Exxon Co USA v. FERC

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 30, 1999 Decided July 13, 1999

No. 95-1520

Exxon Company, U.S.A.,
Petitioner

v.

Federal Energy Regulatory Commission, et al.,
Respondents

Tesoro Alaska Petroleum Company, et al.,
Intervenors

Consolidated with
Nos. 96-1078, 96-1464, 97-1733, 98-1005

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 Coun-
sel. 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 re-
mand of the Commission's earlier order adopting the distilla-
tion 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 approv-
ing 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 lower-
quality 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 explica-
tion 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

__________
1 API gravity is a measure of density created by the American
Petroleum Institute. Under API gravity analysis, unlike the more
familiar concept of specific gravity, a higher number indicates a less
dense crude oil or petroleum product.

gravity method in favor of a "distillation" or "assay" method-
ology, 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 tempera-
tures and the evaporated products produced at each tempera-
ture 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 ("re-
sid").

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 de-
grees). 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 adjust-
ment 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 approxi-
mate the market value of other cuts without processing. Id.

at 694. That is, the Commission cannot "consistent with the
requirement of reasoned decisionmaking, value some cuts
precisely and others haphazardly." Id. We therefore re-
manded 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 distilla-
tion 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 heavy
resid because the market price of FO-380 bore only a limited
and unquantified relation to the value of heavy resid as a
blending component. See id. at 695. While we concluded
that expert testimony in the record supported a "conclusion
that FO-380 and the 1050+ resid share some physical prop-
erties," it did not even suggest that "the two materials have
equal or even near-equal market values." Id. We therefore
remanded the valuation of the resid cuts to the agency for
further proceedings consistent with our opinion.

In our review of FERC's order approving the 1993 settle-
ment, we rejected not only the specifics of the FO-380
comparison, but also FERC's decision to value resid based on
its use as a feedstock for "cokers," refinery equipment which
breaks resid down even further into lighter fuel products and
a heavy residue, which might be asphalt at some plants, or
other materials with differing uses. Exxon and others ar-
gued that resid should be priced at its marginal use value,

which Exxon claimed was as a blending component for
FO-380. When remanding, we observed that this economic
argument, while it might not by itself carry the day, did
possess enough "analytical force" that the Commission should
on remand "explicitly address whether the marginal use of
1050+ resid should be taken into account in that cut's
valuation methodology." Id.

C. FERC's Proceedings on Remand

In response to our opinion, FERC initiated settlement
proceedings regarding these remanded issues. When this
effort failed, FERC set the matter for hearing. At the same
time, the Commission's Chief ALJ made further attempts to
secure a settlement. The parties filed three separate settle-
ment proposals, one by nine parties2 ("the Nine Party Settle-
ment"), and unilateral proposals from Exxon and Tesoro.
The ALJ provided opportunity for all parties to file materials
in support of or in opposition to the settlement offers. Fol-
lowing the submissions, the ALJ heard oral argument and the
parties filed supplemental briefs. See Certification of Con-
tested Settlement and Ruling on Motion to Omit the Initial
Decision, Trans Alaska Pipeline Sys., 80 FERC p 63,015, at
65,212-13 ("1997 Opinion").

The ALJ ultimately certified the Nine Party Settlement to
the Commission, and opted not to certify the unilateral pro-
posals from Exxon and Tesoro, finding that legal precedent
required this decision and that in any event the proposals
were biased in favor of the proposing parties. The ALJ
reviewed the record in detail and determined that the only
issues properly before him were the remands for valuation of
light and heavy distillate and light and heavy resid. He
found that the Nine Party Settlement's proposed valuations,
which follow, were fair and reasonable and supported by

__________
2 The nine settling parties are Amoco Production Company,
ARCO Alaska, Inc., BP Exploration (Alaska), Inc., MAPCO Alaska
Petroleum, Inc., OXY USA, Inc., Petro Star, Inc., Phillips Petrole-
um Company, the State of Alaska, and Union Oil Company of
California. See 1997 Order, 81 FERC p 61,319, at 62,458 n.5.

record evidence. See 1997 Opinion, 80 FERC p 63,015, at
65,233.

