[Congressional Record Volume 151, Number 45 (Friday, April 15, 2005)]
[Senate]
[Pages S3751-S3753]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Ms. MURKOWSKI (for herself and Mr. Stevens):
  S. 822. A bill to prevent the retroactive application of changes to 
Trans-Alaska Pipeline Quality Bank valuation methodologies; to the 
Committee on Energy and Natural Resources.
  Ms. MURKOWSKI. Mr. President, I rise today for myself and fellow 
Alaska Senator Ted Stevens to introduce legislation concerning a 
complex issue, the Quality Bank that is used to facilitate payments 
between shippers using the Trans-Alaska Oil Pipeline System to reflect 
variations in the value of different crude oil streams that are 
injected into the pipeline.
  Since its opening in June 1977, the Trans-Alaska Pipeline System, 
TAPS, has carried crude oil from Alaska's North Slope to Valdez where 
the oil is shipped to market. The pipeline carries crude oil from 
various sources and of varying quality--the oil injected into the line 
before the pipeline's Pump Station One near Deadhorse, AK, and 
commingled as the blended stream of oil travels south to Valdez. The 
TAPS Quality Bank was established to compensate producers of higher 
quality crude oil for the difference in the value of the crude injected 
at the North Slope and that of the lower-quality commingled stream 
received in Valdez, since each shipper receives a quantity of the 
blended stream equivalent to the amount it injected into the line.
  Companies injecting low-quality crude oil pay into the Quality Bank, 
while companies injecting high quality crude receive a payment from the 
Quality Bank. In addition, between the North Slope and Valdez, two 
refineries, Flint Hills and Petro Star, withdraw a portion of the 
common stream from TAPS, partially refine the crude oil into products 
such as gasoline, diesel and jet fuel, and reinject into TAPS the other 
components of crude left over after their refinery processes. Each fuel 
extracted from the crude is called a ``cut.'' To compensate producers 
for the loss in value of the crude oil because of what is removed by 
these refineries, refiners also pay into the Quality Bank. The 
objective of the Quality Bank is to make monetary adjustments so that 
each shipper is in the same economic position it would enjoy if it 
received the same oil in Valdez that it delivered to TAPS on the 
state's North Slope.
  The methodology used to determine Quality Bank payments has been a 
subject of controversy since the Quality Bank's creation. The problem 
arises because there is no independent market for the crude injected on 
the North Slope and thus no way to objectively determine its value. The 
methodology is set by the Federal Energy Regulatory Commission. Since 
the early 1980s, FERC-approved methodologies have been challenged in 
court and revised multiple times. In 1993, the majority of North Slope 
shippers proposed and FERC approved a settlement calling for the use of 
a ``distillation'' methodology, which would value crude oil based on 
the market price of various cuts created when the components are 
separated based on different boiling points--the distillation process. 
This methodology replaced the former ``gravity'' methodology where oil 
was valued based on its relative gravity.
  Since 1993, disputes have focused largely on the valuation of cuts at 
the highest boiling points--the ``Heavy Distillate'' cut that 
evaporates at temperatures between 350 and 650 degrees F. and the 
Resid, residual, cut, which includes the portion remaining after 
distillation of all other cuts at boiling points up to 1050 degrees F. 
Two additional cuts are also at issue, the VGO and Naptha cuts.
  In 1997, responding to a D.C. Circuit Court of Appeals ruling, FERC 
approved a settlement with a revised valuation methodology for 
Distillate and Resid. Under the FERC order, the new valuation 
methodologies were to be applied on a prospective basis only. Later, 
the D.C. Circuit in 1999 told FERC to revise some particular details of 
the Resid valuation and also held that FERC had ``failed to provide an 
adequate explanation'' as to why the new methodology should not be made 
retroactive to 1993.
  Responding to the ruling, the Administrative Law Judge, who in 1997 
had decided that all changes should only apply prospectively, reversed 
his position and released a decision in August 2004 calling for changes 
in the Resid and Heavy Distillate cuts to be applied retroactively, in 
the case of Resid to as far back as 1993. In addition, the 
administrative law judge decided to apply new valuations for VGO and 
Naptha, prospectively. Currently, the judge's decision is awaiting a 
final decision by the FERC on whether to impose the Initial Decision or 
alter it.
  There are clearly major public policy implications resulting from 
this Quality Bank issue. While the bank is a ``zero sum'' game as far 
as money paid in and out of the bank is concerned, the impacts on the 
parties and thus on the citizens of Alaska are anything but equal.

