SOUTHWEST AIRLINES CO. AND AMERICAN AIRLINES, INC., PETITIONERS v. FEDERAL ENERGY REGULATORY COMMISSION AND UNITED STATES OF AMERICA, RESPONDENTS SFPP, L.P., INTERVENOR
No. 18-1134
United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued April 12, 2019 Decided June 14, 2019
Consolidated with 18-1136, 18-1137, 18-1138
On Petitions for Review of Orders of the Federal Energy Regulatory Commission
Steven A. Adducci argued the cause for petitioners. With him on the briefs were Thomas J. Eastment, Gregory S. Wagner, Matthew D. Field, and Richard E. Powers Jr.
Anand R. Viswanathan, Attorney, Federal Energy Regulatory Commission, argued the cause for respondents. With him on the brief were Robert J. Wiggers and Robert B. Nicholson, Attorneys, U.S. Department of Justice, James P.Danly, General Counsel, Federal Energy Regulatory Commission, Robert H. Solomon, Solicitor, and Elizabeth E. Rylander, Attorney. Robert M. Kennedy Jr., Attorney, Federal Energy Regulatory Commission, entered an appearance.
Charles F. Caldwell argued the cause for intervenor. With him on the brief were Daniel W. Sanborn, Michelle T. Boudreaux, and Sabina D. Walia.
Before: TATEL, MILLETT, and KATSAS, Circuit Judges.
Opinion for the Court filed by Circuit Judge TATEL.
I.
For over a century, oil pipelines have been subject to regulation as common carriers under the Interstate Commerce Act. See
As a result, an “indexing” scheme has replaced cost-of-service proceedings as the Commission‘s primary tool for regulating pipeline rates. See Revisions to Oil Pipeline Regulations Pursuant to the Energy Policy Act of 1992, Order No. 561, 58 Fed. Reg. 58,753, 58,754 (Nov. 4, 1993) (explaining that the “Commission believes that indexing of oil pipeline rates will eliminate the need for much future cost-of-service litigation“). Emphasizing that “the hallmark of an indexing system is simplicity,” the Commission explained that pipelines (also called “carriers“) could use the new method to “adjust [their] rates . . . for inflation-driven cost changes without the need [for] strict regulatory review of the pipeline‘s individual cost of service.” Id. at 58,758. By permitting the “nominal level of rates to rise” with “general economy-wide costs,” the Commission stated, “indexing, conceptually, [would] merely preserve[] the value of just and reasonable rates in real economic terms.” Id. at 58,759.
The nuts and bolts of indexing work like this: For every “index year,” which runs from July 1 to June 30, the Commission publishes no later than June 1 an index “based on the change in the final Producer Price Index for Finished Goods (PPI-FG) . . . for the two calendar years immediately preceding the index year.”
The Commission recognizes that, though efficient, an indexing scheme based on “economy-wide costs” may at times produce rates significantly out of step with individual pipelines’ financial realities. Revisions to Oil Pipeline Regulations Pursuant to the Energy Policy Act of 1992, 58 Fed. Reg. at 58,759. For this reason, the Commission permits pipeline customers (also called “shippers“) to “challenge existing rates, even if such rates are below the applicable ceiling levels, if [those customers] reasonably believe such rates are excessive.” Id. at 58,754. These index-based rate challenges come in two varieties: protests, which address proposed rates, and complaints, which address “existing rate[s] or practice[s].”
Because protests proceed extremely quickly—they must be filed within fifteen days of a rate‘s publication, see
In contrast to protests, complaints are subject to a two-year statute of limitations, see
This case began in June 2014, when several shippers (the “Shippers“) filed timely complaints alleging that SFPP‘s 2012 and 2013 index-based rate increases failed the substantially exacerbate test. Claiming that SFPP was already over-recovering its costs at the time it applied its rate increases in 2012 and 2013, the Shippers, citing page 700 data showing that SFPP‘s costs had decreased between the two years preceding each rate increase, argued that the new, higher rates “would substantially exacerbate” those over-recoveries. Id. at P 10. Specifically, the Shippers alleged that (1) SFPP experienced a 4.48% decrease in
The Commission dismissed the complaints in December 2016. See Hollyfrontier Refining & Marketing LLC v. SFPP, L.P., 157 FERC ¶ 61,186, at P 1 (2016). Its logic was simple: “[n]otwithstanding the application of the 2012 and 2013 index increases,” the Commission explained, “SFPP‘s Page 700s on file at the time of the complaints show[ed] that the difference between SFPP‘s costs and revenues declined from . . . 2011 [to] 2012 [to] 2013.” Id. at P 9. Consequently, because “the 2012 and 2013 index increases did not, in fact, substantially exacerbate the pre-existing difference between SFPP‘s revenues and costs,” the Commission concluded that the complaints “fail[ed] the second part of the ‘substantially exacerbate’ test.” Id.
