182 F.3d 30 (D.C. Cir. 1999)
Exxon Company, U.S.A.,Petitionerv.Federal Energy Regulatory Commission, et al.,Respondents,Tesoro Alaska Petroleum Company, et al., Intervenors
No. 95-1520 Consolidated with Nos. 96-1078, 96-1464, 97-1733, 98-1005
United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued April 30, 1999Decided July 13, 1999

[Copyrighted Material Omitted][Copyrighted Material Omitted]
On Petitions for Review of an Order of the Federal Energy Regulatory Commission
Carter G. Phillips argued the cause for petitioner Exxon  Company, U.S.A.  With him on the joint briefs were Eugene
R. Elrod, Stephen S. Hill, Stephen F. Smith, Robert H.  Benna and Jeffrey G. DiSciullo.  Clifton D. Harris, Jr., and  Thomas M. Roche entered appearances.
Robert H. Benna argued the cause for petitioner Tesoro  Alaska Petroleum Company.  With him on the briefs was  Jeffrey G. DiSciullo.  James C. Reed, Jeanne M. Bennett and  David S. Berman entered appearances.
Andrew K. Soto, Attorney, Federal Energy Regulatory  Commission, argued the cause for respondents.  With him on  the brief were Joel I. Klein, Assistant Attorney General, U.S.  Department of Justice, John J. Powers, III, and Robert J.  Wiggers, Attorneys, Jay L. Witkin, Solicitor, Federal Energy  Regulatory Commission, and Susan J. Court, Special Counsel.  David H. Coffman, Attorney, entered an appearance.
John A. Donovan argued the cause for intervenors Arco  Alaska, Inc., et al.  With him on the brief were Matthew W.S.  Estes, Bradford G. Keithley, Charles William Burton, Jason  F. Leif, John W. Griggs, W. Stephen Smith, Randolph L.  Jones, Jr., Alex A. Goldberg and Richard Curtin.  Carolyn Y.  Thompson, Richard D. Avil, Jr., and Dean H. Lefler entered  appearances.
Albert S. Tabor, Jr., John E. Kennedy and S. Scott Gaille  were on the brief for intervenors TAPS Carriers.  Marvin T.  Griff and Dean H. Lefler entered appearances.
Before:  Ginsburg, Sentelle and Randolph, Circuit Judges.
Opinion for the Court filed by Circuit Judge Sentelle.
Sentelle, Circuit Judge:


1
Exxon Company, U.S.A. and  Tesoro Alaska Petroleum Company petition for review of the  Federal Energy Regulatory Commission's ("FERC" or  "Commission") order revising the valuation methodology for  specified grades of petroleum products after our partial remand of the Commission's earlier order adopting the distillation method for determining compensation due shippers on  the Trans Alaska Pipeline System for differences between the oil streams injected and oil streams received.  See Order  Modifying and Adopting Contested Settlement Proposal,  Trans Alaska Pipeline Sys., 65 FERC p 61,277 (1993) ("1993  Order"), approved in part and remanded in part, OXY USA,  Inc. v. FERC, 64 F.3d 679, 684 (D.C. Cir. 1995) ("OXY").  In  the order before us, FERC approved with modifications a  contested settlement over the objection of petitioners.  We  grant the petition for review in part and vacate and remand  for further proceedings those parts of FERC's order approving the use of proxies for the market valuation of one grade of  petroleum product and the decision to apply the settlement  prospectively only.

I. BACKGROUND

2
The Trans Alaska Pipeline System ("TAPS") provides the  only commercially-viable method for moving crude oil pumped  from the oil fields on Alaska's North Slope to the shipment  point at Valdez, Alaska, the Alaskan gateway to the world  market.  Several oil companies own interests in various oil  fields on the North Slope.  The oil in those fields differs  significantly in quality, but the realities of shipping that oil on  the single pipe of the TAPS requires the blending of the oil  streams from different fields.  Unlike packages shipped by a  common carrier, the oil streams cannot be segregated during  shipping, and the blended streams cannot be separated at the  Valdez end of the pipeline.  Instead, at the Valdez end of the  pipeline, each shipper receives a quantity of the blended  common stream equivalent to the amount it injected at the  North Slope end.  Companies that inject higher quality crude  receive oil at the Valdez end of the pipeline identical in  quality to that received by companies that inject lower quality  crude oil.  The TAPS carriers file tariffs specifying how the shippers will compensate each other for these differences in quality,  and their methodology must be approved by the Commission  pursuant to its authority under the Interstate Commerce Act  ("ICA"), 49 U.S.C.app. S 1 et seq.  See also Department of  Energy Organization Act, Pub. L. No. 95-91, S 402(b), 91  Stat. 565, 584 (1977), codified at 42 U.S.C. S 7172(b) (1988)  (repealed 1994), recodified as amended at 49 U.S.C. S 60502 (transferring authority to regulate oil pipeline rates under the  ICA from the Interstate Commerce Commission to FERC);Exxon Pipeline Co. v. United States, 725 F.2d 1467, 1468 n.1  (D.C. Cir. 1984) (explaining transfer of authority).  TAPS has  created a system which requires companies injecting lowerquality oil to compensate companies injecting higher-quality  oil by creating a "Quality Bank," which awards shippers  credits for high-quality oil and debits for low-quality oil.  The  TAPS Quality Bank is an arrangement that "makes monetary  adjustments [among] shippers in an attempt to place each in  the same economic position it would enjoy if it received the  same petroleum at Valdez that it delivered to TAPS on the  North Slope."  OXY, 64 F.3d at 684.  While this is simple  enough in concept, determining the relative value of the  injected streams is in fact a complex technical task.  There is  no independent market to set the relative price of the various  streams of North Slope crude because the crude is not sold  until after it is commingled and brought to Valdez.  When the  system was originally created, the relative value of oil was  determined by the "API gravity"1 of the oil because lighter,  high-gravity crude is generally more valuable than heavier,  low-gravity crude.  See id. at 685.  The "straight-line gravity  method" measured the gravity of each incoming stream and  compared it to the gravity of the oil received by that shipper  at the far end, and determined Quality Bank credits or debits  accordingly.  See id.  In 1989, however, OXY USA and  Conoco, Inc. challenged this methodology, and in 1991 a  FERC Administrative Law Judge ("ALJ") determined that it  "no longer yield[ed] a just and reasonable result."  57 FERC  p 63,010, at 65,049-50, 65,052-53 (1991).  (For a full explication of the proceedings, see OXY, 64 F.3d at 683-89.)


3
The majority of North Slope shippers in an attempt to  settle the tariff dispute proposed abandoning the straight-line gravity method in favor of a "distillation" or "assay" methodology, which would value crude oil based on the market price  of the various component products (called "cuts") created  when the crude oil is heated to a series of specific temperatures and the evaporated products produced at each temperature are recondensed.  See OXY, 64 F.3d at 687.  The five  cuts created by this process at the lower boiling points-propane, isobutane, normal butane, natural gasoline, and  naphtha--and one of the heavier cuts, gas oil, are not at issue  here, as we upheld the method of valuing those cuts in our  earlier review.  See id. at 701.  We vacated and remanded for  further proceedings as to distillate and residual fuel oil ("resid").

