Frontier Pipeline Co. v. Federal Energy Regulatory Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 10, 2006 Decided May 26, 2006

No. 04-1343

FRONTIER PIPELINE COMPANY AND EXPRESS PIPELINE LLC,
PETITIONERS

V.

FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT

BIG WEST OIL, ET AL.,
INTERVENORS

Consolidated with
04-1344 and 04-1349

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.
 2

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.
 3

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)
 4

(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).
 5

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 non-
affiliated 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
 6

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) (“Second 2001 Order”); Big West Oil Co. v. Frontier

1
Challenges to an “initial rate” filed under 18 C.F.R. § 342.2
are not explicitly governed either by § 343.2(c)(1) or by the cited
explanatory text from the Order, see, e.g., Order No. 561, FERC
Stats. & Regs. ¶ 30,985, at 30,955, 58 Fed. Reg. at 58,762/3
(discussing application to “existing rates that are the product of
indexing”).
 7

Pipeline Co., 94 FERC ¶ 61,339, at 62,259 (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 continuous movement of
freight over the lines of two or more railroads. There are
a variety of methods by which the railroads along a
through route may price their services. If they establish a
joint rate, shippers pay a specified rate for the shipment
over the route and the revenue is divided among the
railroads according to an agreed formula [i.e., by a
contract among the carriers]. In the absence of a joint
rate, shippers pay a “combination rate,” which is simply
the sum of the individual rates charged by those railroads
on the through route. The individual rates which, when
aggregated, produce the combination rate may be either
local rates, applicable to any shipment between the
relevant points served by the particular carrier, or
proportional rates, applicable only to that carrier’s
portion of a through movement.

A carrier on a through route that is priced by
combination rate is free at any time to modify the local or
proportional rate it charges for its portion of the through
route, subject to whatever independent legal constraints
restrict its choice of rates. By contrast, once a joint rate is
established, no carrier may modify it without unanimous
agreement from the other participating carriers . . . .

Pittsburgh & Lake Erie Railroad Co. v. ICC, 796 F.2d 1534,
1536-37 (D.C. Cir. 1986) (emphasis added); see also
Seaboard Coast Line Railroad v. United States, 724 F.2d
 8

1482, 1484-85 (11th Cir. 1984); Commonwealth of
Pennsylvania v. ICC, 561 F.2d 278, 281-82 (D.C. Cir. 1977);
Metropolitan Edison Co. v. Conrail, 5 I.C.C.2d 385, 402
(1989). The local or proportional rates covering the
individual movements that constitute a through route are
known as intermediate rates of that route. See Seaboard
Coast Line Railroad, 724 F.2d at 1485.

A note about the above taxonomy: The either-or
phraseology in the discussion of local and proportional rates
is potentially misleading, since “local” describes both (1) a
rate that applies only to local traffic, and (2) a rate that applies
both to local and through traffic. For rates of the second type
(to which all the intermediate rates in this case belong), the
phrase “local and proportional,” which occurs often in this
proceeding’s record, is technically inaccurate under the case
law; but the phrase has the virtue of suggesting that the rates
apply to both forms of traffic. Trusting that our explanation
will prevent a misreading, we join FERC in following the
typology of the case law, referring to those rates simply by the
name “local.”

B. Facts of the Case

Each of the shippers, Big West Oil, LLC, and Chevron
Products Company, owns a refinery in Salt Lake City, Utah.
Both ship crude oil from the Canadian border to their
respective refineries over a sequence of four separately owned
pipelines—in order of usage: Express Pipeline, LLC, Frontier
Pipeline Company, Anschutz Ranch East Pipeline, Inc., and
Chevron Pipeline Company.

During the period in question, each of the four carriers
published its own individual tariff—variously referred to as
“local,” “proportional,” “local proportional,” or “local and
 9

proportional”—that offered the same rate for a movement
from the origin of the carrier’s individual segment to its
terminus, regardless of whether the shipment itself started and
ended at those points or went all the way from the border to
Salt Lake City. In other words, each carrier was offering a
single rate for its segment and wasn’t exercising its option to
charge through shippers a different rate from local shippers.
Oral Arg. Tr. 49-50 (stating, without contradiction in the
record excerpts presented to us or in statements of counsel,
that each carrier had the right to publish a proportional rate
different from the local rate, which right none of them
exercised); see also Second 2001 Order, 95 FERC at 61,792;
First 2001 Order, 94 FERC at 62,256-57. Thus, it was
possible for a shipper to transport oil over the four successive
segments by contracting separately with each of the four
pipelines and paying each its rate. Oral Arg. Tr. 34-35, 41-42,
49-51; see also Express Pipeline LLC, 99 FERC ¶ 61,229, at
PP 4, 8, pp. 61,950-51 & n.4 (2002) (“Cancellation Order”);
Affidavit of Van Hoecke at 4.

In 1998 the four pipelines contracted among themselves
to give through shippers a discount. Under the contract,
Express published joint tariffs (known as the “Express joint
tariffs”) under which a shipment going all the way from the
border to Salt Lake City would be charged a single joint rate,
lower than the sum of the four local rates. Cancellation
Order, 99 FERC at PP 2-4, pp. 61,949-50. (Technically, the
tariffs offered multiple joint rates, which varied according to
shipment characteristics that don’t concern us, including grade
of petroleum and term commitment. E.g., Express Pipeline
Partnership Joint and Proportional Term Rate Tariff No. 21,
Supp. 3.) Unlike the other three pipelines, Chevron Pipeline
did not participate directly in the joint tariff agreement,
though it apparently did so indirectly, through a side
agreement with Frontier and Anschutz. Cancellation Order,
99 FERC at P 3, pp. 61,949-50.
 10

The Express joint tariff proposals of 1998 complied with
Texaco Pipeline, Inc., 72 FERC ¶ 61,313 (1995), a FERC
ruling on how it would evaluate joint rate proposals under the
ceiling level regime, an issue not explicitly addressed in Order
No. 561. Oral Arg. Tr. 14-15. In Texaco, FERC held that the
ceiling level for such a rate “is the sum of the ceiling levels
associated with individual tariff rates currently on file” for the
individual movements making up the journey covered by the
joint rate. 72 FERC at 62,310. The joint rate proposal’s
compliance with Texaco is no surprise, since the joint rate (as
a matter of business) could not be greater than the sum of the
local rates, and each local rate (as a matter of law) was
required to be no greater than its corresponding ceiling level.
As already mentioned, of course, a rate at or below its
“ceiling” may still be found unjust and unreasonable if a
shipper can meet the standard specified in Order No. 561.

