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Parties Involved:
Federal Energy Regulatory Commission
Respondent
Gulfmark Energy, Inc.
Intervenor for Respondent
MarkWest Michigan Pipeline Company, LLC
Petitioner
United States of America
Respondent

Document Text:

United States Court of Appeals 

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued January 18, 2011 Decided July 1, 2011 

No. 10-1075 

MARKWEST MICHIGAN PIPELINE COMPANY, LLC, 

PETITIONER

v. 

FEDERAL ENERGY REGULATORY COMMISSION AND UNITED 

STATES OF AMERICA, 

RESPONDENTS

GULFMARK ENERGY, INC., 

INTERVENOR

On Petition for Review of Orders 

of the Federal Energy Regulatory Commission 

Charles F. Caldwell argued the cause for petitioner. With 

him on the briefs was Elizabeth B. Kohlhausen. 

Carol J. Banta, Attorney, Federal Energy Regulatory 

Commission, argued the cause for respondents. With her on 

the brief were Robert B. Nicholson and Robert J. Wiggers, 

Attorneys, U.S. Department of Justice, Thomas R. Sheets, 

General Counsel, Federal Energy Regulatory Commission, 

and Robert H. Solomon, Solicitor. John J. Powers III, 

Attorney, U.S. Department of Justice, entered an appearance. 

USCA Case #10-1075 Document #1316137 Filed: 07/01/2011 Page 1 of 13
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Before: GINSBURG and GRIFFITH, Circuit Judges, and 

RANDOLPH, Senior Circuit Judge. 

Opinion for the Court filed by Circuit Judge GRIFFITH. 

GRIFFITH, Circuit Judge: To settle a dispute over rates, 

oil pipeline owner MarkWest agreed with two of its three 

shippers to restrict rate increases for a three-year period. But 

neither the agreement nor the relevant regulations clearly lay 

out how to determine the rates MarkWest may charge now 

that the three-year period is past. MarkWest proposed its 

view, which the Federal Energy Regulatory Commission 

(FERC) rejected and replaced with its own. Finding both the 

agreement and the regulations ambiguous, we defer to the 

reasonable views of the Commission and deny MarkWest’s 

petition for review. 

I 

To reduce costs, delays, and uncertainties associated with 

determining whether rates are just and reasonable, Congress 

enacted the Energy Policy Act of 1992 (EPAct), Pub. L. No. 

102-486, 106 Stat. 2776.*

 The EPAct required FERC to 

 

*

 The federal government has regulated interstate oil pipelines as 

common carriers under the Interstate Commerce Act (ICA) since 

1906. See Hepburn Act, Pub. L. No. 59-337, § 1, 34 Stat. 584, 584 

(1906). The ICA requires that pipeline owners charge their shippers 

rates that are “just and reasonable.” 49 U.S.C. app. § 15(1) (1988); 

see also id. § 1(5). Regulatory authority resided in the Interstate 

Commerce Commission (ICC) until 1977, when Congress created 

FERC. See Department of Energy Reorganization Act, Pub. L. No. 

95-91, § 402(b), 91 Stat. 565, 584 (1977). Although Congress has 

since amended the ICA, FERC regulates oil pipelines under the 

statute as it existed in 1977. See Act of Oct. 17, 1978, Pub. L. No. 

95-473, § 4(c), 92 Stat. 1337, 1470. This version of the ICA was 

USCA Case #10-1075 Document #1316137 Filed: 07/01/2011 Page 2 of 13
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establish “a simplified and generally applicable ratemaking 

methodology for oil pipelines.” Id. § 1801, 106 Stat. at 3010 

(codified at 42 U.S.C. § 7172 note). In 1996, FERC 

promulgated Order No. 561 to implement this mandate. See

Order No. 561, Revisions to Oil Pipeline Regulations 

Pursuant to the Energy Policy Act of 1992, 58 Fed. Reg. 

58,753 (Nov. 4, 1993). See generally Ass’n of Oil Pipe Lines 

v. FERC, 83 F.3d 1424 (D.C. Cir. 1996) (upholding Order 

No. 561). 