A. Distillate

4
Under the original 1993 settlement offer, the distillate cut  included the portion of the stream that evaporated between  350 and 650 degrees Fahrenheit.  Under the 1993 settlement  order, FERC split this proposed cut into two cuts, light  distillate (350-450 degrees) and heavy distillate (450-650 degrees).  FERC determined that it would price light distillate  as jet fuel and heavy distillate as No. 2 fuel oil, the products  into which those cuts are normally refined, without adjustment for processing costs.  See 1993 Order, 65 FERC  p 61,277, at 62,288.  We rejected that methodology because  each cut would require further processing to reach the quality  required for the proxy product.  See OXY, 64 F.3d at 693.Because the settlement as modified by FERC essentially  valued a raw material as if it were a finished product, we  determined that it overvalued these heavier cuts, resulting in  a windfall to those shippers whose streams contained the  highest relative proportion of heavy crude.  See id.  Although  we recognized that we could not require FERC to achieve a  perfect method of valuing petroleum streams, particularly  streams including cuts without a market, we nonetheless held  that FERC must be consistent in its methodological choices.That is, if the Commission chose to value a portion of the cuts  at market without adjusting for processing costs, then it  must, at least "to the extent possible," attempt to approximate the market value of other cuts without processing.  Id. at 694.  That is, the Commission cannot "consistent with the  requirement of reasoned decision making, value some cuts  precisely and others haphazardly."  Id.  We therefore remanded the distillate valuation for further consideration by  FERC.

B. Resid

5
As the name implies, the residual, or "resid," cut consists of  the portion of the petroleum stream remaining after distillation of all other cuts at lower boiling points.  In the 1993  settlement order, FERC split the resid into two cuts--light  resid (1,000 to 1,050 degrees Fahrenheit) and heavy resid (all  remaining material).  The order valued these cuts in relation  to the market price of proxies:  No. 6 fuel oil for light resid  and FO-380 for heavy resid with no adjustment for the  processing necessary to receive these market prices.  We  upheld FERC's decision to create a separate light resid cut,  but vacated the valuation of that cut at the price of No. 6 fuel  oil as we found that the record did not disclose a relationship  between the price of that purported proxy and the value of  the cut.  Likewise, we concluded that the record did not  demonstrate that FO-380 was a reasonable proxy for heavy  resid because the market price of FO-380 bore only a limited  and unquantified relation to the value of heavy resid as a  blending component.  See id. at 695.  While we concluded  that expert testimony in the record supported a "conclusion  that FO-380 and the 1050+ resid share some physical properties," it did not even suggest that "the two materials have  equal or even near-equal market values."  Id.  We therefore  remanded the valuation of the resid cuts to the agency for  further proceedings consistent with our opinion.


6
In our review of FERC's order approving the 1993 settlement, we rejected not only the specifics of the FO-380  comparison, but also FERC's decision to value resid based on  its use as a feedstock for "cokers," refinery equipment which  breaks resid down even further into lighter fuel products and  a heavy residue, which might be asphalt at some plants, or  other materials with differing uses.  Exxon and others argued that resid should be priced at its marginal use value, which Exxon claimed was as a blending component for  FO-380.  When remanding, we observed that this economic  argument, while it might not by itself carry the day, did  possess enough "analytical force" that the Commission should  on remand "explicitly address whether the marginal use of  1050+ resid should be taken into account in that cut's  valuation methodology."  Id.


7
C. FERC's Proceedings on Remand In response to our opinion, FERC initiated settlement  proceedings regarding these remanded issues.  When this  effort failed, FERC set the matter for hearing.  At the same  time, the Commission's Chief ALJ made further attempts to  secure a settlement.  The parties filed three separate settlement proposals, one by nine parties2 ("the Nine Party Settlement"), and unilateral proposals from Exxon and Tesoro. The ALJ provided opportunity for all parties to file materials  in support of or in opposition to the settlement offers.  Following the submissions, the ALJ heard oral argument and the  parties filed supplemental briefs.  See Certification of Contested Settlement and Ruling on Motion to Omit the Initial  Decision, Trans Alaska Pipeline Sys., 80 FERC p 63,015, at  65,212-13 ("1997 Opinion").


8
The ALJ ultimately certified the Nine Party Settlement to  the Commission, and opted not to certify the unilateral proposals from Exxon and Tesoro, finding that legal precedent  required this decision and that in any event the proposals  were biased in favor of the proposing parties.  The ALJ  reviewed the record in detail and determined that the only  issues properly before him were the remands for valuation of  light and heavy distillate and light and heavy resid.  He  found that the Nine Party Settlement's proposed valuations,  which follow, were fair and reasonable and supported by record evidence.  See 1997 Opinion, 80 FERC p 63,015, at  65,233.


9
Light distillate:  valued based on a weighted average of the West Coast and Gulf Coast prices of jet fuel, adjust-ed by 0.5 cents per gallon to reflect processing costs.


10
Heavy distillate:  valued based on weighted average of the West Coast price of Waterborne Gas oil, reduced by 1cent per gallon to reflect processing costs and the Gulf Coast price of No. 2 fuel oil reduced by 2 cents per gallon to reflect processing costs.  (The processing costs were based on the testimony of Nine Party expert witness John O'Brien who stated that ANS crude oil needed to be processed to reach the 0.5 percent level for sulfur demanded by the market. )


11
Light resid (1000 degrees F to 1050 degrees F):  The1993 settlement had eliminated separate treatment of light resid and combined it with the 1050+ cut.  The Nine Party Settlement approved by the ALJ  instead rolled it into the Vacuum Gas Oil ("VGO") cut, by raising the top end of that cut to 1050 degrees, which the nine parties claim conforms with industry practice.


12
Heavy resid (1050+):  continued use of the West Coast price of FO-380 as a West Coast reference price, subtracting 4.5 cents per gallon as a processing cost.  Added Gulf Coast 3 percent sulfur No. 6 fuel oil as a Gulf Coast reference product, and adjusted that figure by the same4.5 cents.


13
The ALJ noted that the nine parties supported the settlement only if it applied prospectively.  See id. at 65,241.  The  ALJ determined that the remand did not require that the  new methodology be applied retroactively and that the Commission retained the discretion to determine when to make  the settlement effective.  See id. at 65,243.  The ALJ also  recommended prospective application under the circumstances.  See id.


14
The Commission reviewed and accepted the ALJ's recommendations as to each valuation, finding in its order that each determination was based on substantial evidence.  FERC  found that there was no active market for resid, and opted to  price resid based on its value as a coker feedstock.  FERC  determined that the two reference products were the actively traded petroleum products that had physical characteristics  most resembling resid, and used these adjusted prices as a  proxy for the value of resid as a coker feedstock.  It also  decided to apply the new rates prospectively, stating that this  was consistent with the 1993 Order applying the new rates  prospectively, which was affirmed by this court in OXY."[The new settlement] does not change the methodology to be  used, but modifies how to value the remanded cuts."  See  1997 Order, 81 FERC p 61,319, at 62,467.  The Commission  noted that the TAPS Quality Bank was sui generis, so  precedents cited by Exxon and Tesoro as supporting retroactive application of the new methodology were not dispositive.

