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San Pablo Bay Pipeline Co. LLC v. California Public Utilities Commission

California Court of Appeal, Fifth District

December 11, 2013

SAN PABLO BAY PIPELINE CO. LLC et al., Petitioners,
v.
CALIFORNIA PUBLIC UTILITIES COMMISSION, Respondent; Tesoro Refining & Marketing Co. et al., Real Parties in Interest.

ORIGINAL PROCEEDINGS; petition for writ of review of decision of the Public Utilities Commission of the State of California.

Page 1437

COUNSEL

Goodin, MacBride, Squeri, Day & Lamprey, James D. Squeri, San Francisco; Munger, Tolles & Olson, Fred A. Rowley, Jr., Los Angeles, and L. Ashley Aull for Petitioners.

Frank R. Lindh, San Francisco, Helen W. Yee and Paul Angelopulo for Respondent.

Manatt, Phelps & Phillips, David L. Huard, Tara S. Kaushik, San Francisco, [165 Cal.Rptr.3d 391]Benjamin G. Shatz, Los Angeles; Orrick, Herrington & Sutcliffe, Joseph M. Malkin, San Francisco; Pillsbury WinthropShaw Pittman, Kevin M. Fong, Michael S. Hindus and Wesley M. Spowhn, San Francisco, for Real Parties in Interest.

OPINION

Franson, J.

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Subsidiaries of Shell Petroleum Inc. that own and operate a crude oil pipeline filed this original writ proceeding to challenge a decision by the California Public Utilities Commission (the Commission or PUC) concerning the refund of a portion of the fees the subsidiaries collected from Chevron, Tesoro and Valero for transporting oil through the pipeline. The issue before this court is whether the Commission erroneously included privately owned truck racks and storage tanks in the pipeline assets subject to regulation as a public utility.[1]

We conclude the Commission properly interpreted its earlier decision that held the Shell Petroleum subsidiaries had dedicated the pipeline to public use. That decision addressed the pipeline as a whole and did not include dedication findings on an asset-by-asset dedication basis and did not explicitly mention the truck racks and storage tanks. Nonetheless, the Commission's interpretation that those assets were covered by its dedication decision was consistent with the broad statutory definition of " pipe line" (Pub.Util.Code, § 227) and the axiom that the " greater contains the less" (Civ.Code, § 3536).

Therefore, the Commission's decisions are confirmed.

FACTS

The Parties

The proceedings before this court began with a petition for writ of review filed by Shell subsidiaries San Pablo Pipeline Company, LLC (Pipeline Company) and its affiliate, Shell Trading (US) Company (Shell Trading). For purposes of this opinion, Pipeline Company and Shell Trading are collectively referred to as " petitioners."

The Commission is the sole respondent. It is the California administrative agency with the statutory authority to supervise and regulate public utilities and to do all things that are necessary and convenient in the exercise of that power and jurisdiction. (Pub.Util.Code, § 701.) The Commission issued the decisions challenged in this writ proceeding.

The three real parties in interest are (1) Chevron Products Company (Chevron); (2) Tesoro Refining and Marketing Company (Tesoro); and (3)

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Valero Marketing and Supply Company (Valero). Their " interest" is in recovering part of the money they paid to the Shell affiliates to have crude oil shipped by pipeline from Chevron's oil production fields near Bakersfield to refineries operated by Tesoro and Valero in the San Francisco Bay Area. The three real parties in interest are collectively referred to as " shippers" in this opinion.

The Shell Group

Royal Dutch Shell plc is the ultimate parent company of the entities comprising the Shell group, which includes the intermediary corporation Shell Petroleum Inc. [165 Cal.Rptr.3d 392] and the petitioners Pipeline Company and Shell Trading.

Both petitioners, through the various layers of corporate organization, are subsidiaries of Shell Petroleum Inc. The intermediary entities between Shell Petroleum Inc. and Pipeline Company include Equilon Enterprises LLC, which does business as Shell Oil Products U.S. (Shell Products). Shell Products is relevant because, when Chevron initiated proceedings before the Commission, Shell Products owned the pipeline that is the subject of this litigation. Currently, Shell Products is a parent company of the pipeline's present owner, Pipeline Company.