Light distillate: valued based on a weighted average of
the West Coast and Gulf Coast prices of jet fuel, adjust-
ed by 0.5 cents per gallon to reflect processing costs.

Heavy distillate: valued based on weighted average of
the West Coast price of Waterborne Gasoil, reduced by 1
cent per gallon to reflect processing costs and the Gulf
Coast price of No. 2 fuel oil reduced by 2 cents per gallon
to reflect processing costs. (The processing costs were
based on the testimony of Nine Party expert witness
John O'Brien who stated that ANS crude oil needed to
be processed to reach the 0.5 percent level for sulfur
demanded by the market. )

Light resid (1000 degrees F to 1050 degrees F): The
1993 settlement had eliminated separate treatment of
light resid and combined it with the 1050+ cut. The
Nine Party Settlement approved by the ALJ instead
rolled it into the Vacuum Gas Oil ("VGO") cut, by raising
the top end of that cut to 1050 degrees, which the nine
parties claim conforms with industry practice.

Heavy resid (1050+): continued use of the West Coast
price of FO-380 as a West Coast reference price, sub-
tracting 4.5 cents per gallon as a processing cost. Added
Gulf Coast 3 percent sulfur No. 6 fuel oil as a Gulf Coast
reference product, and adjusted that figure by the same
4.5 cents.

The ALJ noted that the nine parties supported the settle-
ment only if it applied prospectively. See id. at 65,241. The
ALJ determined that the remand did not require that the
new methodology be applied retroactively and that the Com-
mission retained the discretion to determine when to make
the settlement effective. See id. at 65,243. The ALJ also
recommended prospective application under the circum-
stances. See id.

The Commission reviewed and accepted the ALJ's recom-
mendations as to each valuation, finding in its order that each

determination was based on substantial evidence. FERC
found that there was no active market for resid, and opted to
price resid based on its value as a coker feedstock. FERC
determined that the two reference products were the actively-
traded petroleum products that had physical characteristics
most resembling resid, and used these adjusted prices as a
proxy for the value of resid as a coker feedstock. It also
decided to apply the new rates prospectively, stating that this
was consistent with the 1993 Order applying the new rates
prospectively, which was affirmed by this court in OXY.
"[The new settlement] does not change the methodology to be
used, but modifies how to value the remanded cuts." See
1997 Order, 81 FERC p 61,319, at 62,467. The Commission
noted that the TAPS Quality Bank was sui generis, so
precedents cited by Exxon and Tesoro as supporting retroac-
tive application of the new methodology were not dispositive.

II. STANDARD OF REVIEW

The standard of review applicable to FERC's approval of
this proposed settlement of the issues remaining on remand is
the same as it was in OXY. FERC's decision to approve a
portion of a contested settlement must be supported by
substantial evidence, and we must set aside FERC's approval
if it was "arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with law." 5 U.S.C. s 706(2)(A),
(E). Our inquiry under the arbitrary and capricious test is
"narrow and a court is not to substitute its judgment for that
of the agency." Motor Vehicle Mfrs. Ass'n of the United
States, Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43
(1983). Where, as in the instant case, the analysis to be
performed "requires a high level of technical expertise, we
must defer to the informed discretion of the responsible
federal agencies." Marsh v. Oregon Natural Resources
Council, 490 U.S. 360, 377 (1989) (internal quotation marks
omitted). Nonetheless, the Commission must engage in ra-
tional decisionmaking, see, e.g., State Farm, 463 U.S. at 43;
OXY, 64 F.3d at 690. We held in OXY that the agency had
supplied a reasoned analysis for changing its prior policies
when it adopted the distillation methodology. See OXY, 64

F.3d at 690. However, more important for purposes of the
petitions now before us, we granted the petitions for review of
the 1993 Order to the extent that they challenged the Com-
mission's methods of valuing the distillate and resid cuts.