II. STANDARD OF REVIEW

15
The standard of review applicable to FERC's approval of  this proposed settlement of the issues remaining on remand is  the same as it was in OXY.  FERC's decision to approve a  portion of a contested settlement must be supported by  substantial evidence, and we must set aside FERC's approval  if it was "arbitrary, capricious, an abuse of discretion, or  otherwise not in accordance with law."  5 U.S.C. S 706(2)(A),  (E).  Our inquiry under the arbitrary and capricious test is  "narrow and a court is not to substitute its judgment for that  of the agency."  Motor Vehicle Mfrs. Ass'n of the United  States, Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43  (1983).  Where, as in the instant case, the analysis to be  performed "requires a high level of technical expertise, we  must defer to the informed discretion of the responsible  federal agencies."  Marsh v. Oregon Natural Resources  Council, 490 U.S. 360, 377 (1989) (internal quotation marks  omitted).  Nonetheless, the Commission must engage in rational decision making, see, e.g., State Farm, 463 U.S. at 43;OXY, 64 F.3d at 690.  We held in OXY that the agency had  supplied a reasoned analysis for changing its prior policies  when it adopted the distillation methodology.  See OXY, 64 F.3d at 690.  However, more important for purposes of the  petitions now before us, we granted the petitions for review of  the 1993 Order to the extent that they challenged the Commission's methods of valuing the distillate and resid cuts.

III. CHALLENGES TO THE NEW SETTLEMENT

16
The petitioners make multiple arguments challenging the  valuation of specific cuts and FERC's failure to require that  qualitative differences between the same cuts of different  streams be considered when determining the relative value of  each stream.  They argue that FERC acted arbitrarily by  failing to value resid based on its marginal use as a fuel oil  blend stock instead of as a coker feedstock;  improperly failed  to account for differences in quality among the the same cuts  of different streams when valuing resid;  improperly chose a  price proxy for its value as a coker feedstock;  and failed to  address challenges to the methodology for determining resid's  value as a coker feedstock.  The petitioners also challenge  FERC's decision to implement the new valuation methodology prospectively only.  We address first the valuation challenges, and uphold the agency's decisions as supported by  substantial evidence with the exception of the use of FO-380  less 4.5 cents and 3 percent sulfur No. 6 fuel oil less 4.5 cents  as proxy prices for heavy resid.  The adjusted valuation  solves none of the problems we identified in our prior opinion  because there is no evidence that the prices of the reference  products, even after the 4.5 cents adjustment, bear any  rational relationship to the market value of resid.  We therefore vacate and remand the portion of FERC's order affecting the valuation of heavy resid.

IV. INTRA-CUT QUALITY DIFFERENCES

17
Exxon3 argues that FERC's failure to account for differences in quality among the heavy distillate cuts of the individual streams before they are commingled in the TAPS common stream violates the terms of our earlier remand in OXY,  and is arbitrary and capricious.  We disagree.


18
Petitioners claim that the goal of the Quality Bank is to  place an accurate value on the streams flowing into the TAPS,  and failure to account for quality differences in the distillate  cuts of the streams coming from different oilfields is not  reasoned decision making.  We disagree that Exxon's argument follows logically from our remand.  In OXY, we recalled  that the goal of the Quality Bank is "to assign accurate  relative values," 64 F.3d 693 (emphasis added), to the diverse  streams delivered to the pipeline.  We vacated in part the last  order because the methodology approved therein had favored  one class of cuts above others.  We remanded in order that  FERC might provide a methodology with a reasoned relative  uniformity, knowing that absolute precision at any level of the  cuts was unachievable.  That is, we did not remand because  the old method was inaccurate, but because it was unfairly  nonuniform.  To have demanded 100 percent accuracy would  have been to hold the agency to "an impossibly high standard."  Id. at 694.  The specific purpose in our remand was  to require the agency to resolve the relative overvaluation of  some cuts, which were valued at the market price for their  proxy despite the fact that significant processing was required to bring those products up to a market standard. Exxon seeks to expand the duty of the Commission to refining the degree of distinction among component streams within individual cuts.  Specifically, Exxon seeks to have us  vacate FERC's order insofar as it does not recognize and  adjust for differences in the sulfur content of distillate as a  key factor in determining market value.  Part of the adjustment to the per-barrel price of distillate is to account for  removing sulfur so that it can be sold as jet fuel or No. 2 fuel  oil.  In implementing that methodology, FERC assumed that  all streams had the same sulfur content, when Exxon had  shown that such was not the case.  Exxon argues that FERC  should not use the sulfur content of the commingled streams  when determining the value of the cut, but must determine  the sulfur content and thus the value of the distillate cut of  the oil from each field before it enters the common stream. Because some streams have a higher sulfur content, they  would require more processing and consequently have a lower  value once processing costs were factored into the per-barrel  price.  Other streams with a lower sulfur content would have  a higher value because no further processing would be needed  to bring the oil up to the quality of the proxy product.


19
Exxon further argues that treating all of the streams as if  they have the same sulfur content violates OXY, which calls  for accurately valuing the streams;  that it is arbitrary and  capricious because it makes assumptions contrary to fact;and that FERC's failure to even consider the issue is arbitrary and capricious.  Specifically, Exxon argues that FERC  improperly determined that the scope of its actions was  limited by the terms of our remand, but that in any event,  FERC cannot claim that it addressed only the issues required  by the court because it did more than we ordered when it  changed the West Coast proxy for heavy distillate, even  though no party challenged the one adopted in the 1993 and  1994 orders, and eliminated the light resid cut, even though it  was affirmed in OXY.  Exxon contends that having opened  the door, so to speak, FERC was obligated to consider the  information provided by Exxon and Tesoro about the differences in quality among the streams because it has an obligation under the ICA " 'to ensure that pipeline rates are just  and reasonable.' "  OXY, 64 F.3d at 690 (quoting Texas  Eastern Transmission Corp. v. FERC, 893 F.2d 767, 774 (5th  Cir. 1990)).  Exxon argues that refusing to consider the  quality differences was therefore arbitrary and an abuse of  discretion.  In its 1997 Order, FERC noted that it had  rejected the same argument in its 1993 Order, and that we  had not reversed or vacated that ruling.  Exxon argues  nonetheless that by adjusting the market prices of the proxies  to account for removing sulfur, FERC itself has now determined that sulfur content is an important aspect of valuing  heavy distillate.


20
We reject Exxon's argument that FERC's failure to differentiate between the streams was arbitrary and capricious.  In  OXY, we required FERC to take into account the significant  processing costs that rendered its unadjusted use of a proxy product unreasonable in relation to the valuation of other  portions of the stream.  Exxon's contention that FERC must  value each stream at the wellhead based on its individual  sulfur content calls for more than we required.  We did not  hold in OXY that differences in quality between the streams  must be considered, and do not do so now.  Inherent in our  approval of FERC's adoption of the distillation methodology  in OXY was our approval of the agency's conclusion that there  was no need to consider intra-cut quality differences, and that  the agency properly determined that the relative proportions  of the cuts in each stream is sufficiently accurate as a method  of determining the relative value of the streams.  See 65  FERC p 61,277, at 62,287 (1993), and 66 FERC p 61,188, at  61,240 (1994).  In any event, it was not arbitrary and capricious to determine the value of each cut in the TAPS stream  after it has been mixed, instead of separately valuing the cuts  of each stream.  The fact that a more precise method exists  for determining the relative value of the streams does not  render the decision to adopt a less accurate, but more administrable, method arbitrary and capricious.  FERC has opted  to use a magnifying glass to determine the values of the  streams, and we will not fault it for not using a microscope.


