Tesoro Alaska Petroleum Co. v. Federal Energy Regulatory Commission

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 16, 2000 Decided December 19, 2000

No. 99-1223

Tesoro Alaska Petroleum Company,
Petitioner

v.

Federal Energy Regulatory Commission and
United States of America,
Respondents

Williams Alaska Petroleum Inc., et al.,
Intervenors

Consolidated with
99-1224, 99-1239, 99-1250

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

---------

 Virginia A. Seitz and Robert H. Benna argued the causes
for petitioners Exxon Company, U.S.A. and Tesoro Alaska
Petroleum Company. With them on the briefs were Eugene
R. Elrod, Steven S. Hill and Jeffrey G. DiSciullo.

Andrew K. Soto, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondents. With him on
the brief were John H. Conway, Acting Solicitor at the time
the brief was filed, Timm L. Abendroth, Attorney, Joel I.
Klein, Assistant Attorney General, John J. Powers, III and
Robert J. Wiggers, Attorneys. Jay L. Witkin, Solicitor, and
Susan J. Court, Special Counsel, Federal Energy Regulatory
Commission, entered appearances.

John A. Donovan argued the cause for intervenors BP
Exploration (Alaska), Inc. et al. With him on the brief were
Matthew W.S. Estes, Bradford G. Keithley, Charles William
Burton, Jason F. Leif, Richard Curtin, Randolph L. Jones,
Jr. John W. Griggs and W. Stephen Smith. Dean H. Lefler
entered an appearance.

Albert S. Tabor, Jr., John E. Kennedy and S. Scott Gaille
were on the brief for intervenors TAPS Carriers. Alex A.
Goldberg entered an appearance.

Before: Williams, Randolph and Tatel, Circuit Judges.

Opinion for the Court filed by Circuit Judge Williams.

Williams, Circuit Judge: The Trans Alaska Pipeline Sys-
tem ("TAPS") is a 48-inch diameter pipeline carrying crude
oil from Alaska's North Slope approximately 800 miles south
to Valdez, Alaska. Each shipper delivers its own crude oil to
the pipeline, in which the oils are commingled; at the termi-
nus the shipper takes delivery of a proportional share of the
common stream. The crude oils delivered initially differ from
each other in various characteristics that affect market value.
Because of the commingling, a shipper will not in all likeli-
hood receive the same quality of oil at Valdez that it delivered
to the pipeline. Without some adjustment, the ones deliver-
ing relatively higher-value crudes would unfairly lose, and the
ones delivering lower-value crudes would unfairly gain. The

parties here battle over the formula governing the adjust-
ment, which the Federal Energy Regulatory Commission
controls in the exercise of its authority to regulate interstate
oil pipeline rates.1

Exxon Company, U.S.A.2 and Tesoro Alaska Petroleum
Company filed complaints with the Federal Energy Regulato-
ry Commission assailing aspects of the prevailing formula.
Exxon challenges the formula itself, a so-called "distillation"
methodology that the Commission adopted in 1993 and later
modified in 1997; Tesoro contests the specific valuation of
two "cuts" of petroleum, West Coast naphtha and West Coast
vacuum gas oil ("VGO"). A rate order must be modified
where "new evidence warrants the change." Tagg Bros. &
Moorhead v. United States, 280 U.S. 420, 445 (1930). Both
Exxon and Tesoro appear to have offered evidence that is
new in relation to what was before the Commission in its
earlier determinations and sufficiently compelling to require
reconsideration of the earlier resolution. We therefore re-
verse and remand the case for the Commission to reconsider
the adoption of the distillation methodology and the pricing of
West Coast naphtha and West Coast VGO, or to provide a
suitable explanation for why it should not.

__________
1 The authority was originally vested in the Interstate Com-
merce Commission, then transferred to the Federal Energy Regula-
tory Commission when it replaced the Federal Power Commission
in 1977. See 49 U.S.C. App. ss 1 et seq. (1988); see also 49 U.S.C.
s 60502 ("The Federal Energy Regulatory Commission has the
duties and powers related to the establishment of a rate or charge
for the transportation of oil by pipeline or the valuation of that
pipeline that were vested on October 1, 1977, in the Interstate
Commerce Commission or an officer or component of the Interstate
Commerce Commission.") (emphasis added). The Commission's
jurisdiction over the rates for oil going through to Valdez is
uncontested. See Trans Alaska Pipeline System, 23 FERC
p 61,352 at 61,762 (1983).

