4. Background
SFPP operates a network of pipelines for the transportation of refined petroleum products, such as gasoline, diesel, and jet fuel. Most of this network provides public utility service and both this Commission (CPUC) and the Federal Energy Regulatory Commission (FERC) have regulatory authority over portions of SFPP's operations.
A ruling dated August 25, 2006, consolidated these proceedings pursuant to Rule 552 of the Commission's Rules of Practice and Procedure except for A.06-08-028 and C.06-12-031, which were subsequently consolidated at a February 26, 2007 PHC.
4.1. Procedural History
See Appendix A for an abbreviated procedural history of each of the consolidated proceedings. Various parties timely protested all applications and SFPP timely replied to all complaints. Although the composition of the group of complainants and protestants has changed over the years, this decision refers to them collectively as Indicated Shippers (the term they use themselves in filings here and at FERC), except where necessary to distinguish a specific party's position or interests. The record for this opinion is composed of all filed documents and pleadings and the exhibits received into evidence for the consolidated proceedings.
Subsequent to C.97-04-025, SFPP filed five separate applications for rate increases: A.00-03-044, filed March 16, 2000; A.03-02-027, filed February 21, 2003; A.04-11-017, filed November 16, 2004; A.06-01-015, filed January 26, 2006; and A.06-08-028 filed August 25, 2006. These applications each seek a separate and unique increase in retail rates and were implemented subject to refund pursuant to Public Utilities (Pub. Util.) Code Section 455.3 upon 30-day notice.3 Additionally, two more complaints were filed: C.00-04-013 filed on April 14, 2000, and C.06-12-031 on December 29, 2006.
In short, these proceedings include the following issues.
C.97-04-025 - Whether:
· the Sepulveda Line is subject to the Commission's jurisdiction;
· SFPP is entitled to a ratemaking allowance for income tax expense;
· SFPP's environmental costs should be allocated between inter- and intrastate operations; and
· SFPP's rates for the Watson Station facilities are reasonable.
A.00-03-044 - Whether:
· SFPP's tariff rates should be market-based due to competitive alternatives.
C.00-04-013 - Whether:
· SFPP's rates as charged at that time were just and reasonable.
A.03-02-027 - Whether:
· It is reasonable to grant SFPP's rate request proposal for test year 2003. Issues include:
i. A fair and reasonable cost of capital;
ii. Fair and reasonable other costs, some of which are dependent on rehearing C.97-04-025; and
iii. all other test year costs.
A.04-11-017 - Whether:
· It is reasonable to grant SFPP an increase in its rates for pipeline transportation services within California.
A.06-01-015 - Whether:
· It is reasonable to grant SFPP an increase in its rates for pipeline transportation services within California.
A.06-08-028 - Whether:
· It is reasonable to grant SFPP an increase in rates for pipeline transportation services within California by authorizing an Ultra Low Sulfur Diesel Surcharge.
C.06-12-031 - Whether:
· SFPP's rates as charged at that time were just and reasonable for shipments of refined petroleum products on the North, West and South Lines.
Evidentiary hearings, on an unconsolidated basis, were held as follows:
1) C.97-04-025 on October 23 - 27, 2000 (Rehearing of D.98-08-033 ordered by D.99-06-093);4
2) A.00-03-044 on February 1, 2, 5, 6, 13, 2001, and May 13, 2003;
3) C.00-04-013 on February 1, 2, 5, 6, 2001; (concurrent with 2, above, but not consolidated); and
4) A.03-02-027 on December 9 - 12, 2003.
4.2. Preliminary Settlement Discussion
By ruling dated August 25, 2006, ALJ Long ordered a PHC to discuss the possibility of settling the as yet unconsolidated proceedings. At the PHC, the ALJ consolidated the six oldest proceedings, through A.06-01-015. ALJ Long directed the parties to meet and develop a settlement plan. Following the October 17, 2006 PHC, the parties met with ALJ Weissman, assigned as a mediator, to develop a potential framework for settlement discussions.
