3. Discussion

Crimson requests that we authorize an increase in rates on the Line 600 and Line 700 pipeline systems of approximately 65%, resulting in an annual revenue increase of $4.13 million. The proposed rates were based on (1) personal knowledge of California's crude oil distribution systems and the alternatives available to potential customers of the pipelines; (2) comparison with rates approved by the Commission for other pipeline utilities; and (3) consideration of anticipated rates of return. As noted above, rates for shipping oil on Lines 600 and 700 have not increased since January 1, 1992. During that period, oil production in the subject service area has declined approximately 30%¹ and the Consumer Price Index has increased approximately 56%.² Assuming that the amount of oil shipped on these pipelines has decreased to the same extent that oil production has dropped in the region, an increase of at least 86% would be necessary to restore revenues to their real 1992 levels.

Applicant also compared its proposed rates with rates we recently approved for Chevron Pipeline Company's (CPL) Northam Pipeline System, a system that is quite similar to the Line 600 and Line 700 system. CPL's Northam Pipeline charges Commission-approved rates that range from 3.2¢ to 11.1¢ per mile for transporting crude. Applicant's proposed rates would range from 1.0¢ to 1.3¢ per mile. Finally, if we approve Applicant's proposed rates, Applicant will enjoy a 3.45% overall rate of return (ROR) including a 5.46% return on equity (ROE). ROR in this range compare very favorably with the rates authorized for CPL's Northam system in D.08-06-042 of 8.54% ROR and 12.09% ROE.

We conclude that the proposed rate increase is reasonable and should be approved.

¹ California Division of Oil and Gas District 1 production declined from 43.5 million barrels in 1992 to 30.1 barrels in 2006. Exhibit D to the Application, Declaration of Larry Alexander, at ¶ 4.

² Ibid. ¶ 5.