Petro Star Inc. v. Federal Energy Regulatory Commission and United States of America

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 7, 2025 Decided January 23, 2026
No. 23-1348
PETRO STAR INC.,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION AND UNITED
STATES OF AMERICA,
RESPONDENTS
ANADARKO PETROLEUM CORPORATION, ET AL.,
INTERVENORS
Consolidated with 24-1012, 24-1013
On Petitions for Review of an Order of the
Federal Energy Regulatory Commission
Kenneth M. Minesinger argued the cause for petitioner
Petro Star Inc. With him on the briefs were Dominic Draye and
Howard L. Nelson.

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Steven A. Adducci argued the cause for petitioner
ConocoPhillips Alaska, Inc. With him on the briefs were
Gregory S. Wagner and William G. Bolgiano.
Amy L. Hoff argued the cause for petitioner TAPS Carriers.
With her on the briefs was Dean H. Lefler.
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, entered appearances.
Lorrie M. Marcil argued the cause for Shipper intervenors
in support of respondents. With her on the joint brief were
Eugene R. Elrod, Steven A. Adducci, Gregory S. Wagner,
William G. Bolgiano, Robin O. Brena, Kelly M. Moghadam,
Joseph S. Koury, Andrew T. Swers, and Tina M. Grovier.
Joel F. Wacks, Deanne E. Maynard, Bradley S. Lui, and
Kerry C. Jones were on the brief for intervenor State of Alaska
in support of respondents.
Kenneth M. Minesinger, Dominic Draye, and Howard L.
Nelson were on the brief for intervenor Petro Star Inc. in
support of respondents.
Before: PILLARD, RAO, and CHILDS, Circuit Judges.
Opinion for the Court filed by Circuit Judge RAO.
RAO, Circuit Judge: The Trans Alaska Pipeline System
(“TAPS”) transports crude oil from Alaska’s North Slope to the
Port of Valdez, 800 miles south. The oil inserted into TAPS by
different shippers is commingled in a common stream but

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varies in quality. To compensate shippers that put higher-
quality oil into the pipeline but receive lower-quality
commingled oil, the TAPS owners implemented a “Quality
Bank.” Shippers of below average quality oil must pay into the
Bank, while shippers of above average quality oil are paid by
the Bank. Oil quality is determined by the relative proportions
of nine components, known as “cuts.” The Quality Bank
formula is regulated by the Federal Energy Regulatory
Commission (“FERC”) and incorporated into the TAPS
owners’ tariffs.
This case involves a decades-long dispute between
shippers over the formula for valuing the lowest-quality cut,
called “Resid.” Petitioner Petro Star thinks Resid is
undervalued relative to the other cuts, while petitioner
ConocoPhillips Alaska thinks Resid is overvalued. The TAPS
owners separately petition to challenge FERC’s conclusion that
the TAPS Quality Bank administrator violated the tariff.
We deny all three petitions. Petro Star and ConocoPhillips
have failed to demonstrate that the existing Quality Bank
formula for valuing Resid is unjust or unreasonable. We also
deny the petition of the TAPS owners because FERC’s finding
of a tariff violation was not unlawful or arbitrary.
I.
A.
TAPS is a privately owned pipeline subject to FERC’s
ratemaking authority under the Interstate Commerce Act. The
TAPS owners are required to set just and reasonable rates, and
FERC may prescribe new rates if it finds existing rates are
unjust or unreasonable.

