SFPP LP v. FERC ( 2020 )


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  •  United States Court of Appeals
    FOR THE DISTRICT OF COLUMBIA CIRCUIT
    Argued April 3, 2020                  Decided July 31, 2020
    No. 19-1067
    SFPP, L.P.,
    PETITIONER
    v.
    FEDERAL ENERGY REGULATORY COMMISSION AND UNITED
    STATES OF AMERICA ,
    RESPONDENTS
    ASSOCIATION OF O IL PIPE LINES, ET AL.,
    INTERVENORS
    Consolidated with 19-1077, 19-1078, 19-1081, 19-1082,
    19-1084, 19-1086, 19-1090
    On Petitions for Review of Orders of
    the Federal Energy Regulatory Commission
    Charles F. Caldwell argued the cause for petitioner SFPP,
    L.P. With him on the briefs were Michelle T. Boudreaux,
    Sabina D. Walia, Daniel W. Sanborn, and Susan B. Kittey.
    Steven M. Kramer and Daniel J. Poynor were on the briefs
    for intervenor Association of Oil Pipe Lines in support of
    2
    petitioner SFPP, L.P. Steven H. Brose and Steven G. Reed
    entered an appearance.
    Gregory S. Wagner argued the cause for Shipper
    petitioners. With him on the joint briefs were Steven A.
    Adducci, Matthew D. Field, Richard E. Powers Jr., Melvin
    Goldstein, Thomas J. Eastment, and Frederick G. Jauss, IV.
    Scott Ray Ediger, Attorney, Federal Energy Regulatory
    Commission, argued the cause for respondents. With him on
    the brief were Michael F. Murray, Deputy Assistant Attorney
    General, Robert J. Wiggers and Robert B. Nicholson,
    Attorneys, U.S. Department of Justice, James P. Danly,
    General Counsel, Federal Energy Regulatory Commission,
    Robert H. Solomon, Solicitor, and Elizabeth E. Rylander,
    Attorney.
    Charles F. Caldwell, Sabina D. Walia, Daniel J. Poynor,
    Daniel W. Sanborn, Susan B. Kittey, and Steven M. Kramer
    were on the joint brief for intervenors SFPP, L.P. and
    Association of Oil Pipe Lines in support of respondents.
    Steven A. Adducci, Matthew D. Field, Gregory S. Wagner,
    Richard E. Powers Jr., Melvin Goldstein, Thomas J. Eastment,
    and Frederick G. Jauss, IV were on the joint brief for Shipper
    intervenors in support of respondents.
    Before: SRINIVASAN , Chief Judge, ROGERS and WILKINS,
    Circuit Judges.
    Opinion for the Court filed PER CURIAM.
    PER CURIAM: SFPP, L.P., is a common-carrier oil pipeline
    that transports petroleum products through Arizona, California,
    Nevada, New Mexico, Oregon, and Texas. SFPP, along with
    3
    several shippers that transport petroleum products over SFPP’s
    pipelines, challenge two Federal Energy Regulatory
    Commission orders concerning SFPP’s tariffs.
    SFPP first filed the tariff increases at issue in 2008. FERC
    initially addressed those tariffs in a series of three orders.
    SFPP, L.P., Opinion 511, 
    134 FERC ¶ 61,121
     (Feb. 17, 2011);
    SFPP, L.P., Opinion 511-A, 
    137 FERC ¶ 61,220
     (Dec. 16,
    2011); SFPP, L.P., Opinion 511-B, 
    150 FERC ¶ 61,096
     (Feb.
    19, 2015). We granted petitions for review and vacated those
    orders in part in United Airlines, Inc. v. FERC, 
    827 F.3d 122
    ,
    137 (D.C. Cir. 2016). FERC issued two further orders on
    remand. SFPP, L.P., Opinion 511-C, 
    162 FERC ¶ 61,228
    (Mar. 15, 2018); SFPP, L.P., Opinion 511-D, 
    166 FERC ¶ 61,142
     (Feb. 21, 2019).
    SFPP and Shippers petition for review of these two orders
    on remand from United Airlines. SFPP challenges FERC’s
    decisions to deny SFPP an income tax allowance, to decline to
    reopen the record on that issue, and to deny SFPP’s retroactive
    adjustment to its index rates. Shippers challenge FERC’s
    disposition of SFPP’s accumulated deferred income taxes
    (“ADIT”) and its temporal allocation of litigation costs.
    We deny the petitions for review. With respect to SFPP’s
    challenges, we hold that FERC’s denial of an income tax
    allowance to SFPP was both consistent with our precedent and
    well-reasoned and that FERC did not abuse its discretion or act
    arbitrarily in declining to reopen the record on that issue. We
    further hold that FERC reasonably rejected retroactive
    adjustment to SFPP’s index rates. With respect to Shippers’
    challenges, we hold that FERC correctly found that the rule
    against retroactive ratemaking prohibited it from refunding or
    continuing to exclude from rate base SFPP’s ADIT balance,
    and that FERC reasonably allocated litigation costs.
    4
    I. Income Tax Allowance
    The first issue in these petitions for review is whether
    FERC’s denial of an income tax allowance in SFPP’s cost of
    service was lawful. In Opinion 511-C, FERC concluded that
    granting both an income tax allowance and a discounted cash
    flow return on equity resulted in double recovery of income tax
    costs. Opinion 511-C ¶¶ 21–22. To prevent that double
    recovery, FERC denied SFPP an income tax allowance. 
    Id. at ¶ 21
    . FERC then denied rehearing on the issue. See Opinion
    511-D ¶ 10.
    SFPP contends that FERC’s orders are both contrary to our
    decision in ExxonMobil Oil Corp. v. FERC, 
    487 F.3d 945
     (D.C.
    Cir. 2007), and arbitrary and capricious in their treatment of
    United Airlines, 
    827 F.3d 122
    , in connection with their
    conclusion that the discounted cash flow return on equity
    produces a pre-tax return, and in their purported lack of
    consideration for the income tax liability of SFPP’s corporate
    parent. We disagree. FERC’s denial of an income tax
    allowance in SFPP’s cost of service was fully consistent with
    our precedent and well-reasoned.
