_seq-~396,e¢ te
`
`STINSON
`LEONARD
`STREET
`
`Bovid W.D'Alessandro
`
`202.728.3014 DIRECT
`202.572.9989 DIRECT FAX
`devid.dalessandro@sfinson.com
`
`.
`
`2
`
`.
`
`.
`see bt stepth FILED
`. SECEAT:7 OFTHE mS
`Be
`
`2b Ji28 PF 13
`
`
`aTAMEEctaeaa
`
`Lo hat
`
`wacotiinoe
`
`
`District of Columbia Circuit
`E. Barrett Perryman U.S. Courthouse
`333 Constitution Avenue, N.W.
`
`Washington, DC 20001-2866
`
`
`NITED STAT.aCv"2OF APPEALS
`ORIGINAL
`ARDISTRICT OFCOLUMBIACIRCUIT
`
`
`JAN 79 2016
`
`
`.
`
`t§- 102 2
`
`Re:
`
`Koch Alaska Pipeline Company, LLC v. Federal Energy Regulatory Commission.etal.,
`Case No. 16-
`
`Dear Mr. Langer.
`
`Enclosed forfiling in the captioned proceeding are an original and four copies of the
`Petition for Review of Koch Alaska Pipeline Company, LLC and Corporaie Disclosure
`Statement. Also enclosed ts a filing fee of $500.00 payable to Clerk, U.S. Court of Appects,
`and a copyof the Federal Energy Regulatory Commission order on appeal. We have also
`enclosed two exira copies of fhesefilings. Please time and date stamp these additional
`copies and retum them to the courier.
`IF you have any questions regarding this filing. please contact the undersigned.
`
`Respectfully submitted,
`
`Stinson Leonard Street LLP
`
`Aud Whvobypg
`
`’ David W. D' Alessandro
`
`;
`|
`
`|
`
`DWD:SLS
`
`Enclosures
`
`ce:
`
` Afl parties to proceedings
`
`STINSON.COM
`
`GORE(30054699.0002/1 14016745.)
`
`wee
`
`&
`
`-
`
`W775 PENNSYLVANIA AVENUE N.W., SUITE 800 * WASHINGTON, DC 20006
`202.785.9100 MAIN «© 202.785.9143 FAX
`
`

`

`
`
`THE DISTRICT OF COLUMBIA CIRCUIT
`UNTER STATES COUNT OF
`FOR DISTRICT CF COLUNGIAGIRGUTT
`
` IN THE UNITED STATES COURT OF APPEALS
`
`KOCH BNUtesPIPELINE
`COMBROEWED
`
`yp
`
`.
`16-1022
`
`) )
`
`)
`} No
`}
`)
`)
`
`) )
`
`))
`
`Petitioner,
`
`VS.
`
`.
`FEDERAL ENERGY
`_ REGULATORY COMMISSION
`AND UNITED STATES OF
`AMERICA -
`
`‘Respondents.
`
`PETITION FOR REVIEW
`
`Pursuantto Rule 15 ofthe Federal Rules ofAppellate Procedure and 28
`«USC. 85 2342-2344, Koch Alaska Pipeline Company, LLC hereby petitions this
`
`Court for review of BP Pipelines (Alaska) Inc.,Order on Initial Decision, 153
`FERC { 61,233 (Nov. 20, 2015), issued by Respondent Federal Energy Regulatory
`Commission in DocketNos. [S09-348-004, etal. (“Opinion No. 544”). A copyof
`Opinion No. 544 is attached hereto as Exhibit A.
`ae
`
`

`

`
`
`Respectfully submitted,
`
`Anat)(oancbeiws
`
`David D’Alessandro
`Kelly A. Daly
`M. Denyse Zosa
`Stinson Leonard Street LLP
`1775 Pennsylvania Ave NW, Suite 800
`Washington DC, 20006
`(202) 785-3100
`(202) 785-9163- Fax
`david.dalessandro@stinson.com
`kelly.daly(@stinson.com
`denyse.zosa(@stinson.com
`
`Counselfor Koch Alaska Pipeline
`Company, LLC
`
`Dated: January 19, 2016
`
`

`

`
`
`
`IN THE UNITED STATES COURT OF APPEA
`
`
`
`_
`
`) ) ))
`
`Cl TORRENS
`ITED STATES
`asp TIT
`OFCOLNEcIRCUT
`aapworeBURYOFAPRDISTRICT OF COLUMBIA CIRCY
`
`FOR DISTRICTOF 60
`:
`uo}
`uAN 19 2018
`KOCH
`\gIPELINE
`COMPRECEIVER
`
`
`
`CLERK
`
`No__.__16-1022
`
`)
`)
`)
`
`)) )
`
`~
`FEDERAL ENERGY
`REGULATORY COMMISSION
`AND UNITED STATES OF
`AMERICA
`
`Respondents.
`
`CORPORATE DISCLOSURE STATEMENT
`OF KOCH ALASKA PIPELINE COMPANY, LLC
`
`Pursuant to Rule 26.1 of the Federal Rules of Appellate Procedure and the
`Rules of this Court, Koch Alaska Pipeline Company, LLC (““KAPCO”)
`respectfully submits ihis Corporate Disclosure Statement. During the period at
`issue in this proceeding, KAPCO owned an interest in the Trans Alaska Pipeline
`
`System (“TAPS”) and providedtransportation service through TAPS in accordance
`with the terms ofits tariff. KAPCOis a limitedliability company organized under
`the laws of the state of Alaska. KAPCO is wholly owned by Koch Pipeline
`Company, L.P., a Delaware limited partnership. No publicly held corporation
`
`owns 10% or more of KAPCO’s stock.
`
`

