Husky Mktg. & Supply Co. v. Fed. Energy Regulatory Comm'n

105 F.4th 418

HUSKY MARKETING AND SUPPLY COMPANY, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION and United States of America, RespondentsMPLX Ozark Pipe Line LLC, Intervenor

No. 23-1042

Consolidated with 23-1043

United States Court of Appeals, District of Columbia Circuit

Argued March 12, 2024

Decided June 21, 2024

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

Gregory S. Wagner argued the cause for petitioner. With him on the briefs were Richard E. Powers, Jr. and Joseph R. Hicks.

Scott Ray Ediger, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With him on the brief were Matthew R. Christiansen, General Counsel, and Robert H. Solomon, Solicitor. Robert J. Wiggers and Robert B. Nicholson, Attorneys, U.S. Department of Justice, entered appearances.

Elizabeth B. Kohlhausen argued the cause for intervenor in support of respondents. With her on the brief were Dean H. Lefler and Deborah R. Repman.

Before: Millett, Circuit Judge, and Edwards and Ginsburg, Senior Circuit Judges.

Ginsburg, Senior Circuit Judge:

Two customers of a crude-oil pipeline petition for review of orders issued by the Federal Energy Regulatory Commission (FERC) approving the pipeline's application to charge market-based rates for its shipping services. The petitioners contend the Commission adopted an arbitrary and capricious definition of the relevant geographic destination market for the pipeline's services when analyzing whether it had market power. We disagree and deny their petitions for review.

I. Background

Petitioners Husky Marketing & Supply Company and Phillips 66 Company ship crude oil on the MPLX Ozark, a 22-inch-diameter pipeline that runs 433 miles from Cushing, Oklahoma to Wood River, Illinois. MPLX Ozark is owned by MPLX LP, a master limited partnership the general partner of which is a wholly owned subsidiary of Marathon Petroleum Corporation.

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In December 2018, Marathon filed with the FERC an application for permission to charge market-based rates for transporting crude oil from Cushing to Wood River on the MPLX Ozark. Marathon asserted it did not have market power in the relevant geographic origin and destination markets and therefore should be allowed to charge market-based rates rather than cost-indexed rates, which are the default rates for oil pipelines regulated by the Commission. See, e.g., MarkWest Mich. Pipeline Co. v. FERC, 646 F.3d 30, 31-33 (D.C. Cir. 2011).

Husky and Phillips intervened to oppose Marathon's application, asserting the carrier's proffered definition of the relevant destination market, viz., the St. Louis-St. Charles-Farmington Bureau of Economic Analysis (BEA) economic area, was incorrect. They claimed the properly defined destination market was Wood River, a city of 10,000 in which they alleged MPLX Ozark had market power.

The Commission referred the matter to an administrative law judge (ALJ) who, after an evidentiary hearing, found the correct destination market was the narrower Wood River market advanced by Husky and Phillips, rather than the broader St. Louis BEA Economic Area advanced by Marathon. Both Marathon and the Petitioners filed exceptions to the ALJ's decision.

The Commission unanimously reversed the ALJ's decision. MPLX Ozark Pipe Line LLC, 180 FERC ¶ 61,053 (2022). Rather than accept Marathon's broad St. Louis BEA definition, however, the Commission concluded the correct geographical destination market was Wood River together with Patoka, Illinois — a small town about 75 miles to the east that is the downstream destination for a substantial majority of the crude oil shipped to Wood River on the MPLX Ozark.

The FERC reached its destination-market conclusion based primarily upon its determination that if MPLX Ozark tried to exercise market power by raising prices or restricting output, then its shipping customers could easily switch to other Patoka-bound pipelines that do not go through Wood River. The Commission rejected the ALJ's analysis because it did not consider pipelines that do not go through Wood River to reach Patoka and beyond. 180 FERC ¶ 61,053, at para. 24.

In defining the destination market to be Wood River, the ALJ had relied heavily upon the hypothetical monopolist test performed by the Commission staff.^* The Commission concluded that facts in the record about "market participants provide[d] sufficient information to define the relevant geographic market . . . without the consideration of a detailed hypothetical monopolist test." Id. at para. 23. It then reasoned, based upon market-share data, that the Wood River-Patoka market was a competitive one in which MPLX Ozark did not have market power, and it approved Marathon's application for permission to charge market-based rates.

Husky and Phillips petitioned for rehearing and moved to reopen the record, but the Commission denied their requests. MPLX Ozark Pipe Line LLC, 181 FERC ¶ 61,242 (2022). Husky and Phillips now petition for review. We have jurisdiction under 28 U.S.C. §§ 2321, 2342 and 42 U.S.C. § 7192(a). See 49 U.S.C. app. § 17(10) (1988); see also Ass'n of Oil Pipe Lines v. FERC, 83 F.3d 1424, 1432 n.14 (D.C. Cir. 1996); Earth Res. Co. v. FERC, 628 F.2d 234, 235 (D.C. Cir. 1980).

