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MOBILE OIL CORP. v. DOE

September 21, 1982

MOBIL OIL CORPORATION, EXXON CORPORATION, GULF OIL CORPORATION, and MARATHON OIL COMPANY, Plaintiffs,
v.
THE DEPARTMENT OF ENERGY, and JAMES B. EDWARDS, Secretary of Energy, Defendants



The opinion of the court was delivered by: MUNSON

MEMORANDUM-DECISION AND ORDER

 The plaintiff oil refiners have instituted this action to obtain declaratory relief in connection with certain provisions of the Mandatory Petroleum Price Regulations, 10 C.F.R. Part 212, that pertained to motor gasoline. Specifically, the plaintiffs have challenged the procedural and substantive validity of a "three cent" retail price equalization rule which contained a "deemed recovery" component. Alternatively, they have contested the validity of an "equal application" rule, which also contained a deemed recovery component. Jurisdiction is invoked under Section 5(a) (1) of the Emergency Petroleum Allocation Act of 1973 [EPAA], 15 U.S.C. § 754(a) (1), Section 211 of the Economic Stabilization Act of 1970 [ESA], 12 U.S.C. § 1904 note, Section 523(b) of the Energy Policy and Conservation Act, 42 U.S.C. § 6393(b); Section 502(b) of the Department of Energy Organization Act, 42 U.S.C. § 7192(b), the Administrative Procedure Act, 5 U.S.C. § 702, and under 28 U.S.C. §§ 1331, 1337, 1361, 2201, and 2202.

 Presently before the Court are the plaintiffs' motion for summary judgment, and the defendants' cross-motion for summary judgment.

 I.

 In 1971, President Nixon announced his Economic Stabilization Program, which, as embodied in the ESA, was intended to halt the rising tide of inflation, which, at that time, was plaguing the country. A supervisory body of this Program, the Cost of Living Council [CLC], was delegated the authority to issue regulations necessary to the accomplishment of this objective.

 Beginning in 1973, the CLC, in an effort to stem the spiraling prices of petroleum products, promulgated a number of rules that imposed mandatory price controls upon refiners. See 38 Fed. Reg. 15765 (June 15, 1973); 38 Fed. Reg. 19464 (July 20, 1973); 38 Fed. Reg. 21593 (August 9, 1973); 38 Fed. Reg. 22536 (August 22, 1973); 38 Fed. Reg. 23794 (September 4, 1973); 38 Fed. Reg. 25686 (September 14, 1973); 38 Fed. Reg. 28845 (October 17, 1973); 38 Fed. Reg. 30267 (November 2, 1973); 38 Fed. Reg. 31686 (November 16, 1973); 38 Fed. Reg. 33577 (December 6, 1973). Although these controls placed ceilings upon the maximum prices that refiners could charge for motor gasoline, they did not purport to forbid refiners from setting prices that were less than the regulatory limitations. See Fed. Reg. at 15765; 38 Fed. Reg. at 19464.

 Congress also sought to limit petroleum prices. In November, 1973, it enacted the EPAA, which directed the President to issue regulations governing the pricing and allocation of crude oil and petroleum products. See 15 U.S.C. § 753(a). In Section 4(b) (1) of the original, and amended, EPAA, Congress directed the President to promulgate regulations that would provide for:

 
(A) protection of public health (including the production of pharmaceuticals), safety and welfare (including maintenance of residential heating, such as individual homes, apartments and similar occupied dwelling units), and the national defense;
 
(B) maintenance of all public services (including facilities and services provided by municipally, cooperatively, or investor owned utilities or by any State or local government or authority, and including transportation facilities and services which serve the public at large);
 
(C) maintenance of agricultural operations, including farming, ranching, dairy, and fishing activities, and services directly related thereto;
 
(D) preservation of an economically sound and competitive petroleum industry; including the priority needs to restore and foster competition in the producing, refining, distribution, marketing, and petrochemical sectors of such industry, and to preserve the competitive viability of independent refiners, small refiners, nonbranded independent marketers, and branded independent marketers;
 