`

`
`
`Koch Alaska Pipeline Company, LLC is also an indirect subsidiary of Koch
`
`Industries, Inc., a Kansas corporation. Koch Industries, Inc. has no parent, noris
`
`there any publicly held company that holds a 10% or larger interest in Koch
`
`Industries, Inc.
`
`Respectfully submitted,
`
`
`
`Kelly A. Daly
`M. Denyse Zosa
`Stinson Leonard Street LLP
`1775 Pennsylvania Ave NW, Suite 800
`“Washington DC, 20006
`(202) 785-3100
`(202) 785-9163- Fax
`david.dalessandro@stinson.com
`kelly.daly@stinson.com
`denyse.zosa(@stinson.com
`
`Counselfor Koch Alaska Pipeline
`Company, LLC
`
`' Dated: January 19, 2016
`
`

`

`EXHIBITA|
`
`[copy of Opinion No. 544]
`
`

`

`
`
`153-FERC f 61,233
`UNITED STATES OF AMERICA
`
`FEDERAL ENERGY REGULATORY COMMISSION
`
`OPINION NO. 544
`
`BP Pipelines (Alaska)Inc.
`BP Pipelines (Alaska) Inc.
`BP Pipelines (Alaska) inc.
`BP Pipelines (Alaska) Inc,
`ConocoPhillips Transportation Alaska Inc.
`ConocoPhillips Transportation Alaska Inc.
`ConocoPhillips Transportation Alaska Inc.
`
`ExxonMobil Pipeline Company
`ExxonMobil Pipeline Company
`ExxonMobil Pipeline Company
`ExxonMobil Pipeline Company
`
`Unocal Pipeline Company
`Unocal Pipeline Company
`Unocal Pipeline Company
`Unocal Pipeline Company
`Unocal Pipeline Company
`Unocal Pipeline Company
`Unocal Pipeline Company
`Koch Alaska Pipeline Company, L.L.C.
`Koch Alaska Pipeline Company, L-L.C.
`
`_ BP Pipelines (Alaska) Inc.
`BP Pipelines (Alaska) Inc.
`BPPipelines (Alaska) Inc.
`BP Pipelines (Alaska) Inc.
`
`Docket No. 1809-348-004
`Docket No. 1S09-395-004
`Docket No. 1810-204-002
`Docket No. 18 10-491-000
`
`Docket No. IS09-384-004
`Docket No. IS 10-205-003
`Docket No. IS10-476-001
`
`Docket No. IS09-391-004
`Docket No. IS09-177-005
`Docket No. I810-200-002
`Docket No. I1S10-547-000
`
`Docket No. 1S09-176-004
`Docket No. IS07-41-005
`Docket No. 1S808-53-005
`Docket No, IS10-52-001
`Docket No. OR10-3-001
`Docket No. 1810-490-000
`. Docket No. IS11-3-000
`
`Docket No. IS 10-54-001
`Decket No. IS 10-496-000
`
`Docket No. 1S09-348-006
`Docket No. 1809-395-006
`Docket No. 1810-204-004
`Docket No, IS10-491-003
`
`ConocoPhillips Transportation Alaska Inc.
`ConocoPhillips Transportation Alaska Inc.
`ConocoPhillips Transportation Alaska Inc.
`
`Docket No. IS09-3 84-006
`Docket No. I§10-205-005
`’ Docket No. IS10-476-003
`
`

`

`
`
`~ Docket No. 809-348-004,er al.
`
`ExxonMobil Pipeline Company
`ExxonMobil Pipeline Company
`ExxonMobil Pipeline Company
`ExxonMobil Pipeline Company
`
`Unocal Pipeline Company
`Unocal Pipeline Company
`Unocal Pipeline Company
`Unocal Pipeline Company
`Unocal Pipeline Company
`Unocal Pipeline Company
`Unocal Pipeline Company
`
`Koch Alaska Pipeline Company, L.L.C.
`Koch Alaska Pipeline Company, L.L.C.
`
`-ii-
`
`Docket No. IS09-391-006
`Docket No. IS09- 177-007
`Docket No. [§10-200-004
`Docket No. IS10-547-002
`
`Docket No. IS09-176-006
`Docket No. I807-41-007
`Docket No. IS08-53-007
`Docket No. 1§10-52-003
`Docket No. OR10-3-004
`Docket No. IS10-490-002
`Docket No. IS1 1-3-002
`
`Docket No. I§10-54-003
`Docket No. IS10-496-003
`
`ORDER ON INITIAL DECISION
`
`Issued November 20, 2015
`
`

