 United States Court of Appeals
         FOR THE DISTRICT OF COLUMBIA CIRCUIT



Argued December 8, 2014          Decided February 20, 2015

                       No. 13-1248

                TESORO ALASKA COMPANY,
                       PETITIONER

                            v.

 FEDERAL ENERGY REGULATORY COMMISSION AND UNITED
                STATES OF AMERICA,
                   RESPONDENTS

            BP PIPELINES (ALASKA) INC., ET AL.,
                      INTERVENORS


                Consolidated with 13-1249


          On Petitions for Review of an Order of
        the Federal Energy Regulatory Commission


    Robin O. Brena argued the cause for petitioners. With
him on the joint briefs were Anthony S. Guerriero, Kelly M.
Helmbrecht, Joseph Koury, and Andrew T. Swers. David W.
Wensel entered an appearance.

   Beth G. Pacella, Deputy Solicitor, Federal Energy
Regulatory Commission, argued the cause for respondent.
                             2
With her on the brief were David L. Morenoff, General
Counsel, and Robert H. Solomon, Solicitor.

     Charles F. Caldwell argued the cause for respondent
intervenors. With him on the brief were Dean H. Lefler,
Steven H. Brose, Steven Reed, Daniel J. Poynor, Eugene R.
Elrod, Christopher M. Lyons, and J. Patrick Nevins.
Elizabeth B. Kohlhausen and Ruth M. Porter entered
appearances.

    Before: GRIFFITH, KAVANAUGH and WILKINS, Circuit
Judges.

    Opinion for the Court filed by Circuit Judge WILKINS.

     WILKINS, Circuit Judge: The Trans Alaska Pipeline
System (TAPS) runs for 800 miles from Prudhoe Bay on
Alaska’s North Slope to a southern terminus at Port Valdez.
TAPS is jointly owned by the three TAPS Carriers, BP
Pipelines (Alaska) Inc., ConocoPhillips Transportation
Alaska, Inc., and ExxonMobil Pipeline Company. The crux
of the consolidated Petitions before us is a challenge to the
authority of the Federal Energy Regulatory Commission
(FERC) to approve a cost pooling agreement among the
Carriers that allocates most fixed costs on the basis of each
Carrier’s share of combined interstate and intrastate
utilization of TAPS.

     TAPS carries a common stream—that is, the oil in the
pipeline from different shippers headed to different
destinations is comingled in transit. The Carriers have an
undivided joint ownership interest in TAPS, which is operated
by the Carriers’ agent, Alyeska Pipeline Service Company.
Each Carrier is entitled to control capacity corresponding to
its percentage ownership share. A shipper seeking to move
                              3
oil on the pipeline must pay one of the Carriers for
“nominating” oil from one point on the pipeline to another,
and the shipper adds to and withdraws from the common
stream accordingly. TAPS is used for both interstate shipping
(where the oil is destined for points beyond Alaska, via the
Valdez Marine Terminal), and intrastate shipping (where the
oil is destined for a refinery within the state). Under a
complex regulatory structure, FERC is empowered to set
maximum rates for interstate service and the Regulatory
Commission of Alaska (RCA) is empowered to do the same
for intrastate service. Although each Carrier may sell
shipment rights on TAPS, the service is provided entirely by
Alyeska rather than by the Carrier itself—in other words, the
three Carriers offer literally identical service.

     A settlement reached in 1985 governed TAPS rates
smoothly for three decades, and the current controversy arose
when that settlement expired. Following several years of
disputes (with each other, with FERC, with RCA, and with
shippers), the Carriers entered into a new settlement
agreement, effective August 1, 2012. The settlement includes
a pooling structure by which fixed costs are allocated to each
Carrier based on total traffic, including both interstate and
intrastate traffic. Petitioners Tesoro Alaska and Anadarko
Petroleum, which ship oil on the pipeline between points
within Alaska, challenge FERC’s approval of that settlement.

     Petitioners argue, first, that FERC misunderstood and
exceeded its statutory authority; second, that including
intrastate traffic in the pooling agreement was improper
regulation of intrastate commerce; and third, that FERC’s
approval of the settlement failed various requirements of the
Administrative Procedure Act (APA). For the reasons
described in detail in this opinion, we find that FERC did
have statutory authority to approve the settlement; did not
                                 4
improperly regulate intrastate commerce; and did comply
with APA requirements in reaching the order challenged here.
Accordingly, we deny the Petitions.

