The opinion of the court was delivered by: MUNSON
Presently before the Court are two motions the first has been made by the plaintiff Mobil Oil Corporation (Mobil) to enjoin the issuance by the defendants Department of Energy and Secretary James B. Edwards (hereinafter collectively referred to as DOE) of the "January entitlements notice." See 10 C.F.R. § 211.67(i) (1980). The second motion has been made by the defendants to dismiss plaintiff's complaint. Briefly, the entitlements notice is an essential component of the DOE's entitlements program, which is designed to equalize the access of domestic refiners to price-controlled domestic crude oil. See Pasco, Inc. v. Fed. Energy Admin., 525 F.2d 1391, 1395 (Em.App.1975). This is accomplished by requiring cash transfers (entitlements) to be made from those domestic refiners with a proportionately greater access to price-controlled crude, to those refiners less fortunately situated. A corresponding "entitlements notice" is then published every month reflecting each refiners' entitlements obligation under the program.
To function properly, the entitlements program depends in no small measure on the accurate report of a refiner's "receipts" of price-controlled crude oil. The instant suit grows out of plaintiff Mobil's claim that there are in fact widespread abuses in reporting such "receipts" by refiners. Mobil contends that as a result of this misreporting, it has had to bear a disproportionate share of entitlements obligations. Accordingly, Mobil moved for temporary and preliminary injunctive relief to prevent the DOE from issuing its "January entitlements notice," which allegedly would have immediately required Mobil to shoulder an inequitable share of entitlements obligations. This Court granted Mobil's request for a temporary restraining order on April 21, 1981, and enjoined the DOE "from issuing any further entitlements notices and from requiring Mobil to comply with such notices." The temporary restraining order was to remain in effect for twenty days. See Memorandum-Decision and Order; dated April 21, 1981, at p. 6.
In the meantime, the DOE moved to dismiss plaintiff's complaint. The DOE maintains that pursuant to the doctrine of primary jurisdiction, this Court should defer consideration of the instant case, until the DOE has had an opportunity to complete its own investigation of the merits of Mobil's claims. The Court is informed by the DOE that it is currently investigating the problem of misreporting, but has not as yet completed this investigation. For similar reasons the DOE additionally argues that plaintiff has failed to exhaust administrative remedies, and that the instant dispute is not ripe for judicial resolution. Furthermore, the DOE asserts that even assuming arguendo that plaintiff has satisfied these legal doctrines, it has neither stated a claim nor demonstrated that it will suffer irreparable injury, should the DOE issue the "January entitlements notice."
A hearing on plaintiff's preliminary injunction motion was held on May 12, 1981 and live testimony was taken on the issues of misreporting in the DOE's entitlements program, and the likelihood that plaintiff will suffer irreparable harm if the "January entitlements notice" is released. That same day the Court also heard the parties' arguments with regard to the DOE's motion to dismiss plaintiff's complaint. To fully understand the merits of both pending motions, a more detailed examination of the entitlements program is in order.
Constrained by the Arab oil embargo and dwindling domestic production, the supplies of crude oil in the United States decreased dramatically in 1973. The combined effect of these factors caused severe increases in the price of oil and related products. See 39 Fed.Reg. 31650 (August 30, 1974). To soften the economic hardships associated with reduced supplies and higher prices, the Cost of Living Council created a price control system for crude oil as a part of Phase IV, see former 6 C.F.R. Part 150, Subpart L, 38 Fed.Reg. 22536 (August 22, 1973), of the Stabilization Program. See the Economic Stabilization Act of 1970, as amended, 12 U.S.C. § 1904 note. The system was designed to control the prices of petroleum from the wellhead to finished products, and to create a price incentive to encourage the production of additional quantities of domestic crude.
Under the regulations a "base production control level" (BPCL) was established for each domestic crude oil producing property, equal to the volume of production from that property during each month of 1972. Production levels for the property up to the amount of the BPCL in the corresponding months of any subsequent year had to be sold at a price no higher than a regulatory ceiling price. This crude oil was referred to commonly as "old oil." If the property produced crude oil in excess of the BCPL, the additional quantities or "new oil" could be sold at the higher world market price. See 10 C.F.R. § 212.72 (1980). Also exempt from price controls, and consequently saleable at world market prices, were all imported oil and crude oil produced from marginal or "stripper" wells. See 10 C.F.R. §§ 212.15-16 (1980). At the same time, refinery prices for selected petroleum products were also controlled by regulations. By their terms, refiners were required to establish base prices for each controlled product at their May 15, 1973 price levels, but were permitted a certain degree of price allowance for the increased costs of imported or domestic crude oil from which these controlled products were refined. See 10 C.F.R. §§ 212.81-85 (1980).
