Exxonmobil Oil Corp. v. F.E.R.C.
| Decision Date | 29 May 2007 |
| Docket Number | No. 04-1140.,No. 04-1160.,No. 04-1102.,No. 05-1223.,No. 05-1226.,No. 05-1303.,No. 04-1104.,No. 04-1142.,No. 05-1245.,No. 05-1219.,No. 05-1232.,No. 04-1143.,No. 05-1218.,No. 05-1217.,No. 04-1103.,No. 05-1204.,04-1102.,04-1103.,04-1104.,04-1140.,04-1142.,04-1143.,04-1160.,05-1204.,05-1217.,05-1218.,05-1219.,05-1223.,05-1226.,05-1232.,05-1245.,05-1303. |
| Citation | 487 F.3d 945 |
| Parties | EXXONMOBIL OIL CORPORATION, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION and United States of America, Respondents Western Refining Company, L.P., et al., Intervenors. |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
Charles F. Caldwell and Christopher J. Barr argued the cause for petitioners SFPP, L.P. and the Association of Oil Pipe Lines. With them on the briefs were Albert S. Tabor, Jr., Catherine O'Harra, Sabina K. Dugal, Steven H. Brose, Timothy M. Walsh, Daniel J. Poynor, and Michele F. Joy. Erin M. Murphy, Neil Patten, Judith M. Andrade, Kevin B. Bedell, Glenn S. Benson, and Michael J. Manning entered appearances.
Lona T. Perry, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With her on the brief were R. Hewitt Pate, Assistant Attorney General, U.S. Department of Justice, John J. Powers, III, and Robert J. Wiggers, Attorneys, John S. Moot, General Counsel, Federal Energy Regulatory Commission, and Robert H. Solomon, Solicitor. Robert B. Nicholson, Attorney, U.S. Department of Justice, entered an appearance.
Charles F. Caldwell argued the cause for intervenors SFPP, L.P. and the Association of Oil Pipe Lines in support of respondent. With him on the brief were Christopher J. Barr, Albert S. Tabor, Jr., Catherine O'Harra, Steven H. Brose, Timothy M. Walsh, and Daniel J. Poynor.
Steven A. Adducci, R. Gordon Gooch, Elisabeth R. Myers, Marcus W. Sisk, Jr., Frederick G. Jauss IV, and George L. Weber were on the brief of Shipper Intervenors in support of respondent with respect to arguments of SFPP, L.P. and the Association of Oil Pipe Lines.
Before: SENTELLE, GRIFFITH and KAVANAUGH, Circuit Judges.
Opinion for the Court filed PER CURIAM.
SFPP, L.P., operates pipelines that transport petroleum products through Arizona, California, Nevada, New Mexico, Oregon, and Texas. This case is the latest chapter in a long-running dispute over SFPP's tariffs.
The consolidated petitions for review challenge three orders of the Federal Energy Regulatory Commission ("FERC"):
1. ARCO Products Co. v. SFPP, L.P., 92 FERC ¶ 61,244 (2000) ("Order Consolidating Proceedings");
2. ARCO Products Co. v. SFPP, L.P., 106 FERC ¶ 61,300 (2004) ("Order on Initial Decision"); and
3. SFPP, L.P., 111 FERC ¶ 61,334 (2005) ("Remand Order").
Several shippers—i.e., firms that pay to transport petroleum products over SFPP's pipelines—seek review of these three orders. The shipper petitioners are BP West Coast Products, Chevron Products, ConocoPhillips, ExxonMobil Oil, Navajo Refining, Ultramar, Valero Marketing and Supply, and Western Refining. The shippers raise several challenges to the Commission's orders. In particular, they argue that: (1) the Commission unlawfully granted an income tax allowance to SFPP; (2) the Commission applied the wrong standard and relied upon faulty data in its analysis of whether SFPP's rates should be "de-grandfathered" under the Energy Policy Act of 1992; and (3) the Commission erroneously held that certain shippers were not entitled to reparations for rates charged on SFPP's East Line after August 1, 2000. SFPP and the Association of Oil Pipe Lines have intervened on behalf of the Commission with respect to these issues.
SFPP and the Association of Oil Pipe Lines have also cross-petitioned for review of the three challenged orders. They argue that the Commission incorrectly interpreted the Energy Policy Act and made several computational errors in determining whether SFPP's rates should be de-grandfathered. The shippers have intervened on behalf of the Commission regarding these issues.