(E) the allocation of suitable types, grades, and quality of crude oil to refineries in the United States to permit such refineries to operate at full capacity;
 
(F) equitable distribution of crude oil, residual fuel oil, and refined petroleum products at equitable prices among all regions and areas of the United States and sectors of the petroleum industry, including independent refiners, small refiners, nonbranded independent marketers, branded independent marketers, and among all users;
 
(G) allocation of residual fuel oil and refined petroleum products in such amounts and in such manner as may be necessary for the maintenance of, exploration for, and production or extraction of --
 
(i) fuels, and
 
(ii) minerals essential to the requirements of the United States,
 
and for required transportation related thereto;
 
(H) economic efficiency; and
 
(I) minimization of economic distortion, inflexibility, and unnecessary interference with market mechanisms.

 15 U.S.C. § 753(b) (1) (A)-(L). In setting forth Section 4(b) (1) (F), 15 U.S.C. § 753(b) (1) (F), Congress was particularly concerned with the problem of price discrimination: "The reference to equitable prices in the bill is specifically intended to emphasize that one of the objectives of the mandatory allocation program is to prevent price gouging or price discrimination which might otherwise occur on the basis of current shortages." H.R. Rep. No. 93-628, 93rd Cong., 1st Sess., reprinted in [1973] U.S. Code Cong. & Admin. News at 2702.

 Section 4(b) (2) of the EPAA, as originally adopted, specified that the President's regulations should "provide for a dollar-for-dollar passthrough of net increases in the cost of . . . refined petroleum products to all marketers or distributors at the retail level." 15 U.S.C. § 753(b) (2) (A). The purpose of this provision is set forth in the legislative history:

 
It is contemplated that prices for allocated fuels will be set at levels or pursuant to methods which will permit adequate compensation to assure that private property is not implicitly confiscated by the government. Most importantly, the president must, in exercising his authority, strike an equitable balance between the sometimes conflicting needs of providing adequate inducement for the production of an adequate supply of product and of holding down spiraling consumer costs.

 H.R. Rep. No. 93-628, 93rd Cong., 1st Sess., reprinted in [1973] U.S. Code Cong. and Admin. News, at 2703. In 1975, this provision was amended to read: "refined petroleum products at all levels of distribution from the producer through the retail level."

 Following the passage of the EPAA, in December, 1973, the President created a predecessor agency of the Department of Energy [DOE], and delegated to this agency his authority under the EPAA. See 38 Fed. Reg. 33575 (December 6, 1973). The CLC subsequently delegated its authority under the ESA to this same agency. See 39 Fed. Reg. 24 (January 2, 1974).

 In January, 1974, the new agency adopted the CLC's price rules, and published them as the Mandatory Petroleum Price Regulations. See 39 Fed. Reg. 1949 (January 15, 1974). These Regulations laid down guidelines affecting the maximum prices that a refiner could charge for the sale of "covered products", which included crude oil and "special products" such as motor gasoline. See 10 C.F.R. § 212.31, 39 Fed. Reg. at 1950, 1951.

 One critical feature of the Regulations was a "price rule." Set forth in 10 C.F.R. § 212.82(a), this rule provided that "[a] refiner may not charge to any class of purchaser a price in excess of the base price" of motor gasoline except under certain specified circumstances. 39 Fed. Reg. at 1952. In this regard, "class of purchaser" was defined as "purchasers . . . to whom a person has charged a comparable price for comparable property or services pursuant to customary price differentials between these purchasers . . . and other purchasers. . . ." 10 C.F.R. § 212.31, 39 Fed. Reg. at 1950.

 As used in the price rule, and in other provisions, "base price" represented the sum of (1) a refiner's weighted average price at which motor gasoline was lawfully priced in transactions with a particular class of purchaser on May 15, 1973; and (2) a refiner's increased "product" costs, or increases in the costs of crude oil and purchased products since May, 1973, 10 C.F.R. § 212.83(b), 39 Fed. Reg. at 1954. 10 C.F.R. § 212.82(f); 39 Fed. Reg. at 1953. Increased "product" costs were determined according to a refiner cost allocation formula. This formula yielded a cents-per-gallon figure referred to as "d[i]", which denoted the maximum amount of increased "product" costs that a refiner could apportion to a special product like motor gasoline:

 
§ 212.83. Allocation of refiner's increased product costs.
 
