United Airlines, Inc. v. Fed. Energy Regulatory Comm'n

• Decision Date: 01 July 2016
• Docket Number: No. 11-1479,C/w 15-1105,C/w 15-1107,C/w 12-1069,C/w 12-1073,C/w 12-1086,C/w 12-1070,C/w 15-1101,11-1479
• Citation: 827 F.3d 122
• Parties: United Airlines, Inc., et al., Petitioners v. Federal Energy Regulatory Commission and United States of America, Respondents BP West Coast Products LLC, et al., Intervenors
• Court: U.S. Court of Appeals — District of Columbia Circuit

827 F.3d 122

United Airlines, Inc., et al., Petitioners

v.Federal Energy Regulatory Commission and United States of America, Respondents

BP West Coast Products LLC, et al., Intervenors

No. 11-1479

C/w 12-1069

C/w 12-1070

C/w 12-1073

C/w 12-1086

C/w 15-1101

C/w 15-1105

C/w 15-1107

United States Court of Appeals, District of Columbia Circuit.

Argued March 22, 2016

Decided July 1, 2016

Thomas J. Eastment, Washington, DC, argued the cause for Shipper Petitioners. With him on the briefs were Gregory S. Wagner, Richard E. Powers, Jr., Melvin Goldstein, and Steven A. Adducci. Frederick G. Jauss and Marcus W. Sisk Jr., Washington, DC, entered appearances.

Charles F. Caldwell argued the cause for Petitioner SFPP L.P. With him on the briefs were Dean Lefler and Daniel W. Sanborn. Deborah R. Repman entered an appearance.

Ross R. Fulton and Lisa B. Luftig, Attorneys, Federal Energy Regulatory Commission, argued the causes for respondents. On the brief were William J. Baer, Assistant Attorney General, U.S. Department of Justice, James J. Fredricks and Robert J. Wiggers, Attorneys, Robert H. Solomon, Solicitor, Federal Energy Regulatory Commission, Beth G. Pacella, Deputy Solicitor, and Elizabeth E. Rylander, Attorney.

Steven A. Adducci, Thomas J. Eastment, Gregory S. Wagner, Richard E. Powers Jr., and Melvin Goldstein, Washington, DC, were on the brief for Shipper Intervenors in support of Federal Energy Regulatory Commission.

Charles F. Caldwell, Dean H. Lefler, and Daniel W. Sanborn were on the brief for intervenor SFPP, L.P. in support of respondents. Elizabeth B. Kohlhausen entered an appearance.

Before: Griffith and Kavanaugh, Circuit Judges, and Sentell e, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge Sentelle

.

Sentelle

, Senior Circuit Judge:

Petitioners SFPP, L.P. (“SFPP”) and several shippers—“i.e. , firms that pay to transport petroleum products over SFPP's pipelines,” ExxonMobil Oil Corp. v. FERC , 487 F.3d 945, 947 (D.C. Cir. 2007)

—challenge aspects of three orders from the Federal Energy Regulatory Commission (“FERC”) related to filings by SFPP for cost-of-service tariffs on its pipelines. SFPP disputes FERC's choice of data for calculating SFPP's return on equity and the Commission's decision to grant only a partial indexed rate for the 2009 index year. The shipper-petitioners (the “Shippers”) claim that FERC's tax allowance policy for partnership pipelines, such as SFPP, is arbitrary or capricious and results in unjust and unreasonable rates. We grant-in-part and deny-in-part SFPP's petition and grant the Shippers' petition for review.

I. BACKGROUND

SFPP is a Delaware limited-partnership, common-carrier oil pipeline. The pipeline transports refined petroleum products from California, Oregon, and Texas to various locations throughout the southwestern and western United States. On June 30, 2008, SFPP filed tariffs to increase rates on its West Line, which transports petroleum products throughout California and Arizona. These new tariffs had an effective date of August 1, 2008. Also on June 30, 2008, SFPP made a separate tariff filing to decrease the rates on its East Line, which runs from West Texas to Arizona. The purported impetus for these filings was increased throughput on SFPP's East Line due to a recently completed expansion, which accordingly decreased throughput on the West Line. Several shippers protested the West Line tariff filing by raising challenges to SFPP's cost of service.

On December 2, 2009, an administrative law judge issued an Initial Decision addressing the shippers' arguments. FERC reviewed the Initial Decision in Opinion 511, 134 FERC ¶ 61,121 (2011)

, considered a request for rehearing of that opinion in Opinion 511-A, 137 FERC ¶ 61,220 (2011), and then reviewed a request for rehearing of Opinion 511-A in Opinion 511-B, 150 FERC ¶ 61,096 (2015)

. Both SFPP and the Shippers¹ petition this Court for review of these three FERC orders.

SFPP makes two arguments in its petition. First, it claims that FERC arbitrarily or capriciously failed to utilize the most recently-available data when assessing its so-called real return on equity. Second, SFPP asserts that FERC erred when it declined to apply the full value of the Commission's published index when setting SFPP's rates for the 2009 index year. We grant SFPP's petition with respect to the first issue but deny the petition with respect to the second.

