Opinion ID: 2633766
Heading Depth: 4
Heading Rank: 2

Heading: Significance of TSM Depreciation

Text: 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], wouldn't it? A: That is correct. Q: Are you aware of any carrier prior to 1996 who had a voluntary revenue reduction? A: I'm not aware of one. Q: You went through every individual carrier's form . . . and you don't remember any voluntary reductions prior to 1996? A: I don't 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 RCA's 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 [State's] objective of ensuring a declining tariff profile. . . . The [State's] 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 system's 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 State's 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 RCA's 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 TSM's status as a negotiated settlement component ipso facto insulates it from inclusion in a historical ratebase 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 straightline depreciation ab initio would unreasonably subject the shippers to the burden of twice compensating the Carriers for a portion of their investment and contravene RCA's mandate to set just and equitable rates.