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Shippers inserting oil into TAPS must account for its
quality through the Quality Bank formula. In 1993, FERC
approved the formula’s current methodology, which values
crude oil based on the relative proportions of nine component
cuts. This court affirmed the general methodology in OXY
USA, Inc. v. FERC, 64 F.3d 679, 687–92 (D.C. Cir. 1995), but
litigation continued over how to set prices for certain cuts.
While the lighter and more valuable cuts have published
market prices, three of the heavier, lower-quality cuts—
including Resid—do not. FERC must therefore estimate the
value of these cuts.
The dispute in this case centers on the formula for
estimating the value of Resid, the heaviest cut. Resid is
essentially the sludge left over after all other components of
crude oil have been boiled out in the refining process. Resid
can be used to make asphalt or processed in a specialized
refinery unit called a “coker” to produce marketable liquid
fuels and a coal-like solid fuel called “coke.” Because Petro
Star’s two refineries lack cokers, Petro Star returns substantial
amounts of Resid to TAPS. As the only shipper returning Resid
to the common stream, Petro Star benefits from a Quality Bank
formula that attributes a higher value to Resid because it lowers
the payments Petro Star must make for its degradation of the
common stream. See Petro Star Inc. v. FERC, 835 F.3d 97, 101
(D.C. Cir. 2016). The other shippers, by contrast, benefit from
a lower valuation for Resid, which increases the payments
Petro Star must make.
In the absence of a market for unprocessed Resid, the
Quality Bank formula presumes that Resid will be processed in
a coker to produce finished products that are sold at published
market prices. The value of Resid is calculated by estimating
its value as a coker feedstock, that is, as the raw material
processed by a coker. Resid’s value as a coker feedstock is

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determined by subtracting the costs of coking a barrel of Resid
from the published market price of the finished products that
result from coking a barrel of Resid. The current Resid
valuation formula was adopted by an administrative law judge
(“ALJ”) in 2004 after an extensive hearing and was affirmed
by both FERC and this court. Trans Alaska Pipeline Sys., 113
FERC ¶ 61,062, 61,174–80 (Oct. 20, 2005); Petro Star Inc. v.
FERC, 268 F. App’x 7, 8–9 (D.C. Cir. 2008).
B.
This case arose in 2013, when FERC opened an
investigation into whether the formula for pricing Resid was
still just and reasonable under the Interstate Commerce Act.1
Petro Star and ConocoPhillips intervened in the proceedings,
arguing the formula misvalued Resid. FERC concluded the
parties failed to establish that the existing method for valuing
Resid was unjust or unreasonable. We found FERC’s
explanation inadequate and remanded to the agency. Petro
Star, 835 F.3d at 103, 110. FERC again found the formula just
and reasonable. BP Pipelines (Alaska) Inc., 162 FERC
¶ 61,147, slip decision ¶ 2 (Feb. 20, 2018). After Petro Star
petitioned for review, we granted FERC’s unopposed motion
for voluntary remand.
On remand, an ALJ held a nine-week hearing featuring
hundreds of exhibits and more than a dozen expert witnesses
and concluded that the formula for valuing Resid remained just
and reasonable. BP Pipelines (Alaska), Inc., 179 FERC
¶ 63,013, slip decision ¶ 7 (May 16, 2022) (“Initial ALJ
1 Exercising authority under the Interstate Commerce Act, FERC
may, after a complaint or on its own initiative, investigate the
lawfulness of existing tariffs and prescribe “just and reasonable”
rates if it finds that existing rates are unjust or unreasonable. 49
U.S.C. app. §§ 15(1), 13(2) (1988).

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Decision”). FERC largely affirmed the order as to the valuation
of Resid. BP Pipelines (Alaska), Inc., 185 FERC ¶ 61,206, slip
decision ¶ 2 (Dec. 20, 2023) (“Final Order”). FERC also
concluded that the Quality Bank administrator violated the
tariff by testing the properties of Resid in the pipeline on a
monthly basis without updating the yields in the Resid
valuation formula. Id. ¶¶ 2, 73–74. Petro Star, ConocoPhillips,
and the TAPS owners timely petitioned for review, while the
remaining shippers and the State of Alaska intervened to
defend FERC’s order.
II.
Before reaching the merits, we consider our jurisdiction.
“Initial review occurs at the appellate level only when a direct-
review statute specifically gives the court of appeals subject-
matter jurisdiction to directly review agency action.” Watts v.
SEC, 482 F.3d 501, 505 (D.C. Cir. 2007). We have consistently
exercised direct review jurisdiction over challenges to FERC
orders involving oil pipelines, relying on the direct review
provisions applicable to the Interstate Commerce Commission
(“ICC”). After the ICC Termination Act of 1995, however, we
continued to exercise direct review jurisdiction without
identifying the source of our authority. We now confirm that
the courts of appeals have direct review jurisdiction over FERC
orders involving oil pipelines under the Hobbs Act.
Judicial review of FERC orders shall “be made in the
manner specified in or for” the substantive law under which
FERC acts. 42 U.S.C. § 7192(a). Because FERC acts under the
authority of the ICC (as set forth in the Interstate Commerce
Act) when it regulates oil pipelines, and because ICC orders
were subject to direct review in circuit courts under the Hobbs
Act, FERC orders regulating oil pipelines were similarly

