Opinion ID: 184925
Heading Depth: 1
Heading Rank: 7

Heading: prospective application of the settlement

Text: 57 Exxon and Tesoro argue that FERC committed legal error when it decided that it would implement the settlement order prospectively only. The method that we found unreasonable and remanded has been in effect since 1993, and the Commission stated when it was adopting the distillation methodology that in the event it was reversed and Exxon suffered economic losses, it could correct any legal errors after the appeal. See Order on Rehearing, Trans Alaska Pipeline Sys., 66 FERC p 61,188, at 61,423 (1994). Now, when it has corrected the legal errors identified in OXY, the Commission has opted to apply the new rates prospectively only, leaving the parties without remedy for the years of unlawful valuations, and granting the settling parties a windfall. 58 Exxon argues that this circuit's precedents require FERC to return the parties to the position they would have occupied had this legal error not been made. See Public Utils. Comm'n of the State of California v. FERC, 988 F.2d 154, 168 (D.C. Cir. 1993) (CPUC) (citing cases); see also, e.g., Panhandle Eastern Pipe Line Co. v. FERC, 907 F.2d 185, 189 (D.C. Cir. 1990); Office of Consumers' Counsel, State of Ohio v. FERC, 826 F.2d 1136, 1139 (D.C. Cir. 1987) (per curiam).This rule is drawn from the logic of the statute itself.Natural Gas Clearinghouse v. FERC, 965 F.2d 1066, 1074 (D.C. Cir. 1992). 59 FERC's reasons for refusing to do so, Exxon argues, are wrong as a matter of law. First, the agency agreed with the ALJ that the cases cited by Tesoro and Exxon are not dispositive because, while CPUC and Panhandle recognized that the Commission has the authority in some circumstances to issue orders which have retroactive effect, neither of those cases required it. 1997 Opinion, 80 FERC p 63,015, at 65,242. Exxon argues that the language from those cases explicitly states that when the Commission commits legal error, the proper remedy is one that puts the parties in the position they would have been in had the error not been made. CPUC, 988 F.2d at 168. This use of the word the, as opposed to a, proper remedy suggests FERC must order retroactive payment when it commits legal error. 60 Exxon also argues that FERC improperly attempts to rely on the filed rate doctrine as mandating prospective application of its order. See 1997 Order, 81 FERC p 61,319, at 62,467. Exxon argues that despite its protestations, FERC has the authority to correct its error, and that the shippers had notice that there might be a later correction to the rate, which  'changes what would be purely retroactive rate making into a functionally prospective process by placing the relevant audience on notice at the outset that the rates being promulgated are provisional only and subject to later revision.'  Natural Gas Clearinghouse, 965 F.2d at 1075 (quoting Columbia Gas Transmission Corp. v. FERC, 895 F.2d 791, 797 (D.C. Cir. 1990)). 61 Exxon next argues that even if FERC did have discretion to determine whether to apply the corrected valuation retroactively, its failure to do so in this case amounts to an abuse of that discretion. FERC stated as reasons for its decision the observations that the change here was one of valuation, not of methodology, and that the Quality Bank was sui generis. Neither of these reasons, it contends, supports the decision not to remedy the injury to Exxon and Tesoro. Exxon notes that FERC had retroactively applied adjustments in vacuum gas oil rates that were set under the distillation method, rendering both justifications meaningless. Exxon also points out that FERC does not explain how the sui generis nature of the Quality Bank has any bearing on whether the aggrieved parties should be made whole. 62 Exxon further argues that the refusal to make the aggrieved parties whole violates the central purpose of the Quality Bank, which was created as part of FERC's  'continuing obligation to ensure that pipeline rates are just and reasonable.'  OXY, 64 F.3d at 690 (citing 49 U.S.C. S 1(5) and quoting Texas Eastern Transmission Corp., 893 F.2d at 774). Moreover, it contends, this abuse of discretion is compounded because FERC refused the injured parties a stay pending appeal in 1994 on the basis that it could correct any legal errors later found on appeal. 63 Exxon cites a string of our precedents holding that it is proper to correct such legal errors retroactive to the time they occurred. In Tennessee Valley Municipal Gas Association v. FPC, 470 F.2d 446 (D.C. Cir. 1972), we held: If the policy of the Natural Gas Act is not arbitrarily to be defeated by uncorrected Commission error, the [injured party] must be put in the same position that it would have occupied had the error not been made. Id. at 452. In Public Service Co. of Colorado v. FERC, 91 F.3d 1478 (D.C. Cir. 1996), we stated: Absent detrimental and reasonable reliance, anything short of full retroactivity ... allows [some parties] to keep some unlawful overcharges without any justification at all. The court strongly resists the Commission's implication that the Congress intended to grant the agency the discretion to allow so capricious a thing. Id. at 1490. The Public Service Co. decision was made in the context of the Natural Gas Policy Act. We held that the parties were on notice of a potential change in the way a tax would be charged to customers, and thus did not detrimentally rely on the agency's prior position. As a result, we held that it was fair to make refunds of those tax charges retroactive to the date of notice. 64 Finally, Exxon argues that FERC's so-called equitable exercise of its discretion failed to give any weight to the injury to the parties and the resulting windfall to the Nine Parties, who benefit because of agency error, rendering the agency's ultimate decision irrational.