The Pipeline

The pipeline is a 265-mile 20-inch heated crude oil pipeline running from oil fields in Kern County to the San Francisco Bay Area (SJV Pipeline). The SJV Pipeline includes gathering systems that collect oil from production fields and connect into trunk lines. Trucks also deliver crude oil to the SJV Pipeline. For instance, San Ardo crude oil is brought to the Coalinga Station by truck, unloaded and then blended with the San Joaquin Valley heavy crude that is transported by the SJV Pipeline. Similarly, the Bakersfield Tank Farm collects San Joaquin Valley heavy crude delivered by truck.[2] The SJV Pipeline's facilities also include breakout and storage tanks, which are used to manage deliveries and maintain efficient levels of flow.

The SJV Pipeline transports crude oil to three refineries in the Bay Area: (1) the Shell refinery in Martinez, California; (2) the Tesoro Golden Eagle refinery in Martinez, California; and (3) and the Valero refinery in Benicia, California. The fact that the SJV Pipeline is heated is important because San Joaquin Valley heavy crude is thick (i.e., has a high viscosity) and can be transported efficiently only in a heated pipeline.

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The history of the SJV Pipeline began in the late 1950's or early 1960's when Tidewater Oil Company built it to transport crude oil from the Kern River area to Tidewater's refinery in the Bay Area.

Subsequently, the SJV Pipeline was acquired by Texaco, Inc. In 1986, the State of California and the City of Long Beach filed a lawsuit in Los Angeles County that alleged that Texaco was operating the SJV Pipeline as a common carrier. The basic thrust of the complaint was that buy-sell agreements used by Texaco were a sham designed to evade Commission regulation and that Texaco, by providing transportation services through the buy-sell agreements, had dedicated the SJV Pipeline to public use.[3]

In 1994, the Second Appellate District of the Court of Appeal issued an unpublished opinion in State of California v. Chevron Corp., holding that the SJV Pipeline was operated as a private enterprise and was not a common carrier subject to Commission regulation.

In 1998, ownership of the SJV Pipeline changed when Texaco and Shell Oil Company [165 Cal.Rptr.3d 393] formed Equilon Enterprises LLC (i.e., Shell Products) as a joint venture. The joint venture's assets included the SJV Pipeline and a refinery in Martinez, California that Shell Oil Company contributed.

In 2001, Chevron wanted to acquire Texaco and sought regulatory approval of the acquisition. Chevron was permitted to retain Texaco's ownership rights of crude oil production in the San Joaquin Valley, but was not allowed to keep Texaco's interest in the SJV Pipeline. As a result, Texaco sold its interests in the pipeline to Shell Oil Company. As part of the sale, a contract was entered that required Shell Oil Company to purchase crude oil from Texaco at the production fields and sell crude oil to Texaco at a delivery point in the San Francisco Bay Area. Chevron, as Texaco's successor, obtained these contractual rights and used them to satisfy its obligations to deliver crude oil to refineries in the Bay Area.

LEGAL PROCEEDINGS

In December 2005, Chevron's dissatisfaction with the contractual arrangements under which it had access to the SJV Pipeline led Chevron to file a complaint with the Commission. Chevron asked the Commission to find the

Page 1441

SJV Pipeline was a public utility and exercise jurisdiction. Chevron alleged that the Shell affiliates had manifested an unequivocal intention to dedicate the excess capacity of the SJV Pipeline to public service and the buy-sell agreements were a subterfuge to evade Commission jurisdiction. Chevron's request for relief sought (1) a determination of just and reasonable rates for transportation of crude oil in the SJV Pipeline and (2) an order directing the Shell affiliates to refund to Chevron the difference between the rates paid by Chevron from April 1, 2005, and the reasonable rates determined by the Commission.

Chevron also alleged that it was obligated contractually to deliver approximately 62,000 barrels of crude per day to Tesoro at the Golden Eagle refinery and approximately 4,000 barrels of crude per day to Valero at its Benicia refinery. Chevron fulfilled a portion of its delivery obligations, about 22,000 barrels per day, using the KLM Pipeline, an unheated common carrier pipeline owned and operated by Chevron.[4] Chevron alleged that the SJV Pipeline, which is heated, was the only practical way to transport the approximately 44,000 additional barrels per day of San Joaquin Valley heavy crude needed to meet its contractual obligations with Tesoro and Valero.

Later in December 2005, Tesoro filed a petition to intervene in the proceeding initiated earlier that month by Chevron.

In July 2007, the Commission issued Decision 07-07-040 and concluded that the SJV Pipeline had been dedicated to public service and, thus, was subject to regulation by the Commission.

In December 2007, the Commission ruled on the petitioners' application for rehearing by issuing Decision 07-12-021, which modified the prior decision. Among other things, the modification directed Shell Products and Shell Trading to file tariffs for its third party contracts.[5] The [165 Cal.Rptr.3d 394] Commission's modified decision did

Page 1442

not resolve Chevron's request for a refund of unreasonable charges paid since April 1, 2005, because the overcharges could not be calculated until a reasonable tariff was established.