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subject to direct review.2 See 28 U.S.C. § 2342 (1976) (adding
ICC orders to those reviewable under the Hobbs Act); 49
U.S.C. § 60502 (codifying the 1977 transfer of powers relating
to “the transportation of oil by pipeline” from the ICC to
FERC); Earth Res. Co. of Alaska v. FERC, 628 F.2d 234, 235
(D.C. Cir. 1980) (per curiam) (“[T]his court has the same
jurisdiction to review FERC orders concerning oil pipelines as
it has to review orders of the [ICC] under [the Hobbs Act].”).
In 1995, Congress enacted the ICC Termination Act,
which removed references to the ICC from the Hobbs Act and
replaced them with references to the Surface Transportation
Board. Pub. L. No. 104-88, § 305, 109 Stat. 803, 944–45.
Although there are now no orders of the ICC referenced in the
Hobbs Act, this court has continued to exercise direct review
jurisdiction over FERC oil pipeline orders, but without
explaining how such jurisdiction is consistent with the ICC
Termination Act.3 See, e.g., Husky Mktg. & Supply Co. v.
FERC, 105 F.4th 418, 421 (D.C. Cir. 2024); MarkWest
Michigan Pipeline Co., LLC v. FERC, 646 F.3d 30, 34 (D.C.
2 When Congress recodified and partially repealed the Interstate
Commerce Act in 1978, it provided that the Act was “not repealed”
to the extent its provisions “related to the transportation of oil by
pipeline.” Pub. L. No. 95-473, § 4(c), 92 Stat. 1337, 1470. The 1977
version of the Interstate Commerce Act remains the governing
organic statute for FERC’s oil pipeline authority, even though the
Act is no longer part of the U.S. Code. ExxonMobil Oil Corp. v.
FERC, 487 F.3d 945, 956 & n.1 (D.C. Cir. 2007) (per curiam).
3 In a challenge to FERC oil pipeline orders, this court ordered the
parties to be prepared to discuss the effect of the ICC Termination
Act on direct appellate jurisdiction. See Order, United Airlines, Inc.
v. FERC, No. 11-1479 (D.C. Cir. Mar. 11, 2016). Although
discussed at argument, the court assumed jurisdiction without
explanation. See United Airlines, Inc. v. FERC, 827 F.3d 122, 127–
28 (D.C. Cir. 2016).

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Cir. 2011); ExxonMobil Oil Corp. v. FERC, 487 F.3d 945, 958
(D.C. Cir. 2007) (per curiam); Ass’n of Oil Pipe Lines v. FERC,
83 F.3d 1424, 1432 n.14 (D.C. Cir. 1996).
Although the ICC is no longer listed in the Hobbs Act, its
removal was simply a function of Congress reconstituting the
erstwhile ICC as the Surface Transportation Board. Deletion of
the ICC from the Hobbs Act did not sub silentio eliminate
direct appellate review of orders made under authority
previously transferred from the ICC to FERC. We reached a
similar conclusion with respect to authority transferred from
the ICC to the Department of Transportation (“DOT”), holding
that the ICC Termination Act did not eliminate direct review of
DOT orders. Aulenback, Inc. v. Fed. Highway Admin., 103
F.3d 156, 165 (D.C. Cir. 1997). Because there was no
“indication that Congress intended a contrary result,” orders
issued under DOT’s inherited ICC authority remained
“reviewable under [the Hobbs Act].” Id. The abolition of the
ICC did not affect direct appellate review of powers previously
transferred from the ICC to other agencies.
In sum, the ICC Termination Act did not eliminate direct
appellate review jurisdiction over FERC orders involving oil
pipelines. We therefore have jurisdiction over these petitions
under the Hobbs Act.
III.
When reviewing a FERC order, we “assess whether it is
‘arbitrary, capricious … or otherwise not in accordance with
law.’” Petro Star, 835 F.3d at 102 (quoting 5 U.S.C.
§ 706(2)(A)). The arbitrary and capricious standard requires
that an agency decision “be reasonable and reasonably
explained.” Mobil Pipe Line Co. v. FERC, 676 F.3d 1098, 1102
(D.C. Cir. 2012). The reviewing court “is not to substitute its
judgment for that of the agency.” OXY USA, 64 F.3d at 690.

