Opinion ID: 184925
Heading Depth: 1
Heading Rank: 4

Heading: intra-cut quality differences

Text: 17 Exxon 3 argues that FERC's failure to account for differences in quality among the heavy distillate cuts of the individual streams before they are commingled in the TAPS common stream violates the terms of our earlier remand in OXY, and is arbitrary and capricious. We disagree. 18 Petitioners claim that the goal of the Quality Bank is to place an accurate value on the streams flowing into the TAPS, and failure to account for quality differences in the distillate cuts of the streams coming from different oilfields is not reasoned decision making. We disagree that Exxon's argument follows logically from our remand. In OXY, we recalled that the goal of the Quality Bank is to assign accurate relative values, 64 F.3d 693 (emphasis added), to the diverse streams delivered to the pipeline. We vacated in part the last order because the methodology approved therein had favored one class of cuts above others. We remanded in order that FERC might provide a methodology with a reasoned relative uniformity, knowing that absolute precision at any level of the cuts was unachievable. That is, we did not remand because the old method was inaccurate, but because it was unfairly nonuniform. To have demanded 100 percent accuracy would have been to hold the agency to an impossibly high standard. Id. at 694. The specific purpose in our remand was to require the agency to resolve the relative overvaluation of some cuts, which were valued at the market price for their proxy despite the fact that significant processing was required to bring those products up to a market standard. Exxon seeks to expand the duty of the Commission to refining the degree of distinction among component streams within individual cuts. Specifically, Exxon seeks to have us vacate FERC's order insofar as it does not recognize and adjust for differences in the sulfur content of distillate as a key factor in determining market value. Part of the adjustment to the per-barrel price of distillate is to account for removing sulfur so that it can be sold as jet fuel or No. 2 fuel oil. In implementing that methodology, FERC assumed that all streams had the same sulfur content, when Exxon had shown that such was not the case. Exxon argues that FERC should not use the sulfur content of the commingled streams when determining the value of the cut, but must determine the sulfur content and thus the value of the distillate cut of the oil from each field before it enters the common stream. Because some streams have a higher sulfur content, they would require more processing and consequently have a lower value once processing costs were factored into the per-barrel price. Other streams with a lower sulfur content would have a higher value because no further processing would be needed to bring the oil up to the quality of the proxy product. 19 Exxon further argues that treating all of the streams as if they have the same sulfur content violates OXY, which calls for accurately valuing the streams; that it is arbitrary and capricious because it makes assumptions contrary to fact;and that FERC's failure to even consider the issue is arbitrary and capricious. Specifically, Exxon argues that FERC improperly determined that the scope of its actions was limited by the terms of our remand, but that in any event, FERC cannot claim that it addressed only the issues required by the court because it did more than we ordered when it changed the West Coast proxy for heavy distillate, even though no party challenged the one adopted in the 1993 and 1994 orders, and eliminated the light resid cut, even though it was affirmed in OXY. Exxon contends that having opened the door, so to speak, FERC was obligated to consider the information provided by Exxon and Tesoro about the differences in quality among the streams because it has an obligation under the ICA  'to ensure that pipeline rates are just and reasonable.'  OXY, 64 F.3d at 690 (quoting Texas Eastern Transmission Corp. v. FERC, 893 F.2d 767, 774 (5th Cir. 1990)). Exxon argues that refusing to consider the quality differences was therefore arbitrary and an abuse of discretion. In its 1997 Order, FERC noted that it had rejected the same argument in its 1993 Order, and that we had not reversed or vacated that ruling. Exxon argues nonetheless that by adjusting the market prices of the proxies to account for removing sulfur, FERC itself has now determined that sulfur content is an important aspect of valuing heavy distillate. 20 We reject Exxon's argument that FERC's failure to differentiate between the streams was arbitrary and capricious. In OXY, we required FERC to take into account the significant processing costs that rendered its unadjusted use of a proxy product unreasonable in relation to the valuation of other portions of the stream. Exxon's contention that FERC must value each stream at the wellhead based on its individual sulfur content calls for more than we required. We did not hold in OXY that differences in quality between the streams must be considered, and do not do so now. Inherent in our approval of FERC's adoption of the distillation methodology in OXY was our approval of the agency's conclusion that there was no need to consider intra-cut quality differences, and that the agency properly determined that the relative proportions of the cuts in each stream is sufficiently accurate as a method of determining the relative value of the streams. See 65 FERC p 61,277, at 62,287 (1993), and 66 FERC p 61,188, at 61,240 (1994). In any event, it was not arbitrary and capricious to determine the value of each cut in the TAPS stream after it has been mixed, instead of separately valuing the cuts of each stream. The fact that a more precise method exists for determining the relative value of the streams does not render the decision to adopt a less accurate, but more administrable, method arbitrary and capricious. FERC has opted to use a magnifying glass to determine the values of the streams, and we will not fault it for not using a microscope. 21 We also uphold against challenge FERC's two changes to the price of heavy distillate, both of which are supported by the record. FERC changed the reference price for the West Coast from No. 2 fuel oil to Waterborne Gasoil, and adjusted the price of Waterborne Gasoil by one cent per gallon and the Gulf Coast price of No. 2 fuel oil by two cents to account for processing. See 1997 Order, 81 FERC p 61,319, at 62,460.These adjustments were based on the testimony of expert witnesses John O'Brien and Christopher Ross. Ross testified that these products most closely resembled Alaskan North Slope (ANS) heavy distillate, see Affidavit of Christopher E. Ross, p 19 (Jan. 29, 1997), and O'Brien testified that the ANS heavy distillate cut required treatment to reach the necessary sulfur level, see Affidavit of John O'Brien, WW 13-15 (Jan. 28, 1997). These decisions were supported by adequate record evidence and we uphold the agency.