Association of Oil Pipe Lines v. F.E.R.C., s. 94-1538

Decision Date06 August 1996
Docket Number94-1644,95-1051,95-1052,Nos. 94-1538,s. 94-1538
Citation83 F.3d 1424
PartiesASSOCIATION OF OIL PIPE LINES, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Kaneb Pipe Line Operating Partnership, L.P., et al., Intervenors.
CourtU.S. Court of Appeals — District of Columbia Circuit

On Petitions for Review of Orders of the Federal Energy Regulatory Commission.

Keith R. McCrea argued the cause for petitioner/intervenor Association of Oil Pipe Lines, with whom Paul F. Forshay, Patrick H. Corcoran and Michele F. Joy, Washington, DC, were on the briefs.

Dennis Lane argued the cause for petitioner/intervenor Total Petroleum, Inc., et al., with whom David W. D'Alessandro was on the briefs. Kelly A. Daly and Roger A. Berliner, Washington, DC, entered appearances.

Eric L. Christensen, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent, with whom Jerome M. Feit, Solicitor, Janet K. Jones, Attorney, Anne K. Bingaman, Assistant Attorney General, United States Department of Justice, John J. Powers, III, and Robert J. Wiggers, Washington, DC, Attorneys, were on the brief.

Melvin Goldstein, Marcus W. Sisk, Jr., David W. D'Alessandro, Dennis Lane and R. Gordon Gooch were on the brief for intervenors Sinclair Oil Corporation, et al. Dena E. Wiggins, Washington, DC, entered an appearance.

Steven G. Reed and Steven H. Brose entered appearances for intervenors ARCO Transportation, Alaska, Inc. and Four Corners Pipeline Company. Cheryl M. Feik, Howard E. Shapiro and James C. Moffatt entered appearances for intervenor Kaneb Pipe Line Operating Partnership, L.P. Timothy M. Walsh, Washington, DC, entered an appearance for SFPP, L.P. Patrick G. Pitet, Findlay, OH, entered an appearance for intervenor Marathon Pipeline Company. Kevin M. Hawley entered an appearance for intervenor Williams Pipe Line Company. Jeffrey G. DiSciullo, Washington, DC, entered an appearance for intervenor CKB Petroleum Corporation.

Before: SENTELLE, RANDOLPH and ROGERS, Circuit Judges.

Opinion for the Court filed by Circuit Judge ROGERS.

ROGERS, Circuit Judge:

In Order No. 561, 1 and two companion orders, Order No. 571 2 and Order No. 572, 3 the Federal Energy Regulatory Commission ("Commission") comprehensively revised its oil pipeline regulations in response to the mandate of the Energy Policy Act of 1992 ("EPAct"). 4 Both pipelines and shippers challenge the Commission's new ratemaking scheme on two main grounds: first, whether the Commission properly selected the Producer Price Index for Finished Goods minus one percent ("PPI-1 %") as the appropriate inflation index for the price ceiling on oil pipeline rates, and second, whether the Commission adopted reasonable procedures for implementing the indexed price ceiling. 5 We conclude that by establishing a general indexing methodology along with limited exceptions to indexed rates, the Commission has reasonably balanced its dual responsibilities of ensuring just and reasonable pipeline rates and simplifying and streamlining ratemaking through generally applicable procedures. See Interstate Commerce Act ("ICA") §§ 1-15; 6 EPAct §§ 1801, 1802. We therefore also conclude that the Commission's rate orders are a reasoned exercise of its statutory authority and deny the petitions for review.

After briefly reviewing the background of the Commission's orders in Part I, we address a notice-and-comment challenge in Part II and then address the challenges to the Commission's choice of index in Part III, to the rate-decrease provisions in Part IV, and to the market-based and cost-based alternatives, as well as to the protest and complaint procedures, in Part V.

I.

Background. Oil pipelines have been subject to rate regulation under the Interstate Commerce Act since the enactment of the Hepburn Act in 1906. Pub.L. No. 59-337, 34 Stat. 584. For decades, the Interstate Commerce Commission applied the "fair value" ratemaking methodology initially required in Smyth v. Ames, 169 U.S. 466, 546-47, 18 S.Ct. 418, 433-34, 42 L.Ed. 819 (1898), even after the Supreme Court adopted the more permissive "end result" test in FPC v. Hope Natural Gas Co., 320 U.S. 591, 603, 64 S.Ct. 281, 288, 88 L.Ed. 333 (1944). In the first judicial review of an oil pipeline ratemaking proceeding, which occurred just as Congress transferred regulatory authority to the newly created FERC, see supra note 6, the court ordered the Commission to reconsider the valuation methodology. Farmers Union Central Exchange v. FERC, 584 F.2d 408, 412-22 (D.C.Cir.1978) (Farmers Union I ), cert. denied, 439 U.S. 995, 99 S.Ct. 596, 58 L.Ed.2d 669 (1978). The court explained that the regulation of oil pipelines differed in several respects from other public-utility regulation and concluded that "we have little to rely on in constructing a theory of oil pipeline ratemaking." Id. at 413. When the Commission adhered to the valuation methodology on remand and announced its intent to conduct only very light-handed regulation, the court again reversed and ordered the Commission to comply with its duty under ICA § 1(5) to ensure that oil- pipeline rates "shall be just and reasonable." Farmers Union Central Exchange v. FERC, 734 F.2d 1486, 1500-10 (D.C.Cir.) (Farmers Union II ), cert. denied, 469 U.S. 1034, 105 S.Ct. 507, 83 L.Ed.2d 398 (1984).