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FERC may prescribe “just and reasonable” rates for oil
pipelines if, after a “full hearing,” it finds that existing rates are
“unjust or unreasonable.” 49 U.S.C. app. § 15(1) (1988). The
proponent of a rate change bears the burden of showing that the
existing rate is unjust or unreasonable. BP Pipelines (Alaska)
Inc., 149 FERC ¶ 61,149, 61,975–76 (Nov. 20, 2014). A rate
may be “just and reasonable” even if the methodology
underlying it is not “the only reasonable methodology.” OXY
USA, 64 F.3d at 692.
IV.
Petitioners Petro Star and ConocoPhillips challenge
FERC’s conclusion that the TAPS Quality Bank formula for
valuing Resid remains just and reasonable. Petro Star claims
Resid is undervalued, causing Petro Star to receive too little
credit for the Resid it injects into the pipeline. Conversely,
ConocoPhillips maintains that Resid is overvalued and that
Petro Star’s payments into the Quality Bank are insufficient to
offset its degradation of the common stream. We deny both
petitions.
A.
Because there is no established market price for Resid, the
Quality Bank estimates the value of a barrel of Resid. To find
this value, the formula subtracts coking costs from the value of
coker yields and then divides by the number of barrels of Resid
processed by a hypothetical coker. The value of coker yields is
estimated by multiplying the quantity of finished products
yielded through coking (generated by an agreed-upon model)
by the published market prices of those products. Coking costs

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are found by adding the capital costs, fixed operating costs, and
variable operating costs of the hypothetical coker.4
The current dispute is over the “capital costs” component
of the coking costs in the Quality Bank formula. Capital costs
are estimated by reference to the capital invested in building a
coker (the “investment base”). Under the current formula, the
investment base is the cost of constructing a hypothetical West
Coast coker in the year 2000, adjusted for inflation using a cost
index. To calculate annual capital costs, this inflation-adjusted
amount is multiplied by a 20 percent “capital recovery factor,”
which is meant to “reflect the capital recovery West Coast
cokers would extract from … customers through their charges
for processing Resid into products with published prices.”
Final Order ¶ 152. Put another way, the Quality Bank formula
calculates annual capital costs as 20 percent of the coker’s
inflation-adjusted investment base. Based on the Quality Bank
formula, when the capital costs—and therefore coking costs—
are higher, the per-barrel value of unprocessed Resid is lower.
That is to say, the more it costs to process Resid into useful
products, the less the unprocessed Resid is worth.
4 For the purposes of analyzing this petition, the formula may be
simplified as follows:
Per Barrel Value of Resid = Value of Coker Yields - Coking Costs
Barrels of Resid Processed
where:
Coking Costs = Capital Costs + Fixed Costs + Variable Costs.
See Initial ALJ Decision ¶ 83 (providing a more detailed formula).
Again, the Quality Bank formula uses market prices of coker yields,
and the parties stipulated to the number of barrels of Resid processed.
See id. ¶¶ 14–16, 83–87 & n.234. The dispute here is limited to the
capital costs component of coking costs.

