ARCO Alaska, Inc. v. F.E.R.C.
| Decision Date | 23 July 1996 |
| Docket Number | Nos. 94-1774,95-1009,94-1044 and 95-1066,s. 94-1774 |
| Citation | 89 F.3d 878 |
| Parties | ARCO ALASKA, INC., et al., Petitioners v. FEDERAL ENERGY REGULATORY COMMISSION and United States of America, Respondents MAPCO Alaska Petroleum, Inc., et al., Intervenors. |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
On Petitions for Review of Orders of the Federal Energy Regulatory Commission.
Steven G. Reed, Washington, DC, argued the cause for petitioner ARCO Transportation Alaska, Inc. With him on the briefs was Steven H. Brose, Washington, DC. Matthew W.S. Estes, Washington, DC, argued the cause for petitioners ARCO Alaska, Inc., et al. With him on the briefs were C.M. Naeve, Washington, DC and Timothy R. Thomas, Ravenna, OH. John P. Griffin, Assistant Attorney General, Juneau, AK, was on the briefs for petitioner State of Alaska. Robert H. Loeffler, Washington, DC, entered an appearance.
Samuel Soopper, Attorney, Federal Energy Regulatory Commission, argued the cause for respondents. Jerome M. Feit, Solicitor, was on the brief. John J. Powers, III, and Robert J. Wiggers, Attorneys, United States Department of Justice, Washington, DC, entered an appearance.
John E. Kennedy, Houston, TX, argued the cause for intervenors. Albert S. Tabor, Jr., Houston, TX, Dean H. Lefler, Houston, TX, Randolph L. Jones, Jr., Tulsa, OK, Clifton D. Harris, Jr. and James E. Prince, Houston, TX, were on the joint brief. Steven H. Brose, Washington, DC, entered an appearance for intervenor ARCO Transportation Alaska, Inc.
Before: WILLIAMS, GINSBURG and SENTELLE, Circuit Judges.
Opinion for the Court filed by Circuit Judge WILLIAMS.
The heyday of the Trans Alaska Pipeline System ("TAPS") is over. The large oil fields on the North Slope, from which the pipeline has long carried oil 800 miles to Valdez, are aging. With the decline in production TAPS is carrying fewer barrels of petroleum today than in the past. This decline has critical implications for rates charged on the pipeline.
Petitioners challenge the continued validity of a ratemaking method designed when the pipeline operated at capacity to compensate for the greater opportunity costs of carrying denser, more viscous oil as opposed to "lighter" oil. They claim that because the pipeline now operates at less than maximum capacity, there are no opportunity costs to carrying "heavy" oil, only a slightly increased cost for more fuel and drag-reducing agent. Under current conditions the traditional rate differentials between the two types are far greater than these costs. Petitioners therefore assert that continued use of the differentials constitutes discriminatory pricing in violation of § 2 of the Interstate Commerce Act ("ICA"), 49 U.S.C. app. § 2. We agree that the Commission has not justified its sticking to the formerly appropriate method. We also reverse the Commission's determination that the pipeline must publish certain information about its operations in tariff form.
The pipeline is owned in varying percentages by seven corporate affiliates of North Slope producers (the "TAPS carriers"), and operated by their jointly owned operating company, the Alyeska Pipeline Service Company. The carriers file tariffs each year, with rates that are to be calculated in accordance with the TAPS Settlement Methodology set forth in the 1985 TAPS Settlement Agreement approved by FERC.
Four different petroleum streams--from each of the major oil fields on the North Slope--are tendered to TAPS at Pump Station 1 for delivery to Valdez. Variations in the density and viscosity of these streams affect the maximum flow rate of TAPS--the maximum number of barrels that TAPS can transport in a day. In order from lightest to heaviest (in terms of viscosity and density), the streams are: Lisburne, Sadlerochit, Endicott, and Kuparuk. The greater the density and viscosity of the stream (or mixture of streams), the lower the maximum flow rate.
