Trans-Alaska oil pipeline system

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Title:
Trans-Alaska oil pipeline system Department of Energy intervention : report
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v, 23 p. : ; 24 cm.
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English
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United States -- Congress. -- House. -- Committee on Interstate and Foreign Commerce. -- Subcommittee on Oversight and Investigations
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U.S. Govt. Print. Off.
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Washington
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Trans-Alaska Pipeline (Alaska)   ( lcsh )
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federal government publication   ( marcgt )
non-fiction   ( marcgt )

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Reuse of record except for individual research requires license from LexisNexis Academic & Library Solutions.
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CIS Microfiche Accession Numbers: CIS 79 H502-3
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Reuse of record except for individual research requires license from Congressional Information Service, Inc.
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Dec. 1978.
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At head of title: 95th Congress, 2d session. Committee print. Committee print no. 95-70.
Statement of Responsibility:
by the Subcommittee on Oversight and Investigations of the Committee on Interstate and Foreign Commerce, House of Representatives, Ninety-fifth Congress, second session.

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University of Florida
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All applicable rights reserved by the source institution and holding location.
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aleph - 022593720
oclc - 04915434X
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AA00024717:00001

Table of Contents
    Front Matter
        Page i
        Page ii
    Letter of transmittal
        Page iii
        Page iv
    Table of Contents
        Page v
        Page vi
    Introduction and summary
        Page 1
        Page 2
        Page 3
        Page 4
    Recommendations
        Page 5
        Page 6
    Chapter I. Early stages of Department of Energy intervention
        Page 7
        Page 8
        Page 9
        Page 10
    Chapter II. Direct testimony--the heart of DOE's TAPS intervention
        Page 11
        Page 12
        Page 13
        Page 14
    Chapter III. Secretary Schlesinger's May 5, 1978, decision
        Page 15
        Page 16
        Page 17
        Page 18
        Page 19
        Page 20
    Chapter IV. DOE disappears from the TAPS case
        Page 21
        Page 22
        Page 23
    Back Cover
        Page 24
Full Text


95th Congress CO ITTEE PRINT COMMITTEE
2d Session COMTEEPITIT No. !).5-7o




TRANS-ALASKA OIL PIPELINE SYSTEMNf: DEPARTMENT OF ENERGY I


( JAN 17 1979 REPOR

BY THE '00SI1 o'i 4

SUBCOMMITTEE ON OVERSIGHT
INVESTIGATIONS

OF THE

COMMITTEE ON INTERSTATE AND
FOREIGN COMMERCE
HOUSE OF REPRESENTATIVES
NINETY-FIFTH CONGRESS
SECOND SESSION






w)

DECEMBER 1978




U.S. GOVERNMENT PRINTING OFFICE 36-798 WASHINGTON : 1978

For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington, D.C. 20402
















COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE

HARLEY 0. STAGGERS, West Virginia, Chairman JOHN E. MOSS, California SAMUEL L. DEVINE, Ohio
JOHN D. DINGELL, Michigan JAMES T. BROYHILL, North Carolina
PAUL G. ROGERS, Florida TIM LEE CARTER, Kentucky
LIONEL VAN DEERLIN, California CLARENCE J. BROWN, Ohio
FRED B. ROONEY, Pennsylvania JOE SKUBITZ, Kansas
JOHN M. MURPHY, New York JAMES M. COLLINS, Texas
DAVID E. SATTERFIELD III, Virginia LOUIS FREY, JR., Florida BOB ECKHARDT, Texas NORMAN F. LENT, New York
RICHARDSON PREYER, North Carolina EDWARD R. MADIGAN, Illinois
CHARLES J. CARNEY, Ohio CARLOS J. MOORHEAD, California
JAMES H. SCHEUER, New York MATTHEW J. RINALDO, New Jersey
RICHARD L. OTTINGER, New York W. HENSON MOORE, Louisiana
HENRY A. WAXMAN, California DAVE STOCKMAN, Michigan
ROBERT (BOB) KRUEGER, Texas MARC L MARKS, Pennsylvania
TIMOTHY E. WIRTH, Colorado PHILIP R. SHARP, Indiana JAMES J. FLORIO, New Jersey ANTHONY TOBY MOFFETT, Connecticut JIM SANTINI, Nevada ANDREW MAGUIRE, New Jersey MARTY RUSSO, Illinois EDWARD J. MARKEY, Massachusetts THOMAS A. LUKEN, Ohio DOUG WALGREN, Pennsylvania BOB GAMMAGE, Texas ALBERT GO RE, JR., Tennessee BARBARA A. MIKULSKI, Maryland

W. E. WILLIAMSON, Chief Clerk and Staff Director KENNETH J. PAINTER, First Assistant Clerk ELEANOR A. DINKINS, Assistant Clerk WILLIAM L. BURNS, Printing Editor


SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

JOHN E. MOSS, Califoinia, Chairman JIM SANTINI, Nevada JAMES M. COLLINS, Texas
THOMAS A. LUKEN, Ohio NORMAN F. LENT, New York
DOUG WALGREN, Pennsylvania MATTHEW J. RINALDO, New Jersey
ALBERT GORE, JR., Tennessee DAVE STOCKMAN, Michigan
CHARLES J. CARNEY, Ohio MARC L. MARKS, Pennsylvania
HENRY A. WAXMAN, California SAMUEL L. DEVINE, Ohio (ex officio)
PHILIP R. SHARP, Indiana ANTHONY TOBY MOFFETT, Connecticut ANDREW MAGUIRE, New Jersey ROBERT (BOB) KRUEGER, Texas

HARLE Y 0. STA((. ERPS, Wvsl Virginia (ex officio)
JOHN P. GALLOWAY, Eiterqi 'ask Forc Director RICHARD A. FRANDSEN, C)u11sNl PAMELA R. MORRISSETTE, S17t asisftnf BERNARD J. WUNEtR:, Jr..,Minority 'a' ~s
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LETTER OF TRANSMITTAL


HOUSE OF REPR ESENTATIVES,
SUBC02NIrIrEE ON OVERSIGILT AND I INVESTIGATION,
COMITTIE ON INTERSTATE AND FO )REIGN CO)MIIEI1CE1
Washington, D.C., December 1978.
Hon. HARLEY 0. STAGGERS,
Chairman, Committee on Interstate and Foreign Commerce, Washington, D.C.
DEAR MR. CHAIRMAN: The attached report of the Subcommittee on Oversight and Investigations reviews the Department of Energy's (DOE) intervention in rate proceedings pending before the Federal Energy Regulatory Commission to establish transportation tariffs for the Trans-Alaska Pipeline System (TAPS). The report finds that DOE's intervention in TAPS, the biggest (in terms of dollars) rate case in U.S. history, has been poorly managed and inept. In addIition, the report concludes that the Department of Energy has not served the national interest by effectively dropping out of the TAPS proceedingan action which could undermine future Alaskan oil development and efforts to reduce foreign oil imports.
The report, based on two days of joint public oversight hearings held with the Subcommittee on Energy and Power, recommends that Secretary Schlesinger personally strive to improve management at all levels of the Department of Energy.
Sincerely,
JOHN E. Moss,
Chairman, Subcommittee on Oversight and Investigations.
(M)