While the end of the Arab oil embargo in 1974 led to replenished supplies of imported crude oil, the overall price of foreign crude increased significantly. This price increase widened the disparity between the controlled price for "old oil" and the market price of "new oil," and was reflected in the costs and therefore the relative prices charged by refiners. See 39 Fed.Reg. 31650 (August 30, 1974). However, refiners with greater access to the less expensive price-controlled crude oil typically the larger integrated refiner had a cost advantage over those of their competitors who could only secure supplies of uncontrolled crude oil usually the small or independent refiners. Thus, at a time when increased supplies of crude oil made the market place much more sensitive to price considerations, the economic viability of these small and independent refiners was being threatened. Moreover, consumers in various parts of the country who depended primarily on stocks of uncontrolled crude oil ("new oil," imported and "stripper" crude oil) contended with much higher prices than other regions with ready access to crude oil that was price-controlled.
In an effort to eliminate the inequities in the refining and marketing sectors of the petroleum industry without sacrificing the beneficial elements of the two-tier price system, the Federal Energy Administration (FEA), the immediate predecessor of the DOE, proposed and adopted the entitlements program. See generally 10 C.F.R. §§ 211.66-67 (1980); Transcript of May 12, 1981 hearing at p. 31 (hereinafter Tr. at p. -- -). As reflected in its legislative history, the primary purpose of the entitlements program was the equitable distribution of price-controlled crude oil throughout the petroleum industry:
In large measure, the goal of the proposal is to improve the access of small and independent refiners to old domestic oil. In addition, however, the proposed program is also designed effectively to provide all refiners with proportionate amounts of old oil, based on their relative refinery capacities. The proposed program is accordingly aimed not only at bringing the small and independent refining sector as a class into a more competitive position with respect to the majors, but it is also specifically designed to assure that all segments of the petroleum industry will benefit equally from lower-priced domestic oil. Thus, the FEA anticipates that in some cases, major oil companies (with a low level of old oil supplies) will benefit by the program, while some small refiners (with a high level of old oil supplies) may be required to buy entitlements under the program. This goal is consistent with the Congressional objectives of achieving equitable distribution of crude oil at equitable prices among all sectors of the petroleum industry and preserving an economically sound and competitive petroleum industry.
39 Fed.Reg. 31650 (August 30, 1974).
Toward these ends, the FEA rejected the option of actual physical reallocation of crude oil among refiners, in favor of monthly cash payments to refiners with relatively less access to price-controlled crude oil than the national average, from refiners with proportionately greater access. See Tr. at p. 32; and 10 C.F.R. § 211.67(b) (1980). These entitlements obligations are costed into the price of crude oil, see 10 C.F.R. § 211.67(m) (1980), and then adjusted into the maximum lawful price for the following month. See 10 C.F.R. § 212.83(c)(2) (1980). See generally, Pasco, Inc. v. FEA, 525 F.2d 1391, 1395 (Em.App.1975); Cities Service Co. v. FEA, 529 F.2d 1016, 1021 (Em.App.1975). A description of the mechanics of the entitlements program follows.
Under the provisions of the entitlements program, each refiner must report on a monthly basis, inter alia, its crude oil runs to distillation units, as well as the price, volume, and type of all crude oil booked into the refinery as a "receipt." See 10 C.F.R. § 211.66 (1980). These reports are due approximately two months after the report subject month. Id. Based on the information gleaned from these reports, every eligible refiner is issued a number of entitlements for the month. An entitlement is a "license" to refine one barrel of price-controlled crude oil for the month. See 10 C.F.R. § 211.62 (1980).
