Methodology to determine certain transportation costs for pipelines

# (a)

For transportation of oil or gas for which costs are determined under this section, the applicable costs of transportation are determined for a calendar year by calculating the total amount for the year for the following items and allocating that total, as provided under this section, to the specific quantity of oil or gas transported:

# (1)

an allowance for operating and maintenance expenses of the facility;

# (2)

annual depreciation on capital investment in the facility at original cost; except as otherwise provided under (k) of this section, depreciation is calculated using straight-line depreciation over the allowed economic life of the facility;

# (3)

a return on capital investment in the facility at original cost net of depreciation accumulated before the year of calculation, with the undepreciated capital investment adjusted to account for accumulated deferred income taxes;

# (4)

income tax on the equity portion of the return under (3) of this subsection as determined under (e) and (f) of this section;

# (5)

ad valorem taxes on the facility;

# (6)

an allowance for the cost of dismantlement and removal of the pipeline facility and of restoration after removal of the pipeline facility, if the tariff specifically identifies and provides for the allowance to be included in the applicable recourse rate, in the case of a regulated gas pipeline facility, or the applicable rate, in the case of a regulated oil pipeline facility.

# (b)

For purposes of (a)(1) of this section, the allowance for operating and maintenance expenses is the amount of expenses actually incurred that

# (1)

are direct costs of operating and maintaining the facility or are overhead costs directly related to operation and maintenance of the facility; and

# (2)

in the case of

(A) a gas pipeline facility, are properly reportable as operation and maintenance expenses on the Federal Energy Regulatory Commission's FERC Financial Report, FERC Form No. 2: Annual Report of Major Natural Gas Companies, as revised as of March 26, 2010 and adopted by reference (FERC Form 2), or, for a gas pipeline facility not subject to FERC regulation, would be properly reportable as operation and maintenance expenses on FERC Form 2 if the facility were subject to FERC regulation;

(B) an oil pipeline facility, are properly reportable as operation and maintenance expenses on the Federal Energy Regulatory Commission's FERC Financial Report, FERC Form No. 6:Annual Report of Oil Pipeline Companies, as revised as of March 26, 2010 and adopted by reference (FERC Form 6), or, for an oil pipeline facility not subject to FERC regulation, would be properly reportable as operation and maintenance expenses on FERC Form 6 if the facility were subject to FERC regulation.

# (c)

For purposes of (a)(2) and (3) of this section, capital investment in the facility includes an allowance for funds used during construction.

# (d)

For purposes of calculating annual depreciation under (a)(2) of this section,

# (1)

the allowed economic life is

(A) in the case of a regulated gas pipeline facility or gas treatment plant, the greater of

(i) the estimated useful life used in calculating the recourse rate in the filed tariff; or

(ii) 25 years;

(B) in the case of a regulated oil pipeline facility, the greater of

(i) the estimated useful life used in calculating the rate in the filed tariff; or

(ii) 25 years;

(C) in the case of a nonregulated pipeline facility or gas treatment plant, the greater of

(i) the estimated useful life used for financial accounting purposes; or

(ii) 25 years;

# (2)

a change in ownership of an asset does not alter the depreciation schedule established for the original owner;

# (3)

a capital investment may be depreciated only once, and may not be depreciated below a reasonable salvage value; if specifically identified and provided for in an applicable tariff for a regulated pipeline, the salvage value may be negative, unless the calculation of costs under (a) of this section includes an allowance under (a)(6) of this section for dismantlement and removal of the pipeline facility and restoration after removal of the pipeline facility.

# (e)

For purposes of calculating the return on capital investment under (a)(3) of this section, the percentage of the capital investment treated as financed with long-term debt is the greater of

(1) the percentage actually used by the facility owner to finance the facility; or (2) 70 percent for a gas pipeline facility or gas treatment plant, or 55 percent for an oil pipeline facility. The remainder is treated as financed with equity. The return on the portion of the capital investment treated as financed with long-term debt is the actual cost, if any, of the debt or, in the absence of actual cost, the return computed by the department using the weighted average of the cost of long-term debt for the applicable proxy group designated by the department under (f) of this section.

# (f)

For purposes of the equity portion of the return on capital investment under (a)(3) of this section, an after-tax rate of return on the percentage of the capital investment treated as financed with equity will be determined by the department for a calendar year using a two-stage discounted cash flow model. In implementing that model, the department will give substantial weight to the Federal Energy Regulatory Commission's Policy Statement in Composition of Proxy Groups for Determining Gas and Oil Pipeline Return on Equity, Docket No. PL07-2-000, dated April 17, 2008 and adopted by reference for that purpose, subject to the following:

# (1)

the department will designate the group of proxy companies from companies that meet the following criteria:

(A) the company is publicly traded;

(B) the company is

(i) a natural gas pipeline company for purposes of determining the rate of return for a gas pipeline facility or gas treatment plant;

(ii) an oil pipeline company for purposes of determining the rate of return for an oil pipeline facility;

(C) the company and its shares are recognized and tracked by Value Line or a similar investment information service;

(D) pipeline operations constitute a high proportion of the company's business;

(E) the company or its predecessor in interest has been in operation for at least three years;

(F) there are estimates by Institutional Brokers' Estimate System established by
Thomson Reuters, or similar estimates, of five-year earnings growth for the company;

(G) the company has a history of paying dividends or distributions and is currently paying a dividend or distribution;

(H) the company has not eliminated or announced an intention to eliminate its dividend or distribution;

# (2)

in determining whether a company meeting the criteria under (1) of this subsection should be included in the group of proxy companies, the department may consider the following factors:

(A) the size of the company's market capitalization;

(B) the company's credit rating;

(C) whether four or more companies have already been selected for inclusion in the proxy group of companies;

# (3)

the department will calculate the rate of return for a calendar year based on information about the group of proxy companies for a recent 12-month period selected by the department.