Order No. 561 uses an “indexing system” to set “ceiling 

levels” that limit increases in pipeline rates. 58 Fed. Reg. at 

58,754. The calculation of that ceiling begins with an “initial 

rate”—a baseline rate that FERC has determined to be just 

and reasonable for any one of three reasons: (1) it was 

grandfathered in by the EPAct, see Pub. L. No. 102-486, 

§ 1803, 106 Stat. at 3011 (codified at 42 U.S.C. § 7172 note); 

(2) the pipeline has filed evidence of the actual costs of 

operation to support the rate, see 18 C.F.R. § 342.2(a); or 

(3) one shipper has agreed in writing to pay the rate and no 

other shipper has protested, see id. § 342.2(b). The initial rate 

is the rate the pipeline charges during the first “index year”—

the period from July 1 to June 30. Each year thereafter, the 

pipeline’s price hikes are limited by a ceiling level that 

accounts for inflation. To determine its first inflation 

adjustment, a pipeline owner multiplies its initial rate by the 

FERC Oil Pipeline Index, a coefficient FERC publishes 

annually based on the Department of Labor’s Producer Price 

Index for Finished Goods. The next year, the pipeline owner 

adjusts its ceiling level “by multiplying the previous index 

year’s ceiling level by the most recent [FERC coefficient].” 

Id. § 342.3(d)(1). That process is repeated for each successive 

 

last codified as an appendix to Title 49 of the 1988 U.S. Code. See

49 U.S.C. app. §§ 1-27 (1988). 

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index year. In this case especially, it is important to note that 

even though a pipeline owner may charge a rate below the 

ceiling level, see id. § 342.3(a), the maximum charge for the 

next year is computed by multiplying the current year’s 

ceiling level by the Oil Pipeline Index for that year, and not 

by the actual rate charged, id. § 342.3(d)(1). 

An example illustrates how FERC uses indexing. 

Suppose that the Commission found that a pipeline’s rate of 

100 cents per barrel in 2005 was just and reasonable, 

permitting the owner to set this price as his pipeline’s initial 

rate. Because the Commission’s inflation index for the year 

starting July 1, 2006, was 1.061485, 71 Fed. Reg. 29,951 

(May 24, 2006), during the next year the same pipeline could 

charge no more than 106.1485 cents per barrel, i.e., 100 

multiplied by 1.061485. The inflation index for the year 

starting July 1, 2007, was 1.043186, 119 FERC ¶ 61,155 

(May 16, 2007), so in that year the pipeline could charge no 

more than 110.7326 cents per barrel: the previous year’s 

ceiling level of 106.1485 cents per barrel multiplied by 

1.043186. 

Once FERC has approved a pipeline’s initial rate, that 

baseline continues to provide the starting point for calculating 

the pipeline’s ceiling levels each year unless and until the 

pipeline owner establishes a new initial rate. Pursuant to 18 

C.F.R. § 342.3(d)(5), a pipeline owner can set a new initial 

rate using one of three “method[s] other than indexing”: 

(1) by showing that it has experienced cost increases that 

exceed the rate increases indexing would allow, id.

§ 342.4(a); (2) by showing that it lacks market power and 

therefore could not set a new initial rate that would be 

anticompetitive, id. § 342.4(b); or (3) by showing that all of 

its shippers consent to a new initial rate, id. § 342.4(c). When 

a pipeline owner is allowed to set a new initial rate under one 

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of these scenarios, that rate becomes the just and reasonable 

baseline to which the Commission’s indexing method applies 

in subsequent years. 

On November 18, 2005, petitioner MarkWest filed rates 

with the Commission for its Michigan pipeline. Two of the 

three shippers that use the pipeline—Sunoco and GulfMark 

Energy—protested. Merit Energy, which does not itself use 

the pipeline but sells oil to companies that do, also protested. 

On January 31, 2006, before the Commission considered the 

dispute, the parties agreed to a settlement, which the 

Commission subsequently approved. 

Although the settlement agreement had no term, it 

created a three-year “Moratorium Period” from January 31, 

2006, until January 31, 2009, during which the agreement set 

the maximum rates MarkWest could charge its shippers. 

Settlement Agreement 4. Like the Commission’s indexing 

method, the settlement agreement set an initial rate for 

shipping for the first five months of the Moratorium Period, 

January 31 through June 30, 2006. For the index years that 

began on July 1, 2006, 2007, and 2008, the settlement 

agreement established an “Annual Inflation Cap” that, like 

FERC indexing, pegged MarkWest’s maximum rates to the 

Department of Labor’s Producer Price Index statistics. Unlike 

FERC’s Oil Pipeline Index, however, the Annual Inflation 

Cap used a slightly different measure of inflation that in most 

years yields a lower rate. 

