MarkWest Michigan Pipeline Co. v. FERC

Filing

OPINION filed [1316137] (Pages: 13) for the Court by Judge Griffith [10-1075]

USCA Case #10-1075

Document #1316137

Filed: 07/01/2011

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued January 18, 2011

Decided July 1, 2011

No. 10-1075
MARKWEST MICHIGAN PIPELINE COMPANY, LLC,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION AND UNITED
STATES OF AMERICA,
RESPONDENTS
GULFMARK ENERGY, INC.,
INTERVENOR

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

Charles F. Caldwell argued the cause for petitioner. With
him on the briefs was Elizabeth B. Kohlhausen.
Carol J. Banta, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondents. With her on
the brief were Robert B. Nicholson and Robert J. Wiggers,
Attorneys, U.S. Department of Justice, Thomas R. Sheets,
General Counsel, Federal Energy Regulatory Commission,
and Robert H. Solomon, Solicitor. John J. Powers III,
Attorney, U.S. Department of Justice, entered an appearance.

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Before: GINSBURG and GRIFFITH, Circuit Judges, and
RANDOLPH, Senior Circuit Judge.
Opinion for the Court filed by Circuit Judge GRIFFITH.
GRIFFITH, Circuit Judge: To settle a dispute over rates,
oil pipeline owner MarkWest agreed with two of its three
shippers to restrict rate increases for a three-year period. But
neither the agreement nor the relevant regulations clearly lay
out how to determine the rates MarkWest may charge now
that the three-year period is past. MarkWest proposed its
view, which the Federal Energy Regulatory Commission
(FERC) rejected and replaced with its own. Finding both the
agreement and the regulations ambiguous, we defer to the
reasonable views of the Commission and deny MarkWest’s
petition for review.
I
To reduce costs, delays, and uncertainties associated with
determining whether rates are just and reasonable, Congress
enacted the Energy Policy Act of 1992 (EPAct), Pub. L. No.
102-486, 106 Stat. 2776.* The EPAct required FERC to
*

The federal government has regulated interstate oil pipelines as
common carriers under the Interstate Commerce Act (ICA) since
1906. See Hepburn Act, Pub. L. No. 59-337, § 1, 34 Stat. 584, 584
(1906). The ICA requires that pipeline owners charge their shippers
rates that are “just and reasonable.” 49 U.S.C. app. § 15(1) (1988);
see also id. § 1(5). Regulatory authority resided in the Interstate
Commerce Commission (ICC) until 1977, when Congress created
FERC. See Department of Energy Reorganization Act, Pub. L. No.
95-91, § 402(b), 91 Stat. 565, 584 (1977). Although Congress has
since amended the ICA, FERC regulates oil pipelines under the
statute as it existed in 1977. See Act of Oct. 17, 1978, Pub. L. No.
95-473, § 4(c), 92 Stat. 1337, 1470. This version of the ICA was

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establish “a simplified and generally applicable ratemaking
methodology for oil pipelines.” Id. § 1801, 106 Stat. at 3010
(codified at 42 U.S.C. § 7172 note). In 1996, FERC
promulgated Order No. 561 to implement this mandate. See
Order No. 561, Revisions to Oil Pipeline Regulations
Pursuant to the Energy Policy Act of 1992, 58 Fed. Reg.
58,753 (Nov. 4, 1993). See generally Ass’n of Oil Pipe Lines
v. FERC, 83 F.3d 1424 (D.C. Cir. 1996) (upholding Order
No. 561).
Order No. 561 uses an “indexing system” to set “ceiling
levels” that limit increases in pipeline rates. 58 Fed. Reg. at
58,754. The calculation of that ceiling begins with an “initial
rate”—a baseline rate that FERC has determined to be just
and reasonable for any one of three reasons: (1) it was
grandfathered in by the EPAct, see Pub. L. No. 102-486,
§ 1803, 106 Stat. at 3011 (codified at 42 U.S.C. § 7172 note);
(2) the pipeline has filed evidence of the actual costs of
operation to support the rate, see 18 C.F.R. § 342.2(a); or
(3) one shipper has agreed in writing to pay the rate and no
other shipper has protested, see id. § 342.2(b). The initial rate
is the rate the pipeline charges during the first “index year”—
the period from July 1 to June 30. Each year thereafter, the
pipeline’s price hikes are limited by a ceiling level that
accounts for inflation. To determine its first inflation
adjustment, a pipeline owner multiplies its initial rate by the
FERC Oil Pipeline Index, a coefficient FERC publishes
annually based on the Department of Labor’s Producer Price
Index for Finished Goods. The next year, the pipeline owner
adjusts its ceiling level “by multiplying the previous index
year’s ceiling level by the most recent [FERC coefficient].”
Id. § 342.3(d)(1). That process is repeated for each successive
last codified as an appendix to Title 49 of the 1988 U.S. Code. See
49 U.S.C. app. §§ 1-27 (1988).

