827 F.3d 122
D.C. Cir.2016Background
- SFPP, L.P., a partnership oil pipeline, filed cost-of-service tariffs in 2008 increasing West Line rates and decreasing East Line rates; shippers protested alleging flaws in SFPP’s cost-of-service calculations.
- FERC issued Opinion 511 (2011), Opinion 511-A (2011), and Opinion 511-B (2015) resolving contested issues; SFPP and multiple shippers petitioned this Court for review.
- Two main SFPP challenges: (1) FERC’s selection of September 2008 data rather than April 2009 data to set the “real” return on equity (ROE); (2) FERC’s partial application (25%) of the published 2009 index increase to SFPP’s 2009 rates.
- Shippers separately challenged FERC’s policy granting an income-tax allowance to partnership pipelines, arguing it leads to double recovery of taxes because partnerships are not taxed at the entity level and the discounted cash flow ROE already produces an after-tax return.
- The D.C. Circuit reviewed FERC’s orders for arbitrary and capricious action under the Administrative Procedure Act and afforded deference on complex ratemaking matters.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Choice of data for SFPP’s real ROE | SFPP: FERC arbitrarily ignored its policy favoring the most recent cost-of-equity data and must use April 2009 or explain choosing Sept. 2008 | FERC: April 2009 data reflected the 2008–09 market collapse and anomalous inflation, so Sept. 2008 was more representative | Court: Agreed April 2009 could be rejected as unrepresentative, but FERC failed to provide a reasoned basis for selecting Sept. 2008; vacated and remanded on this issue |
| Application of 2009 index to rates | SFPP: Regulations allow applying the full published 2009 index (7.6025%) to 2009 ceiling/rates | FERC: Full index would cause double recovery because SFPP’s 2008 cost-of-service already captured much of those cost increases; protests permit FERC to limit index | Court: Upheld FERC’s partial (25%) index adjustment as reasonable given protests and comparison to actual cost increases; denied relief to SFPP |
| Partnership tax allowance (double recovery) | Shippers: Tax allowance to partnership pipelines causes double recovery (partnerships incur partner-level taxes and DCF ROE already yields an after-tax return) and renders rates unjust and unreasonable | FERC: ExxonMobil permits tax allowances for partnerships because partner-level taxes can be imputed to the pipeline; any disparity stems from the tax code, not FERC policy | Court: Held FERC did not adequately demonstrate there is no double recovery; vacated and remanded for FERC to justify mechanism ensuring no double recovery (e.g., adjust DCF ROE or eliminate allowance) |
Key Cases Cited
- ExxonMobil Oil Corp. v. FERC, 487 F.3d 945 (D.C. Cir. 2007) (upheld FERC’s rationale for partnership tax allowance but left room for reasoned alternatives)
- BP West Coast Prods., LLC v. FERC, 374 F.3d 1263 (D.C. Cir. 2004) (criticized FERC’s prior Lakehead approach and warned against creating a "phantom tax")
- Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591 (1944) (rates must yield returns commensurate with returns on investments of corresponding risk)
- Williston Basin Interstate Pipeline Co. v. FERC, 165 F.3d 54 (D.C. Cir. 1999) (explains DCF model premise for ROE)
- Ass’n of Oil Pipe Lines v. FERC, 83 F.3d 1424 (D.C. Cir. 1996) (deference to FERC expertise in ratemaking)
- Butte County v. Hogen, 613 F.3d 190 (D.C. Cir. 2010) (discussing overlap of arbitrary-or-capricious and substantial-evidence review)