United States Court of Appeals, District of Columbia Circuit
Southwest Airlines Co. and American Airlines, Inc., Petitioners
Federal Energy Regulatory Commission and United States of America, Respondents SFPP, L.P., Intervenor
April 12, 2019
Petitions for Review of Orders of the Federal Energy
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.
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.
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
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.
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.
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).
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.
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