On February 20, 2015, the U.S. Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) held that FERC had the authority to approve a cost pooling agreement among the carriers of the Trans Alaska Pipeline System (“TAPS”) that allocates certain fixed costs on the basis of each carrier’s share of combined interstate and intrastate utilization of TAPS. In upholding this determination by FERC, the D.C. Circuit found that FERC could indirectly regulate intrastate oil prices as a result of its regulation of interstate prices.
Three carriers have a joint interest in TAPS. Each carrier’s percentage of capacity on TAPS is operated by the carriers’ joint agent, Alyeska Pipeline Service Company. The service offered by each carrier is identical, and either interstate or intrastate transportation can be achieved through any of the three carriers’ offerings. The original rates for shipping oil on TAPS were highly contested and subject to protracted litigation. A settlement reached in 1985 governed TAPS rates for thirty years and provided for annual rate-setting through 2011, which was estimated to be the end of the pipeline’s useful life.
When the carriers filed rates for 2005 and 2006, as per the annual rate setting requirement, Tesoro Alaska (“Tesoro”), Anadarko Petroleum (“Anadarko”) and the State of Alaska protested to FERC, arguing that the rates were unjust, unreasonable and otherwise unlawful. FERC then cancelled the 1985 settlement and required that the carriers set the rates for the TAPS based on FERC’s general methodology for oil pipeline ratemaking. After some dispute, a new settlement agreement was reached and filed with FERC in September of 2012. The 2012 settlement involved a cost pooling agreement between the TAPS carriers, where the expenses required for maintaining the TAPS system, for both interstate and intrastate service, would be combined. Tesoro and Anadarko feared that the cost pooling among the carriers would act as a disincentive to price competition and could lead to them paying high prices to ship oil intrastate.
Tesoro and Anadarko, both intrastate shippers on TAPS, challenged FERC’s approval of the 2012 settlement. Tesoro and Anadarko argued that FERC’s authority to regulate interstate commerce did not allow FERC to regulate intrastate costs, including proposals to pool such costs with interstate costs. The D.C. Circuit denied Tesoro and Anadarko’s petitions, holding (1) that FERC had sufficient evidence for its findings and did not act arbitrarily or capriciously; and (2) that FERC has “authority over intrastate traffic—at least, where FERC has found it a necessary incident to regulation of interstate traffic.”
A copy of the D.C. Circuit’s decision can be found here.