Alaska Administrative Code
Title 11 - Natural Resources
Part 3 - Oil and Gas
Chapter 25 - Royalty Election Under Alaska Gasline Inducement Act
11 AAC 25.190 - Transportation contracts not at arm's length - pipelines other than the Alaska mainline and Canada mainline

Universal Citation: 11 AK Admin Code 11 AAC 25.190

Current through August 30, 2024

(a) If a lessee, its marketing affiliate, or any affiliate other than a transportation affiliate transports qualified gas on a pipeline other than the Alaska mainline or Canada mainline and that pipeline is a transportation affiliate, the cost of transportation must be the allowable actual and reasonable cost, as determined under (b) - (n) of this section, 11 AAC 25.160, and 11 AAC 25.210, of transportation provided by the pipeline that is the transportation affiliate. However, if the circumstances described in (o) of this section occur, the amount determined under that subsection must be used as the cost of transportation.

(b) If calculating allowable actual and reasonable cost in accordance with (b) - (n) of this section, the lessee, without regard to whether a pipeline is subject to the jurisdiction of the Federal Energy Regulatory Commission (FERC), and except as provided in (c) - (n) of this section, shall calculate that cost in accordance with the FERC Cost-of-Service Rates Manual, dated June 1999, the FERC Order Issuing Clarification and Granting Rehearing in Southern Natural Gas Co., 130 FERC Para. 61,193 (Docket nos. CP09-36-002, CP09-40-001, and AD10-3-000, March 18, 2010), and the FERC Order Granting Rehearing in Florida Gas Transmission Co., 130 FERC Para. 61,194 (Docket nos. CP09-17-001, AC08-161-002, and AD10-3-000, March 18, 2010). The FERC documents listed in this subsection are adopted by reference for purposes of this section, except as provided in (c) - (n) of this section.

(c) 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 qualified gas:

(1) an allowance for operating and maintenance expenses of the pipeline;

(2) annual depreciation on capital investment in the pipeline at original cost;

(3) annual amortization of allowance for funds used during construction (AFUDC);

(4) an after-tax return on the sum of capital investment in the pipeline at original cost net of depreciation accumulated before the year of calculation, and AFUDC net of cumulative AFUDC amortized before the year of calculation, with the undepreciated capital investment and unamortized AFUDC balances adjusted to account for accumulated deferred income taxes and retirements; a return may not be earned on cash working capital;

(5) income tax on the equity part of the return on capital investment under (4) of this subsection;

(6) ad valorem taxes on the pipeline;

(7) if specifically identified and approved in an applicable tariff for a regulated pipeline, an allowance for the cost to dismantle and remove the pipeline and for restoration after removal of the pipeline.

(d) For purposes of determining the allowance described in (c)(1) of this section, the proper allocation of operating and maintenance expenses must be determined with reference to whether the applicable transportation services agreement requires rolled-in or incremental rate treatment. Operating and maintenance expenses may not include ad valorem taxes or any other cost otherwise recoverable under (c)(2) - (7) of this section. Operating and maintenance expenses must be the properly allocable portion of the lower of operating and maintenance expenses

(1) that would be properly reportable on FERC Form 2 if the pipeline were subject to FERC jurisdiction;

(2) that are prudently incurred, as determined by the regulatory agency with jurisdiction over the pipeline; or

(3) allowed under the applicable transportation services agreement.

(e) For purposes of (c)(2), (4), and (5) and (h) of this section,

(1) capital investment must be the properly allocable part of the lower of capital investment
(A) that would be properly reportable on FERC Form 2 if the pipeline were subject to FERC jurisdiction;

(B) that is prudently incurred, as determined by the regulatory agency with jurisdiction over the pipeline; or

(C) allowed under the applicable transportation services agreement;

(2) the proper allocation of capital investment must be determined with reference to whether the applicable transportation services agreement requires rolled-in or incremental rate treatment; and

(3) a change in ownership of an asset does not alter the original cost valuation of capital investment.

(f) AFUDC used to determine the items described in (c)(3) and (4) of this section must be calculated consistent with the FERC Cost-of-Service Rates Manual, adopted by reference in (b) of this section,

(1) with AFUDC being accrued beginning at the time that certificate pre-filing, if required under 18 C.F.R. 157.21, commences under 18 C.F.R. 157.21(e), or if pre-filing is not required, at the time that filing of an application for a FERC certificate of public convenience and necessity is accepted under 18 C.F.R. 157.8; and

(2) using the weighted average cost of capital determined in accordance with (i) and (j) of this section, and annual compounding.