To determine a refiner's monthly allocation of entitlements, the formula vastly simplified is as follows: the national domestic supply ratio (DOSR), which is the ratio of price-controlled crude to the national total runs to stills, is multiplied by the volume of crude oil runs to stills reported by the refiner for that month. See 10 C.F.R. § 211.67(a)(1) (1980). A refiner is then issued entitlements equal to the above computed figure. The second step in determining the refiner's ultimate entitlements obligation is to calculate the monthly receipts of "deemed old oil." See 10 C.F.R. § 211.67(b)(2) (1980). This sum represents a refiner's total receipts of price-controlled crude oil. A refiner's entitlements position is the difference between its entitlement allocation and deemed old oil receipts. If the entitlements allocation is greater than a refiner's deemed old oil receipts, the refiner will be able to sell entitlements. Whereas, if the entitlements allocation is less than a refiner's deemed old oil receipts, it will have to purchase additional entitlements from a refiner that is in a position to sell entitlements, in order to process those additional supplies of price-controlled crude. See 10 C.F.R. §§ 211.67(b)-(c) (1980).
The regulations do not match up entitlements purchasers and sellers every month for the purpose of making these transactions. Instead, historic trading relationships have evolved in the industry. The price of an entitlement, however, is set by regulation, and is determined by subtracting from the weighted average cost of a barrel of uncontrolled crude, the weighted average cost of a barrel of "old oil." See 10 C.F.R. § 211.67(i)(4) (1980).
Every month the DOE publishes an entitlements notice "evidencing the issuance of entitlements" and containing the following information: The DOSR, the name of each refiner to which entitlements have been issued, the number of barrels of deemed old oil included in each refiner's adjusted crude oil receipts, the number of entitlements issued to each refiner, the number of entitlements required to be purchased or sold by each such refiner, and the price at which entitlements shall be purchased and sold. See 10 C.F.R. § 211.67(i)(2) (1980). A refiner's failure to comply with the obligations imposed by the entitlements notice or the entitlements program in general, is subject to civil liability of $ 20,000 per day for each day of non-compliance, and criminal sanctions of imprisonment for one year and a fine of $ 40,000 per day for each day of non-compliance. See 15 U.S.C. § 754; 10 C.F.R. §§ 205.203(a)(2), (b)(1) (A), (c)(1)(B).
Two final points on the operation of the entitlements program must be made. The first is that although the entitlements program is operated on a monthly basis, a given month's entitlements notice does not reflect a "freeze-frame" picture of the refinery industry for that month. As a primary matter, the entitlements notice itself is issued two months after the subject month it reports about. Secondly, such factors as errors in reporting, recertifications of crude oil, adjustments in crude oil receipts and costs, and exception relief granted by the DOE's Office of Hearings and Appeals, inject a degree of inaccuracy in each month's entitlements notice. Yet, over the course of the program these discrepancies are supposed to be accounted for, and correction lists are issued accordingly. See Tr. at p. 46, and Plaintiff's Exhibit # 2(y).
It should also be noted that the entitlements program has been amended several times over the course of its life.
Some of these amendments were to further advance the goal of equitable distribution of price-controlled crude oil. Still other changes have been for the purpose of granting subsidies to various sectors of the petroleum industry. For example, the deemed old oil computation was necessitated by a change in the program that added an "upper" tier of price-controlled crude oil, and redesignated "old oil" as "lower" tier.
It will be recalled that the original form of the entitlements program only included the one category of "old oil." Perhaps most affected by the changes in the entitlements program's directions, especially in the area of subsidies, has been the DOSR calculation. The DOSR now incorporates different types of subsidies, which are provided in the form of additional allocations of entitlements for the following programs: small refiner "bias," exceptions and appeals relief in the entitlements program, California heavy crude refining incentives, for the import of naptha into Puerto Rico, for the import of residual fuel oil into the East Coast refining district, synthetic fuel development, domestic residual fuel deductions, and for crude oil sold to the Strategic Petroleum Reserve. The effect of these program modifications has been to reduce the size of the DOSR. As shall be explained in greater detail momentarily, a lower DOSR causes fewer entitlements to be issued to all refiners, and therefore increases their proportionate burden under the program. In addition, a lower DOSR furthers the likelihood that even some traditional entitlements sellers will become entitlements purchasers.
See infra at pp. 429-430. With this examination of the purpose, evolution, and operation of the entitlements program complete, the Court turns to consider the factual predicate for Mobil's assertion that a preliminary injunction should issue against the DOE's "January entitlements notice."
