Commissioner James Danly Statement
January 13, 2023
Docket No. OR17-2-001
I dissent from the Commission’s Order on Rehearing and Clarification in Magellan Midstream Partners, L.P. (Magellan).[1] This order transforms a petition for declaratory order into a vehicle by which to establish an (unjustified) industry-wide policy. In doing so, the Commission violates the Administrative Procedure Act (APA) and establishes an unjustified and industry-chilling policy.
Before I explain my reasoning, a thorough recitation of the proceeding’s procedural history is required, both to provide the background necessary to understand my reasoning, and to refresh the memories of those who may have forgotten the details of this more than half-decade old case.
Background
Over six years ago, on November 14, 2016, Magellan filed a petition for declaratory order asking the Commission to declare that its proposal to “establish a marketing affiliate to buy, sell and ship crude oil [(Marketing Affiliate)] is compliant with the Interstate Commerce Act [(ICA)].”[2]
Two days later, the Secretary of the Commission noticed the petition, describing it as “seeking confirmation that certain proposed marketing affiliate transactions are permissible under the ICA and Elkins Act, as more fully explained in the petition.”[3] The Secretary’s notice put potential parties on notice that the Commission would consider whether Magellan’s specific crude oil marketing affiliate proposal was permissible under the ICA and Elkins Act. Commission precedent supports no other reading. “Petitions for declaratory order are based on the specific facts and circumstances presented.”[4]
Timely interventions and comments were filed, including a request that “should the Commission decide to address issues relating to marketing affiliates . . . it does so through a rulemaking proceeding, in view of the fact that the matter is an industry wide concern.”[5]
Approximately one year later, on November 22, 2017, the Commission denied Magellan’s petition finding that “the proposed transactions described by Magellan in its Petition would constitute an unlawful rebate under the ICA.”[6] The Commission’s Order made no mention of an industry-wide concern or request to initiate a rulemaking proceeding.
On December 22, 2017, Magellan filed a timely request for clarification or, in the alternative, request for rehearing.[7] Among other requests, Magellan asked the Commission to clarify whether its order applies to “all liquids pipelines regulated under the ICA,”[8] after having acknowledged that its “Petition requested the Commission to find that an oil pipeline’s establishment of a crude oil Marketing Affiliate.”[9]
Weeks later, both existing parties and would-be late-intervenors filed what they knew to be generally impermissible answers to rehearing requests, requests for late intervention, and comments, arguing that Magellan’s request improperly expanded the scope of the proceeding.[10] Would-be late-intervenors expressed concern that the Commission could “change its policies in a manner that would result in substantive changes to existing commonplace, industry-wide practices.”[11] They also argued that the Commission should accept their interventions because they had good cause to intervene late, as it was not until after Magellan’s clarification request that it was apparent that the Commission’s findings could apply industry-wide.[12]
Likewise, existing parties and would-be late-intervenors argued that the Commission should waive its regulations and accept their answers because Magellan’s request “raised new factual and legal allegations not previously addressed in the pleadings” and that “the Commission has allowed an answer ‘so that [the opposing parties] may have an opportunity to respond to these new allegations.’”[13] Not a single party contested the late interventions and Magellan did not oppose the answers to its rehearing request.
Nearly five years came and went without a word from the Commission. And now that the Rehearing Order has issued, it denies the late interventions in one, brief sentence: “Movants have not met [the] higher burden of justifying late intervention.”[14] It denies the answers with similar economy: “Rule 713(d) of the Commission’s Rules of Practice and Procedure prohibits answers to a request for rehearing. Accordingly, we deny the motions to answer Magellan’s rehearing request and reject the answers to Magellan’s rehearing request.”[15]
Then after conceding that “the Order on Petition only addressed the transactions discussed in the Petition,”[16] the order establishes a presumption for how it “will evaluate whether a transaction violates the rebate provisions”[17] that will apply to any affiliate shipper moving product on any affiliate pipeline.[18]
The Denial of Late Interventions, Answers to Rehearing Request, and Comments Violates the APA
In order to satisfy due process, an agency must afford interested parties adequate notice of the issues that will be considered and the opportunity to participate in the proceeding.[19] In order to satisfy the APA, the agency must then “respond to the substantial arguments”[20] raised and it must explain any departure from its precedent.[21]
Setting aside potential violations of the Due Process Clause, a matter the litigants and the courts are perfectly capable of resolving upon petition for review, this order violates the APA by failing to respond to the litigants “substantial arguments” supporting late intervention and by failing to explain its departure from Commission precedent.