2 Exxon Company, U.S.A. was a division of Exxon Corporation.
Since filing its appeal, Exxon Corporation has merged with Mobil
Corporation to become Exxon Mobil Corporation.

 * * *

In 1984 the Commission approved a settlement agreement
establishing a "Quality Bank" to make the required adjust-
ments between shippers. See Trans Alaska Pipeline Sys-
tem, 29 FERC p 61,123 (1984).3 The Quality Bank initially
used a so-called "gravity" method. As the term gravity is
used here, it is a measure of density established by the
American Petroleum Institute ("API"). In contrast to "spe-
cific gravity", a higher API gravity represents a less dense
crude oil or petroleum product. See Exxon Co., U.S.A. v.
FERC, 182 F.3d 30, 35 n.1 (D.C. Cir. 1999). Because crude
oil was generally more valuable to the extent that it was
"higher"-gravity, i.e., lighter, the Quality Bank initially valued
crude oils according to their gravity.

Starting in 1987, the amount of natural gas liquids
("NGLs") in the stream increased, changing the picture--or
at least the perception. Two factors contributed to this
increase. First, natural gas operations expanded in Prudhoe
Bay, resulting in sharply increased deliveries of NGLs at the
head of the pipeline. OXY USA, Inc. v. FERC, 64 F.3d 679,
691 (D.C. Cir. 1995); see also Exxon Co., U.S.A. v. Amerada
Hess Pipeline Corp., 87 FERC p 61,133 at 61,521 (1999)
("Exxon Decision"). Second, expansion of one refinery and
construction of another along the route led to an increase in
removal of valuable mid-weight petroleum products from the
stream, apparently leaving a higher proportion of the lighter
NGLs in the petroleum at the end of the pipeline. OXY, 64
F.3d at 691; see also 57 FERC p 63,010, at 65,053 (1991).
NGLs have a much higher API gravity relative to other
petroleum components, but critics of the gravity method
argue that NGLs reduce rather than raise the value of the
common stream. See OXY, 64 F.3d at 686.

Responding to the resulting complaints under s 13(2) of
the Interstate Commerce Act, the Commission in 1989 started
to investigate the gravity method. It found that the method
was no longer just and reasonable and, in approving a con-

__________
3 Unless stated otherwise, all citations to FERC orders have
the title "Trans Alaska Pipeline System".

tested settlement in 1993, adopted the distillation method.
See 65 FERC p 61,277 (1993) ("Distillation Decision"), order
on reh'g, 66 FERC p 61,188 (1994), further order on reh'g, 67
FERC p 61,175 (1994). This latest method recognizes eight
"cuts" of petroleum products (propane, isobutane, normal
butane, natural gasoline, naphtha, distillate, VGO and resid)
in each stream entering TAPS, ranked by their boiling points.
The cuts are individually priced. Each shipper's delivery is
categorized under this system and valued in accordance with
the volume-weighted price of its component cuts. Because
Alaskan North Slope ("ANS") oil is sold in both the Gulf
Coast and West Coast markets, each cut is assigned Gulf
Coast and West Coast prices. Distillation Decision, 65
FERC at 62,290.

For some cuts there were acceptable indicators of market
value from the Oil Price Information Service ("OPIS") or
Platt's Oilgram. No such markers were available, however,
for distillate, VGO or resid, or for West Coast naphtha. For
these cuts the settlement proposed to use prices for kindred
products, adjusted for differences between them and the
actual cuts. The Commission rejected this approach, saying
that for a system to be non-discriminatory it must use
"market prices, uncomplicated by subjective adjustments."
Id. at 62,289. As part of this "No Adjustment Policy," the
Commission rejected the proposed use of adjusted West
Coast prices to value the West Coast naphtha cut and instead
set a Gulf Coast price for the cut. On rehearing, it also
ordered the use of Gulf Coast prices for West Coast deliveries
of VGO. Tesoro Alaska Petroleum Co. v. Amerada Hess
Pipeline Corp., 87 FERC p 61,132 at 61,514 (1999) ("Tesoro
Decision"). In OXY we affirmed the switch from the gravity
to the distillation method but remanded to the Commission its
refusal to adjust the reference prices for the distillate and
resid cuts. 64 F.3d at 701. In due course the Commission
approved a nine-party settlement on these issues, providing
for some redefinition of cuts and for use (for several of the
cuts) of petroleum product prices adjusted to reflect process-
ing costs. See 81 FERC p 61,319, at 62,462-65 (1997). On

