Liquid Energy Pipeline Ass'n v. Fed. Energy Regulatory Comm'n

109 F.4th 543

LIQUID ENERGY PIPELINE ASSOCIATION, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSIONand United States of America, RespondentsEnergy Infrastructure Council and Enbridge Inc., Intervenors

No. 22-1045

Consolidated with 22-1103

Consolidated with 22-1104

Consolidated with 22-1105

Consolidated with 22-1110

Consolidated with 22-1257

Consolidated with 22-1258

United States Court of Appeals, District of Columbia Circuit

Argued October 25, 2023

Decided July 26, 2024

On Petitions for Review of Orders of the Federal Energy Regulatory Commission Miguel A. Estrada argued the cause for Carrier Petitioners. With him on the joint briefs were Amy L. Hoff, Elizabeth B. Kohlhausen, Charles F. Caldwell, Matthew S. Rozen, Aaron Smith, Daniel J. Poynor, Linda C. Bailey, Hyland Hunt, and Ruthanne M. Deutsch. William S. Scherman, Jason J. Fleischer, and Steven M. Kramer, entered appearances.

Steven A. Adducci argued the cause for Shipper Petitioners. With him on the briefs were Richard E. Powers, Jr., Matthew D. Field, Gregory S. Wagner, and William G. Bolgiano.

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

Miguel A. Estrada, Matthew S. Rozen, and Aaron Smith were on the brief for intervenor Liquid Energy Pipeline Association in support of respondents. Jason J. Fleischer, Steven M. Kramer, and William S. Scherman entered appearances.

Richard E. Powers, Jr., Matthew D. Field, Steven A. Adducci, Gregory S. Wagner, William G. Bolgiano, Elizabeth A. Zembruski, Matthew T. Rick, and James Harrison Holt were on the brief for Shipper-Intervenors in support of respondents.

Before: Srinivasan, Chief Judge, Millett and Wilkins, Circuit Judges.

Srinivasan, Chief Judge:

Every five years, the Federal Energy Regulatory Commission reviews the methodology used by oil pipelines to set their maximum annual rate increases. That methodology is called the Index. In 2020, the Commission conducted its five-year review and set the Index level for the next cycle. After that Index took effect, the Commission modified it on rehearing. We vacate that order because the Commission was obligated to—but did not—adhere to notice-and-comment procedures when resetting the Index on rehearing.

I.

A.

The Interstate Commerce Act (ICA) charges the Federal Energy Regulatory Commission with ensuring that the rates charged by interstate oil pipelines are "just and reasonable." 49 U.S.C. App. § 1(5) (1988). In the Energy Policy Act of 1992, Congress required the Commission to "establish[ ] a simplified and generally applicable ratemaking methodology" for producing just and reasonable rates. Pub. L. No. 102-486, § 1801, 106 Stat. 2776, 3010 (citing 49 U.S.C. App. § 1(5) (1988)).

The Commission implements that congressional mandate through the Index, a methodology for setting the maximum rate increases pipelines may charge customers each year. Ass'n of Oil Pipe Lines v. FERC (AOPL I), 83 F.3d 1424, 1429-31 (D.C. Cir. 1996). While pipelines are required to file their initial rates with the Commission, "pipelines may increase their rates without seeking the Commission's approval, so long as the increase does not exceed the annual limit, computed using the index." Ass'n of Oil Pipe Lines v. FERC, 876 F.3d 336, 339 (D.C. Cir. 2017). The Index is "designed to enable pipelines to recover costs by allowing pipelines to raise rates at the same pace as they are predicted to experience cost increases." AOPL I, 83 F.3d at 1430.

B.

The Commission reviews the Index every five years. In June 2020, the Commission began the process for its next five-year review by inviting comments on a new proposed Index. Notice of Inquiry, Five-Year Review of the Oil Pipeline Index, 171 FERC ¶ 61,239 (June 18, 2020). A group of pipelines (whom we will refer to as Carriers) and a group of pipeline customers (whom we will refer to as Shippers) both submitted comments. Carriers proposed changes that would give rise to a higher Index (and so would allow for higher potential cost increases) than the proposed Index, while Shippers sought the opposite.

On December 17, 2020, the Commission issued an Initial Order establishing an Index level higher than the proposed Index. Order Establishing Index Level, Five-Year Review of the Oil Pipeline Index, 173 FERC ¶ 61,245 (Dec. 17, 2020). In calculating that Index, the Commission adopted Carriers' proposals. The Commission published the Initial Order in the Federal Register and made the Order effective on February 16, 2021. Five-Year Review of the Oil Pipeline Index, 86 Fed. Reg. 9448. The Index established by the Initial Order was slated to become effective on July 1, 2021. Id.