`

`Docket No. IS09-348-004,etal.
`
`- fii -
`
`OPINION NO. 544
`
`TableofContents
`
`Page
`
`4.
`
`Future CarrierFilingstoRecoverfor SRProjectUpgrades.sevenaneeaeescsessventes -55-
`
`General Background ..........cccsccssscsssessensnceecesocseatsnsesesnssanaeetsetseserssssseesevarseseaaeeeones -2-
`T.
`Il. Prudence of the SR Project..........ssssssssssssesseeeessassassensecteaseceecectansaceerseeseecnereconeeas ~4-
`A. Description of the SR Project .......-.ccssssssscssessscnssssanssersssseseeeersseccenessenssteeeenesees -4-
`B.
`Initial Decision... ccescessssseensestsscssssecscecsonsensnsscneusuqensyssssatstenstansutyenseteetanseaes -~7-
`CC.
` DASCUSSIONL..........sccccsceseeeseercanseneeorenensssersnarsecrsnseesaseatedecerteseeessseceees senses snrenerecsesers -§8-
`Serious Doubt Exists Regarding the SR Project ..............cc.-sscessssssseeeeereres - 10-
`The Carriers Have Not Satisfied Their Burden..................peetessennsnececenatentes -24-
`Prudence Remedies.............ccessssecescsossertescsssvescesencobesqasnavatteatsuaneasarauessseosens - 50-
`
`1.
`2,
`3.
`
`TH.—_Basse and Test Period .........:sssscsssssscesssecessessssesennsensnsnssneareesesestuarsenessanenennsteosane - 57-
`A. The Initial Decision .................cccseccsnesenessccensaseenenseencedysnascenaseeessntenseaseseensesnets -57-
`B. Briefs On and Opposing Exceptions ......0........ecssesscseesiessescenseeesensteetsarenvarteases -57-
`C. Commission Decision......:sccccssereresccsssecscesscssssecssesteneersestacsceasutateetenssetseotetaas ~ 58-
`TV.
`Add Valorem Taxes........cenesssusssrrecsesseessssseassnerayenssatesrsaseeenssaseeeetesensssarsaterssnrase - 59-
`A. The Initial Decision ............:..sceesencsecessatscensennsecsesgateettnenedunsensteraueasasttnatstesaeeas - 59 -
`B. Briefs On and Opposing Exceptions -..........scscsseselecctseeseesesccanensenseesesrereteeees - 59-
`C. Commission Decision..............c.cescecssssreressencensseneneteccecenesensserseneegarsenaeneces sense -61-
`V. Litigation Expenses .......scccsssssssessseeseessesetsnseersereetsensteceerenae nsacesntonensssnesceseeasenens - 62 -
`A.
`TheInitia] Decision ..............ccccacescesssrartoressacssacnsaceessrascanseesecerenssseargnesaetesaaases - 62-
`B. Briefs On and Opposing Exceptions .............:.--cssesssssseceerseesrrstserssnegneeateaeseeee - 63 -
`C. Commission Decision..............:scccessscssscesenerscssvepstesnenscesesstugaetevacsengenscsueseavens? - 63 -
`VIL
`Oil-Spili-Related Cost of Service ISsves............:.ccueeccccarssereneerersersserseneeceeteeenes - 65 -
`A.
`Initial Decision 20... ccscescceccenseeeseeecnessnsensersessegepateesnsasgressaneters¢sansuqeenataceaseees - 65 -
`B. Briefs On and Opposing Exceptions ............:ccscssscsssseneesseccerarseneneceaseceataaeatees - 65 -
`C. Commission Decision... eeececceceeeeesenseesenenseretseesseersnenncseeceepegeunsearecennsoen - 65 -
`
`