21
We also uphold against challenge FERC's two changes to  the price of heavy distillate, both of which are supported by  the record.  FERC changed the reference price for the West  Coast from No. 2 fuel oil to Waterborne Gasoil, and adjusted  the price of Waterborne Gasoil by one cent per gallon and the  Gulf Coast price of No. 2 fuel oil by two cents to account for  processing.  See 1997 Order, 81 FERC p 61,319, at 62,460.These adjustments were based on the testimony of expert  witnesses John O'Brien and Christopher Ross.  Ross testified  that these products most closely resembled Alaskan North  Slope ("ANS") heavy distillate, see Affidavit of Christopher E.  Ross, p 19 (Jan. 29, 1997), and O'Brien testified that the ANS  heavy distillate cut required treatment to reach the necessary  sulfur level, see Affidavit of John O'Brien, WW 13-15 (Jan. 28,  1997).  These decisions were supported by adequate record  evidence and we uphold the agency.

V. RESID CUT VALUATION ISSUES
A.Exxon and Tesoro's Challenges

22
In OXY, we noted that resid like distillate did not trade on  an open market and therefore was difficult to evaluate.Nonetheless, and even in the face of "the deference we owe  the Commission's judgments," we concluded that the 1993  settlement approach to valuation of resid did not "satisfy the  APA's basic requirement of reasoned decisionmaking."  OXY,  64 F.3d at 694 (citing State Farm, 463 U.S. at 43).  We  therefore remanded that portion of the assay methodology to  the Commission for further consideration.


23
The method before us in the present review fares no better  than the last, and for the same reasons:  even with the 4.5  cents per gallon adjustment, "the record demonstrates no  more than that the price[s] of FO-380 [or No. 6 fuel oil]  bear[ ] some remote relationship to the value of 1050+ resid  as a feedstock."  Id. at 695.  We remand FERC's decision to  value resid at the price of FO-380 less 4.5 cents on the West  Coast and Waterborne 3% sulfur No. 6 fuel oil less 4.5 cents  on the Gulf Coast.  The figures derived from the use of these  proxies with a subsequent adjustment do not bear a demonstrated relationship to the value of resid, either as a coker  feedstock or as a blending agent for fuel oil.  Exxon and  Tesoro raise multiple challenges to FERC's valuation process  for this cut.

1. Marginal Use

24
Exxon argues that FERC erred again, as it did in the 1993  Order in not employing the marginal use of resid as a  blending agent for fuel oil rather than its value as coker  feedstock in establishing the valuation methodology for that  cut.  Exxon contends that the error is a fundamental one in  that the ALJ's finding, adopted by the Commission, that  there is no active market for resid is flawed.  In Exxon's  view, although there are few trades of resid, there is in fact a  market, and a sparsity of open trades is only due to the fact  that the refiners who use resid rarely need to purchase it  from others because they already obtain it as a byproduct of their own refining operation.  Exxon further argues that  there are formulae that can be used to derive resid's value as  a blend stock despite the absence of market trades.  Thus  Exxon prays the court to vacate the relevant portion of  FERC's order and remand the controversy for valuing of  resid as a blend stock.


25
FERC responds that there was conflicting evidence regarding the existence of a market for ANS resid, and the ALJ and  the Commission reasonably adopted the testimony of Nine  Party witnesses A.L. Gualtieri and Benjamin Klein, who  testified that resid was rarely traded, and was instead used as  a coker feedstock.  See 1997 Opinion, 80 FERC p 63,015, at  65,238-41.  The ALJ also determined, based on the record,  that it was inappropriate to value resid based on its marginal  use as fuel oil blend stock because most of the refineries did  not seek to purchase resid but created it as part of their  refinery process.  See id. 65,240.  The absence of an active  market for resid made the economic principle of marginal use,  which depends on a liquid market, unreasonable in this  circumstance.  See id. 65,240-41.


26
We see no reason to disturb FERC's adoption of the ALJ's  determination that resid is best valued based on the market  value of its constituent products. The expert testimony of  Klein constitutes substantial evidence in support of FERC's  decision that marginal use analysis does not require the  valuation of resid as a blendstock.

2. Conradson Carbon Residue Content

27
As with distillate, Exxon argues that FERC arbitrarily  ignored quality differences in the streams which affect the  value of the different cuts.  The Conradson Carbon Residue  Content ("CCR") of resid affects its value, and the different  streams delivered to the TAPS undisputedly have differing  CCR content.  Exxon reiterates the argument it made concerning sulfur that failing to account for differing CCR  content was arbitrary and capricious.  The CCR content  figure used by FERC was not even derived from the oil  shipped over TAPS, but from a blend used by an expert  which included other crude oils.  FERC responds that it


28
properly rejected the suggested intra-cut differentials based  on CCR content for the same reasons it rejected the quality  differentials based on sulfur content.  For the reasons stated  in Parts III and IV above, we hold that FERC was not  required to consider intra-cut differences in CCR content  when determining market value.

3. Choice of Proxies

29
Exxon next argues that FERC acted arbitrarily when it  chose to use the adjusted price of FO-380 as a proxy for  valuing resid as a coker feedstock.  In OXY, we found that  using the unadjusted market price of FO-380 as a proxy was  arbitrary and capricious.  The 4.5 cents adjustment now  adopted is arbitrary for the same reasons.  There is no  demonstrated relationship between the value of FO-380 and  coker feedstock other than an observed rough correlation in  price, and even the data relied on by FERC shows inconsistent relationships in the price of FO-380 and the coker  feedstock values calculated by the experts.  Exxon argues  that determining resid's value as a coker feedstock "requires  determining the identity, quantity, and value of products  produced in a coker from resid and subtracting from the  value the costs of producing those products and placing them  in a marketable condition."  See Joint Brief of Petitioners  Exxon Company, U.S.A. and Tesoro Alaska Petroleum Company at 42.  Exxon also argues that FERC chose the wrong  feedstock to value because it used a blend of crudes which  would be used by a hypothetical refinery, rather than actual  individual North Slope crude streams.  Exxon further contends that it presented numerous challenges to the methodology ultimately adopted by FERC, showing inaccuracies in the  expert's assumptions regarding cost calculations, product outputs and product yields.  Finally, it argues that because the  ALJ never allowed discovery, it could not replicate the expert's computer modeling on the PIMS system (a standardized petroleum industry modeling system used to calculate  refinery needs and outputs).  The ALJ and the Commission  did not specifically address these arguments, which Exxon  contends makes their decisions arbitrary and capricious.