    A. Background
    Rates for pipelines subject to FERC’s jurisdiction must be
    “just and reasonable.” BP W. Coast Prods., LLC v. FERC, 
    374 F.3d 1263
    , 1286 (D.C. Cir. 2004). Just and reasonable rates
    “yield[] sufficient revenue to cover all proper costs, including
    federal income taxes, plus a specified return on invested
    capital.” City of Charlottesville v. FERC, 
    774 F.2d 1205
    , 1207
    (D.C. Cir. 1985). “There is no question that as a general
    proposition a pipeline that pays income taxes is entitled to
    recover the costs of the taxes paid from its ratepayers.” BP W.
    5
    Coast, 
    374 F.3d at 1286
    . Master limited partnerships
    (“MLPs”) like SFPP was at relevant times, however, incur no
    income tax liability at the entity level. 
    Id.
     (citing 
    26 U.S.C. § 7704
    (d)(1)(E)). In this case, we once again address FERC’s
    income tax allowance policy for such partnership pipelines.
    FERC’s policy on this issue has a “tortuous history.”
    ExxonMobil, 
    487 F.3d at 948
    . As we outline below, this Court
    has vacated two of FERC’s previous policies. The third time
    turns out to be the charm: we now uphold FERC’s third policy.
    FERC’s first policy afforded partnership pipelines an
    income tax allowance for income taxes that were attributable
    to corporate but not individual unitholders. Lakehead Pipe
    Line Co., L.P., 
    71 FERC ¶ 61,338
    , at ¶ 62,314–15 (June 15,
    1995). Pursuant to its Lakehead policy, FERC granted SFPP
    an income tax allowance for the portion of its income attributed
    to its corporate unitholders in SFPP’s rate filings. See SFPP,
    L.P., Opinion No. 435, 
    86 FERC ¶ 61,022
    , at ¶ 61,102–04 (Jan.
    13, 1999), reh’g denied in relevant part, Opinion No. 435-A,
    
    91 FERC ¶ 61,135
    , at ¶ 61,508–09 (May 17, 2000).
    This Court vacated those orders in relevant part. BP W.
    Coast, 
    374 F.3d at 1285
    . We concluded that the Lakehead
    policy lacked a reasoned basis to afford “corporate tax
    allowances for corporate unit holders, but [not] individual tax
    allowances reflecting the liability of individual unit holders.”
    
    Id. at 1290
    . FERC sought to justify that distinction on the
    ground that individuals who invest in corporations that in turn
    invest in pipelines face an additional layer of taxation not faced
    by investors who invest directly in pipelines. 
    Id. at 1288
    . We
    rejected that ground as “a product of the corporate form, not of
    the regulated or unregulated nature of the pipeline or any
    comparable investment or of the risks involved therein.” 
    Id. at 1291
    . We further concluded that, when the regulated entity
    6
    generates no tax, “the regulator cannot create a phantom tax in
    order to create an allowance to pass through to the rate payer.”
    
    Id.
     We reasoned that investor-level income tax costs are no
    different than any other investor-level cost, such as
    bookkeeping expenses, for which investors receive no separate
    allowance. 
    Id.
     We thus concluded that SFPP was “entitled to
    no allowance for the phantom income taxes it did not pay.” 
    Id. at 1288
    .
    In response to BP West Coast, FERC adopted its second
    policy. That policy in a sense leveled up rather than down,
    affording partnership pipelines an income tax allowance “on all
    partnership interests . . . if the owner of that interest has an
    actual or potential income tax liability on the public utility
    income earned through the interest.” Policy Statement on
    Income Tax Allowances, 
    111 FERC ¶ 61,139
    , at ¶ 61,736 (May
    4, 2005). Pursuant to that policy, FERC granted SFPP an
    income tax allowance on remand from BP West Coast to
    provide for the taxes paid on partnership income for both its
    individual and corporate partners. SFPP, L.P., 
    111 FERC ¶ 61,334
    , at ¶ 62,455–56 (June 1, 2005) (SFPP 2005 ITA
    Order).
    This Court denied, in relevant part, petitions for review of
    FERC’s order on remand. ExxonMobil, 
    487 F.3d at 955
    . We
    concluded that FERC had “resolved the principal defect of the
    Lakehead policy, which was the inadequately explained
    differential treatment of the tax liability of individual and
    corporate partners.” 
    Id. at 951
    . We also held that FERC had
    adequately explained why granting an income tax allowance
    did not create a phantom tax liability. 
    Id.
     at 954–55. In
    particular, because income taxes on each partner’s distributive
    share of the pipeline’s income must be paid regardless of
    whether the partner actually receives a distribution, we held
    that FERC reasonably attributed such taxes to the regulated
    7
    entity. 
    Id. at 952
    . In closing, we noted that “a fair return on
    equity might have been afforded if FERC had . . . comput[ed]
    return on pretax income and provid[ed] no tax allowance at
    all,” but we left that “policy decision” to FERC. 
    Id. at 955
    .
    SFPP filed to increase its tariffs again in 2008, and FERC
    again granted SFPP a full income tax allowance. See Opinion
    511 ¶ 61,546, reh’g denied in relevant part, Opinion 511-A
    ¶ 62,353.
    Shippers petitioned for review of those orders. They
    contended that granting an income tax allowance in addition to
    a return on equity calculated via FERC’s discounted cash flow
    methodology results in a double recovery of tax costs. United
    Airlines, 827 F.3d at 134. We granted those petitions in United
    Airlines, concluding that FERC had failed to demonstrate
    otherwise, rendering its orders arbitrary or capricious. Id. We
    reasoned that FERC’s discounted cash flow methodology
    “determines the pre-tax investor return required to attract
    investment, irrespective of whether the regulated entity is a
    partnership or a corporate pipeline.” Id. at 136. Moreover,
    unlike corporate pipelines, partnership pipelines incur no
    income taxes at the entity level. Id. Therefore, granting an
    income tax allowance would account only for taxes already
    provided for in the discounted cash flow return on equity. See
    id. We then vacated and remanded to FERC to consider
    “mechanisms for which the Commission can demonstrate that
    there is no double recovery,” such as “remov[ing] any
    duplicative tax recovery for partnership pipelines directly from
    the discounted cash flow return on equity,” or “eliminating all
    income tax allowances and setting rates based on pre-tax
    returns.” Id. at 137.