No attempt is made to explain why, given well-pleaded requests for late intervention, the late intervenors failed to meet their “higher burden.” This is especially irksome because the fears averred by the would-be late-intervenors were proven well founded by the order.
No attempt is made to explain why, after the passage of five years and the unexpected change in proceeding’s scope, the late interventions would prejudice the Commission or other parties.[22]
No attempt is made to explain why, after the unexpected change in the scope of the proceeding, there was not good cause to waive the Commission’s regulation’s and accept the answers to Magellan’s rehearing request.
No attempt is made to explain this order’s departure from past precedent finding good cause to accept answers and grant late interventions when the scope of a proceeding has expanded.[23]
The Commission’s failure to address these issues (all of which were raised in late intervention requests and motions to submit answers) violates the APA’s requirement that the Commission respond to arguments and acknowledge and explain departure from precedent.[24]
The Order’s Establishment of Presumption is Unjustified
The presumption established by this order is not supported by much in the way of credible evidence. Bear in mind, a presumption is “[s]omething that is thought to be true because it is highly probable.”[25] Has the Commission really supported the conclusion that it is “highly probable” that there is no other rational economic purpose for an affiliate to move product on an affiliated pipeline in the face of unfavorable price differentials other than to receive a rebate from the parent company?
The justification for establishing this presumption boils down to an analysis of “integrated company economics”[26] (a term some have described as “vague and [having] no common, accepted regulatory meaning”[27]) and one, single, century-old court case.[28] Not only does the record offer scant support for the establishment of a presumption, there is abundant evidence supporting the exact opposite conclusion from that drawn in the order. One commenter explained that Magellan’s proposal to ship solely for benefit of integrated company economics “is not a transaction [with] which [they are] familiar, and to the best of [their] knowledge, it is not a common practice among liquids petroleum marketers on affiliated pipelines.”[29] Several commenters explained there are “numerous” legitimate business reasons why an affiliated shipper may move product when the price differential is unfavorable;[30] one of those commenters listed the ten following categories of transactions, each accompanied by detailed explanation: mitigation of deficiency payments, establish and maintain shipper history, long-term contractual commitments, liquidity—available quantity and/or quality of product, overall transaction value, product inventory management, brine inventory management, “wet barrel” sales, ad valorem management, and blending upgrade value.[31]
It is impossible at this point to predict the precise consequences of establishing this presumption—but doubtless, the inevitable chilling, and perhaps the effective obstruction, of movements by affiliate shippers on affiliate pipelines cannot be a result that Congress intended. Indeed, as the Commission acknowledges, “Congress specifically rejected any prohibition against oil pipelines shipping products in their own name and on their own pipelines.”[32] If affiliate shipper movements in the face of unfavorable price differentials are presumed to be unlawful rebates, affiliate shippers will be reluctant to move product on affiliated pipelines, in part because they will have no confidence that a contemplated move will end up being conducted under favorable economics. As one commenter stated, “in many instances, parties cannot determine whether they incurred a loss until the underlying agreement has terminated and any loss already incurred.”[33] And even if a movement is ultimately found compliant with the ICA, the uncertainty would persist through years of litigation, all under the cloud of threatened penalties.
The Majority’s “Clarification” Leaves a Great Deal More to Clarify
Though styled as a “clarification,” this order raises a great many more questions than it answers. Now that the Commission has established a presumption, how exactly will we implement it? It is apparent the majority expects some future activity. What other reason could there have been to spend pages detailing an algebraic formula for how the Commission “will evaluate whether a transaction violates the rebate provisions”[34]? Does the majority anticipate that affiliates or pipelines will file petitions for declaratory order for specific transactions or that pipeline competitors will file formal complaints based on spot prices at origin and destination markets?[35] Will the Commission initiate complaint proceedings sua sponte? Will the Office of Enforcement be directed to conduct audits and investigations? How burdensome on the pipelines and shippers will compliance with these investigations be? For that matter, how burdensome will it be on the Commission to conduct the searching reviews necessary to unearth the prima facie evidence of an unlawful rebate?