Shell Products and Shell Trading sought judicial review by filing a petition for writ of review with the Second Appellate District of the Court of Appeal. In June 2008, the petition was denied. Two months later, the California Supreme Court denied a petition for review. Consequently, the Commission's decision that the SJV Pipeline had been dedicated to public use and the order directing the Shell affiliates to file a tariff is a final decision and no longer subject to challenge in court.

The Second Proceeding Before the PUC

The present proceedings began in March 2008, when Chevron filed a complaint with the Commission alleging that since at least April 1, 2005, the Shell affiliates had not filed tariffs setting forth the rates, terms and conditions of service for the pipeline. Chevron again requested the Commission to order the Shell affiliates to pay Chevron a refund equal to the difference between the rates Chevron actually paid after April 1, 2005, and the reasonable rates determined by the Commission.

A description of the proceedings before the Commission is set forth below in part II.A.

In March 2012, the matter reached this court when Pipeline Company and Shell Trading filed a petition for writ of review. The two primary disputes raised by the petition concern (1) whether the Commission properly analyzed the statute of limitations that applies to the shippers' refund claims and (2) whether the Commission erred in treating the storage tanks and truck racks as part of the public utility.

In May 2012, the Commission filed a motion to dismiss issues in the petition involving the statute of limitations determinations. This court granted the motion to dismiss in an order dated October 31, 2013, and explicitly stated that the order was not a decision on the merits, was not to be given law-of-the-case effect, and was without prejudice to the right of any party to raise an issue anew after the Commission's final determination of the refund and statute of limitations issues.

DISCUSSION

I. COURT REVIEW OF COMMISSION DECISIONS

The Commission is a state agency of constitutional origin with far-reaching duties, functions and powers. (Cal. Const., art. XII, §§ 1-6.) Its primary

Page 1443

purpose is to supervise and regulate every public utility in California. (Pub.Util.Code, § 701.) In undertaking these functions, the Commission has been given administrative, legislative and judicial powers. ( San Diego Gas & Electric Co. v. Superior Court (1996) 13 Cal.4th 893, 915, 55 Cal.Rptr.2d 724, 920 P.2d 669.)

Hearings and rehearings conducted by the Commission are governed by articles 1 and 2, respectively, of chapter 9, part 1, division 1 of the Public Utilities Code. Judicial review of the Commission's decisions is governed by article 3 (i.e., Pub.Util.Code, §§ 1756-1768) of the same chapter.

A party aggrieved by the Commission's final decision may petition for a writ [165 Cal.Rptr.3d 395] of review in the court of appeal. (Pub.Util.Code, § 1756, subd. (a).) Before seeking judicial review, the aggrieved party must file an application for rehearing. (Pub.Util.Code, § 1756, subd. (a).) The application for rehearing must raise each issue that the party intends to raise in the court of appeal— that is, the party must exhaust its administrative remedies. (Pub.Util.Code, § 1732.) As a result of these requirements, matters before this court will involve the Commission's original decision and its subsequent decision on the application for rehearing.

Because Public Utilities Code section 1756, subdivision (a) used the word " may," this court's review is described as discretionary rather than mandatory. ( The Ponderosa Telephone Co. v. Public Utilities Com. (2011) 197 Cal.App.4th 48, 55, 127 Cal.Rptr.3d 844.) However, petitions for a writ of review function as appeals from the administrative decision and should not be denied on policy grounds unrelated to their merits. ( Id. at p. 56, 127 Cal.Rptr.3d 844.)

The scope of judicial review of Commission decisions is set forth in Public Utilities Code section 1757. That provision authorizes us to determine whether the Commission (1) acted without, or in excess of, its jurisdiction; (2) proceeded in the manner required by law; (3) issued a decision not supported by the findings; (4) made findings not supported by substantial evidence in light of the whole record; (5) abused its discretion; or (6) violated a constitutional right. (Pub.Util.Code, § 1757, subd. (a).)

II. STORAGE TANKS AND TRUCK RACKS AS AN INTEGRAL PART OF THE PUBLIC UTILITY

The following overview identifies the main procedural steps before the Commission that are relevant to the issues raised by the petitioners about the storage tanks and truck racks. The proceedings started in December 2005 and ended over six years later in February 2012.

The first proceeding produced a July 2007 general determination by the Commission [165 Cal.Rptr.3d 396] that the SJV Pipeline had ...


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