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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 19, 2004 Decided April 9, 2004

No. 03-1107

FLYING J INC., ET AL.,

PETITIONERS

v.

FEDERAL ENERGY REGULATORY COMMISSION AND

UNITED STATES OF AMERICA,

RESPONDENTS

ASSOCIATION OF OIL PIPE LINES,

INTERVENOR

On Petition for Review of an Order of the

Federal Energy Regulatory Commission

Melvin Goldstein argued the cause and filed the briefs for

petitioners.

Judith A. Albert, Attorney, Federal Energy Regulatory

Commission, argued the cause for respondents. With her on

 Bills of costs must be filed within 14 days after entry of judgment.

The court looks with disfavor upon motions to file bills of costs out

of time.
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the brief were R. Hewitt Pate, Assistant General Counsel,

John J. Powers, III and Robert J. Wiggers, Attorneys, Cynthia A. Marlette, General Counsel, Federal Energy Regulatory Commission, and Dennis Lane, Solicitor. Laura J. Vallance, Attorney.

C. Frederick Beckner, III argued the cause for intervenor.

With him on the brief was Michele F. Joy. Lawrence A.

Miller entered an appearance.

Before: GINSBURG, Chief Judge, HENDERSON, Circuit Judge,

and WILLIAMS, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge

WILLIAMS.

WILLIAMS, Senior Circuit Judge: Section 1801(a) of the

Energy Policy Act of 1992 (‘‘EPAct’’) directed the Federal

Energy Regulatory Commission to promptly issue a final rule

establishing ‘‘a simplified and generally applicable ratemaking

methodology for oil pipelines.’’ Pub. L. No. 102–486, 106

Stat. 2776, 3010 (1992), reprinted in 42 U.S.C. § 7172 note.

Congress also declared that oil pipeline rates that had not

been contested or opposed for one year before October 24,

1992 should be deemed ‘‘just and reasonable’’ for purposes of

the controlling statutory mandate, § 1(5) of the Interstate

Commerce Act. EPAct, § 1803(a)(1). Under this provision,

‘‘the vast majority’’ of then-prevailing rates were available as

a baseline for a ‘‘rate cap’’ system, under which a pipeline

could charge any rate within the previously established ceiling. See Revisions to Oil Pipeline Regulations Pursuant to

Energy Policy Act of 1992, Order No. 561–A, FERC Stats. &

Regs. (CCH) ¶ 31,100 (1994) (‘‘Order No. 561–A’’) at 31,092.

But to protect both pipelines and their customers from being

adversely affected by cost changes over time, the Commission

provided that the cap would change annually in accordance

with a predetermined formula or index, which would be

independent of each pipeline’s own cost experience. Revisions to Oil Pipeline Regulations Pursuant to the Energy

Policy Act of 1992, Order No. 561, FERC Stats. & Regs.

(CCH) ¶ 30,985 (1993) (‘‘Order No. 561’’) at 30,946. In contrast to traditional rate ceilings based on each regulated
3

firm’s own cost experience, use of such a formula gives the

pipelines incentives to pursue cost-saving innovations. See

id. at 30,948 & n.37. And if the annual adjustment approximates the likely experience of reasonably efficient pipelines,

there will be relatively little need to entertain applications for

exceptions based on a divergence of pipeline cost experience

from the evolving cap. See Order No. 561–A at 31,092.

Accordingly the Commission seeks an index based on the

pipelines’ aggregate past experience.

In its initial implementation of the EPAct in 1993–94, the

Commission applied a methodology that led it to an index of

PPI–1, i.e., the annual change in the producer price index,

minus one percentage point. See Order No. 561 at 30,951–52.

(Technically, it was PPI–FG–1, or producers’ price index—

finished goods, minus one percentage point.) Pipeline owners

challenged the methodology in court, but we upheld the

Commission. Association of Oil Pipe Lines v. FERC, 83

F.3d 1424 (D.C. Cir. 1996) (‘‘AOPL I’’). In 2000 FERC

fulfilled an earlier promise to revisit the issue. Although it

arrived again at PPI–1, it did so via a new methodology.

Again the pipelines sued. This time, finding that the Commission had deviated without adequate explanation from the

earlier methodology, and had failed to answer various criticisms of its new approach, we remanded the case for further

consideration. We expressly refrained from vacating, noting

that PPI–1 might prove sustainable even after FERC’s reexamination. Association of Oil Pipe Lines v. FERC, 281 F.3d

239, 247–48 (D.C. Cir. 2002) (‘‘AOPL II’’). On remand, rather

than defend the methods used in the 2000 approach, FERC

re-adopted those used in 1993–94 (with some changes), and

chose an index of plain PPI. See Order on Remand: Five–

Year Review of Oil Pipeline Pricing Index, 102 FERC

¶ 61,195 (February 24, 2003) (‘‘Remand Order’’). The present

petitioners are shippers, who argue that the Commission was

arbitrary and capricious in failing to stick to the innovations

made in 2000. They have not made their case, however.
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* * *