Digitized by the Internet Archive in 2013

















http://archive.org/details/transalaskaoilpiOOu nit





























CONTENTS

Page
Introduction and I
Recommendations- 5
Chapter I-Early stages of Department of Energy intervention 7
Chapter II-Direct testimony-The heart of DOE's TAPS intervention-- 11
Chapter III-Secretary Schlesinger's May 5, 1978, decision------------- 15
Chapter IV-DOE disappears from the TAPS case -------------------- 21
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TRANS-ALASKA OIL PiPELINE SYSTEM: DEPARTMENT OF ENERGY INTERVENTION
INTRODUCTION AND SUMMARY
In 1968, oil was discovered at Prudhoe Bay, Alaska. Shortly thereafter, plans were announced for the construction of a Trans Alaska Pipeline System (TAPS) to carry this oil from the Alaskan North Slope to Valdez, Alaska, for transhipment to the U.S. lower 48 states. Construction of the pipeline began in 1974, and oil first began to flow through TAPS during the summer of 1977. T he original cost projection for the pipeline was approximately $900 million, but by the time TAPS went into operation exp~endlitures totalling over $9 billion had been made. TAPS thus became the laro'est reg-ulated energy transport at ion project ever constructed.
In M~ay and June 1977, seven of the eight owners of TAPS, aniticip)Aing its comp~letion in mid-1977, fi~nd tariffs with the Interstate Commerce Commaission (CC) setting out the rules and rates governingc transportation of oil over TAPS. Formal protests contesting the reasonableness of the initial tariff rates were immediatel v filed wxith the ICC by the State of Alaska, the Arctic Slope Regional Corp~oraio0n (representing the interests of Inupiat Eskimos), the United States Department of Justice, and the ICC's Bureau of Investigations and Enforcement.
The ICC, by its order of July 7, 1977, referred the investigation of the lawfulness of the initial rates to an Administrative Law Judge, who scheduled consideration of the issues into two phases. The first phase of the proceeding was to address, among others, the issues of a "just and reasonable" rate of return to the TAPS owners, the most app~rop~riate rate base on which to apply the rate of return, andl the alpprop~riate tax treatment for computing a tariff. Phase 11 will review the costs of the pipeline project to determine what costs, if any, should not be included in the pipeline rate base because of mismanagement.
On October 1, 1977, the date the Department of Energy Organization Act of 1977 went into effect, jurisdiction over the transportation of oil in interstate commerce by pipeline was transferred from the Interstate Commerce Commission to the Federal Energy Regulatory Commission (FERC). Formal hearings on the TAPS tariffs are currently being conducted by the FERC.
The Congress, recognizing that various rate proceedings can at times have a significant impact on national energy policy, permitted the Secretary of Energy, under Sec. 405 of the Department of Energy Organization Act, to intervene on the record as a matter of right in such proceedings. In recognition of the important national energy issues attending to TAPS, the Department of Energy intervened in the TAPS proceedings before FERC on October 7, 1977.
(1)






2

In opposing the tariff rates filed by the eight major oil companies who own TAPS, DOE took the position that the "national economic interest and the national energy policy to reduce reliance on imported oil militate in favor of the minimum tariffs [for TAPS] consistent with the costs and risks prudently incurred by the pipeline owners.' 1 2 To obtain minimum tariffs, DOE urzed that the "rate of return be set as low as possible without being c'Onfiscatory." I
During the Subcommittee's hearings, Administrator Bardin further explained the significance of the TAPS tariffs:
* Now, the higher the tariff, the higher the rate charged for hauling the oil through the pipeline to Valdez, the less is left over for the wellhead. There is no question if we leave very little at the wellhead we are minimizing the development incentive to come up with more oil on the Alaska North Slope.
Worse than that, there are eight companies who are coowners of this pipeline and they, of course, can take their profits in the transportation function-all other things being equal. Most of the eight are also producers. For a producer who is a coowner in the pipeline it is competitively advantageous because of that vertical integration to see his own share developed, but the potential new entrant, another company who might come in as an exploi-er, as a developer, as a producer, will be at a competitive disadvantage against the coowners of the pipeline.
We have an interest in seeing to it that the profits taken in the pipeline function, while adequate to reward the risks taken and to justify and sustain the cost of that investment, not be excessive.4
Finding itself without the expertise and in-house capability to address the key issues in the case, such as rate of return, DOE contracted with the Washington, D.C. consulting firm of J. W. Wilson & Associates to provide expert testimony on behalf of DOE. The Wilson & Associates expert testimony, consisting of separate presentations by three persons from within the firm, was prepared under the supervision of DOE's Economic Regulatory Administration in close consultation and coordination with the Office of General Counsel.
The most controversial aspect of the testimony was the rate of return recommendation. By advocating a low rate of return, 8.85 percent overall, Dr. Wilson's testimony was in keeping with DOE's brief and was well below the rates of return, some as high as 20 percent, sought by the oil company owners of TAPS to support tariffs which average $6.21 per barrel.'

I The percentage ownership interests in the pipeline are as follows: Percent
ARCO ------------------------------------------------------------------------------------- 21.00
Sohio --------------------------------------------------------------------------------------- 33.34
Exxon -------------------------------------------------------------------------------------- 20.00
Amerada Hess ------------------------------------------------------------------------------ 1.50
Mobil --------------------------------------------------------------------------------------- 5.00
Phillips ------------------------------------------------------------------------------------- 1.66
Union -------------------------------------------------------------------------------------- 1.66
BP ----------------------------------------------------------------------------------------- V5.84
Total ------------------------------------------- 7 ------------------------------------- 100.00
Excluding Union, the same seven companies own approximately 95 percent of the Prudhoe Bay production.
2 Department of Energy Pre-Hearing Brief in Trans-Alaska Pipeline System, FERC Docket No. OR 78-1 (hereinafter cited as DOE Pre-Hearing Brief); printed at Hearings on Trans-Alaska Oil Pipeline System: DOE Intervention before the Subcommittee on Oversight and Investigations and the Subcommittee on Energy and Power of the Committee on Interstate and Foreign Commerce, House of Representatives, 95th Cong., 2nd Sess., Serial No. 95-112, June 26 and 26, 1978 (hereinafter cited as Hearings) at 3 et seq.
3 Id. at 15.
4 Hearings, 57.
3 The pipeline owner oil companies have filed for tariffs which range from $6.04 to $6.44 per barrel. Accord Ing, to workpapers submitted by Wilson & Associates to DOE, an 8.85 overall rate of return in the context of specified debt/equity and capital structure parameters would result in a TAPS tariff in the neighborhood of $4.45 per barrel. The proposed DOE recommendation would have been at the lower end of the spectrum when compared to other protestants such as the Department of Justice, FE RC staff or State of Alaska.






3

The importance of the TAPS rate of return proceeding to the owvners.-, of TAPS and to future Alaskan oil exploration anci (levelopmnent is5 suggested by the following example. Assuming the $6.21 tariff proposed by the TAPS owners to be but 81 cents (or 15 percent) higher than that which will be ultimately set by FERC, the resulting savings in pipeline transportation costs would increase the wellhead price of Alaskan oil by that same 81 cents per barrel in providing an additional $324,000,000 per year incentive for the exploration andi development of Alaskan oil." Over a twenty year period that w~ouild amount to an applroximate $6.5 billion.
The second volume of testimony from the Wilson firm, prepared by Mr. George Donkin, provided specific examples of recently discovered Alaskan North Slope formations containing "signincant quantities" of crude oil where incentives to dlevelop) andl prIoduce could be undermined by artifically high tariffs. Mr. Donkin's testimony also discusses how, as a result of high TAPS tariffs, "non-owner petroleum companies would be placed at a distinct competitive disadvantage, relative to the TAPS owners, in exploration, development and, producing operations on the Alaskan North Slope."I
The high cost of transporting Alaskan oil is already threatening, moreover, to prevent the Atlantic Richfield and British Petroleum companies from producing between one-half to one billion barrels of proved reserves west of Prudhoe Bay. According to company officials "the price received for the oil will be crucial" in determining whether those known reserves will ever be produced.'
The DOE sponsored Wilson testimony was due to be filed with FERO by close of business Friday, May 5, 1978. However, in a last minute decision, Secretary Schlesinger scrubbed the filing of that testimony and seriously undermined the Department's intention to push for the lowest legally permissible rate of return in support of minimum tariffs for TAPS. Ironically, Secretary Schlesinger has acknowledged that the testimony, which had been prepared at public expense, was a professionally sound product consistent with the Department's policy in the TAPS case.9
As a result of the Secretary's decision, DOE became the only major party, in the biggest (in terms of dollars) rate case in U.S. history, which failed to make a direct evidentiary presentation in support of its policy positions concerning the maximization of Alaskan oil production. In so doing DOE seemingly failed, moreover, to honor its statutory mandates to. promote competition and prevent unreasonable profits in the various segments of the energy industry.10
In the face of mounting criticism of Dr. Schlesinger's action, the DOE released Wilson & Associates from their contractual obligations to the Department to permit an Eskimo group, the Arctic Slope Regional Corporation. to sponsor Wilson's testimony. In so doing, the Department of Energy placed the burden of supporting the national energy interest in TAPS on a tribe of Eskimos who had
8 Based on annual pipeline throughput of 400,000,000 barrels.
7 Prepared Direct Testimony of George L. Donkin, April 1978, at pp. 24 and 25.
8 The Oil Daily, May 2,1i978, printed at Hearings, 26.
9 Hearings, 48.
10 Department of Energy Organization Act of 1977, Public Law No. 95-91, 42 USGS 7112(12) (August 4, 1977); Federal E nergy Admi nistrat ion Act of 1974, Public Law No. 93-275, 15 U SGCS 764 (5) (May 7, 1974)


