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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. Amerada Hess Pipeline Corp. v. Regulatory Commission of Alaska (02/15/2008) sp-6231
Notice: This opinion is subject to correction before
publication in the Pacific Reporter. Readers are
requested to bring errors to the attention of the Clerk
of the Appellate Courts, 303 K Street, Anchorage,
Alaska 99501, phone (907) 264-0608, fax (907) 264-0878,
e-mail corrections@appellate.courts.state.ak.us.
THE SUPREME COURT OF THE STATE OF ALASKA
| AMERADA HESS PIPELINE | ) | |
| CORPORATION, BP PIPELINES | ) Supreme Court No. S- 12230 | |
| (ALASKA | ) INC., CONOCOPHILLIPS | ) |
| TRANSPORTATION ALASKA, INC., | ) Superior Court No. 3AN-02- 13511 CI | |
| EXXONMOBIL PIPELINE COMPANY, | ) | |
| KOCH ALASKA PIPELINE COMPANY, | ) | |
| LLC, MOBIL ALASKA PIPELINE | ) O P I N I O N | |
| COMPANY, and UNOCAL PIPELINE | ) | |
| COMPANY, | ) No. 6231 February 15, 2008 | |
| ) | ||
| Appellants, | ) | |
| ) | ||
| v. | ) | |
| ) | ||
| REGULATORY COMMISSION | ) | |
| OF ALASKA, TESORO ALASKA | ) | |
| COMPANY, and WILLIAMS ALASKA | ) | |
| PETROLEUM, INC., | ) | |
| ) | ||
| Appellees. | ) | |
| ) | ||
Appeal from the Superior Court of the State
of Alaska, Third Judicial District,
Anchorage, John Suddock, Judge.
Appearances: Louis R. Veerman, Pamela D.
Weiss, Molly C. Brown, Guess & Rudd, P.C.,
Anchorage; Steven H. Brose, Steven Reed,
Steptoe & Johnson LLP, Washington, D.C.;
Albert S. Tabor, Jr., John E. Kennedy, Vinson
& Elkins, L.L.P., Houston, Texas, for
Appellants Amerada Hess Pipeline Corporation,
BP Pipeline (Alaska) Inc., ConocoPhillips
Transportation Alaska, Inc., ExxonMobil
Pipeline Company, Mobil Alaska Pipeline
Company, and Unocal Pipeline Company. Tina
M. Grovier, Birch, Horton, Bittner & Cherot,
Anchorage; John B. Rudolph, Hall, Estill,
Hardwick, Gable, Golden & Nelson, P.C.,
Washington, D.C., for Appellant Koch Alaska
Pipeline Company, LLC. Charles E. Cole, Law
Offices of Charles E. Cole, Fairbanks;
Stephan H. Williams, Anchorage, for Appellee
Regulatory Commission of Alaska. Robin O.
Brena, David W. Wensel, Brena, Bell &
Clarkson, P.C., Anchorage, for Appellee
Tesoro Alaska Company. Douglas S. Parker,
Preston, Gates & Ellis LLP, Anchorage;
Randolph L. Jones, Jr., Conner & Winters,
Tulsa, Oklahoma, for Appellee Williams Alaska
Petroleum, Inc.
Before: Fabe, Chief Justice, Matthews,
Eastaugh, and Carpeneti, Justices. [Bryner,
Justice, not participating.]
PER CURIAM
The Regulatory Commission of Alaska (RCA) determined
that the shipping rates charged by the owners of the Trans-Alaska
Pipeline were unjust and unreasonable from 1997 through 2000 and
ordered refunds for that period. The owners appealed to the
superior court, which affirmed, and now appeal to this court.
They make the following four arguments:
1. The RCA inappropriately based its rate calculations on
depreciation data from a contract between the pipelines
owners and the State.
2. The RCAs decision violated the rule against retroactive
ratemaking by making its order enforceable from the
time when the rates were first challenged (1997) and
not from the time of the order (2002).
3. The RCA provided an unreasonably low rate of return
considering the risks involved with investment in the
pipeline.
4. The RCA violated due process by retaining an economic
advisor who four years earlier wrote a masters thesis
arguing that the pipelines rates were too high.
The owners arguments on appeal are generally the same
as those they presented to the superior court. We conclude that
the superior court correctly resolved these arguments and
therefore adopt the opinion of the superior court as set forth in
the appendix.
The opinion of the superior court is AFFIRMED.
IN THE SUPERIOR COURT FOR THE STATE OF ALASKA
THIRD JUDICIAL DISTRICT AT ANCHORAGE
AMERADA HESS PIPELINE CORPORATION, )
BP PIPELINE (ALASKA) INC., )
EXXONMOBIL PIPELINE COMPANY, )
MOBIL ALASKA PIPELINE COMPANY, )
PHILLIPS TRANSPORTATION ALASKA )
INC., UNOCAL PIPELINE COMPANY, )
WILLIAMS ALASKA PIPELINE COMPANY )
LLC, and the STATE OF ALASKA, ) Case No. 3AN-02-13511
CI
)
Appellants, )
)
vs. )
) RCA Docket Nos. P-97-4, P-
97-7
REGULATORY COMMISSION OF ALASKA, )
)
Appellee. )
)
DECISION AND ORDER*
I. FACTS AND PROCEEDINGS
Appellees Tesoro Alaska Company (Tesoro) and Williams Alaska
Petroleum Inc. (Williams, or collectively the shippers), refiners
of North Slope oil, protested to appellee Regulatory Commission
of Alaska (RCA) 1997 intrastate rates for the Trans Alaska
Pipeline System (TAPS). The appellants (the TAPS Carriers) are
subsidiaries of major oil producing companies;1 they hold title
to undivided joint interests in the pipeline, and certificates of
convenience to operate the pipeline. They delegate physical
operations and maintenance to their wholly owned agent, the
Alyeska Pipeline Service Corporation (Alyeska).
RCA decreed the challenged rates provisional and subject to
refund. Following extensive administrative proceedings, RCA
promulgated Order No. 151 in Docket P-97-4.2 Order No. 151
exceeds two hundred pages. Twenty-six years into TAPSs life,
Order No. 151 for the first time set fully litigated, rather than
settlement-generated, intrastate rates. RCA concluded that the
1997-2000 intrastate TAPS rates were not just and reasonable
under Alaskas Pipeline Act.3 RCA rejected the settlement-
generated ratemaking methodology, and prospectively substituted a
depreciated original cost (DOC) methodology. RCA determined
values for constituent components of the DOC formula, calculated
rates substantially lower than those filed by the Carriers, and
ordered refunds to the shippers. The TAPS Carriers and the State
of Alaska appeal this decision to the Superior Court pursuant to
Alaska Rule of Appellate Procedure 602(a)(2).4
Planning for TAPS began in 1967. Oil first flowed in 1977.
The Federal Energy Regulatory Commission (FERC) regulates most of
the oil throughput as interstate commerce. Somewhat less than
ten percent is delivered to refineries near Fairbanks and Valdez
or shipped to Nikiski. RCA regulates only this intrastate
component.
Precursor rate litigation commenced post-construction of
TAPS in 1977. After eight years of expensive and burdensome
parallel proceedings before FERC and RCAs predecessor agency the
Alaska Public Utilities Commission (APUC), the State of Alaska
and the TAPS Carriers settled both the interstate and intrastate
dockets in 1985. Thereafter the TAPS Carriers have calculated
intrastate rates pursuant to their dickered deal, known as the
TAPS Settlement Methodology (TSM). TSM is a highly customized
ratemaking methodology which deviates significantly from
traditional ratemaking methodologies used by RCA and its
predecessors, APUC and the Alaska Pipeline Commission.
The TAPS Carriers submitted their settlement for approval by
APUC on May 30, 1986. Petro Star Inc., a Fairbanks refiner,
protested and thereby prolonged proceedings until it in turn
settled with the Carriers in 1993. APUC granted final approval
to the TAPS settlement with the following relief-tinged words:
[e]ntities impacted by oil pipeline rates are
sophisticated and capable financially and
practically of protecting their own
interests. Not one has come forward to
contest the TAPS Settlement. Under these
circumstances, the public interest does not
require that this proceeding be continued.[5]
Thus APUC entered no findings on the merits regarding the initial
rate litigation commenced in 1977 and ultimately terminated in
1993. But APUC left open the door for the instant rate
litigation:
Each new rate filed by the TAPS Carriers
under the Intrastate Settlement Agreement is
considered to be a revised tariff filing
. . . subject to the same standards and
procedures to which it would have been
subject if the Intrastate Settlement
Agreement had not been accepted.[6]
The procedural history of the TAPS rate litigations is set
forth at Endnote 2 of Order No. 151. On December 23, 1996,
Tesoro protested the 1997 filed rates; Mapco, predecessor of
Williams Alaska Petroleum Inc., subsequently intervened. The
APUC opened Docket 97-4 to determine if post-1996 rates were just
and reasonable under AS 42.06.370. The Carriers filed their case-
in-chief on October 8, 1998, focusing on whether TSM should
continue to govern intrastate rates. On March 15, 1999, Tesoro
filed a motion for summary judgment alleging a failure of proof
that 1997-98 TSM-based intrastate rates were just and reasonable.