III. CHALLENGES TO THE NEW SETTLEMENT

The petitioners make multiple arguments challenging the
valuation of specific cuts and FERC's failure to require that
qualitative differences between the same cuts of different
streams be considered when determining the relative value of
each stream. They argue that FERC acted arbitrarily by
failing to value resid based on its marginal use as a fuel oil
blendstock instead of as a coker feedstock; improperly failed
to account for differences in quality among the the same cuts
of different streams when valuing resid; improperly chose a
price proxy for its value as a coker feedstock; and failed to
address challenges to the methodology for determining resid's
value as a coker feedstock. The petitioners also challenge
FERC's decision to implement the new valuation methodolo-
gy prospectively only. We address first the valuation chal-
lenges, and uphold the agency's decisions as supported by
substantial evidence with the exception of the use of FO-380
less 4.5 cents and 3 percent sulfur No. 6 fuel oil less 4.5 cents
as proxy prices for heavy resid. The adjusted valuation
solves none of the problems we identified in our prior opinion
because there is no evidence that the prices of the reference
products, even after the 4.5 cents adjustment, bear any
rational relationship to the market value of resid. We there-
fore vacate and remand the portion of FERC's order affect-
ing the valuation of heavy resid.

IV. INTRA-CUT QUALITY DIFFERENCES

Exxon3 argues that FERC's failure to account for differ-
ences in quality among the heavy distillate cuts of the individ-
ual streams before they are commingled in the TAPS com-

__________
3 Exxon and Tesoro filed a joint petition for review. For simplici-
ty's sake, we will refer to the joint arguments of the two petitioners
as Exxon's arguments.

mon stream violates the terms of our earlier remand in OXY,
and is arbitrary and capricious. We disagree.

Petitioners claim that the goal of the Quality Bank is to
place an accurate value on the streams flowing into the TAPS,
and failure to account for quality differences in the distillate
cuts of the streams coming from different oilfields is not
reasoned decisionmaking. We disagree that Exxon's argu-
ment follows logically from our remand. In OXY, we recalled
that the goal of the Quality Bank is "to assign accurate
relative values," 64 F.3d 693 (emphasis added), to the diverse
streams delivered to the pipeline. We vacated in part the last
order because the methodology approved therein had favored
one class of cuts above others. We remanded in order that
FERC might provide a methodology with a reasoned relative
uniformity, knowing that absolute precision at any level of the
cuts was unachievable. That is, we did not remand because
the old method was inaccurate, but because it was unfairly
nonuniform. To have demanded 100 percent accuracy would
have been to hold the agency to "an impossibly high stan-
dard." Id. at 694. The specific purpose in our remand was
to require the agency to resolve the relative overvaluation of
some cuts, which were valued at the market price for their
proxy despite the fact that significant processing was re-
quired to bring those products up to a market standard.
Exxon seeks to expand the duty of the Commission to refin-
ing the degree of distinction among component streams with-
in individual cuts. Specifically, Exxon seeks to have us
vacate FERC's order insofar as it does not recognize and
adjust for differences in the sulfur content of distillate as a
key factor in determining market value. Part of the adjust-
ment to the per-barrel price of distillate is to account for
removing sulfur so that it can be sold as jet fuel or No. 2 fuel
oil. In implementing that methodology, FERC assumed that
all streams had the same sulfur content, when Exxon had
shown that such was not the case. Exxon argues that FERC
should not use the sulfur content of the commingled streams
when determining the value of the cut, but must determine
the sulfur content and thus the value of the distillate cut of
the oil from each field before it enters the common stream.

Because some streams have a higher sulfur content, they
would require more processing and consequently have a lower
value once processing costs were factored into the per-barrel
price. Other streams with a lower sulfur content would have
a higher value because no further processing would be needed
to bring the oil up to the quality of the proxy product.