SFPP and Indicated Shippers failed to resolve any issue and subsequently determined that their preferred course was to resume litigation. As a result, ALJ Long scheduled a further PHC on February 26, 2007, during which he added the two newest proceedings, A.06-08-028 and C.06-12-031, to the consolidated proceedings. (Transcript at 156 and 162.) The parties stated their preferred option was for Administrative Law Judge Long to render a proposed decision primarily on the ratesetting issues included in A.03-02-027, relying upon the filed documents and evidentiary record developed earlier, in hearings before ALJ Brown, from December 9 to 12, 2003. Consequently, ALJ Long set aside submission so that parties could provide one further exhibit as well as concurrent opening briefs on April 16, 2007, and concurrent replies on May 7, 2007. (Transcript at 167.) These dates were subsequently extended at the request of all parties to April 26, 2007 and May 17, 2007, respectively.
4.3. Control of SFPP
This section describes the ownership and control of SFPP in effect when the consolidated proceedings were filed. It then describes recent changes. We take official notice of the record in A.06-09-0165 for the most current information regarding SFPP's organization immediately prior to and after the transfer of control, which the Commission approved in D.07-05-061. The ownership in place for the record periods of these consolidated proceedings is relevant to deciding certain issues, including whether to adopt an allowance for income tax expenses in revenue requirements.
4.3.1. Kinder Morgan Inc.'s (KMI) Prior
Ownership & Control of SFPP
In these consolidated ratesetting proceedings, the relevant owner of SFPP was KMI as it existed prior to the transfer of control to Knight Holdco, LLC (Knight Holdco) authorized in D.07-05-061. Attachment 1 to D.07-05-061 (and also attached here as Appendix C, Attachment 1) illustrates the complex arrangement by which KMI, through Kinder Morgan Energy Partners, L.P. (KMEP) and other KMI subsidiaries, indirectly owned and controlled SFPP and its affiliate Calnev Pipe Line, LLC (Calnev).6 D.07-05-061 describes KMI, a Kansas corporation, as:
[O]ne of the largest energy transportation, storage and distribution companies in North America. It owns an interest in or operates approximately 43,000 miles of pipelines that transport primarily natural gas, crude oil, petroleum products and CO2; more than 150 terminals that store, transfer and handle products like gasoline and coal; and provides natural gas distribution service to over 1.1 million customers. (D.07-05-061, at 7, citing the application, (A.06-09-016) at 5.)
D.07-05-061 also describes KMI's ownership and control over SFPP and Calnev during the period under review here:
KMI owns a minority equity interest in KMEP and, in addition, the general partner interest of KMEP. The majority ownership in KMEP is publicly held through publicly traded units in the KMEP limited partnership. KMI's direct and indirect ownership in KMEP as of December 31, 2005 was approximately 15.2 percent. KMI exercises control over KMEP, however, through its ownership of the general partner interest and through its ownership of all of the voting shares of Kinder Morgan Management, LLC, to which KMEP's general partner, KMGPI, has delegated the authority to manage the business and affairs of KMEP (subject to certain approval rights of KMGPI). Because the general partner of KMEP and its delegate are controlled by KMI, KMI effectively maintains indirect control of SFPP and Calnev through its indirect control of KMEP. [footnote omitted]. (Id. at 5, emphasis added.)
The Commission authorized a change of control over the intrastate portions of SFPP and Calnev, both common carrier pipeline utilities, to Knight Holdco. Knight Holdco is a private, limited liability company formed under Delaware law, and it became KMI's parent. It is this structure that now operates and controls SFPP and the other companies.7
2 "Proceedings involving related questions of law or fact may be consolidated." That is, consolidation is a discretionary act.
3 Pub. Util. Code § 455.3: "(a) Notwithstanding any other provision of law, including, but not limited to Section 454, no later than January 1, 1998, the commission shall adopt rules and regulations that substantially revise the manner in which oil pipeline corporations may change and use rates.
