Document 252341

Virginia State Corporation Commission
eFiling CASE Document Cover Sheet
Case Number (if already assigned)
PUE-2013-00011
Case Name (if known)
Document Type
OTHR
Document Description Summary
Expert Testimony and Report - Short Version .
Total Number of Pages
74
Submission ID
6810
eFiling Date Stamp
4/30/2013 4 :44 :26PM
IMA
W
PA
w
COMMONWEALTH OF VIRGINIA, ex rel.
STATE CORPORATION COMMISSION
CASE NO. PUE-2013-00011
Ex Parte: In the matter of investigating the toll
Rates of Toll Road Investors Partnership 11, L.P .,
Under § 56-542 D of the Code of Virginia
JOINT EXPERT REPORT OF
MR. ROBERT G. VAN HOECKE AND DR. A41CHAEL J. WEBB
April 30, 2013
I-A
W
REPORT CONTENT
1.
Introduction ...... . .. ..... . . . ...... . . .. .... .. . ..... . . . ...... . . ...... . . . . . ..... . . . ...... . . ...... . . ...... . . . ........ . . . ..... . . . ....... . . 2
H.
Purpose and Overview ...... . . ...... . . . ..... . . . ...... . . ...... . . . ..... . . . ...... . . .... ... . . ..... . . . ...... . . ........ . . . ..... . . . ... 3
M.
Appropriate Toll Standards Under §56-542 of the Virginia Code . . ..... . . . ...... . . ... ... .. . . . ..... . ... 4
A.
B.
C.
Relationship of Tolls and User Benefits . . . ..... . . . ....... . ...... . . . ..... .. . ........ ........ . . ...... . . . . 13
Tolls Must Not Materially Discourage Use of the Roadway .. . . . ...... . . ........ . ....... . . .. 16
Tolls Must Provide Operator No More Than a Reasonable Return . . . ...... . . . ..... . . . ... 19
1.
Reasonable Return Must be Determined Based on Costs .... .. ........ . . . ..... . . . . 19
Allowed Components of Return . . . ..... .. . ....... . ...... . . . .. ... .. . ...... . . ...... .. . . ...... . . . . 21
2.
3.
Return of Investment (Depreciation) . . . . ...... . . ...... . . . ..... . . . ...... . . ...... .. . . ..... . . ... 22
4.
Reasonable Return Must be Based on Prudent Investment . . . ........ . ....... . . .. 31
IV.
Preliminary Assessment of TRIP 11's Compliance with Relevant Criteria ... .. ...... . . . ..... . . . . 31
V.
Conclusion and Recommendation .. .. . ...... . . ...... . . . ....... . . . ...... . . ...... . . . ..... . ........ . . ...... .. . ..... . . . ... 39
I
PA
W
I.
INTRODUCTION
1.
We are Mr. Robert G. Van Hoecke and Dr . NEchael J . Webb . Mr. Van Hoecke is
a Principal with the firm of Regulatory Economics Group, LLC-a firm specializing in
economic and financial consulting to regulated entities . Dr. Webb is a Director with the
same firm. Our business address is 2325 Dulles Comer Boulevard, Suite 470, Hemdon,
Virginia 20171-4675.
2.
Mr. Van Hoecke has twenty-nine years of experience working for and providing
consulting services to regulated entities and has testified before state and federal
agencies, state and federal courts, and before domestic and international arbitral tribunals.
A detailed listing of Mr. Van Hoecke's qualifications is provided at Exhibit No. I - Dr.
Webb has sixteen years of experience providing consulting services to regulated entities.
He has filed testimony before state and federal agencies. In addition, Dr. Webb holds a
PhD in economics from George Mason University, and has taught courses in Law and
Economics, the Economics of Regulation, and the Economics of Energy to both graduate
and undergraduate students. Attached as Exhibit No. 2 is Dr. Webb's curriculum vitae.
3.
Upon learning of the investigation' initiated by the State Corporation Commission
("Commission") into the rate structure and rate level charged by Toll Road Investors
Partnership II, L.P. ("TRIP 11") in response to Delegate David I. Ramadan's complaint,
we met with Delegate Ramadan and offered to prepare an expert report based on our
Order Initiating Investigation, Docket No. PUE-2013-00011 (January 30, 2013).
2
I"
W
combined experience and expertise in regulatory matters . We are not being compensated
for our time analyzing these issues or preparing this report. 2
H.
PURPOSE AND OVERVIEW
4.
The Commission's authority to regulate TRIP 11's operation of the Dulles
Greenway was promulgated in the Virginia Highway Corporation Act of 1988 ("Act")
and is codified in §56-535 through §56-552 of the Virginia Code ("Code") . In its Order
Initiating Investigation of the rate structure and rate level charged by TRIP 11, the
Commission cites the statutory requirements of §56-542 D of the Code, which sets forth
three requirements the Commission will apply in this investigation. Specifically, the
Commission must ensure that tolls are set at a level : (1) "Which is reasonable to the user
in relation to the benefit obtained"; (2) "which will not materially discourage use of the
roadway by the public"; and (3) "which will provide the operator no more than a
reasonable return as determined by the Commission ."
3
Having determined that an
investigation was warranted, the Commission requested submissions to "address and
define with specificity the standards that the Commission should apply for each of these
three requirements ."
5.
The purpose of our report is to present relevant standards we believe the
Commission should consider when carrying out its investigation. At this juncture our
analyses have been limited to certain publicly available documents, however using this
information we will explain why, in our opinion, TRIP 11's current rate level and rate
structure are inconsistent with the statutory mandates defined above. We anticipate
In addition, neither of us resides nor works in Loudoun County .
Case No. PUE-2013-0001 1 . Order Initiating Investigation . Page 3
3
~A
W
through TREP 11's concurrent filing and the discovery process that more detailed
information will be forthcoming. For this reason we respectfully reserve the option to
supplement our submission and to respond to TRIP 11's anticipated evidence as relevant
.4
information becomes available in this proceeding
6.
In Section 1H below, we will address standards the Commission should consider
which will ensure that TREP H's tolls and toll structure meet the mandates established by
the Act. In Section IV we will provide comments on how these proposed standards
should be applied and to the extent information is available provide an illustration of their
application.
M.
APPROPRIATE TOLL STANDARDS UNDER §56-542 OF THE
VIRGINIA CODE
7.
Pursuant to the Act the Commission has the power to regulate TRIP H as a public
service corporation.5 The tolls charged by the TRIP H in performing its "public duties"
are governed within a broad framework characterized by three explicit factors.
Specifically, "the Commission, upon application, complaint or its own initiative, and
after investigation, may order substituted for any toll being charged by the operator a toll
which is set at a level:
which is reasonable to the user in relation to the benefit obtained and
ii.
which will not materially discourage use of the roadway by the public and
To the extent it is appropriate we may submit a reply report on July 9, 2013 in accordance
with the current procedural schedule.
§56-542 B
4
1-b
W
iii.
which will provide the operator no more than a reasonable return as
determined by the Commission ."6
8.
In evaluating the appropriate regulatory standards that the Commission should
consider when evaluating TRIP 11's toll levels and structure it is important to consider
how these three independent statutory requirements work together to establish a
comprehensive means of regulatory oversight. The statutory requirement that "[the toll]
will provide the operator no more than a reasonable return as determined by the
Commission"7 call for an examination of the operator's cost of providing the regulated
service when evaluating the tolls. Moreover, other statutory provisions in §56-542
clearly establish cost-based requirements to ensure : (1) that the operator's costs are not
improper or excessive;8 (2) that any contractual relationship with a closely associated or
affiliated entity are no less favorable than the operator than it could obtain in an arm's
length transaction;9 (3) rates shall be neither applied or collected in a discriminatory
fashion; 10 (4) that the price paid in connection with any ownership change does not
contribute to an increase in cost or tolls;" and (5) the use of any proceeds or funding
obtained by the operator from bond indentures or credit agreements are limited to certain
purposes-generally to build and maintain the physical plant or refinance any debt
previously incurred for this limited purpose.
6
§56-542 D
7
Emphasis added.
8
§56-542 C
9
§56-542 C
10
11
12
12
§56-542 B
§56-542 E
§56-542 G
5
These types of requirements, which in
I-A
W
general address cost reasonableness and prudency, are commonly imposed on public
service or infrastructure entities subject to economic regulation . This cost-based approach
to regulation is typically referred to as cost of service or rate of return regulation .' 3
9.
The cost of service approach to economic regulation is well established and has
been applied by regulatory agencies at the state and federal level for many decades. It is
based on the principle that the regulated entity is granted an opportunity to recover it's
reasonable and prudently incurred cost of providing the service, which would include a
reasonable return on its prudently made investment associated with the assets used to
provide the regulated service. 14 As Dr. Bonbright observed in Principals ofPublic Utility
Rates:
one standard of reasonable rates can fairly be said to outrank all others in
importance attached to it by experts and by public opinions alike--the
standard of cost of service, often qualified by the stipulation that the
relevant cost is necessary cost or cost reasonably or prudently incurred . 15
10.
An extensive body of economic literature and case law has developed to guide
regulatory agencies in established cost-based standards for setting rates that limit the
returns to a reasonable level . This guidance, which we find relevant for interpreting the
provisions of §56-542 D, is summarized as follows. First, the regulated entity should be
given the opportunity to recover prudently incurred operating expenses and investment .
To the extent the entity incurs imprudent costs, or makes imprudent decisions which
13
14
is
For purposes of this report we will refer to this as cost of service regulation.
We address the details of the appropriate cost of service standard below and evaluate
TRIP 11's current rates under this standard using publicly available information .
Bonbright, James C. Principles ofPublic Utility Rates New York: Columbia University
Press, 1961 . p.67 (emphasis in original) Also see, Alfred E. Kahn, "The Economics of
Regulation : Principles and Institutions" . The MIT Press : Cambridge, Massachusetts .
(1988) Volume 1, Chapter 2.
6
P
W
result in additional costs, these should not be included in the rates, nor should they be
reflected in the return. Second, the entity is only given an opportunity to earn a
reasonable return on investment, commensurate with other investments of similar risk
observed in the marketplace . 16 When determining reasonable return on investment (both
debt and equity), the Commission should identify the rate of return that similar entities of
comparable risk must offer both equity and debt investors in order to efficiently attract
17
the capital required to build the regulated assets . The Commission should then apply
the resulting weighted average cost of capital ("WACC") against the prudent level of rate
base (generally based on the depreciated level of investment used to provide the regulated
service) in order to detennine the maximum level of debt and equity return which is
reasonable. Regulated entities are not guaranteed a return nor are they guaranteed that
they will even recover their operating costs and make a profit .
18 Consequently, as a
general matter, regulatory agencies and the courts prohibit regulated entities from
engaging in retroactive ratemaking-taking costs which are properly incurred but not
16
17
Is
Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591 (1944) There is a
zone of reasonableness where the level of projected return can be neither excessive nor
confiscatory.
Provided the debt is arm's-length and has been provided by a non-affiliated party, most
regulatory bodies will accept a rebuttable presumption that the actual embedded cost of
debt is reasonable, absent a determination that the capital structure is not prudent or
representative of the market or risks. In addition, to the extend another entity, such as a
parent guarantees to provide recourse for the debt, most regulatory authorities look
through the regulated entity to that guarantor when determining the weighted average
cost of capital .
Market Street Ry. v. Railroad Commn., 324 U.S . 548 (1945)
1-4
W
recovered in one period and seeking to adjust rates in future periods to retroactively
recover those costs.' 9
11 .
Apart from being deemed improper by the courts, retroactive ratemaking causes
several problems when setting reasonable rates and evaluating the proper level of return
commensurate with the operator's risk. First, it can cause different generations of users
to bear different levels of cost responsibility for the same asset or regulated service (i.e.,
intergenerational inequity). Absent special circumstances this is inappropriate, just as it
would be inappropriate to unduly discriminate . In addition, setting current maximum
rates on the basis of costs which supported rates in prior periods effectively provides to
the regulated entity an opportunity to recover the same cost more than once. This
provides a form return surety, thereby reducing the operator's risk. If the reduced risk is
not properly reflected in the allowed rate of return-which is applied to the rate basethis can result in excessive rates or returns .
12.
In addition to the traditional cost of service requirements, which are essentially
captured in the requirement that "[the toll] will provide the operator no more than a
reasonable return" the Act does not limit the regulatory oversight of the tolls to a
traditional cost of service review, but went further to establish two additional independent
statutory requirements . These additional requirements work in concert with the
limitations of return to create a more comprehensive regulatory structure. These two
companion provisions require that tolls must be : (1) "reasonable to the user in relation to
the benefit obtained"; and (2) "not materially discourage use of the roadway by the
19
The courts have held that retroactive ratemaking is prohibited in determining cost of
service rates that provide no more than a reasonable return . See, Public Service Company
ofNew Hampshire v. FERC, 600 F.2d. 944 (D.C. Cir . 1970)
'A
P&
W
public" . As we explain below, the overarching statutory framework created by these
three criteria was designed to maximize the public benefit derived from the roadway.
13.
It is appropriate for the Commission to request input regarding "standards that the
Commission should apply for each of these three requirements" and to take this
opportunity to re-evaluate its past regulation of the Dulles Greenway. In recent years,
several community leaders and many local residents have raised numerous concerns that
the Dulles Greenway tolls are excessive and that its toll structure is not sensitive to the
distances users travel on the roadway .20 Despite public assurances from TRIP Il's
financial officer in 1999 that the Dulles Greenway was "on very solid financial ground
( . . . ) [w]e have had positive cash flow for some time, and with the [recent debt] closing we
now have a debt structure which matches our revenue stream" it is clear now that the
course that TRIP 11 envisaged has taken a wrong turn. 21 It is clear conditions have
changed which support a reconsideration of the prior standards used by the Commission .
14.
At the time of the prior assurances in 1999, the average toll was $1 .25, average
daily traffic had recently climbed to around 34, 00022_-due in part to toll reductions a few
1999.23 Annual revenues
years earlier which caused traffic to double between 1996 and
were just over $15 million and cash operating expenses before financing (i.e., total
20
21
22
23
In addition to Delegate Ramadan's complaint filed in this case, see e.g., Representative
Frank Wolf s letter to Loudon Elected Officials at Exhibit No.3, and Leesburg Today
news article regarding Representative Wolf s backing of Loudon Board of Supervisors
formal request for distance-based tolling at Exhibit No. 4.
See a newsletter from tollroadnews.com in May 1999, attached hereto as Exhibit No. 5.
Direct Testimony of Ashley Yelds on behalf of TRIP 11 in Case No. PUE-2006-0008 1 .
See page 55 of the Maunsell report in Exhibit No. 6 attached hereto .
Direct Testimony of E. Thomas Sines on behalf of TRIP 11 in Case No. PUE-200600081 . See Exhibit No. 7 attached hereto at page 6.
9
1~0
W
operating expenses less depreciation and interest expense) was about $8.5 million
resulting in positive cash flow from operations of $6 .6 million. The roughly $500 million
in debt, although much higher than the cost of the toll road property, had an average
interest rate of 7%, a AAA rating and was set to be repaid by 2036.
15.