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index year. In this case especially, it is important to note that
even though a pipeline owner may charge a rate below the
ceiling level, see id. § 342.3(a), the maximum charge for the
next year is computed by multiplying the current year’s
ceiling level by the Oil Pipeline Index for that year, and not
by the actual rate charged, id. § 342.3(d)(1).
An example illustrates how FERC uses indexing.
Suppose that the Commission found that a pipeline’s rate of
100 cents per barrel in 2005 was just and reasonable,
permitting the owner to set this price as his pipeline’s initial
rate. Because the Commission’s inflation index for the year
starting July 1, 2006, was 1.061485, 71 Fed. Reg. 29,951
(May 24, 2006), during the next year the same pipeline could
charge no more than 106.1485 cents per barrel, i.e., 100
multiplied by 1.061485. The inflation index for the year
starting July 1, 2007, was 1.043186, 119 FERC ¶ 61,155
(May 16, 2007), so in that year the pipeline could charge no
more than 110.7326 cents per barrel: the previous year’s
ceiling level of 106.1485 cents per barrel multiplied by
1.043186.
Once FERC has approved a pipeline’s initial rate, that
baseline continues to provide the starting point for calculating
the pipeline’s ceiling levels each year unless and until the
pipeline owner establishes a new initial rate. Pursuant to 18
C.F.R. § 342.3(d)(5), a pipeline owner can set a new initial
rate using one of three “method[s] other than indexing”:
(1) by showing that it has experienced cost increases that
exceed the rate increases indexing would allow, id.
§ 342.4(a); (2) by showing that it lacks market power and
therefore could not set a new initial rate that would be
anticompetitive, id. § 342.4(b); or (3) by showing that all of
its shippers consent to a new initial rate, id. § 342.4(c). When
a pipeline owner is allowed to set a new initial rate under one

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of these scenarios, that rate becomes the just and reasonable
baseline to which the Commission’s indexing method applies
in subsequent years.
On November 18, 2005, petitioner MarkWest filed rates
with the Commission for its Michigan pipeline. Two of the
three shippers that use the pipeline—Sunoco and GulfMark
Energy—protested. Merit Energy, which does not itself use
the pipeline but sells oil to companies that do, also protested.
On January 31, 2006, before the Commission considered the
dispute, the parties agreed to a settlement, which the
Commission subsequently approved.
Although the settlement agreement had no term, it
created a three-year “Moratorium Period” from January 31,
2006, until January 31, 2009, during which the agreement set
the maximum rates MarkWest could charge its shippers.
Settlement Agreement 4. Like the Commission’s indexing
method, the settlement agreement set an initial rate for
shipping for the first five months of the Moratorium Period,
January 31 through June 30, 2006. For the index years that
began on July 1, 2006, 2007, and 2008, the settlement
agreement established an “Annual Inflation Cap” that, like
FERC indexing, pegged MarkWest’s maximum rates to the
Department of Labor’s Producer Price Index statistics. Unlike
FERC’s Oil Pipeline Index, however, the Annual Inflation
Cap used a slightly different measure of inflation that in most
years yields a lower rate.
But the settlement agreement did not ignore the FERC
ceiling levels. During the Moratorium Period, the settlement
agreement allowed MarkWest to “increase . . . rates” each
July 1 “to reflect . . . inflation adjustments as promulgated
annually by the FERC,” provided that this figure “[did] not
exceed [the Annual Inflation Cap].” Settlement Agreement 4.