30
FERC responds that the 4.5 cents per gallon adjustment to  the price of FO-380 on the West Coast and No. 6 fuel oil on  the Gulf Coast as proxies for resid was reasonable, based on  expert witness O'Brien's testimony and administrative ease. These are the lowest-quality products actively traded, and the  adjustment was within the range of variation between the  calculated value of resid as a coker feedstock and the per gallon price of FO-380.  See Ross Affidavit p 21.  O'Brien  derived the calculated value of resid as a coker feedstock  using the PIMS model and compared those calculated values  to the market price of FO-380 over the same five-year period. The relationship varied from resid being worth $1.21 per  barrel more than FO-380 in 1993 to being worth $3.01 per  barrel less than FO-380 in 1995, and averaged being worth  $1.12 per barrel less over the five-year period.  See 1997  Opinion, 80 FERC p 63,015, at p 65,239 (citing O'Brien Affidavit WW 56-598 Exhibit QB ar-23).  O'Brien testified that the  4.5 cents per gallon adjustment (equal to $1.89 per barrel less  than FO-380) proposed by the Nine Party Settlement fell  within the observed range of variation over the five-year  period and was therefore reasonable.  See id. FERC also  notes that Exxon and Tesoro both suggested a method that  tied the price of heavy resid to FO-380.  The difference is  that Exxon uses a complex formula to adjust the price.4

B. Analysis

31
While we find substantial record evidence supporting the  intermediate steps FERC took in determining the value of  resid--i.e., its determinations that no active market exists,  that resid is best valued as a coker feedstock rather than as a  blender for fuel oil, and that FO-380 and No. 6 fuel oil are the  actively-traded products in the relevant markets most similar  in physical characteristics to resid--we cannot conclude that  the last step follows logically from these premises.  We therefore cannot uphold the use of FO-380 less 4.5 cents on  the West Coast and Waterborne 3% sulfur No. 6 fuel oil less  4.5 cents on the Gulf Coast as a proxy price for resid.


32
The 4.5 cents adjustment, while it falls within the range of  the observed variation, does no more than that.  There is no  evidence that the prices of the proxy products are more than  coincidentally related to the value of resid as a coker feedstock.  Moreover, the calculated value of resid using the  PIMS model does not even vary consistently with the price of  FO-380.  As petitioners noted when this case was before us  in OXY, by the same logic we could use the price of coal with  an adjustment as a proxy for the price of diamonds because  both are a source of carbon, even if the prices fluctuate  inconsistently.  With only five years' data to consider, the  sample is too small to convince us that there is some other,  unstated relationship at work which guarantees that the price  of FO-380 and the value of resid will correlate consistently  within some specified range.  We recognize that the agency is  addressing the Quality Bank Administrator's concerns that  more complex systems may give the appearance that the  price of resid is open to manipulation, and thus is seeking a  product that is traded on the market to use as a proxy, which  would allow the Quality Bank Administrator to perform a  simple market-based calculation when determining the value  of resid.  These goals of administrative efficiency and objectivity do not free the agency from the requirement that the  chosen proxy bear a rational relationship to the actual market  value of resid.  We remand once again to the agency to  determine a logical method for deriving a value for resid. Because we remand, we do not reach the technical objections Exxon and Tesoro raise regarding specific calculations.

VI. TESORO'S INDEPENDENT CHALLENGES
A. Tesoro's Standing

33
In addition to the arguments raised jointly with Exxon,  Tesoro raises numerous additional challenges to FERC's  decision.  However, before we address the arguments raised  by Tesoro in its individual brief, we must consider as a threshold matter whether Tesoro has standing to petition us  for review.  Intervenors argue that Tesoro lacks standing  because it is no longer a shipper on the TAPS system and  therefore no longer has a legally cognizable stake in the  outcome.  As a result, they argue, the case is moot as to it  and issues raised only by Tesoro are not properly before us.Intervenors also argue that because Tesoro passed its Quality  Bank costs through to its shippers, it was not aggrieved by  the orders under review.


34
Tesoro counters that it has standing as a competitor of  MAPCO, one of the shippers on the TAPS system, which is  subsidized by TAPS because its stream is overvalued.  We  have held that even non-shippers and competitors may be  within the ICA's zone of interest.  See OXY, 64 F.3d at 697.Tesoro also notes that it currently purchases ANS crude from  one supplier and hopes to acquire more from another.  Tesoro Reply Brief at 19 n.10.


35
The Intervenors are correct that only "aggrieved" parties  may seek judicial review of a final FERC order issued under  the ICA.  See 28 U.S.C. S 2344;  OXY, 64 F.3d at 696;  Shell  Oil Co. v. FERC, 47 F.3d 1186, 1200 (D.C. Cir. 1995).  We use  traditional standing principles to determine if a party is  indeed aggrieved.  See OXY, 64 F.3d at 696;  Water Transp.  Ass'n v. ICC, 819 F.2d 1189, 1193 (D.C. Cir. 1987).  To be  aggrieved, Tesoro must have suffered an "injury in fact"  traceable to FERC's action, a decision in its favor must be  capable of redressing that injury, and its interest must be  within the zone of interests protected by the statute.  Tesoro  has shown that it would suffer competitive injury if other  shippers were advantaged by unfair Quality Bank valuations,  a decision on our part altering those valuations would redress  that injury, and the ICA permits a very broad range of  parties to complain to FERC about pipeline operations.  The  ICA permits the Commission to respond to complaints about  "anything done or omitted to be done by any common carrier" subject to the statute lodged by, inter alia, "[a]ny person,  firm, corporation, company, or association." 49 U.S.C.app.  S 13(1).  Tesoro has standing to challenge the decision here.

B.Tesoro's Position

36
Tesoro marshals additional attacks on FERC's approval of  the settlement, some technical and some that are arguably  procedural.


37
1. Considering Processing Costs for Only Two Cuts


38
Tesoro argues that FERC erred in singling out the light  and heavy distillate cuts for processing cost calculations when  processing costs associated with other cuts are ignored.  It  argues that this violates the requirement in OXY that streams  be valued equally.  In OXY we remanded the light distillate  and heavy cuts for new valuation because further processing  was required before they could be sold as jet fuel and No. 2  fuel oil respectively.  Tesoro now claims that FERC arbitrarily ignored the question of whether further processing  was needed before the other cuts could be sold as the proxy  products FERC used to value them.  Failing to do so, it  claims, skews the valuation in favor of the heavier streams.This argument fails to comprehend our earlier opinion.There we upheld the agency's finding that the lighter cuts  were of sufficiently comparable quality to the market proxies  that no further processing was needed, and therefore no cost  adjustment was needed.  Essentially, the market price was  correct because in those instances the distillation method  resulted in a market-ready product.  We will not reexamine  this issue now.  For the reasons given above in Parts III, IV,  and V.A.2, we do not entertain the argument that quality  differences between the streams must be considered at this  stage.

2. Costs of Sulfur Removal

39
Tesoro argues that internal inconsistencies in the Nine  Party data show that the processing costs for sulfur removal  are not credible, specifically because there is a higher perunit cost to remove sulfur from heavy distillate than from  resid.  Tesoro presented evidence challenging these calculations, which the ALJ and FERC failed to fully address.


40
FERC responds that Tesoro's argument that there are  inconsistencies in O'Brien's cost calculations for sulfur removal was never raised before the Commission, and cannot be  raised now before the court.  If the issue was preserved, the  agency argues that Tesoro has produced no evidence showing  that the calculations are incorrect, and that the agency could  reasonably have adopted O'Brien's calculations.


