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At DC Circuit, FERC Defends Oil Pipeline Index Rehearing Orders as the Result of Notice and Comment Process

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On October 25, 2023, the United States Court of Appeals for the District of Columbia Circuit heard the Liquid Energy Pipeline Association’s (“LEPA”) challenge to the Federal Energy Regulatory Commission’s (“FERC”) rulings, including two rehearing orders, from its most recent five-year review of the oil pipeline rate index (Nos. 22-1257 and 22-1258). The argument drew an active bench from Chief Judge Srinivasan and Judges Millett and Wilkins. Judge Millet dominated the questioning from the bench, but all three judges were in on the action. Miguel Estrada started by arguing for nearly an hour (allotted 20 minutes) on behalf of LEPA. The Shippers (Steve Adducci) argued for almost a half hour and FERC (Matthew Glover) for a bit more than a half hour. LEPA’s arguments were effective, but the panel remained noticeably critical. This was expected given the composition of the panel.

LEPA started and finished with their strongest point that under Administrative Procedure Act (“APA”) notice and comment rulemaking, the resulting rule cannot be modified on rehearing. The argument appeared to resonate with the panel. Judge Millett noted the uniqueness of FERC’s rehearing process amongst federal agencies. Similarly, the strongest criticism that FERC endured from the panel was that the agency’s notice and comment process was inconsistent with APA requirements. Judge Srinivasan directed most of his questions to FERC counsel, including a number of pointed questions about the agency’s lack of authority to change its results on rehearing without further notice and comment. Under pressure from the bench, FERC made a tactical mistake and argued that the rehearing process was actually part of its notice and comment process. Then counsel for FERC failed to reconcile this argument with the fact that no responses to rehearing requests are permitted under FERC’s rules — notice without comment.

FERC was also in the hot seat addressing finality issues for agency action under Allegheny Defense1, which held that FERC’s tolling orders cannot fend off judicial review. Judge Millett, the author of the court’s decision in Allegheny Defense, appeared to defend her decision. Nevertheless, FERC sought to distinguish Allegheny Defense as limited to the Natural Gas Act and Federal Power Act and inapplicable under the Interstate Commerce Act. The panel elicited distinctions between FERC’s view of a final order vis-à-vis its elongated rehearing process and when a regulated entity is required to comply or be subjected to enforcement action. Judge Srinivasan observed critically that the agency is defining a process that is convenient to the agency and not the regulated pipelines.

LEPA’s appointments clause arguments also drew interest from the panel. LEPA argued that the tolling order was invalid because the Deputy Secretary who issued it was not duly appointed as an Officer. Judge Wilkins questioned LEPA’s counsel on the arguments with an apparent eye to avoiding the issue in crafting any potential relief. Additionally, Judge Srinivasan asked FERC about the appointments clause issues, and particularly the real impact of a Secretary’s order tolling agency action. FERC’s counsel responded carefully by reading to the Court quotes provided by the agency for this oral argument explaining how in this case the Secretary was directed to act by the chairman and had no discretion. FERC’s counsel did not make generalized statements about the Secretary’s authority, but offered clarifications specific to the facts of this case.

LEPA also appeared to gain a little ground arguing about investor reliance on the recurring five-year index adjustment process and how ultra vires and retroactive changes can create costly uncertainties in an investment-intensive industry.

By comparison to LEPA and FERC, the Shippers’ arguments were highly technical. They focused on what an effective or lawful rate is versus a just and reasonable rate, including how FERC implements rates and issues refunds. As well, Judge Millett specifically questioned FERC about whether an index, as opposed to an indexed rate, could ever be unjust and unreasonable. Judge Millett appeared concerned not only with the distinction between the index and the rate, but that a change in the index was different than a change in a rate, garnering explanations on the process for challenging rates at FERC. Judge Millett also appeared wary of vacating the second FERC rehearing order because it could result in the reinstatement of an order that the agency characterized (in the later order) as resulting in unjust and unreasonable rates.

Overall, the hot bench challenged all parties at argument. Although the panel appeared skeptical of LEPA’s challenge, their questions demonstrated some understanding of the key arguments made by LEPA. A decision could be issued in about three months, but there is not a set timeline.

1 Allegheny Def. Project v. FERC, 964 F.3d 1 (D.C. Cir. 2020)(en banc)

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.