San Pablo Bay Pipeline Co. v. Public Utilities Commission , 196 Cal. Rptr. 3d 609 ( 2015 )

Filed 12/22/15
CERTIFIED FOR PARTIAL PUBLICATION*
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIFTH APPELLATE DISTRICT
SAN PABLO BAY PIPELINE COMPANY, F069796
LLC et al.,
Petitioners,
OPINION
v.
PUBLIC UTILITIES COMMISSION,
Respondent;
TESORO REFINING & MARKETING
COMPANY et al.,
Real Parties in Interest.
ORIGINAL PROCEEDINGS; petition for writ of review of decision of the Public
Utilities Commission of the State of California.
Goodin, MacBride, Squeri, Day & Lamprey, James D. Squeri, Megan Somogyi;
Munger, Tolles & Olson, Fred A. Rowley, Jr., and Joshua Patashnik for Petitioners.
Karen Clopton, Helen W. Yee, Paul Angelopulo and Jonathan C. Koltz for
Respondent.
* Pursuant to California Rules of Court, rules 8.1105(b) and 8.1110, this opinion is
certified for publication with the exception of part III.
Manatt, Phelps & Phillips, David L. Huard and Benjamin G. Shatz for Real Party
in Interest Tesoro Refining & Marketing Company.
Orrick, Herrington & Sutcliffe, Joseph M. Malkin and Eric M. Hairston for Real
Party in Interest Chevron Products Company.
Pillsbury Winthrop Shaw Pittman, Kevin M. Fong and Michael S. Hindus for Real
Party in Interest Valero Marketing and Supply Company.
-ooOoo-
In San Pablo Bay Pipeline Co. LLC v. Public Utilities Com. (2013) 221
Cal. App. 4th 1436, this court confirmed a decision of the California Public Utilities
Commission (the Commission or PUC) that certain truck racks and storage tanks were
part of a pipeline subject to its jurisdiction as a public utility. At the time, we deferred
consideration of statute of limitations issues until the Commission filed a final decision
on those issues and the related issue of the amount of money to be refunded to shippers
that had used the pipeline. (Id. at p. 1442.)
The Commission has rendered its decision and petitioner San Pablo Bay Pipeline
Company, LLC (Pipeline Company) filed this writ proceeding to challenge the refund of
approximately $104.3 million. Pipeline Company contends the refund is too large
because the Commission (1) erred in applying the statute of limitations and thus awarded
refunds for too long of a period and (2) undervalued the costs Pipeline Company incurred
for “line fill” oil used to help transport oil shipments through the pipeline.
The Commission argues that it has the authority to toll the two-year statute of
limitations in Public Utilities Code section 7351 and that section should not be interpreted
as an absolute bar to every type of tolling. We conclude that in the peculiar facts of this
case, which was processed in a jurisdictional phase followed by a ratemaking and
1 All unlabeled statutory references are to the Public Utilities Code.
2.
reparations phase, the Commission had the authority to bifurcate the matter into two
phases and to conclude the limitations period did not run during the first phase.
As to the Commission’s decision to treat line fill as a capital asset valued at its
original cost, we conclude Pipeline Company has failed to clearly establish the
unreasonableness of the Commission’s method of valuation.
Therefore, the Commission’s decision is confirmed.
FACTS AND PROCEEDINGS
The Parties
Pipeline Company, a wholly owned subsidiary of Shell Oil Products US, owns and
operates the pipeline in question and is the sole petitioner in this writ proceeding.
Pipeline Company, as used in this opinion, includes the prior owner of the pipeline and
other Shell affiliates.
The Commission is the only respondent. The three real parties in interest are
(1) Chevron Products Company (Chevron); (2) Tesoro Refining & Marketing Company
(Tesoro); and (3) Valero Marketing and Supply Company (Valero; collectively,
“shippers”). The shippers paid Pipeline Company to transport crude oil by pipeline from
Chevron’s oil production fields to refineries operated by Tesoro and Valero.
The Pipeline
The pipeline is a 20-inch heated crude oil pipeline that runs approximately
265 miles from oil fields in Kern County to the San Francisco Bay Area (SJV Pipeline).
SJV Pipeline transports crude oil to (1) the Shell refinery in Martinez, California; (2) the
Tesoro Golden Eagle refinery in Martinez, California; and (3) and the Valero refinery in
Benicia, California. In 2011, the SJV Pipeline transported an average of 150,000 to
160,000 barrels per 24-hour period of continuous operations (i.e., per stream day).
Approximately 50,000 barrels of this amount was delivered to shipper’s Bay Area
refineries, while the balance was delivered to the Shell refinery in Martinez. Further
details regarding SJV Pipeline’s characteristics and history are described in San Pablo
3.
Bay Pipeline Co. LLC v. Public Utilities Com., supra, 221 Cal.App.4th at pages 1439 to
1440 and are not repeated here.
Phase One of Proceedings
Chevron’s Complaint
On December 5, 2005, Chevron filed its initial complaint with the Commission.
The complaint was designated C.05-12-004. Chevron alleged that (1) the SJV Pipeline
had been operated as a public utility since before 2005; (2) effective April 1, 2005,
Pipeline Company increased the rates charged on Chevron’s shipments from $1.08 to
$1.686 per barrel; and (3) Pipeline Company overcharged and discriminated against
nonaffiliated shippers in violation of California law.
Chevron alleged that it was obligated contractually to deliver crude oil to Tesoro
at the Golden Eagle refinery and to Valero at its Benicia refinery. Chevron alleged that
the SJV Pipeline, which is heated, was the only practical way to transport approximately
44,000 barrels per day of San Joaquin Valley heavy crude needed to meet its contractual
obligations with Tesoro and Valero. This lack of practical alternatives meant that
Pipeline Company was in a position to impose monopoly prices for the transportation
services provided by the SJV Pipeline.
Chevron’s complaint asked the Commission (1) to declare that the SJV Pipeline
was a public utility subject to the Commission’s jurisdiction and (2) to find that Pipeline
Company had violated the Public Utilities Code by (a) failing to file tariffs for its pipeline
services, (b) discriminating between its affiliates and other shippers in the rates charged,
(c) charging unreasonable rates to nonaffiliated shippers, and (d) illegally changing its
rates. Chevron’s request for relief also asked the Commission to determine just and
reasonable rates effective April 1, 2005, and to order Pipeline Company “to refund to
Chevron the difference between the rates paid by Chevron from April 1, 2005 and the
reasonable rates determined by the Commission.”
4.
Tesoro’s Intervention
On December 13, 2005, Tesoro filed a petition to intervene in case C.05-12-004.
Tesoro’s petition alleged that it was dependent upon the SJV Pipeline because it was the
only heated crude oil line from Bakersfield to its Golden Eagle refinery at Martinez and
the only pipeline that could efficiently ship heavy viscous San Joaquin crude oil. Tesoro
also alleged it had a substantial interest in the remedies sought by Chevron as the impact
of the Pipeline Company’s charges fell on it because the amount Tesoro paid to Chevron
for the crude oil included those transportation charges. Tesoro supported the relief
sought by Chevron and stated it did “not seek a broadening of the issues presented in the
Complaint.”
The addition of Tesoro to the proceeding did not change the volume of oil for
which a refund was sought and Pipeline Company did not oppose Tesoro’s petition to
intervene. Consequently, the Commission granted Tesoro’s request to intervene.
Prehearing Procedures
In March 2006, after a prehearing conference, the Commission bifurcated the
proceeding, with the first phase limited to whether the SJV Pipeline was a public utility
subject to the Commission’s jurisdiction and the second phase, if necessary, to address all
ratemaking and remedies. The scoping memo and ruling that established the two phases
did not specify the precise procedural steps that would be used if a second phase was
necessary.
Subsequently, the parties filed various motions designed to resolve the first phase
of the proceeding. Pipeline Company filed a motion to dismiss and both sides filed
motions for summary adjudication.
2007 Decision
In July 2007, the Commission resolved the pending motions by issuing Decision
07-07-040. The Commission denied Pipeline Company’s motions and granted Chevron’s
motion for summary adjudication, concluding that the SJV Pipeline had been dedicated to
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public service and, thus, was subject to regulation by the Commission. The Commission
also concluded that “this proceeding should be closed, effectively immediately.” This
conclusion may explain what was intended by the March 2006 scoping memo and ruling
when it bifurcated the proceeding.
Pipeline Company requested a rehearing and, in response, the Commission issued
Decision 07-12-021, which modified its prior decision. Among other things, Decision
07-12-021 expanded the earlier order by including a paragraph that directed Pipeline
Company “to file tariffs for its third party contracts.” The new decision also stated, “This
proceeding, Case (C.) 05-12-004, is closed.”
