Notice: This opinion is subject to formal revision before publication in the
Federal Reporter or U.S.App.D.C. Reports. Users are requested to notify
the Clerk of any formal errors in order that corrections may be made
before the bound volumes go to press.
United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 19, 2004 Decided April 9, 2004
No. 03-1107
FLYING J INC., ET AL.,
PETITIONERS
v.
FEDERAL ENERGY REGULATORY COMMISSION AND
UNITED STATES OF AMERICA,
RESPONDENTS
ASSOCIATION OF OIL PIPE LINES,
INTERVENOR
On Petition for Review of an Order of the
Federal Energy Regulatory Commission
Melvin Goldstein argued the cause and filed the briefs for
petitioners.
Judith A. Albert, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondents. With her on
Bills of costs must be filed within 14 days after entry of judgment.
The court looks with disfavor upon motions to file bills of costs out
of time.
2
the brief were R. Hewitt Pate, Assistant General Counsel,
John J. Powers, III and Robert J. Wiggers, Attorneys, Cyn-
thia A. Marlette, General Counsel, Federal Energy Regulato-
ry Commission, and Dennis Lane, Solicitor. Laura J. Val-
lance, Attorney.
C. Frederick Beckner, III argued the cause for intervenor.
With him on the brief was Michele F. Joy. Lawrence A.
Miller entered an appearance.
Before: GINSBURG, Chief Judge, HENDERSON, Circuit Judge,
and WILLIAMS, Senior Circuit Judge.
Opinion for the Court filed by Senior Circuit Judge
WILLIAMS.
WILLIAMS, Senior Circuit Judge: Section 1801(a) of the
Energy Policy Act of 1992 (‘‘EPAct’’) directed the Federal
Energy Regulatory Commission to promptly issue a final rule
establishing ‘‘a simplified and generally applicable ratemaking
methodology for oil pipelines.’’ Pub. L. No. 102–486, 106
Stat. 2776, 3010 (1992), reprinted in 42 U.S.C. § 7172 note.
Congress also declared that oil pipeline rates that had not
been contested or opposed for one year before October 24,
1992 should be deemed ‘‘just and reasonable’’ for purposes of
the controlling statutory mandate, § 1(5) of the Interstate
Commerce Act. EPAct, § 1803(a)(1). Under this provision,
‘‘the vast majority’’ of then-prevailing rates were available as
a baseline for a ‘‘rate cap’’ system, under which a pipeline
could charge any rate within the previously established ceil-
ing. See Revisions to Oil Pipeline Regulations Pursuant to
Energy Policy Act of 1992, Order No. 561–A, FERC Stats. &
Regs. (CCH) ¶ 31,100 (1994) (‘‘Order No. 561–A’’) at 31,092.
But to protect both pipelines and their customers from being
adversely affected by cost changes over time, the Commission
provided that the cap would change annually in accordance
with a predetermined formula or index, which would be
independent of each pipeline’s own cost experience. Revi-
sions to Oil Pipeline Regulations Pursuant to the Energy
Policy Act of 1992, Order No. 561, FERC Stats. & Regs.
(CCH) ¶ 30,985 (1993) (‘‘Order No. 561’’) at 30,946. In con-
trast to traditional rate ceilings based on each regulated
3
firm’s own cost experience, use of such a formula gives the
pipelines incentives to pursue cost-saving innovations. See
id. at 30,948 & n.37. And if the annual adjustment approxi-
mates the likely experience of reasonably efficient pipelines,
there will be relatively little need to entertain applications for
exceptions based on a divergence of pipeline cost experience
from the evolving cap. See Order No. 561–A at 31,092.
Accordingly the Commission seeks an index based on the
pipelines’ aggregate past experience.
In its initial implementation of the EPAct in 1993–94, the
Commission applied a methodology that led it to an index of
PPI–1, i.e., the annual change in the producer price index,
minus one percentage point. See Order No. 561 at 30,951–52.
(Technically, it was PPI–FG–1, or producers’ price index—
finished goods, minus one percentage point.) Pipeline owners
challenged the methodology in court, but we upheld the
Commission. Association of Oil Pipe Lines v. FERC, 83
F.3d 1424 (D.C. Cir. 1996) (‘‘AOPL I’’). In 2000 FERC
fulfilled an earlier promise to revisit the issue. Although it
arrived again at PPI–1, it did so via a new methodology.
Again the pipelines sued. This time, finding that the Com-
mission had deviated without adequate explanation from the
earlier methodology, and had failed to answer various criti-
cisms of its new approach, we remanded the case for further
consideration. We expressly refrained from vacating, noting
that PPI–1 might prove sustainable even after FERC’s reex-
amination. Association of Oil Pipe Lines v. FERC, 281 F.3d
239, 247–48 (D.C. Cir. 2002) (‘‘AOPL II’’). On remand, rather
than defend the methods used in the 2000 approach, FERC
re-adopted those used in 1993–94 (with some changes), and
chose an index of plain PPI. See Order on Remand: Five–
Year Review of Oil Pipeline Pricing Index, 102 FERC
¶ 61,195 (February 24, 2003) (‘‘Remand Order’’). The present
petitioners are shippers, who argue that the Commission was
arbitrary and capricious in failing to stick to the innovations
made in 2000. They have not made their case, however.
