[Congressional Record Volume 151, Number 54 (Thursday, April 28, 2005)]
[Extensions of Remarks]
[Pages E825-E826]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




               INTRODUCTION OF QUALITY BANK VALUATION ACT

                                 ______
                                 

                             HON. DON YOUNG

                               of alaska

                    in the house of representatives

                        Thursday, April 28, 2005

  Mr. YOUNG of Alaska. Mr. Speaker, I rise today to introduce 
legislation to eliminate endless litigation--and the associated 
economic hazard to Alaska--over the valuation of oil that is shipped 
through the Trans-Alaska Oil Pipeline System, TAPS.
  The current litigation over this issue concerns valuations used in 
connection with the ``TAPS Quality Bank,'' which shippers make payments 
into or receive payments from depending on the quality of the crude oil 
they inject into the pipeline. This litigation has been ongoing since 
1989, and there is no end in sight. Unfortunately, the incentive of 
parties to litigate is compounded because the Federal Energy Regulatory 
Commission, FERC, apparently has authority in these cases to impose 
changes in oil valuations on a retroactive basis.
  My bill provides that, after December 31, 2005, the FERC will no 
longer have authority to apply changes to Quality Bank valuations on a 
retroactive basis. In other words, if FERC makes changes in the method 
by which oil shipped through the pipeline is valued, they must do so 
only on a prospective basis. This will impose a strong incentive for 
parties to the existing litigation to settle before the end of this 
year, and ensure, with respect to any future changes to valuations, 
that no TAPS shipper is exposed to the kind of retroactive liability 
that could accrue in the existing dispute.
  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 is injected into the 
line before the pipeline's Pump Station One near Deadhorse, Alaska 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 in Valdez 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 other 
shippers for the lower relative value of the oil the refineries return 
to TAPS, 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 450 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 Naphtha cuts.
  In 1997, responding to a DC 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 DC 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 
Naphtha, 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.
  For decades Alaskans suffered from the effects 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.
  The recent decision of the FERC Administrative Law Judge to apply new 
Quality Bank methodology assessments retroactively, however, 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 cost 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.
  My 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--
including 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 
in-state refinery capabilities. We wanted to avoid a legislative 
solution to this purely Alaskan case. We renewed our pleas for action 
in a letter sent to FERC on April 5th.

[[Page E826]]

  In the intervening six months, while two mediation sessions have 
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 this reason, I am introducing today legislation identical to S. 
822, already introduced by Senators Stevens and Murkowski, to limit the 
ability of FERC in the future to make retroactive the impacts of future 
Quality Bank valuation methodology changes. I plan to push for 
inclusion of this provision in the energy legislation being considered 
by Congress this year.
  By this legislation, after Dec. 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
  I 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 Dec. 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 notice 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 I, along with Senators Stevens and Murkowski, 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.

                          ____________________