    In response to United Airlines, FERC adopted its third
    policy. Under that policy, FERC would “no longer permit
    8
    MLPs to recover an income tax allowance in their cost of
    service.” Inquiry Regarding the Commission’s Policy for
    Recovery of Income Tax Costs, 
    162 FERC ¶ 61,227
    , at ¶ 8
    (Mar. 15, 2018). The same day it adopted that policy, FERC
    denied SFPP an income tax allowance on the basis that granting
    an income tax allowance in addition to a discounted cash flow
    return on equity would result in double recovery of income tax
    costs. Opinion 511-C ¶¶ 21–22. FERC denied rehearing on
    the issue. See Opinion 511-D at ¶ 10. SFPP now petitions for
    review.
    B. Double Recovery
    We review FERC orders under the Administrative
    Procedure Act (“APA”), which empowers the Court to reverse
    “any agency action that is arbitrary, capricious, an abuse of
    discretion, or otherwise not in accordance with law.” Hoopa
    Valley Tribe v. FERC, 
    913 F.3d 1099
    , 1102 (D.C. Cir. 2019)
    (citation and internal quotation marks omitted); see 
    5 U.S.C. § 706
    (2)(A). Under the arbitrary and capricious standard,
    “FERC’s decisions will be upheld as long as the Commission
    has examined the relevant data and articulated a rational
    connection between the facts found and the choice made.”
    ExxonMobil, 
    487 F.3d at 951
    . “In reviewing FERC’s orders,
    we are ‘particularly deferential to the Commission’s expertise’
    with respect to ratemaking issues.” 
    Id.
     (quoting Ass’n of Oil
    Pipe Lines v. FERC, 
    83 F.3d 1424
    , 1431 (D.C. Cir. 1996)). But
    the Court gives no deference to an agency’s interpretation of
    judicial precedent. New York New York, LLC v. NRLB, 
    313 F.3d 585
    , 590 (D.C. Cir. 2002).
    FERC’s orders adopt and apply a policy that is consistent
    with this Court’s precedents in BP West Coast, ExxonMobil,
    and United Airlines, and is reasonably explained. Accordingly,
    we deny the petition for review on the double-recovery issue.
    9
    First, FERC’s policy is consistent with this Court’s
    precedents. While we upheld an income tax allowance for
    SFPP in ExxonMobil, 
    487 F.3d at 955
    , we clarified in United
    Airlines that ExxonMobil did not foreclose “the possibility of
    eliminating all income tax allowances and setting rates based
    on pre-tax returns,” 827 F.3d at 137. Indeed, we noted in
    ExxonMobil that “a fair return on equity might have been
    afforded if FERC had . . . comput[ed] return on pretax income
    and provid[ed] no tax allowance at all for the pipeline owners.”
    
    487 F.3d at 955
    . ExxonMobil held only that FERC had
    adequately justified its “policy decision” to provide an income
    tax allowance in that case. 
    Id.
    That case, though, implicitly reserved the double-recovery
    issue because FERC represented that it was addressing it in a
    separate proceeding. United Airlines, 827 F.3d at 135. And in
    United Airlines, we concluded that FERC had failed to engage
    in reasoned decision-making on the double-recovery issue. Id.
    at 134. We charged FERC on remand with considering
    “mechanisms for . . . demonstrat[ing] that there is no double
    recovery,” including potentially “eliminating all income tax
    allowances and setting rates based on pre-tax returns.” Id. at
    137. FERC’s orders do exactly that.
    Of course, while an “agency is free to adopt a new policy
    on remand” following vacatur of its prior policy for lack of
    reasoned decision-making, the agency still must provide a
    reasoned basis for that new policy. ExxonMobil, 
    487 F.3d at 954
    . FERC did so here. FERC concluded that granting both
    an income tax allowance and a discounted cash flow return on
    equity results in double recovery of tax costs, and, to avoid that
    problem, denied SFPP an income tax allowance. Opinion
    511-C ¶¶ 21–22.
    10
    SFPP no longer challenges FERC’s solution to the double-
    recovery problem, but only the problem’s existence in the first
    place. On that score, FERC’s double-recovery finding tracked
    this Court’s analysis in United Airlines. FERC reasoned from
    two core premises. First, SFPP does not incur entity-level
    income taxes. Opinion 511-C ¶ 22. Second, the discounted
    cash flow methodology determines “a return that covers
    investor-level taxes and leaves sufficient remaining income to
    earn investors’ required after-tax return.” 
    Id.
     From those two
    premises, it follows that granting SFPP an income tax
    allowance for its investor-level income taxes and a discounted
    cash flow return on equity results in a double recovery of
    income tax costs. 
    Id.
    SFPP challenges only the second premise, contending that
    the discounted cash flow methodology does not determine a
    pre-tax return. SFPP contends that, because investors knew,
    under FERC’s previous policy approved in ExxonMobil, that
    they would recover income tax costs via an income tax
    allowance, they would not require a return on equity that covers
    those same income taxes. We cannot conclude that FERC’s
    contrary conclusion was unreasonable.
    Under FERC’s discounted cash flow methodology, a
    pipeline’s return on equity is based on the yields of a proxy
    group of publicly traded securities with comparable risks.
    United Airlines, 827 F.3d at 128. FERC calculates those yields
    as the present value of expected dividends or distributions
    divided by the stock or unit price. Id. Investors must pay
    income taxes on their distributive share of the pipeline’s
    income, regardless of whether the source of that income is an
    income tax allowance or any other cost-of-service line item.
    See ExxonMobil, 
    487 F.3d at
    952 (citing United States v. Basye,
    
    410 U.S. 441
    , 453 (1973)). Consequently, an investor’s
    distributive share of the pipeline’s income must provide for
    11
    both the investor’s income tax liability on that income and the
    investor’s after-tax required return, regardless of whether the
    pipeline is afforded an income tax allowance. See Opinion
    511-C ¶ 22.