review, we rejected the revised valuation of the resid cut and
again remanded. Exxon, 182 F.3d at 42.

In 1996, while the OXY remand was under way, Exxon filed
a complaint against seven TAPS owners pursuant to ss 9,
13(1) and 15(1) of the Interstate Commerce Act, 49 U.S.C.
App. ss 9, 13(1), 15(1) (1988)--leading to the present case.
Upholding an ALJ decision, the Commission dismissed the
complaint, holding that Exxon had failed to produce evidence
of changed circumstances to justify re-examination of the
1993 adoption of the distillation method. Exxon Decision, 87
FERC at 61,527-30.

Tesoro participated in the proceedings before the ALJ on
Exxon's complaint, raising issues that the ALJ ultimately
identified as different from Exxon's. The ALJ's order of
dismissal mooted Tesoro's arguments but noted that Tesoro
was free to file its own complaint. Exxon Co., U.S.A. v.
Amerada Hess Pipeline Corp., 83 FERC p 63,011, at 65,102 &
n.90 (1998). It did so in August 1998, attacking the valuation
of the naphtha and VGO cuts. The Commission dismissed
this, also on a finding of no changed circumstances. Tesoro
Decision, 87 FERC at 61,517-20.

Petitioners argue that because their complaints were dis-
posed of by Motion for Summary Disposition, our review is de
novo. That would be true if we were reviewing a district
court's equivalent action. But these dismissals implicate the
Commission's expertise and policy-making authority, compel-
ling deference. Motor Vehicle Manufacturers Ass'n of the
United States v. State Farm Mutual Auto. Ins. Co., 463 U.S.
29, 43 (1983). The requisite deference does not, however,
mean passive acceptance of irrational or unexplained decision
making. Id.; see also Louisiana Public Service Comm'n v.
FERC, 184 F.3d 892, 895 (D.C. Cir. 1999). Here we find the
Commission's answers to the evidence unconvincing.

* * *

In Tagg Bros. & Moorhead v. United States, 280 U.S. 420
(1930), the Supreme Court held that a "rate order is not res
judicata." Id. at 445. Specifically, where a party presents

"new evidence [that] warrants the change," the regulatory
agency has the power and duty "to institute new proceed-
ings." Id. Just as a plaintiff may allege a new cause of
action for every time a conspiracy in restraint of trade
operates against him, see Stanton v. District of Columbia
Court of Appeals, 127 F.3d 72, 78 (D.C. Cir. 1997), so each
new shipment by a carrier gives rise to a new cause of action,
as to which a previous adverse determination is not res
judicata, Interoceanica Corp. v. Sound Pilots, Inc., 107 F.3d
86, 91 (2d Cir. 1997); Hawaiian Telephone Co. v. Public
Utilities Comm'n of Hawaii, 827 F.2d 1264, 1274 (9th Cir.
1987). Issue preclusion might nonetheless be applicable, but
Tagg Bros. suggests that any such application is quite weak.

The Commission acknowledges the authority of Tagg Bros.,
but reframes Justice Brandeis's formula--allowing re-opening
for "new evidence"--into one requiring evidence of "changed
circumstances." It is unclear if any such limit may be
imposed. In OXY itself we observed, "[t]he fact that a rate
was once found reasonable does not preclude a finding of
unreasonableness in a subsequent proceeding." 64 F.3d at
690 (internal quotation omitted). See also Texas Eastern
Transmission Corp. v. FERC, 893 F.2d 767, 774 (5th Cir.
1990). In OXY, as we noted, there were changed circum-
stances--the increased proportion of NGLs in the common
stream, and in Texas Eastern there was an issue that the
prior determination had not confronted (the consistency of
minimum commodity bills with cost allocation based on the
modified fixed variable approach), 893 F.2d at 774. In rate
cases that look toward the setting of a future rate (as this
does, having been brought under s 13(1) of the Interstate
Commerce Act), unacceptable competitive distortions could
occur if one shipper were perpetually locked into a rate less
advantageous than the one enjoyed by a competitor. The
Supreme Court has emphasized this concern in the tax con-
text:

[A] subsequent modification of the significant facts or a
change or development in the controlling legal principles
may make that [judicial] determination obsolete or erro-

 neous, at least for future purposes. If such a determina-
tion is then perpetuated each succeeding year as to the
taxpayer involved in the original litigation, he is accorded
a tax treatment different from that given to other tax-
payers of the same class.

Commissioner of Internal Revenue v. Sunnen, 333 U.S. 591,
599 (1948). Accordingly, we have upheld the denial of issue
preclusion where the Commission had initially rejected a
requested rate on grounds of difficulties in tracing costs of
service, but in a later proceeding the utility offered a solution.
Second Taxing Dist. of Norwalk v. FERC, 683 F.2d 477, 484
(D.C. Cir. 1982). The new solution was perhaps a changed
circumstance, but it was one under the control of the utility
and thus seems somewhat akin to new evidence. In any
event, because the outcome of our decision here does not turn
on the distinction between evidence of changed circumstances
and evidence that is merely new, we need not decide whether
there is any reason to retreat from the language of Justice
Brandeis.

Exxon provided the testimony of Dr. Pavlovic, an economic
consultant, who tested the accuracy of the modified distilla-
tion methodology for 34 crude oils in the California crude oil
market from 1993 to 1996. Pavlovic used regression analysis
to compare the relative values of the cuts produced by the
distillation method with actual market prices. He claimed his
tests showed that the distillation method "substantially over-
values low-value, heavier petroleum and substantially under-
values high-value, lighter petroleum." Joint Appendix
("J.A.") at 430. He also testified that this bias "increase[d]
dramatically in 1994 and remain[ed] large thereafter." Id. at
451. A perfect pricing method would produce a coefficient of
1.0 in a regression of the method's relative values on those of
the benchmark market. Whereas the coefficient--also called
a bias measure--was indeed just over 1.0 for 1993 (1.07), it
jumped in 1994 to 1.65 and remained around 1.6 for the next
two years. Id. at 495. Pavlovic argued that he could reject,
at a statistically significant level, the hypothesis that the bias

measure was 1.0 in 1994-1996.4 Id. at 453.

Pavlovic's testimony appears to constitute not only new
evidence but changed circumstances as well. It shows that,
for reasons not yet conclusively determined, the degree of
bias resulting from the use of the distillation method rose
from imperceptible to severe after 1993. The Commission's
answer--that it "consistently has refused to base its decisions
on how the TAPS Quality Bank should operate based on
regression analyses of West Coast or world crude values,"
Exxon Decision, 87 FERC at 61,528--baffles us. The Com-
mission cannot be saying that regression analysis, good
enough to be a valuable tool for everyone else interested in
quantitative analysis, is never good enough for the Commis-
sion.

The Intervenors offer an explanation that may be part of
what the Commission in fact had in mind: "Dr. Pavlovic's
analysis was like testing a methodology designed to value
Alaskan apples by applying that methodology to a crate of
California oranges." Intervenors' (BP Exploration (Alaska),
Inc. et al.) Br. at 13 ("Intervenors' Br."). This glib use of the
old apples-oranges metaphor overlooks the problem confront-
ing the Commission: There simply are no market prices for
the Alaskan crude oils delivered into TAPS. If there were,
there would be little or no issue about inferring their relative
values. To the extent that the California crudes are similar
to the Alaskan crudes, Pavlovic's technique seems to test the
accuracy of the distillation method. Compare J.A. at 440-43.

Exxon also provided the testimony of Mr. Moore, an engi-
neer, and Dr. Hausman, an applied economist. Moore
stressed that the gravity of ANS crude oil (consisting of the
streams that enter at the start of the pipeline at Pumping
Station #1 and the return stream from refineries along its
path) had increased from about 28