[[Page S3752]]

  For decades Alaskans suffered under the impacts of having to import 
all refined fuel products into the State from West Coast refineries. 
Besides higher prices caused by transportation, that left the State 
wholly dependent on fuel supplies that needed to travel at least 2,000 
miles on average to reach Alaska consumers--sometimes through bad 
weather and difficult sea conditions. With the construction of in-State 
refineries, Alaskans finally saw greater security of supply, less 
dependence upon weather for shipment arrivals, and the possibility of 
lower fuel prices because of potentially reduced transportation costs. 
The greater dependability of fuel supplies improved aviation freight 
shipments at the Anchorage and Fairbanks international airports, 
helping create jobs in air freight and related industries.
  But the decision of the Administrative Law Judge to apply new Quality 
Bank methodology assessments retroactively, places the economics of in-
State refineries at risk. That in turn not only impacts the job 
security for the roughly 400 Alaskans who work at the refineries, but 
also threatens the State's energy and economic security.
  The problem is that both of the refineries must make long- and short-
term business decisions based on crude costs when they process crude 
oil into product. Refineries optimize their production slates based on 
current market realities. It is difficult for them to operate, given 
low profit margins, if oil values can change years later as a result of 
Quality Bank decisions. They simply have no way to make rational 
business decisions when the value of their products can be determined 
retroactively long after they can protect themselves for perceived 
mistakes in FERC-approved valuation methodologies. This certainly 
threatens the ability of the refineries to attract capital, money 
needed for them to modernize and meet new ultra-low sulfur diesel 
``clean fuel'' requirements soon to go into effect.