Since that time conditions have changed. Ownership of TRIP 11 was transferred
to Macquarie Infrastructure Groups ("MIG") in 2005 . Significant toll increases over the
last six years have pushed the maximum two-axle toll from $2.70 in 2006 to $4. 10
currently- $4.90 during rush hour . Prior to the rate increases, average daily traffic
climbed to 61,185 in 2005. Most recent first quarter 2013 traffic statistics show the daily
traffic has averaged at 44,02 1 .
24
Revenues have increased almost five fold to $72.4
million. Cash operating expenses before financing have increased more than 70 percent
to $14.7 million. Yet due to the significant rate and corresponding revenue increases the
cash flow from operations (before depreciation and debt service) has increased almost
nine-fold to $57.7 million.25 Long-term debt has ballooned, reaching $958 million with
an extended term of 2056-prompting a recent downgraded by Fitch to BB+. 21 TRIP 11
requested and received a twenty-year extension on its toll road concession now through
2056 .
16 .
Table I presents the change in TRIP 11's positive cash flow from operations which
it described as "very solid ground" in 1999 as compared to a more recent period .
24
25
26
See Exhibit No. 6 at page 5 and page 56 of the Maunsell report contained therein, Exhibit
No. 8 at page 3 .
Compare TRIP 11's 2005 and 2012 financial statements attached hereto as Exhibit No. 9
and Exhibit No. 10.
See Exhibit No. I I
10
1-b
W
Table I
Toll Road Investors Partnership 111, L.P.
Cash Flow from Operations ($ millions)
Total Revenue
1999
15.1
2012
72.4
Total
1999 to 2012
681 .3
Cash Operating Expenses 1\
Revenue in Excess of Operafing Cost
8.5
6.6
14.7
57.7
213 .7
467.6
Source : Exhibit No . 12
1 1 Excludes Depreciation and Interest Expense
17.
The table above excludes cost associated with return-both the return of capital
(depreciation) and return on capital (debt and equity) which are related to the assets used
to provide the regulated service. In other words, the $467.6 million in cash flow from
operations represents the funds that have been collected over the past fourteen years that
were available to be applied to return . 27 As of the end of 2012, TRIP U's gross project
investment was approximately $435 million . The depreciation expense reported by TRIP
U during this period was $138 million. Consequently, even if one first assigns the
positive cash flow to the return of investment, $329.6 million in revenues were available
to be applied to costs associated with the return on investment (debt and equity) during
this period . However, since 2004 TRIP 11 has increased long-term debt by $442.8
million, from $515 .7 million in 2004 to $958.5 million in 2012 . During the same period
gross project investment only increased approximately $85.7 million, from $349.4
million in 2004 to $435.1 million in 2012 . This leaves almost $700 million dollars of
27
Assuming the Commission finds that all of the cash operating costs were prudent during
this period .
II
~-D
V-3
cash flow and proceeds from incremental debt that was not used to fund the construction
of physical plant or refinancing debt previously incurred for this purpose .
18 .
,J)
A
TRUP H has incurred significant levels of debt, more than three times the net book
value of the assets . TRIP H reports a current interest expense in excess of $64 million,
more than four times the annual operating costs and approximately twenty percent of the
current net value of the assets used to provide the regulated service. Notwithstanding that
the Commission extended its concession an additional twenty years to 2056. The level of
debt and debt service is not reasonable and is resulting in high tolls which appear to be
diverting traffic, causing significant congestion on other roads in the area and
undermining a primary purpose for granting the concession in the first place-to reduce
the need to expend public funds to increase the road capacity along this route. The
graphic below demonstrates that approximately 80 percent of the toll which users pay to
drive on the Dulles Greenway relate to the operator's debt.
28
IPMM
WM WO
t-MM
SAM
am
28
Accessed from the Dulles Greenway's website on April 26, 2013
12
0~
19.
It is appropriate for the Commission to reevaluate the standards that it will apply
when setting tolls. The Commission has the authority to reconsider decisions it has made
more than a decade ago, especially if current evidence suggests that those decisions are
no longer consistent with its statutory requirements established in the Act, or are not well
reasoned today given the current evidence . Conditions may change over an extended
time and ultimately the Commission should establish standards that meet the
requirements of the Act and are well reasoned based on the facts and circumstances of the
current proceeding. Therefore we support the recent Commission order requesting
submissions for standards that should be applied when setting tolls pursuant to the Act.
A.
20.
Relationship of Tolls and User Benefits
Delegate David Ramadan, Representative Frank Wolf and others have previously
requested that the Dulles Greenway tolls be adjusted to reflect travel distance. We
believe that the Commission should give strong consideration to imposing a standard that
requires tolls be established on a distance-basis, absent clear and convincing evidence
that an alternate structure is more efficient and results in greater public benefit .
21 .
Cost-based rates are generally established in the first instance based on the
principal of cost causation. In other words, costs that are caused by a particular class of
traffic or are associated with travel over a specific portion of a regulated entity's assets
should be assigned to those movements, or classes of traffic, for cost recovery purposes.
A motorist traveling westbound for only the short distance between the main toll plaza to
Route 606, less than 2 miles, derives little benefit from the remaining 12 miles of
roadway to Route 7 in Leesburg . Yet under the current toll structure these users are
13
1-b
W
likely regain traffic which TRIP II has diverted over the recent years due to high tolls,
albeit at a lower toll . The incremental traffic generates minimal incremental cost for
TRIP 11 and therefore additional traffic generated by the lower tolls should be profitable
for TRIP 11 on an incremental basis . Moreover, in the not too distant future the Silver
Line Metro extension is projected to be operation in eastern Loudoun County. The
absence of distance based tolls on the Dulles Greenway could lead to greater traffic
congestion on alternate routes .
26.
We anticipate that TRIP H may argue that shorter distance movements might
create congestion on the toll way. Currently the TRIP 11 has congestion based tolls which
the Commission approved in a prior proceeding . As we noted above, a significant level
of traffic has been diverted since the congestion-based toll structure was approved, the
average daily traffic count is down from 61,185 in 2005 to approximately 44,021 in first
quarter 2013 . It is highly likely that under the current traffic conditions, TRIP II cannot
support the need for a congestion surcharge . The Commission should require TRIP 11 to
provide a detailed traffic study to justify if congestion-based tolls are still warranted. If
after distance-based tolls are established significant congestion occurs on the Dulles
Greenway, TRIP 11 should be allowed to submit an application seeking congestion or
peak pricing, but only on those segments and during times when significant congestion
existing .
B.
27.
Tolls Must Not Materially Discourage Use ofthe Roadway
It is notable that in addition to the other criteria, the legislation provides that the
toll charged by the operator must not to "materially discourage use of the roadway by the
public" . This requirement is firmly based on the concept of maximizing the public
16
~A
W
benefit derived from the toll road and preventing an exercise of market power . If this
criteria was not in place, operator might exercise market-power by increasing rates above
a reasonable level a divert traffic and attempt to increase profits with less traffic . 32
28.
In fact, TRIP 11's presentations to investors demonstrate that this is exactly the
experience on the Dulles Greenway since 2008. Rates have increased and traffic has
been diverted to other routes, thereby increasing congestion on these roads . 33 However,
TRIP U's revenues have increased every year.
29.
This has contributed to the need for the Commonwealth's Department of
Transportation ("VDOT") to construct expanded capacity on bypass routes at public
expense.34 It is notable that this outlay in part duplicates capacity which already exists on
the Dulles Greenway . Notwithstanding VDOT's efforts to expand these alternate routes,
during the times when TRIP H charges congestion-based pricing these, alternate routes
face significant congestion . Despite the reduced traffic count on the Dulles Greenway,
TRIP H continued to increase its revenue, indicating that it may be charging rates which
reflect an exercise of market power. A century of economic theory and regulatory
precedent suggest that rates reflecting an exercise of market power imply an
unreasonably high return.
30.
Public service companies, like the Dulles Greenway, represent what economists
call a "Natural Monopoly". Specifically, Natural Monopoly is characterized by a firm
32
33
34
Decreasing quantity and increasing price represents the textbook example by which a
firm with market-power exercises this market-power .
See Exhibit No. 20.
See page 35 of Exhibit No. 21 noting capacity upgrades on alternative routes .
17
I-A
W
having substantial fixed costs and low variable costs. Once constructed, the Natural
Monopoly's low variable cost may provide it a significant market advantage over firms
wanting to enter the market.
It is important to recognize, however, that having market
power and being a monopoly are not equivalent. A firm with only one or two
competitors, especially if those competitors are capacity constrained, may possess a
substantial degree of market power and have the ability to charge prices and set quantities
(i.e. traffic on the road, as discussed above) at levels that do not produce optimal social
benefit. For these reasons, absent sufficient market forces to prevent the exercise of
market power, Natural Monopolies which provide a public service are often subject to
economic regulation, typically based on its cost of service 35
31 .
There are several reasons to believe that the Dulles Greenway does possess
market power. In certain investor presentations TRIP 11 indicates that they may have
market power. 36 Operator claims that congestion on alternate routes is increasing every
year and they as "well positioned to take advantage" of the increased congestion in the
future.
32.
One justification for requiring that tolls must not materially discourage use of the
roadway by the public is to maximize the public benefit from the road . Any mechanism
which allows the operator to take costs used to justify prior maximum rates and include
those costs tojustify future higher tolls may undermine this statutory requirement . This
35
36
If a firm with these characteristics were required to charge prices equal to marginal cost it
would become insolvent . As a result investors would not invest in this firm and society
would be worse off. However, the cost of service methodology described below balances
the interests of the users and the investors .
See Exhibit No. 20 at page marked "Exhibit 5"
18
~a
W
is because it removes any financial incentive for the operator to maintain reasonable tolls
that do not divert traffic or otherwise suffer the potential loss. In essence it provides
greater surety that the operator will recover its return despite actions it might take which
diverts traffic .
C
Tolls Must Provide Operator No More Than a Reasonable Return
I.
33 .
Reasonable Return Must be Determined Based on Costs
The Commission is not required to determine that the Dulles Greenway is a public
utility before it can impose a traditional cost of service (rate of return) regulatory
framework in setting its rates. First, the Act specifically envisions that the Commission
will limit the investor returns generated by the Dulles Greenway to a reasonable level .
Second, certificated public service corporations, such as TRIP II, are in effect granted the
opportunity to pursue business within the constructs of their enabling legislation and
governing code . As stated in §56-542 D, the operator is subject to a ceiling rate of return
set forth by the Commission ; it is provided "no more than a reasonable return" . Contrary
to positions that TRIP Il has articulated in the past the fact that it is not a franchised
monopoly, or lacked eminent domain authority when constructing the roadway, or
operates the roadway under a time limited concession does not provide any justification
for departure for traditional cost of service regulation, nor does it change the statutory
obligations of the Commission established in the Act. Other inftastructure-based
companies face similar challenges and are yet regulated on a cost of service approach .
Clearly each of these limitations were known when the Act was passed 37 and yet they still
37
The lack of eminent domain and limited concession period were actually established in
the Act. See §56-54 1, Eminent Domain; and §56-55 1, Termination of certificate;
dedication of assets.
19
~A
W
imposed a duty on the Commission to evaluate the reasonableness and prudency of TRIP
H's costs in order to limit the return to a reasonable level as one of three guiding
ratemaking principals .
34.
Consequently cost of service ratemaking provides a reasonable way to apply the
regulatory and economic concept underlying the provisions in the Act in evaluating the
TREP II's tolls. In this regard, TRIP H should be allowed the opportunity to recover its
prudently incurred cost of service, including a reasonable return on its depreciated
investment relative to the current period of operation. It should not be guaranteed a
return or cost recovery, nor should it be allowed to reflect any debt or financing costs in
its cost of service which was not directly related to construction or expanding of physical
assets used in providing the regulated toll road service. 38
35.
In the following section we provide a broad overview of the cost of service
standard the Commission should apply when examining the reasonableness of TRIP II's
tolls and rate structure. In the subsequent section, we also present an illustrative
calculation of TREP 11's cost of service under this approach based on publicly available
information. 39
36.
The Commission should evaluate the reasonableness of the Dulles Greenway rates
using a depreciated original cost ("DOC") cost of service methodology . This approach is
38
39
See §56-542 G
Given the lack of certain cost and traffic information in the public record we are not able
to verify the appropriateness or prudency of certain costs for inclusion in the operator's
cost of service . Therefore we believe that the attached computation likely overstates the
costs that should be included in setting tolls. To the extent we are able to obtain
additional information we reserve the right to update these calculations in order to
provide the Commission with a more complete record upon which to make its decision .
20
4
I-a
W
widely accepted by most state regulatory agencies that oversee the economic regulation
of public service corporations in the United States . In general, a DOC cost of service is
comprised of four main elements ; (1) prudently incurred operating expenses; (2) an
allowed return of the asset base ; (3) a reasonable allowed return on the deprecated value
of the existing asset base ;40 and (4) a provision of income taxes.
37 .
To the extent a Commission is setting forward looking rates, as opposed to
reviewing past cost recovery, they should examine actual costs over a recent twelve
month period ("base period") and adjust these costs to remove any imprudent costs. In
addition, any non-recurring cost incurred during the historical period may need to be
removed or amortized to the extent the Commission determines that is appropriate. In
addition, because the rates are being set for a future period, the Commission should
consider if there are any "known and measureable" changes anticipated in the cost or
traffic in the near term, e.g., over the next nine months. If so, appropriate adjustments
should be made in order to determine a rate that will provide the operator with an
opportunity to recover its projected cost of service .
2.
38 .
Allowed Components of Return
The reasonable return noted under §56-542 D is to be "determined by the
Commission ." In a regulatory environment the notion of "return" is comprised of two
components. First, a regulated entity may charge rates that include a return of capital,
which is represented by depreciation expense reflected over the useful life of the asset.
Second, a regulated entity may charge rates that include return on capital. The return on
capital is calculated by determining a reasonable capital structure (i.e. debt and equity
40
This is commonly referred to as "rate base".
21
0)
a
PA
W
ratio). Once this is determined the allowed return on investment is determined by
applying a weighted average cost of capital ("WACC") to the net rate base. The WACC
is determined by multiplying a reasonable cost of debt by the debt percentage and a
reasonable cost of equity by the equity percentage .
39.
The net rate base represents the depreciated cost of the assets used to provide the
regulated service. Under cost of service the interest expense from the operator's income
statement is replaced with an allowed debt and equity return on investment when
determining the reasonable level of costs . Standards for determining a reasonable rate of
return should be guided by the principle that firms and even projects within firms must
compete for capital . Within the regulatory context, this means that a reasonable rate of
return will provide the regulated firm with a return on capital equivalent to the return it
would have earned on projects of similar risk
. 41
Return of Investment (Depreciation)
40.
Depreciation represents the return of the cost incurred in the construction of
physical assets used in regulated service. The depreciation expense represents the
opportunity for the regulated entity to recover this return based on the allocation of this
cost to specific periods in which the assets are used. Regulators typically require
depreciation of regulatory assets to be performed on a straight-line basis over their useful
lives. However, to the extent the regulated entity can demonstrate that an alternate form
of depreciation is more appropriate, or that a significant difference exists between the
economic life and physical life of an asset, they may seek approval to adjust the method
of depreciation . If the projected economic or physical lives of the assets materially
41
Federal Power Commission v . Hope Natural Gas Co., 320 U.S . 591 (1944)
22
change while in regulated service, regulators should require the regulated entity to
perform a depreciation study and seek approval to prospectively adjust the depreciation
factors based on the new information .