"(b) The revised rules and regulations shall adhere to the following criteria:
(1) Pipeline corporations shall be required to give the commission and all shippers no less than 30 days' notice of rate changes.
(2) After the 30-day notice of rate change, pipeline corporations shall be permitted to change rates and use those rates prior to commission approval.
(3) The commission shall have the authority to suspend a rate change and use of the changed rate for a period of time not to exceed 30 days from expiration of the 30-day notice period specified in paragraph (1).
(4) Pipeline corporations shall refund, with interest, any portion of the rate change that is subsequently disallowed by the commission to all shippers within 30 days of the commission's decision becoming final. Interest shall accrue from the date the new rate is first charged.
(5) Any increase in the shipping rate charged by an oil pipeline corporation prior to commission approval shall not exceed 10 percent per 12-month period. The commission shall determine the appropriateness of allowing retroactive charge and collection of subsequently approved rate increases above 10 percent.
"(c) It is the intent of the Legislature that oil pipeline corporations be permitted to use new rates after the period of the suspension of a rate change, if any, by the commission pursuant to paragraph (3) of subdivision (b) prior to commission approval, provided any disallowed portion of the new rate is fully refunded with interest."
Unless otherwise indicated, all statutory references are to the Public Utilities Code.
4 D.99-09-038 denied SFPP's request for a rehearing of D.99-06-093, which granted the rehearing of D.98-08-033 in C.97-04-025. (2 CPUC3d 344.)
5 Joint Application of SFPP, L.P. (PLC-9 Oil), Calnev Pipe Line, L.L.C., Kinder Morgan, Inc., and Knight Holdco LLC, for Review and Approval under Public Utilities Code Section 854 of the transfer of Control of SFPP, L.P., Calnev Pipe Line, L.L.C.
6 As Attachment 1 shows, KMEP held SFPP and its affiliate, Calnev, via a 98.9800% limited partner interest in the KMEP subsidiary, Kinder Morgan Operating Limited Partnership-D (OLP-D); KMGPI held the 1.0101% general partner interest in OLP-D. OLP-D owned 100% of Calnev through a subsidiary, Kinder Morgan Pipe Line, LLC, and held a 95.5% general partner interest in SFPP (Santa Fe Pacific Pipelines, Inc. retained a 0.5% limited partner interest). KMEP, a master limited partnership organized under Delaware law, had ownership interests in four other operating limited partnerships besides OLP-D. These arrangements effectively provided KMI with indirect control over not only SFPP and Calnev, but also numerous other business enterprises (e.g., transportation of oil, natural gas and refined petroleum; storage of refined petroleum products, chemicals, and other liquids; production of crude oil and carbon dioxide).
There are no employees in Kinder Morgan Management, LLC (KMR), KMPGI, KMEP, SFPP or Calnev. Attachment 2 to D.07-05-061 (and also Appendix C, Attachment 2 here) illustrates, schematically, the means by which KMI provides employees to its subsidiaries and allocates costs for shared services. Employees work for KMGP Services Company, Inc. (KMGP Services Co.), which is 100% owned by KMPGI. KMGP Services Co. then dedicates all of its employees to KMEP (managed by KMR). Allocations for shared services occur through Kinder Morgan Services LLC (KM Services), which is 100% owned by KMR.
7 Attachment 3 to D.07-05-061 (and also attached here as Appendix C, Attachment 3) illustrates the post-transaction organizational structure, including Knight Holdco's ownership by five groups of investors. The preliminary proxy statement filed with the Securities and Exchange Commission provided information to the Commission on the anticipated, respective ownership interests upon closing: KMI Management Group - 36.63%; Goldman Sachs -25.14%; AIG - 16.02%; Carlyle Partners IV - 11.11%; and Carlyle/Riverstone III - 11.11%.
Pursuant to D.07-05-061, Knight Holdco or one of its subsidiaries now owns all outstanding shares of KMI, whether contributed by Kinder and the other KMI management participating in the deal, or repurchased from nonparticipating shareholders. This transfer of all KMI shares vested ownership and control of KMI in Knight Holdco.