C. The FERC Proceedings

The present controversy began in January 2001, when
Big West brought challenges to Frontier’s and Anschutz’s
local tariffs, principally under ICA § 13(1), alleging that both
were substantially out of proportion to the individual costs of
the respective carriers and thus unreasonable under § 1(5).
First 2001 Order, 94 FERC at 62,256-57. Further, Big West
challenged the Express joint tariff as unreasonable under
§ 1(5), First 2001 Order, 94 FERC at 62,259, and included
Express as a respondent, solely on the ground that Express
(whose local rate the complaint didn’t question) was, as a
participant in the joint rate, jointly and severally liable for
reparations arising from it, id. at 62,257; Big West Oil Co. v.
Frontier Pipeline Co., 95 FERC ¶ 61,281, at 61,986 (2001)
(“2001 Rehearing Order”).
 11

On receiving the complaints, FERC reached the
conclusion that Big West’s evidence, although confined to the
local rates of two of the pipelines providing the through
service, could without more show the joint rate covering all
four pipelines to be unreasonable. In rejecting the carriers’
motions to dismiss, FERC acknowledged that Big West failed
“to contest [i.e., to offer evidence against] the joint tariff rates
in their entirety.” First 2001 Order, 94 FERC at 62,259.
FERC insisted, however, that this was not an obstacle to Big
West’s challenge to the joint tariffs, since the shipper was
“disputing [the local] rates because they are used to determine
the amount of joint rates.” Id. We return later to the question
what the phrase “used to determine” may have meant. If the
ALJ found the local rate to be reasonable, FERC ruled, “it can
be assumed that the subject Express joint rates meet the
standard set forth in Texaco,” but if the ALJ found the local
rate to be unreasonable, then, “the Express joint rates must be
recalculated in accordance with Texaco,” First 2001 Order,
94 FERC at 62,260.

A month after Big West’s complaints, Chevron Products
brought essentially identical challenges to the same rates and
included the same carriers as respondents. Second 2001
Order, 95 FERC at 61,792-93. Chevron Products’ affiliate,
Chevron Pipeline, was not a direct participant in the joint rate
and was not included as a respondent in either complaint.

FERC consolidated Big West’s and Chevron Products’
complaints for the purpose of settlement procedures and
ordered that, should those procedures fail, there would be two
ALJ hearings: one for all challenges to Frontier’s local tariff
and one for all challenges to Anschutz’s local tariff. 2001
Rehearing Order, 95 FERC at 61,986; Second 2001 Order, 95
FERC at 61,794. As to the dispute over the joint rates, FERC
adopted, for the purpose of all complaints, the same theory
that it had originally adopted for Big West’s complaints, the
 12

only difference being that two local rates rather than one
would be at issue. Second 2001 Order, 95 FERC at 61,793-
94.

Because settlement procedures did not lead to an
agreement, ALJ proceedings began; but soon afterward the
shippers and Anschutz settled all pending issues, including the
unreasonableness of the joint tariff insofar as it concerned
Anschutz. The shippers and Frontier also reached a
settlement during the ALJ hearing, covering reparations for
past movements under the local Frontier tariff and a future
reduction in the local and joint tariffs. But as to reparations
for shipments under the joint tariffs, Frontier and the
complainants agreed only that for the purpose of “calculating
the reparations, if any,” the just and reasonable rate for
Frontier’s local tariff for the relevant past period was “$0.57
for light petroleum,” i.e., the only type of petroleum involved
in the disputed shipments. Joint Stipulation of July 18, 2002
at 7 (emphasis added). The $0.57 was much less than the
actual local rate charged in the period, which had been about
$1.50.

In August 2002, Frontier submitted to FERC a
compliance filing, arguing that it owed no reparations on the
joint tariff. FERC rejected the filing in February 2004,
concluding that the Express joint rate was unreasonable to the
extent it exceeded “the sum of the applicable local rates,
including the stipulated $0.57 per barrel for Frontier.” Big
West Oil Co. v. Frontier Pipeline Co., 106 FERC ¶ 61,171, at
P 17, p. 61,571 (2004) (“Reparations Order”). In other
words, it calculated reparations as the difference between
(1) the joint rate filed and actually charged and (2) the sum of
(a) the stipulated rate for the Frontier segment and (b) the
local rates on file for the reparations period for the remaining
three segments. Frontier and Express requested rehearing,
which FERC denied. Big West Oil Co. v. Frontier Pipeline
 13

Co., 108 FERC ¶ 61,183, at PP 8-53, pp. 62,097-62,105
(2004) (“Rehearing Order”).

D. Discussion

The crux of the carriers’ petition is that FERC erred by
rejecting their argument that although one of the intermediates
of the route covered by the joint rate was unreasonable,
(1) one or more of the other intermediates might well have
been below their respective maximum reasonable levels
(perhaps because of greater competition on those segments),
such that (2) the depression of some of the intermediate rates
might partly or completely offset the excessiveness of the
others, meaning (3) the joint rate couldn’t be condemned as
unreasonable, at least not without considering the joint rate as
a whole. The carriers say that FERC failed to explain why,
under the ICA and EPAct, such an argument isn’t valid.

We agree with the carriers that the Commission has failed
to reconcile its finding that the joint rate was unreasonable
under ICA § 1(5) with the Supreme Court’s construction of
that section. The first pertinent decision is Louisville &
Nashville Railroad Co. v. Sloss-Sheffield Steel & Iron Co.,
269 U.S. 217 (1925). The Commission had found certain
joint rates unreasonable, id. at 222, and, for shipments over a
certain period, held one of the carriers (the only one for which
the statute of limitations—as to that period—hadn’t run) liable
for the entire overcharge, id. at 230-31. The Court rejected
that carrier’s claim that it should be liable only for a portion of
the excess commensurate with its share of the ICC’s mandated
prospective rate reduction. Id. at 231-34. Although this
holding is not relevant here, the Court also specifically
targeted the carrier’s argument “that the joint through rates
should be treated as if they were merely a combination of the
full individual rates of the several carriers, because the rates in
 14

question were in fact constructed by combining as factors the
existing published proportional rates of the several carriers.”
Id. at 231. The Court found this irrelevant, explaining:

The fact that the joint rate had been constructed out of
existing proportional rates is not of legal significance.
The rates complained of were not merely the aggregate of
individual local or proportional rates customarily charged
by the respective lines for the transportation included in
the through routes. The rates in question were strictly
joint through rates. Each through rate was complained of
as a unit. . . . A single charge was made for the
transportation from point of origin to point of destination.

