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Trans-Alaska line. But the relationship of crude oil

prices between West Coast and Chicago refineries, dictated by the dominant Middle Eastern crude, is such that only a 25 cent differential in transportation costs can be sustained one third of the differential that the relative return

-

on capital cost figures indicate.

Another way of putting the same point is this: Α Trans-Canadian tariff rate that reflected the West Coast Chicago difference in crude oil prices would be approximately 26 percent greater than a Trans-Alaska rate. Thus a Canadian line could cost only about $4.41 billion at the upper limit to be economically feasible. There is a vast gap between that figure and the $6.6 billion a TransCanadian line would cost. A Trans-Canadian line would be an economic white elephant.

One of the difficulties in setting forth plans and estimates involving enterprises of the size and complexity that are under discussion here is that the calculation of costs and benefits must be made against an ever-changing economic and technological environment.

Cost escalations

have made cost estimates obsolete in a matter of months.

The cost estimates used by the Department of the Interior

for instance in its impact statement on the Trans-Alaska
line have more than doubled as litigation has brought
project development to a halt. The changing environment
of the international oil market, by establishing inter-
national crude as a price maker in the American market, has
moved the thin economic case for a Trans-Canadian oil line
from the arguable to the indefensible. With the passage of

yet more time in delay, it is possible that even the factors
in the economic equation that have been thought to favor
a Trans-Canadian gas line will swing to the side of a Trans-
Alaska route for gas. During the delay on the Trans-Alaska
project, the technology of liquid gas transportation and
the economics of gas price and scarcity patterns in the West
have encouraged El Paso Natural Gas to propose a Trans-
Alaska route. The factor of continuing delay is likely to

enhance the feasibility of the El Paso proposal in comparison

with the Trans-Canadian route, where transportation costs

continue to increase rather than decrease.

།

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PIPELINE AND TANKER TARIFFS

Temple, Barker & Sloane, Inc., of Wellesley

Hills, Massachusetts, has developed for the State of

Alaska a computer model to determine what the tariff rates on the Trans-Alaska pipeline will be. The State of Alaska calculated pipeline tariff rates by simulating the actual income statement of a pipeline company for any given year of pipeline operation. The operating cost, financing cost, tax liability, after tax profit and concurrent tariff rate were all calculated.

This

method of simulating the expected tariffs on the TransAlaska and the Trans-Canadian lines allows a realistic estimate to be made of the actual cost of transportation in any given year of operation. The estimation procedure, unlike the "discounted cash flow" approach, is accurate on a year-to-year basis. For example, the simulation approach' fully displays the high tariff rate that is expected to prevail during the period of throughput buildup and the lower rates expected as the pipeline reaches the end of investment valuation due to physical depreciation at the end of its useful life.

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The Temple, Barker & Sloane model serves

as the basis for the tariff analyses that follow.
For comparative purposes tariff information on the
Trans-Alaska line has been extended to apply to a
Trans-Canadian line, and it has been used to deter-
mine a tariff rate on the segment of a Trans-Canadian
line that would carry oil from Edmonton to Chicago.
The sixth year of operation has been selected for
these comparisons because it is representative of the
period of pipeline operation after a normal through-
put is reached. The State of Alaska will prepare
tariff analyses for other years upon request.

The following assumptions have been used in

all determinations of how tariffs would be constructed:

1.

· 2.

A Trans-Alaska line will cost $3.5 billion; a Trans-Canadian line would cost $6.6

billion.

Eighty-five percent of the cost of the

pipeline will be financed with borrowed

capital.

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3. The debt will be amortized over 25 years.

4.

5.

6.

7.

8.

Debt interest will be 8 percent.

The pipeline will be depreciated over 35 years for bookkeeping and ratemaking purposes, which the Interstate Commerce

Commission may reasonably be expected to

allow.

The pipeline will be depreciated at the accelerated rate now provided in the Internal Revenue Code for tax computation purposes.

A tax rate proportional to the combined effective United States and Alaskan state tax rate will be applied. (Lower or

higher Canadian and provincial tax rates would alter this assumption.)

The rate base valuation will be deter

mined generally as the Interstate Com

merce Commission now determines such

bases.

95-903 73 - pt. 4-38