But the settlement agreement did not ignore the FERC 

ceiling levels. During the Moratorium Period, the settlement 

agreement allowed MarkWest to “increase . . . rates” each 

July 1 “to reflect . . . inflation adjustments as promulgated 

annually by the FERC,” provided that this figure “[did] not 

exceed [the Annual Inflation Cap].” Settlement Agreement 4. 

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Thus the settlement agreement restricted MarkWest’s right to 

increase pipeline prices to the lesser of either the pipeline’s 

ceiling levels under FERC’s indexing system or the increase 

permitted by the Annual Inflation Cap. As it turned out, for 

each year of the Moratorium Period, the Annual Inflation Cap 

provided for rates that were less than the pipeline’s ceiling 

levels. 

All agree that the Commission’s indexing methodology 

will govern MarkWest’s rates now that the Moratorium 

Period is past. The only dispute in this case concerns the 

initial rate MarkWest must use to calculate its new annual 

ceiling levels. MarkWest argues that after the end of the 

Moratorium Period, its ceiling levels should be calculated as 

if its maximum rates had been set under FERC’s indexing 

methodology all along. In other words, MarkWest would have 

FERC go back to the initial rate for 2006 and, using that as 

the baseline, apply its inflation measure for each year 

thereafter. In contrast, the Commission would simply pick up 

the rates where the settlement agreement left off, using the 

last rate under the agreement as the initial rate for the period 

after the agreement. See MarkWest Mich. Pipeline Co., Order 

on Tariff Filing and Granting Clarification, 126 FERC 

¶ 61,300 (Mar. 31, 2009) [hereinafter Order]; MarkWest 

Mich. Pipeline Co., Order Denying Rehearing, 130 FERC 

¶ 61,084 (Feb. 2, 2010) [hereinafter Rehearing Order]. 

The Commission’s approach creates two consequences 

MarkWest seeks to avoid. First, it will require MarkWest to 

charge substantially lower rates going forward because it uses 

a lower initial rate. Second, under the Commission’s 

approach, even though the agreement’s Moratorium Period 

ended on January 31, 2009, MarkWest could not raise its rates 

until the next index year began on July 1, 2009. The 

Commission read the settlement agreement as setting new 

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initial rates on July 1, 2008, Order 4, and FERC regulations 

do not permit a pipeline owner to use indexing to raise its 

rates above the initial rate until the start of the next index 

year, 18 C.F.R. § 342.3(d)(5). 

On March 31, 2009, the Commission rejected 

MarkWest’s rate filing on the ground that its proposed rates 

were too high because the settlement agreement established 

new initial rates on July 1, 2008. 126 FERC ¶ 61,300. On 

February 2, 2010, the Commission denied MarkWest’s 

petition for rehearing. 130 FERC ¶ 61,084. MarkWest filed a 

timely petition for review in this Court on April 2, 2010. We 

have jurisdiction pursuant to 28 U.S.C. § 2342 (1976). 

II 

In National Fuel Gas Supply Corp. v. FERC, 811 F.2d 

1563, 1569-70 (D.C. Cir. 1987), we read the Supreme Court’s 

decision in Chevron U.S.A. Inc. v. Natural Resources Defense 

Council, Inc., 467 U.S. 837 (1984), to require deference to the 

Commission’s interpretation of language in a settlement 

agreement resolving rate disputes. The court identified two 

reasons for such deference. First, Congress explicitly 

delegated to FERC broad powers over ratemaking, including 

the power to analyze relevant contracts. Nat’l Fuel Gas 

Supply Corp., 811 F.2d at 1569-70. In this case, the 

Commission had an important role in the settlement 

agreement: by its terms the agreement only became binding 

when approved by the Commission. Settlement Agreement 7. 

Second, in rate-setting cases like this one, the Commission 

has “familiarity with the field of enterprise to which the 

contract pertains.” Nat’l Fuel Gas Supply Corp., 811 F.2d at 

1570. 

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Applying Chevron, “we first consider de novo whether 

the settlement agreement unambiguously addresses the matter 

at issue. If so, the language of the agreement controls . . . .” 

Ameren Servs. Co. v. FERC, 330 F.3d 494, 498 (D.C. Cir. 

2003) (internal citations omitted). If the agreement is 

ambiguous or silent, however, “we defer to the Commission’s 

construction of the provision at issue so long as that 

construction is reasonable.” Koch Gateway Pipeline Co. v. 