36-798-78-2





4

intervened in TAPS for the understandable purpose of advancing its own financial interests.
On June 26 and 27, 1978, the Subcommittee on Oversight and Investigations and the Subcommittee on Energy and Power held joint public oversight hearings on DOE's intervention in the TAPS case. Mindful of the national energy interests involved in TAPS, the hearings undertook a case history review of the Department's overall performance in TAPS and the decisionmaking process which led to Secretary Schlesinger's May 5 decision. DOE's performance in TAPS was also thought to be an appropriate yardstick to evaluate the dayto-day working relationships and management of key offices within the recently consolidated Department of Energy. The Subcommittees interest was further enhanced by the National Energy Act legislation which contemplates important new responsibilities for DOE's intervention program.
Witnesses who appeared before the Subcommittees included Dr. James R. Schlesinger, Secretary of Energy, Mr. David Bardin, Administrator of the Economic Regulatory Administration, Mr. Eric J. Fygi, Acting Deputy General Counsel and members of their staffs who were directly responsible for conducting DOE's intervention in the TAPS case.
The primary topic of this report is not the merits of the issues presented in the TAPS proceeding per se, issues on which the members of the Subcommittee may disagree, but rather the operational efficiency and effectiveness of the Department, and its intervention program, in advancing national energy policies in an important rate case and the failure of Secretary Schlesinger to offer an acceptable explanation for his decision not to submit the proposed Wilson & Associates testimony to FERC.
After extensive investigation and two days of public hearings, the Subcommittees conclusions are as follows:
1. DOE did not serve the national interest by effectively dropping out of the TAPS proceeding, an action which could undermine future Alaskan oil development and efforts to reduce foreign oil imports.
2. The DOE intervention in the TAPS proceedings to date has been poorly managed, inept and inconsequential.
3. DOE is woefully lacking in the in-house expertise necessary to address the complex issues presented in pipeline ratemaking cases such as TAPS.
4. The Economic Regulatory Administration, particularly in the initial stages, failed to provide the Office of General Counsel with the policy guidance and technical expertise necessary to adequately support the Department's intervention before FERC.
5. DOE had no established procedures for timely review of policy questions and proposed testimony in Federal and State interventions, and Administrator Bardin failed to properly manage the TAPS intervention so that sufficient time was provided for Secretary Schlesinger's review of the consultant's testimony.
6. Secretary Schlesinger was remiss in not establishing Department policy on the role of contractor personnel, until substantially after ERA had expended public funds to specifically contract for expert witness testimony on behalf of DOE in TAPS-a situation which he later found objectionable.





5

RECOMMENDATIONS
Unfortunately, it is too late to undo the damage (lone to DOE's intervention by its failure to file direct testimony and to amelionite the concern that Secretary Schlesinger's actions in TAPS were InfItienced by an unwillingness to oppose the major oil companies in TAPS. In addition, the mismanagement, lack of established procedures and policies, and administrative breakdowns which characterized the Department's TAPS intervention are seemingly so ingrained and reflective of overall DOE chaos and mismanagement as to defy ready solution.
In the first year of the Department's existence, senior level officials, including Secretary Schlesinger, were seemingly consumed by the struggle to pass the National Energy Plan. With much of this controversial legislation behind us, it is imperative that Secretary Schlesinger not let extraneous activities and presidential missions detract from his having to personally strive to improve management at all levels of the DOE.
To its credit, DOE has moved to correct certain of the glaring shortcomings revealed in the intervention program by theTAPS experience. On August 10, 1978 Deputy Secretary O'Leary informed the Subcommittees that "procedures for handling interventions in Federal and State regulatory agency proceedings have been established."" In particular, an Intervention Review Committee composed of the Assistant Secretary for Policy and Evaluation, the Economic Regulatory Administrator, and the General Counsel has been set up to select cases for intervention, establish major policy objectives, and supervise the overall level of DOE involvement. Lines of responsibility between the key internal offices of the Department have also been made clearer.
11 Letter from Deputy Secretary John F. O'Leary to Chairman John E. Moss, August 10, 1978, printed at Hearings, 241 et seq.















CHAPTER I-EARLY STAGES OF DOE INTERVENTION
The Administrator of the Economic Regulatory AdIminis trat ion (ERA) has been dlelegatedl the Secretary's authority to intervene on behalf of the Department in proceedings before FERC of- other Federal and State agencies .12 Mr. Davidl Bardin, the Administrator, authorized1 DOE's intervention before FERC in the TAPS case on October 7, 1977.
Administratively within DOE, the lawyers assignedl to the case from the Office of General Counsel (OGC) viewed ERA as their client andl lookedI to ERA for policy guidance andI technical support in carrying out DOE's intervention. Unfortunately, (1 tringr the peri0(1 from October 1977 through mid December 1977, policy guidance, technical support, and overall supervision from ERA were virtually nonexistent.
The confusion within ERA and the breakdown in coordination between OGC and ERA was chronicled in a memorandum prepared by the staff attorneys which described the situation in October, 1977 as follows:
The Office of the General Counsel found itself in the anomalous position of trying to articulate a position in a very important proceeding without the benefit of a client oi a policy. There ensued during most of the month of October what could, without hyperbole, most accurately be described as a game of "bureaucratic ping pong" between Doug Robinson's office and Doug Bauer's office 13 within ERA, with the attorneys for the Office of General Counsel serving as the ping pong bail. During this period of time, Bruce Driver and/or Woody Torrence scheduled nuerous meetings with pcrsons in each of these offices only to be told shortly before, shortly after, or at such meetings (when they were not cancelled) that the authority with respect to the Trans-Alaska Pipeline matter had been transferred to another office.14
As late as the first week of December, 1977, the staff attorneys cornplained of no departmental policy, no expert witnesses, no paralegal assistance and a brief due in a matter of (lays. In late December, the ERA staff was finally able to formulate departmental positions and policies which were approved by Mr. Bardin and set forth in DOE's pre-hearing brief on December 30, 1977.
DOE, in the pre-hearing brief, took the position that the "national economic interest and the national energy policy to reduce reliance on imported oil militate in favor of the minimum tariff (for TAPS) consistent with the costs and risks prudlently incurred by the pipeline owners."'25 The brief went on to note that the manner in which the oil revenues are apportioned by the FERO between the wellhead price for oil and the TAPS tariff impacts on the consumer, the national economy and the nation's oil supplies.
12 Delegation Order 0204-4, promulgated by the Secretary of the Depart ment~ of Energy on October 1, 1977. 13 Mr. Robinson is E RA's Assistant Administrator for Regulations and Emergency Planning wilie Mr. Bauer at the time was the Assistant Administrator for the Office of Utility Systems. 14 Doe Memorandum of December 7, 1977, describing 0 G C participation in case, printed at Hearings, 129. 15 DOE Pre-Hearing Brief, printed at Hearings, 12.
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8