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Thus the settlement agreement restricted MarkWest’s right to
increase pipeline prices to the lesser of either the pipeline’s
ceiling levels under FERC’s indexing system or the increase
permitted by the Annual Inflation Cap. As it turned out, for
each year of the Moratorium Period, the Annual Inflation Cap
provided for rates that were less than the pipeline’s ceiling
levels.
All agree that the Commission’s indexing methodology
will govern MarkWest’s rates now that the Moratorium
Period is past. The only dispute in this case concerns the
initial rate MarkWest must use to calculate its new annual
ceiling levels. MarkWest argues that after the end of the
Moratorium Period, its ceiling levels should be calculated as
if its maximum rates had been set under FERC’s indexing
methodology all along. In other words, MarkWest would have
FERC go back to the initial rate for 2006 and, using that as
the baseline, apply its inflation measure for each year
thereafter. In contrast, the Commission would simply pick up
the rates where the settlement agreement left off, using the
last rate under the agreement as the initial rate for the period
after the agreement. See MarkWest Mich. Pipeline Co., Order
on Tariff Filing and Granting Clarification, 126 FERC
¶ 61,300 (Mar. 31, 2009) [hereinafter Order]; MarkWest
Mich. Pipeline Co., Order Denying Rehearing, 130 FERC
¶ 61,084 (Feb. 2, 2010) [hereinafter Rehearing Order].
The Commission’s approach creates two consequences
MarkWest seeks to avoid. First, it will require MarkWest to
charge substantially lower rates going forward because it uses
a lower initial rate. Second, under the Commission’s
approach, even though the agreement’s Moratorium Period
ended on January 31, 2009, MarkWest could not raise its rates
until the next index year began on July 1, 2009. The
Commission read the settlement agreement as setting new

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initial rates on July 1, 2008, Order 4, and FERC regulations
do not permit a pipeline owner to use indexing to raise its
rates above the initial rate until the start of the next index
year, 18 C.F.R. § 342.3(d)(5).
On March 31, 2009, the Commission rejected
MarkWest’s rate filing on the ground that its proposed rates
were too high because the settlement agreement established
new initial rates on July 1, 2008. 126 FERC ¶ 61,300. On
February 2, 2010, the Commission denied MarkWest’s
petition for rehearing. 130 FERC ¶ 61,084. MarkWest filed a
timely petition for review in this Court on April 2, 2010. We
have jurisdiction pursuant to 28 U.S.C. § 2342 (1976).
II
In National Fuel Gas Supply Corp. v. FERC, 811 F.2d
1563, 1569-70 (D.C. Cir. 1987), we read the Supreme Court’s
decision in Chevron U.S.A. Inc. v. Natural Resources Defense
Council, Inc., 467 U.S. 837 (1984), to require deference to the
Commission’s interpretation of language in a settlement
agreement resolving rate disputes. The court identified two
reasons for such deference. First, Congress explicitly
delegated to FERC broad powers over ratemaking, including
the power to analyze relevant contracts. Nat’l Fuel Gas
Supply Corp., 811 F.2d at 1569-70. In this case, the
Commission had an important role in the settlement
agreement: by its terms the agreement only became binding
when approved by the Commission. Settlement Agreement 7.
Second, in rate-setting cases like this one, the Commission
has “familiarity with the field of enterprise to which the
contract pertains.” Nat’l Fuel Gas Supply Corp., 811 F.2d at
1570.