Id. at 233. This passage may do no more than rule that
carriers offering a joint rate cannot demand that it be treated
as a combination rate (for joint and several liability purposes)
just because it happens to equal the sum of the intermediates.
But the Court went on:

The division of the joint rate among the participating
carriers is a matter which in no way concerns the shipper.
The shipper’s only interest is that the joint rate be
reasonable as a whole. It may be unreasonable although
each of the factors of which it is constructed was
reasonable. It may be reasonable although some of the
factors, or of the divisions of the participants, were
unreasonable.

Id. at 234 (emphasis added).

To be sure, the local rates against which FERC here
purports to judge the Express joint rate aren’t “factors” (i.e.,
there’s no evidence they have any functional relationship to
the joint rate) or “divisions” (i.e., there’s no evidence that they
correspond to the portions of proceeds received by the various
 15

participants). But Sloss-Sheffield’s apparent message—that
the reasonableness of a joint rate is to be assessed as a whole
rather than simply by reference to one of its segments (or,
more generally, to fewer than all of its segments)—seems
entirely applicable. Certainly FERC’s orders made no effort
to explain how local rates are any more suitable than factors
or divisions as bases for judging the reasonableness of a joint
rate.

The second case, Great Northern Railway Co. v. Sullivan,
294 U.S. 458 (1935), involved genuine combination rates,
each being the sum of two proportional rates. Id. at 459-60.
The ICC found the proportional rates applicable to one of the
two segments to be unreasonable under § 1(5) and ordered the
carrier on that segment to pay reparations for the excess. Id.
at 461. The Commission made no finding as to the
reasonableness of the overall combination rates (nor of the
proportionals applicable to the other of the two segments);
indeed, the shippers never denied that the aggregate charges
were reasonable and could have been collected without
liability if the carriers had “imposed the charges by means of
‘joint’ instead of the ‘combination’ through rates that they did
establish.” Id. at 461-62. Reversing the ICC, the Court
concluded:

[A]s to the shipments here involved the [petitioner’s]
proportional [rate] cannot be applied save as it is a part of
the through rate. There was a single charge which,
though based on the combination rate, was precisely the
same in amount as if the rate had been jointly made. As
shown by our decision in [Sloss-Sheffield], the division
among connecting carriers of charges based on joint
rates—those involved in that case were constructed out of
existing proportionals—is no concern of the shipper. The
proportionals here involved are but parts of a through rate
and cannot be distinguished from divisions of a joint rate.
 16

The shipper’s only interest is that the charge shall be
reasonable as a whole.

Id. at 463 (citations omitted) (emphasis added).

Addressing Great Northern, FERC said only:

Great Northern is distinguishable from the instant
case in that it addressed combination rates based on the
sum of proportional rates, not on the sum of local rates.
The Supreme Court explained the difference between the
types of rates by stating, “A proportional differs from a
local rate in that it covers only terminal service at place of
receipt or at place of delivery but cannot, as does the local
rate, cover both.” [294 U.S. at 460.] The Court in Great
Northern specifically recognized that there was no
applicable joint rate at issue. [Id. at 460-61.]

Rehearing Order, 108 FERC at P 42, p. 62,103 (footnotes
omitted).

The Commission’s closing sentence seems to have things
exactly backwards. The Court rejected liability because, for
purposes of the principle that a through rate could only be
judged as an aggregate, it saw no material difference between
a joint rate (clearly to be judged only as an aggregate) and a
combination rate (by extension, also to be judged only as an
aggregate).

Further, the Commission’s implicit description of the
joint rate here as “based . . . on the sum of local rates” is hard
to make sense of. Earlier, in rejecting the carriers’ motions to
dismiss, FERC used a similar formulation, explaining its
indifference to the costs on the unchallenged segments by
asserting that Big West was “disputing [the local] rates
because they are used to determine the amount of joint rates.”
First 2001 Order, 94 FERC at 62,259 (emphasis added). But
 17

nothing in the orders, statements of counsel, or the record
excerpts presented to us suggests that the joint rate was “based
on” the sum of the local rates or that the local rates were “used
to determine” the joint rate—except in the very general sense
that the business rationale for the joint rate was to provide a
discount from the locals. And even if the joint rate were
somehow calculated “based on” the sum of the locals, reliance
on one local rate to condemn the joint rate would seem to
violate Sloss-Sheffield’s instruction not to use less than all the
“factors” constituting a rate to judge the whole.

Perhaps FERC means to read Great Northern as saying
only that a through rate should not be judged against the sum
of proportionals, a reading that might leave the Commission
free to judge a joint rate against the sum of locals. But it’s
hard to see why locals wouldn’t be just as problematic as
proportionals when employed as yardsticks to measure the
reasonableness of a through rate. If the carrier offers local
rates but not proportional rates (i.e., its rates don’t vary based
on local versus through service), as each carrier did here, then
from the perspective of the through shipper, the local rates are
functionally identical to the proportional rates in Great
Northern. Alternatively, if the carrier charges different rates
to local shippers and through shippers, the result is merely to
render the local rates irrelevant from the perspective of the
through shipper. It’s also unclear why Great Northern’s
admonition against judging a combination rate on the basis of
one unreasonable intermediate wouldn’t apply with equal
force to judging a joint rate in the same way (particularly in
light of Sloss-Sheffield). The basic principle—that variations
in competition may produce lower-than-“reasonable” rates on
particular segments, so that in defending a through rate a
carrier must be free to show that its average costs were higher
for that segment than the rate it charged the segment
customers—would seem applicable. FERC’s orders say
nothing about this.
 18

On the proportional-local distinction, FERC counsel
attempted an answer at oral argument: the joint-rate shippers
during the period in question had the option to ship under the
local rates, and if Frontier’s local rate hadn’t been
unreasonably high, the sum of the locals would have been
lower than the joint rate, and the shippers therefore would
have exercised their option. Thus, counsel urged, FERC
should now award reparations as if things had unfolded that
way. Oral Arg. Tr. at 34-35, 37, 41-42. The factual existence
of the shippers’ option appears undisputed. But the orders
presently under review never even mention the option, much
less rely on it to distinguish Great Northern. Under SEC v.
Chenery Corp., 332 U.S. 194, 196 (1947), accordingly, we
cannot entertain the argument.