RCA granted the motion on April 10, 2000, reasoning that the
Carriers focus on the validity of TSM over the TAPS lifetime must
yield to a focus on the specific years in question. RCA
calendared additional proceedings for the Carriers to prove their
1997-2000 rates just and reasonable, in light of RCAs summary
judgment findings.
The Carriers filed their second-round direct testimony on
July 12, 2000. Their central point, elaborated in a benchmark
economic model, was that if a standard DOC methodology, employing
standard straight-line depreciation rather than TSM accelerated
depreciation, had been employed ab initio, consistently
calculated 1997-2000 rates would be higher than those actually
filed by the Carriers under TSM. A five-week hearing ensued
beginning April 2001.
RCA promulgated Order No. 151 on November 27, 2002,
decreeing inter alia that the Carriers intrastate rates for 1997-
2000 were excessive and that historically recovered accelerated
depreciation, rather than a deemed straight-line depreciation,
governed calculation of the Carriers year-end 1996 unrecovered
investment (rate base). RCA calculated the rate base to be $669
million rather than the $3.2 billion computed by the Carriers.
RCA also ruled upon various disputes as to component factors of
the traditional ratemaking formula such as the appropriate
treatment of risk factors, rates of return, and the amount of
presumed equity and debt which financed construction of the
pipeline. RCA parenthetically found that under the TSM regime up
to 1998, the Carriers potentially garnered a $9.9 billion
windfall through excessive rates. RCA made no attempt to
recapture any such windfall because the regulatory proscription
against retroactive ratemaking prevents redress for past year
under- or over-collections. Using its traditional DOC
methodology and data inputs derived from the record, RCA
established rates for the disputed period.
The Carriers appealed from Order No. 151 on December 6,
2002. Later, RCA issued Order No. 159, rejecting applications by
several Carriers for individualized rates for 1997-2000.
Finally, RCA issued Order No. 162 establishing a 10.5% interest
rate on refunds. The Carriers appealed from that order on June
3, 2003. The instant proceeding consolidates appeals of those
three orders. The State of Alaska joins the appeal on two issues
only, RCAs computation of pre-1997 depreciation and its refusal
to set individual Carrier rates. RCA intervened to defend its
orders.
The TAPS Carriers, but not the State of Alaska, challenge
Order No. 151 on procedural due process grounds over RCAs denial
of a motion to recuse staff economist Antony Scott. RCA is
authorized by statute to hire engineers, examiners,
administrative law judges, arbitrators, mediators, experts,
clerks, accountants, and other agents and assistants.7 In 1999,
the Alaska Legislature appropriated funds for a staff economist.
RCA commissioner Nanette Thompson hired Mr. Scott, a doctoral
candidate in economics at the University of Wisconsin Madison.
He began his work at RCA in July 2000, several months after RCAs
grant of summary judgment to Tesoro to the effect that the
Carriers had failed to prove that their filed rates were just and
reasonable, and prior to the Carriers second case-in-chief.
Upon learning of Mr. Scotts appointment, the Carriers timely
moved on March 12, 2001 for his recusal. At the University of
Wisconsin in 1996, Mr. Scott had submitted a masters thesis
entitled The Trans Alaska Pipeline System: The Consequences and
Causes of Regulatory Failure. Mr. Scott argued that aspects of
the TSM engendered a windfall for the Carriers because TSM was
inadequately tied to costs. Protracted adversary rate
proceedings, caused in part by the FERCs reluctance to regulate
decisively, gave the Carriers a bargaining advantage. The State
of Alaska probably ceded too much at the bargaining table.
Mr. Scott was acquainted with Mr. Richard Fineberg, an
economist who also criticized the TAPS settlement. At the time
Mr. Scott was hired by RCA, Mr. Fineberg was hired by RCAs Public
Advocacy Section, which operated separately from the
commissioners and their advisory staff pursuant to AS 42.04.150.
Fineberg subsequently testified in the proceedings below.
Mr. Scott avers that he read several articles authored by
Mr. Fineberg as he researched his masters thesis. Pre-hiring,
Scott engaged in telephone and e-mail contacts with Fineberg, who
paid Scott $150 for brief research. In April 2000, Fineberg e-
mailed Scott that he had been retained by the Public Advocacy
Section to work on the case and that he had tried but failed to
bring [Mr. Scott] in on the case. Mr. Scott responded that he
had been hired to work as advisory staff; Fineberg sent a
congratulatory note. At RCA Scott briefly met Fineberg. Scott
denied that they discussed any aspect of his thesis, Finebergs
articles or the case at hand.
RCA denied the recusal motion, citing AS 42.04.050s
authority to hire staff with technical expertise. It
distinguished cases cited by the Carriers regarding bias on the
part of administrative decisionmakers because Mr. Scott was not
one. It analogized Mr. Scott to a specialized law clerk, and
stated:
[W]e must determine whether the highly
complex TAPS Settlement Methodology (TSM)
results in just and reasonable rates. The
assignment we have given Scott is not to
investigate independently, or to be an
advocate or a witness. Scott is one among a
team of advisors, including our
administrative law judges, and expert
professional financial and engineering staff,
who assist us in carrying out our duties. We
rely upon our team of advisors to help us
understand and evaluate the extensive and
highly technical testimony offered by all
parties.
Because of his expertise as an economist,
Antony Scott is very valuable to us. We
cannot readily substitute another advisor,
both because of funding limits and because we
believe, based on the lengthy process
required to hire him, that similarly
qualified economists are not easily found.
. . . .
In this case we have taken some extraordinary
measures to assure that our decision-making
process is not unduly influenced by any
assertions outside the record or by any
theories that Scott may have developed in the
past on issues relevant to these proceedings.
Upon notice of the TAPS Carriers objections
to Scotts work as our advisor, we inquired in
detail about Scotts contacts with Fineberg.
We explored with Scott the extent to which he
is able to segregate and identify for us any
philosophical leanings or opinions he may
have about the subject matter of this case.
Our discussions included his ability to act
in a fair and impartial manner to help us
understand the technical testimony and
opinions of all witnesses in this case.
II. STANDARD OF REVIEW
In this consolidated appeal from administrative decisions,
the superior court directly scrutinizes the merits of those
decisions. The court reviews RCAs factual findings under a
substantial evidence standard; they should be upheld if supported
by relevant evidence that a reasonable person might accept as
adequate to support them.8
As to questions of law not implicating RCAs special
expertise, this court substitutes its own judgment. If RCA
employs specialized expertise in a legal determination, the court
applies a rational basis standard; RCAs interpretation prevails
over the courts, so long as RCA is reasonable.9
The deferential reasonable basis standard also applies to
fundamental policy decisions.10 But a failure to consider an
important factor can undermine the reasonableness of a policy
decision.11 Also, an unexplained failure to follow agency
precedent can erode the deference due a policy decision.12
III. DISCUSSION
a. Failure To Recuse
The TAPS Carriers complain that RCAs refusal to recuse staff
economist Scott denied them a fair and impartial hearing, in
violation of the due process clauses of both the United States
and Alaska Constitutions.13 Their briefing intertwines citations
to federal and Alaska cases. It is useful to first survey
federal law.
Professor Richard Pierce, Jr., successor author of the oft-
cited Kenneth Culp Davis Administrative Law Treatise, provides an
apt introductory summary to the federal law of neutral decision
makers:
The concept of bias has at least five
meanings. Although the five kinds of bias
shade into each other, the main ideas about
bias in an adjudication may be stated in five
sentences, each of which deals with one kind
of bias: (1) A prejudgment or point of view
about a question of law or policy, even if so
tenaciously held as to suggest a closed mind,
is not, without more, a disqualification.
(2) Similarly, a prejudgment about
legislative facts that help answer a question
of law or policy is not, without more, a
disqualification. (3) Advance knowledge of
adjudicative facts that are in issue is not
alone a disqualification for finding those
facts, but a prior commitment may be. (4) A
personal bias or personal prejudice, that is
an attitude toward a person, as distinguished
from an attitude about an issue, is a
disqualification when it is strong enough and
when the bias has an unofficial source; such
partiality may be either animosity or
favoritism. (5) One who stands to gain or
lose by a decision either way has an interest
that may disqualify if the gain or loss to
the decisionmaker flows fairly directly from
her decision.
The heart of each of the five propositions is
supported by clear and noncontroversial law
and by prevailing opinion, except that the
first two propositions are commonly
misunderstood, especially the effect of a
closed mind on issues of law or policy or
issues of legislative fact. With that one
exception, the problems about the law of bias
do not relate to the soundness of the five
propositions but relate to their application
and to the clear demarcation of each from the
others.[14]
The TAPS Carriers allege that prejudgment of adjudicative
facts by a staff member creates an appearance of bias on the part
of the three decisionmaker commissioners. They argue that RCAs
decision should be vacated pursuant to Cinderella Career &
Finishing School, Inc. v. FTC15 if a disinterested observer may
conclude that [the agency] has in some measure adjudged the facts
as well as the law of a particular case in advance of hearing it.