While we are on that subject, how will the Commission gain access to the necessary information in the first place? In order to make out a case of an unlawful rebate, we must have evidence that the affiliate shipper moved product on the affiliated pipeline versus some other pipeline or mode of transportation and we must know the origin and destination of that movement. Carriers are prohibited from simply handing that information over. Under the ICA, it is “unlawful for any common carrier” to “knowingly [] disclose . . . without the consent of such shipper . . . any information concerning the nature, kind, quantity, destination, consignee, or routing of any property tendered or delivered to such common carrier for interstate transportation.”[36] A carrier may only disclose such information “in response to any legal process issued under the authority of . . . any officer or agent of the Government of the United States . . . in the exercise of his powers.”[37] Similarly, to gather information on price differentials, the Commission will have to subpoena the affiliate shipper for data on non-jurisdictional transactions and, almost certainly, obtain the contracts themselves, likely by compulsion.[38] How does the Commission plan to handle this confidential, commercially sensitive, non-jurisdictional information?
How far-reaching will the Commission’s rebate inquiry be? Will we only apply the presumption on a prospective basis? An existing party and would-be intervenor both raised this exact issue and the Commission declined to favor them with a response.[39]
While the majority does explain that its “rebate analysis would reflect the price differentials between the origin and the destination over the term of [a Term and Service Agreement] (not merely the daily spot price),”[40] it does not specify how it will consider movements transported on an uncommitted, walk-up service basis. Will the Commission find an illegal rebate if an affiliate shipper paying a walk-up rate moved product when price differentials were unfavorable for just that day?
Also, imagine the burden for a non-jurisdictional affiliate shipper to identify every buy-sell transaction that involved product that was moved on an affiliate pipeline over a contract term (often 10 years), and to gather the evidence necessary to demonstrate that it moved product when price differentials were unfavorable, but did so for legitimate reasons and not solely to benefit integrated company economics. Now imagine the burden on staff to assess that information for multiple rebate cases simultaneously. One wonders whether the majority gave even fleeting consideration to the practical consequences of this order
For these reasons, I respectfully dissent.
[1] Magellan Midstream Partners, L.P., 181 FERC ¶ 61,207 (2022) (Rehearing Order).
[2] Magellan November 14, 2016 Petition for Declaratory Order, at 1 (emphasis added).
[3] FERC Secretary Bose November 16, 2016 Notice of Petition for Declaratory Order, at 1 (emphasis added).
[4] Puget Sound Energy, Inc., 139 FERC ¶ 61,241, at P 12 (2012); see also Rehearing Order, 181 FERC ¶ 61,207 at P 15 (“The Commission addresses petitions for declaratory orders based upon the specific facts described in the petition.”); id. (“the Commission appropriately applied the ICA to the specific transactions”); id. P 27 (“[T]he Order on Petition addresses the specific transactions described in the Petition and does not address transactions involving different facts.”); N.Y. Indep. Sys. Operator, Inc., 178 FERC ¶ 61,179, at P 52 (2022) (“The manner in which the Commission addresses a petition for declaratory order depends on the ‘specific facts and circumstances’ presented to the Commission.”) (citation omitted); New England Ratepayers Ass’n, 172 FERC ¶ 61,042, at P 36 (2020) (“The manner in which the Commission addresses a petition for declaratory order depends on the ‘specific facts and circumstances’ presented to the Commission.”) (citation omitted); Rockies Express Pipeline LLC, 160 FERC ¶ 61,127, at P 36 (2017) (“The Commission’s orders granting petitions requesting a declaratory order ‘are based on the specific facts and circumstances presented.’”) (citation omitted); ITC Grid Dev., LLC, 154 FERC ¶ 61,206, at P 45 (2016) (“Petitions for declaratory order, and orders granting those petitions, ‘are based on the specific facts and circumstances presented.’”) (citation omitted); W. Grid Dev., LLC, 130 FERC ¶ 61,056, at P 56 (2010) (“our determination here is strictly limited to the specific circumstances identified by the applicant”); Smart Grid Policy, 128 FERC ¶ 61,060, at P 149 (2009) (“as with any . . . petition for declaratory order, the Commission will make the . . . determination based on the specific facts and circumstances presented”); Sharyland Utils., L.P., 121 FERC ¶ 61,006, at P 23 (2007) (granting petition for declaratory order “[b]ased on the specific facts presented”).
