Ass'n of Oil Pipe Lines v. Fed. Energy Regulatory Comm'n

• Decision Date: 28 November 2017
• Docket Number: No. 16-1059,16-1059
• Citation: 876 F.3d 336
• Parties: ASSOCIATION OF OIL PIPE LINES, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION and United States of America, Respondents Air Transport Association of America, Inc., d/b/a Airlines for America, et al., Intervenors
• Court: U.S. Court of Appeals — District of Columbia Circuit

876 F.3d 336

ASSOCIATION OF OIL PIPE LINES, Petitioner

v. FEDERAL ENERGY REGULATORY COMMISSION and United States of America, RespondentsAir Transport Association of America, Inc., d/b/a Airlines for America, et al., Intervenors

No. 16-1059

United States Court of Appeals, District of Columbia Circuit.

Argued September 12, 2017

Decided November 28, 2017

Steven Reed argued the cause for petitioner. With him on the briefs were Steven H. Brose, Daniel J. Poynor, and Steven M. Kramer, Washington, DC.

Susanna Y. Chu, Attorney, Federal Energy Regulatory Commission, argued the cause for respondents. With her on the brief were James J. Fredricks and Robert J. Wiggers, Attorneys, U.S. Department of Justice, Robert H. Solomon, Solicitor, Federal Energy Regulatory Commission, and Beth G. Pacella, Deputy Solicitor.

Richard E. Powers Jr., Steven A. Adducci, Matthew D. Field, Thomas J. Eastment, Gregory S. Wagner, David A. Berg, Jeffrey M. Petrash, and James H. Holt, Washington, DC, were on the brief for Shippers Intervenors in support of the Federal Energy Regulatory Commission.

Before: Kavanaugh and Srinivasan, Circuit Judges, and Edwards, Senior Circuit Judge.

Edwards, Senior Circuit Judge:

Pursuant to authority granted to it under the Interstate Commerce Act, 49 U.S.C. app. § 15(1) (1988), and the Energy Policy Act of 1992, Pub. L. No. 102-486, § 1801(a), 106 Stat. 2776, 3010 (codified at 42 U.S.C. § 7172 note (2006)), the Federal Energy Regulatory Commission ("FERC" or "Commission") employs an indexed ratemaking system to govern oil pipeline rates. See Order No. 561, Revisions to Oil Pipeline Regulations Pursuant to the Energy Policy Act of 1992 , 58 Fed. Reg. 58,753, 58,753 –54 (Nov. 4, 1993). The Commission calculates the index each year using a formula aimed at capturing the change in costs experienced by the oil pipeline industry. Id. at 58,754. It reexamines the formula it utilizes to set the annual index every five years. Id. With limited exceptions, it has applied a generally consistent methodology, approved by this court, to calculate the change in normal industry costs at each five-year interval. See Ass'n of Oil Pipe Lines v. FERC (AOPL I ), 83 F.3d 1424 (D.C. Cir. 1996).

On December 17, 2015, after engaging in notice and comment rulemaking, the Commission issued an order adopting the index formula for the 2016 to 2021 period. Five–Year Review of the Oil Pipeline Index , 80 Fed. Reg. 81,744 (Dec. 31, 2015) [hereinafter 2015 Order]. The Association of Oil Pipelines ("AOPL") filed a petition for review of the 2015 Order in this court on February 16, 2016. AOPL alleges that the Commission acted arbitrarily and capriciously in violation of the Administrative Procedure Act ("APA") by departing in two ways from the methodology used in past index reviews: First, according to AOPL, FERC, without reasoned explanation, impermissibly relied solely on the middle 50 percent of pipeline cost-change data and failed to incorporate the middle 80 percent of cost-change data. Second, AOPL asserts that FERC, without adequate justification, impermissibly used "Page 700" cost-of-service data to calculate the index level instead of the "Form No. 6" accounting data that had been employed in the past. We find no merit in AOPL's claims.

Because "[t]he Commission, not this or any court, regulates" oil pipeline rates, our role on review of the 2015 Order is limited. FERC v. Elec. Power Supply Ass'n , ––– U.S. ––––, 136 S.Ct. 760, 784, 193 L.Ed.2d 661 (2016). The record makes it plain that the Commission adequately and reasonably explained its decision not to consider the middle 80 percent of pipelines' cost-change data. Furthermore, contrary to AOPL's assertion, nothing in any of FERC's past index review orders bound the agency to use the middle 80 percent of pipelines' cost-change data. Likewise, the Commission's rationale for utilizing the cost-of-service data from Page 700 is clear and reasonable. And there is nothing in the record to support AOPL's claim that FERC's decision to use Page 700 data indicates an unexplained shift in its measurement objective. In this situation, the words of the Supreme Court are quite apt:

The disputed question[s in this case involve] both technical understanding and policy judgment. ... Our important but limited role is to ensure that the Commission engaged in reasoned decisionmaking—that it weighed competing views, selected [an index] with adequate support in the record, and intelligibly explained the reasons for making that choice. FERC satisfied that standard. ... [T]he Commission met its duty of reasoned judgment. FERC took full account of the alternative policies proposed, and adequately supported and explained its decision.

