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

Heading: Tesoro's Position

Text: 36 Tesoro marshals additional attacks on FERC's approval of the settlement, some technical and some that are arguably procedural. 37
38 Tesoro argues that FERC erred in singling out the light and heavy distillate cuts for processing cost calculations when processing costs associated with other cuts are ignored. It argues that this violates the requirement in OXY that streams be valued equally. In OXY we remanded the light distillate and heavy cuts for new valuation because further processing was required before they could be sold as jet fuel and No. 2 fuel oil respectively. Tesoro now claims that FERC arbitrarily ignored the question of whether further processing was needed before the other cuts could be sold as the proxy products FERC used to value them. Failing to do so, it claims, skews the valuation in favor of the heavier streams.This argument fails to comprehend our earlier opinion.There we upheld the agency's finding that the lighter cuts were of sufficiently comparable quality to the market proxies that no further processing was needed, and therefore no cost adjustment was needed. Essentially, the market price was correct because in those instances the distillation method resulted in a market-ready product. We will not reexamine this issue now. For the reasons given above in Parts III, IV, and V.A.2, we do not entertain the argument that quality differences between the streams must be considered at this stage.
39 Tesoro argues that internal inconsistencies in the Nine Party data show that the processing costs for sulfur removal are not credible, specifically because there is a higher perunit cost to remove sulfur from heavy distillate than from resid. Tesoro presented evidence challenging these calculations, which the ALJ and FERC failed to fully address. 40 FERC responds that Tesoro's argument that there are inconsistencies in O'Brien's cost calculations for sulfur removal was never raised before the Commission, and cannot be raised now before the court. If the issue was preserved, the agency argues that Tesoro has produced no evidence showing that the calculations are incorrect, and that the agency could reasonably have adopted O'Brien's calculations. 41 We hold that Tesoro preserved this issue for review when it argued before the Commission that there was no way, absent discovery, to determine that O'Brien's cost estimates are not totally arbitrary and that the conflicting testimony of its experts supported a lower cost per unit for removing sulfur. Motion of Tesoro Alaska Petroleum Company for Expedited Reconsideration and Remand or to Permit Appeal Concerning Certification of Nine Party Settlement WW 36-37 (Oct. 15, 1997). As for the merits of the issue, we hold that FERC reasonably relied on the testimony of Nine Party witness O'Brien in reaching the adjustment. Witness O'Brien testified that different methods would be needed to bring the two products into compliance. Heavy distillate could be blended with a lighter product to bring it into compliance with the 0.5% market tolerances for sulfur in West Coast Waterborne Gas oil, the reference product on the West Coast. However, such blending would not be economically feasible to bring it down to the 0.2% sulfur content of Gulf Coast No. 2 fuel oil, the Gulf Coast reference product, so it would have to be processed to remove the excess sulfur. See 1997 Opinion, 80 FERC p 63,015, at 65,234; O'Brien Affidavit WW 13-15.This difference in approach accounts for the difference in cost. Thus, there is no inconsistency warranting the relief Tesoro seeks.
42 Tesoro argues that FERC arbitrarily and capriciously accepted the Nine Parties' processing cost adjustment for light distillate. Tesoro argues that its expert testified that no further processing was required for light distillate to meet the requirements for jet fuel, the proxy product used for valuation of the light distillate cut. FERC arbitrarily accepted the Nine Parties' experts' claims that 0.5 cents per gallon in processing was required before the cut would meet the standard. Tesoro also argues that its expert pointed out unreasonable additions to the cost of the processing, such as unnecessary pumping and inflated administrative costs, and that FERC accepted this flawed estimate without considering contrary evidence and thus failed to satisfy the substantial evidence standard. We find this objection to be without merit. There is substantial record support for the Commission's determination that a 0.5 cent/gallon adjustment was required to account for the processing of light distillate into jet fuel. That evidence consisted of expert testimony before the ALJ by Nine Party witness O'Brien supporting the processing costs figures eventually adopted by the ALJ and thereafter by the Commission. See Reply Comments of the Nine Settling Parties in Support of the Nine Party Settlement at 4-5 (Mar. 17, 1997). 43
44 Tesoro next argues that FERC ignored substantial and important criticism of the coker valuation of resid. Under the adopted method, resid's coker feedstock value is deemed to be the value of the products created less the cost of processing. Tesoro argues that the other experts' opinions were based on the wrong mix of product yields, that the PIMS model used is not in the record, and that Tesoro's expert could not replicate the results. Tesoro also argues that its expert showed that the coker operating costs used by the Nine Parties' experts were overstated. Because the PIMS model is not in the record, FERC could not make a rational connection between the facts and the conclusions drawn therefrom. 45 Given that we are remanding the question of valuation of resid because FERC has not provided a reasoned explanation for its determination to set resid's value as a coker feedstock and to use FO-380 less 4.5 cents on the West Coast and Waterborne 3% sulfur No. 6 fuel oil less 4.5 cents on the Gulf Coast as a proxy price, we need not decide this detailed factual question, as the factual record may change on remand. FERC will necessarily address these issues when it revalues resid, and such complex technical questions belong first to the informed discretion of the agency. See OXY, 64 F.3d at 691.