41
We hold that Tesoro preserved this issue for review when it  argued before the Commission that there was "no way,  absent discovery, to determine that O'Brien's cost estimates  are not totally arbitrary" and that the conflicting testimony of  its experts supported a lower cost per unit for removing  sulfur.  Motion of Tesoro Alaska Petroleum Company for  Expedited Reconsideration and Remand or to Permit Appeal  Concerning Certification of Nine Party Settlement WW 36-37  (Oct. 15, 1997).  As for the merits of the issue, we hold that  FERC reasonably relied on the testimony of Nine Party  witness O'Brien in reaching the adjustment.  Witness O'Brien  testified that different methods would be needed to bring the  two products into compliance.  Heavy distillate could be  blended with a lighter product to bring it into compliance  with the 0.5% market tolerances for sulfur in West Coast  Waterborne Gas oil, the reference product on the West Coast. However, such blending would not be economically feasible to  bring it down to the 0.2% sulfur content of Gulf Coast No. 2  fuel oil, the Gulf Coast reference product, so it would have to  be processed to remove the excess sulfur.  See 1997 Opinion,  80 FERC p 63,015, at 65,234;  O'Brien Affidavit WW 13-15.This difference in approach accounts for the difference in  cost.  Thus, there is no inconsistency warranting the relief  Tesoro seeks.

3. Processing Costs for Light Distillate

42
Tesoro argues that FERC arbitrarily and capriciously accepted the Nine Parties' processing cost adjustment for light  distillate.  Tesoro argues that its expert testified that no  further processing was required for light distillate to meet  the requirements for jet fuel, the proxy product used for  valuation of the light distillate cut.  FERC arbitrarily accepted the Nine Parties' experts' claims that 0.5 cents per gallon  in processing was required before the cut would meet the standard.  Tesoro also argues that its expert pointed out  unreasonable additions to the cost of the processing, such as  unnecessary pumping and inflated administrative costs, and  that FERC accepted this flawed estimate without considering  contrary evidence and thus failed to satisfy the substantial  evidence standard.  We find this objection to be without  merit.  There is substantial record support for the Commission's determination that a 0.5 cent/gallon adjustment was  required to account for the processing of light distillate into  jet fuel.  That evidence consisted of expert testimony before  the ALJ by Nine Party witness O'Brien supporting the  processing costs figures eventually adopted by the ALJ and  thereafter by the Commission.  See Reply Comments of the  Nine Settling Parties in Support of the Nine Party Settlement at 4-5 (Mar. 17, 1997).


43
4. Coker Feedstock Value Based on Improper Assumptions and Calculations Not in the Record


44
Tesoro next argues that FERC ignored substantial and  important criticism of the coker valuation of resid.  Under  the adopted method, resid's coker feedstock value is deemed  to be the value of the products created less the cost of  processing.  Tesoro argues that the other experts' opinions  were based on the wrong mix of product yields, that the  PIMS model used is not in the record, and that Tesoro's  expert could not replicate the results.  Tesoro also argues  that its expert showed that the coker operating costs used by  the Nine Parties' experts were overstated.  Because the  PIMS model is not in the record, FERC could not make a  rational connection between the facts and the conclusions  drawn therefrom.


45
Given that we are remanding the question of valuation of  resid because FERC has not provided a reasoned explanation  for its determination to set resid's value as a coker feedstock  and to use FO-380 less 4.5 cents on the West Coast and  Waterborne 3% sulfur No. 6 fuel oil less 4.5 cents on the Gulf  Coast as a proxy price, we need not decide this detailed  factual question, as the factual record may change on remand. FERC will necessarily address these issues when it revalues resid, and such complex technical questions belong first to the  informed discretion of the agency.  See OXY, 64 F.3d at 691.

5. Eliminating the Fuel Oil Cut

46
Tesoro argues that FERC improperly eliminated the light  resid cut and determined that the 1000-1050 degree cut  should be valued as VGO.  (We had previously affirmed  FERC's creation of the light resid cut, but had remanded for  new valuation.)  The Nine Parties had suggested this change,  and FERC approved it.  Tesoro argues that the new cut is  beyond the capability of many refineries.  It suggests that  the ALJ was confused when he determined that this change  was consistent with the Commission's treatment of this cut.


47
FERC reasonably found, in resolving this technical matter,  that the record evidence supports a determination that "the  standard industry cut point shown on assays is 1050."  See 1997 Order, 81 FERC p 61,319, at 62,464.  This  finding, coupled with the testimony of expert witness O'Brien,  see id. at 65,236-37, provided substantial evidence supporting  the agency's decision that VGO is a permissible product on  which to base the valuation of 1000 to 1050 degree resid.

6. The Choice of Waterborne Gasoil

48
Tesoro argues that FERC arbitrarily and capriciously approved the Nine Parties' selection of Waterborne Gas oil as  the proxy product for valuing West Coast heavy distillate. Tesoro argues that Waterborne Gas oil is not a West Coast  product, but is a Singapore product created in Singapore and  is thus subject to Far East refining and market economics. This, it argues, is inconsistent with the stated goal of the  settlement of valuing the product on the coast where it is  "delivered and used."  Waterborne Gas oil, a high-sulfur product, cannot be sold on the West Coast.  See Tesoro Brief at  19-21.


49
The agency states that "the reference price used is 'Platt's  U.S. West Coast spot quote for Waterborne Gas oil less 1  cent per gallon for processing costs.'  ...  That quoted Platt  West Coast Waterborne Gas Oil price represents the value of significant Gas oil transactions on the United States West  Coast."  1997 Order, 81 FERC p 61,319, at 62,463-64.  Witness Ross stated that the price for Waterborne Gasoil was a  West Coast price, even if the product was ultimately exported  to Singapore.  See Affidavit of Christopher E. Ross WW 7-10  (Mar. 17, 1997).  Given this record support, we will not  disturb FERC's determination.


50
7. Inconsistent Treatment of Heavy Distillate and Resid


51
Tesoro also argues that the valuation of heavy distillate is  inconsistent with the valuation of resid.  West Coast heavy  distillate is valued based on its marginal use as the lowest value product requiring the least processing (high sulfur  Waterborne Gas oil), whereas resid is valued based on its  highest-value use as a coker feedstock.  Tesoro argues that  this impermissible inconsistent treatment overvalues the  heaviest streams.  This amounts to a reiteration of the question addressed above regarding FERC's determination that it  is appropriate to value resid as a coker feedstock in the  absence of a liquid market for the product.  We uphold  FERC's decision for the reasons stated above in Section  V.A.1.

8. Naphtha and Gas Oil

52
Tesoro argues that FERC should have reevaluated other  cuts, particularly naphtha and gas oil.  Specifically, Tesoro  argues that FERC failed to value these two cuts based on a  weighted valuation of the prices on both the West Coast and  Gulf Coast, which violates the "dual-market principle."  See  Brief of Petitioner Tesoro Alaska Petroleum Company at 22.None of these products are valued based on Gulf Coast  prices, which overvalues gas oil and undervalues naphtha,  thus favoring heavy streams.  Whatever the merits of these  arguments might be, the issues they raise are beyond the  scope of the limited remand, and therefore not properly  before us.

C. Procedural Questions

53
Tesoro next argues that FERC arbitrarily and capriciously  failed to provide for adequate procedures to ensure a reliable record.  Specifically, Tesoro argues that FERC should have  ordered discovery and hearings with cross-examination to  resolve contested issues because of the vastly differing positions of the experts.  Live hearings would have permitted the  ALJ to make credibility determinations, and cross examination would have permitted Tesoro to challenge specific portions of the experts' testimony.  For instance, Tesoro  objects that the PIMS computer model is not in the record,  and thus the assumptions underlying the coker feedstock  valuations could not be tested,5 and argues that some of the  Nine Parties advocated higher payments into the Quality  Bank earlier in the litigation.  Tesoro cites Astroline Communications Co. Ltd., Partnership v. FCC, 857 F.2d 1556,  1571 (D.C. Cir. 1988);  Porter v. Califano, 592 F.2d 770, 783  (5th Cir. 1979);  and Xerox Corp. v. Genmoora Corp., 888 F.2d  345, 355 (5th Cir. 1989), as establishing the principle that  review of a contested settlement on the merits requires  discovery and cross-examination.