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Applying Chevron, “we first consider de novo whether
the settlement agreement unambiguously addresses the matter
at issue. If so, the language of the agreement controls . . . .”
Ameren Servs. Co. v. FERC, 330 F.3d 494, 498 (D.C. Cir.
2003) (internal citations omitted). If the agreement is
ambiguous or silent, however, “we defer to the Commission’s
construction of the provision at issue so long as that
construction is reasonable.” Koch Gateway Pipeline Co. v.
FERC, 136 F.3d 810, 814-15 (D.C. Cir. 1998).
Step one of this analysis is not difficult because the
settlement agreement is silent on the matter of how to set the
ceiling on rates following the Moratorium Period. Under these
circumstances, we must defer to the Commission’s
interpretation if reasonable.
MarkWest argues that the settlement agreement did not
change its initial rates, observing that during the Moratorium
Period the agreement required the parties to calculate the
maximum rate MarkWest could have charged under the
Commission’s indexing method. Though this rate could only
be charged if it were lower than the rate derived under the
Annual Inflation Cap, MarkWest contends that the
agreement’s use of FERC indexing somehow shows that the
parties did not intend to change the pipeline’s initial rates.
The Commission addressed this argument in its
Rehearing Order, explaining that “[t]he fact that MarkWest’s
Settlement . . . uses the Commission’s indexing regulations as
a procedural framework to implement the Settlement does not
change the character of the rates MarkWest filed pursuant to
the terms of the Settlement.” Rehearing Order 7. That is, the
settlement agreement’s use of FERC indexing during the
Moratorium Period reveals little, if anything, about what

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baseline the parties expected FERC indexing to use after the
Moratorium Period ended.
MarkWest also challenges the Commission’s view that
the settlement agreement established new initial rates for the
index year that began on July 1, 2008, which could not be
adjusted for inflation until July 1, 2009, the start of the next
index year. See 18 C.F.R. § 342.3(d)(5) (providing that when
a pipeline owner establishes a new initial rate, that rate will be
the applicable ceiling level until the start of the next index
year). MarkWest argues that the Commission’s interpretation
reads out of the agreement the January 31, 2009, end date of
the Moratorium Period by effectively extending this period to
July 1. Pointing to the “cardinal principle of contract
construction . . . that a document should be read to give effect
to all its provisions,” Segar v. Mukasey, 508 F.3d 16, 22 (D.C.
Cir. 2007) (internal quotation marks omitted), MarkWest
argues that the Commission treats the three-year Moratorium
Period as if it were actually three years and five months long.
But this mischaracterizes what the Commission has done.
As explained in its Rehearing Order, the Commission simply
reads the agreement as setting new initial rates on July 1,
2008. Rehearing Order 8. Under the Commission’s
regulations, a pipeline owner cannot adjust an initial rate for
inflation until the beginning of the next index year, which in
this instance began on July 1, 2009. See 18 C.F.R.
§ 342.3(d)(5). But the Commission did nothing to extend the
Moratorium Period, and MarkWest was free to change its
rates in other ways once the period ended. For example,
during the Moratorium Period MarkWest could not set new
initial rates in excess of the rates it was permitted to charge
under the Annual Inflation Cap. Once the Moratorium Period
ended, however, it was free to depart from the Annual
Inflation Cap’s limits on new initial rates so long as it did so

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in a way that the Commission’s regulations allow. Despite
MarkWest’s arguments to the contrary, we conclude that the
agreement is ambiguous as to whether it established new
initial rates.
In the face of this ambiguity, the Commission’s reading
of the settlement agreement was reasonable. As the
Commission recognized, Order 4, the parties specified a
method for calculating maximum annual rate increases during
the Moratorium Period that closely tracks the FERC indexing
methodology by using the maximum rates from one year as
the basis for calculating the next year’s ceiling levels. Like
FERC indexing, the settlement agreement’s Annual Inflation
Cap specifies a formula for deriving a coefficient based on the
Department of Labor’s Producer Price Index inflation
statistics. The settlement agreement also directs MarkWest to
calculate its maximum annual rate increases by multiplying
this coefficient by the previous year’s maximum rates.
Though the Annual Inflation Cap and FERC indexing
incorporate different measures of inflation, they use the same
basic approach.
These similarities suggest that the parties may have
intended a further similarity as well. FERC indexing uses the
maximum rate a pipeline owner is allowed to charge in one
year to calculate the maximum rate that it may charge the next
year. In the same way, the parties may have intended to use
the maximum rate MarkWest was allowed to charge at the
end of the Moratorium Period to calculate rates after the
Moratorium Period ended. The parties agreed that the Annual
Inflation Cap would provide fair, inflation-adjusted maximum
rates during the Moratorium Period, and it would hardly be
surprising if they also thought the Annual Inflation Cap would
provide a fair initial rate for calculating future rate increases.
The settlement agreement does not clearly adopt this