Judicial Review of 2007 Decision
Pipeline Company’s attempts to have the decision, as modified, overturned in
court were unsuccessful. The Second Appellate District of the Court of Appeal denied its
petition for writ of review in June 2008 and, two months later, the California Supreme
Court denied a petition for review. Consequently, the Commission’s decision that the
SJV Pipeline had been dedicated to public use and its order directing Pipeline Company
to file a tariff became a final decision no longer subject to challenge in administrative or
judicial proceedings.
Phase Two of Proceedings
New Pleadings—Complaint and Tariff Application
On March 26, 2008, well before Pipeline Company’s judicial challenges to the
Commission’s modified decision were rejected by the California Supreme Court in
August 2008, Chevron initiated the second phase of the proceedings by filing another
complaint with the Commission, Case C.08-03-021.
Chevron’s complaint alleged the Commission’s modified decision held Pipeline
Company was operating the SJV Pipeline as a public utility and, since at least April 1,
2005, Pipeline Company had not filed tariffs setting rates for services on the SJV Pipeline
as required by law. The second complaint repeated verbatim Chevron’s request in its
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prior complaint for the Commission to determine just and reasonable rates for
transportation of crude oil on the SJV Pipeline effective April 1, 2005, and to order
Pipeline Company “to refund to Chevron the difference between the rates paid by
Chevron from April 1, 2005 and the reasonable rates determined by the Commission.”
About six months later, in September 2008, Pipeline Company filed an application
proposing a tariff for the SJV Pipeline, which the Commission designated Application
08-09-024.
Consolidation of Complaints and Tariff Application
On February 13, 2009, Chevron and Pipeline Company filed a joint motion to
consolidate Pipeline Company’s tariff application with Case C.08-03-021. Pipeline
Company’s tariff application sought to establish forward-looking just and reasonable
rates, while Chevron’s refund claim was backward-looking in that it addressed charges
paid during the period from April 1, 2005, until the effective date of the approved tariff.
The joint motion stated that “the just and reasonable rate for the past period may very
well be different from the just and reasonable tariff rate,” but asserted the cases involved
similar legal issues and much of the same evidence. The joint motion also stated that
Chevron’s amended complaint eliminated Chevron’s request for penalties and, therefore,
“both cases will be categorized as ratesetting.”
Also on February 13, 2009, Tesoro filed a complaint with the Commission that
was similar to Chevron’s March 2008 complaint in that it sought a refund equal to the
difference between what Tesoro paid to ship crude oil and the reasonable rates
determined by the Commission.
On March 23, 2009, Valero also filed a complaint seeking a refund of overcharges.
The Commission designated the proceedings relating to the complaints filed by Chevron,
Tesoro and Valero as Case 08-03-021, Case 09-02-007 and Case 09-03-027, respectively.
7.
Prehearing Procedures
In April 2009, the Commission filed a scoping memo and ruling that addressed the
motion to consolidate Pipeline Company’s pending tariff application with the three
refund complaints. The Commission directed that the four matters be consolidated as a
ratesetting proceeding, stating:
“This proposal [to consolidate as a ratesetting proceeding] was received
positively by counsel for all parties. In order to facilitate this global
approach, Chevron and Tesoro have refiled their complaint cases as refund
claims and Valero has filed a similar refund claim. All three of these cases
are preliminarily classified as adjudicatory.”2
The scoping memo enumerated 10 issues that were appropriate for resolution in
the consolidated proceeding, including (1) the just and reasonable rates, terms and
conditions for public utility service on the SJV Pipeline during the period from April 1,
2005, through the effective date of the approved tariffs and (2) the refunds, if any, to the
shippers for unjust and unreasonable rates imposed during that period.
The scoping memo also established a schedule for (1) the submission of written
evidence by the parties, (2) an evidentiary hearing, (3) the filing of concurrent opening
and reply briefs, (4) the issuance of a proposed decision, and (5) the parties’ comments
and replies to comments on the proposed decision. The schedule left open the date for
the final decision.
2011 Decision
In June 2011, after the scheduled steps were completed, the Commission issued
Decision 11-05-026. The decision (1) set rates at $1.34 per barrel, (2) adopted tariff
provisions to govern the sale of transportation services on the SJV Pipeline, and
(3) ordered the payment of refunds to the shippers for overcharges made from April 1,
2005, to the effective date of the decision.
2 Over five years later, in Decision 14-06-052, the Commission stated the consolidation of
the four matters was “in conformance with the intent behind our bifurcation ruling.”
8.
The Commission found the just and reasonable rate for transportation of crude oil
on the SJV Pipeline from April 1, 2005, through December 31, 2005, to be $1.23 per
barrel. The Commission also found the just and reasonable rate for the period from
January 1, 2006, through the effective date of the tariff to be $1.246 per barrel. These
rates were the rates Pipeline Company charged to a Shell affiliate during those periods.
Decision 11-05-026 addressed the appropriate refund period by noting that at the
time of consolidation of the refund cases with the rate setting case, “all parties including
[Pipeline Company] treated April 1, 2005 as the earliest date from which refunds could
be sought.” Rejecting Pipeline Company’s position that the refund period began on
August 1, 2007 (the effective date of Decision 07-07-040), the Commission found the
refund period started on April 1, 2005, and ran until the approved tariff when into effect.
Application for Rehearing
In July 2011, Pipeline Company filed an application for a rehearing of Decision
11-05-026 that asserted a “myriad [of] legal errors” occurred in the Commission’s
decision setting rates, approving the tariff, and awarding refunds. Pipeline Company
argued that the Commission exceeded its jurisdiction and failed to proceed as required by
law by awarding refunds (1) for a period prior to its July 2007 finding the SJV Pipeline
was subject to its jurisdiction and (2) for a period before the two-year statute of
limitations set forth in section 735.
2012 Decision
In February 2012, the Commission issued Decision 12-02-038, which modified its
prior decision and granted a rehearing on the sole issue of how to calculate the refunds.
Decision 12-02-038 stated that the Commission correctly found the refund period
commenced on April 1, 2005, because (1) the three-year statute of limitations in
section 736 applied, (2) Pipeline Company waived its right to object to the start date of
April 1, 2005, and (3) the statute of limitations was equitably tolled by the filing and
pendency of Chevron’s original complaint.
9.
Petition for Judicial Review and Application to PUC for a Rehearing
In March 2012, Pipeline Company filed a petition for writ of review in this court
to challenge Decision 11-05-026 and the modification implemented by Decision 12-02-
038.
Three days later, the shippers challenged the Commission’s grant of a limited
rehearing as to the refund calculation by filing an application for rehearing of
Decision 12-02-038. As a result of Pipeline Company’s petition for writ review and the
shippers’ application for rehearing, Decision 21-02-038 was subject to an administrative
challenge and a judicial proceeding at the same time.
In April 2012, the Commission granted a limited rehearing of Decision 12-02-038
on all issues related to the refund calculations. Because the issues related to the statute of
limitations were intertwined with the calculation of the refund, the Commission vacated
its earlier determinations regarding the statute of limitations, stating its belief that “all
matters related to the refund should be considered together.”
In May 2012, the Commission requested this court to dismiss the issues in Pipeline
Company’s petition involving the statute of limitations. The Commission, having
vacated its analysis and conclusions regarding the statute of limitations issues, believed it
should not be required to defend the vacated portions of its decisions in the writ
proceeding before this court. We granted the Commission’s motion to dismiss in an
order dated October 31, 2013, and explicitly stated that the order was without prejudice to
the right of any party to challenge the Commission’s final determination of the refund
and statute of limitations issues.
In accordance with the Commission’s grant of a limited rehearing, the
Commission received written evidence, testimony and further briefing during 2012.
2013 Decision
In May 2013, the Commission issued Decision 13-05-017, reiterating its
conclusion that refunds were owed back to April 1, 2005. In support of this conclusion,
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the Commission found that Pipeline Company was an advocate, benefactor and cause of
the delay in considering the shippers’ refund claims and also found:
“21. All the complaints raised the same material factual and legal
issues, and asked for the same relief, as Chevron’s 2005 complaint. There
is no significant factual distinction, and no legal distinction between the
refund claims of Tesoro, Valero and Chevron. All three shippers were
subject to the same illegal and discriminatory transportation overcharges
for the same period of years.”
“22. Our bifurcation ruling temporarily deprived [shippers] of a
forum in which to pursue their refund claims until [Pipeline Company] filed
its ratesetting application.”
