ELR Citation: ELR 21475
No(s). s. 95-1305, 96-1153, -1267 (D.C. Cir. Jul 8, 1997)

The court upholds the Federal Energy Regulatory Commission's (FERC's) determination that litigation and settlement costs incurred by oil pipeline carriers in connection with the Exxon Valdez oil spill are "extraordinary expenses," and that the settlement agreement between the carriers and the state of Alaska prohibits the recovery of "extraordinary expenses" as part of the carriers' tariffs. The settlement agreement refers to specific accounts that are part of the FERC Uniform System of Accounts (USOA). Although the USOA regulations were promulgated by the Interstate Commerce Commission (ICC), the court first holds that FERC's interpretation of the USOA's regulations is entitled to deference, because jurisdiction over oil pipelines was transferred from the ICC to FERC, FERC adopted the ICC's regulations, FERC is entrusted with administering regulations relating to oil pipelines, and FERC has expertise in the field.

The court next holds that FERC reasonably classified the litigation and settlement costs as "extraordinary items" under Account 680. The court finds that FERC's conclusion that the oil spill was the relevant accounting event by which to define "extraordinary" was reasonable. The USOA's regulations define "extraordinary items" as those characterized by both their unusual nature and infrequent occurrence taking into account the environment in which the firm operates. Because size is relevant, FERC's determination that the oil spill was unusual and infrequent was reasonable given that the Exxon Valdez oil spill was the largest in U.S. history. "Extraordinary items" must also meet the materiality standard. According to the USOA's regulations, an item is considered material when it exceeds 10 percent of annual income before extraordinary items. The litigation and settlement costs totaled almost 23 percent of the carriers' aggregate net income. Because the settlement agreement provides that the amount included in specific USOA accounts is the consolidated amounts of all carriers, aggregation was reasonable and FERC reasonably concluded that the litigation and settlement costs were material.

The court next holds that FERC's determination that the settlement agreement precludes recovery in the carriers' tariffs of "extraordinary items" recorded in Account 680 is amply supported. The court rejects the carriers' argument that the litigation and settlement costs are initially included as operating expenses in Account 610, which are recoverable, and then reclassified to Account 680. The court finds that the evidence extrinsic to the settlement agreement, on which the carriers relied, is not admissible, because it goes to the subjective intent of the parties rather than their mutual intent at the time of the negotiations. Moreover, FERC determined that all expenses meeting the requirements for inclusion in Account 680 at the time they are incurred should be recorded directly into that account and not initially classified into other accounts. Finally, the court finds that FERC's explanation that the net carryover provision of the settlement agreement applies only to operating expenses and not to extraordinary items is amply supported.

Counsel for Petitioners
Steven Reed
Steptoe & Johnson
1330 Connecticut Ave. NW, Washington DC 20036
(202) 429-3000

Counsel for Respondent
Samuel Soopper
Federal Energy Regulatory Commission
825 N. Capitol St. NE, Washington DC 20426
(202) 208-0200

Before Williams and Rogers, JJ.