Opinion ID: 703151
Heading Depth: 3
Heading Rank: 1

Heading: The 1050+ resid

Text: 57 The Commission searched for a proxy price for the 1050+ resid that would be consistent with its belief that objectivity was best served by valuing petroleum cuts only at unadjusted market prices. It offered the following justification for its selection of the published price of FO-380 as an appropriate proxy: 58 We are cognizant that [FO-380] does not correlate directly with the specifications of [resid]; however, it is the best commonly available published pricing indicator which most closely approximates the specifications of [resid]. This reference price represents the least desirable, heaviest gravity product still traded on major markets. Moreover, since the purpose of the Quality Bank is only to establish relative values for the TAPS crude streams ... our purpose is adequately served by this reference pricing scheme. 59 Rehearing Order, 66 F.E.R.C. p 61,188 at 61,420. 60 Petitioners Exxon, Alaska, and Tesoro challenge FERC's valuation of the 1050+ resid and in doing so reiterate their support for the settlement proposal's methodological approach. They believe that FERC's methodology significantly overvalues resid, thus penalizing shippers of petroleum having a low content of the 1050+ resid. 61 The Commission's resid valuation methodology suffers from the same conceptual flaw that plagues its distillate methodology: the record demonstrates no more than that the price of FO-380 bears some remote relationship to the value of 1050+ resid as a feedstock. FERC offers two arguments in defense of its use of FO-380 as a proxy, neither of which is convincing. First, relying on expert testimony, the Commission claims that FO-380 can substitute for the 1050+ resid as a feedstock. Notably, neither the witness who so testified nor any other stated that it was a common industry practice to use FO-380 as a feedstock when resid would do the job. Consequently, although the cited testimony supports the conclusion that FO-380 and the 1050+ resid share some physical properties, it in no way suggests the two materials have equal or even near-equal market values. As petitioners aptly note, FERC's reasoning is akin to suggesting that if diamonds can be substituted for coal as a source of carbon, the price of diamonds would be an appropriate proxy for the price of coal. The Commission's conclusion simply does not follow from its premise. 62 The Commission's alternate justification is that it has assigned, as a proxy for this least valuable component of the common stream, the petroleum product having the lowest published price. The fact that FO-380 is cheaper than other petroleum products with active markets, however, in no way demonstrates that its value is even remotely commensurate with that of resid. If the Commission values other cuts in the TAPS streams using relevant market prices but significantly overvalues resid, the Quality Bank will consequently overvalue resid-laden petroleum streams relative to those with a significantly lower resid content. We therefore find the 1050+ resid portion of the assay methodology arbitrary and capricious and remand it to the Commission for further consideration. 63 Petitioners' criticism of the Commission's 1050+ resid valuation methodology, however, runs deeper than the methodology's most obvious shortcoming. Petitioners object to the Commission's emphasis on resid's value as a feedstock. They argue that, according to basic economic principles, a product's marginal use--not its most prevalent use--dictates its market price. While conceding that most North Slope resid is used as a feedstock, petitioners contend, and FERC does not dispute, that the 1050+ resid's marginal use is as an ingredient of FO-380 or similar fuel oils. To convert this resid into the less viscous FO-380, lighter oils more expensive than FO-380 must be used as a blending agent. This leads petitioners to their ultimate conclusion that 1050+ resid must be less valuable than FO-380. The Commission, in its various orders, has failed to respond to this argument. 64 It is true that a competitive market will set a product's price at its marginal use value, see Paul A. Samuelson and Anthony Scott, Economics: An Introductory Analysis 471 (1966), but this hardly proves that a market would price resid precisely at its value as a blending agent to the refiners that use it for that purpose. If there are market imperfections, petitioners' position might not be correct. Thus, their suggested resid valuation methodology is not necessarily the only reasonable one. Nonetheless, petitioners' argument has sufficient analytical force. On remand, the Commission should explicitly address whether the marginal use of 1050+ resid should be taken into account in that cut's valuation methodology.