The Carriers concede that if Mr. Scotts masters thesis merely
amounts to a prejudgment or point of view regarding questions of
law or policy (legislative facts), due process is not offended.
They contend that the thesis instead involves case-specific or
adjudicative facts. The Carriers recognize that Mr. Scott was not
a decision maker, but argue that staff bias suffices to taint the
entire process.
Appellees Tesoro and RCA argue inter alia that the standard
for disqualification is not the prejudgment in some measure test
applicable to adjudicative facts, but rather an irrevocably
closed mind test which applies to agency prejudgments of
legislative facts.16 They believe Mr. Scotts thesis is best
characterized as policy-oriented analysis rather than as a
finding of contested facts. They emphasize that Mr. Scott was a
mere staffer, and not a decision maker, so his biases could not
disqualify the three RCA commissioners.
The test proposed by the TAPS Carriers derives from
Cinderella Career & Finishing Schools. During a speech to a
press association the chairman of the Federal Trade Commission
briefly criticized a charm school for implying that its
curriculum opened doors to airline hostess jobs. The charm
schools administrative appeal was then pending before the
chairman. The Cinderella court concluded that his public remarks
created an appearance that he had prejudged the case such that it
would proceed in predestined grooves.17 In the light of prior
warnings to him in other cases, the court scarcely concealed its
disgust for his ethical laxity. Cinderella most squarely stands
for the proposition that intemperate public remarks by a decision
maker create a constitutionally impermissible appearance of
outcome-determinative prejudgment.
As framed by the parties, the issue for decision is whether
prejudgment of issues by a staffer in an unpublished masters
thesis at a Midwestern university in 1996, triggers the
Cinderella standard of prejudgment in some measure or the far
more deferential irrevocably closed decision maker mind
standard.18 Unlike Cinderella, the case at bar is not a public-
foot-in-mouth case. Even if fact-finding intrudes into the more
predominant analytical drift of Scotts thesis, the aspect of
public intemperance so central to Cinderella is lacking.
In Withrow v. Larkin,19 a state agency investigated a
doctors practices, issued a disciplinary complaint, and then
adjudicated the matter. The physician complained that this
commingling of investigatory and adjudicative functions violated
procedural due process. The U.S. Supreme Court squarely rebuffed
the argument that agency investigations into adjudicatory facts
taint subsequent proceedings. The Court noted initially:
[V]arious situations have been identified in
which experience teaches that the probability
of actual bias on the part of the judge or
decision maker is too high to be
constitutionally tolerable. Among these
cases are those in which the adjudicator has
a pecuniary interest in the outcome and in
which he has been the target of personal
abuse or criticism from the party before him.
The contention that the combination of
investigative and adjudicative functions
necessarily creates an unconstitutional risk
of bias in administrative adjudication has a
much more difficult burden of persuasion to
carry. It must overcome a presumption of
honesty and integrity in those serving as
adjudicators; and it must convince that,
under a realistic appraisal of psychological
tendencies and human weaknesses, conferring
investigative and adjudicative powers on the
same individuals poses such a risk of actual
bias or prejudgment that the practice must be
forbidden if the guarantee of due process is
to be adequately implemented.[20]
The Withrow Court did not mention the D.C. Circuits Cinderella
prejudgment in some measure standard, announced five years
earlier. Rather, the Withrow Court revisited the Courts 1948
decision in FTC v. Cement Institute.21 In Cement Institute the
Federal Trade Commission had investigated and reported in writing
to Congress on the legality of an industry-wide pricing
mechanism. The Cement Institute Court assumed arguendo that the
FTC had formed a prejudgment opinion of illegality, but found
that this did not suggest the commissioners minds were
irrevocably closed to testimony, cross-examination, and argument.
The Withrow Court concluded:
The mere exposure to evidence presented in
nonadversary investigative procedures is
insufficient in itself to impugn the fairness
of the board members at a later adversary
hearing. Without a showing to the contrary,
state administrators are assumed to be men of
conscience and intellectual discipline,
capable of judging a particular controversy
fairly on the basis of its own
circumstances.[22]
Under Withrow, RCA could have retained an economist to conduct an
ex parte investigation of the TAPS rate structure. His findings,
indistinguishable from Mr. Scotts thesis, would not disqualify
the commissioners. It is therefore difficult to conclude that
Scotts employment per se offends federal due process.
In NEC Corp. v. United States,23 the Federal Circuit
explicitly rejected the prejudgment in some measure test as
unduly abstract and impractical, adopting the irrevocably closed
mind formulation. In Starr v. Federal Aviation Administration,24
the Seventh Circuit addressed an issue of staff prejudgment. The
FAAs Federal Air Surgeon wrote a position paper opposing case-by-
case exemptions to the FAAs mandatory retirement rule for airline
captains. Captain Starr sought an exemption, moving to recuse
the non-decisionmaker Air Surgeon pursuant to Cinderella. The
Court applied a presumption of good faith and affirmed the FAAs
refusal to recuse.
The TAPS Carriers assert that the Cinderella test applies to
all prejudgment-of-adjudicative-fact cases and that the much less
stringent irrevocably closed mind test only applies to
legislative facts or policy matters. But the Ninth Circuit has
rejected any
rigid, artificial distinction between rule-
making and adjudication. . . . This is
particularly true when the functions of the
agency are varied and comprehensive. Due
process should not depend upon this
distinction but rather upon a specific and
practical inquiry into the decision making
tasks of the Board and a factual analysis of
how the challenged feature could render its
decision making process unfair.[25]
In general, most federal decisions reviewing agency bias
allegations apply a presumption of regulatory propriety at odds
with the vague prejudgment in some measure test. Federal cases
like Cinderella can best be viewed as responses to egregious
official obnoxiousness which gratuitously undermines public
trust, rather than as across-the-board standards for all agency
prejudgments of arguably adjudicative facts.
Although the RCA commissioners sought the assistance of an
economist to manage voluminous technical testimony, they were not
novices in the regulatory field. They heard extensive expert
testimony on all issues. The court has not been cited to facts
suggesting a practical likelihood that the commissioners were in
any sense dominated by the opinions of their staff economist.
There is no evidence that any commissioner prejudged any aspect
of this case. There was no public impropriety by any
commissioner or staffer.
RCA was aware of Scotts thesis and the Carriers concerns.
RCA obtained assurances from him that he would not overstep the
bounds of a loyal staffer in an explanatory and advisory role.
There is scant likelihood that the commissioners were
psychologically or intellectually dominated by their staff member
such that the presumption of honest judgment is rebutted. This
situation does not approach that zone of egregiousness where
federal courts discern a procedural due process violation based
on prejudgment bias relegating adjudication to predestined
grooves.26
Alaska administrative due process decisions tend to survey
both federal and foreign state law. The Court in Amerada Hess
Pipeline Corp. v. Alaska Public Utilities Commission27 did so in
its discussion of the due process implications of commingled
investigative and adjudicative agency action. Citing Withrow,
the court adopted the federal rule allowing adjudicating agencies
to first conduct ex parte investigations: We see no reason to
provide broader due process protection under the Alaska
Constitution in this instance.28
The TAPS Carriers urge that the unusual fact of Scotts on-
point graduate thesis creates an appearance of agency prejudgment
that should offend Alaska due process. They characterize the
thesis as instinct with fact-finding. But graduate student
Scott did not decide whether the butler killed the cook with a
candlestick in the library. Rather, he took publicly available
data regarding pipeline costs, revenues, taxes, capital
structures, and rates of return, plugged them into a standard
ratemaking methodology, and concluded that TSM-generated revenues
exceeded the standard regulatory paradigm. His thesis was
primarily an exercise in analysis, not fact-finding. It is
likely that many economists familiar with traditional ratemaking
principles would opine that TSM was idiosyncratic and yielded
higher-than-normal initial rates. Others might disagree. That
Mr. Scott was not a tabula rasa should not per se disqualify him
from service. Nothing in the record suggests that this exhaustive
ratemaking adjudication was in any sense intellectually dishonest
because of Scotts involvement.
The TAPS Carriers cite two Alaska cases for the proposition
that Mr. Scotts participation offended Alaskas due process
clause. In re Robson involves the Alaska Bar Associations
disciplinary action against lawyer Robson.29 The Court found
that the Bar Associations executive director was part of the
prosecution team. She was present while the Disciplinary Board
deliberated upon and decided Robsons fate. The court held that
her presence violated due process because both the appearance and
the fact of impartiality required that neither prosecution nor
defense counsel intrude into the functional equivalent of a jury
deliberation.
The TAPS Carriers argue that Robson stands for the broad
proposition that participation by manifestly biased persons in
advisory positions violates due process. But Robson stands more
narrowly for the self-evident proposition that all advocates, the
prosecution and defense alike, are per se excluded from the jury
room or its functional equivalent. The case adds little to the
analysis of the readily distinguishable facts of this case; Mr.
Scott never intruded into anything akin to a jury deliberation.