Due to the cost differential between a barrel of price-controlled and uncontrolled crude oil, there was always a financial incentive in the petroleum industry to find methods, whether legal or extra-legal, to "convert" price-controlled crude oil into uncontrolled crude oil. A refiner that could make a barrel of price-controlled oil selling, for example, at $ 8.00 a barrel, "disappear" and then later "reappear" as uncontrolled crude oil selling, for example, at the world market price of $ 38.00 a barrel, would stand to make a tidy profit of $ 30.00 on each barrel sold. Mobil asserts that the phased, and more recently, the complete decontrol of the petroleum industry has provided even additional financial incentive to cheat or "game" the price-control regulations. Some additional background on decontrol is necessary.
On April 5, 1979 President Carter announced his intention to deregulate all domestic crude oil. Soon thereafter, the DOE took steps to implement the President's decision, and it adopted the first of a series of amendments to its regulations, with a view towards gradually lifting the price-controls on domestic crude-oil by October 1, 1981. See 44 Fed.Reg. 66187 (November 19, 1979). The plans for phased decontrol, however, were interrupted by a change in presidential administrations. Shortly after being sworn into office, President Reagan fulfilled one of his campaign pledges by issuing Executive Order No. 12287 on January 28, 1981. That Order provides in pertinent part:
By the authority vested in me as President by the Constitution and statutes of the United States of America, including the Emergency Petroleum Allocation Act of 1973, as amended (15 U.S.C. 751 et seq.), and notwithstanding the delegations to the Secretary of Energy in Executive Order No. 11790, as amended by Executive Order No. 12038, and in order to provide for an immediate and orderly decontrol of crude oil and refined petroleum products, it is hereby ordered as follows:
Section 1. All crude oil and refined petroleum products are exempted from the price and allocation controls adopted pursuant to the Emergency Petroleum Allocation Act of 1973, as amended. The Secretary of Energy shall promptly take such action as is necessary to revoke the price and allocation regulations made unnecessary by this Order.
Section 3. The Secretary of Energy may, pursuant to Executive Order No. 11790, as amended by Executive Order No. 12038, adopt such regulations and take such actions as he deems necessary to implement this Order, including the promulgation of entitlements notices for periods prior to this Order and the establishment of a mechanism for entitlements adjustments for periods prior to this Order.
Section 4. The Secretary of Energy is authorized to take such other actions as he deems necessary to ensure that the purposes of this Order are effectuated.
Sec. 5. Because advance notice of and public procedure on the decontrol provided by this Order would be likely to cause actions that could lead to economic distortions and dislocations, and would therefore be contrary to the public interest, this Order shall be effective immediately.
46 Fed.Reg. 9909-10 (January 30, 1981).
The announcement of phased decontrol and the knowledge that all price-controls on crude oil would be lifted by October 1, 1981, imparted refiners with a new and unique opportunity to cheat or "game" the regulatory system and to make "windfall" profits. With the coming of decontrol, all a refiner had to do in order to maximize its profits on price-controlled crude oil, would be to somehow withhold barrels of the low cost price-controlled crude from the market until after the date of decontrol.
Of course, a barrel of price-controlled crude oil after the date of decontrol would be worth the higher world market price. Thus, when decontrol was announced on April 5, 1979, the petroleum industry was at once provided with further incentive to cheat and "game" the regulatory scheme, and with the method to accomplish these ends. In addition, unwitting participation in such schemes was forthcoming from the political arena. Due to his campaign pledge, President Reagan's election in November 1980, brought with it the chance that complete decontrol would be adopted before its scheduled date of October 1, 1981, and that profits could be taken even sooner. This turned out to be a safe bet, since, as stated already, decontrol of the petroleum industry was in fact ordered by President Reagan on January 28, 1981. Testimony provided by Mobil suggests that this was also the day when millions of barrels of once price-controlled crude oil suddenly began to "reappear." A more detailed examination of this phenomenon and its effect on the entitlements program follows.
At a May 12, 1981 hearing held by this Court on plaintiff's motion for a preliminary injunction, testimony was taken on the problem of the disappearance of price-controlled oil, and its specific effect on the entitlements program. Testifying for plaintiff Mobil was Mr. Roy K. Murdock, General Manager of Crude Oil and Gas Liquid for Mobil's United States Marketing and Refining Division. Murdock based his conclusions about the disappearance of price-controlled crude oil, and its subsequent reappearance, on an analysis of data contained in the "Domestic Crude Oil First Purchasers Report" and the monthly entitlements notices. Appropriately entitled, the First Purchaser reports, inter alia, collects data at the first point of purchase of crude oil, which is usually at the refineries. It will be recalled that the monthly entitlements notices publish data on each of the calculations relevant to the operations of the entitlements program, such as all refinery receipts. See supra at pp. 425-426. Therefore, a comparison of the two data systems can be expected to yield statistically similar volumes of crude oil moving throughout the industry.
