HARD AGROUND - Wreck of the Exxon Valdez - March 24, 1989



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Daily News reporter

Anchorage Daily News
Date: 10/10/94
Day: Monday
Edition: Final
Section: Nation
Page: A1

WASHINGTON- So you think the 1989 Exxon Valdez oil spill, which set the nation's record with 11 million gallons of Prudhoe Bay crude dumped into Prince William Sound, was a freak event? Think again.

An oil spill is not only an ordinary event in the oil transportation business, it is inevitable. And future spills are just as certain to occur.

That isn't the claim of environmentalists or congressional critics, but of the trans-Alaska pipeline owners themselves.

It was made last month before state and federal regulators in an effort to recoup the $133 million cost of Alyeska Pipeline Service Co.'s 1991 settlement with thousands of Alaska Natives, fishermen, business owners and others injured by the spill.

Alyeska's seven oil-company owners hope to recover the $98 million settlement plus about $35 million in legal fees by raising their charges for sending oil through the pipeline. The tariff cases are pending before the Federal Energy Regulatory Commission and the Alaska Public Utility Commission.

The tariff increase would reduce the amount of money the state earns in royalties and taxes from Prudhoe Bay production by about $33 million. That's because about 25 cents of each dollar charged to ship oil through the pipeline comes out of the state treasury.

An increase in tariffs might also raise gasoline costs for consumers in Alaska and the Lower 48.

Under federal and state law, for Alyeska's owners to recover the money, the expense must be an ordinary cost of doing business. To logically establish that, the spill must be an ordinary, routine consequence of doing business. And that's what the owner companies are claiming.

Immediately after the spill, Alyeska officials tried to portray the spill as anything but ordinary.

Testifying before a packed public hearing of the House Interior Committee in Valdez five weeks after Exxon Valdez ran aground on Bligh Reef, Alyeska vice president Theo Polasek called the spill a "tragedy."

He said Alyeska was working with the state on "actions to reduce the potential that this kind of tragedy will ever occur again."

But five years later, in a small hearing room packed with lawyers, a key witness for the pipeline owners told administrative law judges for the state and federal regulatory agencies that the spill was an inevitable result of being in the oil transportation business and that "similar events" in the future will be just as inevitable.

"The transportation (of oil) involves huge pipelines, huge ships, reshipping," said Richard Walker, an Illinois accountant hired to help make the owners' case. "It involves a lot of human beings that are subject to failure, it has a lot of natural forces to contend with and I just don't think there's any reasonable basis to think oil spills will cease."

Walker said that "it's impossible not to spill it, it's a very difficult thing to contain and there will be failures of human beings and mechanical (systems) and ships, pumps, valves and everything else that can fail."

But doesn't the huge volume of oil that was spilled make the Exxon Valdez disaster the least bit unusual, Walker was asked by state lawyers attending the hearing.

Well, Walker said, a distinction is made between spills that cost lots of money and those that don't. But in terms of distinguishing a big, costly spill as unusual, no.

"Oil spills are oil spills," he said. And the only way an oil spill would become an infrequent, and thus unusual, event for Alyeska would be if it got out of the oil-transportation business.

"But as long as they are in the business, they are going to have they are going to meet this standard," Walker said.

Asked about the position they are taking on the spill in the relatively obscure setting of a regulatory proceeding, the pipeline's major owners responded that what Alyeska was saying wasn't really what it meant.

No one really believes that the Exxon Valdez spill was an ordinary and routine event, they said. But to recover their money through a tariff hike, they said, the settlement costs are treated for accounting purposes as an ordinary expense of doing business.

"This hearing is about accounting rules," said Ed Burwell, spokesman for Exxon Corp., which owns about 20 percent of the pipeline system. "They are not talking about (the spill) in the same way that you or I would talk about it."

Burwell said that claiming the settlement cost as an ordinary operating expense is the only way to recover the money because the settlement does not meet regulators' definition of extraordinary expense.

Paul Laird, spokesman for BP Exploration (Alaska) Inc., which owns about 50 percent of the pipeline system, agreed. He said that what Walker was reciting was an accountant's view of the world.

"I'm sure he didn't mean that the spill was ordinary and routine," he said. "Certainly no one at BP or the other owner companies believe the spill was ordinary and routine."

Arco's transportation subsidiary, a 20 percent owner of the pipeline system, went a step further. It said in a prepared statement what Walker and other owner witnesses in the regulatory proceeding seemed to be studiously trying to avoid saying.

"The Exxon Valdez spill was an extraordinary event," Arco said. "There was nothing normal or routine about it."

Asked to state their positions on Alyeska's claims, and on whether the state should continue to oppose them, all but one of five candidates for governor declined to comment or didn't respond. The only one to answer, the Green Party's Jim Sykes, said the owner companies are trying to use semantics as cover for escaping any penalty for the spill.

"For them to argue that a spill of this magnitude is ordinary is pure hogwash," Sykes said. "A major spill of this sort is not routine."

Sykes suggested that one way such settlements might be constructed to prevent the owners from recovering their costs is through the seizure of company stock that would give spill victims a voice in the company's future operations.

The state, in its challenge of the tariff hike, thinks the owners can't have it both ways. If the spill was an extraordinary event, the cost of the settlement is not an ordinary business expense.

"The trans-Alaska pipeline system owners want to treat the spill of the century in these regulatory proceedings as being no different than everyday spills of five or 10 gallons," Robert Loeffler, a Washington lawyer representing Alaska, said in an interview.

"The state's position is that this was a unique event which should be treated as an extraordinary expense that cannot be recovered under the TAPS tariffs," he said.

In its own $31 million damage settlement with Alyeska, the state got the pipeline company's agreement not to try to recover that money through tariff increases.

But the $98 million settlement at issue in this case was not with the state, and lawyers for the plaintiffs never bargained for the same deal to keep the costs of the settlement out of the tariff.

The state stands to be the big loser if the hike goes through. The $33 million reduction in its royalties and taxes from Prudhoe Bay operations would cost Alaska more money that it got from the $31 million, 1991 spill settlement.

Anchorage lawyer Lloyd Miller, a lead plaintiffs' attorney on the $98 million settlement, said in an interview from Anchorage that he thinks it's "outrageous" that Alyeska owners are trying to recover the settlement costs "on the backs of consumers" and the state.

But Miller wasn't surprised by the industry's regulatory maneuverings.

"That, too, is ordinary and routine for them," he said.

Miller mentioned Exxon Corporation's attempt to recover through tax write-offs part of the cost of its $1 billion settlement with the state and federal governments for causing the spill.

The tariff dispute was heard by APUC administrative law judge Janis Wilson and FERC administrative law judge Stephen Grossman at a joint hearing. A decision is expected by the end of the year.

Regardless of which side wins, appeals are expected.

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