TAPS owners take series of setbacks in court

  • By Tim Bradner
  • Sunday, March 16, 2014 9:40pm
  • News

Things have not gone well for Trans-Alaska Pipeline System owners in the courts and key federal regulatory arenas in recent weeks, but the battles aren’t over.

First, on the state level, Alaska’s Supreme Court upheld a $9.98 billion valuation of the pipeline for property tax purposes on Feb. 21, more than ten times the $800 million figure the pipeline owners originally sought.

Second, in Washington, D.C., an administrative law judge with the U.S. Federal Energy Regulatory Commission, or FERC, issued a ruling Feb. 28 disallowing several hundred millions of dollars of investments in TAPS pump station upgrades, although the ruling will be contested and the full commission has yet to issue a decision.

The TAPS owners, which include BP, ConocoPhillips, ExxonMobil and minority owners Koch Industries and Unocal (now Chevron), had filed tariffs that included the expenses for 2009 and 2010. The State of Alaska and Tesoro, who ships oil through TAPS but is not an owner, contested the tariffs.

The TAPS owners had asked for $454.4 million in capital costs to be included in the tariff rate base for the two years, but FERC Administrative Law Judge Carmen Ana Cintron ordered that $397.1 million should be excluded, and approved only $57.3 million of what was requested.

Cintron agreed with the state and Tesoro that the pipeline pump station upgrade project had not been managed well, and the owners had failed to prove the expenses were prudent.

On the property tax case, the state high court’s ruling, on which the pipeline owners have filed a request for reconsideration, dealt only with fiscal year 2006 property taxes. However, it will set precedents that will affect the disputes over TAPS values that will be for the percolating through the courts for the following years.

In the dispute over 2006, the state Department of Revenue, which under state law sets the value for oil and gas properties for taxation, concluded TAPS was worth $3.64 billion. Municipalities that were affected appealed the decision to the revenue department’s State Assessment Review Board, which reviews assessment disputes. The review board agreed with some of the municipalities’ arguments, and upped the value to $4.3 billion.

Municipalities with pipeline property within their boundaries include the City of Valdez, Fairbanks North Star Borough and the North Slope Borough.

Not satisfied with the board review, the municipalities appealed the assessment decision to state Superior Court. The municipalities were concerned that while replacement cost of TAPS was used as the basis for valuing the pipeline, a cost study provided to the state by TAPS owners of what the pipeline would cost, if rebuilt today, was obsolete.

The municipalities had their own cost study done and Judge Sharon Gleason, then a state judge in charge of the case, agreed with it. She set the value at $9.98 billion, which has now been upheld by the Supreme Court.

Gleason agreed with the municipalities that the value should be based on what it would cost to replace the pipeline with an allowance for depreciation to arrive at a $9.98 billion value.

As the disputes roll along, the next phase is the Supreme Court taking briefs in April from the disputing parties on tax years 2007, 2008 and 2009, although the court’s decision on 2006 has sent a signal of how the judges are likely to rule.

“We believe the court’s decision narrows many of the issues involved in the appeals of the superior court’s decision,” for the next three years, said Ken Diemer, a state attorney involved in the case.

Prior to being elevated to the federal court system Gleason ruled that the TAPS value for 2007 is $8.94 billion; for 2008, $9.64 billion, and for 2009, $9.23 billion. The TAPS owners have appealed those decisions to the Supreme Court, however, and a decision will be made at some point for those years.

Meanwhile, tax years 2010, 2011 and 2013 are now before the Superior Court, with the parties actually reaching agreement on 2012.

Jim Greeley, the state oil and gas property assessor, has set a $5.5 billion value for the pipeline for tax year 2014. Municipalities have already said they will appeal that to the state review board.

In what has become a sideshow, Gov. Sean Parnell recently fired one member of the board, Marty McGee, and appointed two retired oil and gas company managers to fill two of five seats on the board.

One of Parnell’s appointments, Dennis Mandell, is under fire, however, for being a resident of California. Critics say state law required members of the board to be Alaska residents.

Senate Democratic Minority Leader Hollis French, D-Anchorage, has asked Partnell to withdraw Mandell’s appointment, but Parnell has refused. Manell worked for ARCO Alaska when he lived in Anchorage.

Another Parnell appointment to the board, Bernard Washington of Anchorage, is a former ConocoPhillips employee. French said Parnell fired McGee from the board because he was an advocate for higher valuations, which helped the municipalities.

How TAPS is valued is very important to the three municipalities that are affected. Under state law the municipalities must use the state’s valuation for pipeline and other oil and gas production and transportation property.

An approximate doubling of the pipeline value for 2006 from the state assessment review board’s determination means the municipalities will collect twice as much tax.

It has a downside for state revenues, however, because the property tax payments are included in the tariffs, or transportation charges that the TAPS owners are allowed to charge for shipping oil.

The pipeline tariff is one of several expenses allowed as deductions against the value of North Slope oil for state tax and royalty purposes. State taxes and royalties constitute about one fourth of the production value of North Slope oil, so indirectly the state pays a quarter of the higher taxes paid to the three municipalities.

The effect of the change is value is not insignificant. As a rule of thumb, every billion-dollar increase in the pipeline valuation for tax increases the pipeline tariff by 10 cents a barrel, according to sources familiar with how the tariffs are calculated. Based on that, the $4 billion increase agreed to by Judge Gleason has effectively raised the tariff by 40 cents per barrel.

TAPS tariffs were averaging $6.28 per barrel for the third quarter of 2013, according to the Department of Revenue, so an additional 40 cents per barrel is significant.

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