Opinion ID: 436086
Heading Depth: 2
Heading Rank: 2

Heading: Systemwide vs. Point-to-Point Rate Regulation

Text: 175 As discussed supra at 1497, FERC decided in Williams to regulate oil pipeline rates on a systemwide, rather than a point-to-point basis. FERC did so by way of a short discussion, on the assumption that the ICC had in the past given scant attention to particular rates on specific routes. 21 FERC at 61,650. Farmers Union objects to this ruling. It challenges FERC's interpretation of past ICC precedents, citing ICC cases in which rates were determined by reference to specific point-to-point movements and their related costs and valuations. See Farmers Union Brief at 69. Farmers Union also noted that the Interstate Commerce Act requires every unjust and unreasonable charge ... [to be] prohibited and declared to be unlawful. 49 U.S.C. Sec. 1(5) (emphasis added). Finally, it contends that systemwide rate regulation could shield rate discrimination from proper remedy. 176 Our review of relevant ICC precedents shows that past oil pipeline proceedings have included attempts to set rates computed on a detailed allocation of costs to the proper section of the pipe-line system. Petroleum Rail Shippers' Association v. Alton & Southern Railroad, 243 I.C.C. 589, 663 (1941); see Minnelusa Oil Corp. v. Continental Pipe Line Co., 258 I.C.C. 41, 54-55 (1944). In both proceedings, the ICC allocated the operational costs of transportation from each originating station, averaged as to distance and weighted as to volume, to every terminal in the relevant system. Because oil pipelines rates are charged on a point-by-point basis, such cost allocation ensures that the costs of providing service over a given territory will be recovered only from the companies that use that particular service. See Minnelusa Oil Corp., 258 I.C.C. at 53 (Operating conditions of defendant pipe lines in Rocky Mountain territory are more difficult than those of pipe line in territory east thereof, as hereinabove explained, but these are reflected for the most part in operating expenses.). We also find disturbing the apparent tension between FERC's action and the language of section 1(5). While FERC made assurances in Williams that patently discriminatory tactics will not be immunized from searching regulatory scrutiny, the FERC's systemwide approach would apparently tolerate substantial variance in allowable returns among pipeline segments without any justification, cost-based or otherwise. 177 However, we need not decide this issue at this time, because FERC made its decision prematurely. The ALJ identified the following issue for consideration during Phase I of the Williams proceeding: 178 Which unit should the Commission regulate (i.e., should the Commission determine rate base upon a system-wide or upon a segmented basis (e.g., petroleum products pipeline v. fertilizer pipeline))? 179 J.A. at 242 (Invitation to Submit Comments) (emphasis added). The ALJ designated this question as a rate base issue. Id. at 241. FERC's ruling, however, went well beyond the determination of the rate base issue, and decided further to abandon all cost allocation to particular pipeline segments, calling the allocation inquiry metaphysical, inconclusive and barren. 21 FERC at 61,651. Previous ICC cases make clear that the question whether to determine rate base upon a system-wide or upon a segmented basis is separate from the question whether costs should be allocated to particular pipeline segments. In those prior ICC cases, the rate base valuation was not broken down into line sections, but the ICC nevertheless proceeded to allocate costs to the proper sections of the pipeline. See Minnelusa Oil Corp., 258 I.C.C. at 54; Petroleum Rail Shippers' Association, 243 I.C.C. at 663. The rate base issue goes to the determination of the proper valuation units upon which a rate of return will be earned, and accordingly constitutes a proper element of the Phase I inquiry, which centered on how to calculate allowable revenue requirements for an oil pipeline. The cost allocation issue, by contrast, determines the fair distribution of the burdens of meeting those revenue requirements among the oil pipeline's customers. See Bonbright, Principles of Public Utility Rates 291-93 (1961). Thus, the cost allocation issue is more properly characterized as a question of rate design. See, e.g., Second Taxing District v. FERC, 683 F.2d 477, 480 (D.C.Cir.1982); Cities of Batavia v. FERC, 672 F.2d 64, 80 (D.C.Cir.1982). 180 The ALJ, however, expressly deferred rate design issues until Phase II of the proceedings. See J.A. at 243 (Invitation to Submit Comments) (A number of additional issues, such as 'rate design' ... were suggested .... Those suggestions were not adopted because, in most instances, the issues raised appear to be more appropriate for consideration in Phase II of this proceeding.); id. at 245 (remarks of ALJ at outset of prehearing conference) (Someone also raised the question of rate design. I consider those Phase II issues. Those issues tend to vary with the particular pipeline.). Accordingly, we find that FERC decided an issue not properly before it. 79 On remand, FERC, if it so desired, could consider the cost allocation issue as a part of Phase I, but if it does so it should give adequate notice to the parties so that the issue can be fully debated before determination. In making a decision on cost allocation principles, FERC should be cognizant of the ICC's past cost allocation practices, and should accord appropriate consideration to the mandate of section 1(5).