The TAPS Carriers also rely upon Vaska v. State.30 There, a
judges law clerk provided the district attorneys office with a
confidential bench memorandum accompanied by a yellow sticky
notation indicating that she was advocating for the D.A. sub
rosa. She was an active partisan who was willing to break the
rules to benefit the state . . . with a bias above and beyond
philosophical or political bias in favor of the government in
criminal cases.31 The Court of Appeals held that if she
participated to a significant degree in judicial rulings in the
case, those rulings should be re-examined by another judge.
When she purloined the bench memo and composed the yellow
sticky, the Vaska law clerk forfeited her presumption of honesty
and fair dealing. She became a volunteer prosecution mole. Like
the Robson prosecutor, she was a fox-in-the-chicken coop. Both
Robson and Vaska involve staffers overstepping well recognized,
bright-line boundaries.
In contrast, Mr. Scott did nothing wrong. He authored a
scholarly thesis in graduate school. Some years later he landed
a job advising a recondite state agency. Whether the job and the
thesis are incompatible is a fair question. But resolution of
the matter turns on the mainstream constitutional and
administrative law analyses in the federal cases cited above, and
not on any punctilio of Alaska law analogized from a jury room
trespass or a rogue law clerk.
As in Amerada Hess, the Alaska Supreme Court will likely
look to federal law to decide the TAPS Carriers due process
challenge and will not perceive it appropriate to adopt a more
expansive interpretation of Alaskas due process clause. Under
either law, the unrebutted presumption of honesty coupled with
the absence of practical indicia that the wills of three fair-
minded men and women were overborne by their specialized law
clerk defeats the claim that Mr. Scotts authorship of an on-point
masters thesis disqualifies him from staff service as a matter of
constitutional law.
b. Alleged Departure from Rate-Base Precedent
Order No. 151 holds that a [depreciated original cost]
methodology applied from the beginning of pipeline operations
should be used in this case to determine rates. The Carriers
explain the DOC methodology in an appendix to their opening
brief. DOC is expressed by the formula R=Br+T+D+O. R stands for
revenue requirement, the annually recomputed dollar amount the
Carriers are permitted to collect through their per-barrel
tariff. B stands for rate base, which is the historical capital
investment to construct, upgrade or augment the asset.
Ratemaking permits the owner companies to recover this investment
over the life of the pipeline; thus the rate base declines
annually. The portion of investment to be recovered in any given
year is termed depreciation. It is to be distinguished from the
more theoretical allowance for diminishment by aging used in
financial accounting and tax law.
Rate of return (r) is the percentage that the owners are
permitted to earn on the constantly diminishing rate base. It is
derived from a weighted average of the cost of equity dollars and
borrowed dollars invested in the pipeline. The percentage mix of
debt and equity dollars is termed the capital structure. The
cost of debt is the applicable interest rate; the cost of equity
is the rate of return to the Carriers allowed by RCA to
compensate them for their investment of capital. Both costs may
be adjusted to compensate for higher than normal risk factors in
the construction or operation of the pipeline. The ratio of
equity and debt used in ratemaking may be derived from book
values, or may, as here, be a hypothetical ratio deemed
appropriate by the ratemaking authority. Since the return on
equity is higher than the return on debt, carriers typically
advocate more equity, and shippers more debt, in a deemed capital
structure.
The Income Tax Allowance (T) is added to permit the owners
their full after-tax earnings on the equity portion of the
capital structure. Operating Expense (O) allows annual recovery
of the gamut of operating expenses including salaries and wages,
maintenance costs, and insurance.
The DOC method uses straight-line depreciation, permitting
Carriers to recover equal amounts of their investments over the
years of the pipelines life. Alternatively, recovery of capital
can be front-loaded in the early years of a pipelines life by
applying an accelerated depreciation schedule. Tesoro and
Williams argued, and RCA found in Order No. 151, that the TSM
rates for all years prior to 1997 were based on accelerated,
rather than straight-line, depreciation, and that pre-TSM rates
effectively included accelerated depreciation. Order No. 151
calculated the 1996 year-end rate base by applying this
accelerated depreciation to the initial post-construction 1977
rate base and to each succeeding annual rate base through 1996.
RCA determined the 1996 year-end rate base to be $669 million.
From 1997 forward this rate base would be depreciated on a
straight-line basis.
The Carriers deny that pre-1997 rates were based on
accelerated depreciation. They argue that TSM should be
disregarded, and that RCA should simply apply straight-line
depreciation from the beginning of the life of the pipeline
through 1996, regardless of the depreciation actually collected.
Their calculation yields a $3.2 billion rate base for year-end
1996. Order No. 151 implicitly finds that all but $669 million
of the Carriers claimed $3.2 billion rate base had already been
recovered; adopting the Carriers numbers would entail a double
recovery of $2.53 billion. This divergence over the correct
depreciation and ensuing rate base dwarfs all other
methodological disputes in this appeal.
The Carriers and the State allege that RCA departed from
agency precedent by employing accelerated rather than straight-
line depreciation to establish the year-end 1996 rate base. Two
rate cases adjudicated by RCA predecessors have calculated a new
rate base midstream in the life of a pipeline. In Cook Inlet
Pipe Line an initial intrastate rate case was commenced thirteen
years into the life of the affected pipeline.32 The APUC
rejected a valuation methodology employed by the Interstate
Commerce Commission for interstate rates, and instead chose to
impose its standard DOC methodology with straight-line
depreciation. APUC similarly applied DOC in Kenai Pipe Line
Co.33 APUC could not discern from the existing record the basis
for the prior intrastate rate, and so adopted straight-line
depreciation.
The Carriers argue that both cases stand for the proposition
that, in midstream rate cases, DOCs straight-line depreciation
must be applied from a pipelines inception to establish the
midstream rate base, without consideration of any accelerated
depreciation actually collected. Since the only two decided
cases proceeded in this fashion, the Carriers perceive an
irrational rejection of precedent in RCAs present recognition of
historical accelerated depreciation for the TAPS midstream rate-
base calculation.
It is useful to cite at some length relevant discussion in
Order No. 151:
When the APUC established a DOC rate base in
the middle of the life of the Cook Inlet
line, it used actual straight-line charges
included under the ICC valuation methodology
to calculate the new DOC rate base.
Therefore, rather than providing precedent
for use of straight-line depreciation when
establishing a rate base in the middle of the
life of the line, Cook Inlet more precisely
stands for the proposition that the actual
depreciation charges should be used for
calculating future rates.
In Kenai, the APUC could not determine which
methodology the Kenai Pipe Line Company (KPL)
had used to calculate prior intrastate rates.
The APUC presumed the prior intrastate rates
were calculated under the ICC valuation
methodology and under those facts, the APUC
concluded that the same straight-line
depreciation that was included or was
includable in rates computed under the ICC
valuation methodology should be used in
calculating the new rates.
The APUC ordered the use of straight-line
depreciation in Kenai and Cook Inlet because
straight-line depreciation was the
depreciation actually used to calculate prior
rates. Kenai and Cook Inlet, therefore,
stand for the proposition that when
establishing a DOC rate base for an existing
pipeline in the middle of the operating life
we should apply the depreciation actually
used to establish prior rates rather than the
depreciation that would or should have been
used. Therefore, the Carriers citations to
Cook Inlet and Kenai as precedent for using
straight-line depreciation in this case to
calculate a DOC rate base are not persuasive.
Instead, Cook Inlet and Kenai support using
[accelerated] TSM depreciation charges to
calculate a mid-stream rate base because that
depreciation schedule was used to establish
the past rates charged to shippers.
The Carriers argue that RCA misinterprets Cook Inlet and
Kenai. But as to Kenai, the agency cited a cold and indeterminate
record, found it reasonable to assume the ICCs valuation
methodology had in fact been used in the past, and thereupon
plugged ICC straight-line depreciation into its DOC formula. If
depreciation had been determined by throwing darts, the
regulators would have recognized past use of randomized dart
depreciation, as RCA reads the decision. This court has no basis
to disagree with RCAs seemingly reasonable interpretation of
Kenai; RCA is entitled to deference based on agency expertise in
interpreting the rate-making decisions of predecessor regulatory
entities.
Even if RCA could be shown to have misread these cases, it
is free to fashion an improved procedure for midstream rate-base
determinations as long as such is not unreasonable and
arbitrary.34 RCA reasonably finds that it would be poor public
policy to allow the Carriers to double collect $2.5 billion of
their investment. An avoidance of any double recovery accords
with lay notions of fairness and common sense; this court would
support RCA in overruling Cook Inlet and Kenai if in fact they
mandated a double recovery. RCA has not been shown to be
unreasonable or arbitrary in rejecting an outcome that reasonable
regulators could find indefensible.
c. Depreciation Component of Prior Rates
The Carriers argue that RCAs conclusion, that accelerated
TSM depreciation rather than straight-line depreciation was
actually collected in the pre-1997 rates, has no reasonable basis
in the record. The Carriers note that their initially filed
rates took effect in July 1977, well before the advent of TSM.
The Carriers argue that the record clearly and indisputably
establishes that straight-line depreciation was used prior to the
1985 TAPS settlement because, in 1982, the parties to the initial
rate litigation stipulated to prospective interlocutory use of
straight-line depreciation.