    FERC explained this phenomenon as follows:
    If an MLP Pipeline obtains a new revenue
    source that increases distributions to investors
    (such as an income tax allowance), the unit
    price will rise until, once again, the investor
    receives the cash flow necessary to cover the
    investor’s income tax liabilities and to earn an
    after-tax return that is comparable to other
    investments of similar risk. Likewise, if the
    MLP’s cash flows are reduced (such as via the
    removal of the income tax allowance) and
    consequently distributions decline, the MLP
    unit price will drop until the returns once again
    both cover investors’ tax costs and provide
    sufficient after-tax returns. Whether or not an
    MLP Pipeline receives an income tax
    allowance, the MLP’s [discounted cash flow]
    return will always be a pre-investor tax return.
    Opinion 511-D ¶ 14 (citations omitted). Thus, FERC explained
    that granting an income tax allowance for investor-level taxes
    does not alter the investor’s discounted cash flow rate of return.
    It only inflates the pipeline’s cost of service with tax costs
    already covered by that return.
    SFPP provides no coherent basis to question that analysis.
    SFPP suggests that if an MLP pipeline obtains an income tax
    allowance, the unit price will rise, which will lower the
    discounted cash flow rate of return. But SFPP neglects that the
    12
    unit price rises because expected distributions rise, thus
    producing no change in the rate of return, as FERC explained.
    
    Id.
    SFPP alternatively contends that that analysis fails to
    account for the tax liability of SFPP’s corporate parent. That
    is incorrect. As FERC explained, “investor-level costs . . . are
    not included in a line item in the cost of service” because they
    are “adequately addressed by the [discounted cash flow return
    on equity].” Opinion 511-C ¶ 29 n.67. Investors, including
    corporations, will not invest “unless the returns are sufficient
    to (a) cover the investor’s costs and (b) allow the investor to
    retain a sufficient return notwithstanding those costs.” 
    Id.
     And
    as we explained previously, investor-level income tax costs are
    “no different” than any other investor-level cost, like
    bookkeeping expenses. BP W. Coast, 
    374 F.3d at 1291
    .
    In sum, consistent with our precedents, FERC reasonably
    identified a double-recovery problem, and reasonably chose to
    solve that problem by removing the income tax allowance for
    partnership pipelines. Accordingly, we deny the petition for
    review of this issue.
    II. Reopening the Record
    The second issue in these petitions for review is whether
    FERC’s denial of SFPP’s request to reopen the record was
    lawful. SFPP contends that FERC abused its discretion and
    arbitrarily treated SFPP differently from similarly situated
    pipelines.* We hold that FERC neither abused its discretion
    nor acted arbitrarily.
    *
    SFPP expressly frames its contentions for the wrongfulness of FERC’s
    refusal to reopen the record as “arbitrary and capricious”
    arguments. SFPP’s Opening Br. 25; see generally 
    id.
     at 25–32. While we
    have occasionally iterated the standard of review applied to such a refusal
    13
    FERC “may” reopen the record if FERC “has reason to
    believe that [doing so] is warranted by any changes in
    conditions of fact or of law.” 
    18 C.F.R. § 385.716
    (c). Changes
    always occur after closing the record, so such discretion “is
    reserved for extraordinary circumstances.” Cities of Campbell
    v. FERC, 
    770 F.2d 1180
    , 1191 (D.C. Cir. 1985). FERC need
    not “hold[] an evidentiary hearing open indefinitely,” waiting
    for a party to “figur[e] out what its story really is.” 
    Id.
     at 1191–
    92. We are similarly reluctant to remand for further
    proceedings absent a change “that is not merely ‘material’ but
    . . . goes to the very heart of the case.” Greater Bos. Television
    Corp. v. FCC, 
    463 F.2d 268
    , 283 (D.C. Cir. 1971).
    After the issuance of Opinion 511-C, SFPP filed a motion
    to reopen the record, proposing to introduce four new exhibits
    on double recovery. Opinion 511-D ¶ 19. FERC denied
    SFPP’s motion, concluding that SFPP’s proffers provided “no
    basis to warrant reopening the record at this late stage in the
    proceeding that outweighs the need for finality in the
    administrative process.” Id. at ¶ 27. FERC noted that SFPP
    had “fully litigated” this issue “through briefing and expert
    testimony in the Commission proceeding prior to United
    Airlines, briefing before the D.C. Circuit, its comments and
    supplemental comments following the United Airlines remand,
    and its request for rehearing of Opinion No. 511-C.” Id.
    (citations omitted).
    as “abuse of discretion,” see, e.g., Minisink Residents for Envtl. Pres. &
    Safety v. FERC, 
    762 F.3d 97
    , 115 (D.C. Cir. 2014) (citation omitted), we
    have also recognized that “arbitrary, capricious, or an abuse of discretion”
    review under 
    5 U.S.C. § 706
    (2)(A) “is now routinely applied by the courts
    as one standard under the heading of ‘arbitrary and capricious review,’”
    Eagle Broad. Grp., Ltd. v. FCC, 
    563 F.3d 543
    , 551 (D.C. Cir. 2009); accord
    HARRY T. EDWARDS & LINDA A. ELLIOTT, FEDERAL STANDARDS OF
    REVIEW 278 (3d ed. 2018). We disambiguate SFPP’s lines of argument for
    the sake of analytical clarity.
    14
    FERC did not abuse its discretion in so concluding. SFPP
    contends that the market response to Opinion 511-C warranted
    reopening the record. But a market response, while relevant, is
    a kind of change that often occurs following issuance of a
    FERC opinion. And FERC itself concluded that the response
    here, namely significant drops in MLP prices, “do[es] not
    undercut the holdings of Opinion No. 511-C.” Id. at ¶ 34.
    SFPP further contends that consideration of the income taxes
    for SFPP’s corporate parent warranted reopening the record.
    But, as FERC explained, any argument for an income tax
    allowance solely for SFPP’s corporate parent was both
    procedurally untimely because SFPP failed to raise the issue to
    FERC prior to its request for rehearing, id. at ¶ 41, and
    substantively dubious given this Court’s vacatur of the
    Lakehead policy in BP West Coast, see id. at ¶¶ 41–45.