# (g)

For purposes of (a)(4) of this section, the

# (1)

combined federal and state income tax rate for the year of calculation must be used for a facility located within the United States;

# (2)

applicable combined foreign income tax rate for the year of calculation must be used for a facility located in another country.

# (h)

The amounts described in (a)(1) and (4) - (6) of this section must be calculated for every calendar year on the same basis, which may be either

# (1)

the amounts incurred during, or applicable to, the calendar year of calculation; or

# (2)

if the facility was

(A) in operation for at least nine months during the calendar year immediately preceding the calendar year of calculation, the amounts incurred during, or applicable to, that immediately preceding calendar year; the amounts are annualized or prorated if necessary to account, respectively, for the facility's being in operation for less than that entire immediately preceding calendar year or less than the entire calendar year of calculation;

(B) not in operation for at least nine months during the calendar year immediately preceding the calendar year of calculation, good-faith estimates of the amounts that will be incurred during, or will be applicable to, the calendar year of calculation; an overestimate or underestimate is deducted from or added to, respectively, the amounts used for the next calendar year.

# (i)

In the calculation of costs of transportation under this section,

# (1)

a management fee may not be included;

# (2)

working capital may not be included in capital investment on which depreciation or a return is calculated.

# (j)

In the allocation of the total amount calculated under (a) of this section to a specific quantity of oil or gas,

# (1)

for a regulated gas pipeline facility or regulated gas treatment plant, per-unit transportation costs are based on 100 percent load factor of certificated capacity;

# (2)

for an oil pipeline facility or nonregulated gas treatment plant, per-unit transportation costs are based on throughput;

# (3)

for a nonregulated gas pipeline facility, per-unit transportation costs are based on

(A) 100 percent load factor of contracted capacity, if the pipeline provides firm transportation service or firm and interruptible service;

(B) throughput, if the pipeline does not provide firm transportation service or firm and interruptible service;

# (4)

the costs of different categories of pipeline transportation services or gas treatment plant services bear the same relationship to one another as under the recourse rates in the applicable tariff, in the case of a regulated gas pipeline facility or regulated gas treatment plant, or as under the rates in the applicable tariff in the case of a regulated oil pipeline facility, unless the department determines that relationship is unreasonable; if the department determines that relationship is unreasonable or for an unregulated pipeline facility or gas treatment plant, the department will reasonably allocate costs among different categories of pipeline transportation services or gas treatment plant services;

# (5)

the costs of pipeline transportation between different pairs of receipt and delivery points bear the same relationship to one another as under the recourse rates in the applicable tariff, in the case of a regulated gas pipeline facility, or as under the rates in the applicable tariff in the case of a regulated oil pipeline facility, unless the department determines that relationship is unreasonable; if the department determines that relationship is unreasonable or for an unregulated pipeline facility, the department will reasonably allocate costs to pipeline transportation between different pairs of receipt and delivery points.

# (k)

If the tariff rates of a regulated pipeline facility or gas treatment plant have a levelized rate structure, the reasonable costs otherwise calculated under this section will also be calculated using a comparable levelized rate structure.

# (l)

For purposes of the department's determination of reasonable costs of transportation under 15 AAC 55.193(c)(5) and this section, to the extent the department is unable to obtain sufficient information to calculate an item in (a)(1) - (6) of this section, the department may make and use a reasonable estimate.

# (m)

On or after January 1 of a calendar year during which a producer expects to produce oil or gas the actual costs of transportation of which are required by 15 AAC 55.193(b)(6) to be calculated using the methodology under this section, the producer may request in writing the department's determination of the applicable after-tax rate of return under (f) of this section. The department will provide the department's determination to the producer no later than the later of July 1 of the calendar year or 90 days after the department receives the producer's request.

# (n)

In this section, "facility" means pipeline facility or gas treatment plant, as applicable.
(Eff. 4/30/2010, Register 194)
Statutory Authority:
Authority:
AS 43.05.080 AS 43.55.040 AS 43.55.900
AS 43.55.020 AS 43.55.110
AS 43.55.030 AS 43.55.150
Editor's note:
The Policy Statement in Composition of Proxy Groups for Determining Gas and Oil Pipeline Return on Equity, Docket No. PL07-2-000, FERC Form 2, and FERC Form 6 may be viewed at the Department of Revenue, Tax Division, 550 W. 7th Avenue, Suite 500, Anchorage, AK 99501, and may be obtained from the Federal Energy Regulatory Commission, 888 First Street, NE, Washington, DC 20426, or on the Federal Energy Regulatory Commission website at www.ferc.gov.
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