2. Introduction
In Decision (D.) 10-11-010, the Commission denied the application of San Pablo Bay Pipeline Company, LLC (Applicant or SPBPC) to charge market-based rates for the transportation of heavy crude oil (SJVH) from the San Joaquin Valley to the San Francisco Bay Area on its heated pipeline (Pipeline). That decision left unresolved the following issues (as stated in the
Scoping Memo) between Applicant and Independent Shippers1 who protested the application:
1. What are the just and reasonable rates, terms and conditions for public utility service on the Pipeline during the period from April 1, 2005 through the effective date of SPBPC's approved tariffs (Past Period)?
2. What refunds, if any, should Applicant or its affiliates (collectively, Shell Parties)2 be ordered to make to Independent Shippers for unjust and unreasonable shipping charges imposed during the Past Period?
3. Should the determination of just and reasonable rates be based on a cost-of-service analysis using the original depreciated cost of the Pipeline?
4. What are the appropriate rate base, rate of return, operating costs and other cost factors that should be used in determining a cost of service for the Pipeline?
5. Does the Commission's jurisdiction over the Pipeline extend to loading and unloading facilities, tanks, pipeline connections and other ancillary facilities which SPBPC does not permit Independent Shippers to use?
6. Does SPBPC have offsets against the refund claims of Independent Shippers?
7. Are the rates, terms and conditions of SPBPC's proposed tariff, filed September 30, 2008, just and reasonable? Are any portions of the proposed tariff, arbitrary, discriminatory, or contrary to industry practice?
8. Should the Commission approve the transfer of ownership of the Pipeline from its prior owner Equilon Enterprises, LLC (Equilon) to SPBPC?
We group these issues into four broad categories.
A. What property is subject to Commission jurisdiction? Does the proposed transfer of ownership include all property necessary to the operation of the Pipeline as a common carrier?
B. What are just and reasonable transportation rates (i) from the effective date of this decision forward and (ii) for the Past Period?
C. What refunds, if any, do the Shell Parties owe to Independent Shippers for overcharges during the Past Period?
D. What tariffs are approved?
2.1. Jurisdictional and Necessary Property
Applicant and Independent Shippers agree that the property subject to Commission jurisdiction includes the Pipeline and any ancillary property necessary to provide regulated service on the Pipeline. They disagree as to what that ancillary property consists of.
SPBPC, which has acquired the Pipeline from other Shell parties subject to Commission approval, also owns ancillary assets such as truck racks and storage tanks that it has designated as non-common-carrier or proprietary assets. These ancillary assets were acquired by SPBPC together with the Pipeline and, as discussed in more detail below, were subsequently excluded from the Pipeline's jurisdictional property.3 Applicant argues that these ancillary assets are unnecessary to the common carrier operation of the Pipeline, have been used historically to provide service solely to Shell affiliates, and would be improperly classified as jurisdictional property.4
Independent Shippers argue that the excluded ancillary assets have been used to provide service to Independent Shippers as well as Shell affiliates,5 and cannot be removed from public utility service without prior Commission approval.6 Independent Shippers are also concerned that SPBPC will use the ancillary assets to discriminate in favor of the Shell Oil refinery in Martinez.7
The burden of proof is on Applicant to demonstrate that property excluded from the transfer of the Pipeline to SPBPC is unnecessary to operation of the Pipeline as a public utility.8 To prove this contention, Applicant introduced the testimony of its witnesses Paul Smith and Harry J. Rathermel. In his direct testimony, Smith testified that the property retained by SPBPC is all the property necessary to operate the Pipeline as a public utility.9 In his rebuttal testimony, Smith identified assets previously treated as common carrier assets that Applicant has reclassified as ancillary assets. These include truck racks and two proprietary tanks at Coalinga; truck racks and five proprietary tanks at Bakersfield; and one proprietary tank at Rio Bravo.10
The effect of this reclassification at each of the four gathering and blending points on the pipeline system is shown in the following table, taken from Rathermel's rebuttal testimony.11 The table compares the percentage allocation of assets between common carrier and proprietary service as of April 2009 and February 2010 at the Rio Bravo, Bakersfield, Coalinga, and Olig stations:
April 2009 February 2010
Rio Bravo Common Carrier 90% Common Carrier 76%
Proprietary 10% Proprietary 24%
Bakersfield Common Carrier 94% Common Carrier 86%
Proprietary 6% Proprietary 14%
Coalinga Common Carrier 90% Common Carrier 90%
Proprietary 10% Proprietary 10%
Olig Common Carrier 100% Common Carrier 80%
Proprietary 0% Proprietary 20%
Except at Coalinga, where the additional changes in asset allocation between April, 2009 and February 2010 were minimal, the February calculation reflects an increase in assets that Applicant asserts are unnecessary for provision of common carrier service of between 8% and 20% of the assets at each location.