54
FERC responds that the procedures employed by the ALJ  provided ample opportunity for the parties to advance all  supporting evidence for their proposals and to illuminate  defects in the counter proposals.  Specifically, the ALJ permitted the parties to file affidavits and other materials in  support of the proposals;  the ALJ heard oral arguments from  all parties in support of the proposals;  the ALJ further  permitted the parties to file post-argument briefs.  FERC  contends that these opportunities were adequate to fulfill all  due process requirements and allowed the parties to adequately present their positions to the ALJ and the Commission.  We agree.


55
While it is true that live testimony and cross-examination  can facilitate a fact-finder's attempts to sort out the truth, we  have not held that such procedures are necessary in all cases.In fact, we have held that "FERC may resolve factual issues  on a written record unless motive, intent, or credibility are at issue or there is a dispute over a past event."  Union Pac.  Fuels, Inc. v. FERC, 129 F.3d 153, 164 (D.C. Cir. 1997);  see  also Louisiana Ass'n of Indep. Producers & Royalty Owners  v. FERC, 958 F.2d 1101, 1113 (D.C. Cir. 1992) (party may not  complain that it was deprived of a fair hearing after receiving  notice of expert testimony on which opposing party relied, an  opportunity to review it, a chance to submit briefs criticizing  it and evidence opposing it, and the opportunity to argue  before the Commission).  In this case, there is a dispute  among experts over the proper method for valuing petroleum  streams.  This type of technical dispute is amenable to resolution by resort to the written record, particularly where  Tesoro had significant opportunities to submit evidence of its  own and criticize the evidence submitted by the Nine Parties. We decline to overturn FERC's decision.


56
VII. PROSPECTIVE APPLICATION  OF THE SETTLEMENT

A. Exxon and Tesoro's Position

57
Exxon and Tesoro argue that FERC committed legal error  when it decided that it would implement the settlement order  prospectively only.  The method that we found unreasonable  and remanded has been in effect since 1993, and the Commission stated when it was adopting the distillation methodology  that in the event it was reversed and Exxon suffered economic losses, it could correct any legal errors after the appeal. See Order on Rehearing, Trans Alaska Pipeline Sys., 66  FERC p 61,188, at 61,423 (1994).  Now, when it has corrected  the legal errors identified in OXY, the Commission has opted  to apply the new rates prospectively only, leaving the parties  without remedy for the years of unlawful valuations, and  granting the settling parties a windfall.


58
Exxon argues that this circuit's precedents require FERC  to return the parties to the position they would have occupied  had this legal error not been made.  See Public Utils.  Comm'n of the State of California v. FERC, 988 F.2d 154, 168  (D.C. Cir. 1993) ("CPUC") (citing cases);  see also, e.g., Panhandle Eastern Pipe Line Co. v. FERC, 907 F.2d 185, 189 (D.C. Cir. 1990);  Office of Consumers' Counsel, State of Ohio  v. FERC, 826 F.2d 1136, 1139 (D.C. Cir. 1987) (per curiam).This rule is drawn from "the logic of the statute itself."Natural Gas Clearinghouse v. FERC, 965 F.2d 1066, 1074  (D.C. Cir. 1992).


59
FERC's reasons for refusing to do so, Exxon argues, are  wrong as a matter of law.  First, the agency agreed with the  ALJ that the cases cited by Tesoro and Exxon are not  dispositive because, while CPUC and Panhandle "recognized  that the Commission has the authority in some circumstances  to issue orders which have retroactive effect, neither of those  cases required it."  1997 Opinion, 80 FERC p 63,015, at  65,242.  Exxon argues that the language from those cases  explicitly states that "when the Commission commits legal  error, the proper remedy is one that puts the parties in the  position they would have been in had the error not been  made."  CPUC, 988 F.2d at 168.  This use of the word "the,"  as opposed to "a," proper remedy suggests FERC must order  retroactive payment when it commits legal error.


60
Exxon also argues that FERC improperly attempts to rely  on the filed rate doctrine as mandating prospective application of its order.  See 1997 Order, 81 FERC p 61,319, at  62,467.  Exxon argues that despite its protestations, FERC  has the authority to correct its error, and that the shippers  had notice that there might be a later correction to the rate,  which " 'changes what would be purely retroactive rate making into a functionally prospective process by placing the  relevant audience on notice at the outset that the rates being  promulgated are provisional only and subject to later revision.' "  Natural Gas Clearinghouse, 965 F.2d at 1075 (quoting Columbia Gas Transmission Corp. v. FERC, 895 F.2d  791, 797 (D.C. Cir. 1990)).


61
Exxon next argues that even if FERC did have discretion  to determine whether to apply the corrected valuation retroactively, its failure to do so in this case amounts to an abuse  of that discretion.  FERC stated as reasons for its decision  the observations that the change here was one of valuation,  not of methodology, and that the Quality Bank was sui generis.  Neither of these reasons, it contends, supports the  decision not to remedy the injury to Exxon and Tesoro. Exxon notes that FERC had retroactively applied adjustments in vacuum gas oil rates that were set under the  distillation method, rendering both justifications meaningless. Exxon also points out that FERC does not explain how the  "sui generis" nature of the Quality Bank has any bearing on  whether the aggrieved parties should be made whole.


62
Exxon further argues that the refusal to make the aggrieved parties whole violates the central purpose of the  Quality Bank, which was created as part of FERC's " 'continuing obligation to ensure that pipeline rates are just and  reasonable.' "  OXY, 64 F.3d at 690 (citing 49 U.S.C. S 1(5)  and quoting Texas Eastern Transmission Corp., 893 F.2d at  774).  Moreover, it contends, this abuse of discretion is  compounded because FERC refused the injured parties a  stay pending appeal in 1994 on the basis that it could correct  any legal errors later found on appeal.


63
Exxon cites a string of our precedents holding that it is  proper to correct such legal errors retroactive to the time  they occurred.  In Tennessee Valley Municipal Gas Association v. FPC, 470 F.2d 446 (D.C. Cir. 1972), we held:  "If the  policy of the Natural Gas Act is not arbitrarily to be defeated  by uncorrected Commission error, the [injured party] must  be put in the same position that it would have occupied had  the error not been made."  Id. at 452.  In Public Service Co.  of Colorado v. FERC, 91 F.3d 1478 (D.C. Cir. 1996), we  stated:  "Absent detrimental and reasonable reliance, anything short of full retroactivity ... allows [some parties] to  keep some unlawful overcharges without any justification at  all.  The court strongly resists the Commission's implication  that the Congress intended to grant the agency the discretion  to allow so capricious a thing."  Id. at 1490.  The Public  Service Co. decision was made in the context of the Natural  Gas Policy Act.  We held that the parties were on notice of a  potential change in the way a tax would be charged to  customers, and thus did not detrimentally rely on the agency's prior position.  As a result, we held that it was fair to make refunds of those tax charges retroactive to the date of  notice.