In dismissing the complaints, the Commission “reject[ed] the . . . Shippers’ contention that [it] should only evaluate the complaints based upon the two years prior to each index increase, i.e., (a) 2010 and 2011 Page 700 data for . . . [the] 2012 index increase and (b) 2011 and 2012 Page 700 data for . . . [the] 2013 index increase,” id. at P 10, and instead chose to consider “the facts available at the time . . . the complaints” were filed in June 2014, id. at P 9. Acknowledging that it had “previously held that the only relevant data for evaluating an index rate change are the data from the two years prior to the index change,” the Commission stated that it had “applied this policy when investigating . . . protest[s] within 15 days of the challenged indexed rate filing.” Id. at P 10. In this proceeding, by contrast, the “Shippers waited two years after the 2012 rate increase and one year after the 2013 index increase to file their complaints,” so, according to the Commission, “[t]his case present[ed] different circumstances” than the Commission had encountered before. Id.
The Commission denied the Shippers’ request for rehearing in March 2018. See Hollyfrontier Refining & Marketing LLC v. SFPP, L.P., 162 FERC ¶ 61,232 (2018). Reiterating that its December 2016 order had “interpret[ed] the Commission‘s rate complaint regulations . . . in a context that the Commission had not previously had occasion to address“—that is, a “situation where additional Page 700 data was available to shed light on the allegations contained in the . . . Shippers’ complaints“—the Commission explained that “when shippers delay challenging [index-based] rates for one or two years, a different process may be employed to take into account data that became available prior to the complaint.” Id. at PP 13-14, 16. The Commission “elected to use that data” because, in its view, “it would be inefficient and inequitable to ‘ignore evidence that was available at the time the . . . Shippers filed their complaints’ when that information ‘undermines the basis of the . . . Shippers’ claim.‘” Id. at P 14 (quoting Hollyfrontier Refining & Marketing, 157 FERC ¶ 61,186, at P 10). The Shippers timely filed petitions for review.
II.
One of the most fundamental principles of administrative law is that agencies must give reasons for their actions. The Administrative Procedure Act directs courts to enforce this obligation by “hold[ing] unlawful and set[ting] aside agency action[s]” that are “arbitrary” or “capricious,”
“A full and rational explanation” becomes “especially important” when, as here, an agency elects to “shift [its] policy” or “depart[] from its typical manner of” administering a program. Great Lakes Gas Transmission Ltd. P‘ship v. FERC, 984 F.2d 426, 433 (D.C. Cir. 1993). The agency “need not demonstrate . . . that the reasons for the new policy are better than the reasons for the old one,” FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009), but it must at least “acknowledge” its seemingly inconsistent precedents and either offer a reason “to distinguish them” or “explain its apparent rejection of their approach,” Tennessee Gas Pipeline Co. v. FERC, 867 F.2d 688, 692 (D.C. Cir. 1989). This is not an especially high bar: “it suffices that the new policy is permissible under the statute, that there are good reasons for it, and that the agency believes it to be better, which the conscious change of course adequately indicates.” Fox Television, 556 U.S. at 515. But however the agency justifies its new position, what it may not do is “gloss[] over or swerve[] from prior precedents without discussion.” Greater Boston Television Corp. v. FCC, 444 F.2d 841, 852 (D.C. Cir. 1970).
Until this case, when considering protests and complaints alike, the Commission always relied exclusively on data from the two calendar years preceding the challenged rate to determine whether the increase was “substantially in excess of the actual cost increases incurred by the carrier.”