Nonetheless, it shall be seen that in actuality, wide discrepancies between the two systems are commonplace, thus evidencing the disappearance phenomenon.
Murdock testified at the hearing that the DOSR the ratio of price-controlled crude to total runs to stills has gradually declined between 1979 and 1980, with a marked decline evident in November and December of 1980. Tr. at pp. 48-49; Plaintiff's Exhibits ## 3 and 4 (plaintiff's exhibits will be delineated Exh. # ].) In the same two-year period the price of an entitlement the difference between the cost of lower tiered price-controlled and uncontrolled crude oil more than tripled from $ 8.74 to $ 27.06. Id. As for the comparison of the First Purchasers data and entitlements program receipts, Murdock testified that in the past two years a disparity or disappearance occurred in volumes of lower tier price-controlled crude reported, and that this disparity has increased over time. Exh. ## 5 and 6. In January, 1979, some 179,000 barrels of price-controlled crude oil were disappearing every day. By December, 1980, the rate of disappearance had increased to 520,000 barrels of price-controlled crude oil every day. Tr. at pp. 53-53.
A comparison on the First Purchasers and entitlements program data on upper tier crude oil shows equally dramatic trends. Tr. at pp. 56-59; Exh. ## 7 and 8. For approximately the first six months of 1979, more upper tier crude was reported as received at refineries than was produced and sold during that period. This trend inverted by August 1979, and a disparity or disappearance of 93,000 barrels per day of price-controlled crude oil was reported. By December of 1980 the disappearance rate had increased to 426,000 barrels per day. It should be added that the relative price of upper tier crude oil during this period changed substantially. At the beginning of 1979 upper tier crude was very near in price to the world market price of crude oil. However, by the end of 1979 the world market price of crude oil had out-paced the price of upper tier crude, and was worth approximately twice as much. The data for upper tier Alaskan North Slope Crude, which has been price-controlled since May 1980, shows a pattern similar to that of upper tier crude. Tr. at pp. 60-62; Exh. ## 9 and 10. At the same time, overall production in all tiers of price-controlled crudes was declining throughout 1979 and 1980. Tr. at p. 64. Nevertheless, a calculation of the percentage disparity, for example, in both categories of lower and upper tier crude is quite revealing. In January 1979, 2.3% of lower and upper tier crude oil had disappeared; by December 1979, 43.4% of lower and upper tier crude oil had disappeared. Tr. at pp. 64-66; Exh. ## 12 and 13.
In total figures, in the year 1979, between 5.2 million and 10.4 million barrels of crude oil were disappearing from the regulatory system every month. By the year 1980, between 12.0 million and 29.6 million barrels of crude oil were disappearing every month. Tr. at pp. 69-71; Exh. ## 14 and 15.
While these millions of barrels of price-controlled crude oil were disappearing, curiously, it seems that at least some of this crude oil was reappearing as decontrolled crude. In January 1980 a surplus of 175,000 barrels per day of decontrolled crude oil appeared in the regulatory system. This figure represents crude oil that was reported as receipts by refiners, but was not reported as having been purchased by first purchasers. By December of 1980, there were 809,000 barrels per day of decontrolled crude oil reappearing in this manner, even though there was really no record of it having been produced. Tr. at pp. 81-83. Significantly, the accuracy of all the data described above is not contested by the DOE.
If the cost of an entitlement is factored into these figures for disappearing crude, remembering that between 1979 and 1980 the price of an entitlement was increasing, $ 5.6 billion of entitlements obligations were not channeled through the entitlements program on a total volume of over 250.3 million barrels of price-controlled crude oil. Tr. at pp. 71-75; Exh. ## 15 and 16. Moreover, from the American public's point of view, if price-controlled crude that disappeared later reappeared as higher priced uncontrolled crude, then this $ 5.6 billion figure represents increased crude costs that may be passed on to them. The Court will next address in more specific terms the ways in which the disappearance of price-controlled crude impacts upon entitlements program refiners. Afterwards, the possible explanations for the disappearance will be considered.