4
* * *
The shippers attach great importance to our decision mere-
ly to remand the 2000 decision, rather than to vacate and
remand. From this they infer that the Commission was
obliged to really try to justify its 2000 methodology for
estimating the rate of change in aggregate pipeline costs,
rather than beating a retreat to its 1993–94 approach. We
rejected exactly such a claim in Southeastern Michigan Gas
Co. v. FERC, 133 F.3d 34 (D.C. Cir. 1998), saying that while
further explanation of the approach triggering remand was
one of the Commission’s options, ‘‘once FERC reacquired
jurisdiction [via the remand], it had the discretion to reconsid-
er the whole of its original decision.’’ Id. at 38. It would
make little sense to force the agency to struggle to uphold a
methodology that it had failed to justify, just because it had
once tried to do so.
On the merits, the shippers insist that the three innovations
that elicited the remand in AOPL II are not merely prefera-
ble, but that the alternatives chosen by the Commission on
remand are so inferior that for it to return to them was
arbitrary. In measuring the changes in pipeline costs be-
tween 1994 and 1999, the Commission adopted in 2000 (and
abandoned on remand) the following methods: First, it
moved from some form of ‘‘fixed-weight’’ method to a ‘‘float-
ing-weight’’ approach. See AOPL II, 281 F.3d at 241–45, for
a discussion of these two techniques. Second, it turned away
from its decision in Orders Nos. 561/561–A to drop the top
and bottom 25% of all observations as ‘‘outliers’’ and instead
used all observations. See id. at 245–46. Third, it stopped
using changes in ‘‘net plant’’ to proxy otherwise unobserved
changes in capital costs due to returns on investment and
income taxes. See id. at 246–47. The shippers assert that
had FERC maintained these three innovations following re-
mand, it would have chosen a price-cap index of PPI–1.
The shippers present this argument only in aggregate
terms, positing that all three changes made by FERC, taken
together, would yield a rate-of-change estimate closer to PPI–
1 than to PPI. They fail to bolster this claim with any
5
analysis describing the incremental impact of each change.
Such information is at a minimum useful, and its absence can
prove fatal; without it, the shippers have provided no reason
to think that their justification for the use of PPI–1 can
survive on only some of its legs. (We note that no one in the
current litigation seems to advocate use of an index differing
from PPI by fractions of a whole number.) This implies that
a defeat on one prong can defeat the whole claim. In this
particular case, however, the shippers fail to show FERC’s
arbitrariness on any of the three issues.
First, the Commission’s decision to revert to a fixed-weight
methodology was reasonable. To show the superiority of the
floating-weight methodology, the shippers argue that changes
in industry averages capture the effect of shifts from crude oil
to petroleum products pipelines. But the Commission was
trying to predict the likely rate of change in the costs to be
experienced by any given pipeline. For that task, the change
in industry averages is irrelevant and leads directly to the
risk of material distortions that we identified in AOPL II, 281
F.3d at 242–43, a subject on which the shippers are silent. At
oral argument shippers’ counsel advanced an additional theo-
ry—namely, that a fixed-weight index is inferior to its float-
ing-weight analog because the former fails to account for
substitution from high-priced to low-price goods over time.
We’re not sure that this adds much conceptually to the crude-
products argument, but in any event we do not reach it. We
noted the argument in AOPL II, id. at 244–45, but didn’t
evaluate it then as FERC had not relied on it. This time
around, although the shippers raised the point before FERC
on remand, they failed to do so in their briefs here, so it is not
properly before us. Compare Carducci v. Regan, 714 F.2d
171, 177 (D.C. Cir. 1993) (citing Fed. R. App. Pro. 28(a)(4)).
Second, the shippers fail to show arbitrariness in the
Commission’s rejection of their preferred method for drop-
ping outlying observations. Their method involves two differ-
ences from that of the Commission, which dropped the 25%
highest and lowest observations of cost changes. The ship-
pers (1) would use 95% of the observations rather than 50%,
and (2) would drop instances of outlying cost levels, rather
6
than, as did the Commission, outlying changes in costs. See
Reply Declaration of Alfred E. Kahn, Revisions to Oil Pipe-
line Regulations Pursuant to the Energy Policy Act, Docket
No. RM00–11–000 (October 2, 2000) (‘‘Kahn Reply’’) at 15.
Although the relevant question for the price-cap index is how
to compensate firms for changes in their costs, not for the
costs per se, the shippers focus on the latter. To the extent
that the shippers’ submissions can be said to address the
point at all (and only by giving their statements a generous
reading can one say that they did so), they evidently seek to
justify the difference with an analysis that rests in essence on
the same ground as their claims in 2000 for use of a floating-
weight system, i.e., inter-pipeline competition. See Further
Statement of F. M. Scherer, Revisions to Oil Pipeline Regu-
lations Pursuant to the Energy Policy Act, Docket No.
