Farmers Union Cent. Exchange, Inc. v. F.E.R.C.

• Decision Date: 26 June 1984
• Docket Number: 83-1130,Nos. 82-2412,MID-AMERICA,s. 82-2412
• Citation: 734 F.2d 1486,236 U.S.App.D.C. 203
• Parties: , 59 P.U.R.4th 1 FARMERS UNION CENTRAL EXCHANGE, INC., et al., Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, and United States of America, Respondents, Williams Pipe Line Company, Association of Oil Pipelines, Getty Pipeline, Inc., Marathon Pipe Line Company, Phillips Pipe Line Company, Sun Pipe Line Company, Mid-America Pipeline Company, Texas Eastern Transmission Corporation, ARCO Pipe Line Company, Intervenors. ASSOCIATION OF OIL PIPE LINES and Williams Pipe Line Company, Petitioners, v. UNITED STATES of America and Federal Energy Regulatory Commission, Respondents, Marathon Pipe Line Company, Farmers Union Central Exchange, Inc., et al., Mid-America Pipeline Company, Buckeye Pipe Line Company, Texas Eastern Transmission Corp., Hydrocarbon Transportation, Inc., Belle Fourche Pipe Line Company, Getty Pipeline, Inc., Sun Pipe Line Company, ARCO Pipe Line Company, Intervenors. PHILLIPS PIPE LINE COMPANY, Petitioner, v. UNITED STATES of America and Federal Energy Regulatory Commission, Respondents, Farmers Union Central Exchange, Inc., et al., Getty Pipeline, Inc., Sun Pipe Line Company, Mid-America Pipeline Company, ARCO Pipe Line Company, Intervenors. SUN PIPE LINE COMPANY, Petitioner, v. UNITED STATES of America and Federal Energy Regulatory Commission, Respondents, Farmers Union Central Exchange, Inc., et al., Getty Pipeline, Inc., Sun Pipe Line Company, Mid-America Pipeline Company, ARCO Pipe Line Company, Intervenors. ARCO PIPE LINE COMPANY, Petitioner, v. UNITED STATES of America and Federal Energy Regulatory Commission, Respondents, Farmers Union Central Exchange, Inc., et al., Belle Fourche Pipe Line Co., Getty Pipeline, Inc., Sun Pipe Line Company, Mid-America Pipeline Company, Intervenors.PIPELINE COMPANY, Petitioner, v. UNITED STATES of America and Federal Energy Regulatory Commission, Respondents, Farmers Union Central Exchange, Inc., et al., Belle Fourche Pipe Line Co., Getty Pipeline, Inc., Sun Pipe Line Company, Intervenors. to 83-1134.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1486

734 F.2d 1486

236 U.S.App.D.C. 203, 59 P.U.R.4th 1

FARMERS UNION CENTRAL EXCHANGE, INC., et al., Petitioners, v.FEDERAL ENERGY REGULATORY COMMISSION, and United States of

America, Respondents,

Williams Pipe Line Company, Association of Oil Pipelines,

Getty Pipeline, Inc., Marathon Pipe Line Company, Phillips

Pipe Line Company, Sun Pipe Line Company, Mid-America

Pipeline Company, Texas Eastern Transmission Corporation,

ARCO Pipe Line Company, Intervenors.

ASSOCIATION OF OIL PIPE LINES and Williams Pipe Line

Company, Petitioners, v.UNITED STATES of America and Federal Energy Regulatory

Commission, Respondents,

Marathon Pipe Line Company, Farmers Union Central Exchange,

Inc., et al., Mid-America Pipeline Company, Buckeye Pipe

Line Company, Texas Eastern Transmission Corp., Hydrocarbon

Transportation, Inc., Belle Fourche Pipe Line Company, Getty

Pipeline, Inc., Sun Pipe Line Company, ARCO Pipe Line

Company, Intervenors.

PHILLIPS PIPE LINE COMPANY, Petitioner, v.UNITED STATES of America and Federal Energy Regulatory

Commission, Respondents,

Farmers Union Central Exchange, Inc., et al., Getty

Pipeline, Inc., Sun Pipe Line Company, Mid-America

Pipeline Company, ARCO Pipe Line

Company, Intervenors.

SUN PIPE LINE COMPANY, Petitioner, v.UNITED STATES of America and Federal Energy Regulatory

Commission, Respondents,

Farmers Union Central Exchange, Inc., et al., Getty

Pipeline, Inc., Sun Pipe Line Company, Mid-America

Pipeline Company, ARCO Pipe Line

Company, Intervenors.