The Commission’s conclusions of law referenced the Commission’s broad
authority under the California Constitution and Public Utilities Code and then addressed
the bifurcation ruling:
“For reasons of administrative practicality, responding to the parties’
requests, and to ensure due process, the Commission lawfully bifurcated the
complaint proceeding into two phases, and properly ordered the filing of a
ratemaking application. [¶] … Our constitutional and statutory authority
permitted us to bifurcate the proceedings, and thus, toll the statute of
limitations during the period in which the Commission and the appellate
courts investigated whether the pipeline was subject to Commission
jurisdiction, from December 5, 2005 through August 20, 2008.”
As to the calculation of the refund, the Commission determined it appropriate to
apply a single refund rate to the entire refund period3 based on the 2006 cost of service
and 2006 throughput. The Commission also determined that “[t]he refund rate should be
calculated using 2006 actual historical data” and found the just and reasonable refund rate
was $1.2450 per barrel. The Commission rejected Pipeline Company’s “proposal to
adjust the base rate for actual volumes and the variable value of line fill based on
fluctuating oil prices.” The Commission found the accepted methodology for valuing
3 The refund period began on April 1, 2005, and ended on June 30, 2011, the effective date
of Pipeline Company’s initial tariff.
11.
line fill, like “line pack” and “cushion gas” in natural gas cases, was to use its original
cost as part of the rate base on which the pipeline earns a rate of return.
Based on these determinations, the Commission concluded that Pipeline Company
owed “refunds to Chevron, Tesoro and Valero in the sum of $104,291,585, plus interest.”
In addition, the Commission adopted $1.34 per barrel as the going-forward rate.
2014 Decision—Final Administrative Decision
Pipeline Company filed an application for rehearing of Decision 13-05-017 and, in
June 2014, the Commission issued Decision 14-06-052, which modified the earlier
decision and denied the application for a rehearing. As to the statute of limitations issue,
Decision 14-06-052 added the following finding of fact: “The Commission limited the
scope of the Phase 1 proceeding to the issue of our jurisdiction over the Pipeline, and all
parties agreed that the refund claims should be part of Phase 2, and not Phase 1.” In
addition, the Commission concluded the closing of C.05-12-004 without addressing the
refund claim “had no effect on the continuing relevance of the 2005 refund claims in
Phase 2.”
Petition for Writ of Review
The issuance of Decision 14-06-052 meant that the Commission’s order regarding
the amount of the refund became final for administrative purposes (i.e., there were no
more administrative remedies to exhaust) and could be challenged in court by way of a
petition for writ of review.
In July 2014, Pipeline Company filed such a petition for writ of review, asserting
errors in the Commission’s (1) statute of limitations analysis and (2) treatment of “line
fill” costs bearing on the amount of the refunds.
12.
DISCUSSION
I. THE COMMISSION AND ITS DECISIONS
A. The Nature of the Commission and Its Authority
The Commission is a state agency of constitutional origin with far-reaching duties,
functions and powers. (Cal. Const., art. XII, §§ 1–6.) The California Constitution
granted broad authority to the Commission to regulate utilities, including the power to fix
rates for the transportation of passengers and property, establish rules, hold hearings, and
award reparations. (Cal. Const., art. XII, §§ 4, 6; see Hartwell Corp. v. Superior Court
(2002) 27 Cal. 4th 256, 264 (Hartwell).) In addition, “[s]ubject to statute and due process,
the commission may establish its own procedures.” (Cal. Const., art. XII, § 2.)
The California Constitution also grants the Legislature broad power to regulate
public utilities and to delegate regulatory functions to the Commission. (Cal. Const.,
art. XII, §§ 3, 5; see Hartwell, supra, 27 Cal.4th at pp. 264–265.) Pursuant to these
constitutional provisions, “the Legislature has granted the [Commission] comprehensive
jurisdiction to regulate the operation and safety of public utilities. (§§ 701, 761, 768,
770, subd. (a).)” (Hartwell, supra, 27 Cal.4th at p. 265.) The most fundamental of these
legislative grants of authority is section 701, which provides:
“The Commission may supervise and regulate every public utility in
the State and may do all things, whether specifically designated in this part
or in addition thereto, which are necessary and convenient in the exercise of
such power and jurisdiction.”
This legislative grant of authority is “expansive” and has been liberally construed.
(Consumers Lobby Against Monopolies v. Public Utilities Com. (1979) 25 Cal. 3d 891,
905, disagreed with on another point in Kowis v. Howard (1992) 3 Cal. 4th 888, 897,
fn. 2.)
13.
B. Judicial Review by Writ
The California Constitution provides plenary power to the Legislature “to establish
the manner and scope of review of commission action in a court of record .…” (Cal.
Const., art. XII, § 5.) Pursuant to this provision, the Legislature has authorized only the
California Supreme Court and the Court of Appeal to review orders and decisions of the
Commission. (§ 1759, subd. (a).)
The procedural mechanism by which a party may challenge a decision by the
Commission is a petition for writ of review filed in the Court of Appeal. (§ 1756,
subd. (a).) Certain procedural requirements must be satisfied before an aggrieved party
may file its petition for writ of review. (See §§ 1756, subd. (a) [application for
rehearing], 1732 [specification of grounds].) Here, Pipeline Company had satisfied the
procedural requirements and, therefore, the merits of its writ petition are properly before
this court.
Petitions for a writ of review function as appeals from the administrative decisions
of the Commission and are the exclusive means of judicial review of such decisions.
Consequently, an appellate court should not deny the petition on policy grounds unrelated
to the merits. (The Ponderosa Telephone Co. v. Public Utilities Com. (2011) 197
Cal. App. 4th 48, 56.) Based on this principle, we will address the merits of Pipeline
Company’s petition for writ of review.
C. Scope and Standards of Review
1. Basic Principles
Judicial review of Commission decisions is relatively narrow. For instance, the
appellate court may not consider new or additional evidence and may not exercise
independent judgment on the evidence. (§ 1757, subds. (a) & (b).) Also, reviewable
issues are limited to whether the Commission (1) acted without, or in excess of, its
jurisdiction; (2) proceeded in the manner required by law; (3) issued a decision not
supported by the findings; (4) made findings not supported by substantial evidence in
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light of the whole record; (5) abused its discretion; or (6) violated a constitutional right.
(§ 1757, subd. (a).)
The foregoing constitutional and statutory provisions are the foundation for the
well-established principle that there is a strong presumption of validity of the
Commission’s decisions. (Greyhound Lines, Inc. v. Public Utilities Com. (1968) 68
Cal. 2d 406, 410 (Greyhound); Clean Energy Fuels Corp. v. Public Utilities Com. (2014)
227 Cal. App. 4th 641, 649.)
2. Statutory Interpretation
Another aspect of the deference given to the Commission’s decision is the
principle that the Commission’s interpretation of the Public Utility Code should be
accepted “unless it fails to bear a reasonable relation to statutory purposes and
language .…” (Greyhound, supra, 68 Cal.2d at pp. 410–411.) This deference is based on
the idea that the Commission has a special familiarity and expertise with the satellite
legal and regulatory issues that informs its interpretation of the statutory provision in
question. (Southern California Edison Co. v. Public Utilities Com. (2014) 227
Cal. App. 4th 172, 185.) An exception to the general rule of deference to the
Commission’s statutory interpretations applies when the issue is the scope of the
Commission’s jurisdiction. (Ibid.)
3. Prejudice
A final aspect of judicial review relates to the element of prejudice. Courts will
annul a decision by the Commission only if the error demonstrated by the aggrieved party
was prejudicial. (The Utility Reform Network v. Public Utilities Com. (2014) 223
Cal. App. 4th 945, 958.)
II. PHASED PROCEEDINGS AND THE STATUTE OF LIMITATIONS
Pipeline Company’s challenge to the Commission’s analysis of the statute of
limitations issue is based on (1) the text of section 735 and (2) the application of that
15.
provision’s two-year limitations period to the complaints filed in the second phase of the
proceedings before the Commission.
In contrast, the Commission takes a much broader view of the issues presented,
arguing that (1) the first phase of the proceedings is relevant because it was started less
than nine months after April 1, 2005; (2) it had the authority to adopt the two-phase
procedure used in this matter; and (3) it had the authority to consider the statute of
limitations tolled during the first phase of the proceedings. The Commission asserts:
“There is no legitimate dispute that Phase 2 was a continuation of Phase 1, as both the
rate case and the complaint cases could only move forward after jurisdiction was
established in Phase 1.”