The relationship between the TAPS tariff and the well-head price stems from the f act that Alaskan oil sells in the lower 48 states at the worldly oil price. Stated simply, the price at the wellhead in Alaska thus equals the world price minus transportation costs. The more it costs to ship a barrel of oil through the 800-mile Trans Alaska Pipeline the lower the price at the wellhead. Lower wellhead prices in turn mean less incentive for future production and exploration.
The predictable effects of establishing TAPS tariffs at levels higher than the lowest reasonable level were identified in the brief as follows:
(1) The wellhead value of the oil would be diminished, with the
result that economic incentives to discover additional reserves
would be lessened;
(2) The value of the [Prudhoe Bay] oil reservior would be
reduced, so that oil production from known reservoirs would be
restrained;
(3) There would be an increase in the nation's dependence on
imported oil with concomitant balance of payments implications;
and
(4) Competition among the ANS producers would be diminished
because of the unfair and unreasonable burden of excessive transportation costs for the non-owner producers.16
As to the critical rate of return element, which directly affects the TAPS tariff the pre-trial brief indicated that DOE would urge that the "rate of return be set as low as possible without being confiscatory." 17 DOE's approach relied on traditional ratemaking principles which suggest that the rate of return be set no higher than that necessary to attract capital to the enterprise. 18
With the filing of the pre-hearing brief on December 30, 1977, the DOE staff faced the next stage of the proceeding which involved the cross-examination of witnesses from the oil company owners of TAPS. Following this cross examination, the hearing schedule called for the filing of direct testimony by the DOE and other protestants.
However, serious problems continued to plague DOE's intervention effort subsequent to the filing of the pre-hearing brief. Early in the proceeding DOE staff recognized that the agency did not have the in-house capability to provide the necessary expert witness testimony or technical assistance required for a meaningful and effective TAPS intervention. To rectify the situation, the ERA staff moved to retain the economic consulting firm of J. W. Wilson & Associates.
The DOE litigation staff looked to the Wilson firm for assistance in three principal areas: (1) cross examination of company and intervenor witnesses, (2) preparation and presentation of expert testimony on behalf of the Department, and (3) for assistance in preparing briefs at the close of the hearing. As revealed by the Subcommittee hearings, not one of these objectives was fully realized.
In January 1978 the immnediate task lacing the attorneys was preparing for the cross examination of some 32 oil company witnesses scheduled to begin on February 8, 1978. To obtain funds necessary for the consulttants to assist DOE counsel in cross examination, Mr. Rich a rd I versidlge, the contract program officer, initiated a $9,500
11 fd. ,.It 13.
"FlY' k. 11ope Naltral Gas (o., :321) U.S. 2A1 (1944); Bluifvld Watrworks & fInprorcmnt Co. v. Public &;rilct Commission 216i2 U.S. 679 (1923).





9

contract. Since he realized that the departmental process of obtaining contracts over $10,000 involved months of delay and administrativee' hassle, he opted for the $9,500 contract even though it was insufficient to accomplish the task at hand. Liversidge's efforts to facilitate and expedite the contract failed in the end, however, because the paperwork got lost within DOE for a 3-week period. As a result the $9,500 contract was not signed until February 8, 1978, the day after cross examination began. The allocated amount allowed the consultants to assist the DOE trial staff in the cross examination of "only a couple of witnesses" and caused Edelman, the chief trial counsel to note that "we have had very limited assistance . from Wilson and Company, in cross examination." "I
The effectiveness of DOE's TAPS intervention was also undermined by ERA's decision not to commit the resources necessary for the agency to share in a computerized system set up by the intervenors so that trial counsel could obtain timely access to the tens of thousands of documents obtained from the oil companies during discovery. DOE's attorneys expected to join the computerized retrieval system set up and shared by the other intervenors, including the Justice Department and FERC staff, but ERA rejected the DOE participation because of a lack of resources. The approximate $6,000 cost to DOE was pitifully small, when compared to the importance of the case and DOE's twelve billion dollar budget. The second member of DOE's trial team, Mr. Gurwitz, testified that this decision precluded easy and timely access to "60 percent of the discovery documents in DOE's possession. 11 20
The bifurcated organizational structure of the intervention program led to a situation where the lawyers assigned to the case were under the administrative supervision of the Deputy General Counsel for Interventions, but had to look to their client, ERA, not only for policy guidance but also for the resources necessary to carry out peculiarly legal activities such as cross examination. In his testimony, Acting Deputy General Counsel Driver recounted one episode where OGC had been promised four additional slots by ERA to support the ERA Intervention Program but after interviewing candidates and being on the brink of hiring two attorneys, the promised slots were withdrawn.21
Regarding the TAPS intervention, trial counsel testified that the resources provided by ERA were inadequate to support the DOE position in the case. Edelman in an internal document stated that "counsel for DOE has been severely hampered by the lack of resources" available to obtain the services of an "expert regulatory economist throughout the proceeding. 11 21 In another document, Edelman compared the $36,500 DOE had available for expert consultants to the $1.9 million that one company alone, Atlantic Richfield Company, had budgeted or spent on the first phase of the case and. concluded that it was a ". . drop in the bucket compared to the monies spent by the oil companies on this case and also compared to the responsibility of the Department of Energy to advocate the national interest in this case. Y7 23
19 DOE Memorandum from OGC to ERA, printed at Hearings, Appendix, 275. 20 Hearings, 115.
21 Hearings, 135.
22 DOE Memorandum (draft) prepared by Edelm,,,,n in May 1978, printed at He,),-rings Appendix, 306. 23 DOE Memorandum from OGC to ERA, printed 91 Hearings Appendix, 27C-277.






10

While the hearing record clearly points to a failure by ERA to effectively and adequately support DOE's intervention in TAPS, it also reveals that the efforts of the OGC trial team were poorly organizedl. In dividing up the responsibilities of the OGC trial staff, Edelman, the lead counsel, assigned virtually all of the major responsibilities to the junior attorney, Mr. Haywood Torrence.2 These duties included summarizing the positions of all parties; preparing the necessary legal memoranda; collecting, collating and reading all prior testimony of witnesses in the case, and developing positive cross examination of all witnesses. To himself, Mr. Edelman reserved such tasks as supervising all of the above tasks, maintaining an overview of the
sand attempting to insure that the budget was not overspent.
Understandably, Torrence notified Edelman that he felt his assignment to prepare, for Edelman's use, cross examination questions for all of the 32 witnesses was "unreasonable" and reminded him that "except in law school, I have never cross examined anyone, anytime, anywhere."1 21 A few (lays later, Torrence quit the TAPS case-a decision in part caused by frustration over the lack of policy guidance and technical assistance.26
Thus as the cross examination of the witnesses for the pipeline owner's began, the DOE intervention effort found itself inadequately supported, ill-prepared and poorly organized. The retention of the economic regulatory expert had been delayed because of an administrative snafu with the contract and the size of the initial contract itself was dictated principally by bureaucratic processing requirements rather than what was needed to effectively (10 the job. The DOE litigation staff did not have timely access to thousands of discovery documents because of an ERA decision not to join the computerized system set up by the other intervenors and the attorney who was to prepare all of the cross examination quit the case shortly before it began.
Mr. Edelman, DOE's chief trial counsel, in a January, 1978 memoran(lum summarized the intervention effort as follows:
I am therefore reminded in our present posture, where the Department of Energy, in a state of disarray and lacking in resources, which is mandated to represent the national interest and has intervened in TAPS, of the days in 1939 when England stood alone, disorganized and virtually unarmed against a powerful Germany. It is challenging and exciting to be the "David" rather than the "Goliath" in any fray. The Government in this case, rather than being the "big bad guy", is the "David" up against the multi-national Goliaths. We are fighting with extremely limited resources the enormous economic strength and capability of eight of the largest oil companies in the world. In a certain sense, it is tragic for the national interest that we have such limited resources. But at least it returns us to the spirit of Valley Forge when our Country was just starting up disorganized and with limited resources. The challenge to organize and to obtain the resources which will enable us to carry out the Presidential mandate to the Department of Energy and to the American people to wage war on the energy problem. While it may seemn absurd even to contemplate doing this in the present state of our organization and resources, nevertheless it has been done before, and it can be done again.27
Unfortunately, Mr. Edelman's optimism was not fulfilled.
24 1)()p E emorandum of January 12, 1978, describing organization of TAPS case, priited at Hearings, 72. 26 D)OE Memorandum of Jaiiuary 26, 1978, discussing work assignment, printed at ilearings Appendix, 264. 26 heauriings, 1:14.
27 D)oE Mernorandum of January 12, 1978, printed at Hlearings, 75-76.