We deny the petitions for review with respect to the income tax allowance issues and the Energy Policy Act issues. We hold that the Commission's income tax allowance policy was not arbitrary or capricious or contrary to law. We also hold that FERC's interpretation of the Energy Policy Act was reasonable. We need not consider several of the arguments raised by SFPP and the shippers regarding FERC's calculations because the parties failed to raise those arguments before the Commission in the first instance. However, we grant the shippers' petition for review with respect to the reparations issue. FERC acted contrary to law when it held that the Arizona Grocery doctrine precluded the Commission from awarding reparations to East Line shippers for rates paid after August 1, 2000.
The first issue in these petitions for review is whether it was lawful for FERC to grant an income tax allowance to pipelines operating as limited partnerships. In the Remand Order, FERC held that SFPP is entitled to an income tax allowance to the extent that its partners incur "actual or potential income tax liability" on the income they receive from the partnership. SFPP, L.P., 111 FERC ¶ 61,334 at 62,456 (2005). The shipper petitioners contend that this order is arbitrary and capricious and contrary to our decision in BP West Coast Products, LLC v. FERC, 374 F.3d 1263 (D.C.Cir.2004), because it grants a tax allowance to entities that do not actually pay income taxes. While we agree that the orders under review and the policy statement upon which they are based incorporate some of the troubling elements of the phantom tax we disallowed in BP West Coast, FERC has justified its new policy with reasoning sufficient to survive our review. We therefore deny the petitions for review with respect to this issue.
FERC's income tax allowance ("ITA") policy for pipelines that operate as limited partnerships has a tortuous history. In 1995, the Commission adopted the "Lakehead policy," under which pipelines' ITA eligibility turned on whether the partners were corporations or individuals. Lakehead Pipe Line Co., 71 FERC ¶ 61,338 at 62,313-15 (1995). In Lakehead, FERC held that a pipeline was entitled to an ITA only for income taxes that were "attributable to its corporate partners." Id. at 62,314. The Commission reasoned:
When partnership interests are held by corporations, the partnership is entitled to a tax allowance in its cost-of-service for those corporate interests because the tax cost will be passed on to the corporate owners who must pay corporate income taxes on their allocated share of income directly on their tax returns. The partnership is in essence a division of each of its corporate partners because the partnership functions as a conduit for income tax purposes.
Id. at 62,314-15. In contrast, FERC held that pipelines were not entitled to an ITA with respect to income attributable to partnership interests held by individuals because "those individuals do not pay a corporate income tax." Id. at 62,315. The Commission noted that its holding "comports with the principle that there should not be an element in the cost-of-service to cover costs that are not incurred." Id.
In the Opinion No. 435 proceedings, FERC applied the Lakehead policy to SFPP's rates, holding that SFPP could include an income tax allowance in its cost-of-service for the share of the partnership's income that was attributable to corporate partners. SFPP, L.P., 86 FERC ¶ 61,022 at 61,102-04 (1999). Several parties petitioned for review of this order. The shipper petitioners argued—as they do in the instant case—that SFPP should not be entitled to any income tax allowance because it is a limited partnership that pays no income tax at the entity level. In contrast, SFPP argued that it should have been granted a full income tax allowance, even on the share of income attributable to non-corporate partners.
In BP West Coast, we granted the shippers' petition for review and vacated the income tax allowance provisions of Opinion No. 435. 374 F.3d at 1285-93. We held that:
[T]he Commission's opinions in Lakehead do not evidence reasoned decision-making for their inclusion in cost of service of corporate tax allowances for corporate unit holders, but denial of individual tax allowances reflecting the liability of individual unit holders.
Id. at 1290. In other words, the Commission did not reasonably explain why corporate partners and individual partners were treated differently under the Lakehead policy. Id. at 1288-90. We acknowledged that corporate income is taxed twice— while other income is taxed only once—but we emphasized that this discrepancy is simply "a product of the corporate form." Id. at 1290-91. FERC may not attempt to compensate for the double taxation of corporations by creating a "phantom" tax allowance. As we explained:
[W]here there is no tax generated by the regulated entity, either standing alone or as part of a consolidated corporate group, the regulator cannot create a phantom tax in order to create an allowance to pass through to the rate payer.
Id. at 1291. Income tax costs are "no different" than any other costs, such as bookkeeping expenses. Id. We noted that just as a pipeline does not receive an allowance for the bookkeeping costs of its investors, neither may it receive an allowance for income taxes paid by "corporate unit holders" (i.e., investors). Id. In sum, our per curiam decision in BP West Coast vacated FERC's Lakehead policy because the Commission did not provide a reasoned explanation for distinguishing between individual and corporate partners, and because the Commission appeared to be granting income tax...
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