46 Tesoro argues that FERC improperly eliminated the light resid cut and determined that the 1000-1050 degree cut should be valued as VGO. (We had previously affirmed FERC's creation of the light resid cut, but had remanded for new valuation.) The Nine Parties had suggested this change, and FERC approved it. Tesoro argues that the new cut is beyond the capability of many refineries. It suggests that the ALJ was confused when he determined that this change was consistent with the Commission's treatment of this cut. 47 FERC reasonably found, in resolving this technical matter, that the record evidence supports a determination that the standard industry cut point shown on assays is 1050. See 1997 Order, 81 FERC p 61,319, at 62,464. This finding, coupled with the testimony of expert witness O'Brien, see id. at 65,236-37, provided substantial evidence supporting the agency's decision that VGO is a permissible product on which to base the valuation of 1000 to 1050 degree resid.
48 Tesoro argues that FERC arbitrarily and capriciously approved the Nine Parties' selection of Waterborne Gas oil as the proxy product for valuing West Coast heavy distillate. Tesoro argues that Waterborne Gas oil is not a West Coast product, but is a Singapore product created in Singapore and is thus subject to Far East refining and market economics. This, it argues, is inconsistent with the stated goal of the settlement of valuing the product on the coast where it is delivered and used. Waterborne Gas oil, a high-sulfur product, cannot be sold on the West Coast. See Tesoro Brief at 19-21. 49 The agency states that the reference price used is 'Platt's U.S. West Coast spot quote for Waterborne Gas oil less 1 cent per gallon for processing costs.' ... That quoted Platt West Coast Waterborne Gas Oil price represents the value of significant Gas oil transactions on the United States West Coast. 1997 Order, 81 FERC p 61,319, at 62,463-64. Witness Ross stated that the price for Waterborne Gasoil was a West Coast price, even if the product was ultimately exported to Singapore. See Affidavit of Christopher E. Ross WW 7-10 (Mar. 17, 1997). Given this record support, we will not disturb FERC's determination. 50
51 Tesoro also argues that the valuation of heavy distillate is inconsistent with the valuation of resid. West Coast heavy distillate is valued based on its marginal use as the lowest value product requiring the least processing (high sulfur Waterborne Gas oil), whereas resid is valued based on its highest-value use as a coker feedstock. Tesoro argues that this impermissible inconsistent treatment overvalues the heaviest streams. This amounts to a reiteration of the question addressed above regarding FERC's determination that it is appropriate to value resid as a coker feedstock in the absence of a liquid market for the product. We uphold FERC's decision for the reasons stated above in Section V.A.1.
52 Tesoro argues that FERC should have reevaluated other cuts, particularly naphtha and gas oil. Specifically, Tesoro argues that FERC failed to value these two cuts based on a weighted valuation of the prices on both the West Coast and Gulf Coast, which violates the dual-market principle. See Brief of Petitioner Tesoro Alaska Petroleum Company at 22.None of these products are valued based on Gulf Coast prices, which overvalues gas oil and undervalues naphtha, thus favoring heavy streams. Whatever the merits of these arguments might be, the issues they raise are beyond the scope of the limited remand, and therefore not properly before us.