The Carriers contend that the 1982 stipulation remained in
force post-settlement. Further, TSM should not be viewed as
establishing any individual component of past rates, because it
merely set agreed-upon ceilings above which the TAPS Carriers
could not file tariffs, and at or below which the State could not
protest the TAPS Carriers rates. The Carriers view TSM
depreciation as a component of an indivisible settlement. While
the State and the Carriers compromised on sundry ratemaking
components to arrive at a mutually satisfactory package deal,
they argue, neither would necessarily have agreed to TSM
depreciation in isolation from other dickered items which
rendered the whole acceptable. Thus the Carriers suggest it is
unfair to select TSM depreciation as the sole enduring feature of
TSM by deeming it actually-collected depreciation.
1. Pre-settlement Depreciation
RCA found the depreciation stipulation to be, for all
practical purposes, irrelevant, because it was superseded by the
TAPS settlement. Order No. 151 reads:
The Carriers have urged that using TSM
depreciation charges to set rate base for
1997-2000 is inappropriate, because TSM
itself contained no depreciation charges for
1977-1983. Instead, the Settlement Agreement
set a starting rate base for 1983 year-end
and determined depreciation charges for 1984
through the present. The depreciation
charges upon which Tesoro relies are
contained in an illustrative exhibit [in
support of APUC approval of the 1985 TAPS
settlement] known as TSM-6.
We acknowledge that the TSM-6 depreciation
charges were not directly used to set
tariffed rates for 1977-1983. Rather, until
the Settlement was brokered, rates were still
being charged according to the originally
filed and suspended rates from 1977. . . .
[T]he record shows that the Carriers and the
APUC relied on the TSM-6 depreciation charges
to arrive at and accept the Settlements
starting rate base . . . . [A]s a witness
for Williams noted, the depreciation
contained in TSM-6 was analogous to setting a
rate based on a suspension rate. In other
words, the Carriers had made a tentative
filing under one rate methodology, and the
actual depreciation rates to be used were not
established until later.
Thus RCA found that TSM was retroactively applied from the
pipelines inception. Tesoro argues that the initial provisional
tariffs were excessive and would have engendered refund
obligations in the billions if TSM had not retroactively reckoned
them to include accelerated depreciation.
RCAs finding that pre-settlement depreciation charges were
consistent with accelerated depreciation is most specifically
supported in the record by the testimony of States witness Jerome
Haas. Mr. Haas was a member of the States settlement team who
participated in the creation of TSM; he testified as both an
expert and an occurrence witness. Haas stated that a core
settlement goal of the State was to set rates that would decline
over time to match declining throughput. Asked how TSM achieved
these declining rates, he explained:
Primarily, the steeply declining rate profile
was achieved by rapidly depreciating the
original, pre-operating TAPS investment over
the years 1977-84, i.e. the operational years
preceding the settlement. . . . Applied
retrospectively [at the time of settlement]
in 1985, the front-loaded depreciation
resulted in presettlement rates that were
roughly equal to the rates the owners
actually collected under their filed tariffs.
The State believed those past rates were
excessive when judged against a benchmark
based on traditional straight-line
depreciation schedules, but it was willing to
accept them as part of a settlement package
that produced reasonable and low tariff rates
for 1990 and beyond. . . . The resulting,
accelerated depreciation schedule was one of
the most attractive benefits to the State of
the TAPS Settlement Methodology. . . . All
parties clearly understood that the effect of
using the rapid depreciation I have described
would be the relatively quick recovery of
invested capital. . . . At the time of the
settlements, it was expected that four-fifths
of the original (pre-operational) TAPS
investment would be recovered by 1990, even
though the system would have operated by then
for only about two-fifths of its expected
economic life.
This quoted passage substantially supports RCAs conclusion
regarding presettlement depreciation. This court may not weigh
or balance conflicting testimony of adverse experts; it is merely
to ascertain whether RCA had a reasonable basis in the record for
determining that the rates filed before settlement included, de
facto, accelerated depreciation. The court so finds.
2. Significance of TSM Depreciation
The parties do not seriously dispute that TSM employs
accelerated depreciation. For example, Carrier expert Adam Jaffe
testified that TSM specified a rate base recovery schedule that
is much more rapid than the normal ratemaking schedule. Carrier
expert Billy Folmar testified that TSM depreciation is unique
because it is front-end loaded.
Tesoro argued, and RCA found, that the computation of
accumulated depreciation from 1977 through 1996 should be based
on the actual depreciation recovered in prior rates. The
Carriers argue that TSM did not establish this datum, but merely
set a rate ceiling; an individual Carrier was free to charge any
rate it chose, concocted under any methodology, so long as the
rate fell at or below the ceiling. But the Carriers cite no
evidence to this court of discounted rates. The theoretical
possibility of below-ceiling rates does not establish the
counterintuitive scenario that Carriers, authorized to recover
accelerated depreciation, failed to do so. In fact, Carrier
witness Billy Folmar testified that no Carrier had voluntarily
reduced a tariff below the TSM ceiling:
Q: Now if BP Pipeline had ever voluntarily
reduced a tariff below the maximum rate it
would be shown on line 135 [of its
calculation of TSM for the year 2000],
wouldnt it?
A: That is correct.
Q: Are you aware of any carrier prior to
1996 who had a voluntary revenue reduction?
A: Im not aware of one.
Q: You went through every individual
carriers form . . . and you dont remember any
voluntary reductions prior to 1996?
A: I dont recall that there were any.
Absent proof of discounted tariffs, to characterize TSM as a mere
ceiling rate is to quibble. Since the Carriers cite no record
evidence of voluntary reductions, their mere ceiling argument
fails to undercut RCAs conclusion that TSM depreciation equates
with depreciation actually recovered.
When the TAPS settlement was presented to the Federal Energy
Regulatory Commission for approval, the State in an Explanatory
Statement represented that accelerated depreciation would
actually be included in charged rates:
The TSM employs a unit of throughput
depreciation schedule which, through
negotiations, was accelerated in order to
meet the [States] objective of ensuring a
declining tariff profile. . . . The [States]
objective . . . required that a large
fraction of the original investment be
depreciated in the early years of the TAPS.
Consequently, the rate base the amount upon
which the owners earn their rate of return
shrinks rapidly. For example, by 1990 the
depreciated cost arising from pre-operational
investments in TAPS would be approximately
one-fifth of its initial 1977 historic cost,
even though about two-thirds of the systems
economic life still remains.
The Explanatory Statement further noted that, by 1990, the heavy
hand of accelerated depreciation would so dramatically diminish
the rate base that the Carriers might lack incentive to continue
pipeline service. Therefore TSM would discard the insignificant
remaining rate base in 1990 in favor of a more lucrative per-
barrel allowance to keep the Carriers in active play.
RCA simply had no hard evidence on which it could conclude
that the TAPS Carriers acted inconsistently with the provisos of
the States Explanatory Statement, forgoing front-loaded
depreciation. The evidence rather consistently tends to refute
such a counterintuitive outcome. Tesoro quotes a telling 1989 BP
Pipeline memorandum explaining away allegations of excess profits
from 1983-1987:
[The] ratemaking agreement . . . front loads
the recovery of investment. . . . [T]hus the
TSM depreciation allowance . . . embedded in
the revenues for the period is materially
greater than that reflected on the financial
records of the carriers. . . . [W]hile there
is certainly substantial cash generation
during the period, it reflects primarily the
accelerated recovery of investment, not
profit.
The author, writing to rebut an inference of windfall profits,
supports RCAs conclusion that TSM depreciation was actually
embedded in the rates collected by the Carriers.
The Carriers contend that the 1982 interlocutory straight-
line depreciation stipulation remained in force post-TAPS
settlement. The State argues more narrowly that in the absence of
a settlement agreement, this stipulation would have governed the
depreciation schedule. The shippers position accords with the
testimony of Williams expert Kenneth Johnston: I view the TSM
undertaking as one that supersedes this stipulation with respect
to rate and tariff matters. This court finds that RCA had before
it sufficient evidence to justify a reasoned conclusion that TSM
superseded the 1982 depreciation stipulation.
Finally, the Carriers and the State contend that no single
aspect of the settlement should be considered in isolation from
all other elements. Doing so might give the shippers the benefit
of one provision of the settlement, without recognition of
balancing tradeoffs regarding other features. Neither the
Carriers nor the State complain about a full historical review of
economic statistics to derive actual annual inputs for the rate
formula; but both contend that TSMs status as a negotiated
settlement component ipso facto insulates it from inclusion in a
historical rate-base computation.
The Carriers offered no concrete evidence that TSM
depreciation charges should have been equitably reallocated to
other components of TSM. The court has not been cited to
evidence that the interests of the carriers were either
advantaged or disserved by accelerated depreciation, or that it
in fact represented a tradeoff. Absent actual proof establishing
why TSM depreciation could or should not survive apart from its
settlement context, RCA was not required to discount record
evidence that such depreciation was embedded in prior rates.
