Opinion ID: 703151
Heading Depth: 3
Heading Rank: 2

Heading: FERC's methodology

Text: 47 The Commission's method of valuing distillate in the TAPS streams deviates from the proposed settlement in two material respects. First, FERC determined that heavy and light distillates are distinctly different and are marketed separately, and thus should be valued separately. 1993 Order, 65 F.E.R.C. p 61,277 at 62,288. Second, because of its determination that all cuts should be valued at unaltered market prices, FERC rejected the proposed settlement's concept of arriving at valuations by adjusting market prices of similar but not identical products. Instead, it ordered the distillate cuts valued at the precise spot market prices of jet fuel and No. 2 fuel oil. Petitioners assert that both departures from the proposed settlement were arbitrary and capricious and/or not supported by substantial evidence. 48 Petitioners contest FERC's decision to split the single distillate cut into heavy and light cuts by arguing that the record is devoid of evidence that the two cuts are, in fact, marketed separately. This objection reads FERC's rationale for splitting the cut too narrowly. The Commission subdivided the distillate cut into light and heavy components because lighter distillate is often refined into jet fuel and then marketed as such, whereas the heavier distillate is incompatible with this use and is therefore processed into and marketed as less valuable products. The record amply supports this conclusion. Given the differences in uses, the Commission reasonably concluded that the assay methodology should place a higher value on light distillate than on heavy distillate. 49 Petitioners' more compelling argument is that FERC's decision to value light distillate at the market price of jet fuel and heavy distillate at the market price of No. 2 fuel oil is flawed because these market proxies are the prices of finished products rather than of raw materials. They claim that considerable processing is necessary before light distillate can be sold as jet fuel, or heavy distillate as No. 2 fuel oil, and that FERC's valuation methodology thus overvalues both light and heavy distillates relative to other cuts in the common stream by not taking these costs into account. 50 The Commission does not dispute petitioners' claim of overvaluation; rather, it defends its methodology on the ground that jet fuel and No. 2 fuel oil spot prices are reasonable proxies for light and heavy distillate and explains that it chose to avoid attaching adjustment formulas to the finished products' market prices to protect the objectivity of the Quality Bank's valuation methodology. Thus, it contends, the pricing decision fell within its proper discretion. 51 We cannot agree. The goal of the Quality Bank valuation methodology, as all parties agree, is to assign accurate relative values to the petroleum that is delivered to TAPS and becomes part of the common stream. In order to achieve this goal, FERC must accurately value all cuts--not merely some or most of them--or it must overvalue or undervalue all cuts to approximately the same degree. If light and heavy distillates are overvalued and other cuts are not, streams rich in these distillates will be overvalued relative to other streams and their owners will receive a windfall in the form of Quality Bank credits. FERC's position appears to be that because jet fuel bears some relation to light distillate and No. 2 fuel oil bears some relation to heavy distillate, the prices of the finished products are close enough to the values of the raw materials to serve as their proxies, although it presents no data to indicate how close the values are in fact. We find this reasoning arbitrary and capricious and thus conclude that, absent a more persuasive justification, FERC's method of valuing distillates violates the APA. 5 U.S.C. Sec. 706(2)(A). 52 The intervenors who support the Commission present a stronger argument. Focusing on light distillate, they concede that converting the raw material into jet fuel requires some processing but contend that this treatment is minimal and not unlike the minor processing required to bring other cuts of the common stream up to the specifications assumed by the spot market prices used to value them. This premise, if true, might support the reasonableness of FERC's light distillate valuation method. It is not the reason that the Commission adopted, however, and we may affirm the agency only on the grounds upon which it relied in exercising its power. See SEC v. Chenery Corp., 318 U.S. 80, 95, 63 S.Ct. 454, 462-63, 87 L.Ed. 626 (1943); Puerto Rico Higher Educ. Assistance Corp. v. Riley, 10 F.3d 847, 850 (D.C.Cir.1993). It is also not supported by substantial evidence in the record. Although one witness characterized the processing required to turn light distillate into jet fuel and heavy distillate into No. 2 fuel oil as minor, Testimony of William Stancil, reprinted in J.A. at 1232, there is no attempt in the record that we are aware of to quantify these minor costs or to project the extent to which ignoring them would result in the overvaluation of TAPS streams heavily laden with distillate. 53 We are conscious of the difficult and necessarily imprecise task FERC faces when it must split petroleum streams into component parts and then place a value on each of them. We agree with the Commission that there is no perfect way to value the different quality oils shipped on TAPS, 1993 Order, 65 F.E.R.C. p 61,277 at 62,286, especially in the case of products without a readily ascertainable market price; and we will not hold the Commission to an impossibly high standard. But if the agency chooses to value some cuts of petroleum at the prices they command in the market without the benefit of processing, as it appears to have done, it must attempt, to the extent possible, to value all cuts at the price they would command without processing. It cannot, consistent with the requirement of reasoned decisionmaking, value some cuts precisely and others haphazardly. Accordingly, we must remand its distillate valuation methodology for further consideration.