Besides failing to distinguish Sloss-Sheffield and Great
Northern, FERC’s order departs from the ICC’s long-standing
principle that under § 1(5) a through rate exceeding the sum of
the intermediate rates is only rebuttably (not conclusively)
presumed unreasonable. Patterson v. Louisville & Nashville
Railroad Co., 269 U.S. 1, 10 n.2 (1925) (citing numerous ICC
cases); Moore Bros. v. Chicago, Burlington, & Quincy
Railroad Co., 210 I.C.C. 95, 99 (1935); Michigan Buggy Co.
v. Grand Rapids & Indiana Railway Co., 15 I.C.C. 297, 299
(1909). The ICC’s approach received the Supreme Court’s
endorsement in Patterson, a case about the interplay between
§ 1(5) and another section of the ICA, § 4(1), 49 U.S.C. app.
§ 4(1) (1988). ICA § 4 originally consisted solely of the
“short-haul/long-haul clause” (forbidding a carrier “to charge
. . . any greater compensation in the aggregate . . . for a shorter
than for a longer distance over the same line, in the same
direction, the shorter being included within the longer
distance”) plus a provision authorizing the Commission to
grant relief from the clause upon application by a carrier. Ch.
104, 24 Stat. 379, 380 (1887). Later, in 1910, after the
Commission had already established the presumption that a
 19

through rate exceeding the sum of the intermediate rates
presumptively violated the reasonableness requirement of § 1,
e.g., Michigan Buggy, 15 I.C.C. at 299, Congress amended § 4
by adding the so-called “aggregate-of-intermediates clause,”
making it unlawful for a carrier “to charge any greater
compensation as a through rate than the aggregate of the
intermediate rates.” Act of June 18, 1910, Pub. L. No. 61-
218, § 8, 36 Stat. 539, 547. (In 1920, Congress divided
certain sections of the ICA into subsections; the
reasonableness requirement of § 1 ended up in § 1(5), and all
the § 4 provisions discussed above ended up in § 4(1).
Transportation Act of 1920, Pub. L. No. 66-152, § 400, 41
Stat. 456, 474-75, § 406, 41 Stat. at 480.) In Patterson the
shippers argued that the relief clause must not apply to the
aggregate-of-intermediates clause, in part because such an
application (they said) would effectively roll back shippers’
rights, i.e., the ICC, whenever it granted relief from the
aggregate-of-intermediates clause, would no longer apply any
presumption of unreasonableness. 269 U.S. at 9-10 & n.2.
The Court said this fear was unfounded: the ICC would
continue—indeed should continue—to hold a through rate
exceeding the sum of intermediates to be presumptively
unreasonable under § 1(5) regardless of the aggregate-of-
intermediates clause or any exemptions to it:

The [ICC] is correct in holding . . . that if a through rate
higher than the aggregate of the intermediates is attacked
under [ICA] § 1, the prima facie presumption that such
higher through rate is unreasonable, and hence unlawful,
obtains now as it did before the 1910 amendment [i.e., the
addition of the aggregate-of-intermediates clause to § 4].
But no such question could arise in a proceeding limited
to § 4. In a proceeding for violation of either clause of
§ 4 [including the aggregate-of-intermediates clause],
there is no occasion to consider either the presumption of
unreasonableness or the existence of a justification for
 20

making the through rate higher. Neither is relevant. For
if there has been an adequate and timely application
within the six months,2 which application remains
undetermined—or an application filed later and granted—
there can be no violation of that section. If there was no
such application filed, the section is violated by the
higher through rate, even if conditions are shown which
would have justified the rate as against a charge of
unreasonableness under § 1.

Id. at 12. The Court ultimately held that § 4(1)’s relief clause
embraced the aggregate-of-intermediates rule as well as the
short-haul/long-haul provision. Id. Its reasoning in support of
that holding treated one principle of § 1(5)’s application to a
through rate as a given: in making a case of unreasonableness,
shippers could shift the burden of proof to the carrier by
showing that the through rate exceeded the sum of the filed
intermediate rates, at which point the carrier could prevail by
showing a “justification” of the excess.

2
This is evidently a reference to yet another clause in § 4,
enacted in 1910 simultaneously with the aggregate-of-intermediates
clause, Act of June 18, 1910, Pub. L. No. 61-218, § 8, 36 Stat. 539,
548, providing that “no rates or charges lawfully existing at the time
of the passage of this amendatory Act shall be required to be
changed by reason of the provisions of this section prior to the
expiration of six months after the passage of this Act, nor in any
case where application shall have been filed before the commission,
in accordance with the provisions of this section, until a
determination of such application by the commission.” The
provision was modified in the Transportation Act of 1920, Pub. L.
No. 66-152, § 406, 41 Stat. 456, 480, and deleted in the
Transportation Act of 1940, Pub. L. No. 76-785, § 6, 54 Stat. 898,
904, meaning it was in force at the time of the Patterson shipments
(1916-1918), 269 U.S. at 6-7.
 21

The line of ICC § 1(5) cases endorsed in Patterson,
creating the rule that a through rate exceeding the sum of
intermediate rates is rebuttably presumed unreasonable,
apparently refers only to the contemporaneously filed rates.
All thirteen ICC cases cited on the point in Patterson, 269
U.S. at 10 n.2, follow this pattern, and no party cites a case to
the contrary. Here, of course, the Express joint rate exceeded
the sum of the intermediates only when a later-stipulated rate
was substituted for one of the contemporaneously filed rates.
Thus, FERC’s approach is doubly removed from the
ICC/Patterson rule, in that the agency (1) found the
presumption triggered by a mixed batch of rates (some
contemporaneously filed, another stipulated as reasonable
after the fact), and (2) made the presumption irrebuttable.

