision by a Federal Energy Regulatory Commission administrative law judge. That decision supported the claim of independent pipeline shippers that tariffs for Lower 48 shipments are excessive.

Determining that the independent shippers made a strong case, the judge recommended that the commission reduce federal tariffs to a level near Alaska's. We're talking about in-state tariffs of about $2 per barrel versus federal tariffs of more than $5 per barrel. Every dollar per barrel in tariff charges costs the state 25 cents in reduced royalty and production tax revenue.

Initially the press reported the decision revolved "around an inconsistency in the cost to move a barrel of oil through the pipeline."

How does inconsistency figure into the picture?

The state's principal argument was that different tariffs for the same service are discriminatory. The judge noted that the reduced tariffs she was recommending would render the state's argument moot. Elsewhere in the lengthy decision, the judge mentioned state arguments only occasionally.

In summary, the independent shippers did the heavy lifting, arguing against excessive tariffs; the state's main argument was largely irrelevant.

When the state has so much at stake in the outcome of this tariff case, how did it become a minor player?

This question deserves consideration for more reasons than lost revenue and litigation expense. The state wants independent companies to find the yet-undiscovered natural gas necessary to make the gas line project economical. But excess tariffs penalize the independent companies, along with the state. As the big three oil companies laugh all the way to the bank with revenue from oil pipeline overcharges, they must smile to think that the gas pipeline tariff provides them new opportunities to plunder shippers.

The May 17 tariff case ruling is the latest in a string of decisions that call into question the 1985 tariff settlement negotiated with pipeline owners by the Department of Law and its consultants. The law firm of Morrison and Foerster was the Department of Law's leading consultant in that case and has been the state's principal pipeline tariff aide ever since. According to the Alaska Budget Report, between July 2003 and the end of 2006, that firm also received $12 million for its assistance on the proposed gas pipeline contract - far more than any other firm.

After the FERC judge's recent decision on tariffs was announced, the governor issued a statement saying she was pleased with the decision. She stated, "The state's attorneys are reviewing the decision and preparing to participate in the next phase of the litigation."

I wonder what the consulting lawyers are making as they jog around the regulatory track while the treasury continues to hemorrhage $400 per minute?

After serving in the governor's office two decades ago, I prepared a report to the Legislature that penetrated the wall of confidentiality and confusion surrounding the tariffs. The report documented delayed information, needless opacity, important omissions and even misinformation that contributed to the approval of the 1985 settlement. At that time, I asked this question: If war is too important to be left to the generals, should petroleum litigation policy be left in the hands of the lawyers?

Gov. Sarah Palin: Tear down this wall!

• Richard A. Fineberg is an independent oil and gas analyst from Ester.

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