41 .
TRIP 11's depreciation expense used to establish tolls should only reflect prudent
investment associated with assets that provide regulated service to the users. To the
extent TRIP H has invested in capital that is not providing regulated service or has made
imprudent investment in capital, even if it is providing regulated service, any depreciation
cost above the level of prudent investment reasonably required to provide the regulated
service should be excluded from the tolls.
42.
TRIP 11's depreciation expense should be computed on a straight-line basis using
the lesser of the physical life of the asset or its economic life. The maximum economic
life for TRIP H must consider the number of years remaining in its concession period .
Based on TRIP U's current net investment of approximately $270 million and its current
depreciation expense of $9.65 million per year, the existing assets are projected to be
fully depreciated in approximately 28 years (i.e., 2040), which is well before the end of
the new concession period .
43.
The Commission has recently extended TRIP H's concession period through 2056 .
As such any current assets which will continue to provide service beyond the original
concession termination date may need to have their depreciation factors adjusted to
reflect the extension of their economic life.
a.
Reasonable Return on Capital Funded by Debt
23
W
W
44.
The interest expense found in TRIP H income statement is not appropriate for cost
of service purposes. As the shown graphic above demonstrates approximately 80 percent
of the tolls users pay is related to the operator's debt . The amount of existing debt is
more than three times TRIP H's net assets, resulting in excessive interest expense. Under
a cost of service standard the Commission computes a reasonable debt return based on
the debt costs and the percentage of rate base that is reasonably funded by debt .
45 .
Excessive interest expense should not be included in the toll rates charged to users
pursuant to §56-542 C, which states :
[Tlhe Commission shall review the [annual] report and other such
materials as it deems necessary for the purpose of determining improper or
excessive costs, and shall exclude from the operator's costs any amounts
which it finds are improper or excessive .
46.
In addition, §56-542 E indicates that if there is a change in ownership, as occurred
when MIG acquired TRIP II in 2005,
[T)he Commission, in any subsequent proceeding to set the level of a toll
charged by the operator, shall ensure that the price paid in connection with
the change in ownership or control, and any costs and other factors
attributable to or resulting from the change in ownership or control, if they
would contribute to an increase in the level of the toll, are excluded from
the Commission's determination of the operator's reasonable return, in
order to ensure that a change in ownership or control does not increase the
level of the toll above the level that would otherwise had been required
under subsection D or subdivision 1 3 if the change in ownership or
control had not occurred .
47.
The dramatic increase in debt since 2004 has lead to an increase in the interest
expense TRIP Il asserts should be considered when setting tolls. TRIP 11's interest
expense was just over $33 million in 1999 . This increased to $43.9 million in 2004 prior
to MIG's acquisition. In 201 1 and 2012, TRIP 11 reported interest expenses of $66.2
24
W
million and $64.8 million, respectively . The Commission should investigate the extent to
which this change in control may have resulted in the increase in costs TRIP 11 is
reporting .
48.
In addition, the Commission should investigate any evidence that might indicate if
TRIP 11 has an affiliated or closely associated relationship with any debt holder . The
legislation explicitly states that; during the course of its annual review of the operator's
costs Commission shall;
Included in [the course of the annual review] shall be consideration of
contractual relationships between the operator and individuals or entities
that are closely associated or affiliated with the operator to assure that the
terms of such contractual relationships are no less favorable or
unfavorable to the operator than what it could obtain in an arm's length
transaction . §56-542 C
Absent a cost of service standard, allowing debt beyond that needed to build or expand
capital assets opens the door for TRIP 11 to circumvent regulatory oversight by over
levering the assets and potentially paying their affiliate an unreasonable rate of interest.
49.
The cost of service requirement to set the debt return based on the portion of rate
base funded by debt is consistent with §56-542 G which would limit any debt service
included in tolls to that debt which funded capital ;
The proceeds and funding provided to the operator from any future bond
indenture or similar credit agreement must be used for the purpose of
refinancing existing debt, acquiring, designing, permitting, building,
constructing,
improving,
equipping,
modifying,
maintaining,
reconstructing, restoring, rehabilitating, or renewing the roadway
property, and for the purpose of paying reasonable arm's-length fees,
development costs, and expenses incurred by the operator or a related
individual or entity in executing such financial transaction, unless
otherwise authorized by the Commission .
25
W
IA
W
If TREP H is able to include in its rates amounts of debt that was not used to build toll
road assets, or refinancing at a lower rate existing debt previously issued to build toll road
assets~ TRIP 11 has unlimited ability to increase rates by simply securing more debt. This
ability is only capped by the coverage ratios imposed by third parties-a result that
reflects bond holders' perceived risk that such abuse may lead to loss on their notes. In
other words, the ability to include in its rates unlimited amounts of debt would effectively
allow TREP 11 to set tolls that would be otherwise unreasonable, thereby evading
regulation . A cost of service standard avoids this problem.
50.
A new regulatory provision effective January 2013 through January 2020 which
instructs the Commission under certain conditions to increase the inflation index applied
to existing tolls if the future tolls are not sufficient to permit the operator to maintain
coverage ratio set forth in the rate covenant provisions of its bond indenture or similar
credit agreement.42 First, the extent to which this provision applies should be limited by
the other existing provisions of the Act. The Commission should only adjust tolls under
this provision to the extent required to meet reasonable debt ratios related to debt
proceeds that were actually used to construct the assets used to provide the regulated
service. In addition, the Commission must also determine that: the level of debt, and its
covenants, are prudent; that any increase in the debt or coverage requirements are not the
result of the prior change in ownership or control ; and any debt held by related parties
reflect terms that are no less favorable than those that could be obtained from unrelated
parties . Absent these standards, or toll set strictly on a cost of service basis, TRIP 11 has
42
§56-542 1 (3)
26
11-A
the potential to unreasonably increase or maintain excessive tolls by issuing excessive
and imprudent debt or by agreeing to overly restrictive coverage ratios .
51 .
Under a cost of service approach the level of debt return permitted in setting
maximum rates is based on the size of the net rate base, the percentage of the rate base
funded by debt, and the reasonable level of debt cost required to attract sufficient debt
investors to provide a level of funds consistent with the debt portion of the rate base . In
this regard, cost of service does not include interest expense that is reflected on the
operator's income statement, but instead reflects a reasonable cost of debt for the portion
of the rate base presumed to be funded by debt.
52.
TRIP 11's debt is more than three time net investment . Consequently, its interest
expense appears excessive given the level of investment in assets used to provide the
regulated service. In addition, its balance sheet suggests that the operation is funded
entirely by debt. There is no indication that MIG contributed any equity to TRIP H
during the 2005 acquisition. On the contrary there appear to have been approximately
$90 million in debt proceeds distributed as a return of capital in 2005 . If a regulator
determines that the actual capital structure of an entity is not reasonable or is not
consistent with market-driven capital structures of similar enterprises it will often impute
a capital structure and cost of debt which it believes is reasonable for purposes of
computing a cost of service.
53 .
In Section IV below we apply a cost of service to TRIP II's 2012 financial results
and we impute a capital structure which is 50% debt and equity. In doing so we have
accepted for the sake of the presentation the actual debt cost associated with TRIP Il's
27
I-A
W
existing long-term debt, roughly 6.36 percent, although we note the Commission may
want to consider if TRIP 11's leveraging effects the level of this cost. This assumption
regarding the capital structure actually increases the overall weighted average cost of
capital we apply in our calculation for two reasons . First, the cost of equity is estimated
to be higher than the cost of debt. Second, we provide TRIP II an allowed income tax
allowance on the equity return based on the maximum statutory federal and state tax
rates.
b.
54.
Reasonable Return on Capital Funded by Equity
In the past the Commission has allowed TRIP II to set its current maximum tolls
based in part on its allowed return . It also appears that in its prior examinations the
Commission has considered past earnings when evaluating the current maximum rates
under a mechanism known as the Reinvested Earnings Account ("REA"). It appears that
the operator has asserted that it should be allowed to not only carry-forward costs that
were used to justify prior rates, but is also allowed to compound additional return in the
form of "interest" when computing the past unrecovered allowed return . The REA
approach in combination with an unreasonably high allowed return on equity results in
excessive levels of proposed allowed equity returns
. 43
As we discussed above, allowing a
regulated entity to use the same cost to justify maximum rates and return in two different
periods is considered retroactive ratemaking and has been prohibited by regulatory
agencies and ruled improper by the Courts . It is inconsistent with the basic tenets of costbased regulation and may create certain intergenerational equity concerns that future tolls
43
See the revised REA exhibit attached to the testimony of Mr. McKean, submitted on
behalf of TREP 11 in Case No. PLJE-2006-0008 1, attached hereto as Exhibit No. 22.
28
P
W
might violate the non-discrimination provision of the Act. We do not believe this
approach is reasonable and have concerns that it will result in excessive tolls.
55 .
In the initial rate proceeding the Commission allowed TREP 11 to set tolls based on
surprisingly high 30 percent return on equ
ity.44
At no point in our extensive regulatory
backgrounds, have either of us heard of a regulatory body granting an allowed return on
equity this high . As a point of reference, comparable allowed returns for natural gas and
oil pipelines, two regulated infrastructure industries that face much greater risk than TRIP
H, will generally average betwetri nine and thirteen percent depending on market
conditions . Moreover, the allowed returns in these industries are not guaranteed . The
operator is not allowed to carry-forward return that the regulatory agency determines is
allowed and permitted to be recovered in one period into a subsequent period .
56.
TRIP H's original investment in the Dulles Greenway appears to have been
funded with approximately I I% equity-$40 million in equity and $3 10 million in debt .
By the end of 2005, TRIP H asserts that it net equity investment was roughly $55 million.
At the same time its balance sheet indicates that the partner's equity was a negative
$333 .5 million. Despite the relative low percentage of project investment funded with
equity, TREP II claims that in 2005 it has $1 .18 billion in retained equity which must be
considered when evaluating the reasonableness of its requested toll increase. 45 This is in
44
45
As a point of reference, this level of return is roughly equivalent to the average annual
return Microsoft has earned since 1987. Given that the Dulles Greenway is a regulated
enterprise and does not involve innovative technology, it is difficult to reconcile the
notion of a reasonable return with allowing TREP Il to earn a 30% return per annurn .
See Exhibit No. 22.
29
addition to the interest expense TRIP 11 computes on roughly $855 .6 million of long-term
debt.
57.
This approach allows TREP 11 to claim a REA and interest expense associated
with long-term debt which is more than three times the net project investment. We
believe such an approach fails to provide any meaningful oversight to ensure that the tolls
are reasonable and that return is not excessive .
58.
TRIP H has had an opportunity for seventeen years to recover any return that it
may reasonably been entitled to during its early operation. In addition, the Commission
has recently extended the TRIP 11's concession until 2056, in essence granting the
operator a remaining concession period which was longer than the original concession
term . There does not appear to have been any substantial investment in the project
investment or improvement in the quality of service that would support the need for an
extended period to recover the actual investment . This action appears to provide TRIP H
additional assurances and opportunities to recover its return and potentially imposes more
imprudent costs on the users. The combination of high allowed returns in prior decisions,
potential retroactive ratemaking through the use of the REA concept, inclusion of interest
expenses from debt not used to fund project investment and the extended concession
period are all inconsistent with the requirement that the tolls and return be limited to a
reasonable level. Conditions have changed and the Commission should establish new
standards addressing those changes in order to meet the requirements of the Act.
59.
Under a cost of service approach an operator is allowed an opportunity to earn a
reasonable equity return based on the size of the net rate base, the percentage of the rate
30
base funded by equity, and the reasonable level of equity cost . The last factor is based on
comparable investments of similar risk so the entity is able to attract sufficient equity
investors to provide a level of funds consistent with the equity portion of the rate base .
60.
As we noted above, the existing TRIP 11 capital structure appears to contain too
much debt therefore for cost of service purposes we have assumed a market-based capital
structure of 50% equity . We have also assumed that an appropriate equity rate of return
should be not greater that the equity returns currently being earned by publicly traded
hazardous liquid pipelines . These companies provide a common carrier infrastructure
service and face much greater risks than TPJP 11.46
4.
61 .
Reasonable Return Must be Based on Prudent Investment
The proper interpretation of "reasonable return" should be based only on prudent
investment . In addition, the requirement of §56-542 C that the operator's cost must not
be improper or excessive would suggest that any cost caused by debt issuance and
affiliate relationships must also be found reasonable before it could be included in the
tolls .
IV.
PRELIAHNARY ASSESSMENT OF TRIEP U'S COMPLIANCE WITH
RELEVANT CRITERIA
62.
In the following section we present an illustrative calculation of a cost of service
for the Dulles Greenway under the DOC cost of service approach based on publicly
available information. For purposes of this illustration we are using information reported
in TRIP U's 2012 financial reports. As we noted above, these costs should be adjusted to
46
These proxy companies are listed in Exhibit No. 23 at page 3
31
1-h
W
remove any imprudent or non-recurring costs. In addition, the impact of any known and
measurable changes in costs should also be considered in setting a forward looking rate .
We anticipate TRIP II will identify any ftiture changes in costs in its direct case.
63 .
For proposes of our analysis we using the actual cash operating expenses that
TRIP H reported in its 2012 income statement (i.e., this excludes depreciation and interest
expense-debt return, which is addressed below) .
64.
The next step is to estimate the net value of the assets used to provide regulated
service. We generally refer to this as rate base . The rate base can consists of several
elements: (1) Property in Service; (2) Allowance for Funds Used during Construction
("AFUDC"); (3) Accumulated Depreciation ; (4) Amortization of AFUDC ; (5) Working
Capital ; (6) Accumulated Deferred Income Taxes ("ADIT").
65 .
Property in Service is a key component of the DOC rate base . It represents the
actual gross cost to construct or acquire the capital facilities (i .e., the physical long-lived
fixed assets) used to provide the regulated service. Most state regulatory bodies require
that the property in service be based on the original cost to construct the assets .
Operators are generally not allowed to write-up the cost of assets acquired from others
which were already in regulated service. As such, the change in ownership of regulated
assets between two parties would not lead to an increase in cost or rates as the result of
the acquisition price the buyer paid for the assets . Virginia Code §56-542 E indicates that
the Commission :
[S]hall ensure that : the price paid in connection with the change in ownership or
control, and any costs and other factors attributable to or resulting from the
change in ownership or control, if they would contribute to an increase in the
32
I-A
W
level of the toll, are excluded from the Commission's determination of the
operator's reasonable return, in order to ensure that a change in ownership or
control does not increase the level of the toll . . .
66.
In preparing the 2012 cost of service for TRIP H attached hereto as Exhibit No.
23, we estimated a gross project investment of approximately $435 million of project
investment based on Note 3 to the TRIP Il's 2012 financials .47 In addition we add to the
project investment the gross amount of fixed assets, approximately $1 .6 million,
associated certain furniture, fixtures, office equipment and vehicles on the assumption all
of these are used to provide regulated service and should be included in the rate base.
