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SFPP, L.P. v. Public Utilities Commission

California Court of Appeals, Fourth District, Third Division

June 13, 2013

SFPP, L.P., Petitioner,

Pub. Order 7/1/13 (See End of Opn.)

Original proceedings; petition for a writ of review of decisions of the California Public Utilities Commission Dec. Nos. 11-05-045, 12-03-026.

Mayer Brown, Donald M. Falk, Neil M. Soltman and Eileen Penner for Petitioner.

Frank R. Lindh, Helen W. Yee and Pamela Nataloni for Respondent.

Baker Botts, Thomas J. Eastment, Gregory S. Wagner; Ropers, Majeski, Kohn & Bentley and Susan H. Handelman for Real Parties in Interest BP West Coast Products and ExxonMobil Oil Corporation.

Weber & Associates, George L. Weber; Orrick, Herrington & Sutcliffe and Joseph M. Malkin for Real Party in Interest Chevron Products Company.

Dorsey & Whitney, Martha C. Luemers and Marcus W. Sisk, Jr., for Real Party in Interest Phillips 66 Company.

Venable, Steven A. Adducci, Richard E. Powers, Jr., and Douglas C. Emhoff for Real Parties in Interest Southwest Airlines Co., Ultramar Inc., and Valero Marketing and Supply Company.

McGuireWoods and A. Brooks Gresham for Real Party in Interest Tesoro Refining and Marketing Company.





Petitioner SFPP, L.P. (SFPP) is a Delaware limited partnership that operates both intrastate and interstate oil pipelines. SFPP’s upstream owners are Kinder Morgan Energy Partners, L.P., a publicly traded partnership, which, through one of its operating partnerships, Kinder Morgan Operating L.P. “D” (which itself is partly owned by Kinder Morgan, Inc.) owns 99.5 percent of SFPP. The other.5 percent is owned by Santa Fe Pacific Pipelines, Inc., a wholly owned, indirect subsidiary of Burlington Northern Santa Fe Corporation.

Respondent Public Utilities Commission of the State of California (the PUC) is the agency charged with regulating public utilities pursuant to Article XII of the California Constitution and the Public Utilities Act, [1] and accordingly, it regulates SFPP’s intrastate pipelines.

Real parties in interest Chevron Products Company, Phillips 66 Company, BP West Coast Products LLC, ExxonMobil Oil Corporation, Southwest Airlines Co., Tesoro Refining and Marketing Company, Ultramar Inc., and Valero Marketing and Supply Company (collectively the Shippers) are oil companies and an airline operator that use and pay for SFPP’s services on its pipeline facilities.

SFPP petitions for a writ of review of two of the PUC’s ratesetting orders, specifically ARCO Prods. Co. v. Santa Fe Pacific Pipeline, L.P. (2011) Dec. No. 11-05-045 [2011 Cal.P.U.C. Lexis 299] (SFPP I or the Final Decision), and the order on rehearing, ARCO Prods. Co. v. Santa Fe Pacific Pipeline, L.P. (2012) Dec. No.12-03-026 [2012 Cal.P.U.C. Lexis 135] (SFPP II or the Rehearing Decision) (collectively the Decisions). SFPP II granted limited rehearing, modified SFPP I in part, and denied rehearing as to all other issues. (SFPP II, supra, 2012 Cal.P.U.C. Lexis 135 at p. *4.)

“The PUC is not an ordinary administrative agency, but a constitutional body with far-reaching powers, duties and functions. [Citations.] The Constitution confers broad authority on the PUC to regulate utilities, including the power to fix rates, establish rules, hold various types of hearings, award reparations, and establish its own procedures. [Citation.]” (Utility Consumers’ Action Network v. Public Utilities Com. (2004) 120 Cal.App.4th 644, 654.)

The PUC’s jurisdiction “includes the authority to determine and fix ‘just, reasonable [and] sufficient rates’ [citation] to be charged by the utilities.” (Southern California Edison Co. v. Peevey (2003) 31 Cal.4th 781, 792.) The California Supreme Court “has endorsed the commission’s position: ‘“The basic principle [of ratemaking] is to establish a rate which will permit the utility to recover its cost and expenses plus a reasonable return on the value of property devoted to public use.” [Citation.]’” (Southern Cal. Gas Co. v. Public Utilities Com. (1979) 23 Cal.3d 470, 476.)

SFPP argues the PUC’s Decisions made two errors in its ratesetting orders. First, SFPP[2] argues the PUC erroneously denied it a federal income tax allowance because it is a limited partnership instead of a corporation. SFPP strains mightily to frame the PUC’s decision as one based on incorrect legal interpretations. It also argues the Decisions are contrary to the PUC’s own factual findings, are an abuse of discretion, and are in violation of due process. None of these arguments are supported by the record and the relevant law. In essence, the PUC’s decision regarding the treatment of partnerships for tax purposes is a policy question, and thus, not subject to reversal by this court.

Second, SFPP claims the PUC set an unreasonably low return on equity, arguing the PUC used a flawed methodology and failed to use a valid proxy group in its rate calculations. We reject SFPP’s arguments on this point as unsupported by the evidence and the Decisions, and conclude the PUC did not abuse its discretion in its calculation of an appropriate return on equity.



The Decisions before us involve numerous consolidated proceedings dating back to 1997. (SFPP I, supra, 2011 Cal.P.U.C. Lexis 299 at p. *2.) In the interests of brevity, we do not detail the entire history of the proceedings, but only those parts relevant to the issues before us.

In 1991, SFPP sought a rate increase from the PUC for the first time since 1985. It was uncontested, and in 1992, the PUC granted SFPP a 9 percent increase. (In re SFPP (1992) 44 Cal.P.U.C.2d 200 [1992 Cal.P.U.C. Lexis 499].)

In 1997, the Shippers filed a complaint with the PUC contesting SFPP’s rates. (See ARCO Prods. Company v. SFPP, LP (1998) 81 Cal.P.U.C.2d 573 [1998 Cal.P.U.C. Lexis 593] (ARCO Prods. Company).) The Shippers asserted that because SFPP was a limited partnership, it does not incur federal income tax liability and its net income after taxes was identical to its net income before taxes. (Ibid.) SFPP conceded “that it is a publicly traded partnership which itself incurs and pays no income tax and that its affiliated corporate unitholders may incur no federal income tax liability on income generated by defendant because of the availability of interest payment offsets under a consolidated income ...

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