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B.
Petro Star advances three reasons why FERC’s approach
to valuing Resid is arbitrary and capricious because it
overstates capital costs and therefore undervalues Resid. We
conclude that FERC reasonably rejected Petro Star’s
arguments.
1.
Petro Star first contends the Resid valuation formula is
unjust and unreasonable because the coker investment base,
which is embedded in the capital costs component of coking
costs, should not be increased with inflation.5 As a result of
inflation adjustments, the investment base has grown from
$351.9 million to approximately $632 million as of 2020. Petro
Star maintains that this perpetual growth is unjust because “in
the real world, the $351.9 million sunk costs of the Coker
would not change and thus should not be inflated in the
[Quality Bank formula].” Petro Star insists the “ever-
increasing” investment base is inconsistent with “commercial
realities,” “punitive,” and akin to a “mortgage [that] can never
be paid off.”
FERC’s rejection of this argument was not arbitrary or
capricious. As FERC explained, estimating the “current market
value of Resid” requires “consider[ing] the current cost of
5 The inflation adjustment is technically applied last, to the entire
coking costs part of the formula. But because the inflation adjustment
can be distributed to each component of the coking costs (capital
costs, variable costs, and fixed costs), and because the order of
operations for applying the inflation adjustment and 20 percent
capital recovery factor does not matter, the inflation adjustment can
be described as applying directly to the investment base. This is how
Petro Star characterizes the inflation adjustment.

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coking Resid.” Final Order ¶ 104. The valuation formula
reasonably adjusts capital costs for inflation just as it does the
coker’s fixed and variable costs. Without a uniform adjustment
to coking costs—including capital costs—the value of coker
yields would reflect current prices but coking costs would not.
This would understate coking costs and consequently
overvalue Resid.
Petro Star’s argument that applying an inflation
adjustment to the capital costs far exceeds any construction
costs of building a coker misconstrues the formula. Again,
applying the inflation adjustment to capital costs is necessary
to ensure the formula reflects the current costs of coking. The
adjustment is not intended to update “the actual construction
cost of building a coker.” Initial ALJ Decision ¶ 237; Final
Order ¶¶ 105–06. Nor is there any “real coker to which the
capital costs can be attributed.” Final Order ¶ 106. As FERC
has repeatedly explained (and Petro Star recognized with
respect to a different cut), the cost index “is simply an
adjustment … for inflation and the passage of time.” Initial
ALJ Decision ¶ 237 (cleaned up).
FERC likewise reasonably dismissed Petro Star’s
argument that increasing the investment base over time is
inconsistent with evidence that coking activity has declined on
the West Coast and that no new cokers have been built in recent
years. FERC found that coker utilization rates remain high and
that West Coast refineries have made capital improvements to
existing cokers even if they have not built new ones. Even the
closure of a coking refinery does not establish that coker
profitability is generally declining. See id. ¶ 236 (observing
that recent closures and project cancellations were “due to
other business and economic reasons”). As FERC recognized,
the closure of a refinery that has a coker unit could increase the
profitability of the cokers at other refineries due to

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consolidation. Evidence of ongoing, profitable coking activity
supports FERC’s conclusion that capital costs should continue
to be adjusted upward with inflation.
In sum, FERC reasonably explained why an inflation
adjustment was appropriately applied to the capital costs
calculation.
2.
Petro Star’s second objection is related to its first: it claims
the 20 percent capital recovery factor is too high, again
resulting in excessive coking costs and a corresponding
undervaluation of Resid. Petro Star argues the capital recovery
factor should be replaced with a metric based on the weighted
average cost of capital.
FERC’s rejection of these arguments was reasonable. As
FERC explained, applying the 20 percent capital recovery
factor results in a capital cost of $10 per barrel of Resid in 2020,
up from $5.54 per barrel in 2000. Petro Star’s witness testified
that this $10 figure matches the “rule of thumb” coker margin
expected within the refining industry.6 It is also consistent with
or even lower than the coker margins expert witnesses
calculated during the extensive 2021 hearing. See, e.g., J.A.
1670 (FERC witness estimating real-world coker margin of
$11.20 per barrel of Resid); J.A. 1851 (ConocoPhillips’s
witness estimating coker margin of $16.78 per barrel during
2014–2019 period); see also J.A. 1157 (TAPS owners’ witness
6 The coker margin is the additional value generated from processing
a barrel of Resid through a coker. Generally speaking, this margin is
“calculated by taking revenues less the cost of feedstock and certain
operating costs.” Final Order ¶ 144 n.327. We follow the parties in
referring to this interchangeably as “coker margin” or “coker profit
margin.”