Id . The conclusions reached by the Court in FERC v. Electric Power Supply Association apply here as well. We therefore deny the petition for review.

I. Background

A. Statutory and Regulatory History

Oil pipelines have long been subject to rate regulation under the Interstate Commerce Act. See Hepburn Act, Pub. L. No. 59-337, 34 Stat. 584 (1906). As currently codified, that statute charges FERC with ensuring that pipeline rates are "just and reasonable." 49 U.S.C. app. § 15(1) (1988). For many years, the Commission calculated rates using a cost-of-service methodology under which pipelines could recover "only a real (inflation-adjusted) rate of return each year." AOPL I , 83 F.3d at 1429; see Opinion No. 154–B, Williams Pipe Line Co. , 31 FERC ¶ 61,377 (June 28, 1985), opinion on reh'g , 33 FERC ¶ 61,327 (1985).

In 1992, Congress enacted the Energy Policy Act, which directed FERC to issue a rule to simplify the ratemaking methodology for oil pipelines. Energy Policy Act of 1992, § 1801(a), 106 Stat. at 3010. To fulfill its Energy Policy Act mandate, the Commission promulgated Order No. 561, adopting an indexed ratemaking system. See 58 Fed. Reg. at 58,754. Under this system, the Commission sets an annual index, which is used to calculate pipeline-specific rate ceilings; pipelines may increase their rates without seeking the Commission's approval, so long as the increase does not exceed the annual limit, computed using the index. 18 C.F.R. § 342.3(a), (d). The Commission also provided that, in limited circumstances, pipelines may increase their rates pursuant to three alternative methods. Id. § 342.4. Among these is a cost-of-service option, which allows a pipeline to file for an individualized rate based on its costs, as it would have under the previous methodology, if the pipeline shows there is a substantial divergence between the costs it experienced and the rate resulting from the index. Id. § 342.4(a).

Order No. 561 also established the formula the Commission would use to set the annual index. 58 Fed. Reg. at 58,757 –60. The index formula is designed to "track[ ] the historical changes in the actual costs of the product pipeline industry."

Id. at 58,760. The Commission determined to use the change in the Producer Price Index for Finished Goods ("PPI–FG"), as published by the U.S. Department of Labor, Bureau of Labor Statistics, as a baseline measure for inflation, adjusted to account for "actual cost changes experienced by the [oil pipeline] industry." Id. ; see also 18 C.F.R. § 342.3(d)(2).

In formulating its methodology, the Commission relied on a proposal from Dr. Alfred Kahn, an industry commenter's expert. See Order No. 561–A, Revisions to Oil Pipeline Regulations Pursuant to Energy Policy Act of 1992 , 59 Fed. Reg. 40,243, 40,245 –46 (Aug. 8, 1994). Dr. Kahn calculated the annual rates of change for operating expenses for each pipeline based on accounting information obtained from part of the pipelines' Form No. 6 annual regulatory filings. See id. at 40,247. He then omitted from his analysis the pipelines within the upper and lower 25 percent of the cost spectrum in order to exclude statistical outliers and incomplete or questionable data. Id. Applying the Kahn Methodology, the Commission considered the middle 50 percent of pipelines' cost-change data and adopted an initial index formula of PPI–FG minus 1.0 percent. See id. ; Order No. 561, 58 Fed. Reg. at 58,760. The Commission additionally determined that consistent monitoring of the formula would be necessary to measure the index's continued capacity to accurately track cost changes in the pipeline industry, and it committed to revisit the formula every five years. See Order No. 561, 58 Fed. Reg. at 58,754. On review, this court upheld the Commission's index scheme in its entirety. See AOPL I , 83 F.3d at 1433, 1445.

In 2000, the Commission engaged in its first review of the index formula. After notice and comment, FERC elected to maintain the PPI–FG minus 1.0 percent formula, but used a different methodology than the one used in 1994. Five–Year Review of Oil Pipeline Pricing Index , 93 FERC ¶ 61,266, at 61,851 –52 (Dec. 14, 2000) [hereinafter 2000 Order ]. On review, this court held that the Commission had failed to articulate and adequately justify its reasons for shifting its methodology and remanded the case for further consideration by the agency. See Ass'n of Oil Pipe Lines v. FERC (AOPL II ), 281 F.3d 239, 240–41 (D.C. Cir. 2002). On remand, FERC largely embraced the Kahn Methodology and adopted an index of PPI–FG with no adjustment. Five–Year Review of Oil Pipeline Pricing Index , 102 FERC ¶ 61,195, at 61,537, 61,539 –41 (Feb. 24, 2003) [hereinafter 2003 Order ]. This court rejected a challenge to the new order. See Flying J Inc. v. FERC , 363 F.3d 495, 500 (D.C. Cir. 2004).

In subsequent index reviews, the Commission continued to rely on the Kahn Methodology, but with some modifications. For example, in 2006, as it had in the 2003 Order, the Commission considered data from pipelines with cumulative per-barrel-mile cost changes in both the middle 50 percent and middle 80 percent of all oil pipelines. See Order Establishing Index for Oil Price Change Ceiling Levels , 114 FERC ¶ 61,293, at 62,038–40 (March 21, 2006) ...