Exxon further argues that treating all of the streams as if
they have the same sulfur content violates OXY, which calls
for accurately valuing the streams; that it is arbitrary and
capricious because it makes assumptions contrary to fact;
and that FERC's failure to even consider the issue is arbi-
trary and capricious. Specifically, Exxon argues that FERC
improperly determined that the scope of its actions was
limited by the terms of our remand, but that in any event,
FERC cannot claim that it addressed only the issues required
by the court because it did more than we ordered when it
changed the West Coast proxy for heavy distillate, even
though no party challenged the one adopted in the 1993 and
1994 orders, and eliminated the light resid cut, even though it
was affirmed in OXY. Exxon contends that having opened
the door, so to speak, FERC was obligated to consider the
information provided by Exxon and Tesoro about the differ-
ences in quality among the streams because it has an obli-
gation under the ICA " 'to ensure that pipeline rates are just
and reasonable.' " OXY, 64 F.3d at 690 (quoting Texas
Eastern Transmission Corp. v. FERC, 893 F.2d 767, 774 (5th
Cir. 1990)). Exxon argues that refusing to consider the
quality differences was therefore arbitrary and an abuse of
discretion. In its 1997 Order, FERC noted that it had
rejected the same argument in its 1993 Order, and that we
had not reversed or vacated that ruling. Exxon argues
nonetheless that by adjusting the market prices of the proxies
to account for removing sulfur, FERC itself has now deter-
mined that sulfur content is an important aspect of valuing
heavy distillate.

We reject Exxon's argument that FERC's failure to differ-
entiate between the streams was arbitrary and capricious. In
OXY, we required FERC to take into account the significant
processing costs that rendered its unadjusted use of a proxy

product unreasonable in relation to the valuation of other
portions of the stream. Exxon's contention that FERC must
value each stream at the wellhead based on its individual
sulfur content calls for more than we required. We did not
hold in OXY that differences in quality between the streams
must be considered, and do not do so now. Inherent in our
approval of FERC's adoption of the distillation methodology
in OXY was our approval of the agency's conclusion that there
was no need to consider intra-cut quality differences, and that
the agency properly determined that the relative proportions
of the cuts in each stream is sufficiently accurate as a method
of determining the relative value of the streams. See 65
FERC p 61,277, at 62,287 (1993), and 66 FERC p 61,188, at
61,240 (1994). In any event, it was not arbitrary and capri-
cious to determine the value of each cut in the TAPS stream
after it has been mixed, instead of separately valuing the cuts
of each stream. The fact that a more precise method exists
for determining the relative value of the streams does not
render the decision to adopt a less accurate, but more admin-
istrable, method arbitrary and capricious. FERC has opted
to use a magnifying glass to determine the values of the
streams, and we will not fault it for not using a microscope.

We also uphold against challenge FERC's two changes to
the price of heavy distillate, both of which are supported by
the record. FERC changed the reference price for the West
Coast from No. 2 fuel oil to Waterborne Gasoil, and adjusted
the price of Waterborne Gasoil by one cent per gallon and the
Gulf Coast price of No. 2 fuel oil by two cents to account for
processing. See 1997 Order, 81 FERC p 61,319, at 62,460.
These adjustments were based on the testimony of expert
witnesses John O'Brien and Christopher Ross. Ross testified
that these products most closely resembled Alaskan North
Slope ("ANS") heavy distillate, see Affidavit of Christopher E.
Ross, p 19 (Jan. 29, 1997), and O'Brien testified that the ANS
heavy distillate cut required treatment to reach the necessary
sulfur level, see Affidavit of John O'Brien, WW 13-15 (Jan. 28,
1997). These decisions were supported by adequate record
evidence and we uphold the agency.

 V. RESID CUT VALUATION ISSUES

A. Exxon and Tesoro's Challenges

In OXY, we noted that resid like distillate did not trade on
an open market and therefore was difficult to evaluate.
Nonetheless, and even in the face of "the deference we owe
the Commission's judgments," we concluded that the 1993
settlement approach to valuation of resid did not "satisfy the
APA's basic requirement of reasoned decisionmaking." OXY,
64 F.3d at 694 (citing State Farm, 463 U.S. at 43). We
therefore remanded that portion of the assay methodology to
the Commission for further consideration.

The method before us in the present review fares no better
than the last, and for the same reasons: even with the 4.5
cents per gallon adjustment, "the record demonstrates no
more than that the price[s] of FO-380 [or No. 6 fuel oil]
bear[ ] some remote relationship to the value of 1050+ resid
as a feedstock." Id. at 695. We remand FERC's decision to
value resid at the price of FO-380 less 4.5 cents on the West
Coast and Waterborne 3% sulfur No. 6 fuel oil less 4.5 cents
on the Gulf Coast. The figures derived from the use of these
proxies with a subsequent adjustment do not bear a demon-
strated relationship to the value of resid, either as a coker
feedstock or as a blending agent for fuel oil. Exxon and
Tesoro raise multiple challenges to FERC's valuation process
for this cut.