A. Section 735
We assume for purposes of discussion that section 735 is the statute of limitations
that applies to the refund claims presented by the shippers. Section 735 provides in
relevant part:
“All complaints for damages resulting from a violation of any of the
provisions of [the Public Utilities Act], except Sections 494 and 532, shall
… be filed with the commission, … within two years from the time the
cause of action accrues, and not after.”4
Pipeline Company contends the Legislature’s use of phrase “shall … be filed” in
conjunction with “and not after” demonstrates a clear legislative intent to prohibit any
extension of the two-year period, whether by tolling or other means. This argument
about legislative intent is based on cases that existed at the time the statute’s predecessors
4 We have assumed that section 735 (and not the exception) applies because no tariff
schedules were in place during the period for which refund is sought. The exception in
section 735 for violations of sections 494 and 532, which are covered by the three-year
limitations period set forth in section 736, the statute of limitations that the shippers contend
applies in this case. Section 494 prohibits common carriers from assessing charges not specified
in its schedules filed and in effect at the time. Section 532 states that no public utility shall
charge rates, tolls or rentals other than those in its schedules on file and in effect at the time.
16.
were enacted and the principle that the Legislature is deemed aware of existing decisions
and to have adopted the meaning of statutory terms already construed. (People v. Scott
(2014) 58 Cal. 4th 1415, 1424.)
1. Cases Addressing Similar Text
Pipeline Company cites Phillips v. Grand Trunk Ry. (1915) 236 U.S. 662
(Phillips), which addresses the meaning of a federal statute that provided “‘all complaints
for the recovery of damages shall be filed with the [Interstate Commerce] Commission
within two years from the time the cause of action accrues, and not after .…’” (Id. at
p. 666.) The court stated that the statute indicated “its purpose to prevent suits on
delayed claims, by the provision that all complaints for damages should be filed within
two years and not after. Under such a statute the lapse of time not only bars the remedy
but destroys the liability [citation] .…” (Id. at p. 667; see Cunningham v. Hawkins
(1864) 24 Cal. 403, 410–411 (Cunningham).) The court adopted this construction and
rejected any implied or express waiver of the limitations period by the carrier because of
the uniformity required by the statute in question and allowing a carrier to waive the
statute as to some shippers and assert it against others would result in discrimination
among shippers of the type forbidden by the statute. (Phillips, supra, at p. 667.)
Pipeline Company also cites a decision by the California Railroad Commission
(predecessor of the PUC) that interpreted a predecessor to section 735 that provided a suit
“‘shall be filed’” within two years of accrual of the cause of action. (James Mills
Sacramento Valley Orchard & Citrus Fruit Co. v. Southern Pacific Co. (1916) 9 C.R.C.
80, 82 (James Mills).) The California Railroad Commission relied on Phillips, even
though the predecessor to section 735 did not contain the phrase “and not after.” (James
Mills, supra, at pp. 82–83.) It construed the statute to mean that all complaints
concerning excessive or discriminatory charges must be filed with it within two years
from the time the cause of action accrues. The California Railroad Commission stated
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that the statute made no exception and no provision allowing further time in the case of
fraud. (Id. at p. 83.) It also concluded the carrier could not waive the statute of
limitations defense. (Ibid.)
Based on this decision and the fact that the Legislature added the phrase “and not
after” to a predecessor of section 735 in 1931, Pipeline Company argues the Legislature
clearly intended that (1) there be no exceptions or other delays in the running of the two-
year period and (2) liability be destroyed after the lapse of two years. (See Stats. 1931,
ch. 806, § 1, p. 1687.)
The Commission cites Toward Utility Rate Normalization, Inc. v. Pacific Bell
(1994) 54 Cal. P.U.C.2d 122 [1994 Cal.P.U.C. Lexis 313, 8] as an example of a case in
which the Commission interpreted the statute of limitations in section 736 to be tolled
until the plaintiff discovers the facts essential to the cause of action. As section 736 also
uses the phrases “shall … be filed” along with “and not after,” the Commission argues
those two phrases do not create an absolute prohibition against tolling.
2. Application of Prior Decisions
The foregoing cases are useful in normal situations where only one complaint is
filed. However, none of the cases cited by the parties involved facts similar to those
presented in this case. The facts of legal significance that render the instant case unique
are (1) the timely filing of an initial complaint seeking the same refund sought in the
second phase, (2) the bifurcation of the proceedings with the agreement of the parties,
(3) the unusual procedural device of an administratively final decision to conclude the
first (i.e., jurisdictional) phase, and (4) the equally unusual procedural device of initiating
the second phase (i.e., restarting the proceedings) by the filing of new complaints and a
ratemaking application. We regard these facts as legally significant because they affect
the public policies underlying the statute of limitations applicable to complaints filed with
the Commission—namely, giving timely notice of claims to the defendant, giving
18.
stability to transactions, protecting settled expectations, promoting diligence, and
preventing the statute of limitations from becoming a tool for discrimination among users
of a public utility. (See generally Stockton Citizens for Sensible Planning v. City of
Stockton (2010) 48 Cal. 4th 481, 499; Phillips, supra, 236 U.S. at p. 667.)
Based on the unique facts of this case and the policies underlying the statute of
limitations, we conclude that cases such as Phillips, Cunningham, and James Mills are
not controlling. The facts of this case put it into a category by itself.
B. Authority for the Two-Phased Proceedings
We conclude the proper analysis in this case is to consider the proceedings in their
entirety and determine whether the Commission had the authority to (1) conduct the
proceedings in two phases and (2) apply the statute of limitations as though there was a
single proceeding initiated in December 2005. We conclude the Commission had the
authority to do both.
1. Authority to Bifurcate
The authority to divide a proceeding into a jurisdictional phase and a ratemaking
and reparations phase is not expressly granted to the Commission by the constitution or
statute and has not been recognized in a published decision. Consequently, we consider
whether the general grants of authority to the Commission are broad enough to authorize
such a procedure.
The Commission relies on both constitutional and statutory provisions addressing
its authority and notes the parties agreed to the bifurcation of the jurisdictional issues.
Article XII, section 2 of the California Constitution provides that “[s]ubject to statute and
due process, the commission may establish its own procedures.” Section 701 states the
Commission may do all things necessary and convenient in the exercise of its power to
regulate public utilities.
19.
First, the constitutional provision allowing the Commission to “establish its own
procedures” does not require those procedures to be adopted pursuant to the
Administrative Procedure Act (Gov. Code, § 11340 et seq.) or even to be adopted in
writing. (Cal. Const., art. XII, § 2.) Therefore, we interpret the Commission’s
constitutional authority to “establish its own procedures” to mean the Commission is
authorized to employ unwritten procedures on a case-by-case basis provided that those
procedures do not contradict a statute and are consistent with the requirements of due
process.
Second, we interpret the Commission’s constitutional authority to “establish its
own procedures” to encompass the bifurcation of the initial case because bifurcation (i.e.,
the use of two phases) is a procedural mechanism. (Cf. Fam. Code, § 2337 [early and
separate trial for certain issues in dissolution of marriage proceeding]; Cal. Rules of
Court, rule 5.390 [bifurcation of issues]; see Fam. Code, § 2025 [certification of
bifurcated issue for appeal].)
Third, the Commission’s use of bifurcation in this case did not offend the
constitutional limitations relating to statutes and due process. Pipeline Company has
cited, and we have located, no statute that prevents the bifurcation of a case into two
phases. Also, the requirements of procedural due process were met in this case because
(1) the parties agreed to the bifurcation of the proceeding and (2) the Commission
explicitly found Pipeline Company advocated and benefited from the bifurcation of the
proceedings.5 Thus, the parties had notice and an opportunity to be heard on the question
of bifurcation. (Traverso v. People ex rel. Dept. of Transportation (1993) 6 Cal. 4th 1152,
5 It appears the benefit to Pipeline Company was the opportunity to seek judicial review of
the vigorously contested jurisdictional issue before investing time and money in the second
phase of the proceedings. Pipeline Company took advantage of this opportunity, though it was
unsuccessful when, on August 20, 2008, the Supreme Court declined to review the Second
Appellate District’s denial of Pipeline Company’s writ petition.
20.
1169 [“procedural due process requires, at a minimum, notice and an opportunity to be
heard”].)
In summary, we conclude the Commission correctly decided it had “lawfully
bifurcated the complaint proceeding into two phases” and its “constitutional and statutory
authority permitted [it] to bifurcate the proceedings .…”
2. Legal Authority to Toll the Statute of Limitations
The Commission also concluded its constitutional and statutory authority
permitted it to “toll the statute of limitations during the period in which the Commission
and the appellate courts investigated whether the pipeline was subject to Commission
jurisdiction, from December 5, 2005 through August 20, 2008.”