[5] Marketlink, LLC December 14, 2016 Comments at 1.
[6] Magellan Midstream Partners, L.P., 161 FERC ¶ 61,219, at P 13 (2017) (Initial Order).
[7] Magellan December 22, 2017 Request for Clarification or, in the Alternative, Request for Rehearing.
[8] Id. at 8-9 (emphasis added).
[9] Id. at 8.
[10] See 18 C.F.R. § 385.213(a)(2) (“An answer may not be made to . . . a request for rehearing, unless otherwise ordered by the decisional authority.”); id. § 385.214(d)(1) (listing the factors the Commission may consider when acting on a late intervention, including whether the movant had good cause and whether there is prejudice or additional burdens upon existing parties); Rehearing Order, 181 FERC ¶ 61,207 at P 7 (“When late intervention is sought after the issuance of a dispositive order, the prejudice to other parties and burden upon the Commission of granting the late intervention may be substantial, and it is generally Commission policy to deny late intervention at the rehearing stage. Thus, movants bear a higher burden to demonstrate good cause for granting such late intervention.”) (citations omitted).
[11] Producer Shippers January 16, 2018 Late Intervention and Comments at 6.
[12] See, e.g., Producer Shippers January 16, 2018 Late Intervention and Comments, at 2-3 (“it was not until after the Commission issued the November 22 Order, and after the pipeline entities filed requests for clarification and/or rehearing of the November 22 Order, on December 22, 2017, that Producer Shippers became aware (or could have become aware) of the potential broadened scope of this proceeding”).
[13] Plains Marketing, L.P. January 8, 2018 Answer at 2 (quoting Mobil Oil Corp., 28 FERC ¶ 61,360, at 61,649 (1984), reh’g denied, 35 FERC ¶ 61,102 (1986)).
[14] Rehearing Order, 181 FERC ¶ 61,207 at P 7.
[15] Id. P 8 (citation omitted).
[16] Id. P 27.
[17] Id. P 16; id. P 20 (“[I]f an affiliated shipper’s pipeline movement would not be economic at the full tariff rate, the Commission presumes that the affiliated shipper is receiving a rebate through integrated-company economics.”) (footnote omitted).
[18] Id. P 27 (“[A]lthough the Order on Petition only addressed the transactions discussed in the Petition . . . the ICA’s prohibitions on rebates apply to all jurisdictional oil pipelines” and “rebates are not limited to marketing affiliates and may prohibit transactions undertaken by affiliated shippers that are not marketers.”) (citations omitted).
[19] Pub. Serv. Comm’n of Ky. v. FERC, 397 F.3d 1004, 1012 (D.C. Cir. 2005) (“The Due Process Clause and the APA require that an agency setting a matter for hearing provide parties ‘with adequate notice of the issues that would be considered, and ultimately resolved, at that hearing.’”) (quoting Williston Basin Interstate Pipeline Co. v. FERC, 165 F.3d 54, 63 (D.C. Cir. 1999); see also 5 U.S.C.§ 554(b)(3) (“Persons entitled to notice of an agency hearing shall be timely informed of . . . the matters of fact and law asserted.”).
[20] New England Power Generators Ass’n, Inc. v. FERC, 881 F.3d 202, 211 (D.C. Cir. 2018) (finding “that FERC did not engage in the reasoned decisionmaking required by the Administrative Procedure Act” because it “failed to respond to the substantial arguments put forward by Petitioners and failed to square its decision with its past precedent”); see also Canadian Ass’n of Petroleum Producers v. FERC, 254 F.3d 289, 299 (D.C. Cir. 2001) (“Unless the Commission answers objections that on their face seem legitimate, its decision can hardly be classified as reasoned.”) (citations omitted); Tesoro Alaska Petroleum Co. v. FERC, 234 F.3d 1286, 1294 (D.C. Cir. 2000) (“The Commission’s failure to respond meaningfully to the evidence renders its decisions arbitrary and capricious.”).