67.
We were not able to verify at this point if this figure includes any write-up of the
assets due to the 2005 change of control. To the extent they do, the write-up should be
removed . 48 In addition, we assume that the assets listed on the financial statements
represent facilities that only provide regulated service. If this is not the case, then an
adjustment would need to be made to remove any assets not used in providing the
regulated service on the Dulles Greenway .
68.
The notes to the financial statements indicate that the project investment costs
reflect all direct and indirect costs related to the acquisition, development and
construction of the project. Because the project investment cost includes all direct and
indirect costs related to the acquisition, development and construction of the project, we
have assumed any cost of capital incurred during the construction of the roadway was
capitalized in the project investment figures discussed above and therefore we have not
attempted to break out any AFUDC .
47
48
See Exhibit No. 10
Pursuant to §56-542 E
33
4
.0
A
PA
W
69.
The accumulated depreciation for the project investment as of year-end 2012 is
reported to be approximately $165 million" and $1 .3 million for fixed assets.50 Since the
cost of capital during construction is capitalized in the project investment, we assume that
the amortizations of these amounts are reflected in the accumulated depreciation balances
that the operator has provided .
70.
A regulated entity is typically allowed to include certain items relating to working
capital in its rate base ; primarily prepayments and certain inventory costs related to
operations. The year-end 2012 balance sheet provided in the financial records submitted
to the Commission indicates that the operator incurred approximately $542 thousand in
prepaid expenses related to operations . We include this amount in the cost of service
calculation. We have not included any prepaid bond insurance or deferred bond issue
cost. These reflect costs associated with long-term debts which are amortized to interest
expense over the term of the financing agreements . These costs represent the cost of debt
financing and not working capital associated with operating the toll road .
71 .
Generally regulated entities are required to compute any tax timing differences
that are created between applying an accelerated tax depreciation factor as compared to a
straight-line book depreciation factor. This timing difference, the accumulated deferred
income tax ("ADIT") is typically determined by applying the maximum statutory state
and federal income tax to the depreciation timing difference generates by applying the
accelerated tax and straight-line book depreciation factors . Under a cost of service
approach the operator is required to recognize the value of any tax timing difference as an
49
50
See Exhibit No. I O at note 3
See Balance Sheets at Exhibit No. 10
34
A
W
offset (i .e., reduction) to the net value of the rate base . TRIP 11 is a pass-through entity
and as such these timing differences accrue to the benefit of its owners. Even in a period
when TRIP 11 reports a net tax loss to the individual investor, these tax deductions can
still serve to further reduce the investors' tax obligation . We advocate that when dealing
with pass-through entities the appropriate method for determining ADIT is to consider
the potential tax obligation of the investor (i.e., determine a weighted average tax rate for
computing ADIT based on the income assignment to each investor and that investor's
expected maximum statutory tax rate) .51 Because TRIP 11 is a pass through entity its
financials do not provide an ADIT balance or enough information to compute such a
balance. Consequently, we have not reduced the rate base in the attached schedule to
account for any ADIT and therefore believe our rate base is over-stated by this amount.
72.
We computed the 2012 end of year rate base by taking the gross project
investment and fixed assets less the associated accumulated depreciation plus working
capital. If additional information becomes available we would also propose to reduce this
balance by the accumulated deferred income tax balance. As presented in Exhibit No. 23
we estimate based on publicly available data that TRIP 11's rate base is no greater than
$273.8 million.
73 .
Once we have determine the appropriate rate base, the allowed return on rate base
can be computed by identif~ing a reasonable after-tax cost of equity and debt and
computing an allowed weighted average cost of capital ("WACC") as follows :
51
This is consistent with our position that part of the operator's cost of service should
reflect a tax allowance. Since TRIP 11 is a pass-through entity, and does not directly pay
any taxes itself, we would compute the tax allowance abased on the maximum allowed
after-tax equity return and the weighted average tax rate for TRIP 11's investors, the
parties that ultimately face the tax obligation .
35
A
~A
W
a
(After-tax Cost of Equity x % of Rate Base funded by Equity)
+ (Cost of Debt x % of Rate Base funded by Debt)
74.
The WACC is applied to the rate base to determine the maximum allowed overall
return - both debt and equity which the Commission will use to determine the maximum
tolls . In determining the WACC it is important that the cost of debt and after-tax cost of
equity represent the risks inherent in the operation of the regulated entity .
75 .
The debt cost used in the WACC must represent a reasonable cost of debt
associated with debt used to construct the assets in the rate base . For purposes of our
calculations we have accepted TRIP U's embedded cost of debt of 6.34% for the current
debt instruments. 52 The Commission should determine if TRIP 11's cost of debt would be
less if it had not issued debt more than three times its net book value. Macquarie
Infrastructure Groups' presentation to its investors indicates that other toll roads in its
portfolio may have a lower cost of debt. 53
76.
Based on our review, it appears that the initial investment in the Dulles Greenway
was funded with only $40 million in equity and $310 million in debt. By 2004, the year
prior to MIG's acquisition, the net book value for the project investment was
approximately $258 .5 million, total assets of roughly $384 million, long-term debt was
approximately $515 .7 million and investor equity was negative, ($202.9) million . 54 In
52
53
54
See Exhibit No. 23 at page 2
See Exhibit No. 21 at slide 29
Financial statements for these periods are not publicly available. A review may be
needed to determine the extent and sources of any equity partner distributions or
contributions that may have occurred during this period.
36
1-a
W
September 2005, MIG acquired 100% interest in the TRIP H, reportedly agreeing to pay
$617.5 million, an amount value that is greater than the total asset value.55 MIG assumed
the existing debt and issued additional debt to bring the total long-term debt at year-end
to more than $855 million . 56 There is no indication on the 2005 cash flow statement that
any investors made an additional equity contribution as part of the acquisition . On the
contrary, during 2005 TRIP H received proceeds from debt in excess of $390 million and
despite reflecting a net income loss in excess of $41 million on the income statement and
only generating $22 .4 million in positive operating cash flow, TRIP 11 distributed almost
$90 million as return of partner capital .57 Consequently, it seems highly likely that the
proceeds for the 2005 bonds were used to fund capital distributions to the investors . In
addition, certain partners were paid $11 million out of the loan proceeds relating to work
they performed in connection with extending the Certificate of Authority and issuing the
2005 Senior Bonds . 58
77 .
Due to the significant leveraging the balance sheet reflects negative equity and it
appears that TRIP H's capital structure is 100% debt.59 In certain situations when a
regulator deten-nines that the capital structure is imprudent and does not reflect
reasonable conditions, it can impute a capital structure for purposes of determining a
reasonable level of return . We believe that is appropriate in this instance.
55
56
57
58
59
Exhibit No. 24
Exhibit No. 9 at note 7
See Exhibit No. 10
This is reflected as an expense on the income statement and contributes to the net loss
that year. Exhibit No. 10 at note 9
Base on our review of Macquarie's report to investors it appears that TREP Il's debt is not
guaranteed by, or has recourse back to, its parent company . See Exhibit No. 21 at slide 9.
37
1-4
W
78.
Based on the average market dfiven capital structures and rates of return observed
for publicly traded oil pipeline companies, we have estimated that a reasonable capital
structure is approximately 50/50 debt/equity and a reasonable return on the imputed
equity is currently 10 .97% '0
79.
Based on these assumption the WACC of 8 .65% is derived by taking the 50%
debt capital structure times TRIP 11's 6.34% cost of debt and summing it with the product
of the imputed 50% equity capital structure and the estimate market-driven after-tax
return on equity of 10.97%.
80.
Multiplying the WACC against the $270.9 million rate base results in an allowed
after-tax return of $23 .4 million.
81 .
We estimated a tax allowance required on the equity portion of the return
assuming that the investors all pay the maximum statutory tax rates of 35% federal and
5 .75% for Virginia state income taxes. The results in an effective tax rate of 38.7% and a
tax allowance on the imputed equity return of $9 .4 million.
82.
The following table aggregating the individual elements for the cost of service
together to determine the maximum revenue requirement that should be allowed when
computing tolls for TREP 11.
60
We believe that these companies actually face greater operating risks that those
encountered by TRIP 11 and therefore these proxy estimates most likely overstate the
level of return TRIP II should receive .
38
)-A
W
0
Ok
A
Table 2
Toll Road Investors Partnership H, L.P.
Operating Expenses (Excl. Interest & Depreciation)
Return of Capital (Depreciation)
Return on Capital
Tax Allowance
Total Cost of Service
($000s)
14,652
9,652
23,443
9,396
57,142
Source : Exhibit No. 23, Page I
83 .
This maximum revenue requirement should be allocated over the vehicle road
miles traveled on the Dulles Greenway to determine distance-based tolls that are
reasonable . We currently do not have detailed usage data for the Dulles Greenway to
illustrate this calculation. We believe the Commission should require TRIP 11 to produce
such information and that absent its production the Commission should impose distancebased tolls based on the length of the movements in proportion to the $4 . 10 toll for a 14
mile movement, or the maximum toll the Commission determines is reasonable-
whichever is less .
84.
Total revenues in 2012 were more than $72 million, which indicates that the rates
are providing revenues in excess of the cost of service. This suggests that the current
level of returns is not reasonable .
V.
CONCLUSION AND RECOMAMNDATION
85 .
Per the Commission's request for submissions, the foregoing addresses and
defines with specificity the standards we believe the Commission should apply to an
investigation under §56-542 D of the Code of Virginia .
39
~A
W
86.
The criteria that the toll "will provide the operator no more than a reasonable
return" and "will not materially discourage the use of the roadway by the public" support
a cost of service approach . We have explained the cost of service standard and provided
an analysis of TREP H's financial results under the cost of service approach. Based on
publically available information, the preliminary results demonstrate that the current level
of return is not reasonable . In addition, the criterion that the toll should be "reasonable to
the user in relation to the benefit obtained" supports the application of a distance-based
rate design standard .
87.
In summary, we conclude that the three concurrent criteria in §56-542 D are
properly interpreted as cost of service regulation and distance-based rate design . Should
in the course of this proceeding further relevant information become available, we
respectfully reserve the option to supplement, modify or extend the content of this report .
40
A
COMMONWEALTH OF VIRGINIA, ex reL
STATE CORPORATION COMMISSION
CASE NO. PUE-2013-00011
Ex Parte: In the matter of investigating the toll
Rates of Toll Road Investors Partnership II, L.P.,
Under § 56-542 D of the Code of Virginia
STATE OF VIRGINIA
TOWN OF HERNDON
Before me, a Notary Public in and for the aforesaid jurisdiction, personally
appeared Robert G. Van Hoecke who, being by me first duly sworn, did depose and say
that he is the individual who prepared with Michael J. Webb the Joint Report of Mr.
Robert G. Van Hoecke and Dr. Michael J. Webb to be submitted to the above captioned
docket, and that the facts stated therein are true to the best of his professional knowledge
and belief .
Robert G. Van
Subscribed and sworn to me on thisac&day of
2013.
§46tary Put4ic-
I-A
W
COMMONWEALTH OF VIRGINIA, ex reL
STATE CORPORATION COMMISSION
CASE NO. PUE-2013-00011
Ex Parte: In the matter of investigating the toll
Rates of Toll Road Investors Partnership H, L.P.,
Under § 56-542 D of the Code of Virginia
STATE OF CALIFORNIA
CITY OF SAN FRANCISCO
Before me, a Notary Public in and for the aforesaid jurisdiction, personally
appeared Michael J. Webb who, being by me first duly sworn, did depose and say that he
is the individual who prepared with Robert G. Van Hoecke the Joint Report of Mr.
Robert G . Van Hoecke and Dr. Michael J. Webb to be submitted to the above captioned
docket, and that the facts stated therein are true to the best of his professional knowledge
and belief.
A%N~41F VeWM1 D,---I
,~~ael
SAN FRANCISCO, CA
Subscribed and sworn to me on this
MARLYN ANO
comm. 0 20OM9
NOTARY PUBW - GUgM
SM FRANC= CoLan
MyC0M-Wfe9Ahft21,2017
Le=LM
day of
A
2013 .
Notary Public
EXHIBIT NO. 1
I-A
W
ROBERT G. VAN HOECKE
Regulatory Economics Group, LLC .
Principal
Mr. Van Hoecke has twenty-nine years of experience in the oil pipeline business . For over twelve years
he held various positions with Williams Pipe Line Company (WPL), including Operations Supervisor,
Health and Safety Supervisor, Strategic Planning and Tariffs Manager, and Tariff and Regulatory Affairs
Manager . Since leaving WPL, Mr. Van Hoecke has provided consulting services to the industry,
primarily relating to cost of service, market studies and business planning . Mr. Van Hoecke has provided
expert testimony in numerous matters relating to pipeline tariffs, cost of service and business practices .
Relevant Experience
Pipeline Operation
*
Directed and Managed WPL's Phase II defense in a rate case before the U.S. Federal Energy
Regulatory Commission (FERC) in Docket No. IS90-21-000 et al.
#
Managed and supervised preparation of monthly, annual and long-range forecasts of volumes,
revenues and related variance comments.
*
Established and supervised system-wide health and safety programs for approximately 700
employees in 10 states .
*
Directed and supervised all day-to-day operational activities of pipeline terminals and pump
stations for a three terminal complex transporting and delivering refined petroleum, fertilizer,
asphalt and LPG .
*
Carried out various aspects of pipeline operations and administration at terminal, pump station
and regional field office levels.
Rates and Regulation
For WPL, directed company's Phase II defense in a rate case before the FERC in Docket No.
IS90-21-000 et al. Responsible for developing the course of defense and selecting appropriate
expert witnesses to testify on the company's behalf. Supervised development of various stages of
discovery, direct testimony, rebuttal testimony and case preparation. Served as chief company
witness and performed short-run marginal cost analysis of integrated pipeline network containing
more than 40,000 distinct routes .
*
Presented testimony in a FERC complaint proceeding to determine whether certain bookkeeping
services provided by a common carrier pipeline were jurisdictional.
*
Expert testimony regarding the proper method for determining just and reasonable transportation
charges for unregulated carbon dioxide pipelines in two separate class action disputes initiated by
royalty interest owners in the Federal District Court of New Mexico and Colorado.
Expert testimony regarding the proper method for determining just and reasonable cost-based
transportation charges for regulated oil pipelines at the FERC.
REGULATORY
ECONOMICS
GROUP, LLC
P
W
* Expert testimony regarding rate reasonableness and revenue adequacy on behalf of an anhydrous
ammonia pipeline at the STB.
* Expert testimony regarding just and reasonable rates for the Trans Alaska Pipeline Settlement
(TAPS) under various alternative cost of service methodologies at the Regulatory Commission of
Alaska and the FERC.
Expert testimony regarding the application of standards set forth in the 1992 Energy Policy Act
(EPAct) for determining whether substantially changed economic circumstances have occurred
for rates previously deemed to be just and reasonable under the EPAct.
Prepared market evaluation, laid-in cost data, and testimony for market-based rate applications
for several oil pipelines seeking market-based rates at the FERC.