The first step of our analysis is to frame the question presented. Framing the
question is a significant step because it defines the specific power exercised by the
Commission and, thus, our inquiry into the source of that power.
We will assume for purposes of discussion that section 735 applies and should be
interpreted so that the lapse of the two-year period “destroys the liability” for
unreasonable rates charged more than two years before the filing of the complaint. (See
Phillips, supra, 236 U.S. at p. 667.) These two assumptions narrow the issue presented in
this case and are consistent with the Commission’s view that its power to toll the statute
of limitations does not require the resurrection of liability previously destroyed.
Therefore, we conclude the limited question presented in this case relates to the
Commission’s authority over how the statute of limitations should be applied after the
bifurcation order. The specific issue presented is whether the Commission has the
authority to bifurcate the proceedings and prevent the restarting of the statute of
limitations during the remainder of the proceedings that occurred after the bifurcation.
This narrow framing of the issue is appropriate under the facts of this case because
the timely filing of the December 2005 complaint gave the Commission jurisdiction over
21.
the cause of action for refunds on shipments made after April 1, 2005, and, at the time of
filing, none of the liability for the post-March 2005 shipments had been destroyed by the
lapse of time. We regard the distinction between (1) the power to resurrect destroyed
liability and (2) the power to treat the bifurcation mechanism as preventing the restarting
of the statute of limitations as critical to the proper framing of the issue presented in this
case.6 (See pt. II.A.2., ante.)
Our examination of the Commission’s authority to prevent the restarting of the
statute of limitations takes the same basic steps as our analysis of its authority to bifurcate
a proceeding into two phases. (See pt. II.B.1., ante.) First, the parties have not cited, and
we have not located, any constitutional provision, statute or published authority that
explicitly addresses the power of the Commission to control the statute of limitations
during the course of a bifurcated proceeding. Second, in the absence of specific
authority, we turn to the sources of the Commission’s general authority. The California
Constitution provides the Commission with the authority to establish its own procedure
and section 701 states the Commission “may do all things … necessary and convenient in
the exercise of [its] power” to supervise and regulate public utilities. This statutory
authority is expansive and should be liberally construed. (See pt. I.A., ante.)
Based on the expansive nature of the Commission’s authority under section 701,
we conclude the Commission has the authority to control the running of the statute of
limitations during the course of a bifurcated proceeding, provided that the first phase was
initiated by a timely filed complaint and the parties agreed to the bifurcation of the
proceedings. Therefore, the Commission had the power to prevent the restarting or
lapsing of the statute of limitations during the first phase of a bifurcated proceeding.
6 The Commission’s power to halt the restarting of the statutory period after the filing of a
timely complaint can also be described as (1) the power to toll the statutory period during
bifurcated proceedings conducted after the filing of a timely complaint or (2) the power to
determine when and how the statutory period runs or lapses during a bifurcated proceeding.
22.
Pipeline Company’s reliance on cases stating that claims based on pre-limitations
conduct are barred and extinguished is misplaced. Those cases did not involve a timely
filed complaint that was timely as to all claims and the bifurcation of proceedings relating
to those claims into two phases.
3. Equitable Power Authority to Toll the Statute of Limitations
The Commission also concluded that its equitable powers allowed it to apply
equitable principles to toll the statute of limitations and section 735 did not prohibit the
exercise of its equitable powers under the facts of this case.
Section 701 and the constitutional provisions do not expressly state that the
Commission has equitable powers. The California Supreme Court has recognized that
the Commission “possesses equitable power to award attorney fees under the common
fund doctrine in quasi-judicial reparation actions.” (Consumers Lobby Against
Monopolies v. Public Utilities Com., supra, 25 Cal.3d at p. 908.) From this holding
relating to attorney fees, we infer that, in general, the Commission has equitable power
when it is performing judicial functions.
Based on this general authority relating to equitable power, the Commission’s
constitutional authority to establish its own procedures, and the unique facts presented by
the bifurcation of the proceeding into two phases, we conclude that the Commission has
the equitable power to apply equitable tolling or equitable estoppel in the limited
circumstances of this case. (See Hopkins v. Kedzierski (2014) 225 Cal. App. 4th 736, 755
[doctrines of equitable tolling and equitable estoppel are distinct].) We do not address
the question whether the Commission’s authority to apply the doctrine of equitable
tolling or estoppel extends beyond the context of a bifurcated proceeding initiated with a
timely complaint.
The three elements of equitable tolling are (1) timely notice of the claim to the
defendant, (2) lack of prejudice to the defendant, and (3) reasonable and good faith
23.
conduct by the claimant. (McDonald v. Antelope Valley Community College Dist. (2008)
45 Cal. 4th 88, 102.) These three elements have been satisfied in this case. First, the
initial complaint filed in December 2005 timely notified Pipeline Company that a refund
of overcharges was being sought for the period beginning April 1, 2005. Second, there
was no prejudice to Pipeline Company because the claims in the second phase are
identical to those raised in the initial complaint and, as a result, Pipeline Company was
alerted to the need to begin investigating the facts that formed the basis of the refund
claim. (Id. at p. 102, fn. 2.) Third, shippers acted in accordance with the bifurcation or
two-phase procedure ordered by the Commission and, therefore, demonstrated the
requisite reasonableness and subjective good faith. Therefore, the three general elements
of equitable tolling were satisfied in this case.
As with our discussion of the Commission’s legal authority to toll or prevent the
lapse of the limitations period during bifurcated proceedings, we note that the equitable
tolling applied in this case is extremely narrow because the December 2005 complaint
that gave Pipeline Company timely notice of the claim initiated the proceedings that
ultimately resulted in the refunds being ordered. Therefore, this is not a situation where
equitable tolling was applied to resurrect liability that was destroyed by the lapse of two
years before the filing of any complaint. Instead, this is a case where the means adopted
to allow judicial review of the jurisdictional question could have been accomplished by
other procedural devices that would have avoided the statute of limitations question and
the choice of procedures should not be used to truncate the shipper’s refund period when
the policies underlying the statute of limitations were satisfied by the initial complaint. 7
7 The Commission chose to analyze the statute of limitations issue using the concept of
tolling. Alternatively, the Commission could have focused on section 735’s use of the word
“complaints” and interpreted it so that the complaints filed in the second phase were deemed to
be subsumed by the initial complaint filed in December 2005. This approach is suggested by the
Commission’s answer, which asserts “that Phase 2 was a continuation of Phase 1.” In other
words, the documents labeled “complaints” that were filed to initiate Phase 2 were not
“complaints” for purposes of section 735 and, as a result, the two phases should be treated as a
24.
Given the deference that courts give to the Commission’s interpretation of the
Public Utilities Act, the foregoing approach to identifying the relevant complaint may
have justified the Commission’s conclusion that the claims for refunds on shipments
going back to April 1, 2005, were timely under section 735.
In summary, we conclude the Commission did not act in excess of its jurisdiction
or authority or contrary to law when it awarded refunds for shipments made on or after
April 1, 2005.
III. LINE FILL AND COST OF SERVICE*
A. Background
1. Cost-of-Service Methodology
Generally, the Commission calculates what constitutes permissible utility rates by
determining (1) a test period for the costs and expenses that can be attributed to providing
the service, (2) the rate base of the utility—that is, the value of the property devoted to
public use—and (3) a reasonable rate of return to be allowed the utility company on its
rate base. (City & County of San Francisco v. Public Utilities Com. (1971) 6 Cal. 3d 119,
122; see SFPP, L.P. v. Public Utilities Com. (2013) 217 Cal. App. 4th 784, 801 [a public
utility is entitled to a reasonable return on the value of the assets it employs to provide
utility service—i.e., its rate base].)
In this case, the Commission used the cost-of-service methodology to
(1) determine the rates that Pipeline Company began charging on April 1, 2005, were
unjust and unreasonable and (2) calculate the $104.3 million in refunds owed to the
shippers.
single case initiated for statute of limitations purposes by the filing of the December 2005
complaint.
* See footnote, ante, page 1.
25.
Pipeline Company accepts the use of the cost-of-service methodology for
determining just and reasonable rates for the refund period, but challenges how the
Commission calculated the cost of one item in the rate base—namely, line fill. The
parties agree that Pipeline Company is entitled to a return on its investment in line fill,
but disagreed on how to determine the value of the investment in line fill.
2. Line Fill
“Line fill” is defined by Pipeline Company as the quantity of oil in the system
required to keep the crude oil moving and make prompt, continuous deliveries. The
Commission describes line fill as “the oil used in the pipe to maintain pressure.” The
shippers refer to line fill as the oil inside the pipes that maintains pressure and pushes
other oil through the pipeline, stating it is necessary for the pipeline to function.