1. Marginal Use

Exxon argues that FERC erred again, as it did in the 1993
Order in not employing the marginal use of resid as a
blending agent for fuel oil rather than its value as coker
feedstock in establishing the valuation methodology for that
cut. Exxon contends that the error is a fundamental one in
that the ALJ's finding, adopted by the Commission, that
there is no active market for resid is flawed. In Exxon's
view, although there are few trades of resid, there is in fact a
market, and a sparsity of open trades is only due to the fact
that the refiners who use resid rarely need to purchase it
from others because they already obtain it as a byproduct of

their own refining operation. Exxon further argues that
there are formulae that can be used to derive resid's value as
a blendstock despite the absence of market trades. Thus
Exxon prays the court to vacate the relevant portion of
FERC's order and remand the controversy for valuing of
resid as a blendstock.

FERC responds that there was conflicting evidence regard-
ing the existence of a market for ANS resid, and the ALJ and
the Commission reasonably adopted the testimony of Nine
Party witnesses A.L. Gualtieri and Benjamin Klein, who
testified that resid was rarely traded, and was instead used as
a coker feedstock. See 1997 Opinion, 80 FERC p 63,015, at
65,238-41. The ALJ also determined, based on the record,
that it was inappropriate to value resid based on its marginal
use as fuel oil blendstock because most of the refineries did
not seek to purchase resid but created it as part of their
refinery process. See id. 65,240. The absence of an active
market for resid made the economic principle of marginal use,
which depends on a liquid market, unreasonable in this
circumstance. See id. 65,240-41.

We see no reason to disturb FERC's adoption of the ALJ's
determination that resid is best valued based on the market
value of its constituent products. The expert testimony of
Klein constitutes substantial evidence in support of FERC's
decision that marginal use analysis does not require the
valuation of resid as a blendstock.

2. Conradson Carbon Residue Content

As with distillate, Exxon argues that FERC arbitrarily
ignored quality differences in the streams which affect the
value of the different cuts. The Conradson Carbon Residue
Content ("CCR") of resid affects its value, and the different
streams delivered to the TAPS undisputedly have differing
CCR content. Exxon reiterates the argument it made con-
cerning sulfur that failing to account for differing CCR
content was arbitrary and capricious. The CCR content
figure used by FERC was not even derived from the oil
shipped over TAPS, but from a blend used by an expert
which included other crude oils. FERC responds that it

properly rejected the suggested intra-cut differentials based
on CCR content for the same reasons it rejected the quality
differentials based on sulfur content. For the reasons stated
in Parts III and IV above, we hold that FERC was not
required to consider intra-cut differences in CCR content
when determining market value.

3. Choice of Proxies

Exxon next argues that FERC acted arbitrarily when it
chose to use the adjusted price of FO-380 as a proxy for
valuing resid as a coker feedstock. In OXY, we found that
using the unadjusted market price of FO-380 as a proxy was
arbitrary and capricious. The 4.5 cents adjustment now
adopted is arbitrary for the same reasons. There is no
demonstrated relationship between the value of FO-380 and
coker feedstock other than an observed rough correlation in
price, and even the data relied on by FERC shows inconsis-
tent relationships in the price of FO-380 and the coker
feedstock values calculated by the experts. Exxon argues
that determining resid's value as a coker feedstock "requires
determining the identity, quantity, and value of products
produced in a coker from resid and subtracting from the
value the costs of producing those products and placing them
in a marketable condition." See Joint Brief of Petitioners
Exxon Company, U.S.A. and Tesoro Alaska Petroleum Com-
pany at 42. Exxon also argues that FERC chose the wrong
feedstock to value because it used a blend of crudes which
would be used by a hypothetical refinery, rather than actual
individual North Slope crude streams. Exxon further con-
tends that it presented numerous challenges to the methodol-
ogy ultimately adopted by FERC, showing inaccuracies in the
expert's assumptions regarding cost calculations, product out-
puts and product yields. Finally, it argues that because the
ALJ never allowed discovery, it could not replicate the ex-
pert's computer modeling on the PIMS system (a standard-
ized petroleum industry modeling system used to calculate
refinery needs and outputs). The ALJ and the Commission
did not specifically address these arguments, which Exxon
contends makes their decisions arbitrary and capricious.

