Court Reviews FERC's TAPS Pipeline Tariff Ratemaking Authority

United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT Argued February 7, 2025 Decided January 23, 2026 No. 23-1348 P ETRO S TAR I NC., P ETITIONER v. F EDERAL E NERGY R EGULATORY C OMMISSION AND U NITED S TATES OF A MERICA, R ESPONDENTS A NADARKO P ETROLEUM C ORPORATION, ET AL., I NTERVENORS 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 petiti one r Petro Star Inc. With him on the briefs were Dominic Draye and Howard L. Nelson.

2 Steven A. Adducci argued the cause for petiti oner ConocoPhillips Alaska, Inc. With him on the briefs were Gregory S. Wagner and William G. Bolgiano. Amy L. Hoff argue d the cause for petitioner TAPS Carriers. With her on the briefs was Dean H. Lefler. Scott Ray Ediger, Attorney, Federal Energy R egulatory Commission, argued the cause for respondent. With him on the brief were M atthew R. Christiansen, General Counsel, a nd Robert H. Solomon, Solicitor. Robe rt J. W iggers and Robe rt 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, D e anne E. Maynard, Bradley S. Lui, and Kerry C. J ones were on the brief for int ervenor State of Alaska in support of respondents. Kenneth M. Min esinger, Dominic Draye, and Howard L. Nelson were on the brief for intervenor Petro Star Inc. in support of respondents. Before: P ILLARD, R AO, and C HILDS, Circuit Judges. Opinion for the Court filed by Circuit Judge R AO. R AO, Circuit Judge: The Trans Alaska Pipeline System (“TAPS”) transports crude oil from Alaska’s No rth Slope to the Port of Valdez, 800 miles south. The oil inser ted into TAPS by different shippers is commingled in a common stream but

3 varies in quality. To compensate shippers that put high er - quality oil into the pipeline but receive lower-quality commingled oil, the TAP S owners implemented a “Quality Bank.” Shippers of below average quality oil must pa y into the Bank, while shippers of above average qu a lity oil are paid by the Bank. O il 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 in to the TAPS owners’ tariffs. This c ase 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 thre e petitions. Petro Star and ConocoPhillips have failed to demonstr a te that the existing Quality Bank formula for valuing Resid is unjust or unreasonable. We also deny the petition of the TAPS owne rs because FERC’s finding of a tariff violation was not unlawful or arbitrary. I. A. TAPS is a privately ow ned pipeline subject to FERC’s ratemaking authority under the Interstate Commerce Act. The TAPS owners are required to set just and reasonable ra tes, and FERC may prescribe new rates if it finds existing rates are unjust or unreasonable.

4 Shippers inserting oil into TAPS must account for its quality through the Quali ty B a nk formula. In 1993, FERC approved the formula’s curre nt methodology, which values crude oil based on the relative proportions of nin e component cuts. Th is court affirmed the general methodology in OXY USA, Inc. v. FERC, 64 F.3d 679, 687–92 (D.C. Ci r. 1995), but litigation continued over how to set prices for certain cuts. While the lighter and more valuable cuts have published market prices, three o f the heavier, lower-quality cuts— including Resid—do not. FERC must therefore estimate the value of the se cuts. The dispute in this case centers on the formula for estimating the value of Resid, the heaviest c ut. Resid is essentially the sludge lef t over after all other components of crude oil have been boil ed out in the refining process. Resid can be used to make asphalt or processed in a specialized refinery unit called a “coker” to produce mark etable liquid fuels and a co al-like solid fuel called “coke.” B ecause Petro Star’s two refineries lack cokers, Petro Star returns substantial amounts of Resid to TAP S. As the only shipp er returning Resid to the common stream, Petro Star benefits from a Quality Bank formula that attributes a h igh er value to Resid because it lowers the payments Petro Sta r 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 low er valuation fo r Resid, which increases th e payments Petro Star must make. In the absence of a ma rket for unprocessed Re sid, the Quality Bank for mula presumes that Resid will be processed in a coker to produce finished products that are sold at published market prices. Th e value of Resid is calculated by estimating its value as a coker feedstock, that is, a s the raw material processed by a coker. R esid’s value as a coker feedstock is