Prepared market evaluation and laid-in cost analysis to support oil industry mergers and
acquisitions at the Federal Trade Commission .
Economics and Finance
*
Assisted in the financial and regulatory evaluation of potential acquisition opportunities .
Participated in the development of a historical cost trend analysis for the oil pipeline industry
related to the oil pipeline tariff index .
Provided expert testimony regarding the reasonableness of certain decisions made by a majority
partner in a joint venture pipeline in a dissolution action initiated by a minority partner before the
Federal District Court of Missouri.
Commercial Analysis
Market evaluations and determining appropriate competitive tariff structures to maximize a
pipeline's profitability . Conducting competitive analysis of potential market encroachments and
assisting pipeline clients in developing a series of strategic and tactical responses . Developing
the data and testimony required for market-based rate applications at the FERC.
Performing economic analysis of proposed business development projects to assist pipeline
management in evaluating various business strategies .
While with WPL, responsible for performing market evaluations and establishing competitive
tariff rates and ancillary fees to maximize profitability. Worked closely with Marketing and
Business Development groups to develop and implement market-based, negotiated rates with
strategic shippers and joint pipeline carriers .
~~REGULATORY
ECONOMICS
R 1= .3GROURLLC
C
W
PA
W
Testimony
Apr . 18, 2012
Filed Answering Testimony on behalf of Enbridge Energy, L.P. at FERC relating
to a Complaint against the carrier's apportionment procedures in Docket No.
OR12-14-001 .
Dec . 12, 2012
Filed Rebuttal Testimony on behalf of Enterprise TE Products Pipeline Company
LLC presenting cost-of-service information in support of Enterprise TEPPCO's
March 16, 2012 rate filing for Tariff Nos . 54.15.0 and 55 .11 .0 in Docket No.
IS12-203-000 .
Nov.20,2012
Rebuttal Expert Disclosure in Sunoco, Inc. (R&M) v. Enbridge Energy, L.P. and
Enbridge Energy, L.P v. Shell Trading (US) Company and Shell Pipeline
Company, LP in the Supreme Court of the State of New York County of New
York. Index No. 601461-2009.
Sep.11,2012
Deposition in Sunoco, Inc . (R&M) v. Enbridge Energy, L.P. and Enbridge
Energy, L.P v. Shell Trading (US) Company and Shell Pipeline Company, LP in
the Supreme Court of the State of New York County of New York. Index No.
601461-2009.
Jul. 16, 2012
Filed Affidavit on behalf of Osage Pipe Line Company, LLC at FERC regarding
grandfathered rates substantial change in Docket No. ORI 2-21 -000.
Jul. 9, 2012
Filed Prepared Direct Testimony on behalf of Enterprise TE Products Pipeline
Company LLC presenting cost-of-service information in support of Enterprise
TEPPCO's March 16, 2012 rate filing for Tariff Nos . 54.15 .0 and 55 .11 .0 in
Docket No. IS 12-203 -000.
Jun .19,2012
Filed Affidavit at FERC in Docket No. IS12-362-000 on behalf of Plains
Pipeline, L.P. supporting its response to an indexed rate filing protest .
Jun .13,2012
Filed Affidavit on behalf of Black Lake Pipeline Company at the FERC in
support of their new Rules and Regulations Tariff No. 79.1 .0 filed on May 26,
201 1 in Docket No. IS 11-3 99-000 .
Apr . 9, 2012
Filed Affidavit on behalf of Enterprise TE at the FERC in support of their March
16, 2012 cost-of-service rate filing in Docket No. IS 12-203-000.
Aug. 9,2011
Filed Second Affidavit on behalf of SFPP at the FERC in response to complaint
filed by ConocoPhillips Company and Chevron Products Company regarding
grandfathered rates and substantial change in Docket Nos . ORII-13-000 and
OR I 1- 16-000 .
Jul. 5, 201 1
Filed Affidavit on behalf of SFPP, L .P. at the FERC in response to complaint
filed by ConocoPhillips Company and Chevron Products Company regarding
grandfathered rates and substantial change in Docket Nos . OR] 1- 13-000 and
ORI 1- 16-000 .
Feb.25,2011
Presented Oral Testimony and Cross Examination before an Arbitral Tribunal at
the International Chamber of Commerce in relation to forecasted transportation
REGULATORY
ECONOMICS
RE .2GROURUC
PA
W
revenues, cost recovery mechanisms, and quantum meruit for historical losses
incurred by international crude oil pipeline . (c. 15 898/VRO)
Jan. 17, 2011
Submitted Third Expert Report in a matter of Arbitration at the International
Chamber of Commerce presenting alternative forecasted transportation revenues
under various scenarios relating to the operation of an international crude oil
pipeline . (c. 15 898/VRO)
Dec .22,2011
Submitted Second Expert Report in a matter of Arbitration at the International
Chamber of Commerce presenting forecasted transportation revenues under
various scenarios, cost recovery mechanisms, and quantum meruit for historical
losses relating to the operation of an international crude oil pipeline. (c. 15
898NRO)
Dec . 21, 2011
Submitted Joint Expert Statement in a matter of Arbitration at the International
Chamber of Commerce regarding forecasted transportation revenues and
quantum meruit for historical losses incurred by international crude oil pipeline.
(c. 15 898NRO)
Nov. 5, 2011
Submitted Expert Report in a matter of Arbitration at the International Chamber
of Commerce presenting forecasted transportation revenues under various
scenarios, cost recovery mechanisms and quantum meruit for historical losses
relating to the operation of an international crude oil pipeline. (c. 15 898NRO)
Nov. 2-3, 2010
Presented Oral Testimony and Cross Examination at the FERC on BP Pipelines
(Alaska) Inc . in Docket Nos . IS09-348 et al. in support of BPPA's cost pooling
mechanism which properly allocates costs among Trans Alaska Pipeline System
Carriers based on usage.
Oct. 4, 2010
Submitted Prepared Reply Testimony at the FERC on behalf of BP Pipelines
(Alaska) Inc . in Docket No. 1509-348-000 .
Jun.18,2010
Submitted Answering Testimony at the FERC on behalf of BP Pipelines (Alaska)
Inc . in Docket Nos . IS-09-348 et al. responding to testimony presented by CPTAI
regarding proper cost pooling mechanism .
Apr . 16, 201 0
Submitted Direct Testimony at the FERC on behalf of BP Pipelines (Alaska) Inc.
in Docket Nos . IS09-348 et al. in support of BPPA's cost pooling mechanism
which properly allocates costs among Trans Alaska Pipeline System Carriers
based on usage .
Mar. 22, 2010
Filed Affidavit on behalf of TE Products Pipeline Company in Docket No. IS 10160-000 regarding the jurisdictional nature of terminals .
Feb . 8, 2010
Submitted Rebuttal Testimony at the California Public Utility Commission
on behalf of San Pablo Bay Pipeline LLC in support of the company's
application for market based rates.
Apr . 1, 2009
Filed Direct Testimony at the California Public Utility Commission
on behalf of San Pablo Bay Pipeline LLC in support of the company's
application for market based rates.
REGULATORY
ECONOMICS
R1= .3GROUP,LLC
~A
W
May 2, 2008
Cross examination in BP West Coast Products et al. v. SFPP Docket No. OR035-001 at the FERC.
Mar. 3, 3008
Filed supplemental Affidavit on behalf of Calnev Pipe Line LLC at the FERC in
response to complaint filed by ExxonMobil Oil Corporation in Docket No.
OR07-5-000.
Feb .27,2008
Submitted Prepared Answering Testimony on behalf of SFPP, L.P. at the FERC
in response to complaint filed by BP West Coast Products, LLC, ExxonMobil Oil
Corporation, and ConocoPhillips Co. in Docket No. OR-03-5-001
Nov. 27, 2007
Filed Affidavit on behalf of Calnev Pipe Line LLC at the FERC in response to
complaint filed by ExxonMobil Oil Corporation in Docket No. OR07-5-000.
Jul. 20, 2007
Submitted Affidavit on behalf of the Petition for Declaratory Order of Enbridge
Pipelines (Southern Lights) LLC at the FERC supporting an innovative rate
structure for the new pipeline in Docket No. OR07-15 .
Mar. 22, 2007
Submitted Expert Designee Report on behalf of Cortez Pipeline Company under
the terms of the Arbitration Agreement established in C02 Committee, Inc v.
Shell Oil Company , Shell C02 Company, Ltd., aka Kinder Morgan C02
Company, L .P., Shell Western E&P, Inc ., Mobil Producing Texas and New
Mexico, Inc., and Cortez Pipeline Company .
Nov. 28 30,2006
Presented Testimony on behalf of Trans Alaska Pipeline System Carriers at the
FERC regarding an investigation of interstate transportation rates in Docket Nos .
ISOS-82 and IS06-01 et a].
Aug. 11, 2006
Filed Prepared Rebuttal Testimony at the FERC on behalf of the Trans Alaska
Pipeline System Carriers in an investigation of interstate transportation rates in
Docket Nos . ISOS-82 and IS06-01 et al .
Jun .29,2006
Presented Direct Oral Testimony and Cross Examination on behalf of Cortez
Pipeline in Arbitration by Agreement involving C02 Committee, Inc. v. Shell Oil
Company, Shell C02 Company, Ltd., aka. Kinder Morgan C02 Company, L.P.,
Shell Western E & P, Inc ., Mobil Producing Texas and New Mexico, INC., and
Cortez Pipeline Company .
May 30, 2006
Filed Expert Report on behalf of Cortez in Arbitration by Agreement involving
C02 Committee, Inc . v. Shell Oil Company, Shell C02 Company, Ltd., aka
Kinder Morgan C02 Company, L.P., Shell Western E & P, Inc ., Mobil
Producing Texas and New Mexico, Inc., and Cortez Pipeline Company .
May 26, 2006
Filed Prepared Answering Testimony at the FERC on behalf of the Trans Alaska
Pipeline System carriers in an investigation of interstate transportation rates
effective January 1, 2006 in Docket Nos . IS05-82 et al. and IS06-01 et al.
Apr . 4, 2006
Filed Prepared Supplemental Direct Testimony at the FERC on behalf of the
Trans Alaska Pipeline System Carriers in an investigation of interstate
transportation rates effective January 1, 2006 in Docket No. IS06-01 et al.
REGULATORY
ECONOMICS
Rr
. .MGROUP,LLC
I-&
W
Mar. 31, 2006
Filed Affidavit at the Surface Transportation Board (STB) on behalf of Valero,
L.P. supporting its claim of materially changed circumstances which would
permit the STB to vacate its prior rate prescription in Koch and thus restore
ratemaking initiatives to Valero in Docket No. 42084 .
Dec .7 .2005
Filed Prepared Direct Testimony at the FERC on behalf of the Trans Alaska
Pipeline System Carriers in an investigation of interstate transportation rates
effective January 1, 2005 in Docket No. ISOS-82 et al.
Jul. 18, 2005
Filed Affidavit in support of Sunoco's answer to ConocoPhillips's protest of
Sunoco's application for authority to charge market-based rates in Docket No.
OR05-7-000 .
Apr. 12, 2005
Filed Prepared Direct Testimony on behalf of Sunoco Pipelines L.P. supporting
Sunoco's application for authority to charge market-based rates in Docket No.
OR05-7-000 .
Feb. 25 Mar . 2, 2005
Presented Oral Testimony and Cross Examination on behalf of SFPP in response
to protest and complaint in Texaco Refining and Marketing et al . SFFP Docket
Nos . OR96-2-000 et al. and IS98-1-000 .
Jan . 28, 2005
Filed Prepared Rebuttal Testimony on behalf of SFPP in response to protest and
complaint in Texaco Refining and marketing et al. SFFP LP Docket Nos . OR962-000 et al. and IS98-1-000 .
Dec .10,2004
Filed Affidavit at the FERC in support of Petition for Declaratory Order filed by
Enbridge Energy Company, Inc. regarding initial rates and determination of rate
base for a proposed crude oil pipeline system between Chicago, U, and Cushing,
OK. Docket No. OR05- 1 -000.
Dec.10,2004
Filed Prepared Answering Testimony on behalf of SFPP in response to protest
and complaint in Texaco Refining and Marketing, et aL v. SFPP, LP Docket Nos .
OR96-2-000 et al. and IS98-1 -000.
Oct. 14, 2004
Filed Affidavit at the STB on behalf of Kaneb Pipe Line Partners, L.P. rebutting
certain statements and allegations contained in the verified statement of
Complainant witnesses in Docket No. 42084 .
Sep.13,2004
Filed Affidavit at the STB on behalf of Kaneb Pipe Line Partners, L.P.
supporting its claim of materially changed circumstances which would permit the
STB to vacate its prior rate prescription in Koch and thus restore ratemaking
initiatives to Kaneb in Docket No. 42084 .
Apr . 6, 2004
Filed Affidavit at the FERC discussing entitlement of third party shippers to
reparations . Big West v. Frontier, Docket No. ORO 1-3.
Apr . 5, 2004
Filed Affidavit at the FERC supporting the response of Frontier Pipeline
Company to the request for rehearing of Big West Oil Company and Chevron
Products Company . Docket Nos . ORO 1 -02-000 and ORO 1 -04-000 .
~~REGULATORY
ECONOMICS
R C .3 GROUP LLC
0
1-6
W
Dec.11,2003
Presented Oral Testimony and Cross Examination on behalf of the Trans Alaska
Pipeline System Carriers in the matter of Tariff Rates To Be Effective January 1,
2003 for the Intrastate Transportation of Petroleum over the Trans Alaska
Pipeline System and the Investigation Into the 2001 and 2002 Tariff Rates for the
Intrastate Transportation of Petroleum over the Trans Alaska Pipeline System
before the Regulatory Commission of Alaska. P-034.
Oct. 15, 2003
Submitted Rebuttal on behalf of the Trans Alaska Pipeline System Carriers in the
matter of Tariff Rates To Be Effective January 1, 2003 for the Intrastate
Transportation of Petroleum over the Trans Alaska Pipeline System and the
Investigation Into the 2001 and 2002 Tariff Rates for the Intrastate
Transportation of Petroleum over the Trans Alaska Pipeline System before the
Regulatory Commission of Alaska. P-034.
Sep.10,2003
Filed Affidavit at the FERC in support of Shell Pipeline Company LP's motion
to compel discovery in Docket No. OR02-1 0.
Aug . 29, 2003
Submitted Prepared Direct Testimony at the FERC on behalf of Shell Pipeline
Company LP in support for its application for authority to charge market-based
rates. Docket No. OR02-1 0.
Jul. 24, 2003
Filed Affidavit at the FERC in support of Shell Pipeline Company LP's motion
to extend the procedural schedule in Docket No. OR02-10 .
Jun .10,2003
Submitted Prepared Answering and Rebuttal Testimony at the FERC supporting
Platte FERC Tariff No. 1474 in Docket Nos . IS02-384-000 et al .
Jun.3,2003
Submitted Prepared Direct Testimony on behalf of the Trans Alaska Pipeline
System Carriers in the matter of Tariff Rates To Be Effective January 1, 2003 for
the Intrastate Transportation of Petroleum over the Trans Alaska Pipeline System
and the Investigation Into the 2001 and 2002 Tariff Rates for the Intrastate
Transportation of Petroleum over the Trans Alaska Pipeline System before the
Regulatory Commission of Alaska . P-034.
