Millions at stake in back taxes to state

With leaves appearing on trees, we are all planning our summer activities and enjoying the sunny days of spring. Due to this seasonal diversion, many Alaskans may have missed an important development in late April when the Federal Energy Regulatory Commission (FERC) determined that the tariffs charged by the Trans-Alaska Pipeline System (TAPS) owners were too high. This ruling will result in an estimated increase of $440 million in production tax and royalty payments to the state for 2007 and 2008. This announcement followed an earlier FERC determination that the TAPS owners overcharged in 2005 and 2006 which should result in another $200 million to the state. While these funds are not in the bank yet, the legal wrangling with the TAPS owners highlights that the state must constantly be on guard to protect the interest of its shareholders (citizens) as our resources are taken to market.

Although the final outcome of this case is of significant financial interest to Alaskans, the tariffs were initially challenged by Tesoro and Anadarko Petroleum, not the state, which had contractually limited its options. Tesoro initially challenged the in-state tariffs to the Regulatory Commission of Alaska (RCA) who determined in 2002 that the cost of shipping oil for in-state delivery was too high. This ruling was challenged and eventually made its way to the Alaska Supreme Court where the RCA decision was validated in February 2008, resulting in reduced in-state shipping costs. Following the RCA decision Anadarko challenged the out-of-state shipping tariffs to FERC and at this point the state joined their efforts.

As a member of the legislature, I have been interested in the operation of TAPS for a number of years, particularly in regard to the tariffs. Since this is a complicated area of regulatory law, I have relied on consultants and legal experts to fill in the gaps and have taken the time while in Washington, D.C., to visit FERC offices to understand their process.

In the interest of providing other legislators and the public with a better picture of the issues associated with the TAPS tariffs, I asked Rep. Carl Gatto, then chairman of the House Resources committee, to hold a hearing in March 2007. This meeting included presentations by economic and legal consultants with many years of background and experience with pipeline operations, costs and tariffs. These individuals reviewed and explained the initial administrative law judge decision at FERC and why the state and its partners were likely to ultimately prevail. Although information from the Alaska Department of Revenue was sketchy at the time, it was estimated that the state could be looking at a future windfall of up to $800 million dollars for the four years in dispute.

In addition to generating increased state revenue, lower pipeline tariffs are crucial for oil exploration companies that don’t own part of TAPS that the state is trying to attract to the North Slope. We are now starting to hear favorable reports stemming from the array of tax credits and deductions in the new ACES oil tax system; however, the value of these incentives can be overwhelmed if transportation tariffs are too high. By working with FERC to keep transportation costs down, companies like ENI, Pioneer and Anadarko can afford to develop smaller satellite fields on the North Slope. This activity creates jobs in Alaska, more oil in the TAPS line and revenue for the state.

The TAPS owners have now appealed the April 16 and earlier FERC rulings to the United States Circuit Court of Appeals for the District of Columbia. Although this action will delay additional funds flowing to our treasury anytime soon, we must keep in mind that the earlier RCA case was ultimately decided in favor of Tesoro and lower tariffs, and so far the FERC rulings have largely favored Anadarko and the state.

The state must be prepared to strongly advocate for a fair outcome since the cost of transporting a barrel of oil from the North Slope to market impacts not only our treasury but our ability to attract exploration companies.

As policymakers we need to follow the mandate of the Alaska Constitution to develop our resources; yet as we do so, we must assure our shareholders — the citizens of Alaska — that we are getting fair value for them.

State Sen. Gene Therriault, a Republican, is from North Pole.