FERC, 136 F.3d 810, 814-15 (D.C. Cir. 1998). 

Step one of this analysis is not difficult because the 

settlement agreement is silent on the matter of how to set the 

ceiling on rates following the Moratorium Period. Under these 

circumstances, we must defer to the Commission’s 

interpretation if reasonable. 

 

MarkWest argues that the settlement agreement did not 

change its initial rates, observing that during the Moratorium 

Period the agreement required the parties to calculate the 

maximum rate MarkWest could have charged under the 

Commission’s indexing method. Though this rate could only 

be charged if it were lower than the rate derived under the 

Annual Inflation Cap, MarkWest contends that the 

agreement’s use of FERC indexing somehow shows that the 

parties did not intend to change the pipeline’s initial rates. 

The Commission addressed this argument in its 

Rehearing Order, explaining that “[t]he fact that MarkWest’s 

Settlement . . . uses the Commission’s indexing regulations as 

a procedural framework to implement the Settlement does not 

change the character of the rates MarkWest filed pursuant to 

the terms of the Settlement.” Rehearing Order 7. That is, the 

settlement agreement’s use of FERC indexing during the 

Moratorium Period reveals little, if anything, about what 

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baseline the parties expected FERC indexing to use after the 

Moratorium Period ended. 

MarkWest also challenges the Commission’s view that 

the settlement agreement established new initial rates for the 

index year that began on July 1, 2008, which could not be 

adjusted for inflation until July 1, 2009, the start of the next 

index year. See 18 C.F.R. § 342.3(d)(5) (providing that when 

a pipeline owner establishes a new initial rate, that rate will be 

the applicable ceiling level until the start of the next index 

year). MarkWest argues that the Commission’s interpretation 

reads out of the agreement the January 31, 2009, end date of 

the Moratorium Period by effectively extending this period to 

July 1. Pointing to the “cardinal principle of contract 

construction . . . that a document should be read to give effect 

to all its provisions,” Segar v. Mukasey, 508 F.3d 16, 22 (D.C. 

Cir. 2007) (internal quotation marks omitted), MarkWest 

argues that the Commission treats the three-year Moratorium 

Period as if it were actually three years and five months long. 

But this mischaracterizes what the Commission has done. 

As explained in its Rehearing Order, the Commission simply 

reads the agreement as setting new initial rates on July 1, 

2008. Rehearing Order 8. Under the Commission’s 

regulations, a pipeline owner cannot adjust an initial rate for 

inflation until the beginning of the next index year, which in 

this instance began on July 1, 2009. See 18 C.F.R. 

§ 342.3(d)(5). But the Commission did nothing to extend the 

Moratorium Period, and MarkWest was free to change its 

rates in other ways once the period ended. For example, 

during the Moratorium Period MarkWest could not set new 

initial rates in excess of the rates it was permitted to charge 

under the Annual Inflation Cap. Once the Moratorium Period 

ended, however, it was free to depart from the Annual 

Inflation Cap’s limits on new initial rates so long as it did so 

USCA Case #10-1075 Document #1316137 Filed: 07/01/2011 Page 9 of 13
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in a way that the Commission’s regulations allow. Despite 

MarkWest’s arguments to the contrary, we conclude that the 

agreement is ambiguous as to whether it established new 

initial rates. 

In the face of this ambiguity, the Commission’s reading 

of the settlement agreement was reasonable. As the 

Commission recognized, Order 4, the parties specified a 

method for calculating maximum annual rate increases during 

the Moratorium Period that closely tracks the FERC indexing 

methodology by using the maximum rates from one year as 

the basis for calculating the next year’s ceiling levels. Like 

FERC indexing, the settlement agreement’s Annual Inflation 

Cap specifies a formula for deriving a coefficient based on the 

Department of Labor’s Producer Price Index inflation 

statistics. The settlement agreement also directs MarkWest to 

calculate its maximum annual rate increases by multiplying 

this coefficient by the previous year’s maximum rates. 

Though the Annual Inflation Cap and FERC indexing 

incorporate different measures of inflation, they use the same 

basic approach. 

These similarities suggest that the parties may have 

intended a further similarity as well. FERC indexing uses the 

maximum rate a pipeline owner is allowed to charge in one 

year to calculate the maximum rate that it may charge the next 

year. In the same way, the parties may have intended to use 

the maximum rate MarkWest was allowed to charge at the 

end of the Moratorium Period to calculate rates after the 

Moratorium Period ended. The parties agreed that the Annual 

Inflation Cap would provide fair, inflation-adjusted maximum 

rates during the Moratorium Period, and it would hardly be 

surprising if they also thought the Annual Inflation Cap would 

provide a fair initial rate for calculating future rate increases. 