  The State's Congressional Delegation last fall in report language 
added to the Federal budget expressed its concern with the equity of 
long retroactive Quality Bank valuation adjustments. Last autumn we 
urged FERC to look carefully at the justice of the Initial Decision of 
the Administrative Law Judge in this case and we encouraged all of the 
eight parties that includes the State of Alaska, to reach an out-of-
court settlement of the 1993 case to bring finality to this complex 
case before it harms instate refinery capabilities. At the time we 
avoided a legislative solution to this purely Alaskan case. We are 
renewing our pleas for action in a letter sent to FERC on Thursday.
  In the intervening six months, while one mediation session has 
occurred, the parties report little or no progress toward reaching a 
mutually agreeable settlement. While opinions may differ on whether 
Congress should intervene to settle the on-going case, there is little 
doubt that Congress should step forward to prevent such an arcane 
dispute from ever again threatening Alaska's energy industry.
  For that reason prior to the next mediation session, today we 
introduce legislation to limit the ability of FERC in the future to 
make retroactive the impacts of future Quality Bank valuation 
methodology changes. By this legislation, after December 31, 2005, FERC 
still will be able to change the methodology for determining the value 
of oil flowing through the pipeline but will not be permitted to apply 
changes to Quality Bank valuation methodologies on anything other than 
a prospective basis.
  We have proposed this provision to prevent this legal nightmare from 
happening again. This provision will first eliminate the perverse 
current incentive for all sides to promote further litigation regarding 
Quality Bank valuations based on the expectation of a retroactive 
application of changes that would result in a large economic windfall. 
The retroactive application of valuation methodology changes encourages 
the sides in a dispute to sue in hopes of gaining a larger benefit in 
the future. This is a ``lottery,'' however, that Alaskans are 
guaranteed to lose.
  By setting December 31, 2005, as the date that FERC can no longer 
apply Quality Bank valuation methodologies on a retroactive basis, the 
legislation will put the FERC and the litigants on record that the 
current dispute must be resolved by the end of this year.
  Requiring FERC to apply valuation methodology changes in connection 
with any future disputes on a prospective basis only will eliminate the 
risk and uncertainty associated with the prospect of nearly unlimited 
retroactive application of Quality Bank payment methodology changes. 
That will allow all Quality Bank participants to be able to conduct 
business with the certainty of knowing that prices received and paid 
for oil today cannot be altered years down the road. In addition, this 
will eliminate the strong incentive that currently exists for some 
parties to engage in endless litigation, in hopes of gaining windfall 
benefits from retroactive application changes.
  While we continue to call on all sides in the current dispute to 
compromise and settle this case now, this bill will discourage if not 
eliminate this type of dispute in the future--a benefit for all 
Alaskans.
  Mr. STEVENS. Mr. President, I join my colleague, Senator Lisa 
Murkowski, in introducing legislation pertaining to the Trans Alaska 
Pipeline System (TAPS) and the Quality Bank.
  The Quality Bank was created to balance accounts among oil producers 
on Alaska's North Slope who produce crude oil of different quality and 
value from different oil fields. When the oil is delivered at Pump 
Station No. 1, it is commingled and transported by TAPS to Valdez, 
Alaska, where it is shipped by tanker to the lower 48 States.
  This Quality Bank accounting concept also applies to oil refineries 
in my State who receive needed crude oil from TAPS, refine various 
petroleum products and return the balance of the crude oil to the 
pipeline. The methodology used to determine these payments has been the 
subject of dispute since the Bank's inception, creating uncertainty in 
the market and a chilling effect on business investment in Alaska.
  In 1989, a legal proceeding was initiated at the Federal Energy 
Regulatory Commission (FERC) that in 1993 changed the methodology under 
which ``Quality Banks'' in Alaska were operated. After 15 long and 
protracted years of legal proceedings before FERC, an Administrative 
Law Judge issued an Initial Decision proposing to replace the Quality 
Bank methodology that the parties assumed they were operating under 
since 1993. It proposes instead a new complex set of valuations that 
the parties could not have predicted and that have very large financial 
impacts, especially on refiners. Significantly, this decision also 
proposes to apply the most significant of these new valuations 
retroactively, all the way back to 1993.
  The Administrative Law Judge's decision to apply this new methodology 
retroactively puts Alaska's in-State refineries at risk at a time when 
the United States can ill afford to lose its limited refining capacity.
  Given the Potential impact should FERC decide to adopt the ALJ's 
decision, Congress included legislative language in the Fiscal Year 
2005 Consolidated Appropriations conference report expressing its 
concern over this issue. Congress urged FERC to carefully Consider the 
specific equities of this case to prevent special hardship, inequity, 
or an unfair distribution of burdens to any party, to assess the equity 
of assigning retroactivity, and to resolve this matter in a fair and 
equitable manner.
  In addition, the State's Congressional Delegation urged the parties 
to reach a settlement to end over 15 years of litigation and bring 
finality to this issue. Despite repeated calls for settlement, the 
parties appear to have made little or no progress towards this end.
  The issue of retroactivity and its application in the aforementioned 
case is problematic given the lack of clear Congressional action on the 
subject. Congress' silence on the subject has given the parties 
incentive to prolong litigation and pursue appeals until they receive a 
ruling which is beneficial to them.
  To remedy this situation and prevent similar disputes in the future, 
we are introducing this legislation to limit FERC's ability to assign 
retroactivity in matters pertaining to the Quality Bank. This 
legislation is necessary to limit business uncertainty associated with 
the use of the Trans Alaska Pipeline System, and to ensure continued

[[Page S3753]]

 domestic refinery activity in order to protect national fuel supplies.

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