CHAPTER 11-DIRECT TESTIMONY-THE HEART OF DOE'S TAPS INTERVENTION
iNotwithstanding the dIisorder, inadlequat e resources, and lack of' technical support which plaguedI the staff efforts, the Depamrt men t was still hopeful of having a meaningful impact on the TAPS case throutih its submission of direct testimony addressing the key issues of' the case. Both OGC and ERA staff members stately that the direct, testimony of Wilson and Associates was going to be the heart of' DOE's TAPS intervention and was considered much more important than the cross examination. Often, cross examination serves only to undercut the opposition case while (direct testimony is the princip al means of getting a cohesive statement of andl the basis for ones views into the evidentiary record, the vital body of facts and expert opinion used to support arguments in brief and sustain the agency's ultimate decision.
To this end ERA, in what was dlescribedl as an "urgent p)rocuremenlt action necessary to support ERA's intervention on behalf of DOE In TAPS,"1 28 entered into a contract modification on February 21, 1978 with the Wilson firm for an additional $27,000.
The contract justification statement for the selection of the Wilson firm contains the following statements:
In order to be effective in this important intervention, DOE expert-witness testimony is required in the complex areas of oil pipeline rate of return, rate base, taxation and competition * ERA therefore requests that J. WV. Wilson and Associates be contracted with to prepare and deliver the expert-witness testimony in support of DOE's intervention in the TAPS tariff proceeding * Absent contract support to pi epare direct testimony, ERA perceives no alternative to finishing out its cross examination of TAPS witnesses and withdrawing D OE from the poceeding.29
Calling language in the justification statement "procurement language" ,3 Administrator Bardin attempted to blunt any criticism of Secretary Schlesinger's eleventh hour decision to scrub the testimony of DOE's expert witnesses by asserting that the contract was only for technical advice andl analysis. According to Bardfin, expert testimony by the Wilson firm was a possible option but he "had not crossed that bridge" at the time of the contract.31
Administrator Bardin's testimony before the Subcommittee is at odds, however, with the testimony of his subordinate M\r. Liversidge, who stated that he had received personal instructions from Bardin
to develop, or to oversee the development of testimony that, was tough and fair." 12 Edelman, moreover, recalled a meeting with Bardin where the Wilson firm was (discussed:
28 DOE Memorandum of February 1978 describing consultants' contract, printed at Hearings Appendix 285.
29 DOE Justification Statement for Selection of J. WV. Wilson & Associates, Inc. of February 21, 1978, printed at Hearings, 35 et seq.
30 Hearings, 34.
31 Hearings, 103.
32 Hearings, 232.





12
I do remember specifically a later meeting with Mr. Bardin in maybe January or February, at which time we discussed the range of possible issues that John Wilson & Associates were going to be testifying on.33
Furthermore, on February 14, 1978, DOE's chief trial counsel had notified all parties in the TAPS case that the Department would be calling three expert witnesses from the Wilson firm in its direct case 34
Any doubt that the Department sought testimony, as opposed to a technical analysis, from the Wilson firm is completely disspelled by the contract terms themselves. Broken into two tasks, Task 1 states that "the contractor will prepare testimony in the following areas, and will deliver the testimony in the proceeding . ." and seriatim payments are allocated upon the "delivery of final testimony," the "filing of testimony by DOE", and the "completion of oral presentation." 15 This contract was approved by Bardin's chief administrative officer and had the concurrence of the Deputy Assistant Administrator for Utility Systems. Liversidge also testified that Bardin was aware of the preparation and signing of the contract with Wilson and that the staff was "proceeding with the development of this testimony." 36
The testimony of the Wilson firm was developed under the overall supervision of the ERA staff in close consultation and coordination with the Office of General Counsel. In early April, five weeks before the Wilson firm's expert testimony was due at the FERC, Liversidge's immediate supervisor, Grey Staples, the Director of the Office of Regulatory Interventions, sent Bardin and other DOE offices a progress report from Wilson & Associates detailing the testimony that the firm was proposing to deliver.
In sen(ling it to officials of the Office of Policy and Evaluation, Office of Special Assistant to the Secretary, Office of General Counsel, and the Office of Resource Applications, Staples sought to "assure that the views of the various parts of DOE are included in the testimony that we will file." 11
Subsequently, several preliminary drafts of the consultants
testimony were circulated by the ERA staff to staff members of other interested offices who in turn submitted comments on the testimony. As a result of this process, the principal intervention stnff for TAPS had every reason to believe that the Wilson & Associates final testimony reflected the best corporate intelligence of the D department, was the product of careful thought, and represented a r infestation
of the policy positions taken by the Department in the pre-hearing brief.
The Wilson & Associates testimony consisted of three volumes. Basing his conclusion on comparable earnings and security market studies set out in the initial 51 page presentation, Dr. John A. Wilson conclude(I that a fair rate of return for TAPS should include an allowance of 12.5 percent for common equity capital. I is overall
33I leti i 1rS ,: 3.
14 1)())E eIfI IT1n to All Counsel For Respondents of Fe hruary 14, 1978, printed a I I e: wings Appendix 3i 5 ) O I c Ni i 1j. W. Wilson and Associates, I ic. of Iebruary 21, 1978, printed Wi lie v' s Appendix 287-290.
36 11e ,: p j
1 )() 11 1 of Anril 7, 1978, deso i r)imLy tes imony id eliici!ing comments, p in (ed at Hearings, 77.






13

rate of return recommendation was 8.85 percent, a return whichi he concluded would fairly compensate the TAPS owners as well as permit the attraction of additional capital for the enterprise. Dr. Carolyn Smith, in a 24-page presentation, reviewed the alternative methods of rate base valuation and recommended that the rate of return be applied to a prudent net original cost rate base. T1he third volume, prepared by Mr. George Donkin, analyzed the undiscovered ANS crude oil resource base, the market structure of the ANS petroleum industry, and most importantly the anticompetitive nature and production. disincentives of artificially high TAPS tariffs.
On April 25, 1978, or 10 (lays before it was due to be filed at FERC, one of Secretary Schlesinger's assistants requested ERA to prepare an information memorandum for the Secretary setting forth the key points in the testimony. This memorandum, which Bardin signed and sent on May 3, 1978, was first seen by the Secretary on the afternoon of May 5, 1978-a few hours before the testimony was due to be filed.
The TAPS case illustrates the absence of, and need for, internal administrative procedures to insure an adequate time for Secretarial review of an action if required. Bardin, after acknowledging a "distinct lack of timeliness" agreed that "the issue should have been forwarded to the Secretary's attention sooner." 38
A separate but somewhat related problem which the TAPS case revealed was the lack of any established clearance procedure for the testimony itself. The principal staff members working on the TAPS intervention were not sure whether the testimony itself had to be signed off at the Secretarial level before filing. In previous cases involving state interventions Administrator Bardin had been the final approving authority. And although this was the first FERC intervention for the Department, Bardin, and not the Secretary, had been the final sign off for the pre-hearing brief which set forth DOE policy positions in the case.
Apparently the need for Secretary Schlesinger's approval of the consultants testimony was not addressed or decidled until a morning meeting on May 5, 1978 when the staff assembled to brief Deputy Secretary O'Leary on the testimony. Administrator Bardin had taken the position in his May 3 briefing memorandum to the Secretary and Deputy Secretary that the 8.85 percent overall rate of return recoinmended by Dr. Wilson would "cover TAPS cost of capital, including a return on equity sufficient to compensate TAPS owners fairly." 19 Such a rate of return, according- to Bardin, would maximize producer competition and production incentives for new North Slope reserves by allocating maximum revenue to the wellhead value. Adoption of more generous rates of return, Administrator Bardin warned, would generatee excess revenues" and result in "windfall capital gains" to TAPS owners.40
As the discussion at the O'Leary meeting concluded, one of Secretary Schlesinger's Special Assistants asked that Secretary .' chles inger be briefed on the testimony although( h the intervention St aF was 11nstructed to "be prepared to go" [with the testimony]. To alleviate
38 Hearings, 46.
31 DOEF Info ma ion Memorandum from Admnistrator Bardin to Secretary Schlesinvzer arnd Deputy Secret ary 0'Lea' y of May 3, 1978, printed at lhearing-s. 31 etseqj. 40Id
41 Staff Interview with Jerry L. Pfeffer, Deputy Assistant Administrator of the Ofice of Ut ility Systems on May 19, 1978.






14

some concerns regarding the financial communities possible concern over the rate of return recommended by DOE for TAPS, officials of the Policy Office and ERA were instructed to modify the letter of transmittal to FERC to further emphasize the Department's view that TAPS was distinguishable from future capital intensive projects that ml!Lrht come before DOE. This was accomplished prior to Secretary Scl lesinger's afternoon meeting.
The belated decision to buck the consultant's testimony to Secretary Schlesinger for final approval led to a hurriedly called meeting at approximately 1:30 p.m. on May 5, 1978, where the Secretary first became aware of the Wilson and Associates testimony. As Chairman Dingell correctly observed, Administrator Bardin did not properly supervise or manage the conduct of the case so that the testimony came up in sufficient time that it could be properly reviewed and the Department had no established review procedures.42
42 Hearings, 50.