`

`
`
`153 FERC 61,233
`UNITED STATES OF AMERICA
`’. FEDERAL ENERGY REGULATORY COMMISSION
`
`Before Commissioners: Norman C. Bay, Chairman;
`Cheryl A. LaFleur, Tony Clark,
`and Colette D. Honorable.:
`
`BP Pipelines (Alaska) Inc.
`BP Pipelines (Alaska) Inc.
`BPPipelines (Alaska) Inc.
`BP Pipelines (Alaska) Inc.
`
`ConocoPhillips Transportation Alaska Inc.
`ConocoPhillips Transportation Alaska Inc.
`ConocoPhillips Transportation Alaska Inc.
`
`ExxonMobil Pipeline Company
`ExxonMobil Pipeline Company
`ExxonMobil Pipeline Company
`ExxonMobil Pipeline Company
`
`Unocal Pipeline Company
`Unocal Pipeline Company
`Unocal Pipeline Company
`Unocal Pipeline Company
`Unocal Pipeline Company
`Unocal Pipeline Company
`Unocal Pipeline Company
`
`Koch Alaska Pipeline Company, L.L.C,
`Koch Alaska Pipeline Company, L.L.C.
`
`BP Pipelines (Alaska) Inc.
`BPPipelines (Alaska) Inc.
`BP Pipelines (Alaska) Inc.
`BP Pipelines (Alaska) Inc.
`
`ConocoPhillips Transportation Alaska Inc.
`ConocoPhillips Transportation AlaskaInc.
`ConocoPhillips Transportation Alaska Inc.
`
`Docket No, 109-348-004
`Docket No. IS09-395-004
`Docket No. IS10-204-002
`Docket No. IS10-491-000
`
`Docket No. IS09-384-004
`Docket No. IS10-265-003
`Docket No. IS10-476-001
`
`Docket No. IS09-391-004
`Docket No. [S09-177-005
`Docket No. 1§ 110-200-002
`Docket No. IS10-547-000
`
`Docket No. IS09-176-004
`Docket No. IS07-41-005
`Docket No. 1808-53-005
`Docket No. IS10-52-001
`Docket No. OR10-3-001
`Docket No. IS10-490-000
`Docket No. IS11-3-000
`
`Docket No. I$10-54-001
`Docket No. IS10-496-000
`
`Docket No. IS09-348-006
`Docket No. [S09-395-006
`Docket No. [810-204-004
`Docket No. IS10-491-003
`
`Docket No. IS09-384-006
`Docket No. 1810-205-005
`Docket No. [S10-476-003
`
`

`

`
`
`Docket No. IS09-348-004,ef al.
`
`.
`
`-2-
`
`ExxonMobil Pipeline Company
`ExxonMobil Pipeline Company
`ExxonMobil Pipeline Company
`ExxonMobil Pipeline Company
`
`;
`
`Unocal Pipeline Company
`Unocal Pipeline Company
`Unocal Pipeline Company
`Unocal Pipeline Company
`Unocal Pipeline Company
`Unocal Pipeline Company
`Unocal Pipeline Company
`
`Docket No. 1S09-391-00
`Docket No. IS09-177-007
`Docket No. IS 10-200-004
`Docket No. IS10-547-002
`
`Docket No. IS09-176-006.
`Docket No. IS07-4 1-607
`Docket No. IS08-53-007 |
`Docket No. IS10-52-003
`Docket No, OR10-3-004
`Docket No. IS 10-490-002
`Docket No. IS11-3-002
`
`Koch Alaska Pipeline Company, L.L.C.
`Koch Alaska Pipeline Company, L.L.C.
`
`Docket No. 1S10-54-003
`Docket No. I$10-496-003 .
`
`OPINION NO. 544
`
`ORDER ONINITIAL DECISION
`
`(Issued November 20, 2015)
`
`This order addresses briefs on and opposing exceptions to an Administrative Law
`i.
`Judge’s Initial Decision’ regarding 2009 and 2010rate filings on the Trans Alaska
`Pipeline System (TAPS). As discussed below, the Commission generally affirms the
`Initial Decision while granting exceptions regarding the remedy for imprudence and
`litigation costs.
`
`L.
`
`General Background
`
`TAPSconsists of a 48-inch diameter oil pipeline andits related facilities. The
`2.
`pipeline is about 800 miles long and transports commingled crude oil produced from
`different fields on the Alaska North Slope (ANS)from Prudhoe Bayto the Port of
`Valdez. TAPS is owned by the Carriers.? Each Carrier possesses an entitlement toits
`
`1 BP Pipelines (Alaska) Inc., 146 FERC 63,019 (2014)(Initial Decision).
`
`At the time ofthe 2009 and 2010 rate filings issue in this proceeding, the TAPS
`Carriers consisted of BP Pipelines (Alaska) Inc. (BP), ConocoPhillips Transportation
`Alaska, Inc. (ConocoPhillips), ExxonMobil Pipeline Company (ExxonMobil), Koch
`(continued...)
`
`

