Opinion ID: 184925
Heading Depth: 2
Heading Rank: 2

Heading: Resid

Text: 5 As the name implies, the residual, or resid, cut consists of the portion of the petroleum stream remaining after distillation of all other cuts at lower boiling points. In the 1993 settlement order, FERC split the resid into two cuts--light resid (1,000 to 1,050 degrees Fahrenheit) and heavy resid (all remaining material). The order valued these cuts in relation to the market price of proxies: No. 6 fuel oil for light resid and FO-380 for heavy resid with no adjustment for the processing necessary to receive these market prices. We upheld FERC's decision to create a separate light resid cut, but vacated the valuation of that cut at the price of No. 6 fuel oil as we found that the record did not disclose a relationship between the price of that purported proxy and the value of the cut. Likewise, we concluded that the record did not demonstrate that FO-380 was a reasonable proxy for heavy resid because the market price of FO-380 bore only a limited and unquantified relation to the value of heavy resid as a blending component. See id. at 695. While we concluded that expert testimony in the record supported a conclusion that FO-380 and the 1050+ resid share some physical properties, it did not even suggest that the two materials have equal or even near-equal market values. Id. We therefore remanded the valuation of the resid cuts to the agency for further proceedings consistent with our opinion. 6 In our review of FERC's order approving the 1993 settlement, we rejected not only the specifics of the FO-380 comparison, but also FERC's decision to value resid based on its use as a feedstock for cokers, refinery equipment which breaks resid down even further into lighter fuel products and a heavy residue, which might be asphalt at some plants, or other materials with differing uses. Exxon and others argued that resid should be priced at its marginal use value, which Exxon claimed was as a blending component for FO-380. When remanding, we observed that this economic argument, while it might not by itself carry the day, did possess enough analytical force that the Commission should on remand explicitly address whether the marginal use of 1050+ resid should be taken into account in that cut's valuation methodology. Id. 7 C. FERC's Proceedings on Remand In response to our opinion, FERC initiated settlement proceedings regarding these remanded issues. When this effort failed, FERC set the matter for hearing. At the same time, the Commission's Chief ALJ made further attempts to secure a settlement. The parties filed three separate settlement proposals, one by nine parties 2 (the Nine Party Settlement), and unilateral proposals from Exxon and Tesoro. The ALJ provided opportunity for all parties to file materials in support of or in opposition to the settlement offers. Following the submissions, the ALJ heard oral argument and the parties filed supplemental briefs. See Certification of Contested Settlement and Ruling on Motion to Omit the Initial Decision, Trans Alaska Pipeline Sys., 80 FERC p 63,015, at 65,212-13 (1997 Opinion). 8 The ALJ ultimately certified the Nine Party Settlement to the Commission, and opted not to certify the unilateral proposals from Exxon and Tesoro, finding that legal precedent required this decision and that in any event the proposals were biased in favor of the proposing parties. The ALJ reviewed the record in detail and determined that the only issues properly before him were the remands for valuation of light and heavy distillate and light and heavy resid. He found that the Nine Party Settlement's proposed valuations, which follow, were fair and reasonable and supported by record evidence. See 1997 Opinion, 80 FERC p 63,015, at 65,233. 9 Light distillate: valued based on a weighted average of the West Coast and Gulf Coast prices of jet fuel, adjust-ed by 0.5 cents per gallon to reflect processing costs. 10 Heavy distillate: valued based on weighted average of the West Coast price of Waterborne Gas oil, reduced by 1cent per gallon to reflect processing costs and the Gulf Coast price of No. 2 fuel oil reduced by 2 cents per gallon to reflect processing costs. (The processing costs were based on the testimony of Nine Party expert witness John O'Brien who stated that ANS crude oil needed to be processed to reach the 0.5 percent level for sulfur demanded by the market. ) 11 Light resid (1000 degrees F to 1050 degrees F): The1993 settlement had eliminated separate treatment of light resid and combined it with the 1050+ cut. The Nine Party Settlement approved by the ALJ instead rolled it into the Vacuum Gas Oil (VGO) cut, by raising the top end of that cut to 1050 degrees, which the nine parties claim conforms with industry practice. 12 Heavy resid (1050+): continued use of the West Coast price of FO-380 as a West Coast reference price, subtracting 4.5 cents per gallon as a processing cost. Added Gulf Coast 3 percent sulfur No. 6 fuel oil as a Gulf Coast reference product, and adjusted that figure by the same4.5 cents. 13 The ALJ noted that the nine parties supported the settlement only if it applied prospectively. See id. at 65,241. The ALJ determined that the remand did not require that the new methodology be applied retroactively and that the Commission retained the discretion to determine when to make the settlement effective. See id. at 65,243. The ALJ also recommended prospective application under the circumstances. See id. 14 The Commission reviewed and accepted the ALJ's recommendations as to each valuation, finding in its order that each determination was based on substantial evidence. FERC found that there was no active market for resid, and opted to price resid based on its value as a coker feedstock. FERC determined that the two reference products were the actively traded petroleum products that had physical characteristics most resembling resid, and used these adjusted prices as a proxy for the value of resid as a coker feedstock. It also decided to apply the new rates prospectively, stating that this was consistent with the 1993 Order applying the new rates prospectively, which was affirmed by this court in OXY.[The new settlement] does not change the methodology to be used, but modifies how to value the remanded cuts. See 1997 Order, 81 FERC p 61,319, at 62,467. The Commission noted that the TAPS Quality Bank was sui generis, so precedents cited by Exxon and Tesoro as supporting retroactive application of the new methodology were not dispositive.