Independent Shippers countered with the testimony of Tesoro witness Mark Georgen. Georgen testified that historically, the disputed tanks were used for third-party service.12 According to Georgen, unless the ancillary assets "are deactivated and completely removed from service, [he presumed that] they would be used for the exclusive benefit of San Pablo Bay's affiliates."13 Unmixed high-quality, low-sulfur crude could be stored in the "proprietary" Shell tanks for delivery in segregated batches to the Shell Oil refinery in Martinez while the Valero and Tesoro refineries could be forced to accept the blended common stream of lower-quality, higher-sulfur crude.14 15 Georgen further testified that exclusion of the ancillary assets from the Pipeline's jurisdictional property would reduce the number of quality grades that Independent Shippers could receive via the Pipeline from five to two and that the two grades of crude oil that Independent Shippers would receive at their Bay Area refineries would be significantly inferior in quality to the crude oil they nominate for shipment to the Bay Area via the Pipeline. Georgen estimates that this quality-based discrimination imposes between $1.00 and $4.50 per barrel in costs on Tesoro that are not borne by the competing Shell refinery.16
Georgen's testimony raises plausible concerns about the exclusion of the tanks and truck racks from the jurisdictional property of the Pipeline and the probability that exclusion of those assets from the Pipeline's jurisdictional property will lead to discrimination in favor of the Pipeline's affiliates. Although Applicant's expert Smith testified that it has included in its jurisdictional property all the property necessary to operate the Pipeline as a public utility, Applicant has not effectively rebutted the argument that excluding those assets will facilitate unlawful discrimination.
Furthermore, Independent Shippers argue correctly that, subject to certain statutory exceptions that do not apply to this case, a regulated utility may not remove property from public service without obtaining Commission approval.17 Typically, utilities seek such approval on an asset-by-asset basis by filing applications under Pub. Util. Code § 851.18 To the extent that this application seeks approval for transfer of the ancillary assets from SPBPC to Shell affiliates, it is a de facto application for § 851 approval. In general, we grant approval of such transfers under § 851 only upon a showing by the utility that the property in question is not "necessary or useful in the performance of its duties to the public." For the reasons outlined above, we believe that SPBPC has not made the requisite showing here and we do not approve the exclusion of those assets from the jurisdictional property of the Pipeline. However, we note that this decision does not preclude SPBPC from filing a subsequent application under § 851 for permission to remove specific assets from public service.
2.2. Just and Reasonable Rates
The bulk of the testimony in this proceeding was directed to the question of what constitutes a reasonable transportation rate. The positions of the parties may be summarized as follows:
Applicant's proposed rate of $2.04 per barrel is just and reasonable. The arbitrator's award of a $1.69 rate in 2005 is evidence of the reasonableness of the proposed rate. All past rates, including the present rate of $1.90, are also just and reasonable.
The present rate of $1.90 per barrel is unjust and unreasonable. On the assumption that the tanks and truck racks are included in the Pipeline's property, the just and reasonable rate is $1.34 per barrel. All past rates were unjust and unreasonable.
Applicant's request to charge market-based rates for its heated oil transportation services was denied in an Interim Decision in this proceeding D.10-11-010, issued by the Commission on November 19, 2010. In that decision, the Commission rejected Applicant's market power analysis finding that Applicant possesses and has exercised considerable market power. To the extent that Applicant seeks to justify the proposed $2.04 rate based on its alleged lack of market power, that rationale falls as a result of the earlier decision.
The Interim Decision also disposes of one of Applicant's other arguments. Applicant's expert Webb testified that the cost of transportation includes a market price adjustment (MPA) of $0.80 cents per barrel which, when added to the nominal transportation charge of $1.90 per barrel results in a "laid-in" price to the refinery purchasers of $2.70 per barrel.19 On this basis, Webb concluded that both the current $1.90 rate and Applicant's proposed $2.04 should be approved because they are less than the $2.70 that purchasers in the Bay Area are currently paying for transportation of crude oil to their refinery gates. The Commission rejected this analysis, finding that the MPA is an adjustment to the posted price of crude oil at different production sites rather than an element of the transportation charge.20 The Interim Decision found that the independence of the MPA from the transportation charge is shown by the existence of contracts for sales "at the lease" that include a full MPA but no transportation charge. The price of a barrel of heavy crude oil delivered at the refinery gates in the Bay Area is the sum of the posted price, the MPA, the pipeline loss allowance (PLA), and the transportation charge. The delivered price will vary with changes in the first three factors, but the transportation rate will remain the same whether the MPA is $0.80 a barrel or $8.00 a barrel.
Applicant's discussion of the impact of the 2005 arbitration award is similarly unpersuasive. Chevron's and Applicant's predecessors in interest executed an agreement in 2001 (2001 Agreement) that established an arbitration process for resolving any disputes over transportation rates.21 In 2004, when the rate was $1.09 per barrel, the parties agreed to binding arbitration under the 2001 Agreement. The arbitrator found that $1.69 per barrel plus a pipeline loss allowance (PLA) of 0.25% was an appropriate market rate for 2005.22 Applicant argues that the arbitrator's award is evidence that $2.04 per barrel in 2010 is a just and reasonable rate:
"Chevron has testified that the establishment by the arbitrator of the rate of $1.69/bbl plus 0.25% PLA reflected a `favorable ruling' for Chevron. [Citation omitted]. Consequently, as of December 2005 there is a rate for SJV Pipeline services that: (i) has been set by mutually agreed upon processes and procedures freely negotiated by sophisticated commercial enterprises; (ii) by definition constitutes a market-based rate-rather than a cost-based rate-for transportation services; and (iii) is deemed `favorable' by Chevron.