64
Finally, Exxon argues that FERC's so-called equitable  exercise of its discretion failed to give any weight to the  injury to the parties and the resulting windfall to the Nine  Parties, who benefit because of agency error, rendering the  agency's ultimate decision irrational.

B. FERC's Position

65
FERC argues that the Commission properly concluded that  the equitable approach would be to implement the settlement  on a prospective basis, as all other TAPS settlements had  been.  The cases cited by Exxon address the issue of whether  FERC is barred from applying a remedy retroactively, not  whether it is required to do so.  FERC's discretion is at its  zenith when deciding what kind of remedy to apply.  See  Towns of Concord, Norwood, & Wellesley, Mass. v. FERC,  955 F.2d 67, 76 (D.C. Cir. 1992).  FERC asserts that it made  its decision based on several equitable factors6:


66
FERC took note (1) that parties supported the Nine Party Settlement only if it were implemented prospectively;  (2) that all prior TAPS cases resolved by settlements have been on a prospective basis;  (3) that the changes adopted by the Settlement Order only modify limited aspects of the distillation methodology put in place in 1993;  and (4) that the TAPS Quality Bank is suigeneris.  81 FERC at 62,467.FERC Brief at 59.  Therefore, FERC argues, it did not  abuse its discretion.  FERC also notes that it did not "bait  and switch" Exxon in denying the stay because each remedy  must be decided on its own merits.

C. Intervenors' Position

67
Intervenors note that we have made clear that FERC has  discretionary authority over whether a settlement should have retroactive effect.  See CPUC, 988 F.2d at 168.  See also  Cities of Batavia, Naperville, Rock Falls, Winnetka, Geneva,  Rochelle and St. Charles, Ill. v. FERC, 672 F.2d 64, 85 (D.C.  Cir. 1982) ("It is clear ... that in denying a refund in this case  the Commission also considered the practical consequences  and the purpose of the Act;  hence we are required to uphold  its exercise of discretionary power.");  Second Taxing Dist.  of the City of Norwalk v. FERC, 683 F.2d 477, 490 (D.C. Cir.  1982) ("Refunds are not mandatory;  the Commission has  discretion to decide whether a refund is warranted in light of  the interests of the customer and the utility.").  OXY did not  require any result in this case, and in the absence of a clear  mandate, they argue, FERC properly exercised its discretion.

D. Analysis

68
We agree that FERC does have a measure of discretion in  determining when and if a rate should apply retroactively. However, such discretion is not without its limits, and we hold  that FERC abused that discretion.


69
The agency's passing mention of the filed rate doctrine has  no bearing on FERC's discretion to reallocate Quality Bank  credits to correct FERC's erroneous valuations of the distillate and resid cuts because all of the TAPS shippers were on  notice as of 1993 that the valuations were contested.  FERC  mentioned the filed rate doctrine not as a justification for its  exercise of discretion, but in discussing the prior decision, in  which the filed rate doctrine was decisive.  As we stated in  OXY, "[t]he rule against retroactive ratemaking ... 'does not  extend to cases in which [customers] are on adequate notice  that resolution of some specific issue may cause a later  adjustment to the rate being collected at the time of service.'The goals of equity and predictability are not undermined  when the Commission warns all parties involved that a  change in rates is only tentative and might be disallowed."64 F.3d at 699 (quoting Natural Gas Clearinghouse, 965 F.2d  at 1075).  In fact, all of the parties participated in the  proceedings before the agency.  Any reliance that they may  have placed on the rates in light of these proceedings was  unwarranted.  As we stated in Public Service Co., "[a]bsent detrimental and reasonable reliance, anything short of full  retroactivity ... allows [some parties] to keep some unlawful  overcharges without any justification at all."  91 F.3d at 1490.


70
There is also a strong equitable presumption in favor of  retroactivity that would make the parties whole.  As we have  stated, "when the Commission commits legal error, the proper remedy is one that puts the parties in the position they  would have been in had the error not been made."  CPUC,  988 F.2d at 168.  This is not to say that FERC must do so in  every case if the other considerations properly within its  ambit counsel otherwise.  However, FERC's listed equitable  factors have no bearing on the decision and do not explain its  decision not to make whole parties who are clearly injured by  undervaluation.  Given the strong presumption in favor of  making injured parties whole and the incentive that this  creates for the parties to litigate regarding past errors and  for the agency to correct those errors, on the record before us  we hold that FERC abused its discretion when it failed  without adequate explanation to make the revaluation and  concomitant Quality Bank adjustments retroactive to 1993,  when the distillation method was adopted.


71
We recognize FERC's concern that the Nine Parties have  stated that they would not support the settlement if it applied  retroactively.  However, we cannot uphold on this basis a  contested settlement in which the settling parties agree to  divvy up a windfall at the expense of the contesting parties. The agency cannot simply take a head count among the  parties in a contested settlement and decide that since those  who will benefit from a settlement outnumber those who will  suffer, it is fair to allow the majority to settle the issue in  their favor.  In settlements where the power of the agency is  not being invoked to overcome the objections of some parties,  all sides typically give up something to arrive at a mutually  painful but acceptable position.  It should be unsurprising  that the Nine Parties are unwilling to support the settlement  unless it remains in their favor if they can invoke the might of  FERC to cram such a settlement down the minority's throats.Parties raising legitimate legal objections cannot be overlooked simply because they are outnumbered, even if the


72
result is that it sends all parties back to the negotiating table  or the hearing room.  The issue of the effective date of the  new valuation method is remanded for action consistent with  this opinion.

VIII. CONCLUSION

73
We uphold FERC's decision with two exceptions--we find  that the decision to use FO-380 less 4.5 cents on the West  Coast and Gulf Coast Waterborne 3% sulfur No. 6 fuel oil less  4.5 cents on the East Coast as proxies for the market  valuation for resid was not supported by substantial evidence  and that the decision to apply the settlement prospectively  was an abuse of discretion.  We vacate those portions of  FERC's order and remand to the agency to reconsider these  issues in light of our opinion.  We deny the petitions for  review in all other respects.



Notes:


1
 API gravity is a measure of density created by the American  Petroleum Institute.  Under API gravity analysis, unlike the more  familiar concept of specific gravity, a higher number indicates a less  dense crude oil or petroleum product.


2
 The nine settling parties are Amoco Production Company,  ARCO Alaska, Inc., BP Exploration (Alaska), Inc., MAPCO Alaska  Petroleum, Inc., OXY USA, Inc., Petro Star, Inc., Phillips Petroleum Company, the State of Alaska, and Union Oil Company of  California.  See 1997 Order, 81 FERC p 61,319, at 62,458 n.5.


3
 Exxon and Tesoro filed a joint petition for review.  For simplicity's sake, we will refer to the joint arguments of the two petitioners  as Exxon's arguments.


4
 FERC's suggestion that Tesoro and Exxon somehow validated  their choice of FO-380 as a reference product is misleading because  Exxon and Tesoro's use of FO-380 as a reference price ties the  value of resid to the value of FO-380 when valuing resid as a  blend stock for fuel oil, not as a coker feedstock.


5
 In light of our remand for reevaluation of heavy resid as a coker  feedstock, the absence of the PIMS model from the record could in  any event be no more than harmless error.


6
 Factor number one, we note, is mentioned only in the agency's  brief to this court and not in its decision.