    Nor did FERC treat SFPP differently from similarly
    situated pipelines. To be sure, in denying rehearing of its
    revised policy, FERC indicated that parties “will not be
    precluded in a future proceeding from arguing and providing
    evidentiary support . . . and demonstrating that [their] recovery
    of an income tax allowance does not result in a double-recovery
    of investors’ income tax costs.” Inquiry Regarding the
    Commission’s Policy for Recovery of Income Tax Costs,
    
    164 FERC ¶ 61,030
    , at ¶ 8 (July 18, 2018). FERC did also
    order further proceedings in SFPP’s rate case after issuance of
    the 2005 Policy Statement on remand from BP West Coast.
    SFPP 2005 ITA Order ¶¶ 66–77. But here, SFPP had ample
    chance to present its case on the double-recovery issue both
    leading up to and on remand from United Airlines. Opinion
    511-D ¶ 27. It was not arbitrary for FERC to deny SFPP “yet
    another bite at the apple” while leaving the door open for other
    pipelines to argue the double-recovery issue on the facts of
    their cases. 
    Id.
    15
    III. Index Rates
    The third issue in these petitions for review is whether
    FERC unlawfully directed SFPP to use its originally filed index
    rates in its compliance filing. SFPP contends that FERC’s
    decision conflicted with BP West Coast and was arbitrary. We
    disagree on both counts.
    In setting prospective rates, “it is ordinarily impossible for
    a pipeline to know at the time of filing what its actual costs will
    be during the effective period of the filed rates.” BP W. Coast,
    
    374 F.3d at 1307
    . Consequently, SFPP uses a test year to
    calculate its cost of service. 
    Id.
     SFPP then designs a rate to
    reflect that cost of service, and multiplies that rate by an index
    to calculate the rate each year during the effective period for
    those rates. See 
    id. at 1302
    . In BP West Coast, we approved
    use of the same indexing methodology used to calculate
    prospective rates to also calculate retrospective reparations in
    rate cases. 
    Id. at 1307
    .
    In its original filing, SFPP proposed index rates for 2012
    and 2013 of 5.4% and 7.77%, respectively. Opinion 511-C
    ¶ 55. But SFPP’s compliance filing to Opinion 511-B, which
    calculated certain refunds, used index rates of 5.52% and 8.5%
    for those years. 
    Id.
     In Opinion 511-C, FERC ordered SFPP to
    recalculate its refunds and going-forward rates based on its
    originally filed index rates. Id. at ¶ 57. FERC explained that it
    would not permit refunds following a rate case that are based
    on index rates different from those previously filed by the
    pipeline and accepted by FERC. Id.
    That decision does not conflict with BP West Coast. In BP
    West Coast, we upheld the use of indexes for retrospective
    reparations calculations, 
    374 F.3d at 1307
    , but we had no
    16
    occasion to consider the issue here: “the permissibility of
    retroactive indexing increases that had not previously been
    sought by the pipeline,” Opinion 511-C ¶ 57.
    FERC’s decision was also well-reasoned. FERC justified
    its position in Opinion 522-B on SFPP’s East Line Rates. 
    Id.
    (citing SFPP, L.P., Opinion 522-B, 
    162 FERC ¶ 61,229
     (Mar.
    15, 2018)). In Opinion 522-B, FERC provided five reasons for
    holding SFPP to its originally filed index rates. Opinion 522-
    B ¶¶ 16–21.
    First, SFPP’s cost-of-service litigation “neither altered the
    industry-wide annual inflationary changes justifying the . . .
    annual index changes nor addressed the annual cost changes
    SFPP itself experienced.” 
    Id. at ¶ 16
    . And the fact that FERC
    reduced SFPP’s rates in its rate case “does not justify allowing
    SFPP now to revisit its . . . indexing filings that involve
    unrelated cost changes.” 
    Id.
     Second, allowing SFPP’s
    retroactive adjustment would inoculate SFPP from the risk of
    its chosen ratemaking strategy. 
    Id. at ¶ 17
    . Third, it would
    “undermine the simplified and streamlined procedures
    indexing was intended to achieve.” 
    Id. at ¶ 18
    . Shippers would
    need to litigate index increases when SFPP initially proposed
    them and again when SFPP newly proposed them at the
    compliance stage, and potentially again should SFPP propose
    still different index increases following further compliance
    filings. 
    Id.
     Fourth, SFPP’s adjustment would disregard
    regulations providing for 30-days’ notice of rate changes. 
    Id. at ¶ 19
    . Fifth and finally, SFPP’s retroactive changes would
    “undermine predictability and rate certainty for shippers.” 
    Id. at ¶ 20
    . While shippers had the opportunity to consider SFPP’s
    rates and any aspects subject to ongoing litigation when
    deciding to use SFPP’s services, shippers had “no notice of the
    . . . index increases SFPP now seeks to retroactively impose”
    on shippers’ “prior movements.” 
    Id.
    17
    SFPP provides no substantial basis to question that well-
    reasoned decision. We accordingly deny the petition for
    review as to this issue.
    IV. Shippers’ Petition
    For their part, Shippers petition for review of FERC’s
    orders on two bases: first, FERC’s treatment of the ADIT
    balance that accumulated between 1992 and 2008; and second,
    FERC’s decision that SFPP could recover its litigation
    expenses over a three-year period. We find that FERC’s
    decisions on these points were reasonable, reasonably
    explained, and not otherwise arbitrary or capricious. We
    therefore deny Shippers’ petition for review.
    Again, FERC orders are reviewed under the APA’s
    arbitrary and capricious standard. Hoopa Valley Tribe, 913
    F.3d at 1102; 
    5 U.S.C. § 706
    (2)(A). So long as the
    Commission “has examined the relevant data and articulated a
    rational connection between the facts found and the choice
    made,” we will uphold its decisions. ExxonMobil, 
    487 F.3d at 951
    . And we are “‘particularly deferential to the Commission’s
    expertise’ with respect to ratemaking issues.” 
    Id.
     (quoting
    Ass’n of Oil Pipe Lines, 
    83 F.3d at 1431
    ).