RM00–11–000 (September 27, 2000) (‘‘Scherer Reply’’) at 13–
14; see also AOPL II, 281 F.3d at 243 (discussing pipeline-
competition argument for floating-weight method). Having
reasonably chosen to return to the fixed-weight methodology,
the Commission might well have contradicted itself if it had
adopted the shippers’ proposal for handling outliers. Curi-
ously, if one removes outlying changes in costs, keeping 95%
rather than only 50% of the observations no longer helps the
shippers but in fact appears to support an index as high as
PPIv1. See Kahn Reply at 15–16 and Table 1.
The third criticism leveled by the shippers is that FERC
improperly used net plant as a surrogate for unobserved
capital costs. As FERC notes, capital costs consist of depre-
ciation, amortization, return on investment, and income taxes,
and the forms pipelines are required to file with FERC
contain data only on the first two components; in 1993–94,
and again on remand, FERC used changes in net plant as a
proxy for the latter two. Before us the shippers challenge
this on the ground that the data submitted to FERC have
become increasingly accurate, thus eliminating the need for a
proxy. While it is evidently uncontested that reported data
have become more accurate, the matters reported on have
remained unchanged, as the shippers themselves acknowl-
edge. See Petitioners’ Opening Br. at 42. As long as the
7
filings fail to account for returns on investment and income
taxes, some sort of proxy for these is suitable regardless of
how accurate the other data may be.
The shippers go on to attack the use of net plant as being
contrary to the Generally Accepted Accounting Practices.
But as they do so only in their Reply Brief, the issue isn’t
properly before us. See Carducci, 714 F.2d at 177. (More-
over, even if the net plant issue had been properly raised, it
likely could not help the shippers: FERC concluded that use
of the data had no impact on the final decision, see Remand
Order, 102 FERC at 61,541, a point the shippers have not
challenged.)
Since the shippers fail to show that FERC’s decisions were
unreasonable on any of the three issues comprising this triad,
their argument clearly fails.
The shippers advance a second cluster of three arguments,
citing evidence in the record supporting the view that if they
prevailed on all three, the Commission’s choice of PPI would
be exposed as arbitrary. In this cluster they assume the
acceptability of the fixed-weight methodology but (1) repeat
their ‘‘outliers’’ position, advocating exclusion only of firms
with extreme cost levels, (2) argue that volumes for 1999
(rather than for 1994) should be used for weighting the
observations, and (3) say that FERC should have included
five pipelines that reported data in 1994 and 1999 but not in
some of the intervening years. Again the shippers fail to
point to any calculations in the record suggesting that error
on fewer than all three would undermine the Commission’s
conclusion.
We need not repeat our analysis of the argument recycled
here from the first triad, namely the claim that FERC should
have excluded outliers based on levels of costs rather than
changes in costs. Coupling it with two new criticisms doesn’t
make it any more compelling.
The attack on the Commission’s choice of 1994 volumes for
weighting purposes, rather than those of 1999, addresses an
issue that is inherent in cost and price indices. At its heart is
8
the difference between the Laspeyres and Paasche methods,
with the former weighting elements on the basis of their
share of the total in the initial period, and the latter assigning
weights based on end-period shares. Neither index is a
perfect measure of changes, however. See, e.g., P. R. G.
Layard and A. A. Walters, Microeconomic Theory 156–57
(1978). The shippers make the well-established point that an
initial-period index overstates the true change in cost. See
Scherer Reply at 12. Indeed. In standard welfare or utility
analysis, the Laspeyres index tends to overstate the change
and acts as an upper bound on the actual rate of change. By
keeping the original weights, it tends to conceal the extent to
which customers have preserved their satisfaction by substi-
tuting away from goods with rising relative prices towards
those with declining relative prices. Layard & Walters at
157. The Paasche conversely serves as a lower bound; nei-
ther index is a priori superior to the other. Id. As the
shippers’ perfectly orthodox critique of an initial-period index
is matched by the equally orthodox critique of an end-period
index, it is not enough to render the Commission’s choice
unreasonable. (We assume in the shippers’ favor that al-
though the usual object of concern is a measurement of
effects on utility, the concerns for over- and under-statement
are substantially the same here despite the different focus in
the Commission’s exercise.) No one appears to have advocat-
ed year-by-year weighting, which tends to split the difference.
The shippers’ final argument is that FERC should have
included several pipelines that reported data in 1994 and 1999
but not in some of the intervening years and two other
pipelines apparently excluded from the study. But the ship-
pers offer no data on the implications of this change indepen-
dent of their treatment of outliers and their choice of base
years for weighting. See Reply Comments of Sinclair Oil
Corp. et al., Revisions to Oil Pipeline Regulations Pursuant
to the Energy Policy Act, Docket No. RM00–11–000 (October
2, 2000) at 9–11. Given that they do not discuss the proposed
change’s incremental impact under FERC’s assumptions of a
50% sample and a 1994 base year, they haven’t made a
sufficient claim that the inclusion of these firms, however
9
sensible, could alone render PPI–1 a better estimator than
PPI.
Since the shippers have failed to establish that any of
FERC’s methodological choices (or combination of choices)
was both erroneous and harmful, the petition for review is
Denied.