The shippers attach great importance to our decision merely to remand the 2000 decision, rather than to vacate and

remand. From this they infer that the Commission was

obliged to really try to justify its 2000 methodology for

estimating the rate of change in aggregate pipeline costs,

rather than beating a retreat to its 1993–94 approach. We

rejected exactly such a claim in Southeastern Michigan Gas

Co. v. FERC, 133 F.3d 34 (D.C. Cir. 1998), saying that while

further explanation of the approach triggering remand was

one of the Commission’s options, ‘‘once FERC reacquired

jurisdiction [via the remand], it had the discretion to reconsider the whole of its original decision.’’ Id. at 38. It would

make little sense to force the agency to struggle to uphold a

methodology that it had failed to justify, just because it had

once tried to do so.

On the merits, the shippers insist that the three innovations

that elicited the remand in AOPL II are not merely preferable, but that the alternatives chosen by the Commission on

remand are so inferior that for it to return to them was

arbitrary. In measuring the changes in pipeline costs between 1994 and 1999, the Commission adopted in 2000 (and

abandoned on remand) the following methods: First, it

moved from some form of ‘‘fixed-weight’’ method to a ‘‘floating-weight’’ approach. See AOPL II, 281 F.3d at 241–45, for

a discussion of these two techniques. Second, it turned away

from its decision in Orders Nos. 561/561–A to drop the top

and bottom 25% of all observations as ‘‘outliers’’ and instead

used all observations. See id. at 245–46. Third, it stopped

using changes in ‘‘net plant’’ to proxy otherwise unobserved

changes in capital costs due to returns on investment and

income taxes. See id. at 246–47. The shippers assert that

had FERC maintained these three innovations following remand, it would have chosen a price-cap index of PPI–1.

The shippers present this argument only in aggregate

terms, positing that all three changes made by FERC, taken

together, would yield a rate-of-change estimate closer to PPI–

1 than to PPI. They fail to bolster this claim with any
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analysis describing the incremental impact of each change.

Such information is at a minimum useful, and its absence can

prove fatal; without it, the shippers have provided no reason

to think that their justification for the use of PPI–1 can

survive on only some of its legs. (We note that no one in the

current litigation seems to advocate use of an index differing

from PPI by fractions of a whole number.) This implies that

a defeat on one prong can defeat the whole claim. In this

particular case, however, the shippers fail to show FERC’s

arbitrariness on any of the three issues.

First, the Commission’s decision to revert to a fixed-weight

methodology was reasonable. To show the superiority of the

floating-weight methodology, the shippers argue that changes

in industry averages capture the effect of shifts from crude oil

to petroleum products pipelines. But the Commission was

trying to predict the likely rate of change in the costs to be

experienced by any given pipeline. For that task, the change

in industry averages is irrelevant and leads directly to the

risk of material distortions that we identified in AOPL II, 281

F.3d at 242–43, a subject on which the shippers are silent. At

oral argument shippers’ counsel advanced an additional theory—namely, that a fixed-weight index is inferior to its floating-weight analog because the former fails to account for

substitution from high-priced to low-price goods over time.

We’re not sure that this adds much conceptually to the crudeproducts argument, but in any event we do not reach it. We

noted the argument in AOPL II, id. at 244–45, but didn’t

evaluate it then as FERC had not relied on it. This time

around, although the shippers raised the point before FERC

on remand, they failed to do so in their briefs here, so it is not

properly before us. Compare Carducci v. Regan, 714 F.2d

171, 177 (D.C. Cir. 1993) (citing Fed. R. App. Pro. 28(a)(4)).

Second, the shippers fail to show arbitrariness in the

Commission’s rejection of their preferred method for dropping outlying observations. Their method involves two differences from that of the Commission, which dropped the 25%

highest and lowest observations of cost changes. The shippers (1) would use 95% of the observations rather than 50%,

and (2) would drop instances of outlying cost levels, rather
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than, as did the Commission, outlying changes in costs. See

Reply Declaration of Alfred E. Kahn, Revisions to Oil Pipeline Regulations Pursuant to the Energy Policy Act, Docket

No. RM00–11–000 (October 2, 2000) (‘‘Kahn Reply’’) at 15.

Although the relevant question for the price-cap index is how

to compensate firms for changes in their costs, not for the

costs per se, the shippers focus on the latter. To the extent

that the shippers’ submissions can be said to address the

point at all (and only by giving their statements a generous

reading can one say that they did so), they evidently seek to

justify the difference with an analysis that rests in essence on

the same ground as their claims in 2000 for use of a floatingweight system, i.e., inter-pipeline competition. See Further

Statement of F. M. Scherer, Revisions to Oil Pipeline Regulations Pursuant to the Energy Policy Act, Docket No.