    A. Background
    A “depreciation deduction” is a tax deduction whereby “a
    property owner can deduct the cost of its property over the
    property’s useful life.” Telecom*USA, Inc. v. United States,
    
    192 F.3d 1068
    , 1069 (D.C. Cir. 1999). The most basic method
    of depreciation is “straight-line” depreciation, which allows a
    property owner to spread the depreciation of an asset evenly
    across the years of its useful life. See 
    id.
     at 1069–70 (“[F]or
    18
    example, an asset with an initial cost of $1,000,000, a salvage
    value of $50,000, and a useful life of 10 years would generate
    annual deductions of $95,000.”). Pertinent here, the IRS also
    allows for “accelerated” depreciation, whereby a “company
    pays less tax than it would under straight-line depreciation in
    the early years of the life of the equipment, and more tax than
    it would under straight-line depreciation in the later years of
    the life of the equipment.” Town of Norwood v. FERC, 
    53 F.3d 377
    , 382 (D.C. Cir. 1995) (emphases omitted); accord, e.g.,
    Opinion 435 ¶ 61,092 (Jan. 13, 1999). In other words, under
    the IRS’s accelerated-depreciation scheme, a company may
    frontload its tax write-offs for the depreciation of an asset.
    FERC’s ratemaking principles employ straight-line
    depreciation. See Opinion 511-D ¶ 62. But FERC permits a
    utility to shield its ratepayers from sudden rate increases
    resulting from accelerated depreciation by using an accounting
    method called “tax normalization.” Town of Norwood, 
    53 F.3d at 382
    . Under tax normalization, the utility creates a deferred
    tax account, called an ADIT account:
    The company charges the ratepayers the tax that
    they would be responsible for under straight-
    line depreciation throughout the life of the
    equipment. Thus, in the early years, the
    company collects more in rates than it pays in
    taxes to the IRS; in the later years, it collects
    less in rates than it pays in taxes. The company
    holds onto the surplus from the early years in a
    deferred tax account, and uses this surplus to
    make up for the deficit in the later years.
    
    Id.
     (emphases omitted); see also Opinion 511-D ¶ 91 (“The
    purpose of normalization is matching the pipeline’s cost-of-
    19
    service expenses in rates with the tax effects of those same cost-
    of-service expenses.”). Additionally, a pipeline
    must reflect ADIT balances in its rate base.
    This ensures that regulated entities do not earn
    a return on cost-free capital based upon the
    timing differences between (a) when pipelines
    recover the normalized tax costs in rates using
    straight-line depreciation; and (b) when taxes
    are actually paid to the IRS using accelerated
    depreciation. These timing differences create
    “cost-free” capital because the pipeline may use
    these funds without paying either a return to
    equity investors or interest on debt. In a cost-
    of-service proceeding, the Commission requires
    the pipeline to deduct the sums in the ADIT
    liability accounts from rate base so the pipeline
    does not improperly earn a return on amounts
    funded by cost-free capital. Reflecting ADIT in
    rate base generally lowers rates because the
    pipeline does not earn a return on the deferred
    taxes.
    Opinion 511-D ¶ 63. FERC’s calculations to determine a cost-
    based rate base use the trended original cost (“TOC”) method,
    which “requires the determination of a nominal (inflation-
    included) rate of return on equity that reflects the pipeline’s
    risks and its corresponding cost of capital.” Williams Pipe Line
    Co., 
    31 FERC ¶ 61,377
    , at ¶ 61,834 (June 28, 1985).
    In Opinion 511-C, having found that SFPP was not entitled
    to include an income tax allowance in its rates, see Opinion
    522-B ¶¶ 15–22, FERC directed SFPP to make a compliance
    filing recalculating its rates and the refunds due to shippers.
    Opinion 511-C ¶¶ 57–58. SFPP then made a compliance filing,
    20
    J.A. 934–68, wherein it removed the ADIT balance from its
    cost of service (“i.e., eliminate[d] the deduction from rate base
    of ADIT liability accounts,” Opinion 511-D ¶ 64, and
    “eliminated the recognition of ADIT balances of
    approximately $28,021,359,” 
    id. at ¶ 89
    ). SFPP’s compliance
    filing also included, in the rates effective from August 2008
    through July 2011, a litigation surcharge, whereby it proposed
    to recover in its rates the $8 million-plus it incurred over the
    course of its litigation of this case, 
    id. at ¶¶ 109, 111, 118
    ; see
    Opinion 511 ¶ 37 (adopting three-year surcharge); Opinion
    511-A ¶ 42 (on rehearing, affirming adoption of three-year
    surcharge).
    Shippers filed comments opposing both of these aspects of
    SFPP’s compliance filing. See, e.g., J.A. 971; see generally 
    id.
    at 969–95. In particular, Shippers argued “that as a result of
    the elimination of SFPP’s income tax allowance, the entire
    ADIT balance [wa]s overfunded and should be amortized to
    shippers,” Opinion 511-D ¶ 65; see also 
    id.
     at ¶¶ 66–67, and
    that “the litigation expenses should be recovered over the entire
    litigation and refund period, rather than an arbitrary three-year
    period,” because the litigation lowered rates during the entire
    period, benefitting all the shippers, 
    id. at ¶ 111
    . FERC rejected
    Shippers’ arguments on these scores in Opinion 511-D. 
    Id.
     at
    ¶¶ 61–108 (ADIT); 
    id. at ¶ 118
     (litigation surcharge).
    B. ADIT
    FERC’s explanation for its decision to permit SFPP to
    eliminate the ADIT balance, and not to require amortization of
    the sum that was previously ADIT back to Shippers through
    prospective rates, rested on three pillars. First, FERC reasoned
    that the elimination of the ADIT balance was appropriate in
    light of the removal from SFPP’s cost of service of an income
    tax allowance. Opinion 511-D ¶¶ 90–91 (“As SFPP is not
    21
    permitted to recover an income tax allowance in its rates, there
    is no rationale for requiring SFPP to record current or deferred
    income taxes on its books.”). FERC further explained that
    “ratepayers have no equitable interest or ownership claim in
    ADIT.” 
    Id. at ¶ 92
    ; see also 
    id. at ¶ 94
     (“Rates designed
    pursuant to the normalization principles . . . do not ‘over-
    collect’ the pipeline’s tax expenses in the early years. Rather,
    such rates require shippers receiving service in the early years
    to pay their properly allocated share of the pipeline’s tax
    expenses for the period of their service.”) (citation omitted).
