Exxon Co. v. Fed. Energy Comm'n.

• Decision Date: 13 July 1999
• Docket Number: No. 95-1520,98-1005,96-1464,97-1733,Nos. 96-1078,95-1520,s. 96-1078
• Citation: 182 F.3d 30
• Parties: (D.C. Cir. 1999) Exxon Company, U.S.A.,Petitioner v. Federal Energy Regulatory Commission, et al.,Respondents, Tesoro Alaska Petroleum Company, et al., Intervenors Consolidated with
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 30

182 F.3d 30 (D.C. Cir. 1999)

Exxon Company, U.S.A.,Petitioner v. Federal Energy Regulatory Commission, et al.,Respondents, Tesoro Alaska Petroleum Company, et al., Intervenors

No. 95-1520 Consolidated with Nos. 96-1078, 96-1464, 97-1733, 98-1005

United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 30, 1999

Decided July 13, 1999

[Copyrighted Material Omitted]

[Copyrighted Material Omitted]

On Petitions for Review of an Order of the Federal Energy Regulatory Commission

Carter G. Phillips argued the cause for petitioner Exxon Company, U.S.A. With him on the joint briefs were Eugene

R. Elrod, Stephen S. Hill, Stephen F. Smith, Robert H. Benna and Jeffrey G. DiSciullo. Clifton D. Harris, Jr., and Thomas M. Roche entered appearances.

Robert H. Benna argued the cause for petitioner Tesoro Alaska Petroleum Company. With him on the briefs was Jeffrey G. DiSciullo. James C. Reed, Jeanne M. Bennett and David S. Berman entered appearances.

Andrew K. Soto, Attorney, Federal Energy Regulatory Commission, argued the cause for respondents. With him on the brief were Joel I. Klein, Assistant Attorney General, U.S. Department of Justice, John J. Powers, III, and Robert J. Wiggers, Attorneys, Jay L. Witkin, Solicitor, Federal Energy Regulatory Commission, and Susan J. Court, Special Counsel. David H. Coffman, Attorney, entered an appearance.

John A. Donovan argued the cause for intervenors Arco Alaska, Inc., et al. With him on the brief were Matthew W.S. Estes, Bradford G. Keithley, Charles William Burton, Jason F. Leif, John W. Griggs, W. Stephen Smith, Randolph L. Jones, Jr., Alex A. Goldberg and Richard Curtin. Carolyn Y. Thompson, Richard D Avil, Jr., and Dean H. Lefler entered appearances.

Albert S. Tabor, Jr., John E. Kennedy and S. Scott Gaille were on the brief for intervenors TAPS Carriers. Marvin T. Griff and Dean H. Lefler entered appearances.

Before: Ginsburg, Sentelle and Randolph, Circuit Judges.

Opinion for the Court filed by Circuit Judge Sentelle.

Sentelle, Circuit Judge:

Exxon Company, U.S.A. and Tesoro Alaska Petroleum Company petition for review of the Federal Energy Regulatory Commission's ("FERC" or "Commission") order revising the valuation methodology for specified grades of petroleum products after our partial remand of the Commission's earlier order adopting the distillation method for determining compensation due shippers on the Trans Alaska Pipeline System for differences between the oil streams injected and oil streams received. See Order Modifying and Adopting Contested Settlement Proposal, Trans Alaska Pipeline Sys., 65 FERC p 61,277 (1993) ("1993 Order"), approved in part and remanded in part, OXY USA, Inc. v. FERC, 64 F.3d 679, 684 (D.C. Cir. 1995) ("OXY"). In the order before us, FERC approved with modifications a contested settlement over the objection of petitioners. We grant the petition for review in part and vacate and remand for further proceedings those parts of FERC's order approving the use of proxies for the market valuation of one grade of petroleum product and the decision to apply the settlement prospectively only.