`

`
`
`“Docket No. IS09-348-004, etal.
`
`-3-
`
`|
`
`percentage ownership share of the pipeline’s capacity, and each Carrier posts its own
`tariffs and has its own customers. The TAPS system is operated by Alyeska Pipeline
`Service Company (Alyeska). Alyeska is jointly owned by the Carriers in direct
`proportion to their ownership of TAPS.*
`
`3.. The Carriers madeaseries ofrate filings which have been consolidated with this |
`
`
`
`proceeding. The filings were protested, and the Commission accepted and suspendedthe
`filings subject to refund and the outcomeof hearing procedures.* On February 27, 2014,
`the Presiding Judge issued an Initial Decision. On May 16, 2014,the Carriers, Anadarko
`Petroleum Corporation (Anadarko), the State ofAlaska (Alaska), Koch,° and
`.
`Commission Trial Staff (Trial Staff) filed briefs on exceptions. On July 25, 2014, the
`Carriers, Anadarko, Alaska, Trial Staff, and Flint Hills Resources Alaska, LLC (Flint
`Hills) filed briefs opposing exceptions.®
`
`Alaska Pipeline Company, LLC (Koch), and Unocal Pipeline Company (Unocal)
`(collectively, Carriers), Koch and Unocal provided final notice oftheir withdrawal from
`TAPS effective as of August 1, 2012. Koch has completed its exit, and Unocal is in the
`process, subject to applicable governmental approvals, of completing the transfer ofits
`TAPSinterests to the remaining Carriers.
`
`4 At its peak in 1998, TAPSthroughput averaged over 2 million barrels per day
`(bpd), while at the close of this record throughput averaged under 620,000 bpd. Carrier
`affiliates transport 95 percent ofthe throughput on the TAPS pipeline.
`
`* E.g., BP Pipelines (Alaska) Inc., 127 FERC J 61,316 (2009). TheInitial
`Decision contains an extensive procedural history describing the nature and timing of
`these filings. 146 FERC { 63,019 at PP 22-61.
`
`* Kochalso joined the Carriers’ brief, butfiled its own brief on exceptions.
`* Also, May 16, 2014, the Association of Oil Pipelines and the Interstate Natural
`Gas Association of America (collectively, AOPL/INGAA)filed a motion requesting
`leave to file an amicus brief supporting certain exceptions to the Initial Decision. On
`June 2, 2015, Anadarko filed an answer opposing AOPL/INGAA’s motion. The
`Commission denies AOPL and INGAA’s motion because theparties’ filings in this
`proceeding have provided a full analysis ofthe issues before the Commission. Mo.
`Interstate Gas, LLC, 142 FERC § 61,195, at P 2, order on reh’g, 144 FERC J 61,220
`(2013).
`
`.
`
`

`

`
`
`Docket No. IS09-348-004,egal.
`
`-
`
`_4-
`
`IL
`
`Prudence of the SR Project
`
`On exceptions, the Carriers assert that the Initial Decision erred by holding that the
`4.
`Strategic Reconfiguration Project (SR Project) was imprudently sanctioned for
`construction.’ Alaska, Anadarko, and Trial Staff filed briefs opposing exceptions urging
`the Commission to affirm the Initial Decision’s holding that the SR Project expenditures
`were imprudent. For the reasons discussed below, the Commission affirms the Initial
`Decision and holds that the SR Project was imprudent.*
`
`A.
`
`Description of the SR Project
`
`The SR Project was the largest modification to TAPS since the pipeline’s
`5.
`construction in the mid-1970s. TAPS was originally constructed with 11 pump stations,
`but only TAPS pumpstations Nos. 1, 3, 4, and 9 remain in use due to declining
`throughput. The SR Project involved replacing the four remaining pump stations with
`new pumps driven by variable-speed electric motors as opposed to the existing gas and
`diesel turbines. The SR Project also replaced the existing control systems in order to
`automate the pumpstations. At the time the SR Project began, the Carriers believed that
`the existing gas turbines could remain operational well into the future; however, the
`Carriers believed that the SR Project could reduce personnel and major maintenance
`expenses by $1.1 to $1.4 billion over a 20 year period.”
`
`|
`
`;
`
`” The Carriers do not challenge the Initial Decision’s holding that the SR Project
`was imprudently implemented, which would disallow $153.6 million under the Initial
`Decision’s holding. Carriers Brief on Exceptions at 4 (citing Initial Decision, 146 FERC
`{ 63,019 at P 1461).
`
`8 As an alternative to the prudence ruling, the ID foundthat — even if costs for the
`SR Project were prudently incurred — the SR Project was not “used and useful.” Initial
`Decision, 146 FERC 4 63,019 at PP 1587-1588. Given that the Commission is upholding
`the Initial Decision’s conclusion that the SR Project was imprudent, the Commission
`need not reach the alternative ruling.
`Eg, Ex. SOA-473 at 1; Ex. SOA-2] at 1; Ex. SOA-282 at 1; Ex. ATC-19 at 109; |
`Ex. ATC-147 at 22; Tr. 7980-7981; Ex. SOA-17 at 16; Ex. ATC-898 at 11-12; Ex. ATC-
`20 at 22.
`
`" E.g., TAPS Carriers’ Brief on Exceptionsat 1-2.
`
`