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approach, but neither does it rule out this possibility.
Confronted with such silence, we defer to the Commission’s
reasonable view of the matter.
III
MarkWest argues in the alternative that the
Commission’s regulations clearly require it to find that the
settlement agreement did not change the pipeline’s initial
rates. But the regulations are no less ambiguous on this point
than the settlement agreement itself, and, once again, we must
defer to the Commission’s reasonable views. An agency’s
interpretation of its own ambiguous regulations is “controlling
unless plainly erroneous or inconsistent with the regulation.”
Auer v. Robbins, 519 U.S. 452, 461 (1997) (internal quotation
marks omitted); see also Marseilles Land & Water Co. v.
FERC, 345 F.3d 916, 920 (D.C. Cir. 2003) (“[A]gencies are
entitled to great deference in the interpretation of their own
rules.”).
This case required the Commission to decide which of
two provisions of 18 C.F.R. § 342 should apply to the parties’
settlement agreement. As we have already noted, § 342.3(a)
allows a carrier to set rates below a given year’s ceiling levels
without having to reduce its ceilings in subsequent years.
MarkWest contends that the settlement agreement did nothing
more than what this section provides. The parties merely
agreed that rates could be set below the ceiling levels on a
temporary basis during the Moratorium Period. Taking
advantage of that provision, MarkWest argues, had no effect
on the initial rate.
However, under § 342.3(d)(5) a pipeline in effect
establishes new initial rates when it sets rates “by a method
other than indexing.” The Commission’s regulations treat

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“[s]ettlement rates” as one such method. Section 342.4(c)
expressly provides:
Settlement rates. A carrier may change a rate without
regard to the ceiling level under § 342.3 if the
proposed change has been agreed to, in writing, by
each person who, on the day of the filing of the
proposed rate change, is using the service covered by
the rate.
The Commission found that this case fits § 342.3(d)(5).
MarkWest argues that § 342.3(a), not § 342.3(d)(5),
applies to the settlement agreement because the agreement’s
rate regime does not precisely fit § 342.4(c). Section 342.4(c)
requires that shippers unanimously consent to a settlement
rate, but only two of MarkWest’s three shippers were parties
to the settlement agreement. Moreover, § 342.4(c) envisions
settlements that raise rather than lower a pipeline’s ceiling
levels. See Frontier Pipeline Co. v. FERC, 452 F.3d 774, 777
(D.C. Cir. 2006) (“A pipeline may raise a rate above the
resulting ceiling level . . . only if . . . all customers consent.”);
Order No. 561, 58 Fed. Reg. at 58,764 (explaining that the
Commission adopted § 342.4(c) to permit carriers to charge
rates to which shippers consent “even though these rates may
be above the ceiling level that would apply under the indexing
methodology”).
But neither does the settlement agreement clearly qualify
as a § 342.3(a) rate reduction. That provision contemplates a
carrier changing its rates in response to competitive pressures,
not in order to settle a legal dispute over whether its ceiling
levels are just and reasonable. Order No. 561, 58 Fed. Reg. at
58,759 (explaining how § 342.3’s indexing methodology
allows carriers “to change rates rapidly to respond to

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competitive forces”); Order 6 (observing that the regulations
allow pipeline owners to “raise their rates at any time to the
ceiling rate if the competitive situation later permits such a
rate increase because any increase up to that level is presumed
to be just and reasonable”).
Confronted with a scenario that its regulations did not
anticipate, the Commission acted reasonably in treating the
settlement agreement as it would treat a § 342.4(c) settlement.
“Because applying an agency’s regulation to complex or
changing circumstances calls upon the agency’s unique
expertise and policymaking prerogatives,” Martin v.
Occupational Safety & Health Review Comm’n, 499 U.S. 144,
151 (1991), we defer to the Commission’s reasonable
interpretation of its own regulations.
IV
For the foregoing reasons, the petition for review is
Denied.

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