To understand how the disappearance of price-controlled crude oil affects the entitlements program refiners, the mechanics of the program must be reconsidered. The disappearance of price-controlled crude oil causes a concomitant reduction in the DOSR the ratio of price-controlled crude to the national total runs to stills. Since the number of entitlements issued to each refiner is a product of the DOSR and that refiners' runs to stills, a shrinking DOSR will cause less entitlements to be issued to all refiners in the program. This means that an entitlements purchaser will have to purchase more entitlements to make up for this net loss, and to be able to refine its excess of price-controlled crude over the national average. By the same token, a seller of entitlements is negatively affected by being issued less entitlements, because it will have fewer entitlements to sell in order to offset its limited access (in comparison to the national average) to price-controlled crude. Moreover, the disappearance of price-controlled crude oil increases the likelihood that the DOSR will shrink to such a low level that it would cause many traditional entitlements sellers to have access to more price-controlled crude oil than the national average.
With this change in position these traditional entitlements sellers would themselves be required to become purchasers of entitlements.
As a participant in the entitlements program Mobil has been directly affected by the problem of disappearing crude oil. Mobil traditionally has been a purchaser of entitlements and has expended some $ 800 million over the life of the program. Tr. at p. 38. In December of 1980, for instance, Mobil was required to purchase $ 48 million worth of entitlements. Because it has been a traditional purchaser of entitlements, Mobil has had to purchase additional entitlements as a result of the disappearance of price-controlled crude oil, and the fewer entitlements it has been issued due to the shrinking DOSR. See Exh. # 3. Murdock testified that in 1979, with Mobil's approximately 5% industry share of the national runs to stills, Mobil paid an additional entitlements burden of $ 64.4 million on $ 1.3 billion of entitlements obligations that escaped the program as a result of the disappearance of price-controlled crude oil. In the year 1980, however, Mobil's increased entitlements burden was four times this amount. According to Murdock's testimony, $ 4.3 billion of entitlements obligations escaped the entitlements program in 1980, and Mobil's share of that burden was $ 220 million of additional entitlements purchases all because of disappearing price-controlled crude. This figure represents 85% of Mobil's total entitlement's obligation for that year. Tr. at p. 91; Exh. # 21.
Murdock testified that a variety of factors could have contributed or actually have caused the incredible disappearance of price-controlled crude. Certainly phased decontrol is one of these, since it was designed to gradually reduce the amount of crude oil subject to price-controls. A second factor is that the entitlements system is constantly undergoing adjustments and corrections. Yet the importance of either of these reasons is suspect due to the fact that the disappearance of price-controlled crude was both continuous, and increased at a faster rate than the base volumes of price-controlled crude were decreasing.
Tr. at p. 55; see e. g. Exh. ## 5-8, 12.
Still a third possible explanation for the disappearance of price-controlled crude is the operation of the DOE's Tertiary Incentive Program. As part of the phased decontrol of crude oil, and for the purpose of increasing domestic production, the DOE adopted the Tertiary Program to provide producers with front-end financing for exotic or "enhanced" forms of oil recovery. See 46 Fed. Reg. 25315 (May 6, 1981). This incentive was in the form of enabling a producer to recertify lower and upper tier crude oil as tertiary incentive crude, and, as a consequence, to receive the market price instead of the otherwise applicable controlled price. More specifically, under this program a producer may certify sufficient quantities of crude oil as tertiary incentive crude to enable it to receive additional revenue to recover expenses on seventy-five percent of certain enhanced forms of crude oil recovery. Murdock raised the possibility that, in the process of recertifying the price-controlled crude oil as tertiary incentive crude, the First Purchasers or entitlements program data might not have accurately accounted for and reported this recertification. Thus, a reporting error could have resulted such that a barrel of price-controlled crude would seem to have disappeared upon a comparison of the First Purchasers and entitlements program data.
After raising this possibility, Murdock effectively demonstrated that it was an implausible explanation for the disappearance of price-controlled crude. Murdock conceded that the Tertiary Program would cause the DOSR to shrink because tertiary incentive crude reduced the quantity of price-controlled crude on the market. As described before, a shrinking DOSR causes additional burdens to befall entitlements program refiners. See supra at pp. 429-430. But he discounted the likelihood that the failure of first purchasers to adjust for tertiary incentive crude could account for the significant disappearance of price-controlled crude oil. Some further background on the adjustment procedures in the First Purchasers Report and the entitlements program will prove useful.