`

`
`
`Docket No. 1S09-348-004, efal. oT
`
`-5-
`
`Beginning in the 1990s, the Carriers and Alyeskainitiated a number ofstudies
`6.
`exploring different options for upgrading the existing TAPS System." In November
`2001, Dick Rabinow (President of ExxonMobil) and BilHowitt (AlyeskaSenior Vice
`President) advised consideration of a new “electrification option” using electric powered
`motors at all pumpstations.”!” Consistent with this recommendation, conceptual
`engineering began in February 2002 to evaluate two upgrade options: (a) the
`electrification proposal and (b) a hybrid option upgrading controls and automating the
`existing gas turbine infrastructure. The conceptual engineering process included an
`August 2002 report by General Electric Industrial Systems (GE), an August 2002 report
`by JTG Technologies (JTG), Alyeska’s October 2002 “Electrification versus Hybrid
`Decision Document,” and Alyeska’s “2003 Long Range Plan” to the Carriers.” Based
`on the conceptual engineering process, the Carriers elected to proceed with preliminary
`_ engineering for the electrification option.
`
`In order to oversee the SR Project, the Carriers formed in October 2002 the SR
`7.
`Project Team directed by John Barrett.“ In December 2002, the Carriers approved AFE
`$020 which authorized $7 million for preliminary engineering ofthe SR Project.'* The
`SR Project Team retained SNC-Lavalin Constructors Inc. (SNC-Lavalin) and Hinz
`Automation as the preliminary engineering contractors. These companies produced a
`Preliminary Engineering Design Report in November 2003.’ On December 18, 2003,
`Alyeska submitted AFE $020for project sanction of $242 million and the SR Project was
`projected to be completed by the end of 2005. The Carriers approved the Project, and in
`March 2004,the project transitioned from preliminary engineering to implementation."”
`
`"! These studies included: (a) the Alyeska Control and Telecommunication Long
`Range Plan (1994), (b) the Bailey Report (1997), (c) the Reinvestment Strategy Study
`(1999), (d) the VECO Report (1999), (e) Authorization for Expenditure F180 (AFE
`F180) (2000), and (g} Kenonic Controls Report (2000).
`
`” Carriers Brief on Exceptions at 28 (Ex. ATC-19 at 43-48; Ex. ATC-20 at 24-27).
`
`13 7g. 29 (Ex. ATC-147; Ex. ATC-148; Ex. ATC-154; Ex. ATC-153).
`
`"4 fd at 31 (citing Ex. ATC-24).
`15 Fd (citing Ex. ATC-165).
`
`16 id (citing Ex. ATC-208 through Ex. ATC-216).
`
`17 Id. at 33 (citations omitted). Contemporaneous with the submission of AFE
`$020, Alyeska separately submitted AFEs to upgrade the facilities and control systems at
`the ramp down stations no longer in use. Ex. SOA-73; Ex. SOA-76; Ex. SOA-80. The
`costs and savings of these other projects were considered in the “all in” electrification
`.
`(continued...)
`
`

`

`
`
`Docket No. IS09-348-004,ez al.
`
`-6-
`
`“In August 2004,“Alyeska submitted to the Carriers AFE S020, Supplement 1 secking
`additional funding of $26.5 million related to electric power at pumpstations 1 and 9.8
`
`It soon became clear that additional expenditures would be necessary due to
`8.
`inadequate engineering supporting theinitial increase.” In November 2005, the Carriers
`approved AFE $020 Supplement2 authorizing an additional $168.1 million.” However,
`the cost escalation continued.
`In September 2006, Alyeska submitted AFE S020
`. Supplement-3 for an additional $80.3 million dollars.” The Carriers did not approve
`AFE $020 Supplement 3 and, in order to control the escalating costs, the Carriers
`required subsequent funding requeststo be on a pump station by pumpstation basis. 7? In
`February 2007, Alyeska submitted a request for an addition $6.36 million related to
`Pump Station 9 in AFE $920.2 In May 2007, Alyeska submitted AFE $320 requesting
`an additional $39.3 million to finish pump station 3.“ In December 2007, Alyeska
`submitted a funding request for an additional $66.5 million to complete AFE $420 for
`pumpstation 4.*5 At the close ofthe record in this proceeding, SR Project facilities at
`pumpstations 3, 4, and 9 had entered into service, but the upgrades at pump station 1
`were not expected to enter into service until 2014.The total estimated project cost had
`reached $786 million.””
`
`.
`
`case that was included in Alyeska’s AFE 8020 economic analysis (Ex. ATC-238 at 15,
`21-22), but the work at these other pump stations did not involve the installation of new
`pumps andelectric motors.
`;
`18 Rx. ATC-279; Ex. SOA-358; Ex. ATC-24 at 28-29; Ex. ATC-27 at 39.
`
`? Fg, Ex. SOA-166 at 1; Ex. SOA-219 at 1.
`
`20 Carriers Brief on Exceptions at 34 (citing Ex. ATC-327; Ex. ATC-328).
`
`71 Rx. SOA-63 at 2.
`
`”? Carriers Briefon Exceptions at 153-54 (citing Ex. ATC-18 at 43).
`
`5 Ex ATC-378.
`
`4 Ex. SOA-121 at 2.
`
`5 Carriers Brief on Exceptions at 152 n.156 (citations omitted).
`
`6 bx, ATC-18 at 50.
`
`27 By. SOA-546 at 7.
`
`