"In this context, it cannot be credibly maintained that the increase in price from $1.09 to $1.69...is indicative of market power. San Pablo Bay further submits that it cannot be creditably maintained that the increase in January 2006 from the arbitrator-approved rate of $1.69 to the existing rate of $1.90 is evidence of market power."23
The difficulty with this argument is that the Commission has already ruled that SPBPC is a monopolist that possesses and has exercised market power over Independent Shippers. Given those findings, we must conclude that the 2005 arbitration set a price that reflected the Pipeline's market power. This conclusion is buttressed by the fact that the Pipeline unilaterally raised its transportation charge by another 21 cents per barrel in 2006, without losing any business from Independent Shippers. We discuss the relationship between the 2001 arbitration and Independent Shippers' refund claims at 14, below.
Applicant also argues that because pipeline transportation costs are a minor fraction of the total cost of refined petroleum products, the pipeline is without market power.24 But this argument is both disingenuous and irrelevant. It is disingenuous because it ignores the reality of the pipeline's monopoly power over its shippers. It is irrelevant because the Commission's jurisdiction does not extend to the unregulated portion of the business activities of integrated oil companies. Our jurisdiction is limited to intra-state common carrier pipelines and our duty is to insure just and reasonable transportation rates on those pipelines. Whether pipeline transportation charges are a major portion or a tiny fraction of the total cost of producing gasoline and other refined petroleum products has no bearing on the question of whether the Pipeline's rates for transporting heavy crude oil are just and reasonable.
In summary, Applicant's arguments for the reasonableness of its current and projected transportation prices are not persuasive and we are left with the task of setting transportation prices based on traditional cost-of-service principles. This task requires two lines of analysis. First, we need to determine a just and reasonable transportation price for the Past Period during which the Pipeline should have been operated as a common carrier but was not. Then we need to determine a just and reasonable transportation price on a going-forward basis and approve a tariff that incorporates that rate.
1 "Independent Shippers" is the collective designation of Chevron Products Company (Chevron), Tesoro Refining and Marketing Company (Tesoro) and Valero Marketing and Supply Company (Valero) all of whom ship undiluted heavy crude oil on the Pipeline to their respective Bay Area refineries.
2 Shell Parties include Applicant, Shell Trading US Company (STUSCO), Shell Oil Products US (SOPUS) and their parent corporation, Royal Dutch Shell (Shell).
3 STUSCO Opening Brief, at 15; Exhibit SP-17 (Smith Testimony) at 5.
4 SPBPC Reply Brief at 58.
5 Exhibit IS-1; Independent Shippers testimony at 12-13. See also Exhibit Tesoro 17, "Response No. 27 of San Pablo Bay to Chevron's Third Set of Data Requests" and Attachment F thereto (Fixed Asset Database) dated April 21, 2009.
6 See Pub. Util. Code § 851 (no sale or other disposition of public utility property without Commission approval) and § 854 (no transfer of control of a public utility without Commission approval).
7 Independent Shippers Joint Reply Brief, at 15.
8 Applicant's ultimate burden is to prove that the rates it seeks are reasonable. Proving that the excluded property is unnecessary to operation of the Pipeline is an essential part of demonstrating the reasonableness of the requested rates. "[T]he ultimate burden of proof of reasonableness...never shifts from a utility which is seeking to pass its costs of operations on to ratepayers..." (Pacific Gas and Electric Co., D.00-02-046.)
9 Exhibit SP-17 Smith identifies with specificity each asset proposed to be assigned to non-common-carrier service.
10 Exhibit SB-18 Smith Rebuttal Testimony.
11 Exhibit SB-29 Rathermel Rebuttal Testimony.
12 Exhibit Tesoro 31, Prepared Testimony o f Mark Georgen for Tesoro Refining and Marketing Company, at 5-6.
13 Ibid. at 10.
14 Ibid.
15 Ibid. Answer 20, at 12. The Pipeline regularly mixes 6,000 bpd of high sulfur outer continental shelf (OCS) crude with low-sulfur Kern River crude at Olig station and "regrades" the OCS to SJVH before shipping it to Independent Shippers' Bay Area refineries. Independent Shippers were unaware of this regrading process prior to discovery in this case.
16 Ibid., Answer 20, at 13.
17 Chevron Opening Brief, at 102.
18 § 851. A public utility ... shall not sell, lease, assign, mortgage, or otherwise dispose of or encumber the whole or any part of its .... plant, system, or other property necessary or useful in the performance of its duties to the public ... without first having secured an order of the commission authorizing it to do so .... .
19 Exhibit SP-2c, Rebuttal Testimony of Michael Webb, at 47.
20 D.10-11-010 at 12.
21 Exhibit Chevron 37.
22 Exhibit Chevron 47-P; Rebuttal Testimony of David R. Lee, at 18.
23 SPBPC Opening Brief at 39-40.
24 Ibid. at 41-43.