 FERC responds that the 4.5 cents per gallon adjustment to
the price of FO-380 on the West Coast and No. 6 fuel oil on
the Gulf Coast as proxies for resid was reasonable, based on
expert witness O'Brien's testimony and administrative ease.
These are the lowest-quality products actively traded, and the
adjustment was within the range of variation between the
calculated value of resid as a coker feedstock and the per-
gallon price of FO-380. See Ross Affidavit p 21. O'Brien
derived the calculated value of resid as a coker feedstock
using the PIMS model and compared those calculated values
to the market price of FO-380 over the same five-year period.
The relationship varied from resid being worth $1.21 per
barrel more than FO-380 in 1993 to being worth $3.01 per
barrel less than FO-380 in 1995, and averaged being worth
$1.12 per barrel less over the five-year period. See 1997
Opinion, 80 FERC p 63,015, at p 65,239 (citing O'Brien Affida-
vit WW 56-598 Exhibit QB ar-23). O'Brien testified that the
4.5 cents per gallon adjustment (equal to $1.89 per barrel less
than FO-380) proposed by the Nine Party Settlement fell
within the observed range of variation over the five-year
period and was therefore reasonable. See id. FERC also
notes that Exxon and Tesoro both suggested a method that
tied the price of heavy resid to FO-380. The difference is
that Exxon uses a complex formula to adjust the price.4

B. Analysis

While we find substantial record evidence supporting the
intermediate steps FERC took in determining the value of
resid--i.e., its determinations that no active market exists,
that resid is best valued as a coker feedstock rather than as a
blender for fuel oil, and that FO-380 and No. 6 fuel oil are the
actively-traded products in the relevant markets most similar
in physical characteristics to resid--we cannot conclude that
the last step follows logically from these premises. We

__________
4 FERC's suggestion that Tesoro and Exxon somehow validated
their choice of FO-380 as a reference product is misleading because
Exxon and Tesoro's use of FO-380 as a reference price ties the
value of resid to the value of FO-380 when valuing resid as a
blendstock for fuel oil, not as a coker feedstock.

therefore cannot uphold the use of FO-380 less 4.5 cents on
the West Coast and Waterborne 3% sulfur No. 6 fuel oil less
4.5 cents on the Gulf Coast as a proxy price for resid.

The 4.5 cents adjustment, while it falls within the range of
the observed variation, does no more than that. There is no
evidence that the prices of the proxy products are more than
coincidentally related to the value of resid as a coker feed-
stock. Moreover, the calculated value of resid using the
PIMS model does not even vary consistently with the price of
FO-380. As petitioners noted when this case was before us
in OXY, by the same logic we could use the price of coal with
an adjustment as a proxy for the price of diamonds because
both are a source of carbon, even if the prices fluctuate
inconsistently. With only five years' data to consider, the
sample is too small to convince us that there is some other,
unstated relationship at work which guarantees that the price
of FO-380 and the value of resid will correlate consistently
within some specified range. We recognize that the agency is
addressing the Quality Bank Administrator's concerns that
more complex systems may give the appearance that the
price of resid is open to manipulation, and thus is seeking a
product that is traded on the market to use as a proxy, which
would allow the Quality Bank Administrator to perform a
simple market-based calculation when determining the value
of resid. These goals of administrative efficiency and objec-
tivity do not free the agency from the requirement that the
chosen proxy bear a rational relationship to the actual market
value of resid. We remand once again to the agency to
determine a logical method for deriving a value for resid.
Because we remand, we do not reach the technical objections
Exxon and Tesoro raise regarding specific calculations.

