Frontier Pipeline Co. v. F.E.R.C.

• Decision Date: 26 May 2006
• Docket Number: No. 04-1344.,No. 04-1343.,No. 04-1349.,04-1343.,04-1344.,04-1349.
• Citation: 452 F.3d 774
• Parties: FRONTIER PIPELINE COMPANY and Express Pipeline LLC, Petitioners v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. Big West Oil, et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 774

452 F.3d 774

FRONTIER PIPELINE COMPANY and Express Pipeline LLC, Petitioners v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent.

Big West Oil, et al., Intervenors.

No. 04-1343.

No. 04-1344.

No. 04-1349.

United States Court of Appeals, District of Columbia Circuit.

Argued February 10, 2006.

Decided May 26, 2006.

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

In Nos. 04-1343 and 04-1349, Steven Reed argued the cause for petitioners Frontier Pipeline Company and Express Pipeline LLC. With him on the briefs were Steven H. Brose, John D. Clopper, and Christopher J. Barr.

In No. 04-1344, Melvin Goldstein argued the cause and filed the briefs for petitioners Big West Oil, LLC and Chevron Products Company.

In Nos. 04-1343, 04-1344, and 04-1349, Judith A. Albert, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With her on the brief were Thomas O. Barnett, Acting Assistant Attorney General, U.S. Department of Justice, John J. Powers and Robert J. Wiggers, Attorneys, and John S. Moot, General Counsel, Federal Energy Regulatory Commission, and Dennis Lane, Former Solicitor.

In Nos. 04-1343 and 04-1349, Melvin Goldstein was on the brief of intervenors Big West Oil, LLC and Chevron Products Company.

In No. 04-1344, Steven H. Brose, Steven Reed, John D. Clopper, and Christopher J. Barr were on the brief of intervenors Frontier Pipeline Company and Express Pipeline LLC. Dawn M. Karolick entered an appearance.

Before: GARLAND, Circuit Judge, and SILBERMAN and WILLIAMS, Senior Circuit Judges.

Opinion for the Court filed by Senior Circuit Judge WILLIAMS.

WILLIAMS, Senior Circuit Judge.

Before us are petitions for review of orders of the Federal Energy Regulatory Commission requiring certain crude oil carriers to pay shippers reparations for excessive rates. The carrier-petitioners contend that FERC went too far, in holding that a joint rate exceeds the just and reasonable rate simply on the basis of a finding about the costs for providing service on one of four segments, where the Commission has denied the carrier any opportunity to show that the overall rate did not exceed costs. The shipper-petitioners contend that FERC didn't go far enough, in awarding reparations only for complaining shippers in privity with the carrier. We grant the carriers' petition, deny the shippers', and remand the case.

I. The Carriers' Petition

A. Background

We first explain the regulatory framework for oil pipelines, as well as some shipping terms.

Congress passed the Interstate Commerce Act ("ICA") in 1887 to regulate railroads, also creating the Interstate Commerce Commission to administer the statute. Ch. 104, 24 Stat. 379. In 1906, it declared the ICA applicable to oil pipelines and correspondingly expanded the ICC's jurisdiction. Hepburn Act, Pub.L. No. 59-337, § 1, 34 Stat. 584, 584. In 1977, it transferred the ICC's authority over oil pipelines to the newly created FERC, Department of Energy Reorganization Act, Pub.L. No. 95-91, § 402(b), 91 Stat. 565, 584 (codified in substance at 49 U.S.C. § 60502), and the next year provided that oil pipelines were to be regulated under the version of the ICA that prevailed on October 1, 1977, Act of Oct. 17, 1978, Pub.L. 95-473, § 4(c), 92 Stat. 1337, 1470. Accordingly, all references to the ICA in this opinion are to the 1977 version, which can be found in 49 U.S.C. § 1 et seq. (1976), reprinted in 49 U.S.C. app. § 1 et seq. (1988). The parties agree that decisions of the ICC applying the ICA prior to the 1977 legislation are treated as if they were FERC decisions; i.e., if FERC deviates from such a decision, it must at least justify the deviation as it would a deviation from a decision of its own under Greater Boston Television Corp. v. FCC, 444 F.2d 841, 852 (D.C.Cir.1970).

ICA § 1(5), 49 U.S.C. app. § 1(5) (1988), requires all rates to be "just and reasonable" and declares all "unjust and unreasonable" rates to be "unlawful." The statute allows a shipper to challenge as unreasonable any rate, whether already filed and applicable, ICA § 13(1), 49 U.S.C. app. § 13(1) (1988), or newly filed, ICA § 15(7), 49 U.S.C. app. § 15(7) (1988). From the dawn of federal oil pipeline regulation in 1906 up to the 1990s, the relevant agencies decided the reasonableness of a rate mainly on the basis of the pipeline's individual costs. See Association of Oil Pipe Lines v. FERC, 83 F.3d 1424, 1428-29 (D.C.Cir.1996) ("AOPL"); Farmers Union Central Exchange v. FERC, 734 F.2d 1486, 1495-96 (D.C.Cir.1984); Farmers Union Central Exchange v. FERC, 584 F.2d 408, 412-22 (D.C.Cir. 1978).