    Finally, FERC explained that requiring SFPP to return ADIT
    to ratepayers would violate the rule against retroactive
    ratemaking. 
    Id.
     at ¶¶ 93–98, 100–03, 105.
    Shippers contend that FERC committed an unexplained
    departure from its precedent and policies in permitting SFPP to
    eliminate the ADIT balance rather than amortizing it. Shippers
    also dispute FERC’s characterization of their proposed solution
    of amortization as retroactive ratemaking, and further assert
    that, in allowing SFPP to simply eliminate the ADIT balance,
    FERC has in fact engaged in retroactive ratemaking.
    We are not persuaded. We agree with FERC that
    refunding ADIT to ratepayers or continuing to remove it from
    rate base would constitute impermissible retroactive
    ratemaking, and accordingly we have no need to address
    Shippers’ other contentions. Shippers’ twin arguments on the
    retroactive-ratemaking issue—that amortizing the ADIT sum
    back to ratepayers would not have been retroactive ratemaking,
    and that failing to do so was—are non-starters, as FERC
    correctly concluded that refunding ADIT, or continuing to
    remove it from rate base, would violate the rule against
    retroactive ratemaking.
    22
    “[T]he rule against retroactive ratemaking ‘prohibits the
    Commission from adjusting current rates to make up for a
    utility’s over- or under-collection in prior periods.’” Old
    Dominion Elec. Coop. v. FERC, 
    892 F.3d 1223
    , 1227 (D.C.
    Cir. 2018) (quoting Towns of Concord, Norwood, & Wellesley
    v. FERC, 
    955 F.2d 67
    , 71 n.2 (D.C. Cir. 1992)). The question
    of whether a particular method of ratemaking is retroactive, and
    thus impermissible, is a question of law rooted in the Interstate
    Commerce Act (“ICA”), 49 U.S.C. app. § 1 et seq. (1988), the
    statute that governs FERC’s regulation of oil pipelines.
    Frontier Pipeline Co. v. FERC, 
    452 F.3d 774
    , 776 (D.C. Cir.
    2006). The rule against retroactive ratemaking is a “corollary”
    of the filed rate doctrine, NSTAR Elec. & Gas Corp. v. FERC,
    
    481 F.3d 794
    , 800 (D.C. Cir. 2007), under which “a regulated
    entity may not charge, or be forced by the Commission to
    charge, a rate different from the one on file with the
    Commission for a particular good or service.” Assoc. Gas
    Distribs. v. FERC, 
    898 F.2d 809
    , 810 (D.C. Cir. 1990) (mem.)
    (per curiam) (Williams, J., concurring). The filed rate doctrine
    is rooted in Section 6(7) of the ICA, 49 U.S.C. app. § 6(7)
    (1988). Frontier Pipeline Co., 
    452 F.3d at 776
     (“[Section] 6(7)
    . . . . establishes the familiar filed rate doctrine.”); see Ark. La.
    Gas Co. v. Hall, 
    453 U.S. 571
    , 577 (1981) (“The filed rate
    doctrine has its origins in [the Supreme] Court’s cases
    interpreting the Interstate Commerce Act.”). “The retroactive
    ratemaking doctrine is . . . a logical outgrowth of the filed rate
    doctrine, prohibiting the Commission from doing indirectly
    what it cannot do directly.” Assoc. Gas Distribs., 
    898 F.2d at 810
     (Williams, J. concurring).
    We review de novo the question of whether amortizing the
    ADIT balance would have constituted retroactive ratemaking.
    Opinion 511-D’s disposition of this issue “purport[s] to rest on
    [FERC’s] interpretation of [D.C. Circuit] opinions. As such,
    23
    [FERC’s] judgment is not entitled to judicial deference.” New
    York New York, LLC, 
    313 F.3d at 590
    .
    FERC explained in Opinion 511-D its view that the
    retroactive ratemaking doctrine prohibits the amortization of
    the sum that was once ADIT back to shippers in prospective
    rates:
    Under the Interstate Commerce Act (ICA), the
    Commission only has the authority to address
    over-recovery by prospectively changing a
    pipeline’s rate, and may not retroactively refund
    over-collected amounts.        Requiring SFPP,
    whose tax allowance is eliminated, to amortize
    to ratepayers ADIT that was lawfully collected
    under previously filed and approved rates
    would infringe on the rule against retroactive
    ratemaking. To do so would, effectively,
    retroactively apply the holding in Opinion No.
    511-C by requiring SFPP to refund either the
    income tax allowance expenses or deferred tax
    reserves recovered under past rates for service
    prior to the commencement of this proceeding.
    Any attempt to refund such amounts to shippers
    would be impermissible, as it would rest on a
    post hoc finding that SFPP’s past rates were not
    just and reasonable.
    Opinion 511-D ¶ 93 (citing City of Piqua v. FERC, 
    610 F.2d 950
    , 954 (D.C. Cir. 1979); OXY USA, Inc. v. FERC, 
    64 F.3d 679
    , 698–700 (D.C. Cir. 2006); Public Utilities Comm’n, 
    894 F.2d 1372
    , 1382–84 (D.C. Cir. 1990); Assoc. Gas Distribs.,
    
    898 F.2d at 810
     (Williams, J., concurring)). FERC also
    distinguished between the instant situation, where a pipeline’s
    income tax allowance has been completely eliminated, and
    24
    circumstances in which ADIT becomes overfunded but an
    income tax allowance remains:
    Where an income tax allowance remains in the
    cost of service and there is excess ADIT
    resulting from a reduction in tax rates, it is
    appropriate to credit the cost of service to reflect
    that the pipeline currently needs to collect a
    lower level of tax expenses in rates to cover the
    tax liability for that year. Rather than returning
    the excess amounts to shippers related to past
    service, the pipeline’s cost of service is adjusted
    on a going forward basis to reflect the fact that
    it now needs to collect less than what it
    anticipated to cover its future tax liabilities. In
    contrast, where there is no income tax
    allowance in Commission rates, there is no
    basis for the “matching” function of
    normalization and no liability for the deferred
    taxes reflected in ADIT.