Both Carriers and Shippers promptly sought rehearing of the Initial Order. Carriers asked for minor changes to the data source used in the Commission's calculations. Shippers, by contrast, substantively challenged the Commission's decisions in calculating the Initial Order's Index level.

On February 18, 2021, the Commission's Deputy Secretary issued a tolling order on the rehearing requests to prevent them from being deemed denied by operation of law. See 18 C.F.R. § 385.713(f). Importantly for our purposes, the tolling order established that neither Carriers nor Shippers were permitted to comment in each other's rehearing proceedings. On July 1, 2021, while the tolling order remained in place, the Initial Order's Index took effect as scheduled.

Subsequently, on January 20, 2022, the Commission issued a Rehearing Order granting Shippers' rehearing request. Order on Rehearing, Five-Year Review of the Oil Pipeline Index, 178 FERC ¶ 61,023 (Jan. 20, 2022). The Rehearing Order adopted Shippers' suggestions for recalculating the Index and set a new, lower Index to be effective on March 1, 2022.

On February 22, 2022, Shippers requested rehearing or clarification of the Rehearing Order. They sought assurance that they could read the Rehearing Order to apply retroactively to the Initial Order's effective date, July 1, 2021. That would enable Shippers to seek refunds of any charged rates exceeding the Rehearing Order's Index. On May 6, 2022, the Commission denied Shippers' request, confirming that the Rehearing Order applied only prospectively.

II.

In their petitions for review, Carriers bring a variety of challenges to the Commission's Rehearing Order. We grant the petitions based on one of the grounds Carriers assert: that the Commission failed to comply with the Administrative Procedure Act (APA) when it modified the Index in the Rehearing Order without adhering to notice-and-comment procedures. Because our ruling in favor of Carriers on that ground affords them all the relief they seek—vacatur of the Rehearing Order—we have no need to consider any of their other challenges.

A.

As a threshold matter, the Commission contends that Carriers failed to exhaust their APA challenge before the agency. A party challenging agency action generally must first raise an issue before the agency to preserve it for judicial review. Advocs. for Highway & Auto Safety v. Fed. Motor Carrier Safety Admin., 429 F.3d 1136, 1150 (D.C. Cir. 2005). Here, the Commission argues that Carriers forfeited their APA notice-and-comment challenge by failing to assert it before the agency. We disagree.

Carriers had no ability to raise their notice-and-comment complaint before the agency granted Shippers' rehearing request in the Rehearing Order. Before any party sought rehearing of the agency's Initial Order, there of course would have been no ripe challenge to the way in which the agency would conduct any potential rehearing procedures: at that time, Carriers had no reason to know whether any rehearing procedures would in fact come to pass. And after Shippers sought rehearing of the Initial Order, the agency, as noted, prohibited Carriers from commenting in Shippers' rehearing proceeding. In those circumstances, Carriers had no occasion to raise their notice-and-comment challenge to the rehearing procedures before the Commission issued the Rehearing Order.

As we have explained, "courts have no authority to require petitioners seeking judicial review of a final agency action to further exhaust administrative procedures." CSX Trans., Inc. v. Surface Trans. Bd., 584 F.3d 1076, 1079 (D.C. Cir. 2009). Carriers therefore were not required to raise their notice-and-comment challenge to the Rehearing Order before the agency in order to present it for judicial review.

B.

Because the ICA does not provide its own procedural rules, we assume the APA's procedural requirements apply. See Carlson v. Postal Regul. Comm'n, 938 F.3d 337, 348 (D.C. Cir. 2019); see also Asphalt Roofing Mfrs. Ass'n v. ICC, 567 F.2d 994, 1002 n.5 (D.C. Cir. 1977). The Commission does not dispute the applicability of the APA. We also assume for present purposes that the Commission's authority under the ICA to rehear its orders, see 49 U.S.C. App. § 17(6)-(7) (1988), encompassed its rehearing of the Index level established in the Initial Order. The question is whether the Commission could conduct that rehearing and change the effective Index level without abiding by the APA's notice-and-comment requirements.

"To foster public participation and facilitate reasoned decisionmaking, 'the Administrative Procedure Act requires agencies to afford notice of a proposed rulemaking and an opportunity for public comment prior to a rule's promulgation, amendment, modification, or repeal.' " Humane Soc'y v. USDA, 41 F.4th 564, 568 (D.C. Cir. 2022) (quoting Am. Hosp. Ass'n v. Bowen, 834 F.2d 1037, 1044 (D.C. Cir. 1987)). Consequently, "once an agency makes a rule—that is, once it makes a statement prescribing law with future effect—the APA requires the agency to provide notice and an opportunity for comment before...