`

`
`
`Docket No. I809-348-004,et al.
`
`.
`
`-7-
`
`B._Initial Decision
`
`The Initial Decision determined that the SR Project was imprudently sanctioned
`9.
`and imprudently implemented. The Initial decision noted that Larkspur Associates
`(Larkspur), 2 cost estimating company hired by the Carriers to evaluate preliminary
`engineering,had warned the Carriers that the pre-sanction cost estimates were
`inaccurate.” Along similar lines, the Initial Decision cited to internal emails prior to SR
`Project sanction in which Alyeska and Carrier employees expressed concerns aboutthe
`SR Project engineering and cost estimates.” The Initial Decision also concludedthat the
`flawed SR Project planning wastied to a rushed schedule that did not allow time for
`adequate engineering™ andthe selection of an inexperienced project manager.*’ The
`Initial Decision further explained that the SR Project cost estimates were based upon
`misconceptions, finding that the Carriers (a) incorrectly assumed the SR Project wasa_s-
`greenfield project as opposed to a higher cost brownfield project,*” (b) incorrectly
`"
`believed that the SR Project would allow the Carriers to avoid certain expenditures to
`comply with Alaska building codes,*? (c) incorrectly assumed that the variable speed stiff
`shaft motors were previously used, tested technology,>‘ and (d) imprudently failed to
`finalize power sources for pumpstations | and 9 at sanction.”
`The Initial Decision also
`stated that its imprudence finding was corroborated by post-sanction documents
`concluding that the Carriers had not planned the SR Project sufficiently prior to sanction
`and at the time of subsequent funding authorizations.
`10.
`TheInitial Decision rejected the justifications offered by the Carriers for the SR
`Project. The Initial Decision criticized the Carriers for relying upon their engineering
`
`78 F.g., Initial Decision, 146 FERC 63,091 at PP 608 — 613, 667, 750, 771, 840 —
`$41, 873, 913, 1228.
`”? Id. PP 540-554, 632-638, 652.
`* Id. PP 393, 497, 503, 690-698. 1454.
`31 fd PP 107, 502, 659, 1016, 1110, 1442.
`
`3 Id. PP 653, 656, 658, 744, 902-903.
`
`53 Id. PP 648.
`
`* Id. PP 1086.
`
`-
`
`5 Id PP 727, 898, 1456.
`
`

`

`
`
`Docket No. 1S09-348-004,ef al.
`
`~
`
`me ge
`
`contractor SNC-Lavalin, which lacked Alaskaexperience.* The Initial Decision
`dismissed the Carriers reviews of the pre-sanction cost estimates as superficial."” The
`Initial Decision dismissed the Carriers’ reliance upon various third party reviews which
`the Carriers argue supported the project sanction, including (2) a report by Independent
`
`ecAnalysts (IPA), aconsulting firm hiredbythe Carrierstoreview the SRProject,
`TO)
`(d) a letterfrom the AlaskaAttorney General,”
`and (e) conceptual engineering
`a report by Argonne National Laboratories, (c) a report from Joint Pipeline Office
`reports from GE and JTG Technologies.*! Furthermore, the Initial Decision rejected the
`Carriers’ argument that they reasonably projected SR Project savings resulting from
`reductions in personnel ‘or maintenance costs.“? The Initial Decision also criticized the
`- Carriers’ expenditureoffunds subsequentto sanction inAFE $020 Supplement 2 and
`thereafter.
`11.
`On exceptions, the Carriers challenge these holdings as discussed below. Trial
`Staff, Alaska, and Anadarko urge the Commissionto affirm the Initial Decision.
`Cc.
`Discussion
`
`%
`
`The Commission affirms the Initial Decision’s holding that the SR Project was
`12,
`imprudent. To determine the prudence of an investment, the Commission evaluates
`whether a “reasonable utility manager” would have made the same investment under the
`same circumstances.** A prudence inquiry addresses whether the pipeline conducted
`reasonable evaluation of the costs and benefits prior to incurring a financial
`
`36 Td. PP 660-663, 1045-1049, 1061,1082.
`
`37 Id. PP 663, 862-869, 1045-1048, 1061.
`
`38 Id PP 763-764, 876, 913.
`
`39 Id PP 762-764.
`
`“0 id. PP 645 1.375.
`
`*! id. PP 364 — 375, 444, 447, 458.
`
`“2 Id. PP 1388 — 1405.
`
`“3 New EnglandPower Co., 31 FERC { 61,047, at 61,084 (1985), order on
`reh’g, 32 FERC { 61,112, affdsub nom., Violet v.FERC, 800 F.2d 280 (ist Cir. 1986).
`
`