                                 I.

    This Court has previously had occasion to describe the
backstory of TAPS:

    [A]fter the discovery of vast oil reserves on the North
    Slope of Alaska in 1969, various oil companies
    constructed an 800-mile pipeline from the Prudhoe Bay
    field south to the warm water port of Valdez. From
    rather modest estimates at the outset, TAPS was
    ultimately completed at a cost of over $9 billion. Oil
    started to flow through TAPS in the summer of 1977 and
    has continued since.

Arctic Slope Reg’l Corp. v. FERC, 832 F.2d 158, 160 (D.C.
Cir. 1987).

     The original maximum rates for shipping oil on TAPS
were hotly contested. Id. But following protracted litigation,
the TAPS Carriers and Alaska reached a settlement agreement
in 1985 that determined maximum rates and provided for
annual rate-setting through 2011, the end of the pipeline’s
then-projected useful life (although provisions existed for
earlier termination of the settlement).1 See id. at 161. In


1
  FERC explains to us that the number of TAPS Carriers has varied
over time: originally there were eight, and now there are three.
Unocal Pipeline Company, which appears in this case as intervenor
for FERC alongside the three current TAPS Carriers, represents that
it provided final notice of withdrawal from TAPS effective August
1, 2012; is not a party to the agreement challenged in this case; and
                                 5
practice, the 1985 agreement governed TAPS interstate rates
without controversy through 2004.

     When the Carriers filed rates for 2005 and 2006, the State
of Alaska and two shippers (Tesoro and Anadarko, petitioners
in this case) protested to FERC, arguing that the rates were
unjust, unreasonable, and otherwise unlawful. In response,
FERC scuttled the 1985 agreement and applied the general
methodology for oil pipeline ratemaking. BP Pipelines
(Alaska) Inc. v. BP Pipelines (Alaska) Inc., 123 FERC ¶
61,287 (2008) (“Opinion No. 502”).            Various entities
petitioned this Court for review of FERC’s decision, and we
rejected some challenges to Opinion No. 502 and found others
unripe. See Flint Hills Res. Alaska v. FERC, 627 F.3d 881
(D.C. Cir. 2010).

     The present Petitions arise from rate filings beginning in
2009, which were separately disputed. On September 25,
2012, the Carriers filed two proposed settlements—one
retrospective and one prospective—to resolve the contested
issues before FERC. Only the prospective settlement, which
sets forth a cost pooling agreement among the Carriers to be
implemented beginning August 1, 2012 (“Pooling
Agreement”), is challenged in these Petitions.

     The Pooling Agreement provides for pooling of fixed
expenses of TAPS (that is, expenses required to keep TAPS
operational for all traffic, including both interstate and
intrastate service).    Petitioners complain—before the
Commission and in these Petitions—that they are harmed by
cost pooling in that it disincentivizes the Carriers from



is in the process of completing the transfer of its TAPS interests to
the current Carriers.
                                6
competing on price in the rates charged to independent
shippers such as themselves for intrastate shipments.

    A settlement judge appointed on order of the
Commission, BP Pipelines (Alaska) Inc., 139 FERC ¶ 61,065
(2012), identified contested issues for the Commission in a
report dated January 8, 2013, BP Pipelines (Alaska) Inc., 142
FERC ¶ 63,006 (2013).2 On July 16, 2013, the Commission
approved the Pooling Agreement in the order on review in
these Petitions. BP Pipelines (Alaska) Inc., 144 FERC ¶
61,025 (2013) (“Order on Contested Settlement”).

     This Court has jurisdiction to review the Commission’s
order under the Interstate Commerce Act, 49 U.S.C. App. §
13(6)(b) (1988).3 These Petitions were timely filed within 60
days of the order as required by the statute. See id. The ICA
has no requirement to seek agency rehearing prior to judicial
review. Id.

                               II.

