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PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

ENERGY DIVISION RESOLUTION O-0042

RESOLUTION

Resolution O-0042. Chevron Pipe Line Company (CPL) proposes to increase its tariff for transporting petroleum products from South Livermore to Fremont in Alameda County. CPL's proposal is approved.

By Advice Letter 30-O filed on May 1, 2002.

By Advice Letter 30-O-A filed on May 13, 2002.

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SUMMARY

This resolution approves CPL's request for a tariff increase for transportation of petroleum products on CPL's South Livermore to Fremont pipeline. The rate approved is $0.045 per barrel (bbl).

CPL is requesting this rate increase because it must make substantial investment in environmental mitigation.

BACKGROUND

CPL's existing rate for transportation of petroleum products on CPL's South Livermore to Fremont pipeline went into effect by Resolution O-0010, dated February 23, 1996, and has been in effect since that time. The existing rate is $0.02/bbl.

The South Livermore to Fremont System is a 15-mile segment of the Bay Area Products Line that transports gasoline, diesel fuel, and jet fuel from Richmond, California refineries to marketing terminals in Northern California. This pipeline system delivers approximately 27,000 barrels per day of such petroleum products to the City of San Jose and parts of Santa Clara County. The Richmond area refineries supply 100% of the jet fuel to the San Jose International Airport, transporting 75% to 100% of that supply through this pipeline system. Chevron asserts that continued operation of the South Livermore to Fremont segment of the Bay Area Products Line is necessary to continue delivery of the refined products to the southern part of the San Francisco Bay Area.

Advice Letter 30-O states that a risk mitigation agreement between CPL and the City and County of San Francisco (City) requires CPL to make investments to complete certain environmental mitigation measures. CPL adds that the only shipper on this system, Chevron Products Company, has concurred to the proposed rate increase.

The South Livermore to Fremont products line is a 15-mile long, 8 inch diameter pipeline that originates in South Livermore and has a single destination in Fremont. A 9-mile segment of the line passes through property owned by the City of San Francisco near the San Antonio Reservoir. The City of San Francisco, the San Francisco Public Utilities Commission and the San Francisco Water Department all have concerns about the close proximity of the petroleum pipeline to the San Antonio Reservoir that provides drinking water to local municipalities. Due to concern of a pipeline leak and possible contamination of the reservoir, the City insisted on certain risk mitigation measures and relocation of the pipeline. CPL came to agreement with the City on mitigation measures, including relocation of the pipeline.

CPL submitted a 2002 results of operation reflecting an investment of $1,100,000 in 2001 and $200,000 for the year 2002 related to the mitigation measures. CPL anticipates that expenditures for project development will occur at a rate of $200,000 to $400,000 per year for several more years and estimates the total cost of pipeline relocation will eventually exceed $5,000,000. Costs for mitigation items planned, but not yet implemented for pipeline relocation are not included in the proposed rate. Investments made on this pipeline prior to 2001 were recovered through the existing tariff rate or absorbed by CPL.

CPL informed the Energy Division that facilities constructed in 2002 are currently in service. About $75,000 of the plant additions budget remaining in 2002 should be spent in the summer of 2002.

CPL has been reviewing the right-of-way renewal on this pipeline since 1985. Since 1995 CPL and the City negotiated right of way issues. Not until 1997 have all parties agreed to terms of a renewal and the mitigation measures to be addressed that serve as a basis for a long-term lease. The agreement requires CPL to complete procedural and mechanical changes to the operation of the pipeline. CPL reports that to date all procedural changes are complete. Such changes are work process changes and are inexpensive to implement. Beginning in 2001 CPL has been addressing the mechanical mitigation measures that require capital investment to install new equipment and ultimately to relocate the line off the City property and away from San Antonio Reservoir. CPL states that it can no longer absorb the costs of mitigation and must request a rate increase.

CPL's proposed Tariff, C.P.U.C. No. 32, would increase the rate to $0.045/bbl. CPL's results of operation analysis reflected a 7.32% rate of return at the proposed rate.

In response to an Energy Division data request, CPL explained that it is debt-free and has not utilized debt financing for its South Livermore to Fremont System. CPL said that it recognizes that regulatory agencies rarely support equity-only capital structures in the computation of transportation rates. To address this concern CPL said it split its capital structure into debt and equity components based approximately on the ChevronTexaco parent capital structure. For 2002 CPL split its rate base 25% to debt and 75% to equity.