CHAPTER III-SECRETARY SCHLESINGER'S MAY 5, 1978, D)EcisION
Three hours before the Wilson & Associates testimony was diie to be filed at FERC, Secretary Schlesinger concluded[ the briefing by his high level staff with the announcement that the testimony would not be filed by DOE. No reasons for his decision were specified at the meeting. The reaction of the OGC and ERA staff members, some of whom were literally stuffing the testimony into envelopes for mailing at the time, was one of total shock and surprise.
if, as the Subcommittee's hearings revealed, DOE's intervention in TAPS was beset and1 undermined by management failures and deficient internal administrative procedures, then Secretary Schlesinger's eleventh-hour decision quashing the Wilson & Associates testimony dealt it a crippling blow. As noted by DOE's chief trial counsel in the case, from an evidentiary point of view the failure to submit direct testimony effectively cut the heart out of the Department's case in TAPS. The ramifications of and reasons behind Secretary Schlesinger's decision repudiating the testimony of DOE's consult ants despite his and Administrator Bardin's acknowledIgement that it was "a professionally sound job" 13 were thus a key point of the hearings.
One immediate consequence of the May 5 (decision was to leave DOE as the only major party in the proceedings which did not make a direct evidentiary presentation in support of its policy positions. Congressman Edward J. Markey read into the record a statement by the Artic Slope Regional Corporation, one of the other protestants in the case, which described the significance of DOE's failure to file testimony as follows:
The Department of Energy's decision leaves a severe gap in the direct evidence to be presented by protestants as no protestant has presented any direct testimony focusing on the effects of tariffs on the development of resources and the particulariy anticompetitive effect of high tariffs."1
As previously noted, the testimony of Mr. Donkin of the Wilson firm was specifically dlesignedl to address the competitive implications of TAPS rates including the impact of the TAPS tariff rates upon the level of untimate recovery of oil and the competitive structure of the producing industry on the Alaskan North Slope.
To "foster and assure competition" and "prevent unreasonable profits within the various segments of the energy industry" 4 are specific statutory mandates given by Congress to the Department of Energy. Notwithstanding these specific legislative mandates, the expenditure of thousands of (dollars of public funds to hire expertwitnesses, several months of internal staff work, the favorable recoinmnendation of Administrator Bardin, and the importance of the case to the future development of Alaskan oil reserves, Seci et arv Schlesinger blocked the filing of testimony designed to articulate DOE's policy
43 Hearings, 47.
44 Hearings, 59.
45 Department of Energy Organization Act of 1977, Public Law No. 95-91, 42 ITSCS '0112(12) (August 4, 1977); Federal Energy Administration Act of 1974, Public Law No. 93-275, 15 USCS 765(4) (May 7. 1974).
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16

positions in the TAPS case. His reasons, as expressed to the Subcommittees, were essentially three.
Inadequate time for review on the afternoon of May 5 was the first reason. The second was his personal belief that private contractors should not formulate or present Government policy. His final reason centered around the low rate of return recommendation in Dr. Wilson's testimony and its impact on the flow of capital for similar future projects.
The overriding reason, according to Secretary Schlesinger, for not going ahead with the testimony of Wilson & Associates was primarily procedural. Two specific and separate considerations fell under the procedural umbrella.
The first, as previously noted, was the fact that the testimony was presented to the Secretary with only a three hour leadtime for review before it was due to be filed at FEIRC. Secretary Schlesinger testified that "the decision was put to me in terms of are we going to file by
5 o'clock or are we not?" 0
The Secretary's refusal in an important case such as TAPS, to submit several volumes of testimony without adequate time for review is understandable. However time constraints could only have been a transitory, and not the real, reason for DOE's failure to submit the testimony because the agency had the option of obtaining an extension of time from the Administrative Law Judge or filing the testimony late. The FERC staff had sought and been granted an extension until May 15, 1978 for filing its expert-witness testimony. Indeed, in his letter to Secretary Schlesinger on May 26, 1978, Chairman Moss pointed out that "absent a showing of real prejudice it is not uncommon for late filed testimony to be received into evidence" and urged that his "personal review of the Wilson & Associates testimony be completed expeditiously to assure the Department of Energy of a meaningful role in the TAPS proceeding."1141
The second procedural consideration which played a role in the May 5 decision was the Secretary's personal belief that private contractors should not "formulate or provide the exposition of Government policy."148 He indicated that he was surprised to learn on May 5 that "members of the Department had previously been prepared to allow independent contractors to testify on behalf of the Government andl formulate policy." 49
After initially calling such a situation "reprehensible" he tempered his description to "inappropriate." 10As evidence of corrective measures taken, Secretary Schlesinger submitted for the hearing record DOE Order 3230.1, a Departmental directive on the role of contractor personnel, which he had signed on June 23, 1978, 3 (lays before the Subcommittee hearings.51
iWhile Secretary Schlesinger may have had long-standing views andl "grave misgivings"521 regarding testimony by contractor personnel
46 Hearings, 65.
47 Letter from Chairman John E. Moss to Secretary of Energy James R. Schlesinger of May 26, 1978, printed at Hearings, 18 et seq.
44 H earings, 39.
49 11earinigs, 40.
60 lHeari ris, 45.
51 DOE Order 3230.1 on The Role of Contractor Personnel In Policy Developmenit and In Representig The Governmnent dated June 23, 1978, printed at Hearings, 42 et seq. 52 Hearings, 63.





17

on behalf of DOE, these Iccefls hlad al)1)arelltlv neveri beelt 111 le known to key dlepartmfental officials ini the (ontract I)p)rou lfnwlt (w intervention offices or to Administrator Bat-diti. As ( hairmoni D111 (, Il accurately concludedl "~ * either DOE let a (:oftl-act iii deliianee of policy, or it had no p)olicy.",5
Rather than the formulation of DOE policy, department officials" viewedl the Wilson & Associates testimony as the articulation of po(licy, positions developed and coordinated with several DOE ofices.0' The basic policy positions had been expressed in the p)re-hearing- brief. And as Chairman Moss noted, the acceptance or rejection of the consultants proposed testimony is where the policy comes in.',' If accepted it then becomes the Department of Energy's position and is presented as such to FERC.
In addition to being first expressed some seven months after the Department came into existence and after it had already entered into and funded a contract calling specifically for consultants testimony, the Secretary's views as to contractor testimony appear to be somewhat unique among governmental agencies. All other major protestants, including the FERC staff and the Department of Justice, contracted with outside consulting experts to provide rate of return testimony on their behalf in the TAPS case. Secretary Schlesinger indicated that on May 5, 1978, he was unaware that outside consultants were testifying on behalf of other government agencies in TAPS but admitted that there was precedent for such use of consultants?, Administrator Bardin claimed total surprise when learning at the hearing that the FERC staff, supposedly the repository of governmental expertise in this area, had employed outside consultants to testify on its behalf in the TAPS case.5 And it is notedl that even after Secretary Schlesinger's May 5 decision, DOE staff members apparently failed to see any problem with government agency sponsorship of the Wilson and Associates testimony because they contacted the Federal Trade Commission to determine whether it would intervene and introduce the testimony in the TAPS case.
In response to the Subcommittee's request for clarification of DOE Order 3230.1,8 Deputy Secretary O'Leary notified the Subcommittees on August 10, 1978, that, while the "intent of DOE Order 3230.1 is to foreclose the formulation or presentation of DOE policy testimony by a consultant . ..," contractor personnel testimony "before a regulatory body in conjunction with testimony of a DOE policy witness will be permitted."59 Interestingly, the Director of the Office of Intervention in his April 7 memorandum raised the very option of a DOE policy witness when he solicited the views of all offices as to "whether testimony by a DOE witness will be needed to establish the policy context for the consultants testimony." 60 This option was rejected by
53 Hearings, 87.
54 DOE Information Memorandum from Administrator Bardin to Secretary Schlesinger and Deputy Secretary O'Leary of May 3, 1978, printed at Hearings, 30. 35 Hearings, 48.
56 Hearings, 45.
67 Hearings, 66.
58 Letter from Chairman John E. Moss and Chairman John D. Dingell to Secretary James R. Schlesinger of July ii, 1978, printed at Hearings, 239.
69 Letter from Deputy Secretary O'Leary to Chairman John E. Moss of August 10, 1978. printed at Hearings, 241 et seq.
60 DOE Memorandum of April 7, 1978, describing testimony and eliciting comments, printed at Hearings, 77.