    In inquiring whether FERC acted beyond its statutory
authority, we apply Chevron’s two-part test to the agency’s

2
  Under FERC’s procedure, the settlement judge does not certify a
contested offer or make substantive findings, but instead “must
report to the Commission that the settlement is contested and
identify the matters at issue.” BP Pipelines (Alaska) Inc., 142
FERC ¶ 63,006 at P 254 (2013).
3
  In 1977, “Congress transferred regulatory authority over oil
pipelines from the Interstate Commerce Commission to FERC.
FERC’s regulation of oil pipelines is governed by the ICA as it
existed on October 1, 1977.” Flint Hills, 627 F.3d at 884 n.1. The
Interstate Commerce Act was last reprinted in the 1988 edition of
the U.S. Code. See 49 U.S.C. App. (1988).
                              7
interpretation of the laws empowering it. See City of
Arlington v. FCC, 133 S. Ct. 1863, 1874-75 (2013) (citing
Chevron USA Inc. v. Natural Res. Def. Council, 467 U.S. 837
(1984).

     FERC orders themselves are reviewed under “the familiar
standard for agency actions: we must set them aside if they
are not supported by substantial evidence or are ‘arbitrary,
capricious, an abuse of discretion, or otherwise not in
accordance with law.’” Flint Hills, 627 F.3d at 884 (quoting
5 U.S.C. § 706(2)(A)). We give “special deference” to
FERC’s expertise in ratemaking cases, reviewing the
Commission’s decision only to determine whether it “has
examined the relevant data and articulated a rational
connection between the facts found and the choice made.”
BP W. Coast Prods., LLC v. FERC, 374 F.3d 1263, 1282
(D.C. Cir. 2004). The Commission, however, must still
“cogently explain why it has exercised its discretion in [the]
given manner.” Id. (quoting Exxon Corp. v. FERC, 206 F.3d
47, 54 (D.C. Cir. 2000)).

                              A.

     Petitioners’ first argument is that FERC exceeded its
statutory authority in approving the Pooling Agreement.
Specifically, Petitioners argue that although the Interstate
Commerce Act (ICA) empowers FERC to regulate interstate
commerce, it “does not grant FERC authority to regulate
intrastate commerce, to pool intrastate costs, or to eliminate
competition among intrastate carriers through the pooling of
intrastate costs.”

     Indeed, FERC is a creature of statute, and “if there is no
statute conferring authority, FERC has none.” Atl. City Elec.
Co. v. FERC, 295 F.3d 1, 8 (D.C. Cir. 2002). So, the key
                               8
question before this Court is whether the Interstate Commerce
Act—and the 1977 transfer of oil pipeline jurisdiction to
FERC—conferred the statutory authority to approve pooling
of intrastate costs as well as interstate costs.

     We begin our analysis, as always, with the statutory text.
See Am. Fed’n of Gov’t Emps., AFL-CIO, Local 3669 v.
Shinseki, 709 F.3d 29, 33 (D.C. Cir. 2013) (citing Chevron,
467 U.S. at 842). The provision invoked by the Commission
as the source of its authority, ICA § 5(1), states in relevant
part:

    Except upon specific approval by order of the
    Commission as in this section provided . . . it shall be
    unlawful for any common carrier subject to this chapter
    . . . to enter into any contract, agreement, or combination
    with any other such common carrier or carriers for the
    pooling or division of traffic, or of service, or of gross or
    net earnings, or of any portion thereof; . . . Provided,
    That whenever the Commission is of opinion, after
    hearing upon application of any such carrier or carriers or
    upon its own initiative, that the pooling or division, to the
    extent indicated by the Commission, of their traffic,
    service, or gross or net earnings, or of any portion
    thereof, will be in the interest of better service to the
    public or of economy in operation, and will not unduly
    restrain competition, the Commission shall by order
    approve and authorize, if assented to by all the carriers
    involved, such pooling or division, under such rules and
    regulations, and for such consideration as between such
    carriers and upon such terms and conditions, as shall be
    found by the Commission to be just and reasonable in the
    premises . . . .
                                 9
     The key textual language here gives FERC power to
regulate the common carrier (rather than, for example, an
interstate service offering). In ICA § 1(3), “common carrier”
is defined to “include all pipe-line companies,” rather than
pipeline rates (emphasis added). Given that there is no
dispute that the relevant parties to the settlement are common
carriers in interstate service, we can find under Chevron step
one that the ICA gives FERC authority over intrastate
traffic—at least, where FERC has found it a necessary
incident to regulation of interstate traffic.4