* * *
 
(c) Allocation of increased-costs --
 
* * *
 
(2) General formulae:
 
* * *
 
d[i] = the dollar increase that may be applied in the period "u" (the current month) to the May 15, 1973 selling price of [a special product] to each class of purchaser to compute the base price to each class of purchaser.

 10 C.F.R. § 212.83(c) (2), 39 Fed. Reg. at 1955.

 To the "base price" a refiner could add certain increased "non-product" costs, or increases in the costs of refining and transporting petroleum products that had been incurred since May, 1973. 10 C.F.R. § 212.83(a) & (b), 39 Fed. Reg. at 1952-53. Under the price rule, this new sum, a "price in excess of base price," could not be recovered by a refiner unless the refiner satisfied certain profit margin limitations and complied with a prenotification procedure that required advance notice of the proposed price increase to the agency for its implicit or explicit approval. 10 C.F.R. §§ 212.82(c) (1) & (2) (i), 212.82(i), 39 Fed. Reg. at 1952, 1954. In addition to these restrictions, a refiner could charge for motor gasoline a "price in excess of base price" only if it "equally applied to each class of purchaser" the amount of increased "non-product" costs allocable to that special product. 10 C.F.R. § 212.82(c) (2) (i) (b), 39 Fed. Reg. at 1953.

 Another important feature of the Regulations was a "cost bank rule", contained in 10 C.F.R. § 212.83(d) (1), 39 Fed. Reg. at 1956. Because the price rule placed limitations upon the prices that a refiner could charge for special products, such as motor gasoline, occasions arose when a refiner could not recover all its increased "product" costs. The cost bank rule addressed these situations, and permitted a refiner to carry over, or "bank", its unrecovered increased "product" costs for inclusion in the calculation of base prices for motor gasoline in a later month:

 
§ 212.83. Allocation of refiner's increased product costs.
 
* * *
 
(d) Carryover of costs. (1) If in any month . . . a firm charges prices for a special product which result in the recoupment of less total revenues than the entire amount of increased product costs calculated for that product pursuant to the general formula . . ., the amount of increased product costs may be added to the May 15, 1973 selling prices to compute the base prices for that special product for a subsequent month.

 Independent retailers operated under a pricing system similar to that scheme imposed upon refiners. In January and February, 1974, however, the agency issued rules permitting independent retailers to increase their retail selling prices for motor gasoline by up to $.03 per gallon in order to reflect "non-product" costs incurred in the marketing of motor gasoline. See 39 Fed. Reg. 809 (January 3, 1974); 39 Fed. Reg. 7795 (February 28, 1974). A refiner could take advantage of this allowance for increased "non-product" costs only if it first satisfied the price rule limitations upon the recovery of a "price in excess of base price." Because of these strictures, refiner-operated stations generally chose not to undertake the burden of increasing motor gasoline prices by $.03 per gallon. Independent retailers of motor gasoline then had to decide whether to charge an additional $.03 per gallon above prices charged by refiner-operated stations, and thereby recover their increased "non-product" costs, or to absorb the $.03 per gallon allowance by selling at prices competitive with those charged by refiner-operated stations.

 On April 2, 1974, the agency responded to a "price disparity" that had developed between independent and refiner-operated stations by publishing an amendment to the general refiner cost allocation formula for determining "d[i]", the amount of increased "product" costs:

 
§ 202.83. Allocation of refiner's increased product costs.
 
* * *
 
(c) Allocation of increased-costs.
 
