Opinion ID: 184925
Heading Depth: 3
Heading Rank: 3

Heading: Choice of Proxies

Text: 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