The settlement agreement does not clearly adopt this 

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approach, but neither does it rule out this possibility. 

Confronted with such silence, we defer to the Commission’s 

reasonable view of the matter. 

III 

MarkWest argues in the alternative that the 

Commission’s regulations clearly require it to find that the 

settlement agreement did not change the pipeline’s initial 

rates. But the regulations are no less ambiguous on this point 

than the settlement agreement itself, and, once again, we must 

defer to the Commission’s reasonable views. An agency’s 

interpretation of its own ambiguous regulations is “controlling 

unless plainly erroneous or inconsistent with the regulation.” 

Auer v. Robbins, 519 U.S. 452, 461 (1997) (internal quotation 

marks omitted); see also Marseilles Land & Water Co. v. 

FERC, 345 F.3d 916, 920 (D.C. Cir. 2003) (“[A]gencies are 

entitled to great deference in the interpretation of their own 

rules.”). 

This case required the Commission to decide which of 

two provisions of 18 C.F.R. § 342 should apply to the parties’ 

settlement agreement. As we have already noted, § 342.3(a) 

allows a carrier to set rates below a given year’s ceiling levels 

without having to reduce its ceilings in subsequent years. 

MarkWest contends that the settlement agreement did nothing 

more than what this section provides. The parties merely 

agreed that rates could be set below the ceiling levels on a 

temporary basis during the Moratorium Period. Taking 

advantage of that provision, MarkWest argues, had no effect 

on the initial rate. 

However, under § 342.3(d)(5) a pipeline in effect 

establishes new initial rates when it sets rates “by a method 

other than indexing.” The Commission’s regulations treat 

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“[s]ettlement rates” as one such method. Section 342.4(c) 

expressly provides: 

Settlement rates. A carrier may change a rate without 

regard to the ceiling level under § 342.3 if the 

proposed change has been agreed to, in writing, by 

each person who, on the day of the filing of the 

proposed rate change, is using the service covered by 

the rate. 

The Commission found that this case fits § 342.3(d)(5). 

MarkWest argues that § 342.3(a), not § 342.3(d)(5), 

applies to the settlement agreement because the agreement’s 

rate regime does not precisely fit § 342.4(c). Section 342.4(c) 

requires that shippers unanimously consent to a settlement 

rate, but only two of MarkWest’s three shippers were parties 

to the settlement agreement. Moreover, § 342.4(c) envisions 

settlements that raise rather than lower a pipeline’s ceiling 

levels. See Frontier Pipeline Co. v. FERC, 452 F.3d 774, 777 

(D.C. Cir. 2006) (“A pipeline may raise a rate above the 

resulting ceiling level . . . only if . . . all customers consent.”); 

Order No. 561, 58 Fed. Reg. at 58,764 (explaining that the 

Commission adopted § 342.4(c) to permit carriers to charge 

rates to which shippers consent “even though these rates may 

be above the ceiling level that would apply under the indexing 

methodology”). 

But neither does the settlement agreement clearly qualify 

as a § 342.3(a) rate reduction. That provision contemplates a 

carrier changing its rates in response to competitive pressures, 

not in order to settle a legal dispute over whether its ceiling 

levels are just and reasonable. Order No. 561, 58 Fed. Reg. at 

58,759 (explaining how § 342.3’s indexing methodology 

allows carriers “to change rates rapidly to respond to 

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competitive forces”); Order 6 (observing that the regulations 

allow pipeline owners to “raise their rates at any time to the 

ceiling rate if the competitive situation later permits such a 

rate increase because any increase up to that level is presumed 

to be just and reasonable”). 

Confronted with a scenario that its regulations did not 

anticipate, the Commission acted reasonably in treating the 

settlement agreement as it would treat a § 342.4(c) settlement. 

“Because applying an agency’s regulation to complex or 

changing circumstances calls upon the agency’s unique 

expertise and policymaking prerogatives,” Martin v. 

Occupational Safety & Health Review Comm’n, 499 U.S. 144, 

151 (1991), we defer to the Commission’s reasonable 

interpretation of its own regulations. 

IV 

For the foregoing reasons, the petition for review is 

Denied. 

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