* * *
 
(2) General formulae:
 
* * *
 
d[i] = The dollar increase that may be applied in the period "u" (the current month) to the May 15, 1973 selling price of [a special product] to each class of purchaser to compute the base price to each class of purchaser, except that the dollar increase that may be applied in the period "u" to the May 15, 1973 selling price of gasoline to compute the base prices to the classes of purchaser which purchase gasoline at retail from a refiner at service stations operated by employees of the refiner may be "d[i]" plus a maximum of $.03 per gallon of gasoline provided that in computing "d[i]" the numerator of the [general formula] is reduced by an equal amount to the product of the actual amount to cents per gallon increased added to "d[i]" above multiplied by the estimated number of gallons of gasoline to be sold during the period "u" at retail through service stations operated by employees of the refiner. . . .

 10 C.F.R. § 212.83(c) (2), 39 Fed. Reg. 12013-14 (April 2, 1974). According to the agency, this refiner "retail price equalization" rule, or "three cent" rule, "permit[ted] a refiner to allocate an additional three cents of its increased product costs" to gasoline prices charged at refiner-operated stations, "provided that a corresponding reduction in the amount of increased product costs allocated to the price of gasoline sold through independent dealer-operated stations is made." 39 Fed. Reg. at 12013. The agency noted further that while the amendment did "not change the total amount of increased product costs" which a refiner could pass through, it did "permi[t] an adjustment in the allocation of those costs which should result in an equalization of the price charged for gasoline produced by the refiner at the retail level." Id. Finally, the agency explained that because the "purpose" of the amendment was "to provide immediate guidance and information . . . and to permit the amendment to be implemented during the month of April," normal rulemaking procedures would be "impracticable" and "good cause" existed for making the amendment effective in less than thirty days. Id.

 Subsequently, according to the agency, an "ambiguity" became apparent in the Regulations. 39 Fed. Reg. 32307 (September 5, 1974). The ambiguity, the agency stated, could be best understood by reference to a "fundamental" tenent of the Regulations, namely, the "equal application of increased product costs among classes of purchaser." Id. As the agency related:

 
The concept of preserving the customary price differentials that existed as of May 15, 1973 among various classes of purchaser of a particular covered product is fundamental to the . . . system of price regulations, and has been expressed in various . . . rules. Under the refiners' price rules, for example, a formula is provided for determining a uniform cents per gallon increment of increased product cost which may be applied to the May 15, 1973 selling price to each class of purchaser, in order to determine the base price for that product to that class of purchaser. The base price is the maximum lawful price for the sale of that product to that class of purchaser. The intent of this regulatory framework was to preserve the 'customary price differentials' between purchasers, which, in fact, serve to define 'class of purchaser' in § 212.31, by requiring the application of equal amounts of increased product costs to the May 15, 1973 selling price to each class of purchaser.

 Id. While observing that, "in general, these regulations have resulted in the equal application of increased product costs among classes of purchaser," the agency cited an "ambiguity" in the Regulations, which was that "sellers are not specifically required actually to charge the prices arrived at under the regulations." Id. The agency then specified the problem:

 
As an improved supply situation has begun to have a restraining influence on prices, the [agency] has become aware that certain sellers have taken the position that they may selectively 'bank' increased product costs as to certain classes of purchaser, for recoupment in a subsequent month, as long as the prices charged to other classes of purchaser do not exceed the maximum lawful price. Such practices could obviously serve to avoid the intent of the overall framework of the price regulations, and the [agency] is undertaking to insure that these pricing practices are not put into effect.

 Id.

 To remedy this perceived situation, the agency, on September 5, 1974, published an amendment to its cost bank rule regarding the banking of increased "product" costs, effective September 1, 1974. The purposes of the amendment, which issued without a prior opportunity for public comment, were

 
to clarify and make explicit the requirement that prices charged for each covered product must reflect the equal application of increased product costs to each class of purchaser, and that failure to charge prices that reflect equal application of increased product costs except to the extent the seller is precluded from charging such prices by the price term of a contract . . . will result in unrecouped increased product costs which the seller will not be permitted to recover in a subsequent month.
 
* * *
 
[to put] all sellers . . . expressly on notice that prices actually charged, and not merely prices calculated as a lawful maximum, must reflect the equal application of increased product costs, except where a pre-existing contract prevents the implementation of such a price.

 Id. at 32306-07. As amended, the cost bank rule for special products now included an explicit equal application rule, with a deemed recovery component, and ...


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