Opinion ID: 184925
Heading Depth: 1
Heading Rank: 5

Heading: resid cut valuation issues

Text: 22 In OXY, we noted that resid like distillate did not trade on an open market and therefore was difficult to evaluate.Nonetheless, and even in the face of the deference we owe the Commission's judgments, we concluded that the 1993 settlement approach to valuation of resid did not satisfy the APA's basic requirement of reasoned decisionmaking. OXY, 64 F.3d at 694 (citing State Farm, 463 U.S. at 43). We therefore remanded that portion of the assay methodology to the Commission for further consideration. 23 The method before us in the present review fares no better than the last, and for the same reasons: even with the 4.5 cents per gallon adjustment, the record demonstrates no more than that the price[s] of FO-380 [or No. 6 fuel oil] bear[ ] some remote relationship to the value of 1050+ resid as a feedstock. Id. at 695. We remand FERC's decision to value resid at the price of 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. The figures derived from the use of these proxies with a subsequent adjustment do not bear a demonstrated relationship to the value of resid, either as a coker feedstock or as a blending agent for fuel oil. Exxon and Tesoro raise multiple challenges to FERC's valuation process for this cut.
24 Exxon argues that FERC erred again, as it did in the 1993 Order in not employing the marginal use of resid as a blending agent for fuel oil rather than its value as coker feedstock in establishing the valuation methodology for that cut. Exxon contends that the error is a fundamental one in that the ALJ's finding, adopted by the Commission, that there is no active market for resid is flawed. In Exxon's view, although there are few trades of resid, there is in fact a market, and a sparsity of open trades is only due to the fact that the refiners who use resid rarely need to purchase it from others because they already obtain it as a byproduct of their own refining operation. Exxon further argues that there are formulae that can be used to derive resid's value as a blend stock despite the absence of market trades. Thus Exxon prays the court to vacate the relevant portion of FERC's order and remand the controversy for valuing of resid as a blend stock. 25 FERC responds that there was conflicting evidence regarding the existence of a market for ANS resid, and the ALJ and the Commission reasonably adopted the testimony of Nine Party witnesses A.L. Gualtieri and Benjamin Klein, who testified that resid was rarely traded, and was instead used as a coker feedstock. See 1997 Opinion, 80 FERC p 63,015, at 65,238-41. The ALJ also determined, based on the record, that it was inappropriate to value resid based on its marginal use as fuel oil blend stock because most of the refineries did not seek to purchase resid but created it as part of their refinery process. See id. 65,240. The absence of an active market for resid made the economic principle of marginal use, which depends on a liquid market, unreasonable in this circumstance. See id. 65,240-41. 26 We see no reason to disturb FERC's adoption of the ALJ's determination that resid is best valued based on the market value of its constituent products. The expert testimony of Klein constitutes substantial evidence in support of FERC's decision that marginal use analysis does not require the valuation of resid as a blendstock.
27 As with distillate, Exxon argues that FERC arbitrarily ignored quality differences in the streams which affect the value of the different cuts. The Conradson Carbon Residue Content (CCR) of resid affects its value, and the different streams delivered to the TAPS undisputedly have differing CCR content. Exxon reiterates the argument it made concerning sulfur that failing to account for differing CCR content was arbitrary and capricious. The CCR content figure used by FERC was not even derived from the oil shipped over TAPS, but from a blend used by an expert which included other crude oils. FERC responds that it 28 properly rejected the suggested intra-cut differentials based on CCR content for the same reasons it rejected the quality differentials based on sulfur content. For the reasons stated in Parts III and IV above, we hold that FERC was not required to consider intra-cut differences in CCR content when determining market value.