What the parties dispute is just how far the Commission has journeyed from its previously trodden path. The Commission tells us that it has done nothing more than consider the best available information—information which, given the “unusual circumstance” occasioned by the Shippers’ “filing delay,” happens to include the “more recent and more representative data” generated by SFPP‘s 2012 and 2013 index-based rate increases. Respondent‘s Br. 13–15. The Shippers see things differently. In their view, the Commission‘s “decision does not simply take into account updated evidence,” but rather “reflects a fundamental change in the standard for evaluating an index-based rate complaint.” Petitioners’ Br. 31. For two reasons, the Shippers have the better of the argument.
First, the Commission has explained that it relies on pre-rate-increase information not because it lacks more recent evidence, but rather because prior-year data reflects precisely what indexing is supposed to measure: cost changes in the previous year. For example, in a 2009
Second, in at least three previous complaint cases, the Commission focused solely on pre-rate-increase information from the preceding two years even though post-rate-increase information was presumably available at the time the complaints were filed. In one case, the Commission dismissed complaints filed in December 2006 and January 2007 against a pipeline‘s 2005 and 2006 index-based rate increases because, as it concluded, the pipeline permissibly “indexed its . . . rates on July 1, 2005, to reflect that its costs in 2004 exceeded its 2003 costs” and then imposed a “July 1, 2006[,] index-based increase” on the basis of “Page 700 [data] for the calendar year 2005 reflect[ing] an increase in costs” from 2004. BP West Coast Products LLC v. SFPP, L.P., 118 FERC ¶ 61,261, at PP 8–9 (2007). In another case, the Commission explained that it would evaluate a complaint filed in 2007 against a 2005 index-based rate “by comparing the costs incurred [by the pipeline] in the calendar year preceding the index year with the prior year“—that is, by comparing “the pipeline‘s costs in 2004 with the costs incurred in 2003.” BP West Coast Products LLC v. SFPP, L.P., 119 FERC ¶ 61,241, at P 9 (2007). And in still another case, the Commission dismissed a 2007 complaint against a 2006 index-based rate because the pipeline had demonstrated with its “revised 2005 FERC Form No. 6” that its “July 2006 . . . index based increase[] did not substantially exacerbate its current over-recovery.” Tesoro Refining & Marketing Co. v. Calnev Pipe Line, LLC, 121 FERC ¶ 61,142, at P 7 (2007).
These three decisions—all cited by the Commission in its December 2016 order or by the Shippers in their request for rehearing—belie the Commission‘s contention
Taken together, these cases demonstrate that when the Commission announced its decision to “consider the data that [becomes] available” “[w]hen shippers delay . . . in filing a complaint,” Hollyfrontier Refining & Marketing, 162 FERC ¶ 61,232, at P 18, it was adopting a policy inconsistent with its earlier course of conduct. Of course, the Commission is free to “depart from a prior policy or line of precedent” so long as it “acknowledge[s] that it is doing so and provide[s] a reasoned explanation.” Louisiana Public Service Commission v. FERC, 772 F.3d 1297, 1303 (D.C. Cir. 2014). But the explanation offered in the challenged orders misses this mark.
The Commission‘s sole justification for its change of heart boils down to this: “it would be inefficient and inequitable to ignore evidence that was available at the time the . . . Shippers filed their complaints.” Hollyfrontier Refining & Marketing, 162 FERC ¶ 61,232, at P 14 (internal quotation marks omitted). This justification, however, begs a very important question: is the available evidence also relevant evidence? As the Shippers point out, if “the index is designed to recover cost increases for the period prior to the increase,” then “[d]ata relating to periods after the effective date of a proposed index rate increase are irrelevant.” Petitioners’ Br. 23. In other words, by assuming that any available post-rate-increase information is relevant to its inquiry, the Commission has reinterpreted—without acknowledgement or explanation—the phrase “actual cost increases incurred by the carrier,”
One final matter requires brief mention. In addition to arguing that the Commission departed from its prior practice without adequate justification, the Shippers claim that, on the same day the Commission issued its March 2018 order, it issued a different order that undermines the evidentiary basis for dismissing the Shippers’ complaints. But given that we are vacating the March 2018 order, we need not reach this alternative ground for granting the petitions for review. The Shippers are free to raise this argument on remand.
III.
For the foregoing reasons, we grant the petitions for review and vacate and remand the Commission‘s December 2016 and March 2018 orders for further proceedings consistent with this opinion.
So ordered.