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comparing range of estimates). As FERC explained, “[b]ecause
there are no published prices for Resid, the profit margins data
for West Coast cokers provides relevant evidence of existing
commercial realities” that bear on “actual costs West Coast
cokers would impose … for processing Resid.” Final Order
¶ 152 (cleaned up).
Against this evidence, Petro Star points to overall refinery
margins, which, according to Petro Star, are much lower than
those suggested by the 20 percent capital recovery factor. But
FERC reasonably explained that Petro Star’s evidence was
about refineries in general—rather than cokers in particular—
and “[e]ven Petro Star’s witnesses acknowledge[d] that cokers
add significant value to a refinery.” Initial ALJ Decision ¶ 120.
Petro Star’s evidence was accordingly insufficient to prove the
Resid valuation formula was unjust or unreasonable. While
Petro Star quibbles with the expert witnesses’ analyses, it
presented no competing evidence regarding actual coker
margins. Given the lack of evidence, FERC reasonably
concluded that Petro Star failed to carry its burden of showing
the 20 percent capital recovery factor was unjust or
unreasonable.
Finally, FERC reasonably explained why it declined to use
the weighted average cost of capital, Petro Star’s preferred
metric. First, this metric was again based on costs for refineries
in general rather than for coking projects in particular. But as
FERC found, cokers generally face greater risks, and thus have
higher expected returns compared to other refinery operations.
Final Order ¶ 170. Second, and more fundamentally, the
“capital recovery factor does not and never was intended purely
to represent the financing cost of capital.” Initial ALJ Decision
¶ 117. Instead, it reflects expected financial returns from
operating a hypothetical coker, a fact Petro Star acknowledged
in prior proceedings when it described the relevance of “coker

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profit margins” to the capital recovery factor. Id. ¶ 108.
Because the record shows coker profit margins are at least $10
per barrel of Resid, it was not unreasonable for FERC to reject
Petro Star’s proposal to use a metric that would allocate much
lower profits to cokers.
3.
Lastly, Petro Star argues the Quality Bank formula is
unjust and unreasonable because of a mismatch between its
components: the formula uses newer, year-2000 construction
costs to calculate the coking costs but uses yields from older,
pre-1985 cokers to calculate the value of coker yields.
In 2002, the relevant parties—including Petro Star—
stipulated that the product yields from coking would “be
determined through the use of PIMS,” which is “a standard,
commercially available computer model … used to simulate
refinery operations.” Trans Alaska Pipeline Sys., 108 FERC
¶ 63,030, slip decision ¶¶ 32 n.19, 1135 (Aug. 31, 2004). Petro
Star now argues the PIMS model it agreed to was based on pre-
1985 cokers that have less valuable yields than modern cokers.
Because the base year for coker capital costs is 2000, Petro Star
argues the Resid valuation formula should reflect the higher-
value yields achieved by newer cokers. In the alternative, Petro
Star argues the investment base—and therefore capital costs—
should be lowered to reflect an older base year.
FERC reasonably rejected Petro Star’s arguments. First,
FERC explained it would be inaccurate to assume Petro Star’s
Resid would be processed in a coker built after 2000. To the
contrary, as one of Petro Star’s witnesses conceded, “most of
the West Coast cokers are older cokers.” Final Order ¶ 53
n.117; see also id. ¶ 53 n.119 (explaining “90% of [West Coast
cokers] were designed and built before 2000”).

