The United States Court of Appeals for the District of Columbia Circuit’s August 30th opinion in petro-star-dc-circuit-taps-quality-bank-case, Case No. 15-1009, August 30, 2016 (D.C. Cir.) will reopen the Federal Energy Regulatory Commission’s (FERC) consideration of the Quality Bank associated with the Trans Alaska Pipeline System (TAPS). The crude oil put into TAPS is of differing quality, some of higher quality, some of lower quality. The Quality Bank compensates companies inputting higher quality crude so that companies inputting lower quality crude do not receive a windfall. The Quality Bank compensates companies by assigning each company’s crude oil a value based on the quality of its components or “cuts.”

The Petro Star case involved calculating the formula for the Resid cut. FERC held a hearing to investigate “the lawfulness of the existing Quality Bank methodology – particularly the valuation of Resid.” Petro Star argued that the Quality Bank undervalued the Resid cut by including a 20% capital recovery factor in the Quality Bank’s formula for Resid. Other companies disagreed, in part for practical reasons, because the higher the Quality Bank valued Resid, the lower the Quality Bank would value (and compensate) their crude. An Administrative Law Judge disagreed with Petro Star. The FERC affirmed.

On appeal the DC Circuit remanded the case for further consideration. Because (i) a “rate order [here the Quality Bank] must be modified where new evidence warrants the change” and (ii) Petro Star “offered evidence that was new in relation to what was before the Commission in its earlier determinations [of the Quality Bank] and sufficiently compelling to require reconsideration of the earlier resolution [regarding the Quality Bank],” the Commission was required to “respond meaningfully” to the evidence lest its decision be arbitrary and capricious. The Commission failed to respond meaningfully to that evidence and thus the court remanded for further consideration.

On remand, the court recognized that the FERC “might reasonably find” that the existing formula used to value Resid continues to be just and reasonable, such that Petro Star’s claim will ultimately fall short. But the court concluded, because Petro Star “raised a facially legitimate objection to the inclusion of the capital recovery factor in the Quality Bank’s processing cost adjustment for Resid, in response, the FERC must “either answer that objection or change its [Quality Bank] formula.”