Dec .20,2002
Submitted Prepared Direct Testimony at the FERC supporting Platte FERC
Tariff No. 1474 in Docket No. IS02-384-0000 et al .
Oct. 28, 2002
Submitted Reply Testimony at the FERC on behalf of Shell Pipeline Company in
response to protest by Phillips Petroleum Co., Tosco Corporation, and
ToscoPetro Corp. Docket No. OR02-1 0-000.
Aug. 9, 2002
Submitted Testimony at the FERC in support of reparations calculations
proposed by Frontier Pipeline Company in Docket Nos. ORO 1 -2-00 and ORO 1 -4000.
Jul . 9, 2002
Submitted Testimony at the FERC on behalf of Shell Pipeline Company in
support for its application for authority to charge market-based rates. Docket No.
OR02-10-000 .
Jan. I I 31,2002
Cross-examination in complaint of ARCO Products Company et al. v. SFPP, LP
in Docket Nos. OR96-2-000, et al . before the FERC.
R
~ ~ REGULATORY
r
.,3ECONOMICS
GROUP, LLC
Ak
1~&
W
Nov.2,2002
Filed Affidavit at the FERC supporting Plantation Pipe Line Company's Petition
for Declaratory Order regarding initial rates for proposed new pipeline service
from Bremen, Georgia to Chattanooga and Knoxville, Tennessee . Docket No.
OR02-1 -000.
Jul. 31, 2001
Filed Prepared Reply Testimony on behalf of SFPP at the FERC in response to
complaint of ARCO Products Company et al. in Docket Nos. OR96-2-000, et al.
May 15,2001
Filed Prepared Answering Testimony on behalf of SFPP in response to complaint
of ARCO Products Company et al . in Docket Nos . OR96-2-000, et al.
Apr. 23 26,2001
Presented Oral Testimony on behalf of Trans Alaska Pipeline System Carriers in
the matter of the correct calculation and use of acceptable input data to calculate
the 1997, 1998, 1999, and 2000 tariff rates for the intrastate Transportation of
Petroleum over the Trans Alaska Pipeline System before the Regulatory
Commission of Alaska P97-4 and P97-7 .
Apr . 2, 2001
Filed Affidavit with the Superior Court of Arizona, Tax Court discussing
Commission regulations regarding the concept of Original Cost in SFPP, L.P. v.
Arizona Department ofRevenue No. TX 1999-00532 .
Mar. 29, 2001
Filed Rebuttal Report on behalf of Cortez Pipeline Company in C02 Claims
Coalition, et al., v. Shell Oil Company, et al. in the United States District Court
for the State of Colorado CfV No. 96-Z-245 1 .
Mar. 26, 2001
Filed Affidavit at the FERC supporting the response of Anschutz Ranch East
Pipeline to the complaint made by Chevron Products Company . Docket No.
OROI-05-000 .
Mar. 20, 2001
Submitted Testimony at the FERC on behalf of West Shore Pipe Line Company
in support for its application for authority to charge market-based rates. Docket
No. OROI-06-000 .
Mar . 14, 2001
Filed Affidavit at the FERC supporting the response of Frontier Pipeline
Company to answer of complaint made by Chevron Products Company . Docket
No . OROI-04-000 .
Mar . 13, 2001
Filed Affidavit at the FERC supporting the response of Anschutz Ranch East
Pipeline Inc . to the amended complaint made by Big West Oil Company . Docket
No. ORO 1-03 -000 .
Mar. 5, 2001
Filed Affidavit at the FERC supporting the response of Frontier Pipeline
Company to answer a complaint made by Big West Oil Company . Docket No.
ORO 1 -02-000 .
Feb.26,2001
Filed Rebuttal Testimony on behalf of Trans Alaska Pipeline System Carriers in
the matter of the correct calculation and use of acceptable input data to calculate
the 1997, 1998, 1999 and 2000 tariff rates for the Intrastate Transportation of
Petroleum over the Trans Alaska Pipeline System before the State of Alaska,
Regulatory Commission of Alaska, P-97-4 .
REGULATORY
ECONOMICS
Rr
. .3GROUPLLC
i-h
W
Feb. 6, 2001
Filed Affidavit at the FERC supporting the response of Anschutz Ranch East
Pipeline Inc . to the complaint made by Big West Oil Company . Docket No.
OR01-03-000 .
Jan. 29, 2001
Filed Affidavit at the FERC supporting the response of Frontier Pipeline
Company to the complaint made by Big West Oil Company. Docket No. ORO I 02-000 .
Dec .20,2000
Prepared Direct Testimony, filed with the FERC, in support of Chase
Transportation Company's application for authority to charge market-based rates
in Docket No. OR01-1-000 .
Nov. 14, 2000
Presented Oral Testimony on behalf of Kinder Morgan Energy Partners, L.P.
before the State of Arizona, Board of Equalization regarding the proper valuation
of SFPP's pipeline assets in the State of Arizona.
Jul. 12, 2000
Filed Second Prepared Direct Testimony on behalf of Trans Alaska Pipeline
System Carriers in the matter of the correct calculation and use of acceptable
input data to calculate the 1997, 1998, 1999 and 2000 tariff rates for the Intrastate
Transportation of Petrolewn over the Trans Alaska Pipeline System before the
State of Alaska, Regulatory Commission of Alaska, P-97-4 .
May 9, 2000
Submitted second report to the American Arbitration Association (AAA)
regarding oil pipeline tariff regulations rebutting testimony of Marcum
Midstream-Farstad, LLC in the arbitration between Marcum Midstream-Farstad,
LLC el .al. v. Amoco Oil Company. Case No. 70 198 00294-99.
May 5, 2000
Filed Affidavit at the FERC supporting the Response of ExxonMobil Pipeline
Company to the Motion to Intervene of BP Exploration & Oil, Inc . in Opposition
to ExxonMobil Pipeline Company's Petition for Declaratory Order and Petition
for Discovery regarding initial transportation rates on the Hoover Offshore Oil
Pipeline System (HOOPS) in Docket No.01100-2-000 .
May 2, 2000
Submitted Testimony at the FERC on behalf of Equilon Pipeline Company, LLC
in support of its cost-of-service filing in Docket No. ISOO-208-000 .
Mar. 20, 2000
Submitted report to the AAA regarding oil pipeline tariff regulations in support
of Amoco Oil, Company's position in the arbitration between Marcum
Midstream-Farstad, LLC et al. v. Amoco Oil Company. Case No. 70 198 0029499 .
Mar. 9, 2000
Filed Affidavit at the FERC supporting ExxonMobil Pipeline Company's
Petition for Declaratory Order regarding initial transportation rates on the
HOOPS in Docket No. OROO-2-000 .
Feb.15,2000
Submitted Testimony at the FERC on behalf of Marathon Ashland Pipe Line
LLC in support of its application for the authority to charge Market-Based Rates
in Docket No. OROO- 1 -000.
~~PEGULATCIRY
ECONOMICS
? 1= .3GROUP,LLC
PA
W
Jun.16,1999
Submitted Testimony at the FERC on behalf of Amoco Pipeline Company in
support of its cost-of-service filing in Docket No. IS99-268-000 .
Apr. 30, 1999
Supplemental Testimony on behalf of Cortez Pipeline Company in C02 Claims
Coalition, et al., v. Shell Oil Company, et al. in the United States District Court
for the State of Colorado CIV No. 96-Z-245 1 .
Feb. 19, 1999
Supplemental Testimony on behalf of Explorer Pipeline Company as part of its
Motion for Summary Disposition in its Application for Market-Based Rates at
the FERC, OR99-1 -000.
Jan . 29, 1999
Oral Testimony and cross-examination in Conoco Pipeline Company, Inc . v.
Transmontaigne Pipeline, Inc. in the United States District Court for the Western
District of Missouri, Southwest Division, Case No. 97-5085-CV-SW-1 .
Jan. 13, 1999
Deposition in C02 Claims Coalition, et al., v. Shell Oil Company, et al. in the
United States District Court for the State of Colorado CIV NO. 96-Z-245 1 .
Nov.23,1998
Prepared Testimony on behalf of Cortez Pipeline in C02 Claims Coalition, et al.,
v. Shell Oil Company, et al. in the United States District Court for the State of
Colorado CIV NO. 96-Z-245 1 .
Oct. 8, 1998
Submitted Testimony on behalf of Explorer Pipeline Company as part of its
Application for Market-Based Rates at the FERC in Docket No.OR99-1-000 .
Oct. 8, 1998
Prepared Direct Supplemental Testimony on behalf of the Trans Alaska Pipeline
System Carriers in the Alaska Public Utilities Commission Docket No. P-97-4,
the protest of the 1997 and 1999 Tariff Rates for the Intrastate Transportation of
Petroleum over the Trans Alaska Pipeline System (revised Oct. 15, 1999).
Sep .25,1998
Deposition in Conoco Pipeline Company, Inc . v. Transmontaigne Pipeline, Inc.
in the United States District Court for the Western District of Missouri,
Southwest Division, Case No. 97-5085-CV-SW-1 .
Aug. 14, 1998
Testimony in Conoco Pipeline Company, Inc. v. Transmontaigne Pipeline, Inc .
in the United States District Court for the Western District of Missouri,
Southwest Division, Case No . 97-5085-CV-SW-1 .
Mar. 2, 1998
Rebuttal Testimony in CF Industries, et al., v. Koch Pipeline Company, LP. at
the STB, Docket No. 41685 .
Dec .17,1997
Deposition in Doris Feerer, et al., v. AMOCO Production Company in the United
States District Court for the State of New Mexico CrV NO. 95-00012-JC/WWD .
Nov. 10, 1997
Direct Testimony in CF Industries v. Koch Pipeline Company, LP. at the STB in
Docket No. 41685 .
May 5, 1997
Doris Feerer, et al., v. AMOCO Production Company in the United States
District Court for the State of New Mexico CIV NO. 95-00012-JCfWWD .
REGULATORY
ECONOMICS
RM3 GROUP, LLC
I-A
w
Dec. 1995
Cross-examination in Phase II of Williams Pipe Line Company, Docket No.
IS90-21-000 et al ., before the FERC.
Oct. 26, 1995
Rebuttal Testimony in Phase II of Williams Pipe Line Company, Docket No.
IS90-21-000 et al., before the FERC.
Jul . 21, 1995
Supplemental Direct Testimony in Phase 11 of Williams Pipe Line Company,
Docket No. IS90-21 -000 et al., before the FERC.
Jul . 1995
Deposition in Phase 11 of Williams Pipe Line Company, Docket No. IS90-21 -000
et al ., before the FERC.
Jan . 23, 1995
Direct Testimony.' in Phase H of Williams Pipe Line Company, Docket Nos .
IS90-2 1 -000 et al before the FERC.
Jul. 30, 1993
Verified Statement in Kerr-McGee Refining Corporation and Texaco Refining
and Marketing, Inc. v. Williams Pipe Line Company, Docket No. OR91-1-000,
before the FERC.
R
~ ~ REG U LATO RY
.,3ECONOMICS
r
GROUP, LLC
~A
W
0
Presentations
Hot Topics in Oil Pipeline Ratemaking : Rate Design & Cost Allocation (September 2012).
Association of Oil Pipelines, Annual Business Conference, Savannah, Georgia .
* Regulatory Due Diligence: Mergers & Acquisition (September 2012). Association of Oil
Pipelines, Annual Business Conference, Savannah, Georgia.
* FERC Jurisdictional Jeopardy (September 2012). Association of Oil Pipelines, Annual
Business Conference, Savannah, Georgia.
* Grandfathered Rates - FERC's New Outlook (September 2011). Association of Oil Pipelines,
Annual Business Conference, Denver, Colorado .
* Jurisdictional Jeopardy (September 2011). Association of Oil Pipelines, Annual Business
Conference, Denver, Colorado .
*
Jurisdictional Jeopardy (September 2010). Association of Oil Pipelines, Annual Business
Conference, Atlanta, Georgia
* Grandfathered Rates and Changed Circumstances (September 2010). Association of Oil
Pipelines, Annual Business Conference, Atlanta, Georgia
* Jurisdictional Jeopardy (September 2009). Association of Oil Pipelines, Annual Business
Conference, San Diego, California
* EP Act, Grandfathered Rates and Changed Circumstances (September 2009). Association of
Oil Pipelines, Annual Business Conference, San Diego, California
# Grandfathered Rates / Changed Circumstances (September 2008). Association of Oil
Pipelines, Annual Business Conference, Austin, Texas.
* FERC Jurisdictional or Not? (September 2008). Association of Oil Pipelines, Annual Business
Conference, Austin, Texas.
*
Changes in North American Logistics and Regulatory Environment (September 2007).
Association of Oil Pipelines, Annual Business Conference, Los Angeles, California.
*
FERC Jurisdictional or Not? (September 2007).
Business Conference, Los Angeles, California .
*
Grandfathered Rates, Changed Circumstances (September 2007).
Pipelines, Annual Business Conference, Loi Angeles, California.
Association of Oil
* FERC Jurisdictional and Non-Jurisdictional Services (May 2006).
Pipelines, Annual Business Conference, Minneapolis, Minnesota.
Association of Oil
* FERC Jurisdictional and Non-Jurisdictional Services (May 2005).
Pipelines, Annual Business Conference, New Orleans, Louisiana.
Association of Oil
Association of Oil Pipelines, Annual
* FERC Form 6 (May 2004). Association of Oil Pipelines, Annual Business Conference, St.
Petersburg, Florida.
REGULATORY
ECONOMICS
R1= .3GROUR,LLC
I-A
W
*
FERC Jurisdictional and Non-Jurisdictional Services (May 2004).
Association of Oil
*
FERC Jurisdictional and Non-Jurisdictional Services (May 2003).
Pipelines, Annual Business Conference, Baltimore, Maryland .
Association of Oil
*
FERC Form 6 - Page 700 (May 2002).
Regulatory Workshop, St . Petersburg, Florida.
*
FERC Jurisdictional and Non-Jurisdictional Services (May 2002).
Pipelines, Accounting and Regulatory Workshop, St . Petersburg, Florida.
*
Market-based Rates for Oil Pipelines (May 2001). Association of Oil Pipelines, Accounting
and Finance Workshop, New Orleans, Louisiana.
4
Market-based Rates for Oil Pipelines (May 2000). Association of Oil Pipelines, Accounting
and Finance Workshop, San Antonio, Texas.
*
Market-based Rates (May 1999).
Workshop, San Antonio, Texas.
*
FERC Form 6 (May 1998). Association of Oil Pipelines, Accounting and Finance Workshop,
Atlanta, Georgia.
*
FERC's Indexation of Oil Pipeline Rates (April 1998). American Petroleum Institute, Pipeline
Conference, Houston, Texas.
*
Applying for Market-based Rates (May 1997). Association of Oil Pipelines, Accounting and
Finance Workshop, Atlanta, Georgia.
*
Oil Pipeline Rate Regulation (March 1997). Executive Enterprises, Oil Pipeline Regulation,
Houston, Texas.