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Second, relying on record evidence, FERC found that the
agreed-upon PIMS model continues to reflect actual West
Coast coker yields. While Petro Star identifies a theoretical
mismatch between the PIMS yields (based on coker data from
the mid-1980s) and the earnings of the hypothetical coker
(based on a coker built in 2000), Petro Star fails to present
evidence that this mismatch has any real world effects. The
record establishes that the PIMS model still reflects the actual
yields of West Coast cokers, within 2.1 percent or less. See
Initial ALJ Decision ¶ 332 (describing trial staff analyses
comparing PIMS yields to historical yield data). And as
discussed, the capital cost calculation—which multiplies the
inflation-adjusted investment base by the capital recovery
factor—continues to accurately reflect actual coker profit
margins. Because both the PIMS-generated yield estimates and
coker costs “resemble those of a typical West Coast coker,”
there is no actual mismatch. Final Order ¶ 58. FERC therefore
did not act arbitrarily by declining to change the Quality Bank
formula in response to Petro Star’s mismatch arguments.
C.
ConocoPhillips also petitions for review, arguing FERC
acted unreasonably by not increasing the capital recovery
factor. It contends the existing formula understates coker
margins for several reasons. First, ConocoPhillips maintains
that the inflation-adjusted investment base has not kept pace
with actual coker construction costs. Second, ConocoPhillips
argues that market data and earnings expectations demonstrate
that coker margins are substantially higher than the $10 per
barrel reflected in the 20 percent capital recovery factor.
We are not persuaded that FERC acted arbitrarily by
declining to increase the capital recovery factor. After
explaining at length why it was unnecessary to decrease the 20

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percent capital recovery factor, FERC concluded that “on
balance” the evidence also did not support an increase. Final
Order ¶ 178. While ConocoPhillips’s models were supportive
of FERC’s decision not to reduce the capital recovery factor,
they did not show that an increase was required. FERC
reasonably found that the model prepared by agency staff—
which produced an estimated capital recovery factor of 22.26
percent and an estimated coker margin of $11.20 per barrel of
Resid—also supported the existing 20 percent capital recovery
factor. While FERC’s goal is to assign a value to Resid
“reflecting its actual market price as closely as possible,” Petro
Star, 835 F.3d at 100, this court has never “demanded 100
percent accuracy,” which would “hold the agency to an
impossibly high standard,” Exxon Co., USA v. FERC, 182 F.3d
30, 38 (D.C. Cir. 1999) (cleaned up).
In light of the imprecision involved in estimating the value
of Resid, FERC reasonably concluded that the existing capital
recovery factor remained just and reasonable. See OXY USA,
64 F.3d at 692 (explaining a rate may be “just and reasonable”
even if the methodology underlying it is not “the only
reasonable methodology”).
* * *
Petro Star and ConocoPhillips both failed to establish that
the existing Resid valuation formula, or any of its challenged
components, is unjust or unreasonable. Estimating the value of
Resid in the absence of a market price, as the formula requires,
is an inherently imprecise endeavor that may result in a range
of just and reasonable rates. Judicial scrutiny is essential to

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ensure the Commission acted reasonably, and we conclude it
did so here.
V.
Finally, we address the petition of the TAPS owners:
ConocoPhillips Transportation Alaska, Inc., ExxonMobil
Pipeline Co., LLC, and Harvest Alaska, LLC. These companies
provide transportation services to oil producers and administer
the Quality Bank according to the terms of the Quality Bank
tariff. FERC determined on remand that the Quality Bank
administrator violated the tariff because he tested the
composition of the Resid in the pipeline but failed to use those
test results to update the Quality Bank formula. The TAPS
owners petition for review because they claim Petro Star
intends to seek damages for this violation.7
As previously discussed, the Quality Bank formula relies
on an industry model to determine the quantity of finished
products created from coking. These quantities vary based on
“yield multipliers” that reflect the characteristics of the Resid
in the pipeline. In 2004, an ALJ set these yield multipliers
based on a 2001 lab analysis of Resid. Section III.G.5 of the
Quality Bank tariff explicitly sets forth the circumstances for
retesting the common stream and updating the yield
multipliers:
The Quality Bank Administrator shall have the
discretion to retest the API gravity, sulfur content and
carbon residue of the Resid component of the
7 According to FERC, “Petro Star has disclaimed any claim to relief
from the Commission for this violation” and “instead will seek
damages in another forum.” Final Order ¶ 191. We do not address
the availability, if any, of retrospective relief for the violation of this
tariff provision.

