Petro Star Inc. v. Federal Energy Regulatory Commission, 835 F.3d 97

Background

The Trans Alaska Pipeline System (TAPS) carries commingled North Slope crude to Valdez; the Quality Bank (administered by FERC) makes zero-sum monetary adjustments to compensate shippers for quality differences among nine distillation "cuts," including Resid (the heaviest).
Six cuts have published market prices; three (Light Distillate, Heavy Distillate, Resid) are "pre-market" and are valued by deducting hypothetical processing costs from finished-product prices. Resid is valued as coke less processing costs.
The Quality Bank’s Resid processing-cost deduction includes a 20% capital recovery factor (capital investment allowance) adopted in prior proceedings. Petro Star and Flint Hills challenged that inclusion as undervaluing Resid.
FERC initiated an investigation (2013), held an ALJ hearing, and the ALJ rejected Petro Star for (1) failing to propose a viable alternative methodology and (2) failing to show the capital allowance was unjust or unreasonable. FERC affirmed; Petro Star sought review.
The D.C. Circuit found Petro Star submitted new and sufficiently compelling evidence (the "less-than-a-barrel" anomaly and West Coast coking-market data) that warranted a reasoned agency response, but concluded FERC and the ALJ failed to address that evidence adequately.
The court remanded for FERC to either reconsider Resid’s valuation methodology or provide a reasoned explanation for retaining the capital recovery factor; the State of Alaska lacked standing to intervene on its asserted issue.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether FERC reasonably retained a 20% capital recovery factor in Resid's processing-cost deduction	Petro Star: Short-run market prices for marketable cuts exclude capital recovery; including a 20% allowance undervalues Resid and creates inconsistency with other cut valuations	FERC: No showing of unjustness; record does not compel removing the allowance; Petro Star failed to propose a viable alternative	Court: FERC failed to respond meaningfully to new evidence (anomaly and market data); remand required for reasoned analysis or remedy
Whether Petro Star had to propose a fully consistent alternative methodology to obtain relief	Petro Star: Removing capital allowance for Resid would correct a distortion and is appropriately focused on Resid valuation	FERC: Petro Star failed burden because it did not propose a consistent valuation for all pre-market cuts	Court: FERC's rejection on that ground was circular—it assumed the correctness of the contested capital allowance; failure to propose an alternative cannot be an independent basis here
Whether the "less-than-a-barrel" anomaly undermines the Quality Bank methodology	Petro Star: From 2009–2012, Quality Bank composite cut values were lower than ANS barrel prices, suggesting Resid undervaluation	FERC/ALJ: Composite comparison is irrelevant because Quality Bank aims only to assign accurate relative values	Court: Because the Quality Bank seeks to mirror market prices under its method, FERC/ALJ failed to explain or rebut the anomaly adequately
Whether the State of Alaska may litigate a broader standard for Quality Bank challenges	Alaska: Parties should be allowed to propose superior, pro-competitive methodologies; FERC failed to address that argument	Petro Star (and FERC): Not raised by petitioner; no concrete injury alleged	Court: Alaska lacks Article III standing and may not expand issues beyond the petitioner; claim dismissed

Key Cases Cited

OXY USA, Inc. v. FERC, 64 F.3d 679 (D.C. Cir. 1995) (Quality Bank must assign accurate relative values among cuts)
Tesoro Alaska Petroleum Co. v. FERC, 234 F.3d 1286 (D.C. Cir. 2000) (agency must respond meaningfully to new evidence warranting reexamination)
Exxon Co., USA v. FERC, 182 F.3d 30 (D.C. Cir. 1999) (deference to agency technical expertise but requires rational explanation)
Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992) (Article III standing requirements)
Chenery Corp. v. SEC, 318 U.S. 80 (1943) (agency cannot rely on post hoc rationalizations)
Tagg Bros. & Moorhead v. United States, 280 U.S. 420 (1930) (new evidence can require modification of rate orders)
Cities of Bethany v. FERC, 727 F.2d 1131 (D.C. Cir. 1984) (appellate court may affirm on ALJ reasoning when adopted by agency)
Shell Oil Co. v. FERC, 47 F.3d 1186 (D.C. Cir. 1995) (desire for a different legal rationale absent concrete harm does not confer standing)
NARUC v. ICC, 41 F.3d 721 (D.C. Cir. 1994) (intervenors cannot expand scope beyond principal parties)
California Dep’t of Water Res. v. FERC, 306 F.3d 1121 (D.C. Cir. 2002) (limitations on issues intervenors may raise)