An online dictionary defines line fill as the amount of oil required to fill a new line
before deliveries can be made at the end of the line and defines line pack as the barrels of
oil maintained in a trunk pipeline at all times to maintain pressure and provide an
uninterrupted flow of oil. ( [as
of Dec. 22, 2015].)
The foregoing definitions are descriptive and do not suggest how to categorize line
fill for accounting purposes or how to determine its value under a cost-of-service
methodology.
B. Contentions
The Commission treated the line fill used in the SJV Pipeline as a fixed asset and
valued it at its 1996 cost. The Commission used 1996 based on (1) its conclusion that the
SJV Pipeline was dedicated to public use and thus subject to its jurisdiction since at least
1996 and (2) Pipeline Company’s failure to submit data as to when it originally provided
line fill.
26.
1. Pipeline Company’s Position
Pipeline Company contends the Commission erred in its analysis of line fill, which
understated its costs and overstated the shippers’ refunds. Pipeline Company asserts that
(1) every batch of crude oil is pushed down the pipeline by batches loaded after it; (2) the
operation of a pipeline requires line fill to keep oil in the system moving; (3) line fill is
replaced continuously with new oil as the batches in the pipeline are delivered; and
(4) the process of continual replacement every three or four days means that the cost of
providing line fill fluctuates with the price of crude oil. Based on these assertions of fact,
Pipeline Company contends line fill should have been treated as a component of working
capital and valued at its actual cost. If the line fill had been valued at replacement cost, it
would have been valued substantially higher than the January 1996 price of $13.75 per
barrel. For example, crude oil prices were over $50 per barrel in January 2006 and over
$120 per barrel in June and July 2008.
2. Commission’s Contentions
The Commission argues that (1) it has wide latitude in choosing the methods
employed in ratemaking and acted reasonably in choosing to value line fill as a capital
asset rather than inventory; (2) its findings of fact are supported by substantial evidence;
and (3) the federal regulations are not binding on it and are not the only reasonable
accounting method for line fill.
C. Rules of Law Governing Ratemaking and Reparations
Section 451 provides that all charges received by any public utility for any service
rendered “shall be just and reasonable. Every unjust and unreasonable charge demanded
or received for such … service is unlawful.”
When section 451 has been violated, the Commission is authorized to order
reparations. In particular, section 734 provides that when the Commission has found a
public utility has charged unreasonable, excessive or discriminatory rates for the
27.
performance of a service, the Commission “may order that the public utility make due
reparation to the complainant therefor, with interest from the date of collection if no
discrimination will result from that reparation.”
The parties have cited no statutory provision specifying the method or criteria the
Commission is required to employ when determining whether charges are just and
reasonable. In recognition of the absence of statutory guidance, the Commission cites the
California Supreme Court for the proposition that its determination of reasonable rates
and charges is presumed correct and it “may choose its own criteria or method of arriving
at it decision, even if irregular, provided unreasonableness is not ‘clearly established.’”
(Pacific Tel. & Tel. Co. v. Public Util. Com. (1965) 62 Cal. 2d 634, 647.)
Pipeline Company has not acknowledged this Supreme Court precedent and its
burden of clearly establishing the unreasonableness of the Commission’s choosing to
treat line fill as a fixed capital asset valued at its 1996 costs. Instead, Pipeline Company
contends: “In their Answers, neither the Commission nor the Shippers provide any legal
or factual justification for the Commission’s method of valuation [of line fill], which
conflicts with the Commission’s own prior ratemaking determinations.”
This contention suggests Pipeline Company believes that the Commission’s prior
decisions create binding precedent. This view of Commission decisions has not been
adopted by our Supreme Court:
“The departure by the Commission from its own precedent or its failure to
observe a rule ordinarily respected by it is made the subject of criticism [by
petitioner], but our reply is that this is not a matter under the control of this
court. We do not perceive that such a matter either tends to show that the
Commission had not regularly pursued its authority, or that said departure
violated any right of the petitioner guaranteed by the state or federal
constitution. Circumstances peculiar to a given situation may justify such a
departure.” (Postal Tel.-Cable Co. v. Railroad Com. (1925) 197 Cal. 426,
436–437.)
28.
The Commission has relied on this statement by the Supreme Court in setting forth
the following description of its authority:
“The Commission may legally depart from its ‘own precedent’ or may fail
to ‘observe a rule ordinarily respected by it,’ so long as ‘[c]ircumstances
peculiar to a given situation may justify such a departure.’ (Postal Tel.-
Cable Co. v. Railroad Com.[, supra,] 197 Cal. 426, 436–437.) Thus, when
the circumstances warrant it, the Commission may adopt an exception to
the general rule.” (Toward Utility Rate Normalization (1993) 52
Cal.P.U.C.2d 673 [1993 Cal.P.U.C. Lexis 737, 4–5].)
Based on the foregoing principles, we conclude that Pipeline Company must
clearly establish the unreasonableness of the Commission’s method for valuing line fill.
In addition, the Commission may depart from any prior method used to value line fill so
long as the circumstances of this case justify that departure.
D. Approaches to Line Fill
1. Court Cases Involving Line Pack or Cushion Gas
One place to look for how to account for and determine the value of line fill is
case law. Many of the cases addressing how to account for line fill, line pack or cushion
gas used in pipelines or reservoirs are tax cases. (E.g., Washington Energy Co. v. U.S.
(Fed. Cir. 1996) 94 F.3d 1557 [depreciation of cushion gas in reservoir]; Pacific
Enterprise & Subsidiaries v. Commissioner (1993) 101 T.C. 1, 17 [“cushion gas and line
pack gas are capital assets and not inventory”].)
In Transwestern Pipeline Co. v. United States (Ct. Cl. 1980) 639 F.2d 679
(Transwestern), the court addressed whether the line pack gas in the taxpayer’s natural
gas pipeline was a depreciable capital asset or constituted an inventory of merchandise
held for sale in the normal course of business. (Id. at p. 680.) The court determined that
(1) the line pack gas was an essential component necessary for the operation of the
pipeline, (2) a vast majority of the line pack gas would be lost on abandonment of the
29.
transmission system,8 and (3) the line pack gas met the definition of a fixed asset under
generally accepted accounting principles, under industry standards, and the system of
accounting used by the Federal Power Commission.9 (Transwestern, supra, at pp. 680–
681.) Based on these determinations, the court concluded the line pack gas should be
treated for income tax purposes as a capital expenditure depreciable over the useful life of
the pipeline system. (Id. at p. 681.)
In Arkla, Inc. v. United States (5th Cir. 1985) 765 F.2d 487, the court addressed
the allowance of depreciation for cushion gas—that is, the volume of gas maintained in a
reservoir to achieve an efficient pressure. (Id. at p. 488.) The court recognized that
(1) some cushion gas was recoverable because it could be removed and sold when the
reservoir was no longer used as a storage facility and (2) other cushion gas could not be
recovered. (Ibid.) The court concluded the recoverable cushion gas was not subject to
depreciation. (Id. at pp. 489–490.) In contrast, the court treated the nonrecoverable
portion of the cushion gas as a capital asset subject to depreciation based on the useful
life of the storage facility. (Id. at p. 490.)
2. Federal Regulations
In at least one context, federal regulations refer to line fill as inventory. Those
regulations address how to calculate the royalty payments due under federal oil leases
and allow the lessee to deduct certain reasonable, actual costs incurred to transport the oil
before calculating the royalty owed. (30 C.F.R. §§ 1206.110 & 1206.111; see 30 C.F.R.
8 According to the trial court’s decision, which the appellate court adopted, “line pack, as a
minimum volume of gas which must always be maintained in Transwestern’s pipeline system if
it is to operate, and which will not be recoverable to any substantial extent at the end of the
system’s useful life, can scarcely be regarded as inventory or as property held primarily for sale
to customers.” (Transwestern, supra, 639 F.2d at p. 685.)
9 The Federal Power Commission was the federal agency that regulated the taxpayer, an
interstate pipeline company, and its rates. In 1977, the Federal Power Commission was
reorganized and renamed the Federal Energy Regulatory Commission (FERC). (Simmons v.
Sabine River Authority Louisiana (5th Cir. 2013) 732 F.3d 469, 471, fn. 1.)
30.
§ 1206.100, subd. (a).) One of the allowed deductions is “[t]he cost of carrying on your
books as inventory a volume of oil that the pipeline operator requires you to maintain,
and that you do maintain, in the line as line fill.” (30 C.F.R. § 1206.110, subd. (b)(4).)