29 Exxon next argues that FERC acted arbitrarily when it chose to use the adjusted price of FO-380 as a proxy for valuing resid as a coker feedstock. In OXY, we found that using the unadjusted market price of FO-380 as a proxy was arbitrary and capricious. The 4.5 cents adjustment now adopted is arbitrary for the same reasons. There is no demonstrated relationship between the value of FO-380 and coker feedstock other than an observed rough correlation in price, and even the data relied on by FERC shows inconsistent relationships in the price of FO-380 and the coker feedstock values calculated by the experts. Exxon argues that determining resid's value as a coker feedstock requires determining the identity, quantity, and value of products produced in a coker from resid and subtracting from the value the costs of producing those products and placing them in a marketable condition. See Joint Brief of Petitioners Exxon Company, U.S.A. and Tesoro Alaska Petroleum Company at 42. Exxon also argues that FERC chose the wrong feedstock to value because it used a blend of crudes which would be used by a hypothetical refinery, rather than actual individual North Slope crude streams. Exxon further contends that it presented numerous challenges to the methodology ultimately adopted by FERC, showing inaccuracies in the expert's assumptions regarding cost calculations, product outputs and product yields. Finally, it argues that because the ALJ never allowed discovery, it could not replicate the expert's computer modeling on the PIMS system (a standardized petroleum industry modeling system used to calculate refinery needs and outputs). The ALJ and the Commission did not specifically address these arguments, which Exxon contends makes their decisions arbitrary and capricious. 30 FERC responds that the 4.5 cents per gallon adjustment to the price of FO-380 on the West Coast and No. 6 fuel oil on the Gulf Coast as proxies for resid was reasonable, based on expert witness O'Brien's testimony and administrative ease. These are the lowest-quality products actively traded, and the adjustment was within the range of variation between the calculated value of resid as a coker feedstock and the per gallon price of FO-380. See Ross Affidavit p 21. O'Brien derived the calculated value of resid as a coker feedstock using the PIMS model and compared those calculated values to the market price of FO-380 over the same five-year period. The relationship varied from resid being worth $1.21 per barrel more than FO-380 in 1993 to being worth $3.01 per barrel less than FO-380 in 1995, and averaged being worth $1.12 per barrel less over the five-year period. See 1997 Opinion, 80 FERC p 63,015, at p 65,239 (citing O'Brien Affidavit WW 56-598 Exhibit QB ar-23). O'Brien testified that the 4.5 cents per gallon adjustment (equal to $1.89 per barrel less than FO-380) proposed by the Nine Party Settlement fell within the observed range of variation over the five-year period and was therefore reasonable. See id. FERC also notes that Exxon and Tesoro both suggested a method that tied the price of heavy resid to FO-380. The difference is that Exxon uses a complex formula to adjust the price. 4
31 While we find substantial record evidence supporting the intermediate steps FERC took in determining the value of resid--i.e., its determinations that no active market exists, that resid is best valued as a coker feedstock rather than as a blender for fuel oil, and that FO-380 and No. 6 fuel oil are the actively-traded products in the relevant markets most similar in physical characteristics to resid--we cannot conclude that the last step follows logically from these premises. We therefore cannot uphold the use of 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 for resid. 32 The 4.5 cents adjustment, while it falls within the range of the observed variation, does no more than that. There is no evidence that the prices of the proxy products are more than coincidentally related to the value of resid as a coker feedstock. Moreover, the calculated value of resid using the PIMS model does not even vary consistently with the price of FO-380. As petitioners noted when this case was before us in OXY, by the same logic we could use the price of coal with an adjustment as a proxy for the price of diamonds because both are a source of carbon, even if the prices fluctuate inconsistently. With only five years' data to consider, the sample is too small to convince us that there is some other, unstated relationship at work which guarantees that the price of FO-380 and the value of resid will correlate consistently within some specified range. We recognize that the agency is addressing the Quality Bank Administrator's concerns that more complex systems may give the appearance that the price of resid is open to manipulation, and thus is seeking a product that is traded on the market to use as a proxy, which would allow the Quality Bank Administrator to perform a simple market-based calculation when determining the value of resid. These goals of administrative efficiency and objectivity do not free the agency from the requirement that the chosen proxy bear a rational relationship to the actual market value of resid. We remand once again to the agency to determine a logical method for deriving a value for resid. Because we remand, we do not reach the technical objections Exxon and Tesoro raise regarding specific calculations.