The parties dispute not only the pre-1977 interpretations
of § 1(5) but also the question whether FERC’s methodology
follows logically from Texaco Pipeline, Inc., 72 FERC
¶ 61,313 (1995), in which FERC approved a proposed joint
rate prospectively, saying that the ceiling for a joint rate was
“the sum of the ceiling levels associated with the individual
tariff rates currently on file,” 72 FERC at 62,310. FERC’s
method here of adding up segment rates to determine a
benchmark for reparations does not follow from Texaco. For
three of the four segments, FERC used filed rates, on which
Texaco never relied. (The filed rates in Texaco happened to
be the same as the ceiling levels, but that was mere
coincidence.) And for the remaining segment, FERC used a
rate stipulated to be reasonable pursuant to a settlement of
cost-of-service proceedings, violating the historic principle
that a through rate cannot be judged on the basis of a
traditional cost inquiry into some segments unless the agency
allows the carrier to be heard on costs for other segments.
Texaco did not remotely question that principle; on the
contrary, it implicitly honored it by adding apples to apples
 22

(ceilings to ceilings), summing figures that approximated cost
by a single method of computation.

FERC also makes a waiver argument that rests on its
misreading of Texaco. It claims that its first order in 2001
gave the carriers fair warning that FERC planned to award
reparations for the difference between the joint rate and the
sum of the locals (three as filed, one as later stipulated); if the
carriers didn’t like the approach, they should have objected
back then. Here is what the First 2001 Order said:

Our policy has been that a joint rate is just and
reasonable if it is less than or equal to the sum of the local
interstate rates currently on file with the Commission.
[Citation to Texaco.] If a pipeline participant in a joint
rate does not have a corresponding local interstate rate on
file with the Commission, the joint rate can be found to
be just and reasonable so long as it is less than or equal to
the sum of the local interstate rates of the remaining joint
participants that are on file with the Commission. . . .

....

. . . If it is established that [Frontier and Anschutz’s
local] rates are just and reasonable, it can be assumed that
the subject Express joint rates meet the standard set forth
in Texaco. However, if it is shown that the local rates of
Frontier and Anschutz are not just and reasonable, then
the Express joint rates must be recalculated in accordance
with Texaco.

First 2001 Order, 94 FERC at 62,259-60 (footnotes omitted).

Contrary to FERC counsel’s argument, these passages
cannot be said to anticipate the approach ultimately adopted.
The order says that a joint rate can be reasonable “if” or “so
long as” it doesn’t exceed the sum of the locals “on file.” The
 23

language (1) is literally consistent with Texaco correctly read,
if one assumes the filed rates are no greater than the ceiling
levels, as the regulations require, but (2) does not necessarily
imply the converse, i.e., that the joint rate is reasonable only if
it doesn’t exceed the sum of filed rates. The converse—a rule
that any filed through rate exceeding the sum of the filed local
rates is unjust and unreasonable—essentially transforms
Texaco, even though the order never suggests that it is
modifying Texaco at all. A reasonable participant in the
process could not be expected to infer that the Commission
would spin Texaco so offhandedly into a repudiation of
decades of application of § 1(5). Worse, even if the converse
rule were implied, it does not match what FERC ultimately
did (add up three filed rates and one later-determined
reasonable rate).

More broadly, it isn’t clear what a reasonable reader
anticipating an extension of Texaco to the reparations domain
should have expected. A literal extension of Texaco’s
principle—that the ceiling for a joint rate is the sum of the
ceilings of the intermediates—might suggest that reparations
should equal the difference between the joint rate and the sum
of the contemporaneously existing ceiling levels (there being
no express provision in the regulations fitting a recomputation
of ceiling levels into the ICA’s provision for reparations). But
the First 2001 Order couldn’t have meant this, for even if the
shippers alleged that the challenged rates exceeded
contemporaneous ceiling levels (and it seems, from the one
complaint presented to us, Joint Appendix at 137-38, that they
made no such allegation), FERC stated that the rates would
need to be recalculated under Texaco upon a finding that “the
local rates . . . are not just and reasonable”—a finding that,
given the very same order’s mandate of individual cost-of-
service hearings, FERC clearly believed might be premised on
something other than a violation of contemporaneous ceiling
levels.
 24

Given the ill fit between the language of the First 2001
Order and the reparations process, and the fact that these
passages never refer to reparations, a reasonable observer
would likely suppose that they referred only to prospective
relief, a matter then still entirely up in the air. Indeed, the
final quoted sentence—that if the challenged local rates are
found unreasonable, the joint rates “must be recalculated in
accordance with Texaco”—makes perfect sense if confined to
prospective relief: if one or more challenged local rates were
found unreasonable and therefore reduced, the reductions
would automatically reduce the segments’ respective ceiling
levels, 18 C.F.R. § 342.3(d)(5), which under Texaco would
automatically reduce the joint rate’s ceiling level, which
would require that the joint rate be “recalculated” (and under
some circumstances, e.g., if all filed segment rates had been at
their prior ceiling levels, reduced), see 18 C.F.R. § 342.3(e).
In any event, FERC cannot prevail on waiver.

In addition, the Commission seeks to justify its override
of historic practice and case law under § 1(5) by invoking the
EPAct’s general mandate to simplify ratemaking. It notes that
the carriers’ proposed rule—allowing a carrier to show that
because other intermediate rates on the through route were
below their respective reasonable maximums the overall
through rate was reasonable—would require individual
inquiries into pipeline costs, exactly the sort of onerous and
complex proceeding that the EPAct and Order No. 561 sought
to sidestep. Thus FERC purports to see that act as a policy
watershed that justifies minimizing the importance of pre-
EPAct precedent. See Rehearing Order, 108 FERC at PP 36,
45, pp. 62,102-03; see also id. at P 9, p. 62,097.

Administrative simplicity is a value, and agencies may
take it into account—EPAct or not. See, e.g., Consolidated
Edison Co. of New York v. FERC, 315 F.3d 316, 325 (D.C.
Cir. 2003) (approving FERC’s invocation of “administrative
 25

convenience” in a proceeding under the Natural Gas Act);
Illinois Public Telecommunications Association v. FCC, 117
F.3d 555, 565 (D.C. Cir. 1997) (evaluating on the merits an
agency claim of “administrative convenience” in a proceeding
under the Telecommunications Act but finding the burdens
avoided by the agency’s approach too small to justify the
cost). But we know of no case, and can’t imagine one from an
American court, where simplification’s value has been taken
to justify the exclusion of all data supporting one side when
equivalent data supporting the other has been admitted. True,
by virtue of a stipulation here the cost issue for Frontier’s leg
of the journey was resolved without a cost inquiry. But that
was a fluke. Essentially, FERC’s approach is to review a joint
rate on the basis of individual cost-of-service inquiries into the
local rates, but only the rates picked by shippers.

