In a ruling that could cost major oil companies tens of millions of dollars, the Supreme Court held 8 to 0 yesterday that the Interstate Commerce Commission obeyed a congressional mandate when it acted to hold down prices for shipping crude through the companies' Trans-Alaska Pipeline System.
The court decided that a 1920 law authorized the ICC to suspend the rates initially proposed by the owners to carry oil 800 miles from the Prudhoe Bay in the Alaskan Arctic to the all-weather port of Valdez on the Pacific Coast.
Pipeline subsidiaries of seven of the eight owners proposed ther initial rates a year ago, shortly before the line opened.
Numerous protests followed. The Justice Department, for example, termed teh rates unreasonably high and said they would "discourage exploration ad development of new fields by reducing the wellhead value of crude." in conflict with national energy policy.
The ICC's Bureau of Investigations and Enforcement, arguing that the rates were "unreasonable" on their face, urged that they be suspended pending a full investigation. After hearing oral argument, the commission suspended the rates for the maximum seven months permitted by law, citing their "probable unlawfulness."
In doing so, the commission said that the rates would yield an excessive return on capital through what objectors called "double dipping."
This charge derived from owners' data showing that the line was financed 85 percent by debt and 15 percent by equity. In calculating the proposed rates, the carriers deducted interest expense in computing net income. Then they added a "return element" to calculated net income sufficient to provide them with a 7 percent return on total investment - that is, on both debt and equity.
The commission also cited objections that the carriers had overstated costs. Under original estimates, the line, called TAPS, was to cost $1 billion. The cost on which the carriers based their proposed rates exceeded $9 billion. Objectors, including the State of Alaska, argued that waste and mismanagement accounted for much of the $8 billion overrun and consequently should be excluded from the TAPS rate base.
In rejecting owners' arguments that it was not empowered to order the suspension, the commission also expressed concern that "maintenance of excessively high rates could act as a deterrent to the use of the pipeline by nonaffiliated oil producers, and would also delay the Alaskan interests in obtaining revenues that depend upon the wellhead price of oil."
The commission ordered interim rates ranging from $4.68 to $5.10 a barrel compared with proposed rates ranging from $6.04 to $6.44. The reduction ranged from $1.13 in the case of Arco to $1.67 in the case of BP.
Four of the TAPS owners then sued - and lost - in the 5th U.S. Circuit Court of Appeals. Meanwhile, the Supreme Court stayed the ICC suspension order, allowing the owners to collect - subject to refund - $1 million to $1.5 million more a day from shippers.
Because the shippers are almost exclusively parents or co-subsidiaries of TAPS owners, Justice William Brenan Jr. said in the opinion for the court affirming the 5th Circuit, to a possibly large extent "excess transportation charges to shippers will be offset by excess profits to TAPS owners, creating a wash transaction from the standpoint of parent oil companies."
But a refund of possibly $20 million now will have to be paid to the State of Alaska and to certain Indian tribes for the difference between the proposed and interim rates. More millions may be owned depending upon the rates ultimately determined to be reasonable since jan. 28, when the suspension period, ended. The post-suspension rates are being contested in a proceeding in the Federal Energy Regulatory Commission.