*
Pipeline Economics (1992-1996).
American
Technology, Harris College, Houston, Texas.
*
Overview of Current Oil Pipeline Regulations (May 1996).
Accounting and Finance Workshop, St . Louis, Missouri .
*
Oil Pipeline Rate Regulation (October 1995). Executive Enterprises, Alternative Ratemaking
and Gas Price Methodologies, Houston, Texas.
*
Pipelines, Annual Business Conference, St . Petersburg, Florida.
Association of Oil Pipelines, Accounting and
Association of Oil
Association of Oil Pipelines, Accounting and Finance
Petroleum Institute,
School
of Pipeline
Association Of Oil Pipelines,
Challenges Facing Oil Pipelines (June 1995). Executive Enterprises, Oil Pipeline Ratemaking
Strategies for the 90s, Houston, Texas.
#
Recent FERC Rulemakings (May 1995). Association of Oil Pipelines, Accounting and Finance
Workshop, St . Louis, Missouri .
*
Quantifying Competition in the Quest for Market-Based Rates (May 1994). Association of
Oil Pipelines, Accounting and Finance Workshop, Dallas, Texas.
*
The Future of Oil Pipeline Ratemaking (May 1993). Association of Oil Pipelines, Accounting
and Finance Workshop, San Antonio, Texas.
~~REGULATORY
ECONOMICS
Z 1= .3GROUP,LLC
~A
W
C
Prior Experience
Klick, Kent &
Allen, Inc.
(1997 -1998)
Senior Consultant
Led client engagements regarding oil pipeline regulatory matters ;
provided financial and economic consulting services to clients regarding
strategic planning, market analysis, ratemaking and litigation support .
Williams Pipe
Line Company
(1993 -1997)
Manager, Tariffs and Regulatory Affairs
Directed company's Phase 11 defense in rate case before the FERC (IS90-2 1 -000 et al.).
Williams Pipe
Line Company
(1990-1993)
Manager, Strategic Planning and Tariffs
Supervised the preparation of monthly, annual and long-range forecasts
of volumes, revenues and related variance comments .
Williams Pipe
Line Company
(1987-1990)
Supervisor, Health and Safety
Responsible for establishing system-wide health and safety programs for
approximately 700 employees in 10 states .
Williams Pipe
Line Company
(1986-1987)
Operations Supervisor
Responsible for supervising all aspects of pipeline terminal and pump
station operations for terminal complex handling refined petroleum,
fertilizer, asphalt and LPG .
Williams Pipe
Line Company
(1984-1986)
Various Positions in Field Operations
Responsible for various aspects of pipeline operation and administration
at the terminal, station and regional field office level.
Education
Northwestern University
Pipeline Economics and Management Program
University of Kansas
B.S. Business Administration
REGULATORY
ECONOMICS
R1= .3GROUP,LLC
I-&
EXHIBIT NO. 2
PA
W
MICHAEL J. WEBB
Regulatory Economics Group, LLC .
Director
Dr. Webb has over fifteen years of oil industry experience. Dr. Webb has extensive experience in all
aspects of oil pipeline rate regulation at the Federal and State levels. He has participated in numerous
projects involving the calculation of cost-based rates. He has also prepared several applications for
authority to charge market-based rates on interstate oil pipelines . He has prepared whitepapers and
met with FTC Staff to gain approval for mergers on behalf of oil companies . Dr. Webb holds a PhD
in economics from George Mason University in Fairfax, Virginia and has published in the journal
Public Choice . His academic interests include applied microeconornics, industrial origination, and
auction theory. He has taught courses in Law and Economics, the Economics of Regulation, and the
Economics of Energy at the graduate and undergraduate level .
Testimony
Apr. 29, 2013
Presented oral testimony at the California Public Utilities Commission on behalf
of SFPP, LP discussing theoretical principles of cost allocation with regard to
Application No. 09-05-014 .
Dec .12,2012
Filed Rebuttal Testimony at the Federal Energy Regulatory Commission on
behalf of Enterprise TE Products Pipeline Company LLC in Docket No. IS12203-000 on matters relating to rate design and cost-of-capital .
Nov. 5, 2012
Filed Direct Testimony at the California Public Utilities Commission on behalf
of SFPP, LP discussing theoretical principles of cost allocation with regard to
Application No. 09-05-014 .
Oct. 10, 2012
Filed Verified Statement at the Federal Energy Regulatory Commission on behalf
of Buckeye Pipeline Company, L.P. in Docket No. OR12-28-000 regarding the
justness and reasonableness of the pipeline's rates.
Jul. 18, 2012
Filed Affidavit at the Federal Energy Regulatory Commission on behalf of
Association of Oil Pipe Lines in Docket No. OR12-4-000 on issues related to
assessing competition in the context of applications for market-based ratemaking
authority .
Jul. 16, 2012
Filed Reply Verified Statement at the Federal Energy Regulatory Commission on
behalf of Buckeye Pipeline Company, L.P . in Docket No. IS 12-185-000 .
Jul. 9, 2012
Filed Prepared Direct Testimony at the Federal Energy Regulatory Commission
on behalf of Enterprise TE Products Pipeline Company LLC in Docket No. IS 1 2203-000 on matters relating to rate design and cost-of-capital .
~ REGULATORY
ECONOMICS
RE .3GROUP,LLC
C
~A
W
10
May 15, 2012
Filed Verified Statement at the Federal Energy Regulatory Commission on behalf
of Buckeye Pipeline Company, L.P. in Docket No. IS12-185-000 addressing
issues related to ratemaking in the context of the company's ratemaking; program.
Apr. 18-20, 2012
Presented oral testimony and responded to questions of Commissioners at the
Public Service Commission of the State the State of Wyoming on behalf of Belle
Fourche Pipeline Company in Docket no. 50000-61 -PR- I I on issues related to
cost-of-service and cost-of-capital .
Feb. 1, 2012
Filed Supplement Direct Testimony at the Public Service Commission of the
State of Wyoming on behalf of Belle Fourche Pipeline Company in Docket No.
50000-61 -PR- I I on issues related to cost-of-service and cost of capital.
Jan . 10- 11, 2012
Presented oral testimony and cross examination at the FERC on behalf of
Enbridge Pipelines (Southern Lights) LLC in Docket Nos . IS 10-399-000, et. al.
on issues related to cost-of-service and rate design.
Jan . 9, 2012
Filed Supplemental Direct Testimony at the Federal Energy Regulatory
Commission on behalf of SFPP, LP in Docket No . IS 1 1-444-001 revising
calculations to accord with Commission's new cost-of service ruling.
Jan . 6, 2012
Filed Rebuttal Testimony before the State Corporation Commission of the State
of Kansas on behalf of Mid-America Pipeline Company, LLC in Docket No. 12MDAP-068-RTS on issues related to cost-of-service and rate design .
Dec . 13, 201 1
Filed Direct Testimony at the Federal Energy Regulatory Commission on behalf
of SFPP, LP in Docket No. IS 1 1-444-001 regarding the proposed indexation of
pipeline rates and the economic principles of the Commission's indexing
methodology.
Nov. 1, 2011
Filled Rebuttal Testimony at the Federal Regulatory Commission on behalf of
Enbridge Pipelines (Southern Lights) LLC in Docket Nos. ISIO-399-000, et. al.
on issues related to cost-of-service and rate design.
Oct. 25, 2011
Filed Affidavit before the State Corporation Commission of the State of Kansas
on behalf of Mid-America Pipeline Company, LLC in Docket No. 12-MDAP068-RTS in support of a Motion to Compel.
Oct. 14, 2011
Filed Direct Testimony before the Public Service Commission of the State of
Wyoming on behalf of Belle Fourche Pipeline Company in Docket No. 5000061-PR-1 I on issues related to cost-of-service and cost-of-capital.
Aug. 19, 2011
Filed Direct Testimony before the State Corporation Commission of the State of
Kansas on behalf of Mid-America Pipeline Company, LLC in Docket No. 12MDAP-068-RTS on issues related to cost-of-service and rate design.
June 7, 2011
Filed Direct Testimony at the Federal Energy Regulatory Commission on behalf
of Enbridge Pipelines (Southern Lights) LLC in Docket Nos . IS10-399-000, et.
al. on issues related to cost-of-service and rate design.
~~REGULATORY
ECONOMICS
zr
. .3G .OUP,LLC
W
Jul . 2, 20 10
Presented oral cross examination of behalf of SFPP, L .P. addressing issues
associated with cost allocation and volume projections in Docket No. IS09-437 .
May 14, 201 0
Filed Rebuttal Testimony on behalf of SFPP, L.P. addressing issues associated
with cost allocation, and volume projections in Docket No. IS09-437 .
MaylO-11,2010
Presented oral cross examination behalf of San Pablo Bay Pipeline, LLC at the
California Public Utility Commission supporting its Application for market based
rates in Docket No . A.08-09-024 .
Apr . 15,2010
Provided direct testimony on behalf of Kuparuk Transportation Company on
Cost of Service issues before the Regulatory Commission of Alaska.
Feb . 23-24, 2010
Presented oral Testimony on behalf of SFPP, L.P. at the California Public
Utilities Commission addressing issues associated with competition, sound
regulatory policy and macro-economic conditions in Docket No. 09-05-014 .
Feb . 8, 2010
Filed Rebuttal Testimony on behalf of San Pablo Bay Pipeline LLC in Docket
No. A-08-09-024 addressing issues related to competitive analysis of San Pablo
Bay's markets .
Jan . 25, 2009
Filed Rebuttal Testimony on behalf of SFPP, L .P. at the California Public
Utilities Commission addressing issues associated with competition, sound
regulatory policy and macro-economic conditions in Docket No. A. 09-05-014 .
Dec.29,2009
Filed Verified Statement on behalf of San Pablo Bay Pipeline, LLC, supporting
Motion to Compel in Docket No. A 08-09-024.
Dec.11,2009
Filed Direct Testimony on behalf of SFPP, L.P. addressing issues associated with
cost-allocation, and volume projections in Docket No. IS09-437 .
Sept . 21, 2009
Filed affidavit supporting SFPP's Petition for Rehearing in Docket No. IS09437 .
Jun .26,2009
Presented Oral Sur-rebuttal testimony on behalf of SFPP, LP addressing issues
associated with volume projections and economic conditions.
Jun . 18-19, 2009
Presented Oral Testimony on behalf of SFPP, LP at the Federal Energy
Regulatory Commission in Docket No. IS08-390-002 addressing issues discussed
in prepared Direct and Rebuttal testimony .
Mar. 27, 2009
Filed Rebuttal Testimony at the Federal Energy Regulatory Commission
discussing cost-al location, depreciation, and the economic conditions associated
with demand for refined petroleum products in SFPP's destination market .
Jan . 13, 2009
Filed a Sworn Declaration on behalf of San Pablo Bay Pipeline, LLC supporting
its Response to Tesoro's Motion for Summary Adjudication in Docket No. A.0809-024 .
Dec . 2-4. 2008
Presented Oral Testimony on behalf of SFPP, LP at the Federal Energy
Regulatory Commission addressing theoretical issues related to allocation of cost
and the economic life of the pipeline .
~~REGULATORY
ECONOMICS
Z 1= .3GROUP,LLC
PA
W
C
Oct. 16, 2008
Filed Direct Testimony at the Federal Energy Regulatory Commission on behalf
of SFPP, LP in Docket No . IS08-390-002 discussing theoretical principles of
cost allocation .
Sept . 30, 2008
Filed Direct Testimony at the California Public Utilities Commission on behalf
of San Pablo Bay, Pipeline Company LLC supporting its market based rates in
Docket No. A.08-09-024. This testimony examined the competition that San
Pablo Bay faces in its origin and destination markets using conventional
measures of market concentration and competition
Sept. 9, 2008
Filed Answering Testimony at the Federal Energy Regulatory Commission on
behalf of SFPP, LP in Docket No. OR03-5-000, discussing theoretical issues
associated with cost-allocation and the economic life of the pipeline.
Jul. 6, 2007
Filed Affidavit at the Federal Energy Regulatory Commission in support of a
motion for rehearing of Frontier Pipeline Company in Docket No. ORO 1 -2-000
and OR014-000 discussing calculation of refunds owed by Frontier.
~~PEGULATORY
ECONOMICS
Rr
. .3GROUP,LLC
~A
W
Relevant Experience
Rate Regulation Issues
*
Led the project team in developing data and preparing cost-of-service calculation in cost-based
rate cases. Assisted multiple witnesses in drafting testimony regarding FERC requirements for
cost-based ratemaking .
*
Prepared cost-of-service filings, consistent with FERC regulations in 18 CFR § 346.2 on behalf of
numerous oil pipelines .
*
Assisted counsel in preparing cross examination regarding cost-based ratemaking and regulatory
theory.
*
Assisted multiple witnesses in drafting testimony presenting Stand-Alone Cost theory to the
FERC.
Antitrust Matters
Prepared a whitepaper for the Federal Trade Commission analyzing the competitive impact of a
pipeline acquisition in the Eastern Pennsylvania area.
Developed a computer-based model to analyze the competitive impact of an oil pipeline
acquisition in the mid-continent region. Prepared a detailed whitepaper explaining the theory
behind the analysis and the results of the analysis. Met with FTC Staff to discuss the results of
the analysis .
Analyzed the competitive impact of a refinery acquisition in the northeastern United States .
Constructed a computer-based simulation based on publicly available data and an analysis of how
the acquisition would impact the market. Prepared multiple whitepapers reporting results of the
analysis. Met with FTC Staff to discuss the results of the analysis.
Market-Based Rate Filings
Assisted in the preparation of an application for market-based ratemaking authority and
associated exhibits consistent with 18 CFR § 348 on behalf of Sunoco Pipeline, LP's marketbased rate filing .
Assisted in the preparation of expert testimony and exhibits filed in Shell Pipe Line Company LP
in market-power case.
Participated in the development of applications for market-based ratemaking authority on behalf
of Chase Pipeline Company, Inc. West Shore Pipeline Company, Inc, and Marathon-Ashland
Pipe Line LLC.
Acquisition Due Diligence
Participated in a project team analyzing the regulatory risk that a private equity fund faced if it
acquired a controlling interest in liquids .
Participated in a project team analyzing the regulatory risk that a pipeline company considering a
conversion in ownership structure from a corporation to a master limited partnership could face if
its rates were contested by its shippers .
REGULATORY
ECONOMICS
REMIGROMLIC
~A
W
Involvement in Prior Regulatory Matters
FERC Matters
OR03-5-001
Complaint against the rates of SFPP's North Line and Oregon Line
IS05-216-000
Protest against the rates of Mid-Amefica Pipeline.
IS05-82-000,
IS06-01-000
Protest and Complaint against TAPS CARRIERS rates.
OR05-7-000
Sunoco Logistics Partners, L.C. Market Based Rate filing
OR96-2-000,
IS98-1-000
Protest and complaint against SFPP's Sepulveda pipeline system
OR05-1-000
Petition for Declaratory Order Filed by Enbridge's Spearhead pipeline.
ORO] -2-000
Calculating reparations owed by Frontier to Big West and Chevron
OR02-10-000
Shell Pipe Line Company, LP application for market-based ratemaking
authority.