There is a difference in adjustment procedures between the First Purchasers and entitlements program data collection systems. In the First Purchasers system, a barrel of crude oil reported as price-controlled in the month of September, for example, and subsequently recertified the following month as price-controlled crude, would not cause the September First Purchasers data to be adjusted. Instead, the recertification would be shown in the next month's First Purchasers report. The contrary is the case with the entitlements program, which would adjust its September data to reflect the recertification of the price-controlled crude. However, based on the foregoing, a subsequent comparison of the First Purchasers and entitlements program data for the month of September would show that one barrel of price-controlled crude had disappeared. Furthermore, it is possible that a disappearance could also be caused if the first purchaser were to simply fail to make the amendment in the First Purchasers Report to reflect the tertiary incentive recertification to begin with. In both of these examples the disappearance would have been caused by the fact that the barrel of price-controlled crude was not entered into the September First Purchasers Report as price-controlled crude, but was adjusted in the September entitlements program data as tertiary incentive crude.
Murdock testified that for several reasons these two scenarios are improbable explanations for the disappearance of significant quantities of price-controlled crude oil. First, he stated that there was absolutely no incentive for a first purchaser of crude oil to "neglect" to properly amend its First Purchaser filing to account for the recertification of tertiary incentive crude. Tr. at p. 110. A refiner's First Purchaser filing is nothing more than a report, and does not, unlike the refiner reports of the entitlements program, affect that refiner's financial obligations under the DOE's regulatory scheme. Id. at 110-11. In fact the opposite appears to be the case. The First Purchasers Report for the year 1980, and for January of 1981, see Exh. # 1, reveals that in fact first purchasers accounted for hundreds of thousands of barrels of tertiary incentive crude. Moreover, at the hearing on plaintiff's preliminary injunction motion, there was no evidence presented that would suggest that the accuracy of the First Purchasers Reports should be substantially doubted.
And while it would be possible that, in recertifying tertiary incentive crude, differences in deadline amendment requirements could cause a barrel of price-controlled crude to seem to have disappeared, adjustment procedures would eventually account for the disappearance in the following month's data, and no net loss actually would have occurred.
Of greater moment is the fact that, even assuming arguendo that the disappearance of price-controlled crude oil could be explained by misreporting in the Tertiary Incentive Program, this rationale would not account for most of the crude oil that has disappeared. The volume of crude oil attributable to the entire Tertiary Incentive Program is relatively insignificant when compared to statistics on the total volume of disappearing price-controlled crude. Tr. at p. 126. Furthermore, the problem of misreporting in the Tertiary Incentive Program, under the scenario outlined above, would only address the disappearance of price-controlled crude oil that has already been booked as such into the entitlements program as a refinery receipt. By contrast, the disappearance of crude oil as reflected in a comparison of the First Purchasers and entitlements data, is caused by the problem of crude oil that has not been booked into the entitlements program in the first place. Therefore, the purported problem of misreporting in the Tertiary Incentive Program could not explain how millions of barrels of price-controlled crude oil, accounted for in the First Purchasers Reports, subsequently disappeared and were never booked into the entitlements program.
Murdock testified that the most reasonable explanation for the disappearance of price-controlled crude, and why much of it never seems to reach the entitlements program, is due to the use of manipulative inventory practices by refiners in the entitlements program. Tr. at pp. 53-4. For a refiner looking to maximize profits through the sale of price-controlled crude after decontrol, entitlements obligations would first have to be avoided. Manipulative inventorying uniquely serves this end. After the announcement of decontrol, refiners realized that commonly used inventory practices in the industry could also be employed to delay the booking of their relatively inexpensive price-controlled crude as received at the refinery (this is called "selective inventorying," tr. at p. 78), until after the date of decontrol, when it would be worth the much higher world market price. The obvious point of this exercise was to avoid the entitlements obligations in order to make a "windfall" profit from the difference between the controlled and market price approximately $ 25.00 per barrel on each barrel of price-controlled crude inventoried in this manner. Tr. at p. 38. In other words, the purpose of the plan was to make price-controlled crude oil disappear, and then later reappear for sale after decontrol.