In 1992 Congress adopted the Energy Policy Act ("EPAct"), instructing FERC to issue, within one year of the statute's enactment, a "final rule which establishes a simplified and generally applicable ratemaking methodology for oil pipelines in accordance with section 1(5)." Pub.L. No. 102-486, § 1801(a), 106 Stat. 2776, 3010, codified at 42 U.S.C. 7172 note. FERC carried out this mandate by issuing Order No. 561, Revision to Oil Pipeline Regulations Pursuant to the Energy Policy Act of 1992, FERC Stats. & Regs. ¶ 30,985, 58 Fed.Reg. 58,753 (1993), order on reh'g, Order No. 561-A, FERC Stats. & Regs. ¶ 31,000, 59 Fed.Reg. 40,243 (1994), aff'd, AOPL, 83 F.3d 1424.

Order No. 561 adopts a rate cap system, under which ceiling levels for pipeline rates are adjusted annually on the basis of a formula predicting annual percentage changes in industry-wide pipeline costs. This system dispenses with intricate calculations of specific pipeline costs. Order No. 561, FERC Stats. & Regs. ¶ 30,985, at 30,946-56, 58 Fed.Reg. at 58,757/2-63/1. Further, whereas fixing rate maximums on the basis of individual pipelines' costs tended to deter pipelines from adopting cost-reducing innovations (as the regulators would ultimately catch up with any cost reduction and lower the ceiling), the new system counters this tendency; a single pipeline's cost reduction is unlikely to much affect the industry-wide index. See Flying J, Inc. v. FERC, 363 F.3d 495, 496-97 (D.C.Cir.2004).

Under the order, a carrier calculates a ceiling level at the start of each index year (which runs from July 1 to June 30) by taking the ceiling level for the previous index year and adjusting it according to the formula. 18 C.F.R. § 342.3(c), (d). The original ceiling level from which this process begins is determined either by reference to the rate in effect on December 31, 1994 (which became the ceiling for the first six months of 1995), 18 C.F.R. § 342.3(d)(4); Order No. 561, FERC Stats. & Regs. ¶ 30,985, at 30,953-54, 58 Fed. Reg. at 58,761/3, or, for service going into effect thereafter, the "initial rate" for such service, 18 C.F.R. § 342.3(d)(5). For such an "initial rate," the carrier can choose any figure it wants, so long as it gets the consent of at least one nonaffiliated shipper and no other shipper protests; failing that, the pipeline must justify the initial rate on the basis of its individual costs. 18 C.F.R. § 342.2; Order No. 561, FERC Stats. & Regs. ¶ 30,985, at 30,959-61, 58 Fed.Reg. at 58,765/1-65/3.

A pipeline may raise a rate above the resulting ceiling level, but only if (1) it shows a lack of market power or a "substantial divergence" between the ceiling level and its individual costs; or (2) all customers consent. 18 C.F.R. § 342.4; Order No. 561, FERC Stats. & Regs. ¶ 30,985, at 30,956-59, 58 Fed.Reg. at 58,763/1-64/3; Order No. 561-A, FERC Stats. & Regs. ¶ 31,000, at 31,106-07, 59 Fed.Reg. at 40,253/1-53/2. When a rate is changed by one of these methods, the new rate becomes the ceiling level for the index year in which the change occurs. 18 C.F.R. § 342.3(d)(5).

A rate increase that doesn't exceed the ceiling level takes effect with no additional showing from the carrier. 18 C.F.R. § 342.3(a). Further, shippers' challenges to rates that comply with the regime— including challenges under ICA § 15(7) to rate changes and under ICA § 13(1) to existing rates—are subject to special limits requiring the shipper to "allege reasonable grounds for asserting" a "substantial" deviation between the challenged rate increase and the pipeline's cost increase (or between the whole rate and the pipeline's costs). 18 C.F.R. § 343.2(c)(1); Order No. 561, FERC Stats. & Regs. ¶ 30,985, at 30,955-56 & n. 74, 58 Fed.Reg. at 58,762/2-63/1 & n. 74.¹

This discussion of the EPAct is far from comprehensive. The statute contains at least one other major provision, known as the "grandfather clause," that confers special protections on rates that had been in effect one year prior to the statute's enactment (i.e., in effect on October 24, 1991) and hadn't been the subject of "protest, investigation, or complaint" during the intervening year. EPAct § 1803, 42 U.S.C. 7172 note; Order No. 561, FERC Stats. & Regs. ¶ 30,985, at 30,966, 58 Fed.Reg. at 58,768/3-69/1. This grandfathering operates independently of the rate-sheltering provisions of Order No. 561. See 18 C.F.R. §§ 342.1, 342.3, 343.2(c)(1); Order No. 561, FERC Stats. & Regs. ¶ 30,985, at 30,952 & n.56, 58 Fed.Reg. at 58,761/1 & n.56; see also Order No. 561-A, FERC Stats. & Regs. ¶ 31,000, at 31,102-04, 59 Fed.Reg. at 40,250/3-52/1. If a filed rate protected by the grandfather clause exceeds its ceiling level, the statutory grandfathering trumps. 18 C.F.R. § 342.3(e). Here, the grandfather clause is inapplicable, since the parties agree that none of the rates at issue enjoys its protection. Big West Oil Co. v. Frontier Pipeline Co., 95 FERC ¶ 61,229, at 61,794, 2001 WL 537836 (2001) ("Second 2001 Order"); Big West Oil Co. v. Frontier Pipeline Co., 94 FERC ¶ 61,339, at 62,259, 2001 WL 306491 (2001) ("First 2001 Order").

We must also review some shipping terminology. As this court explained (in a case on railroads, whose terminology is the same as for oil pipelines):

A through route is an arrangement, express or implied, that provides for the...