I. BACKGROUND

The Trans Alaska Pipeline System ("TAPS") provides the only commercially-viable method for moving crude oil pumped from the oil fields on Alaska's North Slope to the shipment point at Valdez, Alaska, the Alaskan gateway to the world market. Several oil companies own interests in various oil fields on the North Slope. The oil in those fields differs significantly in quality, but the realities of shipping that oil on the single pipe of the TAPS requires the blending of the oil streams from different fields. Unlike packages shipped by a common carrier, the oil streams cannot be segregated during shipping, and the blended streams cannot be separated at the Valdez end of the pipeline. Instead, at the Valdez end of the pipeline, each shipper receives a quantity of the blended common stream equivalent to the amount it injected at the North Slope end. Companies that inject higher quality crude receive oil at the Valdez end of the pipeline identical in quality to that received by companies that inject lower quality crude oil. The TAPS carriers file tariffs specifying how the shippers will compensate each other for these differences in quality, and their methodology must be approved by the Commission pursuant to its authority under the Interstate Commerce Act ("ICA"), 49 U.S.C.app. S 1 et seq. See also Department of Energy Organization Act, Pub. L. No. 95-91, S 402(b), 91 Stat. 565, 584 (1977), codified at 42 U.S.C. S 7172(b) (1988) (repealed 1994), recodified as amended at 49 U.S.C. S 60502 (transferring authority to regulate oil pipeline rates under the ICA from the Interstate Commerce Commission to FERC);Exxon Pipeline Co. v. United States, 725 F.2d 1467, 1468 n.1 (D.C. Cir. 1984) (explaining transfer of authority). TAPS has created a system which requires companies injecting lowerquality oil to compensate companies injecting higher-quality oil by creating a "Quality Bank," which awards shippers credits for high-quality oil and debits for low-quality oil. The TAPS Quality Bank is an arrangement that "makes monetary adjustments [among] shippers in an attempt to place each in the same economic position it would enjoy if it received the same petroleum at Valdez that it delivered to TAPS on the North Slope." OXY, 64 F.3d at 684. While this is simple enough in concept, determining the relative value of the injected streams is in fact a complex technical task. There is no independent market to set the relative price of the various streams of North Slope crude because the crude is not sold until after it is commingled and brought to Valdez. When the system was originally created, the relative value of oil was determined by the "API gravity"¹ of the oil because lighter, high-gravity crude is generally more valuable than heavier, low-gravity crude. See id. at 685. The "straight-line gravity method" measured the gravity of each incoming stream and compared it to the gravity of the oil received by that shipper at the far end, and determined Quality Bank credits or debits accordingly. See id. In 1989, however, OXY USA and Conoco, Inc. challenged this methodology, and in 1991 a FERC Administrative Law Judge ("ALJ") determined that it "no longer yield[ed] a just and reasonable result." 57 FERC p 63,010, at 65,049-50, 65,052-53 (1991). (For a full explication of the proceedings, see OXY, 64 F.3d at 683-89.)

The majority of North Slope shippers in an attempt to settle the tariff dispute proposed abandoning the straight-line gravity method in favor of a "distillation" or "assay" methodology, which would value crude oil based on the market price of the various component products (called "cuts") created when the crude oil is heated to a series of specific temperatures and the evaporated products produced at each temperature are recondensed. See OXY, 64 F.3d at 687. The five cuts created by this process at the lower boiling points-propane, isobutane, normal butane, natural gasoline, and naphtha--and one of the heavier cuts, gas oil, are not at issue here, as we upheld the method of valuing those cuts in our earlier review. See id. at 701. We vacated and remanded for further proceedings as to distillate and residual fuel oil ("resid").

A. Distillate

Under the original 1993 settlement offer, the distillate cut included the portion of the stream that evaporated between 350 and 650 degrees Fahrenheit. Under the 1993 settlement order, FERC split this proposed cut into two cuts, light distillate (350-450 degrees) and heavy distillate (450-650 degrees). FERC determined that it would price light distillate as jet fuel and heavy distillate as No. 2 fuel oil, the products into which those cuts are normally refined, without adjustment for processing costs. See 1993 Order, 65 FERC p 61,277, at 62,288. We rejected that methodology because each cut would require further processing to reach the quality required for the proxy product. See OXY, 64 F.3d at 693.Because the settlement as modified by FERC essentially valued a raw material as if it were a finished product, we determined that it overvalued these heavier cuts, resulting in a windfall to those shippers whose streams contained the highest relative proportion of heavy crude. See id. Although we recognized that we could not require FERC to achieve a perfect method of valuing petroleum streams, particularly streams including cuts without a market, we nonetheless held that FERC must be consistent in its methodological choices.That is, if the Commission chose to value a portion of the cuts at market without adjusting for processing costs, then it must, at least "to the extent possible," attempt to approximate the market value of other cuts without processing. Id. at 694. That is, the Commission cannot "consistent with the requirement of reasoned decision making, value some cuts precisely and others haphazardly." Id. We therefore remanded the distillate valuation for further consideration by FERC.

B. Resid

As the name implies, the residual, or "resid," cut consists of the portion of the petroleum stream remaining after distillation of all other cuts at lower boiling points. In the 1993 settlement order, FERC split the resid into two cuts--light resid (1,000 to 1,050 degrees Fahrenheit) and heavy resid (all remaining material). The order valued these cuts in relation to the market price of proxies: No. 6 fuel oil for light resid and FO-380 for heavy resid with no adjustment for the processing necessary to receive these market prices. We upheld FERC's decision to create a separate light resid cut, but vacated the valuation of that cut at the price of No. 6 fuel oil as we found that the record did not disclose a relationship between the price of that purported proxy and the value of the cut. Likewise, we concluded that the record did not demonstrate that FO-380 was a reasonable proxy for...