5 determined by subt racting 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 hea ring and was affirmed by both FERC and this court. Trans Alaska Pipeline Sys., 113 FERC ¶ 61,062, 61,174–80 (Oc t. 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 wheth er the formula for pricing Resid was still jus t and reasonable under the Interstate Commerce A ct. 1 Petro Star and ConocoPhillips intervened in the procee dings, arguing the formula misvalued R esid. FERC concluded the parties failed to establish that the existing method for valuing Resid was unjust or unreasonable. We fou nd FERC’s explanation inadequate and remanded to the agency. Petro Star, 835 F.3d at 103, 110. FERC again found the for mula just and reasonable. BP Pipelines (Alaska) Inc., 162 FERC ¶ 61,147, slip decision ¶ 2 (Feb. 20, 2018). After Petro Star petitioned for review, w e granted FERC’s unopposed motion for voluntary remand. On remand, an ALJ held a nine-w ee k 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 F ERC ¶ 63,013, slip decision ¶ 7 (May 16, 2022) (“Initial ALJ 1 Exercising authori ty under the Interstat e Commerce Act, FERC may, after a complaint or on its own initiative, investigate t h e lawfulness of existing tariffs and prescribe “j u st and reasonable” rates if it finds that existing rates are unjust or unreasonable. 49 U.S.C. app. §§ 15(1), 13(2) (1988).

6 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 Qual ity 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 t he appellate level only when a direct - review statute specifically gives the court of appeals subject - matter jurisdiction to directly review agency acti on.” Watts v. SEC, 482 F.3d 501, 505 (D.C. Cir. 2007). We hav e consistently exercised direct review j urisdiction over challeng e s to FERC orders involving oil pipelines, relying on the d ire ct review provisions applicable to the Interstate Commerce Commission (“ICC”). After the ICC T ermination 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 F ERC orders involving oil pipelines under the Hobbs Act. Judicial review of F ERC orders shall “be mad e in the manner specified in or for” the substantive law under which FERC acts. 42 U.S.C. § 7192(a). Be ca use FERC acts under th e authority of the ICC (as set forth in the Interstate Commerc e Act) when it regulates oil pipelines, and bec ause ICC orders were subject to direct review in circuit courts under the Hobbs Act, FERC orders regulating oil pipelines we re similarly

7 subject to direct review. 2 S ee 28 U.S.C. § 2342 (1976) (adding ICC orders to those reviewable under the Hobbs Ac t); 49 U.S.C. § 60502 (codifying the 1977 transfer of powers r elating to “ the tr ansporta tion 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 re fe rences 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 refe re nced 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 Se e, e.g., Husky Mktg. & Supply Co. v. FERC, 105 F.4th 418, 421 (D.C. Cir. 2024); MarkWest Michigan Pipeline C o., 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 t he Act was “not repealed” to the extent its provisions “r el ated to the transporta tion of oil by pipeline.” Pub. L. No. 95 - 4 73, § 4(c), 92 S tat. 1337, 14 70. The 1977 version of the Interstat e Commerce Act remains the governing organic sta tute for FERC’s oi l pipeline au thority, eve n 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 chall enge to FERC oil pipel ine orders, this court ordered the parties t o be prepared to discuss the effect of the ICC Terminat ion Act on direct appel late j u risdiction. See Order, United Airlines, In c. 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).

8 Cir. 2011); Ex xonMobil 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 l onger listed in the Hobbs Act, its removal was simply a function of C ongre ss reconstituting the erstwhile ICC as th e 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 transferr ed from the ICC to FERC. We reached a similar conclusion with respect to authority transferred from the ICC to the Department of Tr ansportation (“DO T”), holdi ng 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 C ongre ss 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 a ffect direct appellate review of powers pre viously transferred from the ICC to other agencies. In sum, the ICC Termination Act did not eliminate direct appellate r e view jurisdiction over FERC orders invol ving oil pipelines. We therefore have jurisdi ction over these petitions under the Hobbs Act. II I. When reviewing a FER C order, we “assess wh ether it is ‘arbitrary, capric ious … or otherwise not in accorda nce 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 re viewing court “is not to substitute its judgment for that of the agency.” OXY USA, 64 F.3d at 690.

9 FERC may prescribe “just and reasonable” rates for oil pipelines if, afte r a “full hearing,” it finds that existing rates are “unjust or unrea sonable.” 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 unreasona ble. 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 methodo logy. ” OXY USA, 64 F.3d at 692. IV. Petitioners Petro Star and ConocoPhil lips challenge FERC’s conclusion that the TAPS Quality Bank formula fo r valuing Resid re mains just and reasonable. Petro Star claims Resid is underva lued, causing P etro Star to rec eive too litt le 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 in sufficient to offset its degra dation of the common stream. We deny both petitions. A. Because the re is no established market price for R esid, the Quality Bank estimates the value of a barrel of R esid. To find this value, the formula subtracts coking costs from the value of coker yields a nd then divides by the number of barrels of Resid processed by a hypothetical coker. The value of c oker 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

10 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 capita l invested in building a coker (the “investment base”). Under the current formula, the investment base is the c ost of constructing a hypothe tical 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 perc ent “capital recovery factor,” which is meant to “reflect the capital recovery West C oa st cokers would extract from … customers through their charges for processing Resid into products with published prices.” Final Or der ¶ 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 unproc essed R esid 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 analy zi ng t h i s petition, the formula may be simplified as fol lows: Per Barrel Value of Resid = Value of Coker Yields - Cok ing Costs Barrels of Resid Pr ocessed where: Coking Costs = Capi tal Costs + Fixe d Costs + Varia ble Costs. See Initial ALJ Decis ion ¶ 83 (providing a more detailed formula). Again, the Quality Ba nk f o r mu la uses market p r ices o f coker yields, and t h e 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 compone nt of coking cos t s.