VI. TESORO'S INDEPENDENT CHALLENGES

A. Tesoro's Standing

In addition to the arguments raised jointly with Exxon,
Tesoro raises numerous additional challenges to FERC's
decision. However, before we address the arguments raised
by Tesoro in its individual brief, we must consider as a

threshold matter whether Tesoro has standing to petition us
for review. Intervenors argue that Tesoro lacks standing
because it is no longer a shipper on the TAPS system and
therefore no longer has a legally cognizable stake in the
outcome. As a result, they argue, the case is moot as to it
and issues raised only by Tesoro are not properly before us.
Intervenors also argue that because Tesoro passed its Quality
Bank costs through to its shippers, it was not aggrieved by
the orders under review.

Tesoro counters that it has standing as a competitor of
MAPCO, one of the shippers on the TAPS system, which is
subsidized by TAPS because its stream is overvalued. We
have held that even non-shippers and competitors may be
within the ICA's zone of interest. See OXY, 64 F.3d at 697.
Tesoro also notes that it currently purchases ANS crude from
one supplier and hopes to acquire more from another. Teso-
ro Reply Brief at 19 n.10.

The Intervenors are correct that only "aggrieved" parties
may seek judicial review of a final FERC order issued under
the ICA. See 28 U.S.C. s 2344; OXY, 64 F.3d at 696; Shell
Oil Co. v. FERC, 47 F.3d 1186, 1200 (D.C. Cir. 1995). We use
traditional standing principles to determine if a party is
indeed aggrieved. See OXY, 64 F.3d at 696; Water Transp.
Ass'n v. ICC, 819 F.2d 1189, 1193 (D.C. Cir. 1987). To be
aggrieved, Tesoro must have suffered an "injury in fact"
traceable to FERC's action, a decision in its favor must be
capable of redressing that injury, and its interest must be
within the zone of interests protected by the statute. Tesoro
has shown that it would suffer competitive injury if other
shippers were advantaged by unfair Quality Bank valuations,
a decision on our part altering those valuations would redress
that injury, and the ICA permits a very broad range of
parties to complain to FERC about pipeline operations. The
ICA permits the Commission to respond to complaints about
"anything done or omitted to be done by any common carri-
er" subject to the statute lodged by, inter alia, "[a]ny person,
firm, corporation, company, or association." 49 U.S.C.app.
s 13(1). Tesoro has standing to challenge the decision here.

 B. Tesoro's Position

Tesoro marshals additional attacks on FERC's approval of
the settlement, some technical and some that are arguably
procedural.

1. Considering Processing Costs for Only Two Cuts

Tesoro argues that FERC erred in singling out the light
and heavy distillate cuts for processing cost calculations when
processing costs associated with other cuts are ignored. It
argues that this violates the requirement in OXY that streams
be valued equally. In OXY we remanded the light distillate
and heavy cuts for new valuation because further processing
was required before they could be sold as jet fuel and No. 2
fuel oil respectively. Tesoro now claims that FERC arbi-
trarily ignored the question of whether further processing
was needed before the other cuts could be sold as the proxy
products FERC used to value them. Failing to do so, it
claims, skews the valuation in favor of the heavier streams.
This argument fails to comprehend our earlier opinion.
There we upheld the agency's finding that the lighter cuts
were of sufficiently comparable quality to the market proxies
that no further processing was needed, and therefore no cost
adjustment was needed. Essentially, the market price was
correct because in those instances the distillation method
resulted in a market-ready product. We will not reexamine
this issue now. For the reasons given above in Parts III, IV,
and V.A.2, we do not entertain the argument that quality
differences between the streams must be considered at this
stage.

2. Costs of Sulfur Removal

Tesoro argues that internal inconsistencies in the Nine
Party data show that the processing costs for sulfur removal
are not credible, specifically because there is a higher per-
unit cost to remove sulfur from heavy distillate than from
resid. Tesoro presented evidence challenging these calcula-
tions, which the ALJ and FERC failed to fully address.

FERC responds that Tesoro's argument that there are
inconsistencies in O'Brien's cost calculations for sulfur remov-

al was never raised before the Commission, and cannot be
raised now before the court. If the issue was preserved, the
agency argues that Tesoro has produced no evidence showing
that the calculations are incorrect, and that the agency could
reasonably have adopted O'Brien's calculations.