At peak North Slope production, the number of barrels tendered to TAPS exceeded capacity. Because TAPS's maximum flow rate was lower if it was carrying denser and more viscous petroleum, a barrel of such petroleum displaced more than a barrel of lighter petroleum. To compensate for the opportunity cost of carrying heavy petroleum at maximum flow, TAPS carriers charged shippers of this petroleum an extra amount per barrel, based on a multiplier that in the TAPS Settlement Methodology is dubbed a "pumpability factor." The Methodology defines it as "the decimal fraction which expresses the relationship of the ability of TAPS to transport a particular type of petroleum relative to the ability of TAPS to transport Standard Petroleum," which in turn is defined in another agreement as Sadlerochit oil. (Sadlerochit was evidently chosen simply because it was the largest stream entering TAPS.) Because the relevant circumstances (such as average temperature) change over time, Alyeska calculates the pumpability factors each year. For any stream other than Sadlerochit, it uses a formula that compares the maximum number of barrels that can be transported by TAPS in a day carrying only Sadlerochit with the maximum number when TAPS is carrying a stream of 75% Sadlerochit and 25% of the other stream. The equation is:
1 k (Q subo "Q subi )/(Q subi /4) = pumpability factor
(where Q subo is the maximum flow rate, in barrels per day, of 100% Sadlerochit, and Q subi is the maximum flow rate of a mixture of 75% Sadlerochit and 25% stream i). The resulting pumpability factor is an estimate of the number of barrels of Sadlerochit that are displaced by a barrel of another stream when TAPS is at maximum capacity. In 1992, for example, Alyeska calculated the maximum flow rate for 100% Sadlerochit as 2,112,000 barrels per day, but for a mixed stream of 75% Sadlerochit and 25% Kuparuk as 2,078,000 barrels per day. Plugging these numbers into the formula above yielded a 1992 pumpability factor of 1.065 for Kuparuk. (The pumpability factor for that year for Lisburne, the lightest of the streams, was 0.966.) The factor is applied to both fixed and variable costs, and in 1992 it resulted in an average rate for transportation of a barrel of Kuparuk 22 cents higher than the average rate for a barrel of Sadlerochit.
Today, however, TAPS carries a good deal less than its maximum capacity, and all parties agree that it will never again approach its maximum flow. TAPS is continuously able to carry all barrels tendered to it, and adding barrels of heavier petroleum does not change the flow rate. In fact, for operational reasons the pipeline is always kept full (with no air in it); when the volumes tendered are low, the speed of the stream is reduced. As we understand the record, then, variations in the heaviness of oil do not now affect the rate of flow one way or the other once extra fuel and drag-reducing agent are added. Thus the opportunity cost differential that originally justified the rate differential has disappeared. Indeed, all parties agree that the pumpability factors do not at all reflect the difference in the cost of transporting the different streams of petroleum. Yet surcharges based on pumpability march on.
This rate structure was challenged by several North Slope producers, the State of Alaska, and the FERC staff, who were joined by two of the TAPS carriers (petitioners ARCO Transportation Alaska, Inc. ("ATA") and Unocal Pipeline Company ("UPC")). They relied primarily on § 2 of the ICA, 49 U.S.C. app. § 2, prohibiting discriminatory rates. Opposing them were the remaining TAPS carriers, an in-state refiner (MAPCO Alaska Petroleum), and one producer (Exxon Company, U.S.A.), the intervenors before us here. FERC's Oil Pipeline Board set the issues for hearing before an administrative law judge, who held that use of the pumpability factors resulted in tariff rates that were unjust, unreasonable and discriminatory under 49 U.S.C. app. §§ 1(5) and 2. Amerada Hess Pipeline Corp., 64 FERC p 63,008 at 65,029-32 (July 15, 1993) ("Initial Decision"). The ALJ found that there were some additional costs to shipping heavier petroleum, in the form of more fuel and drag-reducing agent. Id. at 65,033. But the parties agree that these costs amount to no more than about 3 cents per barrel, obviously much less than the rate differences caused by use of the pumpability factors.
The ALJ nonetheless accepted testimony that the pumpability factors measured "use of capacity." Id. at 65,029. But he made clear that he understood the term to refer to "measurements of differences in attainable throughput," id. (emphasis added), which appears to mean precisely that factor that the parties all agree is no longer pertinent. In any event, because the carriers defending the pumpability factors did not try to justify the rate differentials by reference to any non-cost factor, he said that it would be appropriate to use the pumpability factors only if the "use of capacity" differences measured "greater cost," id. at 65,031, and ordered that future rate differences should not exceed cost differences.
The Commission reversed the finding of rate discrimination. Amerada Hess Pipeline Corp., 68 FERC p 61,057 (1994) ("Order on Exceptions"). It agreed that heavier petroleum did not generate greater fixed costs, id. at 61,192, and didn't dispute that the pumpability factors do not properly measure differences in variable costs such as additional fuel and drag-reducing agent. But it said that it was not bound by "strict cost-incurrence" principles in setting TAPS rates. Because the pumpability factors accurately measure "use of capacity" on TAPS, and "use of capacity" was "an accepted method of allocating joint and common [fixed] costs," id., there was no discrimination. As to variable costs, the Commission provided no reasoning at all. The Commission denied the...
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