11 B. Petro Star advance s 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 inve stment 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 h as grown fr om $351.9 million to approximately $632 million as of 2020. P etro Star maintains that this perpetual growth is unjust because “in the real world, the $35 1.9 million sunk costs of the C oker 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 “mortga ge [th at] 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 adjus tment is techni cally applied l as t, to the entire coking cost s part of the formula. But because the inflation adjustment can be d istributed to each componen t of the coking costs (capital costs, variable costs, a nd fixe d costs), and because the orde r of operations for applying the inflation adjustment and 20 percent capital recovery facto r does not matter, the inflation adjustment can be des cribed as applying dir ectly to the inve stment base. This is how Petro Star charact erizes the inflation adjustme nt.

12 coking Resid.” Final Order ¶ 104. T he v aluation formula reasonably adjusts capital costs for inflation just as it does the coker’s fixed a nd va ria ble 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 c onseque ntly overvalue Resid. Petro Star ’s argument that applying an i nflation adjustment to the capital costs far ex c eeds any construction costs of building a coker misconstrues the formula. Again, applying the inflation adjustment to capital costs is nec essary to ensure the formula reflects the curr ent 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 ca n be attributed.” Final Order ¶ 106. As FERC has rep e atedly explained (and Petro Star recognized with respect to a different cut), the cost index “is sim ply an adjustment … for inflation and the passage of ti me.” 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 ac tivity has declined on the West Coast and that n o new cokers have been built in recent years. FERC found that coke r utilization rates re main high and that We st Coast refineries have made capital improvements to existing c okers even if th ey 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 proje ct cancellations were “ due to other business and economic reasons”). As FERC recognized, the closure of a refinery t hat has a coker unit could increase the profitability of the coker s at other refineries due to

13 consolidation. Evidence of ongoing, profitable coking activity supports FERC’s conclusion that capital costs sho uld 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 objecti on is related to its first: it claims the 20 percent capital recovery factor is too high, again resulting in excessive coking costs and a co rre sponding undervaluation of Resid. Petro Star argues the ca pital recovery factor should be re placed with a metric based on the we ighted 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 c ost of $10 per ba rr el 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” cok er margin expected within the refining industry. 6 It is also consistent with or even lower than the coker margins exp ert 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 du ring 2014–2019 period); see a lso J.A. 1157 (TAPS owners’ witness 6 The cok er margin is the additional value generated from processing a barrel o f Resid t h rough a coke r. Generally spe aking, this margi n is “calculated by taking revenues less the cost of feedstock and certain operating costs.” Final Order ¶ 144 n.327. We follow the par ties in referring to this interch angeably as “coker m a rgin” or “coker profi t margin.”

14 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” th at bear on “actual costs West C oa st cokers would im pose … for processing R e sid.” Final Order ¶ 152 (cleaned up). Against this e vidence, Petro Star points to overall refinery margins, which, accordin g 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 coker s in particular— and “[e]ven Petro Star’s witnesses acknowle dge[d] that cokers add significant va lue 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 witness e s’ analyses, it presented no competing evidence regarding actual coker margins. Given the lack of evidence, FERC reasonably concluded that Petro Star failed to c arr y its burden of showing the 20 percent capital recovery factor was unjus t or unreasonable. Finally, FERC reasonably explained why it declined to use the weighted average c ost of capital, P e tro Star’s preferred metric. First, this metric was a gain based on costs for refineries in general rath er than for cok ing projects in particular. B ut as FERC found, cokers generally face greater risks, a nd 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 pur ely to re present the financing cost of ca pital.” Initial ALJ De cision ¶ 117. Instead, it reflec ts expected financial r eturns from operating a hypothetic al coke r, a fact Petro Star acknowledged in prior proceedings when it described the relevan ce of “c oker

