Opinion ID: 2633766
Heading Depth: 3
Heading Rank: 3

Heading: Depreciation Component of Prior Rates

Text: The Carriers argue that RCA's 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.
RCA found the depreciation stipulation to be, for all practical purposes, irrelevant, because it was superseded by the TAPS settlement.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 Settlement's 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 pipeline's 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. RCA's finding that pre-settlement depreciation charges were consistent with accelerated depreciation is most specifically supported in the record by the testimony of State's witness Jerome Haas. Mr. Haas was a member of the State's 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 RCA's 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.
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.
The Carriers and the State argue that RCA's 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, RCA's 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 State's 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 APUC's caveat when it accepted the settlement.