    Id. at ¶ 97 (citations omitted). In FERC’s view, “SFPP’s ADIT
    balance prior to the commencement of this proceeding was
    lawfully collected for the tax costs associated with prior-period
    service,” and “[t]he shippers’ proposal to amortize the
    previously-accumulated ADIT balance in SFPP’s prospective
    rates rests on an impermissible finding that SFPP’s past rates
    were ‘in retrospect too high’ or ‘unjust and unreasonable.’” Id.
    at ¶ 103 (quoting Public Utilities Comm’n, 
    894 F.2d at 1382
    )).
    We concur with FERC’s analysis, and, like FERC, we
    consider Public Utilities Commission instructive, as it
    addressed this precise issue in detail. In that case, a natural-gas
    company had $100 million in ADIT when it switched from
    cost-of-service pricing to pricing based on statutory ceilings.
    25
    
    894 F.2d at 1379
    . Consequently, as here, “the ‘turnaround’
    anticipated under tax normalization,” whereby ADIT would be
    drawn down to cover future tax liability, would “never come to
    pass.” 
    Id. at 1375
    . The Commission allowed the company to
    retain the ADIT balance, but continued to remove it from the
    rate base. 
    Id. at 1379
    . This Court held that approach barred by
    the rule against retroactivity, as it “effectively force[s the
    company] to return a portion of rates approved by FERC.” 
    Id. at 1384
    . We opined that the rule against retroactive ratemaking
    “seeks to protect” “predictability,” 
    id. at 1383
    , and that
    ratemaking decisions “violate[] the rule against retroactive
    ratemaking” if they “rest[] on a Commission view that the
    [prior] rates . . . were in retrospect too high,” 
    id. at 1380
    . Here,
    too, any decision by FERC to return ADIT to Shippers would
    have as a necessary predicate a conclusion that ADIT should
    not have been collected in the first place. The rule against
    retroactive ratemaking therefore prohibits this course of action.
    Shippers contend that Public Utilities Commission should
    not control because there the ADIT became overfunded when
    FERC lost jurisdiction of the ADIT-generating assets, whereas
    here FERC had disallowed an income tax allowance. We fail
    to see why the reason ADIT became overfunded is relevant to
    retroactivity concerns or demands a different result. Shippers
    also argue that Public Utilities Commission was dictum on the
    retroactive-ratemaking issue, such that FERC erred by relying
    on it. As noted, we owe no deference to an agency’s
    interpretation of our precedent, New York New York, LLC, 
    313 F.3d at 590
    , but neither do we perceive any need to parse Public
    Utilities Commission to determine whether its discussion of
    retroactive ratemaking was dictum or holding, because our
    review of the legal question presented leads us to concur with
    FERC’s resolution of the issue.
    26
    Because FERC could neither refund the ADIT nor
    continue to remove it from rate base without violating the rule
    against retroactivity, we cannot say that FERC acted contrary
    to law or arbitrarily and capriciously in permitting SFPP to
    remove ADIT from its cost of service. We therefore deny
    Shippers’ petition as to the issue of FERC’s treatment of ADIT
    in Opinion 511-D.
    C. Litigation Expenses
    In Opinion 511, FERC held that SFPP could “recover its
    regulatory litigation expenses attributable to this proceeding
    through a three-year surcharge” and allowed SFPP “to develop
    the surcharge to reflect the costs incurring in this proceeding
    . . . during the hearing, rehearing and compliance phases.”
    Opinion 511 ¶ 35; accord Opinion 511-A ¶ 42 (affirming
    adoption of a three-year period, rather than a five-year period,
    “because the costs have been incurred over approximately three
    years of litigation”). SFPP’s 511-C compliance filing reflected
    an updated calculation of that approved surcharge “to account
    for additional litigation costs incurred since the Opinion 511-B
    Compliance Filing.” Opinion 511-D ¶ 109. Shippers protested
    to FERC, and now contend to us, that the surcharge (totaling
    some $8,587,491) should not be “levied over a three-year
    period,” but should instead “be recovered over the entire
    litigation and refund period,” because “the litigation has
    extended well beyond three years” and, “although all shippers
    will benefit from the lower rates, only the August 2008 through
    July 2011 shippers will pay the expenses SFPP has incurred in
    litigating this case.” Id. at ¶ 111; accord J.A. 991–93
    (Shippers’ protest); see also Shippers’ Opening Br. at 34–36
    (arguing that FERC offered no “reasoned basis” for its
    decision); Shippers’ Reply Br. at 18–20 (same).
    In Opinion 511-D, FERC rejected Shippers’ proposal:
    27
    The three-year period for recovering the
    litigation expenses was approved in Opinion
    No. 511 and affirmed in Opinion No. 511-A.
    The shippers provide no support for their
    proposal to recover the expenses over the entire
    litigation and refund period, whereas using a
    shorter period is consistent with both
    Commission and court precedent. The use of a
    three-year surcharge remains appropriate
    because, although the litigation remains
    ongoing, the majority of the litigation expenses
    (85.9 percent) were incurred in the earlier stages
    prior to August 2011. Thus, the three-year
    recovery period from August 1, 2008 through
    July 31, 2011 reflects the costliest phase of the
    litigation.
    Opinion 511-D ¶ 118; see also id. at n.249 (citing Opinion 435-
    A ¶ 61,512 (approving five-year surcharge to recover litigation
    expenses incurred over a longer period)).
    Contrary to Shippers’ contentions, we find that FERC
    adequately explained its decision to apply the litigation
    surcharge over the three-year period spanning August 2008 and
    July 2011, rather than spreading those costs over the eleven-
    plus years of the litigation. Even absent FERC’s reference to
    precedent, this decision is reasonable, as FERC’s
    explanation—that 85.9 percent of the expenses were incurred
    over the three-year period to which the surcharge would
    apply—supplies sufficient support for FERC’s election of the
    three-year surcharge rather than Shippers’ preferred route of an
    eleven-year surcharge.
    28
    V. Conclusion
    For the foregoing reasons, SFPP’s and the Shippers’
    petitions for review are denied.
    So ordered.