We have up to this point discussed the case under ICA
§ 1(5) and sections applicable to a § 1(5) case. The orders on
review, however, also lean heavily on ICA § 4(1)’s aggregate-
of-intermediates clause. Rehearing Order, 108 FERC at PP
37-41, 46-50, pp. 62,102-04; Reparations Order, 106 FERC at
P 12, p. 61,570-71. Yet the agency’s brief before this court
downplays the clause. Brief for Respondent at 19-31; but see
id. at 30-31. Counsel at oral argument, when asked, with
reference to § 1(5) and § 4(1), “under what section was the
Commission acting,” responded, “The Commission decided
this case under § 1(5).” Oral Arg. Tr. at 37. We take
Commission counsel at her word.

Because of possible confusion on remand, however, we
think it important to remind FERC that Patterson drew clear
distinctions between § 1(5) and § 4(1), particularly in the
passage from that case quoted in our discussion of § 1(5),
above.
 26

We note but do not rule on the carriers’ two key
objections to the orders as attempted applications of § 4(1).
First they argue that in the ICC’s pre-1977 decisions the term
“intermediate rates” in the aggregate-of-intermediates clause
refers to the “contemporaneously effective” rates, i.e., filed
rates. See Omaha Chamber of Commerce Traffic Bureau v.
Atlanta, Birmingham & Atlantic Railway Co., 93 I.C.C. 583,
585 (1924). FERC adduces no ICC decision to the contrary,
and all that we have seen, such as those cited in Patterson,
269 U.S. at 10 n.3, appear consistent with the principle.
Second, the carriers say that any monetary recovery under the
aggregate-of-intermediates clause requires a showing of
“actual damage,” typically (perhaps exclusively) injury to a
shipper disadvantaged by the challenged rate in competition
with firms enjoying the lower rates used for comparison, as
was true under the short-haul/long-haul provision of § 4(1),
Davis v. Portland Seed Co., 264 U.S. 403, 425-26 (1924), and
under the ICA’s express ban on discriminatory rates (ICA § 2,
49 U.S.C. app. § 2 (1988)), Pennsylvania Railroad Co. v. Int’l
Coal Mining Co., 230 U.S. 184, 197-208 (1913).

Finally, we must address FERC’s attempted reliance on
ICA § 6(7), 49 U.S.C. app. § 6(7) (1988). It establishes the
familiar filed rate doctrine, i.e., the rule that a carrier may
charge no more than the filed rate even if that rate is lower
than the maximum just and reasonable rate:

No carrier . . . shall engage or participate in the
transportation of . . . property . . . unless the rates, fares,
and charges upon which the same are transported by said
carrier have been filed and published in accordance with
the provisions of this chapter; nor shall any carrier charge
or demand or collect or receive a greater or less or
different compensation for such transportation . . . of
property . . . between the points named in such tariffs than
 27

the rates, fares, and charges which are specified in the
tariff filed and in effect at the time.

FERC contends that this provision supports its approach
to joint-rate reparations. Rehearing Order, 108 FERC at PP
14-18, pp. 62,098-99. The Commission’s idea seems to be
that allowing the carriers to show, in defense, that the local
rates for some segments were below the just and reasonable
level, would somehow implicate this provision. The argument
flies in the face of decades of ICC practice; as we just saw,
this allowed carriers that have charged a through rate higher
than the sum of the intermediate filed rates to rebut the
inference that the through rate was unreasonable under § 1(5).
It also violates ordinary language. Section 6(7) merely
prohibits a carrier from charging more than the rate “in effect
at the time” of the shipment. Nobody says that the carriers
here did such a thing. FERC’s § 6(7) argument is wholly
without merit.

On remand, FERC must consider whether the prior
judicial constructions of ICA § 1(5) in Sloss-Sheffield, Great
Northern, and Patterson preclude its condemnation of the
joint rate here without considering the reasonableness of the
rate as an aggregate. See National Cable &
Telecommunications Association v. Brand X Internet Services,
125 S. Ct. 2688, 2700 (2005); Chevron U.S.A., Inc. v. Natural
Resources Defense Council, 467 U.S. 837, 842-45 (1984). If
they do not, of course, the Commission must explain why its
approach is a reasonable construction. Further, to persist in
the outcome here it would have to explain its deviation from
the ICC’s pre-1977 applications of § 1(5).

We need not reach the carriers’ claims that FERC erred in
its damage calculations by using discounted rates and
excluding the local rate of Platte Pipe Line Company.
 28

II. The Shippers’ Petition

The award that prompted the carriers’ petition concerned
a set of shipments made by the shipper-petitioners (Big West
and Chevron Products) as owners of the oil from the moment
it left the border (if not earlier), contracting directly with the
carriers. But there was a second set of shipments made by
third-party owner-shippers, who had contracted to sell the oil
to Big West and Chevron Products under price terms that
specifically included whatever the carriers had charged for
transportation, plus an additional amount dependent on
various factors that don’t concern us. The shipper-petitioners
characterize their contracts with the third parties as “cost-
plus” contracts, in that the price consisted of the cost of
transportation from the border to Salt Lake City, plus
additional charges that didn’t vary with that cost. We assume
in the shipper-petitioners’ favor that their version of events is
accurate.

In their response to Frontier’s compliance filing, Big
West and Chevron Products sought reparations for any
overcharges on the second set of shipments, reasoning that
such charges had been “passed on” to them via the cost-plus
contracts. FERC rejected this “pass-on” theory, holding that
damages under the ICA were available only to shippers who
were in privity with the carrier (i.e., who directly or through
an agent contracted with it). Reparations Order, 106 FERC at
PP 24-28, pp. 61,572-73. The shippers requested rehearing,
which FERC denied. Rehearing Order, 108 FERC at PP 54-
88, pp. 62,105-10. Big West and Chevron Products now
petition for review.

Reparations for violations of the ICA are generally
governed by § 8, 49 U.S.C. app. § 8 (1988), under which a
person who commits an “unlawful” act under the statute is
“liable to the person or persons injured thereby for the full
 29

amount of damages sustained in consequence of any such
violation.” The language appears very general, saying
nothing to suggest that it would be unreasonable under
Chevron for the Commission to limit damages to parties who
were directly charged for the overpriced service.