The cost attributed to line fill is calculated by multiplying the value of the volume of line
fill maintained for the month in question by the monthly rate of return specified by the
regulations. (Ibid.; see 30 C.F.R. § 1206.111, subd. (b)(6)(ii) [calculating cost of pipeline
transportation provided by the lessee or an affiliate].)
Another set of federal regulations are those promulgated by FERC to address its
approval of rates for oil pipelines based on a cost-of-service methodology. (See 18
C.F.R. §§ 346.1-346.3 [oil pipeline cost-of-service filing requirements].) FERC requires
the inclusion of a “Statement E—rate base” in the rate filings of oil pipelines. (18 C.F.R.
§ 346.2(c)(5).) One item required in this statement of the rate base is “working capital
(including materials and supplies, prepayments, and oil inventory).” (Ibid.) The
regulation does not use the terms “line fill” or “line pack” and, therefore, does not specify
whether line fill is part of oil inventory. Nonetheless, Pipeline Company relies on this
regulation to support its argument that line fill should be characterized as oil inventory.
E. Commission’s Analysis of Its Earlier Decision
A major argument by Pipeline Company is that an earlier decision by the
Commission establishes that line fill is treated as working capital and not as a physical
pipeline asset for purposes of ratemaking.
In Pacific Gas and Electric Company (1994) 53 Cal.P.U.C.2d 215 [1994
Cal.P.U.C. Lexis 82] (PG&E), the Commission considered and granted an application to
increase the cost cap for a gas pipeline expansion from $736 million to $849 million.
The Commission addressed the line pack associated with the pipeline by stating, “Line
Pack is rate base item, and is, therefore, removed from plant-in-service total and included
in rate base calculations.” In Appendix B to the decision, the Commission identified
31.
“Working Cash Capital” as an element of the rate base and included three line items
under that heading: (1) “Material and Supplies,” (2) “Line Pack” and (3) “Working Cash
Requirement.” The value of the line pack included in the rate base for 1994 and for 1995
was $1,958,000 for each year. (Id. at pp. 116–118.)
We conclude PG&E does not control how the oil used as line fill must be valued
for purposes of ratemaking and reparations in this case.
First, assuming that PG&E created binding precedent for the proper accounting of
line pack, it would not necessarily apply in this case because Pipeline Company has not
established that line pack in a gas pipeline is so similar to line fill in an oil pipeline that it
is unreasonable to treat them differently. One possible distinction relates to timing. The
term “line fill” suggests oil that is used prior to the initiation of deliveries to fill the
pipeline and make it operational, while the term “line pack” might refer to oil used after
the initial line fill has been replaced.10 Pipeline Company’s failure to demonstrate that
the term “line pack” was used in the 1994 decision in the same manner as the term “line
fill” is used in this case undercuts its argument that the 1994 decision dealt with the same
thing.
Second, even if we assume line pack and line fill are the same thing in the context
of an oil pipeline, PG&E is not authority for the proposition that the valuation of line fill
varies with current oil prices. In PG&E, the value assigned to the line pack was the same
for 1994 and 1995, which implies there was no monthly or periodic revaluation. Thus,
10 For example, it is possible for a utility company operating a pipeline to (1) provide the
initial line fill, (2) subsequently enter into an arrangement where its customers provide and thus
own the line pack that replaces the initial line fill, and (3) later replace the customer’s oil with
line pack oil owned by the utility company. This last step is illustrated by Western Refining
Southwest, Inc. v. F.E.R.C. (2011) 636 F.3d 719, a case in which the pipeline operator removed
the customer’s line fill by pumping it into a storage tank, reversed the line flow and used the
pipeline’s capacity for its own benefit. In our example, the cost of line fill would be the original
expenditure and the cost of the line pack would be incurred sometime after the pipeline became
operational.
32.
we are not convinced by Pipeline Company’s position that the “Commission’s use of
original-cost valuation here cannot be squared with PG&E’s approach.”
Third, and most importantly, Pipeline Company has not clearly demonstrated that
the Commission acted unreasonably in the circumstances of this case by accounting for
line fill as a fixed asset valued at its original cost. Pipeline Company has not
acknowledged that applicable law requires it to clearly demonstrate the unreasonableness
of the Commission’s method for valuing line fill. Consequently, we will consider the
points raised by Pipeline Company as though phrased in terms of that legal standard.
1. Physical Molecules
One argument presented by Pipeline Company is based on the physical molecules
that constitute the line fill. The Commission took the position that the physical molecules
constituting the line fill were not a decisive factor, stating that for ratemaking purposes
“the line fill—not the physical molecules, just the investor investment—is kept at the
original cost.” This position is not clearly unreasonable because line fill is still in the
pipeline after the delivery of a particular contract, even though the molecules in the
pipeline have changed.
It appears that referring to the molecules might be one reasonable way to account
for an asset, but it is not the only reasonable approach. For example, the molecules of
cushion gas in a natural gas reservoir change, but it does not follow that cushion gas must
be valued under a first-in-first-out method of accounting. (See Pacific Enterprise &
Subsidiaries v. Commissioner, supra, 101 T.C. at p. 17 [“cushion gas and line pack gas
are capital assets and not inventory”].) In Transwestern, supra, 639 F.2d 679, the court
rejected the argument that line pack gas constituted inventory even though the molecules
in the pipeline at any given moment were destined for delivery to customers. (Id. at
pp. 686–687.) The court concluded that consideration of the “specific molecules of
natural gas” reaching the customers was less important than the facts that the line pack
33.
remained constant and was necessary for the operation of the pipeline. (Id. at pp. 686–
687.) Both of these factors apply to the SJV Pipeline.
Therefore, we conclude Pipeline Company’s contention that the physical
molecules of the line fill must control how line fill is valued has not been established and,
therefore, Pipeline Company has not demonstrated the Commission’s treatment of the
line fill was clearly unreasonable.
2. Federal Regulations
Pipeline Company also argues there is no merit to the Commission’s grounds for
distinguishing the federal regulations defining “working capital” in the context of oil
pipelines. (See 18 C.F.R. § 346.2, subd. (c)(5) [working capital includes oil inventory].)
This argument does not establish the Commission’s valuation of line fill was
clearly unreasonable because FERC regulations are not binding on the Commission for
purposes of determining whether the Commission “has not proceeded in the manner
required by law.” (§ 1757, subd. (a)(2); see SFPP, L.P. v. Public Utilities Com., supra,
217 Cal. App. 4th 797–798.) As previously noted, there are different ways to account for
line fill and line pack and the federal regulations do not establish the only reasonable
approach.11
F. Van Hoecke’s Approach to Working Capital
1. Van Hoecke’s Testimony and Exhibits
Robert Van Hoecke is a principal of Regulatory Economics Group, LLC, a firm
located in Virginia and specializing in economic, financial and regulatory consulting for
the pipeline industry. Pipeline Company presented Van Hoecke’s testimony to support
its application for approval of tariffs for the SJV Pipeline.
11 In light of this conclusion, we do not reach the question whether the reference to “oil
inventory” in the federal regulation includes line fill. (18 C.F.R. §346.2, subd. (c)(5).)
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Van Hoecke’s written testimony and the schedules he prepared addressed topics
such as (1) cost of service, (2) rates per route, (3) operating expenses, (4) rate base, and
(5) return on rate base. In this case, we are concerned with his approach to the rate base,
which he calculated by adding net property to working capital and subtracting
accumulated deferred income taxes. Van Hoecke assigned $86,000 to working capital,
which his April 2009 written testimony explained as follows:
“Working capital constitutes another element of rate base. Mr. Rathermel
has provided the balance for this item which reflects various stock items
includable in ‘Materials and Supplies’ such as power supplies and
communication modules. I have assumed that 2010 working capital will be
the same as that reflected in 2008.”12 (Fn. omitted.)
Schedule 4 to Van Hoecke’s April 2009 written testimony identified the source of
the working capital number as “Workpaper 1, Line 11.” In turn, that workpaper listed the
source of the working capital number as “Exhibit No. __ (HJR-1), Page 17.” Exhibit
No. __ (HJR-1) is not among the supporting documents provided with Pipeline
Company’s writ petition, but portions of that document are included in the administrative
record as an attachment to the direct testimony of Rathermel. The attachment includes
schedules 1 through 10, but does not include page 17 or the other workpapers.
Van Hoecke’s February 2010 written testimony was submitted with schedules
containing similar descriptions of the source of the working capital figure.
