Background
The Trans Alaska Pipeline System transports crude oil from Alaska’s North Slope to the Port of Valdez. To manage varying oil quality, the system uses a Quality Bank where shippers of lower quality oil pay into a fund while those with higher quality oil receive payments. The dispute centered on the formula used to value Resid, the heaviest crude oil cut, which lacks a published market price. Petro Star argued the formula undervalued Resid, while ConocoPhillips argued it overvalued it. The Federal Energy Regulatory Commission had previously found the formula just and reasonable and determined that the pipeline administrator violated the tariff by testing Resid properties without updating the formula.
The court’s reasoning
The court first confirmed its jurisdiction under the Hobbs Act, ruling that the ICC Termination Act did not eliminate direct review of Federal Energy Regulatory Commission orders involving oil pipelines. Applying the arbitrary and capricious standard, the court found that the Federal Energy Regulatory Commission reasonably rejected arguments that inflation adjustments to the investment base were unjust. The court also upheld the use of a twenty percent capital recovery factor, noting it aligned with industry margins. Regarding the tariff violation, the court held that the administrator violated the plain terms of the tariff by testing Resid properties and failing to update the yield multipliers, even though the testing schedule itself was not just and reasonable.
We deny all three petitions. Petro Star and ConocoPhillips have failed to demonstrate that the existing Quality Bank formula for valuing Resid is unjust or unreasonable.
What it means going forward
The decision maintains the current methodology for valuing Resid crude oil in the Trans Alaska Pipeline System and requires the pipeline administrator to update yield multipliers annually based on monthly testing results.