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Southwest Airlines Co. v. Federal Energy Regulatory Commission

United States Court of Appeals, District of Columbia Circuit

June 14, 2019

Southwest Airlines Co. and American Airlines, Inc., Petitioners
Federal Energy Regulatory Commission and United States of America, Respondents SFPP, L.P., Intervenor

          Argued April 12, 2019

          On Petitions for Review of Orders of the Federal Energy Regulatory Commission

          Steven A. Adducci argued the cause for petitioners. With him on the briefs were Thomas J. Eastment, Gregory S. Wagner, Matthew D. Field, and Richard E. Powers Jr.

          Anand R. Viswanathan, Attorney, Federal Energy Regulatory Commission, argued the cause for respondents. With him on the brief were Robert J. Wiggers and Robert B. Nicholson, Attorneys, U.S. Department of Justice, James P. Danly, General Counsel, Federal Energy Regulatory Commission, Robert H. Solomon, Solicitor, and Elizabeth E. Rylander, Attorney. Robert M. Kennedy Jr., Attorney, Federal Energy Regulatory Commission, entered an appearance.

          Charles F. Caldwell argued the cause for intervenor. With him on the brief were Daniel W. Sanborn, Michelle T. Boudreaux, and Sabina D. Walia.

          Before: Tatel, Millett, and Katsas, Circuit Judges.


          Tatel, Circuit Judge.

         The Federal Energy Regulatory Commission uses a streamlined "indexing" method to ensure that when oil pipelines raise their rates, the resulting charges remain reasonable. Every summer, the Commission calculates an "index" that reflects inflation between the previous two calendar years, and pipelines may, through an expedited process, rely on that index to increase their rates. If a pipeline's customers believe that a particular rate increase, though index-compliant, is still too high, then they may challenge that rate in a proceeding before the Commission. These consolidated cases concern the kind of evidence the Commission deems relevant to such proceedings. In 2014, a group of customers filed complaints against the 2012 and 2013 index-based rate increases implemented by pipeline-owner SFPP, L.P. The Commission, departing from its previous practice, dismissed those complaints by relying on data generated after the challenged increases went into effect. Because the Commission failed to provide sufficient reasons for changing its policy, we vacate the challenged orders and remand for the Commission to explain or reconsider its decision to take into account post-rate-increase information.


         For over a century, oil pipelines have been subject to regulation as common carriers under the Interstate Commerce Act. See Act of June 29, 1906, Pub. L. No. 59-337, § 1, 34 Stat. 584, 584 (extending the Interstate Commerce Act's definition of "common carriers" to include oil pipelines). For most of this time, the pipelines' federal regulators-first the Interstate Commerce Commission and now the Federal Energy Regulatory Commission-used complex "fair value" or "cost-based" ratemaking methodologies, Ass'n of Oil Pipe Lines v. FERC, 83 F.3d 1424, 1428–29 (D.C. Cir. 1996) (internal quotation marks omitted), to prevent pipelines from unlawfully charging "unjust and unreasonable" rates, 49 U.S.C. app. § 1(5)(a) (1988). In the Energy Policy Act of 1992, however, Congress directed the Federal Energy Regulatory Commission to "streamline [its] procedures" and reduce "unnecessary regulatory costs and delays" by "establish[ing] a simplified and generally applicable ratemaking methodology for oil pipelines." Pub. L. No. 102-486, §§ 1801(a), 1802(a), 106 Stat. 2776, 3010.

         As a result, an "indexing" scheme has replaced cost-of-service proceedings as the Commission's primary tool for regulating pipeline rates. See Revisions to Oil Pipeline Regulations Pursuant to the Energy Policy Act of 1992, Order No. 561, 58 Fed. Reg. 58,753, 58,754 (Nov. 4, 1993) (explaining that the "Commission believes that indexing of oil pipeline rates will eliminate the need for much future cost-of-service litigation"). Emphasizing that "the hallmark of an indexing system is simplicity," the Commission explained that pipelines (also called "carriers") could use the new method to "adjust [their] rates . . . for inflation-driven cost changes without the need [for] strict regulatory review of the pipeline's individual cost of service." Id. at 58,758. By permitting the "nominal level of rates to rise" with "general economy-wide costs," the Commission stated, "indexing, conceptually, [would] merely preserve[] the value of just and reasonable rates in real economic terms." Id. at 58,759.

         The nuts and bolts of indexing work like this: For every "index year," which runs from July 1 to June 30, the Commission publishes no later than June 1 an index "based on the change in the final Producer Price Index for Finished Goods (PPI-FG) . . . for the two calendar years immediately preceding the index year." 18 C.F.R. § 342.3(c), (d)(1), (d)(2). So, for example, the Commission recently calculated the index for the twelve-month period spanning July 1, 2019, to June 30, 2020, by comparing the 2018 PPI-FG to the 2017 PPI-FG. See Revisions to Oil Pipeline Regulations Pursuant to the Energy Policy Act of 1992, Notice of Annual Change in the Producer Price Index for Finished Goods, 167 FERC ¶ 61,122, at 1 (May 10, 2019). Once an index is set, each pipeline then computes its own maximum allowable rate-its so-called ceiling level- "by multiplying the previous index year's ceiling level by the [Commission's] most recent index." 18 C.F.R. § 342.3(d)(1). A pipeline may "at any time" increase its rates "to a level which does not exceed [its] ceiling level." Id. § 342.3(a).

         The Commission recognizes that, though efficient, an indexing scheme based on "economy-wide costs" may at times produce rates significantly out of step with individual pipelines' financial realities. Revisions to Oil Pipeline Regulations Pursuant to the Energy Policy Act of 1992, 58 Fed. Reg. at 58,759. For this reason, the Commission permits pipeline customers (also called "shippers") to "challenge existing rates, even if such rates are below the applicable ceiling levels, if [those customers] reasonably believe such rates are excessive." Id. at 58,754. These index-based rate challenges come in two varieties: protests, which address proposed rates, and complaints, which address "existing rate[s] or practice[s]." 18 C.F.R. § 343.1. In both types of proceedings, the challenger must "allege reasonable grounds for asserting . . . that the rate increase is so substantially in excess of the actual cost increases incurred by the carrier that the rate is unjust and unreasonable." Id. § 343.2(c)(1). How the Commission evaluates those allegations, however, depends on whether the shipper brings its challenge in the form of a protest or a complaint.

         Because protests proceed extremely quickly-they must be filed within fifteen days of a rate's publication, see id. § 343.3(a), and the Commission has only thirty days from the rate's filing date to "determine whether to . . . initiate a formal investigation," id. § 343.3(c)-the Commission evaluates protests with a "quick snapshot approach" called the "percentage comparison test," BP West Coast Products, LLC v. SFPP, L.P., 121 FERC ¶ 61,141, at PP 6–7 (2007). Using annual cost data found on page 700 of the pipeline's "Form No. 6," the Commission performs the percentage comparison test by computing "the change in the prior two years' total cost-of-service data." SFPP, L.P., 163 FERC ¶ 61,232, at P 4 (2018); see also 18 C.F.R. § 357.2 (detailing oil pipelines' annual reporting obligations). "[I]f there is [a] 10 percent or more differential between" the percentage-point change in the pipeline's costs and the percentage-point change in its proposed rate, then "the Commission will investigate [the] protested indexed rate change." SFPP, 163 FERC ...

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