We hold that Tesoro preserved this issue for review when it
argued before the Commission that there was "no way,
absent discovery, to determine that O'Brien's cost estimates
are not totally arbitrary" and that the conflicting testimony of
its experts supported a lower cost per unit for removing
sulfur. Motion of Tesoro Alaska Petroleum Company for
Expedited Reconsideration and Remand or to Permit Appeal
Concerning Certification of Nine Party Settlement WW 36-37
(Oct. 15, 1997). As for the merits of the issue, we hold that
FERC reasonably relied on the testimony of Nine Party
witness O'Brien in reaching the adjustment. Witness O'Brien
testified that different methods would be needed to bring the
two products into compliance. Heavy distillate could be
blended with a lighter product to bring it into compliance
with the 0.5% market tolerances for sulfur in West Coast
Waterborne Gasoil, the reference product on the West Coast.
However, such blending would not be economically feasible to
bring it down to the 0.2% sulfur content of Gulf Coast No. 2
fuel oil, the Gulf Coast reference product, so it would have to
be processed to remove the excess sulfur. See 1997 Opinion,
80 FERC p 63,015, at 65,234; O'Brien Affidavit WW 13-15.
This difference in approach accounts for the difference in
cost. Thus, there is no inconsistency warranting the relief
Tesoro seeks.

3. Processing Costs for Light Distillate

Tesoro argues that FERC arbitrarily and capriciously ac-
cepted the Nine Parties' processing cost adjustment for light
distillate. Tesoro argues that its expert testified that no
further processing was required for light distillate to meet
the requirements for jet fuel, the proxy product used for
valuation of the light distillate cut. FERC arbitrarily accept-
ed the Nine Parties' experts' claims that 0.5 cents per gallon
in processing was required before the cut would meet the

standard. Tesoro also argues that its expert pointed out
unreasonable additions to the cost of the processing, such as
unnecessary pumping and inflated administrative costs, and
that FERC accepted this flawed estimate without considering
contrary evidence and thus failed to satisfy the substantial
evidence standard. We find this objection to be without
merit. There is substantial record support for the Commis-
sion's determination that a 0.5 cent/gallon adjustment was
required to account for the processing of light distillate into
jet fuel. That evidence consisted of expert testimony before
the ALJ by Nine Party witness O'Brien supporting the
processing costs figures eventually adopted by the ALJ and
thereafter by the Commission. See Reply Comments of the
Nine Settling Parties in Support of the Nine Party Settle-
ment at 4-5 (Mar. 17, 1997).

4. Coker Feedstock Value Based on Improper Assump-
tions and Calculations Not in the Record

Tesoro next argues that FERC ignored substantial and
important criticism of the coker valuation of resid. Under
the adopted method, resid's coker feedstock value is deemed
to be the value of the products created less the cost of
processing. Tesoro argues that the other experts' opinions
were based on the wrong mix of product yields, that the
PIMS model used is not in the record, and that Tesoro's
expert could not replicate the results. Tesoro also argues
that its expert showed that the coker operating costs used by
the Nine Parties' experts were overstated. Because the
PIMS model is not in the record, FERC could not make a
rational connection between the facts and the conclusions
drawn therefrom.

Given that we are remanding the question of valuation of
resid because FERC has not provided a reasoned explanation
for its determination to set resid's value as a coker feedstock
and to use FO-380 less 4.5 cents on the West Coast and
Waterborne 3% sulfur No. 6 fuel oil less 4.5 cents on the Gulf
Coast as a proxy price, we need not decide this detailed
factual question, as the factual record may change on remand.
FERC will necessarily address these issues when it revalues

resid, and such complex technical questions belong first to the
informed discretion of the agency. See OXY, 64 F.3d at 691.

5. Eliminating the Fuel Oil Cut

Tesoro argues that FERC improperly eliminated the light
resid cut and determined that the 1000-1050 degree cut
should be valued as VGO. (We had previously affirmed
FERC's creation of the light resid cut, but had remanded for
new valuation.) The Nine Parties had suggested this change,
and FERC approved it. Tesoro argues that the new cut is
beyond the capability of many refineries. It suggests that
the ALJ was confused when he determined that this change
was consistent with the Commission's treatment of this cut.

FERC reasonably found, in resolving this technical matter,
that the record evidence supports a determination that "the
standard industry cut point shown on assays is 1050