[21] FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009) (“An agency may not, for example, depart from prior policy sub silento or simply disregard rules that are still on the books.”); Belmont Municipal Light Dep’t v. FERC, 38 F.4th 173, 184 (D.C. Cir. 2022) (Moreover “[i]t is well established that the Commission must respond meaningfully to the arguments raised before it.”) (quoting New England Power Generators Ass’n, Inc. v. FERC, 881 F.3d 202, 210 (D.C. Cir. 2018) (NEGPA)); NEGPA, 881 F.3d at 210 (“[A]n agency must provide [] a reasoned explanation for departing from precedent or treating similar situations differently.”) (quoting W. Deptford Energy, LLC v. FERC, 766 F.3d 10, 20 (D.C. Cir. 2014)).
[22] Though not the legal standard by which such things are judged, I pause to observe that is hard for me to imagine, after we have sat upon this proceeding for so long, how any party’s late intervention request— all of which were filed years ago—could prejudice the parties more than has the Commission’s delay. Our breezy dismissal of the late intervention requests, given our unjustifiable dawdling, appears uncharitable.
[23] See PJM Interconnection, LLC, 110 FERC ¶ 61,053, at P 16 (2005) (“Given the expanded scope of this proceeding, the Commission finds there is good cause to permit the intervention of these entities.”) (citation omitted); San Diego Gas & Elec. Co., 96 FERC ¶ 61,120, at 61,054 (2001) (“[O]ver the course of the . . . proceeding, the Commission has expanded the scope . . . . We find good cause, therefore, to grant the untimely, unopposed motions to intervene . . . .”); Mobil Oil Corp., 28 FERC ¶ 61,360, at 61,649 (1984) (finding good cause to waive prohibition on answers to rehearing requests where “new factual and legal allegations not previously addressed in the pleadings” were raised); see also Kern & Tule Hydro LLC, 174 FERC ¶ 61,081 (2021) (granting late intervention filed nineteen days following issuance of order and finding good cause on the basis that some project details were not specified).
[24] The attentive reader might well wonder why I, having long advocated strict adherence to our procedural rules, may appear to be advocating that the Commission grant the late intervention requests. See N. Nat. Gas Co., 175 FERC ¶ 61,052 (2021) (Danly, Comm’r, dissenting); see also Rio Grande Pipeline Co. LLC, 179 FERC ¶ 61,236 (2022) (Danly, Comm’r, dissenting at P 1) (“The Commission has procedural rules for a reason . . . .”). I am not. Again, setting due process considerations aside for adjudication in another forum, I insist that this Commission follow the basic, black letter obligations imposed upon us by the APA. All that would have been required to satisfy those minimal requirements would have been to offer an explanation, however brief, answering the well-pleaded arguments provided in support of the requests for late intervention. The best course of action would have been to simply deny Magellan’s request and suggest that, if Magellan wanted to expand its hypothetical beyond the terms originally set forth, it should file a new petition for declaratory order under a new fact pattern
[25] Presumption, Black’s Law Dictionary (11th ed. 2019).
[26] Rehearing Order, 181 FERC ¶ 61,207 at P 11 & n.19.
[27] Enterprise Products Partners L.P. January 8, 2018 Answer at 5.
[28] Rehearing Order, 181 FERC ¶ 61,207 at P 13 (citing N.Y., New Haven, & Hartford RR Co. v. ICC, 200 U.S. 361 (1906)). Of course, the age of a case does not, in itself, counsel against reliance upon it, but the briefest of examination of New Haven will show the facts of that case inapposite, and the regulated industry different. See, e.g., Marbury v. Madison, 5 U.S. 137 (1803). Prudent regulation of an industry as important as oil pipelines calls out for a firmer basis in law for our pronouncements. Or, alternatively, we could have at least initiated a generic proceeding by which we might have both thoroughly canvassed the parties’ competing opinions and informed the Commission of the consequences of our decisions.