18

Administrator Bardin who testified that "now for better or for worse, I did not accept that alternative and did not transmit it to the Secretary for his consideration." 61
Thus, the second procedural roadblock, Secretary Schlesinger's qualms regarding exposition of DOE policy by a consultant, could readily have been overcome by proceeding -with the option of a DOE policy witness in conjunction with the Wilson and Associates testimony. Inexplicably, this alternative, first raised in early April, was not reconsidered subsequent to May 5, 1978.
As a secondary reason for his decision to abandon the consultant's testimony, Secretary Schlesinger pointed to certain substantive concerns centeredl principally around the rate of return testimony of Dr. Wilson. The rate of return allowed on the owners investment in TAPS is a critical element in determining the transportation tariff and the smallest variation makes millions of dollars of differencee to the energycompanies each year.
The pipeline owner oil companies have filed for tariffs which range from $6.04 to $6.44 and have sponsored witnesses in the proceedings before FERC who have called for a rate of return as high as 20 percent in support of these and higher tariffs. Adoption of Dr. Wilson's testimony which recommends an 8.85 overall rate of return would result in much lower transportation tariffs but make available millions of (loll ars of additional revenues at the wellhead as a production incentive to maximize the development and exploration of domestic oil reserves on the Alaska North Slope. DOE's pre-hearing brief described the nation's energy policy as one which "seeks to maximize the development and production of domestic energy reserves."1 62
We should note the that Subcommittee is not advancing a position on the merits of the issues in TAPS or the positions expressed in the testimony of any particular witness, including Dr. Wilson. Rather, the concern and focus of the Subcommittees inquiry has been with the management of the case and the DOE decisionmaking process which led to the rejection of consultants testimony prepared under the auspices of DOE to support the strategic national energy interests involving the future development of Alaskan oil reserves which are impactedl by the TAPS case.
Beyond his uncertainty as to Wilson's specific rate of return recommendations, especially their impact on the flow of capital for similar f uture projects, Secretary Schlesinger's comments at the hearing revealedl a distressing lack of confidence in the judgment of high-level departmental officials who were responsible for the TAPS intervention.
DOE's pre-trial brief stated that it would urge that the "rate of return be set as low as possible without being confiscatory."6- A h hearing the Secretary pointed to the recent rate of inflation and (luerie( whether Wilson's rate of return "falls under our injunction of being nonconfiscatory is certainly unclear under those circumstances. 64 When he was pointedly asked whether Wilson's rate of return recommendations were confiscatory he replied: "No, I have no way of making that judgment." 65 In contrast, Administrator Bardin
61 Hearings, 66.
62 D)OE Pre-Ileari23g Brief, printed at Hearings, 14.
6Id. at 15.
I Hearings, 62.
Heurinigs, 100.






19

testified that he did not believe Wilson's rate of return recormlelplations were confiscatory. Other staff mnemblers from ()G(' anid ERA concurred with Administrator Bard in's evaluation.
A second expressedI concern of the Secretary relating to Wilson's rate of return recommendation was "whether it would be sufficient to encourage the flow of capital in other similar ventures. . 11t;
Secretary Schlesinger conceded that DOE, in introducing_ the Wilson testimony, could have made clear that. the recommended rate of return for TAPS, a monopoly oil pipeline from the larest U.S. oil pool to a ready market., would not be indicative of DOE's posit ion on future projects. Indleedl the staff in the four page cover letter which was to accompany the testimony was following this veryv course of act ion so that "investors would not perceive this as some kind of a Dep~artment of Energy effort to keel) low rates of return for all major energy investment opportunities."1 67
In the proposed letter which had been reviewed by Deputy Secret ary O'Leary, Assistant Secretary Aim and Administrator Bardin, DoEj listed eight special factors inherent in the TAPS project which it. believed "demonstrates the extent to which the TAPS project is distinguished from other capital intensive projects." The letter concluded by stating:
The recommendations by DOE, based upon the specific combination of cii'cumstances in the TAPS project, balance the need for fair returns consistent with competitive incentives to encourage expanded ANS production and will encourage optimal investments in and development of current and future enei gy projects. "
According to his testimony before the Subcommittees, Secretary Schlesinger did not read, however, the draft cover letter which focused on one of his major concerns relative to DOE's sponsorship of the Wilson testimony.69
In sum, in rejecting the Wilson testimony Secretary Schlesinger discounted the judgment and expertise of his staff, including Administrator Bardin. He testified that he had "insufficient information at that juncture" 70 and questioned whether "we have the necessary expertise to make a correct judgment."1 71 Significantly, however, no serious effort was made by him after May 5, 1978 to obtain further' information necessary to evaluate or amend the conclusions in Dr. Wilson's testimony.72
In response to questioning from Con(gressman Albert Gore, .Jr., Secretary Schlesinger summed tip his decision as follows:
The decision was made by me on May 5, given the quality of what we hald around, that we ought not to get involved. A fundamental principle is "Whenev-er one does not know whereof one speaks, one does not speak." 73
if Secretary Schlesinger is right, it constitutes a most damning indictment of the Department's operational effectiveness. The Department hadl been in existence over 8 months and its TAPS intervention was of equal duration. A brief had been filed, public funds expended to employ expert consultants, and the final testimony reviewed by all
"6 Hearings, 62.
67 Hearings, ii2.
08 DOE Draft transmittal letter of May 5, 1978, printed at Hearings, 97 et seq. 69 Hearings, 100.
70 Hearings, 62.
71 Hearings, 63.
72 Mr. Donkin's testimony on the important competition and Alaska North Slope development considerations was not filed separately although Secretary Schlesinger acknowledged that "that would be a perfectly acceptable way to proceed." (Hearings, 69.)
73 Hearings, 76.






20

key offices and approved by Administrator Bardin. A failing performance by the Department mn TAPS, the largest rate case in history, raises serious questions as to DOE's dedication to the national objective of increasing domestic oil production and the Department's proficiency in carrying out a program of state utility interventions as contemlplatedI by the recently enacted Public Utility Regulatory Policies Act.
On the other hand, Dr. Schlesinger's abandonment of the consult ants testimony after a 45-minute staff meeting appears to have been reached in an off-handed and summary fashion. According to his testimony, he first became aware of the existence of the consultants testimony minutes before the meeting, a situation which precluded presumably any reading of the three volumes of testimony. Secretary Schlesinger further indicated that, at the time of his decision, the p)re-trial brief containing DOE's policy positions had not been brought to his attention nor was he aware of the supplemental cover letter for the testimony which specifically addressed the Secretary's concern over capital attraction for future projects and concluded that the DOE recommendations embodied in the Wilson testimony "will encourage optimal investments in andl development of current and future energy projects." 14 The effect of Secretary Schlesinger's decision was to overrule the advice of the individual to whom he had delegates responsibility for the TAPS intervention, Administrator Bardin, who, as noted previously, had warned that adoption of more generous rates of return than those recommended by Dr. Wilson would "result in windf all capital gains" to the TAPS owners.75 Administrator Bardin had thoroughly reviewed the testimony and had recommended in favor of its filing by DOE.
The Wilson firm's recommendations, if adopted by FERC, could force the oil company owners of TAPS to lower their transportation charges about, 28 lpeicent-a result that would cost the companies hundreds of millions of dollars profit annually.76 It is also true, as noted by Congressman Markey, that during the spring andl early summer of' 1978'there were widespread press reports about a series of "sweeteners". being offered or dispensed to the oil industry in return for support -for the national energy legislation, particularly the natural gas compromise and crudle oil equalization tax.77 However Secretary Scsnge vigorously denied that his decision quashing the consultntstestimony was such a "sweetener" designed to garner oil in(lust ry sup)por't for the National Energy Plan. 71
74 DOE Draft transmittal letter of May.5, 1978, printed at Hearings, 97 et seq. 75 DOE Information Memorandum from Administrator Bardin to Secretary Schlesinger and Deputy S ecretary O'Leary of May 3, 1978, printed at Hearings, 30 et seq. 76 Workpapers submitted by Wilson & Associates to DOE indicate that with their recommended capital structure and debt/equity ratios an 8.85 percent overall rate of return would yield a tariff in the range 01 $4.45- per barrel. This contrasts with tariffs of $6.04 to $6.44 per barrel by the TAPS owners. The differentia" wheni applied to the existing TAPS throughout capacity of 1.2 million barrels per day demonstrates the enormous economic consequences of this case not only to the carriers but also to future development of the Alaska North Slope.
77 Hearings, 61.
7S Id.