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common stream whenever he believes that there may
be a change in the common stream that will
significantly affect the Resid component unit values.
If the Quality Bank Administrator elects to retest the
Resid component of the common stream and is
satisfied that the sample is properly taken and tested,
the new values for API gravity, sulfur content and
carbon residue content shall be used to calculate the
multipliers (product yields) in the Resid formulas[.]
J.A. 1795. Since at least 2006, the administrator has chosen to
conduct monthly tests of Resid properties in the TAPS
common stream. Notwithstanding these tests, the administrator
has continued to use the results from the 2001 analysis.
FERC found the administrator violated section III.G.5 by
failing to update the yield multipliers with the results of the
monthly tests. FERC also found that it was reasonable to
continue the monthly testing schedule the administrator had
been following, but that monthly updating of the formula
would introduce unreasonable volatility and uncertainty. FERC
therefore ordered a tariff modification to require monthly
testing and annual revisions to the yield multipliers in the
Quality Bank formula.
The TAPS owners advance two arguments for why
FERC’s finding of a tariff violation was arbitrary and
capricious and contrary to law. Neither is persuasive.
First, the TAPS owners argue FERC acted arbitrarily in
finding a violation because section III.G.5 is reasonably read to
require continued use of the 2001 baseline Resid properties
until a significant change occurred. But FERC’s interpretation
is correct under the plain terms of the Quality Bank tariff.
Oklahoma Gas & Elec. Co. v. FERC, 11 F.4th 821, 827 (D.C.
Cir. 2021) (“A tariff provision must be understood according

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to its plain meaning, which we draw from its text and
context.”). The tariff expressly gave the administrator
“discretion to retest … whenever he believes that there may be
a change in the common stream that will significantly affect the
Resid component unit values.” J.A. 1795. But “[i]f the Quality
Bank Administrator elects to retest,” then “the new
values ... shall be used to calculate the multipliers (product
yields) in the Resid formulas.” Id. (emphasis added). In short,
the administrator was not required to test, but he violated
section III.G.5 by testing and then failing to update the formula
with the new results.
Second, the TAPS owners argue it was arbitrary and
capricious for FERC to enforce a tariff provision—here, the
requirement to update the Quality Bank formula every time
Resid was retested, regardless of frequency—that FERC later
found to be unjust and unreasonable. We disagree. Under the
filed rate doctrine, regulated entities must “charge only the
rates filed with FERC.” Oklahoma Gas, 11 F.4th at 829. And
under a corollary to this principle, “agencies may not alter rates
retroactively.” OXY USA, 64 F.3d at 699. In OXY USA, we
explained that “[a]lthough the Quality Bank valuation
methodology” is not a “rate” in the traditional sense, “the filed
rate doctrine applies to changes in that methodology” because
it has long “been an integral element of the TAPS [owners’]
tariff structure.” Id. The administrator was bound to comply
with the plain terms of the Quality Bank tariff, which he failed
to do. After finding that the testing schedule prescribed by the
tariff was not just and reasonable, FERC appropriately ordered
a prospective modification to the tariff. See id. (explaining that
under section 13(2) of the Interstate Commerce Act, which
“reflect[s] these general doctrinal rules” about filed rates,
FERC “has no authority … to apply a change retroactively”).

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In sum, FERC first correctly found that the administrator
violated the plain terms of the tariff. Then, considering the
administrator’s experience with regular testing, FERC
reasonably ordered a tariff change to require monthly testing
(consistent with the administrator’s practice) and annual
updating of the Resid properties.
* * *
Because neither Petro Star nor ConocoPhillips carried its
burden of showing that the existing formula for valuing Resid
was unjust or unreasonable, we deny their petitions. And
because FERC did not err in finding the Quality Bank
administrator violated the tariff, we deny the TAPS owners’
petition as well.
So ordered.

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