     Petitioners make a handful of arguments in an attempt to
defeat this conclusion. First, they rely on language in Exxon
Pipeline Co. v. United States, in which this Court stated in a
footnote that on October 1, 1977, “jurisdiction over the
transportation of oil in interstate commerce by pipeline was
transferred to FERC.” 725 F.2d 1467, 1468 n.1 (D.C. Cir.
1984). Petitioners would read this as a modification of the
ICA that excludes intrastate authority of any kind. But it
cannot be that explanatory language from one of our
opinions—appearing in a footnote, no less—would modify
the Department of Energy Organization Act, which merely
“transferred to, and vested in, [FERC] all functions and
authority of the Interstate Commerce Commission . . . where
the regulatory function establishes rates or charges for the
transportation of oil by pipeline or establishes the valuation of
any such pipeline.” Pub. L. No. 95-91, 91 Stat. 565, 584
(1977).

4
  FERC devotes part of its brief to defending its action through non-
encroachment on state regulatory authority. But the RCA’s non-
challenge     to    FERC’s        approval     of      the    Pooling
Agreement does not change the legal analysis in this case: There is
no question that Congress could have preempted any and all state
regulation of TAPS, so the inquiry collapses back into the statutory
construction question of whether and to what extent it actually did.
                                10

     Next, Petitioners point to provisions of ICA § 1(1) as
limiting FERC’s scope of oil pipeline regulation to
movements in interstate commerce. The language they cite
reads: “The provisions of this chapter shall apply to common
carriers engaged in . . . [t]he transportation of oil . . . by pipe
line . . . from one State . . . to any other State. . . .” ICA §
1(1).

      Petitioners reason that this “limits the scope of oil
pipeline regulation, and indeed the scope of the Act itself, to
movements in interstate commerce.” This ignores the fact
that ICA § 1(1), like the text of § 5(1), applies to “common
carriers” and not directly to rates. Petitioners also point to
ICA § 1(2), which states that “[t]he provisions of this chapter
. . . shall not apply . . .[t]o the transportation of passengers or
property . . . wholly within one State . . . .” But there is no
dispute that FERC lacks a general regulatory power over oil
in intrastate commerce. The controlling question in this case
is whether incidental regulation of intrastate commerce is
authorized. Even if we thought the best reading was that
incidental regulatory power was not allowed under the plain
language of ICA § 5(1) standing alone, it is still a reasonable
interpretation under Chevron step two to look at ICA § 1 and
§ 5 together and conclude that incidental regulation is
permitted.

     Indeed, case law cited by Petitioners themselves supports
this reading. In Texas v. E. Tex. R.R. Co., the Supreme Court
held that approval by the Interstate Commerce Commission of
abandonment of a rail line did not preempt the requirement to
seek state approval for abandonment of the same line that also
carried interstate traffic. 258 U.S. 204 (1922). But the
opinion noted: “As a whole these acts show that what is
intended is to regulate interstate and foreign commerce and to
                                  11
affect intrastate commerce only as that may be incidental to
the effective regulation and protection of commerce of the
other class.” Id. at 217.

     At oral argument, Petitioners contested the applicability
of this incidental impact precedent, claiming that in approving
the settlement challenged here, FERC had decided to “cross
over and start to regulate state commerce” without any reason
“at all.” But that concedes the statutory interpretation point
and opens the question of whether, in approving a TAPS
Pooling Agreement that factored intrastate traffic, FERC was
only incidentally affecting intrastate commerce (as it claims)
or was directly regulating it (as Petitioners claim).

                                  B.

     Was the Pooling Agreement’s factoring of intrastate
traffic in allocating fixed costs merely incidental to the
regulation of interstate commerce? We find that FERC
reasonably concluded that it was. TAPS has fixed costs
regardless of the quantity and nature of actual oil shipment
traffic, and the Pooling Agreement simply allocates those
costs based on total usage rather than on interstate traffic
alone. A contrary decision would force subsidization of
intrastate service by interstate shippers.5 It is obvious why

5
  The point is illustrated by a simplified pipeline system model with
total capacity of 100 units and fixed costs of $100 shared by two
Carriers, A and B, that have equal ownership shares and may carry
both interstate and intrastate traffic. If Carrier A uses 30 units of
capacity for interstate traffic and Carrier B uses 10 units of capacity
for interstate traffic, a cost pooling agreement (assuming 100
percent of fixed cost re-allocation, which is not the case in the
Pooling Agreement on review) would require Carrier A to
reimburse Carrier B for $25 (assuming each already has paid $50 to
cover its pro rata ownership share of the operating costs). Under
                                  12
intrastate shippers such as Petitioners here would find that
desirable, but it is not an arrangement commanded by the
ICA.