ARCO PIPE LINE COMPANY, Petitioner, v.UNITED STATES of America and Federal Energy Regulatory

Commission, Respondents,

Farmers Union Central Exchange, Inc., et al., Belle Fourche

Pipe Line Co., Getty Pipeline, Inc., Sun Pipe Line

Company, Mid-America Pipeline Company,

Intervenors.

MID-AMERICA PIPELINE COMPANY, Petitioner, v.UNITED STATES of America and Federal Energy Regulatory

Commission, Respondents,

Farmers Union Central Exchange, Inc., et al., Belle Fourche

Pipe Line Co., Getty Pipeline, Inc., Sun Pipe Line

Company, Intervenors.

Nos. 82-2412, 83-1130 to 83-1134.

United States Court of Appeals District of Columbia Circuit.

Argued Nov. 18, 1983.

Decided March 9, 1984.

As Amended June 26, 1984.

Petitions for Review of an Order of the Federal Energy Regulatory commission.

John M. Cleary, Washington, D.C., with whom Frederick L. Wood, Washington, D.C., was on the brief for Farmers Union Exchange, Inc., et al., petitioner in No. 82-2412 and intervenor in Nos. 83-1130, 83-1131, 83-1132, 83-1133and83-1134.

Robert G. Bleakney, Jr., Boston, Mass., with whom David M. Schwartz and Robert L. Calhoun, Boston, Mass., were on the brief for Williams Pipe Line Company, petitioner in No. 83-1130 and intervenor in No. 82-2412.

Cheryl C. Burke, Neal J. Tonken and Glenn E. Davis, Washington, D.C., were on the brief for Phillips Pipe Line Company, petitioner in Nos. 83-1131 and intervenor in No. 82-2412.

Paul A. Cunningham, Marc D. Machlin and Arthur W. Adelberg, Washington, D.C., entered appearances for Sun Pipe Line Company, petitioner in Nos. 83-1132 and intervenor in Nos. 82-2412, 83-1130, 83-1131, 83-1133and83-1134.

Robert E. Jordan, III, Steven H. Brose, Timothy M. Walsh, Washington, D.C., and Gerald A. Costello, Los Angeles, Cal., were on the brief for ARCO Pipe Line Company, petitioner in No. 83-1133 and intervenor in Nos. 82-2412, 83-1130, 93-1131and83-1132.

Robert J. Wiggers, Attorney, Dept. of Justice, Washington, D.C., with whom John Powers, III, Attorney, Dept. of Justice, Washington, D.C., was on the brief, for United States of America, respondent in Nos. 82-2412, 83-1130, 83-1131, 83-1132, 83-1133and83-1134.

Robert F. Shapiro, Attorney, Federal Energy Regulatory Commission, Washington, D.C., with whom Stephen R. Melton, Acting General Counsel, Jerome M. Feit, Sol. and Andrea Wolfman, Attorney, Federal Energy Regulatory Commission, Washington, D.C., were on the brief for Federal Energy Regulatory Commission, respondent in Nos. 82-2412, 83-1130, 83-1131, 83-1132, 83-1133and83-1134.

R. Eden Martin, Washington, D.C., with whom Lawrence A. Miller, Washington, D.C., Howard J. Trienens, New York City, and Patrick H. Corcoran, Washington, D.C., were on the brief for Association of Oil Pipelines, intervenor in No. 82-2412, and petitioner in No. 83-1130.Jules M. Perlberg, Chicago, Ill., and Ronald S. Flagg, Washington, D.C., also entered appearances for Association of Oil Pipelines.

Joseph W. Craft, III, Thomas E. Ricky, Kristen E. Cook, Tulsa, Okl., Jack W. Hanks and Ronald M. Johnson, Washington, D.C., were on the brief for Mid-America Pipeline Company, intervenor in Nos. 82-2412, 83-1130, 83-1131, 83-1132and83-1133 and petitioner in No. 83-1134.

James W. McCartney, Albert S. Tabor, Jr., Houston, Tex., David T. Andril, Washington, D.C., Jack E. Earnest and Bolivar C. Andrews, John E. Kennedy, Houston, Tex., were on the brief for Texas Eastern Transmission Corporation, intervenor in Nos. 82-2412and83-1130.

James F. Bell, Washington, D.C., was on the brief for Marathon Pipe Line Company, intervenor in Nos. 82-2412and83-1130.Thomas E. Fennell, Washington, D.C., also entered an appearance for Marathon Pipe Line Company.