Nor do prior judicial interpretations of the ICA support
the shipper-petitioners’ contention. In Southern Pacific Co. v.
Darnell-Taenzer Lumber Co., 245 U.S. 531 (1918), carriers
asserted passing on as a defense, i.e., they argued that
plaintiff-shippers had passed the overcharge onto their
customers and therefore hadn’t been injured. The Court
rejected the defense, declaring that the “general tendency of
the law, in regard to damages at least, is not to go beyond the
first step,” id. at 533, thus avoiding the “endlessness and
futility of the effort to follow every transaction to its ultimate
result,” id. at 534. The shipper-petitioners say that Darnell-
Taenzer applies only to passing-on as a defense, but it was
hardly unreasonable of FERC to find that the Court’s critique
of the theory applies as well when it’s used offensively. Cf.
Illinois Brick Co. v. Illinois, 431 U.S. 720, 729-36 (1977)
(holding that under Clayton Act § 4, 15 U.S.C. § 15, the pass-
on theory must be treated the same regardless of whether it’s
used offensively or defensively).

In Sloss-Sheffield, also involving defensive use of
passing on, the Court identified a complication affecting any
purported calculation of the true economic incidence of the
overcharge. The carrier asked the Court to create an
exception to Darnell-Taenzer for cases where the shipper and
its buyer invariably used a cost-plus contract, i.e., one that set
the price equal to the actual rate paid for the transportation
(even if the rate rose or fell after the agreement was made),
plus a fixed dollar amount per ton. Sloss-Sheffield, 269 U.S.
at 235-36. The Court refused, since the cost-plus arrangement
 30

didn’t altogether negate the economic effect of the overcharge
on the shipper:

The [carrier’s argument] ignores the commercial
significance of selling at a delivered price. When a seller
enters a competitive market with a standard article he
must meet offerings from other sources. On goods sold
f.o.b. destination [i.e., where the seller is liable to the
carrier for the price of transportation, and the buyer
doesn’t take title to the goods until they arrive], the
published freight charge from the point of origin
becomes, in essence, a part of the seller’s cost of
production. An excessive freight charge for delivery of
the finished article affects him as directly as does a like
charge upon his raw materials.

269 U.S. at 237-38. That is, a shipper facing an overcharge
for transportation must (1) maintain its price and accept a
lower profit per unit, or (2) raise its price, at the expense of
risking loss of some (perhaps all) sales. Even if the contract
nominally imposes the cost of transportation on the buyer, the
parties may take account of the overcharge when bargaining
over the other component(s) of the price.

Sloss-Sheffield’s point has broader significance. Parties
agreeing on a sale at a price that fluctuates with shipping costs
do so aware that post-shipment regulatory intervention may
ultimately decrease that cost. As to disposition of the
reparations, any explicit arrangement that they make
presumably controls as between the contracting parties. The
rule of Sloss-Sheffield (understood in light of Darnell-
Taenzer) seems to be that—absent any express provision—
reparations go by default to the party who contracted with the
carrier, since the overcharge is easiest to discern and measure
in the context of the shipper-carrier transaction, whereas the
overcharge’s ultimate impact on transactions and parties down
 31

the supply chain is far less ascertainable. As we shall see,
there are contract clauses from which courts or agencies might
draw a different inference, such as a provision making the
party contracting with the carrier the agent of the other party.
But the shipper-petitioners here asserted no such provision.

The shipper-petitioners attempt to distinguish Sloss-
Sheffield by noting that, in the ICC proceedings, “both the
consignor and the consignees claimed reparation.” 269 U.S.
at 237. The case gave preference to direct purchasers of
transportation, they argue, only because direct and indirect
purchasers were seeking to recover the same overcharge in a
single proceeding, forcing the ICC to choose between them to
prevent double recovery. Reply Brief of Petitioners Big West
Oil, LLC and Chevron Products Company at 7-9. In fact,
however, Sloss-Sheffield mentions the competing claimants
only in passing and says nothing to suggest that its holding is
needed to thwart a risk of double recovery. 269 U.S. at 237-
38. More generally, as the risk of double recovery seems to
have played no role in FERC’s decision, we need not address
the shipper-petitioners’ efforts to assuage our hypothetical
anxiety that accepting their view might generate such a risk.

The shipper-petitioners contend that Gabbert v. Atchison,
Topeka & Santa Fe Railway Co., 93 F.2d 562 (5th Cir. 1937),
interprets Sloss-Sheffield in a way that favors their position.
They are mistaken. In allowing purchasers to recover freight
overcharges the Gabbert court distinguished Sloss-Sheffield
by noting that (1) the Gabbert purchasers took title to the
goods before shipment, and (2) the sellers acted as the buyers’
agents in making physical payment of the charges. Id. at 562-
63. In our case, by contrast, the shipper-petitioners concede
that they took title only after shipment, and they don’t allege
that the third-party firms acted as their agents.
 32

McCarty Farms, Inc. v. Burlington Northern, Inc., 91
F.R.D. 486 (D. Montana 1981), also cited by shipper-
petitioners, held that farmers selling wheat on consignment
had standing to sue a carrier for overcharges even though only
the consignees actually contracted with the carrier. Id. at 487
& n.2, 492. FERC distinguished McCarty on the ground that
the consignors held title to the goods before and during
shipment and also (apparently) on the ground that the
consignees in paying the freight acted as agents for the
consignors. Rehearing Order, 108 FERC at P 69, pp. 62,107-
08. McCarty itself, however, never says which party held title
at what point nor mentions a principal-agent relationship; and
the consignment relationship per se doesn’t imply who would
hold title at what point or necessarily imply a principal-agent
relationship. See RESTATEMENT (SECOND) OF AGENCY § 14J
(1958) (existence of agency relation in consignment
determined by parties’ agreement on obligations of
consignee); id. cmt. b (title in consignment relation).

The principal affirmative basis for the McCarty decision
was Adams v. Mills, 286 U.S. 397, 407-08 (1932), a decision
straightforwardly applying Sloss-Sheffield (and, like it,
authored by Justice Brandeis) to reject the carrier’s passing-on
defense. In Adams, plaintiff-consignees had been liable for
the charges and had paid them, and the decision affirms their
right to recover. Id. at 405-09. But they had evidently been
reimbursed for the charges by the consignors. Id. at 407.
Adams was at pains to make clear that “[t]he rights of the
shippers in the proceeds of the action will not be affected by
[the Court’s] decision,” that those rights “might have been
asserted by intervention” in the Commission proceeding, and
that they might still be asserted. Id. at 407-08. The Adams
dictum thus seems to go no further than to suggest that where
the party with the legal obligation to pay the carrier does so,
and is reimbursed by another party, the reimbursing party can
 33

protect its interests and in some way participate in the action
before the Commission.