15 profit margins” to the capital recovery factor. Id. ¶ 108. Because the record shows coker prof it margins are at least $10 per barrel of Resid, it wa s 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 argue s the Quality Bank formula is unjust and unreasonable bec a use 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 P etro Star— stipulated that the product yields from coking would “be determined through the use of PIMS,” which is “a standa rd, commercially available computer model … used to simulate refinery operations.” Trans Alaska Pipeline S ys., 108 FERC ¶ 63,030, slip decision ¶¶ 32 n.19, 1135 (Aug. 31, 2004). Petro Star now argues th e PIM S model it agreed to was based on pre- 1985 c okers that have les s valuable yields than modern cokers. Because the base year for coker capital costs is 2000, Petro Star argues the Resid v aluation formula should reflect the higher- value yields ac hieved by newer cok er s. In the alternative, Petro Star argue s 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 e xplained it would be inacc urate to assume Petro Star’s Resid would be proc essed in a coker built after 2000. To the contrary, as one of Petro Star ’s witness es conceded, “most of the West Coast coke rs 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”).

16 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 (ba sed on coke r data from the mid-1980s) a nd the earnings of the hypothetical coker (based on a coker buil t in 2000), Petro Star f ails 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 st aff analyses comparing PIMS yields to hist oric al 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 cost s “ re semble th ose of a typic al West Coast coker,” there is no actual mismatch. F inal Order ¶ 58. FE RC therefore did not ac t 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 unre a sonably by not increasing the capital recovery factor. It contends the existing formula understates coker margins for several reas ons. First, ConocoPhillips maintains that the inflation-adjusted investment base has not kept pace with ac tual coker construction costs. Second, ConocoPhillips argues that market data and earnings expe ctations 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 unne cessary to de crease the 20

17 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 ca pital recovery factor, they did not show th at an inc rea se w as required. FERC reasonably found that the model prepa red by agency staff— which produced an estim ated capital recovery f actor of 22.26 percent and an estimated cok er mar gin of $11.20 per barrel of Resid—also supported the existing 20 percent capital recovery factor. While FERC’s goal is to assign a v alue to Resid “reflecting it s actual market price as c losely as pos sible,” 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. FE RC, 182 F.3d 30, 38 (D.C. Cir. 1999) (cleaned up). In light of the imprecisio n involved in estimating the value of R e sid, 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 bot h failed to establish that the existing Resid valuation formula, or any of its challenge d components, is unjust or unreasonable. Estimating the value of Resid in the absence of a market price, as the form ula requires, is an inherently imprecise endeavor that may result in a range of just and reasonable rates. Judicial scrutiny is essential to

18 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 Alask a, LLC. These companies provide transportation services to oil producers and administer the Quality Bank according to the terms of the Quality Bank tariff. FERC de termined on remand that the Quality Bank administrator violated the tarif f 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 petiti on for review because th ey claim Petro Star intends to seek damages for this violation. 7 As previously discussed, the Quality B a nk formula relies on an industry model to determine the quantity of finished products created from coking. These quantities vary based on “yield multi pliers” that reflect the characteristics of the Resid in the pipeline. In 2004, an ALJ set these yield mul tipliers based on a 2001 lab analysis of Resid. Section III.G.5 of the Quality Bank tariff explicitly set s 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 c laim to relief from the Co mmission for this v iolation” and “inst ead will seek damages in another foru m.” Final Order ¶ 191. We do not address the availab ility, if an y, of re t ros pective re lief for the vi o lation of t h is tariff provision.

19 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 th e common stream and is satisfied that the sample is properly taken and test ed, 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 a t lea st 2006, the administrator has chosen to conduct monthly tests of Resid properties in the TAPS common stream. Notwiths tanding these tests, the a dministrator 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 re asona ble 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 requ ire 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 Resi d properties until a significant change occ urred. B ut FERC’s inter pretation is correct under the plai n 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

20 to its plain meaning, which we draw from its text and context.”). The t ariff expressly gave the administrator “discretion to retest … w hene ver he believes that there may be a change in the common s tream that will significantly affect the Resid component unit values.” J.A. 1795. But “[i]f the Q uality 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 for mula 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 formul a every time Resid was retested, regardless of frequency—th at 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 princ iple, “agencies may not alter rates retroactively.” OXY US A, 64 F.3d at 699. In OXY USA, we explained that “[a]lthough the Quality Bank valuation methodology” is not a “rate” in the tra ditional 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 th e Quality Bank tariff, whic h he failed to do. After finding that t he testing schedule prescribed by the tariff w as not just and reasonable, FERC appropriately ordered a prospec tive modification to the tariff. See id. (explaining that under section 13(2) of t he Interstate Comm erce Act, which “reflect[s] these general doctrinal rules” about filed rates, FERC “has no authority … to apply a change retroactively”).

21 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 tari ff 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 v aluing Resid was unjust or unreasonable, we deny their petitions. And because FERC did not err in finding the Q ua lity Bank administrator violated th e tariff, we deny the TAPS owners’ petition as well. So ordered.