On remand from Farmers Union II, the Commission adopted the cost-based ratemaking methodology that remained in effect until Order No. 561. In Opinion No. 154-B, Williams Pipe Line Co., 31 F.E.R.C. p 61,377 (1985), opinion on reh'g, 33 F.E.R.C. p 61,327 (1985), the Commission prescribed the "trended original cost" method of calculating a pipeline's rate base, under which a pipeline recovers only a real (inflation-adjusted) rate of return each year, but the inflation component of the nominal rate of return is added to the rate base. 7 The starting rate base was a modified version of the rate base under the valuation methodology. As an alternative to cost-based rates, the Commission also developed a procedure for market-based rates. Responding to the admonition by the Farmers Union II court that the Commission could not permit market-based rates without findings as to the effectiveness of competition in the relevant market, 734 F.2d at 1508-10, the Commission developed a two-phase procedure that requires pipelines to demonstrate a lack of significant market power in order to qualify for market-based rates. Buckeye Pipe Line Co., 44 F.E.R.C. p 61,066 (1988), reh'g denied, 45 F.E.R.C. p 61,046 (1989).

"[I]n order to reduce costs, delays, and uncertainties," H.R.REP. NO. 474, pt. 1, 102d Cong., 1st Sess. 225, reprinted in 1992 U.S.C.C.A.N. 1953, 2048, Congress in the EPAct directed the Commission to "issue a final rule which establishes a simplified and generally applicable ratemaking methodology for oil pipelines in accordance with section 1(5) of Part I of the Interstate Commerce Act" (which requires just and reasonable rates), by October 24, 1993. EPAct § 1801(a), 106 Stat. at 3010. Congress further required the Commission to issue, by April 24, 1994, "a final rule to streamline procedures of the Commission relating to oil pipeline rates in order to avoid unnecessary regulatory costs and delays." Id. § 1802(a), 106 Stat. at 3010. Congress also declared in the EPAct that oil pipeline rates that had not been protested or opposed for a one-year period before October 24, 1992, were "deemed to be just and reasonable (within the meaning of section 1(5) of the Interstate Commerce Act)," subject to narrow exceptions. Id. § 1803(a), 106 Stat. at 3011. These provisions were part of a comprehensive bill to reform national energy policy generally, in response to energy price shocks in the prior two decades, and were intended to streamline regulatory provisions and to "give pricing flexibility to oil pipelines, while preventing excessive rates and charges against any captive shippers on oil pipelines." H.R. REP. NO. 474, pt. 1, 102d Cong., 2d Sess. 132, 153, reprinted in 1992 U.S.C.C.A.N. at 1955, 1976.

To fulfill the EPAct's mandate for a streamlined process, the Commission established an indexed ratemaking methodology designed to enable pipelines to recover costs by allowing pipelines to raise rates at the same pace as they are predicted to experience cost increases. Order No. 561, at 30,941. As the Commission explained, simplification results from the elimination, with rare exceptions, of rate-specific examinations of costs. Order No. 561-A, at 31,092. 8 This indexing scheme used the EPAct's pre-approved rates as a baseline and set caps for rate increases based on an inflation index.

Of central importance to the Commission's scheme is its choice of index. Initially, the Commission's staff recommended that the Commission base its indexing scheme on the PPI-1%. 9 See Commission Staff Proposal for Revisions to Oil Pipeline Regulation Pursuant to the Energy Policy Act of 1992, at 24 (Mar. 18, 1993) ("Staff Proposal"). After receiving extensive comments from AOPL and other pipelines, the Commission in its notice of proposed rulemaking ("NOPR") proposed a methodology based on a different index: the Gross Domestic Product, Implicit Price Deflator ("GDP-IPD"). 10 [Current] F.E.R.C. Stats. & Regs. (CCH) p 32,497, at 32,727-29 (July 2, 1993); 58 Fed.Reg. 37,671 (July 13, 1993). Again, after receiving extensive comments and new evidence in response to the Commission's proposal, and upon consideration of the entire record, the Commission in its final rule embraced the PPI-1%. The Commission concluded that the PPI-1% "comes closest of all the indices considered in this rulemaking to tracking the historical changes in the actual costs of the product pipeline industry." Order No. 561, at 30,951.

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