[29] Enterprise Products Partners L.P. December 22, 2017 Request for Clarification or, in the Alternative, Rehearing at 4.
[30] See, e.g., Medallion Pipeline Co., LLC December 22, 2017 Request for Rehearing at 23 (“There are numerous, commercially-sound reasons why a marketer, whether or not affiliated with a carrier, may enter into purported ‘loss’ transactions, from time to time, that may not fully recover the pipeline transportation charges involved.”); Enterprise Products Partners, L.P. December 22, 2017 Request for Clarification or, in the Alternative, Rehearing at 8 (“However, there are numerous legitimate business reasons as to why a shipper –whether affiliated with a pipeline or not – may opt to purchase and sell product when the price differential is unfavorable that have nothing whatsoever to do with a rebate or subsidy from the pipeline.”); Plains Marketing, L.P. December 22, 2017 Request for Clarification or, in the Alternative, Request for Rehearing at 10 (stating there are “numerous types of potential marketing transactions where a Marketing Affiliate may have independent business reasons for shipping on an Affiliated Pipeline during periods where the commodity price differential is lower than the filed tariff rate and such reasons are unrelated to the actions of the Affiliated Pipeline or the economics of the integrated company.”); Targa Liquids Mktg. & Trade LLC January 8, 2018 Late Intervention and Answer at 10 (“[Targa] agrees . . . that there are many legitimate business reasons why a shipper would move product between two points when the price differential between the origin and destination points is less than the applicable tariff rate.”); Energy Transfer Partners, L.P. January 8, 2018 Late Intervention and Answer at 8 (“[T]here are many legitimate business reasons why a shipper, whether affiliated with the pipeline or unaffiliated, would move product between two points when the price differential between the origin and destination is less than the applicable tariff rate.”).
[31] Enterprise Products Partners, L.P. December 22, 2017 Request for Clarification, or, in the Alternative, Rehearing at 10-17.
[32] Initial Order, 161 FERC ¶ 61,219 at P 12 (citation omitted); see also United States v. Champlin Ref. Co., 341 U.S. 290, 317-18 (1951) (“The ‘commodities clause’ of the Hepburn Act was designed to prevent railroads from owning businesses whose shipments they carried. When that clause was first considered in the Senate, it applied to ‘common carriers subject to’ the Act. Some senators realized that the ‘commodities clause’—read together with the Lodge Amendment making every pipe-line company subject to the Act—would force a divorcement of pipe lines from refineries. . . . Accordingly, the ‘commodities clause’ finally passed by Congress referred specifically to railroads.”).
[33] Medallion Pipeline Co., LLC December 22, 2017 Request for Rehearing at 10.
[34] Rehearing Order, 181 FERC ¶ 61,207 at P 16.
[35] Rule 206 of the Commission’s Rules of Practice and Procedure require a complaint to “[c]learly identify the action or inaction which is alleged to violate applicable statutory standards or regulatory requirements.” 18 C.F.R. § 385.206(b)(1) (emphasis added).
[36] 49 U.S.C. § 15(13).
[37] Id.
[38] I acknowledge that “[t]here is no doubt that we have authority to subpoena documents from those who are not parties and who are not subject to our jurisdiction.” Trans Alaska Pipeline Sys., 9 FERC ¶ 61,133, at 61,267 n.10 (1979) (citing Ellis v. ICC, 237 U.S. 434 (1915); Servitron v. ICC, 380 F. Supp. 1344 (Md. La. 1974), aff’d, 420 U.S. 999 (1975)).
[39] Medallion Pipeline Co., LLC December 22, 2017 Request for Rehearing at 28 (“[T]he Commission should limit the Order’s disruptive impact by making clear on rehearing that the new policy will have only prospective application.”); Producer Shippers January 16, 2018 Late Intervention and Comments at 6 (“The Commission should rule that the November 22 Order will be applied only on a prospective basis, only to new transactions, and only after a final ruling on all clarification/rehearing requests.”).
[40] Rehearing Order, 181 FERC ¶ 61,207 at P 24 (footnote omitted).