`

`
`
`Docket No. I809-348-004,et al.
`
`-9-
`
`commitment.“ A prudence determination is based upon what the pipeline knew or
`should have known at the time a decision was made.”
`The prudence standard ensures
`that ratepayers are not required to pay for “unnecessary costs.nfs
`13.
`The regulated entity has the burden ofproofto establishprudence. However, in
`order to ensure that rate cases are manageable, a presumption ofprudence applies until
`the challenging party “creates a serious doubt as to the prudence ofan expenditure...
`Serious doubt must-be more than a “bare allegation ofimprudence,” but this threshold
`may not be so demanding that it effectively reverses the statutory burden ofproof.
`Once such serious doubt has been raised, the pipeline has “the burdenof dispelling these
`doubts and proving the questioned expenditure to have been prudent.””
`
`14.
`The Commission holds that Anadarko, Alaska, and Trial Staffhave raised serious
`doubt about the Carriers’ prudence in approving the SR Project. As discussed above,
`prudent management requires considering the costs and benefits prior to initiating a
`project.” Implicit in this obligation is the responsibility to develop cost estimates based
`upon sufficiently complete engineering, planning, and scope to make the cost-benefit
`analysis meaningful. Significant evidence suggests that the Carriers sanctioned the SR.
`Project based upon a cost estimate they should have known was inaccurate. As a result,
`there is serious doubt whether the Carriers performed a reasonable cost-benefit analysis
`prior to sanctioning the SR Project. In the face ofthis serious doubt, the Carriers have
`failed to justify the prudence of the SR Project costs. Accordingly, for the reasons stated
`below, the Commission affirms the holding that the SR Project was imprudent and that
`the Carriers should be denied full recovery ofthe SR Project costs.
`
`_
`
`“ Entergy Servs., Inc., 130 FERC { 61,023, at P 52 (2010); Iroquois Gas
`Transmission Sys., L.P., 87 FERC J 61,295, at 62,170 (1999) (prudence inquiry involves
`comparing ex ante savings to ex ante costs).
`45 New England, 31 FERC at 61,084.
`
`“6 Td. at 61,083.
`
`“ Iroquois, 87 FERCat 62,168.
`48 1d Anaheim, Riverside, Banning, Colton,
`809 (D.C.Cir. 1981).
`
`© Anaheim, 669 F.2d at 809.
`
`«& Azusa, Cal. vy. FERC, 669 F.2d 799,
`
`- © Entergy, 130 FERC 4 61,023 at P 52; Iroquois, 87 FERC at 62,170.
`
`

`

`
`
`Docket No. IS09-348-004,etal.
`
`-10-
`
`. Serious Doubt Exists Regarding,the SR Project
`1.
`The record supports the allegations of serious doubt regarding the prudence of the
`15.
`SR Project. As discussed below, the Carriers should have known that the SR Project cost
`estimates were inaccurate because (a) prior to SR Project’s authorization or sanction,
`Larkspur, a cost estimating company, warned that the SR Project cost estimates awaiting
`approval and sanction were unrealistic; (b) prior to SR Project sanction, internal Carriers
`emails warned ofthe poor quality of the preliminary engineering used to develop SR
`Project cost estimates; (c) an overly aggressive schedule and underqualified SR Project
`. Manager created risks that the preliminary engineering cost estimates would be flawed;
`(d) conspicuous misconceptions and unrealistic assumptions afflicted the SR Project
`design forming the basis of the cost estimate; (e) Carriers’ internal assessments concluded
`that they sanctioned the SR Project based uponinsufficient up-front planning and
`undefined scope; and (f) the Carriers concluded that subsequent SR Project funding
`authorizations were also based upon incomplete engineering and poor planning. The
`Commission finds this evidence far exceeds the threshold for establishing serious doubt
`regarding the SR Project’s prudence.
`
`a.
`
`Pre-Sanction Warnings from Larkspur
`
`Serious doubt regarding the SR Project’s prudence was raised by the December
`16.
`2003 andJ;anuary 2004 Larkspur reports, which warned the Carriers ofpotential
`indccuracies in the cost estimates used to sanction the SR Project. Hired by Carziers to
`- evaluate the SR Project cost estimates prior to SR Project sanction, Larkspur”! provideda
`December 2003 report informing the Carriers that the SR Project’s preliminary
`engineering cost estimates did not fall within 15 percent accuracy. The report expressed
`“major concemsthat the project as currently designed could be built for the current
`estimate value.”** Larkspur further warnedthat the project’s scope was “not clearly
`defined in detail” and that there was a “high degree of certainty that additional scope”
`would be required.
`
`Although the Carriers claim they responded to the December 2003 report, the
`17.
`Carriers failed to assuage Larkspur’s concerns. In its second report issued in January
`2004, Larkspur rereiterated doubts that the current project design could be built for the
`. projected costs. Additionally, Larkspur stated that “[a]lthough the current scope ofthe
`>! Larkspur is a cost estimating company with experience on Alaska’s
`North Slope.
`
`52 Ex, SOA-222at 3, 13.
`
`3 By, SOA-223 at 14.
`
`

`

`
`
`Docket No. 809-348-004,et al.
`
`-ll-
`
`project is changing rapidly since the original estimate was published, manyif not all of
`the potential cost issues stated in this report still apply to the project.°>* Larkspur
`requested a meeting with the SR Project Team, stating that it was “very important”to
`discuss these findings. Despite this request, there is no evidence that such a meeting
`transpired, and there-is no evidence of subsequent interaction-with Larkspur related to the .
`December 2003 and January 2004 reports. Larkspur’s warnings and the Carriers’
`failure to address those warnings support serious doubt regarding the SR Project’s
`' prudence because they indicate that the Carriers should have known that the preliminary
`erigineering cost estimates were inaccurate.
`
`b.
`
`Pre-Sanction Warnings from Carriers’ Staff
`
`Serious doubt regarding the SR Project’s prudenceis also supported by concerns
`18..
`raised by Alyeska’s employees prior to sanction. As SNC-Lavalin finalized its
`preliminary engineering report in 2003, Alyeska senior rotating equipment engineer
`Jerry DeHaas c