This court holds that RCA had a reasonable basis to conclude
that the rates from 1977 through 1982, filed by the Carriers but
never approved on their merits by the Alaska Public Utilities
Commission, were sufficiently robust to be deemed inclusive of
accelerated depreciation; that the initial rate base and the 1983-
85 rates were retroactively established under TSM in accord with
its accelerated precept; that the 1982 depreciation stipulation
was superseded by the TAPS settlement and had no effect on the
initial rate base and subsequent rates; that accelerated
depreciation was embedded in all post-settlement rates, and was
properly used to derive the year-end 1996 rate base; and that an
artificial reversion to a deemed straight-line depreciation ab
initio would unreasonably subject the shippers to the burden of
twice compensating the Carriers for a portion of their investment
and contravene RCAs mandate to set just and equitable rates.
3. Evidence Rule
The Carriers and the State argue that RCAs factual finding
that the Carriers actually collected TSM depreciation over a
twenty-year period violates a public policy against use of
settlement negotiations in subsequent proceedings involving
settling parties. They cite Alaska Rule of Evidence 408 and
associated case law. Appellees counter that the rule is
irrelevant because it only proscribes use of settlement to prove
a disputed claim but does not preclude the shippers from proving
such factual matters as the quantum of accumulated depreciation.Rule 408 reads in
relevant part as follows:
Evidence of (1) furnishing or offering or
promising to furnish . . . a valuable
consideration in compromising or attempting
to compromise a claim which was disputed as
to either validity or amount, is not
admissible to prove liability for or
invalidity of the claim or its amount.
The court agrees with appellees that the rule is inapposite. By
way of analogy, if two competitors settle a dispute by agreeing
to fix prices, a victimized consumer is not precluded from
proving the bargain to establish damages. Here the State and the
Carriers agreed, inter alia, on amounts to be charged shippers
for depreciation. The shippers sought an accounting. Without the
settlement as Exhibit No. 1, RCAs findings would be divorced from
reality.
The TAPS settlement can have no more gravitational force
than APUC accorded it. APUC never found it just and reasonable.
Instead, the State and the Carriers requested a finding that the
public interest was served by the cessation of near-decade long
rate litigation. The States 1986 supporting brief emphasized
that APUC retained unfettered discretion in future third-party
rate cases:
[T]he Commission retains full jurisdiction
over intrastate TAPS tariffs; any non-
signatory to the agreement . . . may seek to
challenge a tariff filed pursuant to the
settlement regardless of whether the tariff
complies with the terms of the
settlement. . . . [T]his commission is
absolutely free as it should be to
establish whatever TAPS tariff rates it finds
are consistent with the statutory
requirement.
Subsequently Petro Star, an affected intrastate shipper not bound
by the agreement, filed a rate protest which was settled in 1993.
The APUC decreed that any future rate challenges would proceed
without deference to the TAPS settlement.35
The State fails to explain why, if RCA remained absolutely
free to establish any tariff consistent with the Pipeline Act, it
could not look to the TAPS settlement to measure accumulated
depreciation for purposes of a rate-base calculation. Under
appellants analysis, the TAPS settlement commits third parties
and RCA to a particular approach in the instant rate
adjudication. Perhaps several billion dollars of already
recovered depreciation must be included in the midstream rate
base.
The court believes such an outcome far exceeds the quite
limited imprimatur of approval the APUC accorded the TAPS
settlement. The settling parties understood and the APUC
announced that the TAPS settlement carried with it no binding
effect in subsequent third-party rate protests. To now accord
the profound effect urged by the Carriers and the State pursuant
to Alaska Rule of Evidence 408 would vest the settlement with a
force contrary to the representations of the settling parties and
to the APUCs caveat when it accepted the settlement.
d. Capital Structure
The Carriers, but not the State, appeal on the ground that
the hypothetical capital structure adopted by RCA for the years
1997-2000 included too much debt and too little equity. They
allege that no reasonable basis supports this, charging RCA with
arbitrarily departing from its own precedents. They urge review
with heightened scrutiny.
The capital structure of a regulated entity affects its
rates. Investors pay income tax on revenues derived from equity
capital but not on debt-attributable revenues matched by
deductible interest payments. A component of the rate formula
holds investors harmless from taxes. Consequently higher levels
of equity versus debt financing generally lead to higher rates.
Rate makers determine the appropriate capital structure. No
party contended that the actual capital structures of the
Carriers should be used, in part because the Carriers are limited-
purpose subsidiaries which likely could not stand alone. The
Carriers instead argued that a composite of the capital
structures of the parent oil- producing companies should be used,
resulting in a presumed Carrier equity in the pipeline of 75-77%
from 1997-2000, or on average 68% from 1968-2000. Tesoro urged
that the parent companies were an inappropriate paradigm. RCA
accepted Tesoros model based on a proxy group of stand-alone oil
and gas pipeline companies operating in other states, which
averaged 50.5% equity.
Tesoro expert Frank Hanley testified that the capital
structure should be consistent with prospective levels of
business risk of an enterprise as revealed by the capital
structures of similarly situated companies. He analyzed the
capital structures of the Carriers parent companies, comparing
that data to a proxy group of five oil pipeline holding companies
and four gas pipelines companies, plus twelve subsidiary gas
pipeline companies. Hanley noted that the Carriers parent
companies included several of the largest integrated oil
companies in the world, with high-risk operations of global
scope. He contrasted them to the Carriers, regulated operating
oil-pipeline companies in an American state, and concluded that
the Carriers were more aptly likened to stand-alone pipeline
companies than to the major producer-refiner-petrochemical parent
companies.
The five proxy oil pipeline companies averaged 49% equity
during 1995-99. For 1999 alone, their average equity was 50.5%.
The four gas holding companies averaged 43.7% equity during 1995-
99, but only because they were bloated with debt from recent
mergers and acquisitions; Mr. Hanley therefore discounted them,
and instead relied on the capital structures of the twelve
subsidiary gas pipeline companies. Their five-year average
equity was 51.6%. Their 1999 equity was 50.7%. Mr. Hanley
concluded that in the real world, stand-alone operating pipeline
companies subsist with a capital structure of approximately 50.5%
equity and 49.5% debt.
Carrier expert William Tye addressed the issue of capital
structure in his pre-filed testimony. He concluded the average
composite capital structure for the Carriers parent companies
should control, but provided no particular reason why this was
preferable to a capital structure derived from stand-alone
pipeline companies. He testified that the composite capital
structure of the parent companies was 22.7% debt to 77.3% equity
at year-end 1997.
The issue of the deemed capital structure for TAPS is
technical and peculiarly within RCAs expertise. With contrary
expert testimony before it, RCA made a plausible decision that
the paradigm should be operating pipeline companies rather than
oil-producing and refining companies. This court is precluded
from second-guessing that conclusion because it is supported by
reasonable evidence in the record viewed as a whole.
e. Risk Premium
The Carriers contend that RCA imputed an inadequate risk
premium to compensate lenders and equity investors for
purportedly extraordinary risks inherent to the project. They
urge that expert witnesses Dr. Tye and Dr. Gaske aptly estimated
the low end of a reasonable risk premium to be 2% on debt and
equity, and that RCA erred by assessing a parsimonious .75% risk
premium on equity alone.
Dr. Tyes pre-filed testimony about risk discusses, in an
abstract and conclusory fashion, such considerations as the
propriety of putting $10 billion investor eggs in one basket;
risks of non-completion or non-viability; legal obstacles;
escalating construction costs; decreasing world oil prices;
possible regulatory setbacks; and Alaskas extreme climate and
geography. He concluded that a risk premium should range from 2-
5%.
RCAs Order No. 151 adopted the Carriers methodology for
computing a risk premium including a prospective view of risks
that, in hindsight, proved evanescent. It rejected rote reliance
on the data inputs proposed by any one testifying expert. RCA
concluded that cited academic studies regarding the risks of
unrelated high-cap or high-tech projects like tunnels, subways,
airports, toll roads, and power plants were quite possibly apples
to oranges comparisons. It decided that, to the extent the
pipeline was ever an all-or-nothing gamble, such risk spanned the
planning stage only. RCA therefore awarded a risk premium for
non-completion due to regulatory and legal uncertainties limited
to that stage. It augmented this risk premium for the
contingency of cost overruns during construction. In other
respects RCA found TAPS less risky than an average pipeline.
There was a low risk of inadequate supply of oil; a low risk of
competition from alternative carriers; no extra risk of
throughput interruption; and no risk of a volatile regulatory
climate.
The Carriers argue that a risk premium should be applied to
the entire capital structure, both debt and equity. RCAs
analysis focuses on the risks to equity investors and does not
specifically discuss the risk to lenders in this context.
Presumably, the risk to lenders is reflected in the interest
rates they charge, for which the Carriers are directly reimbursed
in the rate formula. In a related context, RCA noted that TAPS
could be expected to generate funds to cover debt service under
almost any scenario. It appears that Dr. Tye was the sole
witness to unequivocally endorse a risk premium on debt. RCA was
not required to accept his seemingly idiosyncratic approach to
risk.
RCAs risk analysis was extraordinarily thoughtful and
complete. It addressed the contentions and evidence of all
parties. It supported its analysis with a thirteen-page single-
spaced endnote with eighty-eight citations to the record or to
prior cases. It merits the deference courts must apply when
reviewing complex decisions implicating agency expertise. This
court sustains RCAs findings as supported by the record.
f. Return on Equity
The Carriers argue that RCA departed from precedent without
adequate explanation when it expanded its purview beyond
principle reliance on a discounted cash flow (DCF) methodology
for determining the appropriate rate of return on equity.
