Opinion ID: 2633766
Heading Depth: 3
Heading Rank: 2

Heading: Alleged Departure from Rate-Base Precedent

Text: 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 (0) 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 pipeline's life. Alternatively, recovery of capital can be front-loaded in the early years of a pipeline's 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, DOC's straight-line depreciation must be applied from a pipeline's 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 RCA's 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 ICC's 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 RCA's 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.