(g) For purposes of determining annual depreciation and annual amortization of AFUDC under (c)(2) and (3) of this section, depreciation and amortization must be calculated using the same term of years and same profile for capital recovery used in the transportation services agreement under which qualified gas is shipped. However, if the transportation services agreement does not set out a profile for capital recovery, or establishes a depreciation schedule that recovers total capital before the conclusion of the pipeline's economic life as determined in the initial proceeding for a FERC certificate of public convenience and necessity, depreciation must be calculated to recover capital investment over the economic life of the pipeline, and must be calculated using annual composite depreciation percentages that recover an equal percentage of original plant investment each year. In this calculation the economic life must be the estimated useful life used to calculate the initial recourse rate for the pipeline, or the pipeline's initial generally prevailing rate if a recourse rate is not offered. A change in ownership of an asset does not alter the depreciation schedule, or the accumulated deferred income taxes, established by the original owner of the pipeline when annual depreciation and annual amortization of AFUDC is determined under (c)(2) and (3) of this section. 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 (c) of this section includes an allowance under (c)(7) of this section for dismantlement and removal of the pipeline and restoration after removal of the pipeline.

(h) For pipelines that are regulated either by FERC or the Regulatory Commission of Alaska, accumulated deferred income taxes will be calculated consistent with the FERC Cost-of-Service Rates Manual, adopted by reference in (b) of this section, using the tax depreciation schedule established by the relevant taxing authority for pipeline assets and the book depreciation schedule established under (g) of this section.

(i) For purposes of determining the return on capital investment for a gas pipeline under (c)(4) of this section, the percentage of the capital investment treated as financed with long-term debt is the percentage actually used by the pipeline owner to finance the pipeline or 70 percent, whichever amount is greater. 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 proxy group designated by the department under (j) of this section.

(j) For purposes of (c)(4) 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. The department will use a two-stage discounted cash flow model to determine the return on capital investment in a pipeline. In implementing that model, the department will give substantial weight to the FERC Policy Statement in Composition of Proxy Groups for Determining Gas and Oil Pipeline Return on Equity, Docket No. PL 07-2-000, 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 a natural gas pipeline company;

(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 (I/B/E/S) established by Thomson Reuters, or similar widely available, reliable 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.

(k) For purposes of (c)(5) of this section, the

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

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

(l) The amounts described in (c)(1) and (5) - (7) 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 pipeline 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 pipeline's being in operation for less than that entire immediately preceding calendar year or less than the entire calendar year of calculation; or

(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.

(m) To allocate the total amount for the items set out in (c) of this section to a specific quantity of qualified gas,

(1) per-unit transportation cost is based on contracted capacity or throughput during the royalty reporting period for the pipeline as a whole, whichever amount is greater, unless the pipeline commences commercial operations after issuance of a certificate of public convenience and necessity for the Alaska mainline, in which case per-unit transportation cost is based on a 100 percent load factor of certificated capacity;

(2) the costs of different categories of pipeline transportation services bear the same relationship to one another as under the recourse rates in the applicable tariff, unless the department determines that the relationship under the applicable tariff is unreasonable, in which case the department will allocate costs among different categories of pipeline transportation services;

(3) 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, unless the department determines that the relationship under the applicable tariff is unreasonable, in which case the department will allocate costs to pipeline transportation between different pairs of receipt and delivery points.

(n) A management fee is not an allowable cost of transportation for the purpose of calculating a transportation affiliate's allowable actual and reasonable costs of transportation under this section.

(o) If the cost of transportation as calculated under (b) - (n) of this section is greater than the negotiated rate for transportation available to a lessee or its affiliate, the negotiated rate and not the cost of transportation as calculated under (b) - (n) of this section must be used in calculating the monthly value of the state's royalty share of qualified gas.

Value Line is published by Value Line, Inc., 220 East 42nd Street, New York, NY 10017. Value Line's website address is www.valueline.com.

Authority:AS 38.05.020

AS 38.05.180

AS 43.90.310

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