Instead, RCA averaged the results of four different
methodologies.
Order No. 151 states in relevant part:
The parties largely failed to successfully
rebut each others various approaches to
determining return on equity. For the most
part, the record fails to provide a
theoretical or empirical basis for deciding
whether any particular method is more
appropriate than another. The record also
fails to suggest that any of the expert
witnesses have applied their chosen methods
inappropriately, or have chosen inappropriate
data or parameters.
We find Tesoros expert witness to be the most
credible. We base our rate of return
findings primarily upon Tesoros witnesss
recommendation. Tesoro sponsors multiple
methods because it believes investors rely on
the widest possible information available.
We agree with Tesoro that investors are aware
of all the various traditional cost of common
equity models discussed in financial
literature. Absent good reason for believing
that investors weight the results of one
method more heavily than another in their
assessment of an appropriate rate of return,
it is reasonable to hold that investors
ascribe weight to them all. We note that the
APUC has relied on a variety of methods when
those methods were reliable given the
specific facts at hand.
In addition, we find Tesoros DCF analysis the
most reliable . . . we primarily rely upon
Tesoros recommendation . . . .
This passage supports the Carriers argument that RCA stepped
beyond a primary reliance on a DCF methodology to a more catholic
acceptance of other methods. But RCA more than adequately
explained its reasoning. It found Tesoros Mr. Hanley to be a
compelling expert witness. He, unlike others, testified about
how investors actually tick. RCA preferred subtleties of Mr.
Hanleys DCF methodology, as compared to other DCF presenters.
The quoted excerpt from RCAs rate of return analysis reveals
that the area is technical; that competing theoretical models are
well developed; that RCA understood what it was doing; and that
it was thoughtful, conscientious, and discursive. RCA had a
reasonable rather than an arbitrary basis, supported by the
record, for its approach. A reviewing court is not entitled to
probe further. RCA has adequately explained any departure from
agency precedent and is supported by the record in arriving at
its rate of return conclusions.
g. Retroactive Ratemaking
Retroactive ratemaking is a regulatory taboo in Alaska and a
majority of jurisdictions.36 Rates may only be altered
prospectively, without any attempt to recapture past excess
profits, or to redress deficient past revenues. This protects
the reliance interest of a utility and its customers in the
stability of rates filed by a utility and approved by regulators.
In Order No. 151 RCA found that pursuant to TSM the Carriers had
the opportunity to collect an undeserved $9.9 billion. Yet RCA
properly considered any such excess profit as moot, and nothing
in Order No. 151 purports to reduce or adjust the 1997-2000 rate
structure to account for prior revenue anomalies.
Nonetheless the Carriers argue that RCAs use of TSM
accelerated depreciation to calculate the year-end 1996 rate base
squarely transgressed the retroactive ratemaking prohibition.
The argument is predicated on the notion that the 1982 straight-
line depreciation stipulation was not superseded by the TAPS
settlement agreement, a contention RCA rejected. RCA permissibly
found that TSM accelerated depreciation was actually used by the
Carriers to compute their rates prior to the instant rate
challenge. This finding renders the retroactivity argument
untenable. RCA did not meddle with prior rates. It simply
parsed a highly customized private settlement to determine what
portion of past revenues should fairly be allocated to
depreciation.
The Carriers argue that rates pursuant to Order No. 151
should be prospective from its date of issuance, and that the
Carriers need not refund excess revenues collected under TSM
during 1997-2000 while the rate challenge was pending. The
Carriers characterize TSM as sufficiently long-lived by 1997 that
it had been de facto ratified by RCA. As such TSM had become
impervious to any but the prospective modification allowed in RCA-
initiated challenges of previously approved rates under AS
42.06.410(a).
RCA found to the contrary in Order No. 151. It held that it
had properly suspended the 1997-2000 tariff filings, i.e. it had
allowed the rates provisionally subject to post-hearing refunds
pursuant to AS 42.06.400. That statute governs revised rates
filed by Carriers and judged anew by RCA under its just and
reasonable standard.
Prior to Order No. 151, TAPS tariffs were never approved by
RCA as just and reasonable. The initial rates filed in 1977 were
challenged. The parties engaged in protracted and expensive
litigation until they arrived at a mutually acceptable but sui
generis ratemaking methodology in 1985. The State and the
Carriers alike essentially urged APUC to forgo substantive
evaluation of TSM. The State affirmatively argued that APUC
could rekindle its inquiry upon any future third-party rate
challenge. APUC expressly reserved the right to evaluate rates
anew without prejudice from its acquiescence in TSM. The power
to suspend rates is a significant adjunct to a rate challenge.
Since a rate challenge may demonstrably take years to resolve,
RCA cannot do complete justice to a protestant absent a power to
affect rates from the time of challenge.
When rate litigation recommenced in 1997, its character as a
review of unapproved rates was intact. Neither Tesoro nor
Williams was a party to the TAPS settlement and so neither was
bound thereby. They properly sought the review of TSM that was
interrupted in 1985. These facts fall within AS 42.06.400s
procedure for evaluation of a carrier-generated rate filing.
In contrast, AS 42.06.410, which does not permit suspended rates,
would more aptly apply if RCA had sua sponte initiated review of
rates in which parties enjoyed decisively vested reliance rights,
because the rates had previously been found just and reasonable.
RCA appropriately distinguished cases cited by the Carriers for a
contrary conclusion.
h. Unitary TAPS Rate
The Carriers are wholly owned subsidiaries of oil-producing
companies. Each Carrier owns an undivided joint interest in the
pipeline. The Carriers have jointly formed the Alyeska Pipeline
Service Company (Alyeska) to manage, maintain and operate the
pipeline. Each Carrier holds its own certificate of convenience
to operate an oil pipeline. In-state consumers such as Tesoro
and Williams contract with individual Carriers and are invoiced
directly.
In 1983, the Superior Court invalidated individual rates
approved by APUC, finding TAPS to be a unity and not eight
virtual pipelines.37 At the request of the parties post-TAPS
settlement, that decision was vacated. Thereafter, the Carriers
filed rates not exceeding the TSM ceiling; per the settlement,
those rates were immune from State challenge. The matter of
individual rates became a regulatory non-issue.
During the instant rate litigation, Carrier and shipper
experts agreed RCA should impute to all Carriers identical
capital structures with a deemed debt to equity ratio, common
interest rates for borrowed capital, and a collective rate of
return. The Carriers opted to defend TSM, not with
individualized cost data, but instead with an overarching
benchmark economic model. RCA rejected the model, disagreeing
with its inputs and assumptions. RCA set a date for the Carriers
to file individual rates based on proof of prudent individual
costs, but only so long as the total revenues from all
individually and jointly-filed rates did not exceed RCAs revenue
entitlement set forth in Order No. 151.
On January 27, 2003, three Carriers filed individual rates
for 1997-2000. The ensuing revenue total exceeded RCAs figure.
The Carriers again declined to support their filings with
individualized cost data. RCA rejected the individual rates, and
made final the rates established in Order No. 151. The Carriers
and the State appeal.
The parties engage in statutory construction of the Pipeline
Act to support their positions. For example, the Carriers
discern a clarion legislative mandate that each may file its own
rates to be scrutinized in isolation by RCA.38 Tesoro discerns a
clear discretionary authority to set a common rate.39 The State
finds it inescapable that the Pipeline Act requires individual
rates.
In Order No. 151, RCA concluded that AS 42.06.630(17)
defines tariff to mean a rate for a pipeline facility for
services furnished by the facility and not a rate for each
individual owner of the pipeline facility. Further, from AS
42.06.370(a), All rates demanded or received by a pipeline
carrier or by any two or more pipeline carriers jointly . . .
shall be just and reasonable, RCA inferred authority for a single
rate imposed on joint owners. Finally, RCA found that nothing in
the Pipeline Act precluded it from setting a single rate upon
rejection of filed individual rates as unjust and unreasonable.
The parties cite no legislative history. The referenced
statutes do not explicitly address the issue. The statutes to
which the parties and RCA attribute controlling significance do
not definitively reveal a plain meaning.
RCA twice afforded the Carriers an opportunity to file rates
supported by actual cost data. The Carriers persisted in their
more theoretical rate defense. RCA rejected this approach. The
Carriers have not shown that RCAs requirements were arbitrary or
capricious. Irrespective of the validity of its decision to cap
aggregate revenues from individual and joint rates, RCA had an
adequate and independent basis to reject individual rate filings
by three Carriers, for failure of proof. Absent a compliant
defense of the filed rates, RCA can in a sense be viewed as
setting individual rates for all Carriers; the individual rates
are identical, because no carrier distinguished itself from the
pack.
The State argues that the Carriers have filed individual
rates for years, and RCA has departed from precedent without
adequate explanation. The State does not provide record cites
proving prior price competition. Tesoro contends that no TAPS
Carrier has ever charged anything but the TSM ceiling, citing
testimony to that effect.40 RCA concluded that the record was
insufficient to determine whether the TAPS Carriers ever engaged
in price competition amongst themselves.