ChevronTexaco's cost of debt of 6.5% applied to the debt component of rate base developed an annual interest expense of $35,000. CPL included this interest as an expense in its development of revenue requirements.

CPL shows that total annual revenues for a full year of operation at proposed rates will be about $450,000. If revenues remained at current rates, CPL would operate at a slight deficit.

On May 13, 2002 CPL submitted Advice Letter 30-O-A that provided a map of the South Livermore to Fremont Pipeline System.

NOTICE

Notice of Advice Letter 30-O and 30-O-A was made by publication in the Commission's Daily Calendar. CPL states that a copy of the Advice Letter was mailed and distributed in accordance with Section III-G of General Order 96-A.

PROTESTS

No protest was filed.

DISCUSSION

The South Livermore to Fremont system is part of a pipeline system that transports most of the jet fuel to the San Jose International Airport and petroleum products to other parts of Santa Clara County. These products fill a critical need and shipments must continue.

The City of San Francisco and the San Francisco Public Utilities Commission is concerned that a pipeline leak could contaminate the San Antonio Reservoir. With Advice Letter 30-O-A CPL provided a map showing the pipeline route very close to the north shore of the reservoir. CPL's agreement with the City requires investment in environmental mitigation measures, including relocation of the pipeline off of the City's property and away from the Reservoir. To continue shipments through this pipeline, CPL must make investments in mitigation measures, including relocation of the pipeline.

CPL's forecast results of operations includes an investment of $1,100,000 in 2001 and $200,000 in 2002. CPL stated that it could no longer support the costs of mitigation and it must ask for a rate increase.

The Energy Division reviewed CPL's forecast results of operations for 2002 and believes it fairly represents CPL's 2002 reasonable costs and expenses.

CPL split its capital investment into debt and equity components based on ChevronTexaco parent's capital structure. CPL also used the ChevronTexaco cost of debt to develop an estimate of interest expense. CPL's inclusion of interest as an expense double counts its compensation for interest expense. In California, utilities receive compensation for interest through the rate of return, since the rate of return averages the interest into the capital structure. Exclusion of the interest expense from CPL's estimate of revenue requirement results in a rate of return of 8.35%.

CPL's results of operations reflect a 7.32% rate of return at proposed rates. In Resolution O-0041, which adopted a rate increase for Mobil Pacific Pipeline Company, we held that a rate of return of 8.7% rate of return is reasonable based on a comparison with other pipeline companies. Based on the foregoing, and our observation that CPL's proposed rate of return is actually 8.35%, CPL's proposed rate of $.045/bbl. is reasonable.

COMMENTS

This is an uncontested matter in which the resolution grants the relief requested. Accordingly, pursuant to PU Code 311(g)(2), the otherwise applicable 30-day period for public review and comment is being waived and this matter will be placed on the Commission's agenda for prompt action.

FINDINGS

1. Shipments of petroleum products through the South Livermore to Fremont system fill a critical need and must continue.

2. The pipeline passes through the property owned by the City of San Francisco, very close to the San Antonio Reservoir.

3. The City of San Francisco is concerned that a pipeline leak would contaminate San Antonio Reservoir.

4. As a condition for renewing its lease, CPL agreed with the City of San Francisco on mitigation measures including relocation of the pipeline off of the City's property.

5. The mitigation measures will require substantially more investment in the pipeline.

6. CPL submitted a results of operation analysis based on a 7.32% rate of return.

7. We find CPL's actual proposed rate of return to be 8.35%.

8. CPL's forecast 2002 revenues, operating expenses, and rate of return of 8.35% are reasonable.

9. We should approve CPL's requested rate increase of $0.045/bbl.

THEREFORE IT IS ORDERED THAT:

1. CPL shall increase its transportation rates for its South Livermore to Fremont Pipeline System to $0.045/bbl.

This Resolution is effective today.

I certify that the foregoing resolution was duly introduced, passed and adopted at a conference of the Public Utilities Commission of the State of California held on August 8, 2002; the following Commissioners voting favorably thereon:

            _____________________

Commissioner Geoffrey F. Brown

being necessarily absent did not

participate.

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