65 FERC argues that the Commission properly concluded that the equitable approach would be to implement the settlement on a prospective basis, as all other TAPS settlements had been. The cases cited by Exxon address the issue of whether FERC is barred from applying a remedy retroactively, not whether it is required to do so. FERC's discretion is at its zenith when deciding what kind of remedy to apply. See Towns of Concord, Norwood, & Wellesley, Mass. v. FERC, 955 F.2d 67, 76 (D.C. Cir. 1992). FERC asserts that it made its decision based on several equitable factors 6 : 66 FERC took note (1) that parties supported the Nine Party Settlement only if it were implemented prospectively; (2) that all prior TAPS cases resolved by settlements have been on a prospective basis; (3) that the changes adopted by the Settlement Order only modify limited aspects of the distillation methodology put in place in 1993; and (4) that the TAPS Quality Bank is suigeneris. 81 FERC at 62,467.FERC Brief at 59. Therefore, FERC argues, it did not abuse its discretion. FERC also notes that it did not bait and switch Exxon in denying the stay because each remedy must be decided on its own merits.
67 Intervenors note that we have made clear that FERC has discretionary authority over whether a settlement should have retroactive effect. See CPUC, 988 F.2d at 168. See also Cities of Batavia, Naperville, Rock Falls, Winnetka, Geneva, Rochelle and St. Charles, Ill. v. FERC, 672 F.2d 64, 85 (D.C. Cir. 1982) (It is clear ... that in denying a refund in this case the Commission also considered the practical consequences and the purpose of the Act; hence we are required to uphold its exercise of discretionary power.); Second Taxing Dist. of the City of Norwalk v. FERC, 683 F.2d 477, 490 (D.C. Cir. 1982) (Refunds are not mandatory; the Commission has discretion to decide whether a refund is warranted in light of the interests of the customer and the utility.). OXY did not require any result in this case, and in the absence of a clear mandate, they argue, FERC properly exercised its discretion.
68 We agree that FERC does have a measure of discretion in determining when and if a rate should apply retroactively. However, such discretion is not without its limits, and we hold that FERC abused that discretion. 69 The agency's passing mention of the filed rate doctrine has no bearing on FERC's discretion to reallocate Quality Bank credits to correct FERC's erroneous valuations of the distillate and resid cuts because all of the TAPS shippers were on notice as of 1993 that the valuations were contested. FERC mentioned the filed rate doctrine not as a justification for its exercise of discretion, but in discussing the prior decision, in which the filed rate doctrine was decisive. As we stated in OXY, [t]he rule against retroactive ratemaking ... 'does not extend to cases in which [customers] are on adequate notice that resolution of some specific issue may cause a later adjustment to the rate being collected at the time of service.'The goals of equity and predictability are not undermined when the Commission warns all parties involved that a change in rates is only tentative and might be disallowed.64 F.3d at 699 (quoting Natural Gas Clearinghouse, 965 F.2d at 1075). In fact, all of the parties participated in the proceedings before the agency. Any reliance that they may have placed on the rates in light of these proceedings was unwarranted. As we stated in Public Service Co., [a]bsent detrimental and reasonable reliance, anything short of full retroactivity ... allows [some parties] to keep some unlawful overcharges without any justification at all. 91 F.3d at 1490. 70 There is also a strong equitable presumption in favor of retroactivity that would make the parties whole. As we have stated, when the Commission commits legal error, the proper remedy is one that puts the parties in the position they would have been in had the error not been made. CPUC, 988 F.2d at 168. This is not to say that FERC must do so in every case if the other considerations properly within its ambit counsel otherwise. However, FERC's listed equitable factors have no bearing on the decision and do not explain its decision not to make whole parties who are clearly injured by undervaluation. Given the strong presumption in favor of making injured parties whole and the incentive that this creates for the parties to litigate regarding past errors and for the agency to correct those errors, on the record before us we hold that FERC abused its discretion when it failed without adequate explanation to make the revaluation and concomitant Quality Bank adjustments retroactive to 1993, when the distillation method was adopted. 71 We recognize FERC's concern that the Nine Parties have stated that they would not support the settlement if it applied retroactively. However, we cannot uphold on this basis a contested settlement in which the settling parties agree to divvy up a windfall at the expense of the contesting parties. The agency cannot simply take a head count among the parties in a contested settlement and decide that since those who will benefit from a settlement outnumber those who will suffer, it is fair to allow the majority to settle the issue in their favor. In settlements where the power of the agency is not being invoked to overcome the objections of some parties, all sides typically give up something to arrive at a mutually painful but acceptable position. It should be unsurprising that the Nine Parties are unwilling to support the settlement unless it remains in their favor if they can invoke the might of FERC to cram such a settlement down the minority's throats.Parties raising legitimate legal objections cannot be overlooked simply because they are outnumbered, even if the 72 result is that it sends all parties back to the negotiating table or the hearing room. The issue of the effective date of the new valuation method is remanded for action consistent with this opinion.