RM00–11–000 (September 27, 2000) (‘‘Scherer Reply’’) at 13–

14; see also AOPL II, 281 F.3d at 243 (discussing pipelinecompetition argument for floating-weight method). Having

reasonably chosen to return to the fixed-weight methodology,

the Commission might well have contradicted itself if it had

adopted the shippers’ proposal for handling outliers. Curiously, if one removes outlying changes in costs, keeping 95%

rather than only 50% of the observations no longer helps the

shippers but in fact appears to support an index as high as

PPIv1. See Kahn Reply at 15–16 and Table 1.

The third criticism leveled by the shippers is that FERC

improperly used net plant as a surrogate for unobserved

capital costs. As FERC notes, capital costs consist of depreciation, amortization, return on investment, and income taxes,

and the forms pipelines are required to file with FERC

contain data only on the first two components; in 1993–94,

and again on remand, FERC used changes in net plant as a

proxy for the latter two. Before us the shippers challenge

this on the ground that the data submitted to FERC have

become increasingly accurate, thus eliminating the need for a

proxy. While it is evidently uncontested that reported data

have become more accurate, the matters reported on have

remained unchanged, as the shippers themselves acknowledge. See Petitioners’ Opening Br. at 42. As long as the
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filings fail to account for returns on investment and income

taxes, some sort of proxy for these is suitable regardless of

how accurate the other data may be.

The shippers go on to attack the use of net plant as being

contrary to the Generally Accepted Accounting Practices.

But as they do so only in their Reply Brief, the issue isn’t

properly before us. See Carducci, 714 F.2d at 177. (Moreover, even if the net plant issue had been properly raised, it

likely could not help the shippers: FERC concluded that use

of the data had no impact on the final decision, see Remand

Order, 102 FERC at 61,541, a point the shippers have not

challenged.)

Since the shippers fail to show that FERC’s decisions were

unreasonable on any of the three issues comprising this triad,

their argument clearly fails.

The shippers advance a second cluster of three arguments,

citing evidence in the record supporting the view that if they

prevailed on all three, the Commission’s choice of PPI would

be exposed as arbitrary. In this cluster they assume the

acceptability of the fixed-weight methodology but (1) repeat

their ‘‘outliers’’ position, advocating exclusion only of firms

with extreme cost levels, (2) argue that volumes for 1999

(rather than for 1994) should be used for weighting the

observations, and (3) say that FERC should have included

five pipelines that reported data in 1994 and 1999 but not in

some of the intervening years. Again the shippers fail to

point to any calculations in the record suggesting that error

on fewer than all three would undermine the Commission’s

conclusion.

We need not repeat our analysis of the argument recycled

here from the first triad, namely the claim that FERC should

have excluded outliers based on levels of costs rather than

changes in costs. Coupling it with two new criticisms doesn’t

make it any more compelling.

The attack on the Commission’s choice of 1994 volumes for

weighting purposes, rather than those of 1999, addresses an

issue that is inherent in cost and price indices. At its heart is
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the difference between the Laspeyres and Paasche methods,

with the former weighting elements on the basis of their

share of the total in the initial period, and the latter assigning

weights based on end-period shares. Neither index is a

perfect measure of changes, however. See, e.g., P. R. G.

Layard and A. A. Walters, Microeconomic Theory 156–57

(1978). The shippers make the well-established point that an

initial-period index overstates the true change in cost. See

Scherer Reply at 12. Indeed. In standard welfare or utility

analysis, the Laspeyres index tends to overstate the change

and acts as an upper bound on the actual rate of change. By

keeping the original weights, it tends to conceal the extent to

which customers have preserved their satisfaction by substituting away from goods with rising relative prices towards

those with declining relative prices. Layard & Walters at

157. The Paasche conversely serves as a lower bound; neither index is a priori superior to the other. Id. As the

shippers’ perfectly orthodox critique of an initial-period index

is matched by the equally orthodox critique of an end-period

index, it is not enough to render the Commission’s choice

unreasonable. (We assume in the shippers’ favor that although the usual object of concern is a measurement of

effects on utility, the concerns for over- and under-statement

are substantially the same here despite the different focus in

the Commission’s exercise.) No one appears to have advocated year-by-year weighting, which tends to split the difference.

The shippers’ final argument is that FERC should have

included several pipelines that reported data in 1994 and 1999

but not in some of the intervening years and two other

pipelines apparently excluded from the study. But the shippers offer no data on the implications of this change independent of their treatment of outliers and their choice of base

years for weighting. See Reply Comments of Sinclair Oil

Corp. et al., Revisions to Oil Pipeline Regulations Pursuant

to the Energy Policy Act, Docket No. RM00–11–000 (October

2, 2000) at 9–11. Given that they do not discuss the proposed

change’s incremental impact under FERC’s assumptions of a

50% sample and a 1994 base year, they haven’t made a

sufficient claim that the inclusion of these firms, however
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sensible, could alone render PPI–1 a better estimator than

PPI.

Since the shippers have failed to establish that any of

FERC’s methodological choices (or combination of choices)

was both erroneous and harmful, the petition for review is

Denied.