Tesoro represents that the five Carriers have no employees.
The pipeline itself is operated by Alyeska Pipeline Service
Company, which presumably bills the Carriers based on their
respective percentages of ownership. Significant items such as
debt to equity ratio, cost of borrowed capital, risk factors, and
rate of return are imputed to the Carriers in common; the
Carriers fault the numbers but not the joint imputation.
Individually incurred Carrier expenses may well be a microscopic
factor in the rate equation, given that the parties jointly
operate the pipeline through Alyeska on a shared-cost basis, and
are otherwise imputed invariant capital structures, interest
rates, risk factors, and rates of return. The parties do not
discuss the extent of the administrative burden imposed on RCA by
any statutory mandate to set individual rates.
RCAs total revenue cap means that Carriers seeking leave to
exceed the unitary rate initiate a zero-sum game; some other
Carrier must elect to charge less, so that total revenue remains
constant. The scenario is unrealistic. In practical effect,
Order No. 151 establishes a unitary rate; its individual rate
provision is illusory as to Carriers seeking a rate premium,
given the cap.
The court concludes that interpretation of RCAs enabling
statutes to arrive at practical parameters requires
administrative expertise. RCAs decision to set a unitary rate or
highly conditioned individual rates for this jointly owned and
operated pipeline applies agency expertise to a fundamental
policy question. RCAs interpretation of the Pipeline Act is
entitled to deference. RCAs conclusion regarding the statutory
scope of its discretion is reasonable and must therefore be
sustained by this court.41 Its exercise of this discretion is
supported by the record.
i. Interest Rate
RCA ordered refunds to affected shippers. Alaska Statute
42.06.400(b) states that the difference between a temporary and
permanent tariff, in favor of either a carrier or a shipper,
shall bear interest at the rate set forth in AS 45.45.010(a), or
10.5%. RCA so ordered.
The Carriers argue that AS 42.06.400(b) was at least
impliedly repealed by the 1997 amendment to the Code of Civil
Procedure at AS 09.30.070(a) which established the interest due
on civil judgments [n]otwithstanding AS 45.45.010. The statute
applies a floating interest rate based on the Federal Reserve
discount rate to judgments in civil litigation filed in the
superior or district court. The annual rate may be greater or
lesser than the 10.5% legal rate of interest established in AS
45.45.010 for other purposes. For 2006, the floating rate for
civil judgments is 8.25%.
The amendment of AS 09.30.070 was a component of a
comprehensive tort reform act. The legislatures intent to
relieve society of perceived excesses or irrationalities in civil
litigation was discussed in Evans ex rel. Kutch v. State:
The legislative goals underlying the damages
caps, as well as the rest of chapter 26, SLA
1997, are explicitly stated in chapter 26,
section 1, SLA 1997. Specifically, section 1
states that the legislation was intended to
(1) discourage frivolous litigation and
decrease the costs of litigation; (2) stop
excessive punitive damages awards in order to
foster a positive business environment; (3)
control the increase of liability insurance
rates; (4) encourage self-reliance and
independence by underscoring the need for
personal responsibility; and (5) reduce the
cost of malpractice insurance for
professionals.[42]
Nothing in the Tort Reform Acts stated rationale suggests a more
general purpose to repeal the legal interest rate applicable
outside the context of tort and contract cases. Had the
legislature wished to repeal the interest provision of the
Pipeline Act when it passed tort reform legislation in 1997, it
would logically have done so expressly, and indicated why it was
ranging so far a field from its statement of intent. Nothing in
the Tort Reform Act evinces an intention to affect anything but
tort and contract litigation. Alaska Statute 09.30.070(b) is
specifically tailored to tort and contract claims, linking the
initial interest accrual date to written notice of a claim; the
provision makes little sense in RCAs sphere. RCA appropriately
followed the mandate of the Pipeline Act to order interest at the
legal rate set forth in AS 45.45.010.
IV. CONCLUSION
This court affirms the decision of RCA in all respects.
Points on appeal not specifically addressed in this decision are
denied as without merit.
Dated this 18th day of January, 2006 at Anchorage, Alaska.
/s/ John Suddock
Superior Court Judge
_______________________________
* The superior courts Decision and Order has been edited
to conform to our style and formatting requirements and most
internal citations have been omitted.
1 The eight original owners were subsidiaries of Amerada
Hess, ARCO, BP, Exxon, Mobil, Sohio, Phillips and Union. Mergers
and transfers have reduced their number to five. They are BP
Pipelines (Alaska), Inc.; ExxonMobil Pipeline Company; Phillips
Transportation Alaska, Inc.; Unocal Pipeline Company; and
Williams Alaska Pipeline Company, L.L.C.
2 The same order is also styled Order No. 110 in related
Docket P-97-7 (collectively, Order No. 151).
3 AS 42.06.140 and .410(a).
4 The statutory basis for jurisdiction is found in AS
22.10.020(d), AS 42.06.480(a), and AS 44.62.560-.570.
5 Re Amerada Hess Pipeline Corp., 13 APUC 448, 456
(1993).
6 Id.
7 AS 42.04.050.
8 Alyeska Pipeline Serv. Co. v. Deshong, 77 P.3d 1227,
1231 (Alaska 2003).
9 Id.
10 Id.
11 Ninilchik Traditional Council v. Noah, 928 P.2d 1206,
1217 (Alaska 1996).
12 Totemoff v. State, 905 P.2d 954, 967-68 (Alaska 1995).
13 U.S. Const. amends. V, XIV; Alaska Const. art. I, 7.
14 2 Richard Pierce, Jr., Administrative Law Treatise
9.8, at 648-49 (4th ed. 2002).
15 425 F.2d 583, 591 (D.C. Cir. 1970).
16 FTC v. Cement Inst., 333 U.S. 683, 68 S. Ct. 793, 92 L.
Ed. 1010 (1948).
17 Cinderella Career & Finishing Sch., 425 F.2d at 590.
18 FTC v. Cement Inst., 333 U.S. 683, 68 S. Ct. 793, 92 L.
Ed. 1010 (1948). The phrase irrevocably closed decision maker
mind is this courts, not the Cement Institute Courts.
19 421 U.S. 35, 95 S. Ct 1456, 43 L. Ed. 2d 712 (1975).
20 Id. at 47, 95 S. Ct. 1464 (emphasis supplied).
21 333 U.S. 683, 68 S. Ct. 793, 92 L. Ed. 1010 (1948).
22 Withrow, 421 U.S. at 55, 95 S. Ct. at 1468.
23 151 F.3d 1361 (Fed. Cir. 1998).
24 589 F.2d 307 (7th Cir. 1979).
25 United Farm Workers of Am., AFL-CIO v. Arizona Agric.
Employment Relations Bd., 727 F.2d 1475 (9th Cir. 1984) (citation
omitted).
26 Cinderella, 425 F.2d at 590.
27 711 P.2d 1170 (Alaska 1986).
28 Id. at 1180.
29 575 P.2d 771 (Alaska 1978).
30 955 P.2d 943, 946-47 (Alaska App. 1998).
31 Id.
32 6 APUC 527 (1985).
33 12 APUC 425 (1992).
34 Alyeska Pipeline Serv. Co. v. Deshong, 77 P.3d 1227,
1231 (Alaska 2003).
35 Re Amerada Hess Pipeline Corp., 13 APUC 448, 456
(1993).
36 Matanuska Elec. Assn v. Chugach Elec. Assn, 53 P.3d 578
(Alaska 2002).
37 State v. Alaska Pub. Util. Commn, 3AN 80-7163 CI
(Alaska Super. 1983).
38 TC Init. Br. 123-24, citing variously AS 42.06.630(15)
(defining pipeline carrier as the owner, including corporations
organized under the laws of the United States or of any state of
any pipeline . . . any interest in it); AS 42.06.245 ([T]he
requirements of this chapter for permits and certificates of
public convenience and necessity . . . apply to . . . a pipeline
or pipeline carrier.); AS 42.06.350(a) (every intrastate oil
pipeline carrier shall file . . . all rates . . . pertaining to
service provided under the certificate); AS 42.06.140(3) (RCA
shall require just, fair, and reasonable rates . . . for pipeline
carriers); and AS 42.06.370(a) (requiring that all rates
demanded or received by a pipeline carrier be just and
reasonable).
39 Tesoro Br. 119-20, citing AS 42.06.140 (broad general
regulatory powers); AS 42.06.370(a) (rates charged by a pipeline
carrier, or by any two more pipeline carriers jointly shall be
just and reasonable); AS 42.06.630(a) (tariff means a rate . . .
of a . . . pipeline facility relating to services furnished by
the facility); AS 42.06.630(15) (pipeline carrier means the
owner, including corporations . . . of any pipeline); AS
42.06.630(14) (pipeline or pipeline facility includes all the
facilities of a total system of pipe).
40 See discussion supra at III(c)(2).
41 Denuptiis v. Unocal Corp., 63 P.3d 272 (Alaska 2003).
42 56 P.3d 1046, 1053 (Alaska 2002) (footnotes omitted).
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