IS02-384-000
Protest and Complaint against Platte Pipe Line Company and Express
Pipeline Company, LLC .
OR96-2-000
Complaint against SFPP's rates
ORO 1 -06-000
Application of West Shore Pipe Line Company for market-based ratemaking
authority .
OROI-03-000,
OROI-05-000
Complaint against the rates of Anschutz Ranch East Pipeline Inc.
OROI-02-000,
OROI-04-000
Complaint against the rates of Frontier Pipeline Company .
ORO I - 1 -000
Application of Chase Transportation Company for market-based ratemaking
authority
OROO- 1 -000
Application of Marathon-Ashland Pipe Line, LLC for market-based
ratemaking authority .
~~REGULATORY
ECONOMICS
R C .3GROUPLLC
$A
w
State Matters
P-03-4
Protest and complaint at the Regulatory Commission of Alaska against the
rates of the TAPS Carriers
TO-0 1 147
Protest against Olympic Pipe Line Company, Inc's rate increase at the
Washington Utilities and Telecommunications Commission .
P97-4 and P97-7
Protest and complaint at the Regulatory Commission of Alaska against the
rates of the TAPS Carriers.
TX 1999-00532
Challenge to Arizona tax court's determination that SFPP's property should
be valued at other than original cost.
Other Entities
Docket No. 42084
Analyzing the return of Valero's ammonia pipeline.
Civ No. 96-Z-2451
Challenge to the rates charged by a C02 Pipeline in Federal District Court.
Case No. 70 198
00294-99
Challenge to a pro-rationing policy of Amoco Oil Company filed before the
American Arbitration Association .
Publications and Presentations
Presentation at EUCI regarding all aspects of ratemaking for the liquid pipeline industry,
December 2012.
"Market-Based Rates" Presented at the 2012 Annual Business Conference of the
Association of Oil Pipe Lines
"Regulatory Basics for Oil Pipelines" Presented at the 2012, 2011, 2010, and 2009
Annual Business Conference of the Association of Oil Pipe Lines
"Ratemaking: Beyond the Basics" Presented at the 2011, 2010, 2009, and 2008 Annual
Business Conference of the Association of Oil Pipe Lines
"Pipeline Economics 101" Presented at the 201 1, and 2010 Annual Business Conference
of the Association of Oil Pipe Lines
REGULATORY
ECONOMICS
R1= .3GROUP,LLC
PA
W
0
*
"New Developments in Pipeline Expansions: Executing the Deal" Presented at the 2011
Annual Business Conference of the Association of Oil Pipe Lines
* "FERC 101" Presented at the 2008 Annual Business Conference of the Association of Oil
Pipe Lines
The Political Economy of the Israel Palestine Conflict: An Evolutionary Game Theory
Approach : Doctoral Dissertation .
Rowley, CK and M . J. Webb "Israel and Palestine : the slow road to peace or the fast
track to mutual annihilation" Public Choice (July 2007) 132 : 7-26 .
"The Antitrust Review of Oil Pipe Line Mergers at the FTC" Presented that the 2007
Annual Business Conference of the Association of Oil Pipe Lines.
"FERC 101" Presented at the 2007 Annual Business Conference of the Association of
Oil Pipe Lines.
"Surviving a Rate Case" Presented at the 2006 Annual Business Conference of the
Association of Oil Pipe Lines.
Previous Relevant Employment
Association of Oil
Pipe Lines
(1997-1998)
Intern
Prepared statistical analysis of pipe line failures from publicly available
sources . Assisted Executive Director in employing economic theory to
address industry concerns.
Education
George Mason
Universiry
PhD, Economics
MA, Economics
American University
BA, (Magna Cum Laude) International Relations, Economics
REGULATORY
ECONOMICS
R1= .3GROUP,LLC
1-6
w
40
A
ob
EXHIBIT NO. 12
130440264
Z58'6
919'6
COVO I
160'Ef
808'01
01 VVE
Z5o'l 1
8Lt7'9E
6661
9ZI'SI
E69'9
6ZI'6E
OOOZ
660'ZZ
169'Z 1
C99'017
009"PZ
IOOZ
VL071
805'6
09L'91
9ZO'O 1
108'1 Z
V88'01
K9'LZ
ZOOZ
MIS
91Z'ZI
LIO'Vf
COOZ
Z JO I a~ud
Z I *oM j!q!qxZI
I t, o2rd E I
It oged E I
osuodxg isonjul
uopiowdaCl
17
g
E
Z
I
wall -U-1
anu;)Ao-d jujojL
suoijujado wog molq qseD
asuadxg 2upiado qstD
asuadxo isaialui ptm uoilmajdap Suiploxg \ I
I!q!qxg
1!q!qxg
aoinoS
z *U11 - I T'i
\1 it, o2ed IE I oM I!q!qx3
It ogud I E I , oM I!q!qx3
(Sooos)
SJOISOAtil PU" 1101,
suopoiado wojj Aiojq qsuD
d--l III dtqsjouvmd
8E8'6
130440264
Z99'6
EOZ'99
Olf'15
T-lo-z
9lt7'Ll
9ZL'89
6Z8179
617L'Lg
ZS9'171
OOV'ZL
T1-oz
ZJO Z ased
ZI oN 1!q!qxa
fZ9'01
LgL179
W'LJ7
IZZ'81
J79V59
u-10--z
t7
g
asuodxg isaialul
E
Z
I
woll -U-1
suoiliuodo woLg moij qsuo
asuadxg guilujado qsro
anuDA2-d tMOJL
uoilrpaida(l
asu2dxo Isojolui pue uoijutooldop guiploxg \1
61-tl '01'6,soNl!q!qxg
61-tl '01'6,soMl!q!qxg
068'0 1
gL6'Et,
IZE'S
9ZZ'55
80t,'L
gt,0'95
LECS
810'8S
9ES'01
L60'19
z 'Ul - I *Ull
\1 61171 '01'6'SOMI!q!qx3
61-ti '01'6 *soMl!q!qxa
LZ9'01
Lt,6'Z9
898'Zf
Z68'El
09L'9t7
2oinoS
FO-oz
8917'ZZ
68Z'6Z
LSL'lg
To-o-Z
OLL'817
Z8E'Sl
ESI'V9
Woo-Z
1760'LI7
LLO'L I
1 L l'fP,9
TOOK
8Z['ZJ7
M'Ll
996'65
WE
9tL'gt,
96L'S I
lt,5'179
'60-o-Z
(Sooos)
suotiviado woij molq qseZ)
-d--l III diqsjauved sjoisoAul pruo-S IlojL
130440264
en
eq
anUOAQ-d 1101 P0100110 :)
tZ
130440264
g agud 10 1 -ON 1!q!qxg
aOIA13S JO ISO:) JUJOJL
EZ
61
81
91
El
gl
LI
~ajqd xujL 3jujS puu juiapaj pauiqwo:) -xuW
al B'd Xul QIUIS
ujnloH pamolIV jejol
II
ol
6
8
*-UlI
L
ZI
fq!nbg uo wnio-d pmolIV
jqoU jo isoo
oiju-d,(4!nbg poindw]
oijuH lqoU paindwl
9
g
t,
E
Z
lul!dL, :)jo ISO:) QSLIIDAV P3142!OtA
'LICIV
juj!&Z) SuppoAk
slassV paxil -jd2G poluinmooV
IUOLLQSOALq l33fOJd -ido(I poluinwnooV
SIoSSv POXIA
I
To-li
z t oz 'I E joqwaoo(l
SIOIS ;DAUI PRO-d 1101
uoilvinoleD
ooimas jo isoo pur oseg ajvH
.
d--l III diqSlQLqJ8d
asug almd IgOA jo pug
JUOLUISOAUl 133f0id
alux XLJL plapaj
t, I
[Z *U'l * Ll *U'l
6 *U'l
c4!nbg uo wma-d p3molIV
33uL'mOIIV xLU 3wO3uI
jaldillnW xLU 3wO3ul
I1
Cul
8 *u-1)
1!q!qxg
1!q!qxg
5Z
$
fZ-oZ,suj wnS
C88'ZVO'ZL
$
ZZ
IZ
OZ
L
'0 1
'o I
'o I
'o I
'o I
'ON I!q!qxg
* ON 1!q! qxa
ON 1!q!qxg
1!q!qxg
1!q!qxg
55756S
9 ol I -su-I tunS
ZI
6
+ (01
E a2ud IEZ
Z oSud 'EZ
t, 0-29d
t, ogud
11 aftd
t, o5rd
11 o2vd
amemoliv XL"L
816'lt,['Lg
luj!dL,:) uo tuma-d
(uoijuioaid3Cj) lul!du :)jo turua-d
(uoijupoidoCl V isonjul -loxg) s;)swdxg guilundo
(11 *u'l
aoiAjoS anUOAO-j ILIU13JUI SDJUJS Pal!Un
(91 'Ul- 0/91 *U-1
51 Ui + [t, I *Ul * (g I 'Ul - 0]
uopUxuLjo juatuliudaCl Liutgl'A
6t 'u'l
El ul
S o&.d'ol *oN 1!q!qxa
g agtd 'o I *ON 1!q!qxg
$
$
$
$
$
$
$
$
$
$
$
$
E69'56C6
Z60'ft,t,'EZ
t,99'1 99'6
899'IS9't,l
E69'96C6
%z,E9
%L*8E
%gL,g
%O*SE
CZ6'898't,l
ZWEVVEZ
%99'8
%L6'01
%t,E*9
%05
%09
9EV996'OLZ
zEg,zt,g
QL [I loc, 1)
WOVO'591)
60f'009'1
018,zsl,sft,
E JO I Oft'd
EZ *ON 1!q!qxg
130440264
%00*001
%09,9z
%LZ*8
%t,E*9
%8v' 1
%Ltl*O
%t,L'O
%OV*E
%gz*o
jq5CI jo isoo
%9011 1
%Z9*Lt,
%9tI*E
jqaG jujol
jo JU0013d
PONSIOM
E JO Z O'Bud
EZ *oM 1!q!qxg
E09'189'600'1
OZVLL~'89Z
coo' 18VE8
6ZO'L68'1 V I
t,18'9LL'08t,
LEZ'06'K
jq5U
onssi
D90oz Sal-Jos,
990oz SaUas
V90oz Sal-13s
96661 SOWS
V6661 Sal-JOS
LI 32Rd'01 'oMj!q!qxg :oo1noS
%Lg'S
%OL'S
%VZ*9
%t'I'L
%E I'L
almd Isaialul
iqa(] jo isoo polqgiaM
-d--j IH diquaujiud SIOISOALq P1310-d IIOJL
6*1
L*817
1 *917
V88
17*17
Z*6Z
5'617
VE8
9* 18
g*ZS
6'E
O*g
9,Z
Z'Z
Z*t,
C'17
130440264
8031
061,
66'8
99*v
81*9
961,
917*L
6E*8
9,917
S'l 5
1*176
E* 117
1*817
C*88
CE8
9*LL
L*817
Z'68
I,Z8
z*zg
Z*6Z
L*09
6*9Z
9*"
%
oPff %0-1 1 OH
P121A I - .qslG
. I a.'SAV Pn
z, -3ou
fJO C 039d
CZ *oM I!q!qxa
0'"
Z'98
17-8f
I-8L
8-17L
9-817
17'LZ
17'"
O-Z5
C3,6
1-817
Z-68
Z't,8
9-CS
TOE
6-09
Z I -AOM
L6*01
Vill
qVAOJD
06'0 1
90*L
5L'Z
OL*l
9L*lI
68*9
ZS*17
007
*Isg
-
LO*9
801,
0617
66'8
993,
81*9
96'17
SVL
6E*8
pplA
OZ*9
09'Ot
170'9
llxs
Wd
sm
dWW
dM
Gd3
d93
'IdEl
S'2uWd wuaJ)sP!W UUIP&W
dI SIOUPEd nlOug uu'S.IOW 13Pul-A
Wulnd simpoid osudiolu3
siotwed Xgiou3 oi?p!iqu3
S3SI 2uisfl q ;tAoig snid plaiA
(%) pimajoa qwoj 9 jag y qjAtojg
d-l siouvedoXa3lonig
XuuZltucO AxUd-
V09
U16
Z'l 9
5*88
C'C8
6*179
6*6Z
8*19
8*6E
6'178
17*05
E'LL
9*6L
175
17'8Z
FL17
FLt,
8*88
6115
C*C8
I7*C8
O*t'g
OW
9175
C'9C
8'179
C'017
L .t'g
I7-6L
9'98
0.99
I'l C
0'88
1*15
17'08
VOL
9'8L
8'09
5'8Z
9.19
mcq I tM!H
ZI-Inf
llxs
VVd
sm
dWX
im
Gd3
d3FI
lidu
SlOuVEd XSMEI mSnIq
sioulid Umansm Lmllosuw
d-I MuUud Ag-JOU3 uugioW lapu .rA
U90WOO
AXOJd
sl ;)ulRd si3npQJd asticlimug
SJOUWd nnuEl o2ppqua
d-I SJ2ulnd oXwpng
dno.jg,(xOJd ;auiIad'd
HO -10J sPI31A uoijnq!j ;sla
z
z
I
d-I snuind soilsi2o-I ooounS 1
ouiladid umuoutV IIV suield 9
I,
C
Z
Z
I
d-I sx)tn~md s3ilsi2o-l ooounS L
ouiladid uc3l.[QufV [IV Sululd 9
sioulwd MauZl MnSnM g
099JOAV
tmlpaw
sal!sqam AuudLuoo :zoinoS
c 1 OZ/9/E OOUUUIq ooqBA Wag alTswils2l qJmoJD JA g
LZ'Z
LZ'Z
LZ'Z
LZ*Z
LZ*Z
LZ'Z
LZ*Z
LZ*Z
Tffo-.-i
08*17
q)MOJD
JA 9
ZO'8
*'JAV
dGD
OL'I 1
96*L
f0*51
9L'6
LE'l I
LS*01
snid
PIOIA
11*6 697
17L'17 ME
t,11*9 69*8
LO*5 8917
65*L LCE
8V8 607
71o-!A- q~R-olD
LTZ I
Al(l
TIM
9t"S
'fPV
K17
%oS Aq paildilintu st isumioj q)A%OJ2 dGD O'BPJ'3AV
lioda-d spolsrujL Z I OZ VSS IZ I OZ 16 lq2!suj IrqoID lloollno 92iaug lenuuV Z I OZ Vlg :sisuoojO,4 qvAoiD dCID
6-19
UE6
Z'Z5
Z' 16
C-98
17-99
TOE
0-617
9*517
1*98
17*8t,
O*C8
S'08
E75
C'8Z
9*Lt
-saoud 1!Ids-Isod poisnfpu uo poseq ZIOZ nqoloo moW!H *VVd puL, &~LW jojioqoloo ui paunooo sl!lds)lools I :Z
1-917
WL8
o-LI7
9-98
9'Z8
Z-Z5
17-6Z
O-Lt,
tAO-1 I tPH MO-I
q2!H
Zt-doS
ZI-WnV
A%O-I Puu LPN AILPUOIN
z 1 -100
S93ud
f4lnba uo ninia-d dnoig Axoij
`