2. Commission’s Use of Van Hoecke’s Evidence
The Commission referred to Van Hoecke’s use of $86,000 as working capital
when it addressed Pipeline Company’s argument that line fill was inventory and therefore
12 Van Hoecke refers to 2010 because he chose it as the test year, developed projections for
that year, and used those projections in his proposal regarding the tariff. Van Hoecke’s mention
of Mr. Rathermel refers to Harry “Kent” J. Rathermel, who was Senior Finance Advisor—
Western Region Distribution for Shell Pipeline Company LP when he presented testimony to the
Commission in April 2009 and February 2010. Rathermel testified about the operating expenses
associated with the SJV Pipeline for 2008 and the 2010 test year.
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working capital that must be valued on a present basis (not original cost). One reason the
Commission was not convinced by Pipeline Company’s argument was Van Hoecke’s
approach to working capital. In Decision 14-06-052, the Commission stated that Pipeline
Company’s argument contradicted its own witness, “Van Hoecke, who originally
proposed a working capital amount of $86,000. [Citation.] He did not include oil
inventory in his working capital number.”
The Commission’s finding that Van Hoecke’s $86,000 figure for working capital
did not include oil inventory probably was inferred from (1) Van Hoecke’s testimony that
the working capital balance he used included materials and supplies and the absence of
any mention of oil inventory and (2) the fact that the $86,000 figure was too small to
include oil inventory or line fill. The amount was too small because Matthew Petersen,
another of Pipeline Company’s witnesses, presented calculations that listed the volume of
working inventory at approximately 1.17 million barrels13 and estimated the value of that
inventory as ranging from $64.8 to $120.2 million for the years 2006 through 2011. In
contrast, the evidence presented by Matthew O’Loughlin, one of the shippers’ witnesses,
calculated the value of the line fill at approximately $20.6 million, using a volume of
1.5 million barrels and a 1996 crude oil price of $13.75 per barrel.
3. Pipeline Company’s Argument
Pipeline Company challenges the Commission’s treatment of Van Hoecke’s
testimony by arguing:
“The working capital line item that Mr. Van Hoecke submitted in his
original and rebuttal testimony was $86,000. (App-I 248; App-II 392.) An
examination of the substance of Mr. Van Hoecke’s testimony, however,
reveals no explanation as to what items were or were not included in his
working capital calculations. The Commission cannot simply infer that,
presumably because the $86,000 figure seems in the Commission’s
13 Petersen’s Schedule 8 broke this figure into 865,311 barrels of San Joaquin Valley heavy
crude and 299,774 barrels of San Joaquin Valley light crude.
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estimation to be too low to include oil inventory, line fill was not included.
[¶] … The claim that [Pipeline Company’s] own witness categorically did
not include oil inventory in his working capital calculations is not
supported by any evidence in the record, and cannot be used as a fact that
undermines [Pipeline Company’s] position on line fill valuation.”
Pipeline Company’s argument is based on (1) a representation about what was and
was not included in the record and (2) a challenge to the Commission’s use of an
inference in its role as the trier of fact. We consider each point separately.
4. Explanation in the Record
Counsel for Pipeline Company asserts that Van Hoecke’s testimony reveals “no
explanation as to what items were or were not included in his working capital
calculations.” This statement about the contents of the record is not accurate. (See Bus.
& Prof. Code, § 6068, subd. (d).)
First, Van Hoecke testified that the working capital figure he used reflected
various stock items includable in materials and supplies, such as power supplies and
communication modules. Second, Van Hoecke explained the source of the working
capital figure as being provided by Rathermel. Therefore, Pipeline Company’s assertion
that he provided no explanation of what was included in the working capital figure is
manifestly false. Van Hoecke explicitly identified materials and supplies as being part of
working capital and provided examples of items within that category. He also named
Rathermel as the source of the working capital figure.
In addition, the schedules submitted with Van Hoecke’s written testimony refer to
an “Exhibit No. __ (HJR-1), Page 17” as the source of the working capital figure. This
page was not included in the appendix filed by Pipeline Company to support its petition
and is not part of the administrative record. Its omission cannot be used by Pipeline
Company to its own advantage. The decision of the Commission is presumed correct and
a petitioner has the burden of overcoming that presumption. (See Pacific Gas & Electric
Co. v. Public Utilities Com. (2015) 237 Cal. App. 4th 812, 838 [presumption of
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correctness extends to Commission’s factual determinations].) A petitioner cannot carry
that burden by omitting evidence and then pointing to the absence of that evidence to
support its claim that the Commission misinterpreted the testimony presented. (Cf.
Ballard v. Uribe (1986) 41 Cal. 3d 564, 574 [appellate record was inadequate to
demonstrate reversible error regarding damages because plaintiff failed to include
transcript of relevant testimony].)
5. Commission’s Authority to Draw Inferences
Counsel for Pipeline Company contends that the Commission could not infer the
$86,000 figure for working capital did not include oil inventory. This contention,
unsupported by a citation to authority, directly contradicts established principles of law
relating to the Commission’s ability to draw inferences when evaluating and weighing the
evidence.
In our role as a court of review, we may not hold a trial de novo, take additional
evidence or exercise independent judgment on the evidence. (§ 1757, subd. (b).) Instead,
we determine whether “[t]he findings in the decision of the commission are not supported
by substantial evidence in light of the whole record.” (§ 1757, subd. (a)(4).)
The Supreme Court has held that findings of fact by the Commission have
sufficient evidentiary support “if they are supported by any reasonable construction of the
evidence.” (Toward Utility Rate Normalization v. Public Utilities Com. (1978) 22 Cal. 3d
529, 537; Clean Energy Fuels Corp. v. Public Utilities Com., supra, 227 Cal.App.4th at
p. 649.) Courts have recognized that an evaluation of the evidence by the Commission in
its role as trier of fact often requires it to choose among conflicting inferences. “‘When
conflicting evidence is presented from which conflicting inferences can be drawn, the
commission’s findings are final.’ [Citation.]” (Toward Utility Rate Normalization v.
Public Util. Com., supra, at p. 538.) The same rule applies when conflicting inference
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reasonably may be drawn from undisputed evidence. (Pacific Tel. & Tel. Co. v. Public
Util. Com., supra, 62 Cal.2d at p. 647.)
Under these principles governing the Commission’s use of inferences, we must
reject Pipeline Company’s argument that the Commission could not infer the $86,000
figure for working capital did not include oil inventory. The inference was reasonable
based on the testimony of Petersen and O’Loughlin about the amount and value of the oil
constituting line fill. In short, the Commission’s interpretation of Van Hoecke’s
testimony and the related exhibits passes muster under the substantial evidence standard
of review. (§ 1757, subd. (a)(4).) Therefore, Pipeline Company has not demonstrated the
Commission’s evaluation of Van Hoecke’s testimony contains factual error.
G. Profits on Line Fill
1. Findings
Decision 13-05-017 found that Pipeline Company profited from the sale of the line
fill at market rates when the shippers began to provide the line fill, stating: “Under
[Pipeline Company’s] own calculations, it sold its existing line fill on July 1, 2011 for
over $100 million. [Pipeline Company] is not entitled to profit from this sale again, and
as it provides no legal or factual support for its position, we reject it.”
2. Contentions
Pipeline Company contends that the record provides no support for the
Commission’s finding that it realized a $100 million profit on the line fill.
The Commission argues that its finding is supported by substantial evidence about
the value of the line fill in 1996 and the value of the line fill in 2011, from which it could
deduce the amount of profit by comparing the two figures. Alternatively, the
Commission argues the amount of profit is irrelevant because “none of that profit was
required to be refunded to Shippers” and its statement about profits did not alter the
refund calculation.
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3. Analysis
We conclude that the Commission’s other findings support its refund decision for
purposes of section 1757, subdivision (a)(3) and its finding regarding profits derived
from the 2011 sale of the line fill was not a factor used in determining the refund amount.
Our conclusion that the finding about profit was irrelevant is based on the fact that the
finding was not essential to the Commission’s determination that the line fill was best
regarded as a fixed asset to be valued at 1996 prices. In other words, the Commission
would have treated the line fill as a fixed asset for purposes of determining its value even
if the price of oil in July 2011 had plummeted to $13.75 per barrel and there was no
difference between the original cost of the line fill and the price for which it was sold.
We recognize that Pipeline Company was in a position where it had to challenge
the finding in this writ proceeding because, if Pipeline Company had prevailed on its
other arguments, the finding about profit might have been offered as an alternative basis
for upholding the Commission’s decision.
DISPOSITION
The petition for a writ is denied. Respondent and real parties in interest shall
recover their costs in this proceeding. (Cal. Rules of Court, rule 8.493(a)(1)(A).)
_____________________
KANE, J.
WE CONCUR:
_____________________
HILL, P.J.
_____________________
SMITH, J.
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