CHAPTER IV-DOE DISAPPEARs I~il TfETAPS CASE
The Department of Energy's retreat from active participation in the TAPS case, sounded by Secretary Schlesingrer's Mlay 5 decision, became a full fledged withdrawal in the succeedlingr weeks. Within (lays, Mr. Gurwitz, the second attorney who had been on the case throughout the hearings at FERC, was reassigned outsidIe of the Office of General Counsel. He had been on detail from the Office of Administrative Services to OGC to work on the TAPS case andl was notified, that his detail was up. Shortly thereafter he left DOE to work for another federal agency.
The chief, and now only, trial counsel assigned to TAPS notified the Administrative Law Judge by letter of May 9 that the Department of Energy dlid not intend to put on any witnesses or evidence. On -May 11, 1978, the testimony of Wilson & Associates was placed in the public reading room. Although Secr-etry Schlesinger testified that he instructed "...our people to place the testimony in the public document room . )7 internal memorandla demonstrate that this action was taken only after the Department had received press inquiries concerning its failure to file testimony in the TAPS case.8
Within the Department, the principal intervention staff was left uncertain as to whether the Secretary's May 5 decision signaled a change in DOE policy for TAPS. On May 26, three weeks after the Secretary's decision, OGC was attempting "gto get guidance right from the top" as to policy positions, extent of future DOE participation in TAPS, and tactical concerns including a public response as to why DOE declined to file direct testimony in Phase J*81
Externally, other protestants in the TAPS case such as the State of Alaska and the Artic, Slope Regional Corporation expressed their interest in seeing that the Wilson & Associates testimony was made part of the evidentiary record of the case. The DOE intervention staff also continued to believe that it was important to put the consultants testimony into the evidentiary record. At~ the same time, the staff was reluctant to sever their relationship with the Wilson firm and thus divest themselves of much needed assistance and expertise. In addition, the contract had specifically allocated $5,400 for assistance in preparing the post-hearing brief.
Nonetheless, on June 2, 1978, the Wilson firm received two letters from the Department of Energy. The first letter informed Dr. Wilson that the testimony "was of high quality and in complete compliance with the contract between the Department of Energy and your firm"812
79 Hearings, 39.
80 DOE Memoranda of May 16, 1978 and June 7, 1978, printed at Hearings, 156-157. 81 Leterfm D eputy Secretary O'Leary to Dr. John W. Wilson of June 2, 1978, printed at Hearings, 166.
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22

while the second letter notified him that the contract was being "terminated for the convenience of the government." 83
While the phrase "convenience of the government" may be a term of art in such matters, it was an ironic misstatement of fact in the particular circumstances of the TAPS case. Acting Deputy General Counsel Driver acknowledged that in releasing, the Wilson firm to make them available to contract with another party on the case, DOE was essentially cutting off its left arm. 84The expert assistance of a regulatory economist which the staff thought to be vital was no longer available. DOE's chief trial counsel, who had previous experience in rate proceedings at the state level, testified that this was the first instance where he had had a contract for a regulatory economist terminated in the middle of a proceed ing.8,1
Internal OGC memorandla took the position that considerable technical assistance was necessary for DOE to participa te in the remainder of the case in "any meaningful fashion" and suggested that absent the assistance of an expert regulatory economist DOE would be better off withdrawing from the proceeding. 86 At the hearing,
Acting Deputy General Counsel Driver admitted that meaningful participation by the Department of Energy in the TAPS case was currentlyy at a standstill."8117
Subsequent to the hearings, Deputy Secretary O'Leary notified the Subcommittees that the "Department has no plans at this time to contract with outside experts for further assistance in Phase I of the TAPS proceeding." 88 Thus DOE, lacking expert ratemaking economists, has found itself unable to effectively participate in the cross examination of the protestants witnesses or the rebuttal witnesses of the TAPS owners. Indeed, since May 1978, no DOE attorney has attended the hearings before FERC.
Perhaps in an attempt to close ranks with the Secretary's May 5 decisionn, Administrator Bardin at the hearings expounded his view that the "most important part of the process is an effective, hardhitting brief . based on the record as made by all of the parties." 81 Apparently he is untroubled by the fact that it was under his direction and with his concurrence that the ERA staff expended public f unds to hire outside experts for the specific purpose of presenting testimony in the case.
Furthermore, his view was not shared by DOE's chief trial counsel in the TAPS case who testified:
We want to put on, legally speaking, a strong evidentiary case and unless you have evidence on the record you can't make a case and that has been the problem in ratcmaking cases * 90
DOE officials also acknowledged that without direct testimony and counsels participation (luring cross examination, the agency would not have any real impact in saigthe evidentiary record before the FERC. Thus when it~ comes to writing the brief, correctly described
S3 Letter from Richard N. Suitter (contracting officer) to Dr. John W. Wilson of June 2, 1978, printed at lleariings, 142-143.
s4 Hearings, 137.
SS Hearings, 1-0.
0 1)(E Draft MNemorandum, from General Counsel Coleman and Administrator Bardin to Secretary Sehlesini ger of May 26, 1978, printed at Hearings Appendix, 297 et seq. S' Hleaings, 1:37.
LetIter from D~eputy Secretary O'Leary to Chairman John E. Moss of August 10, 1978, printed at Hearinps, 241.
SHear-ings, 38.
111Heaings, 15,





23

by Congressman Markey as "rhetoric, not evidence," "I DOE will have to rely on the record made exclusively by other parties. As Chairman Dingell noted "you [DOEI will esslentialy be flowerpicking in the prayer that there is a flower of the type which you will enjoy." 92 And Acting Deputy General Counsel Driver told the Subcommittees that the "degree to which that brief can be based on a thorough scrutiny of the entirety of the record of the procee(ling is in doubt." Furthermore, in releasing the Wilson firm, the De)artment will not be able to avail itself of its expertise in preparing the final brief, which DOE back in February, in justifying the Wilson contract, said was essential.
With the Department out of the picture, the Arctic Slope Regional Corporation (Arctic Slope), a relatively minor party with limited private interests in the case, came forward to sponsor the Wilson & Associates testimony. Arctic Slope, citing a severe ga ) in the record and prior good faith reliance on DOE to present testimony on the important competition and Alaskan oil developmentt issues, petitioned the Administrative Law Judge on June 16, 1978 to permit the late filing of the Wilson & Associates testimony.
Arctic Slope Regional Corporation, one of 1:3 groups established pursuant to the Alaska Native Claims Settlement Act, represents the interests of several thousand Inupiat Eskimos, who have a claim to be paid 2 percent of the wellhead value of Alaskan crude oil up to a total of $500 million as consideration for their surrender of aboriginal land claims in the Prudhoe Bay area. The private economic interests of the Eskimo group thus favor low TAPS tariffs, a policy which DOE had said was in the national energy interest as well.
However, at the hearing Secretary Schlesinger agreed with the sentiments expressed by DOE's chief trial counsel in a February memorandum:
We cannot, rely on the other protestants and intervenors to advance the national interests with respect to energy policy. The Arctic Slope Regional Corporation is certainly not in the case with the purpose of protecting the national interest, but rather the interests of the native Americans who own certain rights with respect to the oil being produced.94
Nevertheless, the Department's intervention in TAPS has now come full circle from its early desire to play a major role in the proceeding because the precedents to be set by this first oil pipeline case before FERC and because of the impact the TAPS tariff will have on consumers, the national economy and the Nation's oil supply. As the Subcommittees hearings revealed, the Department is now content to play a cameo role in TAPS, the largest rate-making case in the Nation's history, by simply filing a brief on its concerns in the matter while relying on several thousand Eskimo families to provide evidence, in the form of expert testimony relative to those concerns,s5 and allowing other parties to shape the evidentiary record upon which the FERC must base and sustain its decision.
91 Hearings, 59.
9 Hearings, 91.
93 Hearings, 137.
94 Hearings, 58.
95 On July 18, 1978, the Administrative Law Judge permitted the filing of the testimony of Dr. Wilson on rate of return and Mr. Donkin on the competitive implications of TAPS rates but disallowed as cumulative that of Dr. Smith's on the rate base valuation issue. Interestingly, DOE had supported Arctic Slope's motion calling the testimonies a "significant contribution" to the record of the case.
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