    Of course this must be FERC’s analysis, not ours, and we
think it was. In a prior order, the Commission had adopted an
Administrative Law Judge’s conclusion that uniform rates
were in the public interest because they would minimize
annual filings and result in a single calculation of a “just and
reasonable” rate for identical service provided by the same
operator. Opinion No. 502, 123 FERC ¶ 61,287 at PP 1-2.
Indeed, in that order the Commission referenced an
Administrative Law Judge’s finding that allowing differences
among the Carriers’ interstate rates caused variation from year
to year because they had free reign to set rates, and the



that scenario, Carrier A will be using 75% of the capacity of the
pipeline and will pay $75 of the $100 in fixed costs. Now,
assuming that intrastate costs are excluded from pooling, suppose
that Carrier B sells an additional 10 units of capacity to intrastate
shippers at a rate at or slightly above its variable costs for shipment.
Carrier A will still pay $70 of $100 in fixed costs of the pipeline
even though it is now using only 60% of the capacity (because it
ships 30 units interstate, while Carrier B ships 10 units interstate,
for which fixed costs are allocated by pooling; while fixed costs
apportionable to Carrier B’s 10 intrastate units are allocated by
ownership share). Again, this model simplifies many aspects of the
facts relating to TAPS that were before the Commission, but it
demonstrates the rationale for a pooling of costs that accounts for
both interstate and intrastate traffic. Where there are more than two
carriers and unequal ownership shares (as is the case for TAPS), the
economic incentive on the lowest-ownership carrier to discount
intrastate service will be much more substantial absent a pooling
agreement that factors it into the cost settlement mechanism.
                                13
resulting market pricing was “unduly discriminatory and
unjust and unreasonable.”6 Id. at P 237.

     In the order that is the subject of these Petitions, FERC
referenced Opinion No. 502’s mandate for uniform rates and
observed that a cost pooling mechanism was required to make
uniform rates work and to support the future, long-term
operation of TAPS. Order on Contested Settlement, 144
FERC ¶ 61,025 at P 60-61. FERC invoked ICA § 5(1) and
made the necessary finding that “the Pooling Agreement is in
the interest of better service to the public, as well as economy
in service, and that it will not unduly restrain competition.”
Id. at P 55. In light of the unusual nature of the market for
shipment on TAPS, we hold that this was sufficient
articulation of a rationale justifying the incidental effect on
intrastate commerce challenged here.

                                C.

     Petitioners’ final attempt to defeat the Pooling Agreement
is to raise various challenges under the Administrative
Procedure Act as to whether FERC properly applied ICA
§ 5(1) in approving the settlement. Petitioners invoke
everything but the proverbial kitchen sink, arguing that FERC
misapplied its contested settlement standard, misapplied the
“just and reasonable” standard, failed to support its decision
with substantial evidence, failed to respond to Petitioners’
arguments and evidence, improperly relied on an
Administrative Law Judge’s decision as a benchmark,
improperly relied on its interstate uniform rate ruling, failed to
explain departure from its own precedent, improperly relied

6
  That conclusion—in a separate proceeding about interstate tariffs
to which Petitioners have not claimed they are subject—is not (and
cannot be) challenged in these Petitions.
                                14
on extra-record evidence, and misallocated the burden of
proof in its proceedings.7

     Although we have reviewed each of Petitioners’
assertions individually, we think it adequate to briefly
describe our analysis that FERC did not act arbitrarily or
capriciously and had sufficient evidence for its findings,
including the ultimate required finding that the Pooling
Agreement was “in the interest of better service to the public
or of economy in operation, and will not unduly restrain
competition.” ICA § 5(1).