If refiners scanned the horizon to search out obstacles to this plan in general, or to manipulative inventory practices in particular, they were not to find them in the DOE's entitlement program regulations. Actually, even before the announcement of decontrol, a variety of manipulative inventorying practices were already permitted by the entitlements program's regulations and reporting procedures. The origins of such practices may be traced to the program's accounting constructs, which provide that an entitlement obligation is to only be imposed at the time a barrel of price-controlled crude oil is reported as having been received by the refinery. More specifically, a refinery receipt is charitably defined as follows:
"Crude receipts" means, as to a particular refiner, the volume of crude oil (a) booked into its refineries in accordance with accounting procedures generally accepted and consistently and historically applied by the refiner concerned, for its own account or for the account of a firm other than a refiner or (b) if not previously so booked into its refineries, delivered by that refiner for its account to another refiner pursuant to a processing agreement with that other refiner. Crude oil receipts shall not include crude oil received by a refiner for the purpose of processing at its refineries for the account of another refiner. A particular crude oil receipt shall be deemed to have occurred when the related cost is booked into refinery inventory in accordance with accounting procedures generally accepted and consistently and historically applied by the refiner concerned, whether or not such crude oil has been actually received by that refiner, except that crude oil delivered by one refiner to another refiner pursuant to a processing agreement will be deemed to have been delivered by the delivering refiner to the other refiner when the risk of loss passes to the other refiner under the particular processing agreement or when the crude oil is received at the refinery of the other refiner, whichever occurs first. Crude oil which has been added by a refiner to its inventory and which is thereafter sold or otherwise disposed of without processing for the account of that refiner shall be deducted from its crude oil receipts at the time when the related cost is deducted from refinery inventory in accordance with accounting procedures generally accepted and consistently and historically applied by the refiner concerned. The volume of domestic crude oil included in a refiner's crude oil receipts shall be evidenced by and consistent with invoices received with respect to such crude oil receipts.
10 C.F.R. § 211.67 (1980); See tr. at pp. 84-5.
Thus, constrained simply by the flexible requirement that they employ "accounting procedures generally accepted and consistently and historically applied," a refiner is in effect allowed by the regulations to report a receipt of price-controlled crude for entitlements purposes at any point in the supply chain from wellhead to refinery gate.
Tr. at p. 102. A variety of accounting techniques have been used as a result, as have inventory practices designed to take advantage of them. For instance, some refiners use the "refinery gate" method which reports the crude as a receipt at the time it physically enters the refinery.
This legally enables a refiner to leave unreported for entitlements purposes, any price-controlled crude that has been purchased by the refiner, but continues to be physically located outside the refinery; such as in pipelines, intermediate storage, and in terminals or ships.
Tr. at pp. 53-4. This practice is to be distinguished from the method whereby a barrel of crude is deemed as a receipt when some physical transaction has already occurred. For instance, Mobil uses a point of purchase (usually at the wellhead) inventory practice. By comparison to the previous example, Mobil would be required to report for entitlements purposes, crude it had purchased though had not as yet physically received. Tr. at p. 86.
Another legal and quite commonly used practice is called "time exchanges." See 10 C.F.R. § 211.67(g) (1980). Under this practice a refiner, for example, exchanges crude with another refiner in one month, with the intent that crude oil of similar quality and quantity would be returned in the following month. However, under the entitlements program's regulations, the receipt of the crude oil need not be reported until it is actually received on exchange.
Tr. at p. 78. It will be recalled that an entitlement obligation is only incurred when a barrel of price-controlled crude is booked into a refiner as a receipt. With the use of time exchanges, a refiner could exchange away price-controlled crude for decontrolled crude to be returned on the event of decontrol. The regulations, moreover, would seem sufficiently broad to permit refiners to engage in reciprocal time exchanges so that both could assist the other in avoiding the entitlements obligations. Tr. at p. 79. At the same time, Section 211.67(g) apparently would permit a refiner to avoid reporting receipts of price-controlled crude oil exchanges, where the terms of the exchange were not limited to location and quality differentials, and instead focused on the crude oil "tier" being exchanged. A refiner engaged in this type of practice with a reseller or other refiner that had been able to avoid reporting a crude oil receipt under the entitlements program, would not have to report a price-controlled exchange after decontrol.
The final manipulative inventory device that will be discussed is called "splitting entitlements." Tr. at p. 85. Murdock testified that the entitlements program regulations are flexible enough to permit refiners to selectively deem their non-refining inventories to be made up entirely of price-controlled crude oil. Refiners could take advantage of ...