Thus, even if Adams’s dictum represented a statutory
reading precluding contradiction by the Commission under
National Cable (and we do not decide whether it does), that
reading wouldn’t apply to this case. As to McCarty’s
extension of the Adams dictum, we find that it neither pays
deference to the Interstate Commerce Commission
(unsurprising as it antedates Chevron and deals with class
certification prior to an ICC proceeding, McCarty, 91 F.R.D.
at 486-87) nor represents an interpretation unambiguously
compelled by the statute. Any error by FERC in its treatment
of McCarty is harmless. See 5 U.S.C. § 706 (in judicial
review of agency action, “due account shall be taken of the
rule of prejudicial error”); PDK Laboratories, Inc. v. DEA,
362 F.3d 786, 799 (D.C. Cir. 2004).

Perhaps sensing that the cases interpreting the ICA
provide (at best) no support for their pass-on theory, the
shipper-petitioners argue in the alternative that those decisions
have been implicitly modified by more recent decisions of the
Supreme Court discussing the pass-on theory under an
entirely different statute, Clayton Act § 4, 15 U.S.C. § 15
(“any person who shall be injured in his business or property
by reason of anything forbidden in the antitrust laws may sue
therefor . . . and shall recover threefold the damages by him
sustained”). In a succession of cases, the Court has refused to
allow passing on either as an affirmative theory of recovery or
as a defense, while preserving the possibility of its use in the
case of a “pre-existing cost-plus contract.”

Thus in Hanover Shoe, Inc. v. United Shoe Machinery
Corp., 392 U.S. 481 (1968), the Court held that a pass-on
defense was generally impermissible under Clayton Act § 4,
for two reasons: it was impractical to discern how the
 34

economic consequences of an overcharge were distributed, id.
at 492-93; and plaintiffs further down the supply chain would
normally have smaller stakes and would therefore be less
inclined to enforce their rights, id. at 494. But the Court noted
a possible qualification: “We recognize that there might be
situations—for instance, when an overcharged buyer has a
pre-existing ‘cost-plus’ contract, thus making it easy to prove
that he has not been damaged—where the considerations
requiring that the passing-on defense not be permitted in this
case would not be present.” Id. The Court also rejected
passing-on, but referred to the same possible exception, in
Illinois Brick, 431 U.S. at 735-36, and in Kansas v. Utilicorp
United, Inc., 497 U.S. 199, 217-18 (1990) (rejecting effort to
analogize customers of a utility with regulated prices to
buyers under a cost-plus contract, to enable them to recover
from natural gas suppliers who allegedly overcharged the
utility).

We reject the shipper-petitioners’ contention that these
decisions’ language preserving a possible exception for the
“pre-existing cost-plus contract” renders FERC’s denial of
their pass-on theory unreasonable. Hanover Shoe, Illinois
Brick, and Utilicorp construe Clayton Act § 4 de novo,
choosing what the Court considers to be the single best
approach to damages under that provision. They do not
purport to establish a general federal law of damages. See,
e.g., Illinois Brick, 431 U.S. at 736-37 (characterizing the
question as one of statutory construction). Here, FERC
construes the ICA, a different statute and one that Congress
has empowered the agency to administer with the benefit of
its expertise. The Clayton Act cases raise the possibility of a
“pre-existing cost-plus contract” exception (and we emphasize
they never call it more than a possibility) only because the
Court theorizes that such a contract might eliminate all the
uncertainties normally inherent in applying a pass-on theory.
The degree to which a particular contract can actually fulfill
 35

that promise depends on how precisely one can discern the
motivations of economic actors under various constraints.
And, at any given level of precision, there remains the
question of how to weigh the costs of calculation and of
residual error against the potential advantages of a rule that
supposedly allocates damage rights in more exact conformity
with the actual economic burden of an overcharge. These
issues are not specifically addressed by Congress in the
Clayton Act or the ICA. In the present case, they are for
FERC to judge. And the agency has made a reasoned
judgment, stating that the pass-on theory would “complicate
unnecessarily the Commission’s administration of the ICA,”
Rehearing Order, 108 FERC at P 82, p. 62,109, by saddling
the agency with the “difficulties of isolating transportation
costs,” id. at P 84, 62,109. In apparent response to the
shipper-petitioners’ assertions about the advantages of a more
economically exact allocation of damage rights, the agency
noted that parties remain free to make “private agreements . . .
to share responsibility for transportation or any other costs.”
Id. at P 85, p. 62,110.

On this point, shipper-petitioners again cite McCarty, this
time for the proposition that Hanover Shoe and Illinois Brick
seriously modified the prior interpretations of the ICA in
Darnell-Taenzer and Sloss-Sheffield. McCarty, 91 F.R.D. at
489. But McCarty involved a controversy over class
certification prior to an ICC proceeding; it was not reviewing
an agency construction of the statute. 91 F.R.D. at 486-87.
We further note that so far as appears the defendant in
McCarty neglected to assert the main problem that Illinois
Brick said rendered the theory impractical (i.e., the difficulties
of discerning how the transportation overcharge interacted
with other market conditions in determining the price of the
good), or, if it did, the court declined to grapple with such
difficulties. See McCarty, 91 F.R.D. at 491-92 & nn.15-16.
 36

The shipper-petitioners cite OXY USA, Inc. v. FERC, 64
F.3d 679 (D.C. Cir. 1995), but it is of no use to them. That
case concerns whether parties not in privity with carriers may
have standing to contest FERC rulings under the ICA, not
whether they have a right to reparations. Id. at 697. Finally,
the shipper-petitioners argue in a footnote that FERC’s stance
is inconsistent with prior ICC decisions. Appeal Brief of
Petitioners Big West Oil, LLC and Chevron Products
Company at 28 n.64. They did not raise this argument below,
see Request for Rehearing of Big West Oil LLC and Chevron
Products Company at 1-26; Response of Complainants Big
West Oil LLC and Chevron Products Company to
Compliance Filing of Frontier Pipeline Company etc. at 28-
33, and thus we do not consider it.

***

The carriers’ petition is granted, the shippers’ petition is
denied, and the case is remanded for further proceedings
consistent with this opinion.

So ordered.