II. Standard of Review

We review the FERC's orders under the "arbitrary and capricious" standard, which is deferential and narrow in scope, prescribed by the Administrative Procedure Act (APA), 5 U.S.C. § 706(b)(A). LSP Transmission Holdings II, LLC v. FERC, 45 F.4th 979, 991 (D.C. Cir. 2022); Xcel Energy Servs. Inc. v. FERC, 41 F.4th 548, 557 (D.C. Cir. 2022). "So long as proper procedures have been followed, intelligible reasons have been given, and factual findings are supported by record evidence, FERC must be affirmed." Hecate Energy Greene Cnty. 3 LLC v. FERC, 72 F.4th 1307, 1312 (D.C. Cir. 2023) (cleaned up).

III. Analysis

Husky and Phillips challenge only the FERC's conclusion that Wood River and Patoka constitute the correct relevant geographic destination market. They do not challenge the reasonableness of the Commission's finding that the combined Wood River-Patoka market for deliveries of crude oil is competitive. The only issue before us, therefore, is whether the Commission gave "intelligible reasons" for its conclusion that Wood River and Patoka together constitute the correct destination market in which to analyze whether the MPLX Ozark has market power for its shipping services. Hecate Energy, 72 F.4th at 1312. We hold that it did.

For more than a century, federal law has made it unlawful for a pipeline company to charge a rate that is not "just and reasonable" for the transportation of crude oil in interstate commerce.^† Under longstanding statutory requirements, the owner of an oil pipeline must file proposed rates with the relevant regulatory agency — now the FERC — and receive its approval before the pipeline may charge its customers those rates. A Commission regulation provides that a pipeline ordinarily may charge its customers no more than a "ceiling" rate that reflects the pipeline's costs-of-service and is adjusted annually by the FERC in accordance with the Bureau of Labor Statistics' Producer Price Index for Finished Goods. See 18 C.F.R. § 342.3.

Under another Commission regulation, however, an oil pipeline may charge its customers "market-based" rates that exceed its "ceiling" rate if the pipeline first establishes it does not have market power in the relevant geographic origin and destination markets. See 18 C.F.R. §§ 342.4(b) & 348.1; see also Order No. 572, Market-based Ratemaking for Oil Pipelines, 59 Fed. Reg. 59,148, 59,149-51 (1994). In its decisions, the Commission has defined the relevant geographic market for a pipeline to be "the area in which a shipper may rationally look for transportation service." E.g., Saddlehorn Pipeline Co., LLC, 181 FERC ¶ 61,021, at para. 12 (2022); see also, e.g., White Cliffs Pipeline, LLC, 173 FERC ¶ 61,155, at para. 32 (2020) ("[T]he geographic market . . . include[s] alternatives to the pipeline that are available to shippers in the event the applicant pipeline raises rates above competitive levels").

Courts have long held the "just and reasonable" rate requirement in the statutes that govern the regulation of natural gas and electricity do not require the Commission to use any particular methodology or formula when it sets or approves rates. E.g., Mobil Oil Expl. & Producing Se. Inc. v. United Distrib. Cos., 498 U.S. 211, 224-25, 111 S.Ct. 615, 112 L.Ed.2d 636 (1991); Fed. Power Comm'n v. Hope Nat. Gas Co., 320 U.S. 591, 602, 64 S.Ct. 281, 88 L.Ed. 333 (1944); S. Cal. Edison Co. v. FERC, 717 F.3d 177, 182 (D.C. Cir. 2013). We see no reason, and the parties suggest no reason, to read the just and reasonable rate requirement for oil pipelines any more prescriptively.

The FERC does not require a pipeline owner to use "any particular geographic market definition" in its application to charge market-based rates. Market-based Ratemaking for Oil Pipelines, 59 Fed. Reg. at 59,154. Nor does the Commission limit itself to any specific methodology when it defines the appropriate geographic market in which to evaluate an application. E.g., Guttman Energy, Inc., 161 FERC ¶ 61,180, at para. 183 (2017). It has determined relevant geographic markets in some cases using the hypothetical monopolist test, e.g., White Cliffs Pipeline, at paras. 24-26, 31-34, and in others using a simple fact-based evaluation of the alternative choices available to the customers served by the applicant pipeline, e.g., Marketlink, LLC, 169 FERC ¶ 61,194, at paras. 12-14 (2019).

In the present case, the Commission took the latter course. It concluded that "the appropriate geographic destination market should include both Patoka and Wood River because these areas contain the alternatives that would be available to shippers if MPLX Ozark attempted to exercise market power." 180 FERC ¶ 61,053, at para....