4. Determination of Refunds

The Pipeline charged all Independent Shippers the same transportation rates during the Past Period. Therefore each shipper's refund claim will be calculated based on the same general formula:

Actual Rate Charged during the Past Period minus Just and Reasonable Rate for the Past Period times Number of Barrels shipped during the Past Period equals Refund.

For example, if the actual rate for the Past Period is $2.00, the just and reasonable rate for the Past Period is $1.50, and 10 million barrels were shipped during the Past Period, the Refund would be $0.50 ($2.00 - $1.50) times 10,000,000 or $5,000,000. For calculation purposes, the actual rates for transportation on the Pipeline during the Past Period were:

January through March 2005 $1.09 per barrel

April through December 2005 $1.686 per barrel

January 2006 to present $1.90 per barrel

Chevron argues for five different values for its refund claim:

1. On the assumption that the 2005 and 2006 price increases were unauthorized and subject to disapproval in their entirety by the Commission, Chevron calculates its refund claim as follows:

April through December 2005 $ 6,665,510

January 2006 through January 2010 41,666,385

Total 48,331,895

Interest @ 3-month commercial paper rate 3,023,048

Total Refund as of February 1, 2010 $ 51,354,943

2-3. On the assumption that this proceeding will set just and reasonable rates for the Past Period on a cost of service basis, Chevron offered the testimony of its witness O'Loughlin. He proposed Past Period transportation rates for the Station 36 to Coalinga and Coalinga to Avon segments of the Pipeline of $0.5228 and $0.7847 per barrel, respectively. This analysis³⁰ resulted in two different refund claims including interest as of February 1, 2010 of $43,717,764 if the excluded assets are in public utility service and $46,194,115 if such assets are not in public utility service.

4-5. O'Loughlin also made an alternate calculation based on the Current Reproduction New Less Depreciation (CRNLD) method of valuation according to which the refund as of February 1, 2010 including interest would be $34,575,350 if the excluded assets are in public utility service and $37, 227, 932 if they are not. The various proposed refunds are summarized in the following table:

CHEVRON PROPOSED REFUNDS AS OF 2/1/2010

1. Rate increases disallowed $51,354,943

2. Just and Reasonable rates based on a traditional cost-of-service approach

a. Without Excluded Assets $46,194,115

b. With Excluded Assets $43,717,764

3. Just and Reasonable rates based on a CRNLD approach

a. Without Excluded Assets $37,227,932

b. With Excluded Assets $34,575,350

Since we have already determined that SPBPC must include the disputed assets from public service, we do not further consider alternatives 2-a and 3-a in the above table. Further, as we have often stated,³¹ we believe that just and reasonable rates should be calculated based on traditional cost-of-service principles, and therefore we also exclude alternative 3-b from further consideration.

Applicant's proposed Past Period rates for the same two Pipeline segments were $0.7870 and $1.2770 respectively. Applicant derived these rates from application of traditional cost of service principles to an assumed rate base but its experts and Independent Shippers' experts disagreed sharply about all aspects of the rate calculations.

Applicant argues that the $1.69 competitive market rate set by the arbitrator for 2005 forms a floor under any refund claims. On this basis, refunds would be limited to the difference, if any, between the $1.69 rate and a just and reasonable rate from January 1, 2006 forward, since actual rates prior to January 2006 did not exceed $1.69. Applicant's argument amounts to the claim that Chevron, having voluntarily agreed to the arbitration, is estopped from asserting that the $1.69 rate is not just and reasonable.³² Chevron's position is that the Commission has the exclusive right and obligation to set just and reasonable rates and may ignore any prior rate determination once it has assumed jurisdiction over a pipeline.³³

Although the 2001 Agreement specifies Texas choice of law, we have no reason to believe that Texas law differs materially from California law in respect of the matter being arbitrated. The "Commercial Rates" provision of the 2001 Agreement which governed the determination of the $1.69 rate is a standard "most favored nation" clause that merely requires that Chevron be charged rates no higher than the Pipeline charges other unaffiliated shippers:

4. COMMERCIAL RATES

Equilon will make transportation pursuant to the Agreement available to Texaco [Chevron's predecessor] at location differential rate terms and pipeline loss allowance terms no less favorable than the commercial terms offered or agreed to by third parties for transportation on those same proprietary pipelines for similar movements and similar volume commitments at that time.

This language is clear and we have no reason to suppose that it has any different meaning under Texas law than it does under California law.

The arbitrator's $1.69 market rate represents his estimate of a rate that the Pipeline could charge that all its shippers would pay rather than attempt to clear production by some other means. Such a market rate, imposed by a monopoly service provider possessing substantial market power, is not a competitive rate. Any rate that exceeds a competitive rate is presumptively not a just and reasonable rate. Accordingly, we find that the $1.69 market rate is not a just and reasonable rate for oil shipped prior to January 1, 2006. For the same reason, $1.90 is not a just and reasonable rate for oil shipped during the balance of the Prior Period.

Having rejected the $1.69 rate and the $1.90 rate, we are left with the problem of determining a just and reasonable rate for the Prior Period. Rejecting the rates proposed by Applicant is not equivalent to accepting the $1.09 rate charged at the beginning of 2005, as Chevron urges us to do. We look instead to the rate the Pipeline charged its affiliate STUSCO to ship SJVH to the Shell Martinez refinery during the same period. As a regulated public utility, the Pipeline is under an obligation not to discriminate between Independent Shippers and affiliates. In 2005, the Pipeline charged STUSCO $1.23 per barrel.³⁴ This rate appears to be the result of arms-length negotiation between STUSCO and the Pipeline and we adopt it as the just and reasonable rate for the portion of the Prior Period ending December 31, 2005. From January 2006 forward, the Pipeline charged STUSCO at the rate of $1.246 per barrel³⁵ and we adopt that as the just and reasonable rate for the balance of the Prior Period. Accordingly, the refund claim of each Independent Shipper for the period from April 1, 2005 through December 31, 2005 is equal to $0.46 per barrel ($1.69-$1.23) times the number of barrels shipped plus interest at the 3-month T-bill rate through the date of payment. The refund claim of each Independent Shipper for the period January 1, 2006 to the effective date of new rates developed in this proceeding is $0.654 ($1.90-$1.246) per barrel times the number of barrels shipped plus interest at the 3-month T-bill rate through the date of payment (together with a PLA of 0.15%, equal to the PLA charged to STUSCO by the Pipeline).

³⁰ Exhibit Chevron 49, Attachment MPO_61.

³¹ See, for example, Application of Red and White Fleet, Inc, D.97-06-066.

³² San Pablo Bay Opening Brief, at 73.

³³ Chevron Reply Brief at 37.

³⁴ Exhibit Chevron 12-C.

³⁵ Exhibit Chevron 13-C.