     On the basis of its determination in Opinion No. 502 that
uniform interstate rates were appropriate (not challenged and
not subject to review in this case), the Commission reasonably
found the Pooling Agreement “is in the interest of better
service to the public, as well as economy in service.” Order
on Contested Settlement, 144 FERC ¶ 61,025 at P 55.
Contrary to Petitioners’ assertions, FERC did address
competitiveness arguments: the Commission found that
excluding 25.1 percent of the total TAPS cost of service
provided ample incentive for each Carrier to discount rates
(from the uniform maximums) to compete for volumes. Id.

7
  Citing ExxonMobil Oil Corp. v. FERC, 487 F.3d 945, 962 (D.C.
Cir. 2007), FERC contends that Petitioners are precluded from
judicial review on these claims because they did not previously
raise them with FERC.          But as we explained in CSX
Transportation, Inc. v. Surface Transportation Board, 584 F.3d
1076, 1079 (D.C. Cir. 2009), the ExxonMobil rule cannot apply
where the petitioner had no opportunity to raise an issue until the
agency issued its final rule. Given that each of the claims raised
deals with FERC’s treatment of evidence or reasoning in its final
opinion, CSX requires that Petitioners be able to raise them for
judicial review.
                                 15
at P 62. Petitioners view this differently, of course—they
argue that pooling leads to less incentive to discount, and that
leads to higher rates.8 If followed to its conclusion, however,
Petitioners’ argument would require FERC to ignore intrastate
traffic in approving pooling so that competitive discounting
would drive intrastate prices down to the (relatively small)
variable expense.9 The question FERC was required to
resolve cannot be (as Petitioners would have it) merely
whether the Pooling Agreement “restrained competition,”
because as a matter of economics every pooling arrangement
unquestionably does. Hence, the ICA disallows pooling
agreements absent regulatory approval. Rather, the statutory
question is whether the Pooling Agreement “unduly restrained
competition.” ICA § 5(1) (emphasis added).                FERC
reasonably exercised its judgment that the inherent restraint
was not undue because of the 25.1 percent exclusion. FERC’s
determination—that a 25.1 percent exclusion of costs from
pooling provided an adequate incentive to compete and to
discount—was facially reasonable.


8
  The parties dispute whether BP’s actual intrastate rate increase
(since the Pooling Agreement became effective) is admissible at
this stage, but we need not decide the question. Even assuming it
was, it would not change our analysis.
9
  Another justification by FERC for its exercise of authority is that
even though it lacks plenary authority to regulate intrastate
commerce, there is no bar to its consideration of the impact of
intrastate commerce on interstate rates. See Transm. Agency of N.
Cal. v. FERC, 495 F.3d 663, 667 (D.C. Cir. 2007) (holding that
FERC may consider the rates of a non-regulated utility “to the
extent that they affect the rates” of the regulatory target); see also
Fed. Power Comm’n v. Texaco, Inc., 417 U.S. 380, 401 (1974)
(permitting “indirect regulation” of non-regulated entities in service
of its duty to insure pipeline rates are “just and reasonable”).
                              16
     Petitioners say FERC did not go far enough in protecting
competition. But the consequence of their position would be
to entitle them to a market in which Carriers would have no
incentive to set intrastate rates that contribute toward overall
cost recovery for TAPS construction, maintenance and
operation, and future decommissioning (that is, where the cost
pooling agreement would cause the Carrier’s intrastate cost of
service to approach the variable cost). It is certainly in
Petitioners’ economic interest to seek such an outcome, but
Petitioners have not shown that FERC was required to
mandate it to the detriment of the economics of the overall
pipeline system.

    The record shows that FERC discussed the impacts both
of non-pooling and of pooling, and struck a reasonable
balance between the two. On judicial review, there is limited
scope for questioning the agency’s exercise of the discretion
inherent in this balancing. Petitioners here have not produced
a compelling reason to upset the Commission’s judgment.

                              III.

     In sum, we find: (i) that the Interstate Commerce Act
permits incidental regulation of intrastate commerce pursuant
to approval of a pooling agreement under § 5(1); (ii) that any
regulation of intrastate commerce challenged here was
incident to the Pooling Agreement that FERC found just and
reasonable for interstate commerce; and (iii) that the
Commission did not act arbitrarily or capriciously in
approving the Pooling Agreement or make findings
unsupported by the evidence. Accordingly, we deny the
Petitions for review.

                                                    So ordered.