Frank Saponaro, Jr., Washington, D.C., was on the brief for Buckeye Pipe Line Company, intervenor in Nos. 83-1130.

J. Paul Douglas and Jon L. Brunenkant, Washington, D.C., entered appearances for Getty Pipeline, Inc., intervenor in Nos. 82-2412, 83-1130, 83-1131, 83-1132, 83-1133and83-1134.

Walter E. Gallagher and Peter C. Lesch, Washington, D.C., entered appearances for Hydrocarbon Transportation, Inc., intervenor in Nos. 83-1130.

Jack Vickrey, Houston, Tex., was on the brief for Belle Fourche Pipe Line Company, intervenor in Nos. 83-1130, 83-1133and83-1134.

                   TABLE OF CONTENTS
                                                                   Page
                  I.  BACKGROUND ................................. 1490
                 II.  THE FERC OPINION ........................... 1492
                      A. The Congressional Purpose in
                         Mandating "Just and Reasonable"
                         Oil Pipeline Rates ...................... 1492
                      B. The Economic Context .................... 1493
                      C. Rate Base ............................... 1495
                      D. Rate of Return .......................... 1496
                      E. Other Matters ........................... 1497
                III.  The STANDARD OF REVIEW ..................... 1498
                 IV.  FERC's ACTION CONTRAVENES THE STATUTORY
                      DIRECTIVE TO DETERMINE WHETHER RATES ARE
                      "JUST AND REASONABLE" ...................... 1500
                  V.  FERC's DECISION LACKS A REASONED BASIS ..... 1510
                      A. Rate Base ............................... 1511
                         1. Original Cost Rate Base .............. 1511
                            a. Parent Guarantees and Capital
                               Structure ......................... 1513
                            b. Comparable Risk Analyses .......... 1515
                            c. The "Front-End Load"
                               Problem ........................... 1516
                            d. The Social Costs and Benefits of
                               Transition to a New Rate Base
                               Formula ........................... 1517
                         2. The Association of Oil Pipelines'
                            Recommendations ...................... 1518
                      B. Rate of Return .......................... 1521
                         1. Risk and Allowance Rate of
                            Return ............................... 1523
                         2. The "Inflation Adjustment" and
                            the "Double Counting" Problem ........ 1523
                         3. FERC's "Equity Component" Has
                            No Meaningful Relation to the
                            Rates of Return on Book Equity ....... 1525
                 VI.  MISCELLANEOUS ISSUES ....................... 1527
                      A. Purchase Price of Williams' Assets ...... 1527
                      B. Systemwide vs. Point-to-Point Rate
                         Regulation .............................. 1528
                      C. Tax Normalization ....................... 1529
                VII.  CONCLUSION ................................. 1530
                

Before WALD, EDWARDS and STARR, Circuit Judges.

Opinion for the Court filed by Circuit Judge WALD.

WALD, Circuit Judge:

Petitioners, along with the Department of Justice and the Williams Pipe Line Company, challenge an order of the Federal Energy Regulatory Commission(FERC) on a wide variety of grounds.The FERC order in question specified the generic ratemaking methodology to be applied to all oil pipelines pursuant to the Interstate Commerce Act.In its order, the Commission articulated for the first time its belief that oil pipeline rate regulation should serve only as a cap on egregious price exploitation by the regulated pipelines, and that competitive market forces should be relied upon in the main to assure proper rate levels.Furthermore, in devising a specific ratemaking methodology in accordance with these beliefs, FERC retained the rate base formula used in the past in oil pipeline ratemaking, even though this formula had met with severe criticism from this court in Farmers Union Central Exchange v. FERC, 584 F.2d 408(D.C.Cir.1978), cert. denied sub nom.Williams Pipe Line Co. v. FERC, 439 U.S. 995, 99 S.Ct. 596, 58 L.Ed.2d 669(1978).At the same time, the Commission revised its rate of return methodology so that the resulting rate levels would represent ceilings seldom reached in actual practice.

For the reasons set forth below, we find that the Commission's order contravenes its statutory responsibility to ensure that oil pipeline rates are "just and reasonable."In addition, we hold that FERC failed both to give due consideration to responsible alternative ratemaking methodologies proposed during its administrative proceedings, and to offer a reasoned explanation in support of its own chosen ratemaking methodology, and that therefore the FERC order constitutes impermissible "arbitrary and capricious" agency action.Accordingly, we remand this case for further proceedings consistent with this opinion.

I.BACKGROUND

Williams Pipe Line Company(Williams), ¹ an independent common carrier, operates oil...