The Shippers raise a separate challenge to FERC's current policy of granting to partnership pipelines an income tax allowance, which accounts for taxes paid by partner-investors that are attributable to the pipeline entity. Specifically, the Shippers claim that because FERC's ratemaking methodology already ensures a sufficient after-tax rate of return to attract investment capital, and partnership pipelines otherwise do not incur entity-level taxes, FERC's tax allowance policy permits partners in a partnership pipeline to “double recover” their taxes. We agree that FERC has not adequately justified its tax allowance policy for partnership pipelines and grant the Shippers' petition.

II. ANALYSIS

Under the standard dictated by the Administrative Procedure Act, we will vacate FERC ratemaking decisions that are arbitrary or capricious. See 5 U.S.C. § 706(2)(A)

. Conversely, “FERC's decisions will be upheld as long as the Commission has examined the relevant data and articulated a rational connection between the facts found and the choice made.” ExxonMobil , 487 F.3d at 951. “In reviewing FERC's orders, we are ‘particularly deferential to the Commission's expertise’ with respect to ratemaking issues.” Id. (quoting Ass'n of

Oil Pipe Lines v. FERC , 83 F.3d 1424, 1431 (D.C. Cir. 1996) ). While we have not expressly stated whether we review for substantial evidence FERC's factual findings within orders under the Interstate Commerce Act, “in their application to the requirement of factual support the substantial evidence test and the arbitrary or capricious test are one and the same.” Butte Cty. v. Hogen , 613 F.3d 190, 194 (D.C. Cir. 2010) (citation omitted); cf.

Farmers Union Cent. Exch., Inc. v. FERC , 734 F.2d 1486, 1499 n. 39 (D.C. Cir. 1984) (noting the uncertainty surrounding whether the substantial evidence standard applies to FERC's ratemaking decisions under the Interstate Commerce Act).

The statutory regime governing FERC's ratemaking for oil pipelines is unique. In 1906, as an amendment to the Interstate Commerce Act (the “ICA”), Congress delegated regulatory authority over oil pipelines to the Interstate Commerce Commission. Pub. L. No. 59-337, § 1, 34 Stat. 584, 584. But in 1977, Congress transferred regulatory authority over oil pipelines to FERC. Department of Energy Organization Act, Pub. L. No. 95–91, § 402(b), 91 Stat. 565

, 584 (1977); see also 49 U.S.C. § 60502. Congress then repealed the ICA in 1978 except as related to FERC's regulation of oil pipelines. Pub. L. No. 95–473, § 4(c), 92 Stat. 1337, 1470. For such regulation, the ICA continues to apply “as [it] existed on October 1, 1977 ....” Id. The relevant provisions of the ICA were last reprinted in the appendix to title 49 of the 1988 edition of the United States Code, to which we refer as necessary. Cf. BP West Coast Prods., LLC v. FERC , 374 F.3d 1263, 1271 n. 1 (D.C. Cir. 2004)

.

Substantively, the ICA requires that all rates be “just and reasonable.” 49 U.S.C. app. § 1(5)(a) (1988). Just and reasonable rates are “rates yielding sufficient revenue to cover all proper costs, including federal income taxes, plus a specified return on invested capital.” ExxonMobil , 487 F.3d at 951

(citation omitted).

A. FERC's Choice of Data for Assessing SFPP's Real Return on Equity Was Arbitrary or Capricious

SFPP challenges as arbitrary or capricious FERC's reliance on cost-of-equity data from September 2008 when calculating SFPP's so-called “real” return on equity and the Commission's rejection of more recent data from April 2009. FERC argues in response that the more recent cost-of-equity data “encompassed the stock market collapse beginning in late 2008,” and was therefore anomalous. FERC's Br. 31-32. We agree that FERC had substantial evidence to support its determination that the 2009 data did not reflect SFPP's long-term cost of equity. However, because the Commission provided no reasoned basis to justify its decision to rely on the September 2008 data, we hold that it engaged in arbitrary or capricious decision-making and therefore grant SFPP's petition on this issue.

The Supreme Court stated in Federal Power Commission v. Hope Natural Gas Co.

, that “the return to the equity owner [of a pipeline] should be commensurate with returns on investments in other enterprises having corresponding risks.” 320 U.S. 591, 603, 64 S.Ct. 281, 88 L.Ed. 333 (1944). Further, “[t]hat return ... should be sufficient to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and to attract capital.” Id. In accordance with these principles, FERC uses a so-called “discounted cash flow” model to determine a pipeline's rate of return on equity. See

Composition of Proxy Groups for Determining Gas and Oil Pipeline Return on Equity , 123 FERC ¶ 61,048, at 61,271–73 ¶¶ 3–9 (2008) (discussing the mechanics of the discounted cash flow model). “The premise of the [discounted cash flow] model is that the price of a stock is equal to the stream of expected dividends, discounted to their present value.” Williston Basin Interstate Pipeline Co. v. FERC , 165 F.3d 54, 57 (D.C. Cir. 1999). Under the discounted cash flow model, FERC “examin[es] the percentage returns on equity the market requires for members of a proxy group.” Opinion 511, 134 FERC ¶ 61,121, at ¶ 242. “The members of the proxy group must fall with[in] a reasonable range of comparable risks and have publically traded securities.” Id. Based on the stock prices of securities within the proxy group, FERC “calculates the yield (the percentage return) by dividing the...