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HYDROCARBON TRADING & TRANSP. CO. v. EXXON CORP.

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK


August 25, 1983

HYDROCARBON TRADING AND TRANSPORT COMPANY, INC., Plaintiff, against EXXON CORPORATION, Defendant.

The opinion of the court was delivered by: SPRIZZO

OPINION & ORDER

Plaintiff, Hydorcarbon Trading and Transport Company, Inc. ("HTT"), an independent distributor of petroleum products, commenced this action against Exxon Corporation ("Exxon"), a producer, refiner and distributor of petroleum products, alleging that Exxon violated The Economic Stabilization Act of 1970, 12 U.S.C. § 1904, as incorporated into 15 U.S.C. § 753 (1976 & Supp. IV 1980), by refusing to supply it with gasoline in March, April and May of 1979 and 1980.

 During the energy crisis, shortages of petroleum products caused disruption in the economy and the failure of many businesses in the petroleum industry. See H.R. Rep. No. 531, 93d Cong., 1st Sess., reprinted in 1973 U.S. Code Cong. & Ad. News, p. 2586; Conference Report 93-628, Joint Explantory Statement of the Committee of Conference, 93d Cong., 1st Sess., reprinted in 1973 U.S. Code Cong. & Ad. News, p. 2689. In an effort to deal with these problems, Congress enacted the Emergency Petroleum Allocation Act (the "EPAA"), 15 U.S.C. §§ 751-760, which required the President, inter alia, to promulgate regulations to insure the equitable distribution of petroleum products and to preserve the competitive viability of nonbranded, independent marketers. 15 U.S.C. § 753(b)(1)(D) and (F); see H.R. Rep. No. 531, 93d Cong. 1st Sess., reprinted in 1973 U.S. Code Cong. & Ad. News, p. 2586. *fn1"

 The Mandatory Petroleum Allocation Regulations, 10 C.F.R. Parts 211 and 212 ("MPAR"), sought to achieve these goals by (1) requiring suppliers to distribute their supplies of allocated products in accordance with distribution patterns as they existed during a base period as defined in the regulations; and (2) controlling the maximum lawful price which suppliers could charge for regulated products. *fn2" Three sections of the regulatory scheme are pertinent to an understanding of the issues here. The first is section 211.9(a) which contains the obligation to supply. That regulation provides:

 Supplier/wholesale purchaser relationship:

 (1) Each supplier of an allocated product shall supply all wholesale purchaser-resellers and all wholesale purchaser-consumers which purchased or obtained that allocated product from that supplier during the base period as specified in Subparts D through K of this part.

 10 C.F.R. § 211.9(a) (1980) ("Supplier/Purchase Rule").

 The second is section 211.10 which prescribes the method of calculating the volume of product a supplier is obligated to furnish. That regulation provides, in essence, that a supplier's base period obligation for a particular allocated product equals the total of its purchasers' base period volumes, i.e., the volumes of allocated product purchased or obtained during the appropriate base period ("Base Period Volume"). *fn3" See 10 C.F.R. § 211.10 (1980). However, Base Period Volume does not include amounts of allocated product which have been obtained pursuant to in kind exchange agreements involving the same product, except to the extent that amounts received under such exchange agreements exceed amounts supplied under those agreements. 10 C.F.R. § 211.1010(b)(2)(ii) (1980). *fn4"

 Finally, section 212.83 provides that the maximum lawful price a supplier may charge for an allocated product is the sum of (i) the average May 15, 1973 selling price to the class of purchaser to which the customer belongs; (ii) permissible product cost increases; and (iii) permissible operating cost increases ("Maximum Lawful Price"). 10 C.F.R.§ 212.83 (1980).

 In March and April of 1978, HTT and Exxon entered into three separate product exchange agreements, each of which obligated Exxon to supply HTT with 100,000 barrels of motor gasoline in exchange for HTT's supplying Exxon with 100,000 barrels of No. 2 fuel oil plus cash quality differential. Exhibits A, B and C to the Affidavit of Robert S. Bramlett sworn to on December 12, 1980 ("Bramlett Affidavit"). All three exchange agreements were performed according to their terms between March and June of 1978.

 At the time that the parties entered into and performed their exchange agreements, the base period for the allocation of motor gasoline was 1972. In 1979, however, the base period was changed so as to include the months of March through June of 1978. 44 Fed. Reg. 11,202 (February 28, 1979); 44 Fed. Reg. 42,549 (July 19, 1979). On February 28, 1979, HTT sent a telegram to Exxon advising Exxon that since transactions had occurred during the March 1978 base period, it would require its allocation for March 1979. HTT also requested information about the volume of gasoline which would be available as well as the price therefor. See Exhibit D to Bramlett Affidavit.

 Exxon responded by advising HTT that it would not supply the gasoline requested because in its view exchange transactions did not create supply obligations under the MPAR. See Affidavit of Donald A. Campbell, sworn to May 14, 1981 at paras. 8, 9 ("Campbell Affidavit"), Exhibit B to Affidavits in Support of Defendant Exxon Corporation's Memorandum in Opposition to Plaintiff's Motion for Partial Summary Judgment ("Defendant's Affidavits in Support"); Exhibit E to Bramlett Affidavit. HTT made similar demands for product on various occasions in 1979 and in 1980. Bramlett Affidavit at para. 8; Letter from Donald Craven to the Court, dated May 3, 1983 at 2.

 Although on each occasion when product was requested Exxon had responded by declining to provide gasoline, in 1980 it advised HTT that, if HTT had pressing supply problems, it would consider supplying gasoline in exchange for heating oil and an appropriate cost differential. Campbell Affidavit at para. 9. HTT replied that it would consider furnishing heating oil, but only at the 1978 quality differential. Id. The parties never reached agreement and no gasoline was furnished. Thereafter, HTT sought the assistance of the Department of Energy. *fn5" This action for damages was commenced on May 1, 1980.

 Plaintiff moves for partial summary judgment declaring that the MPAR obligated Exxon to supply it with gasoline in 1979 and 1980. In support of its motion, plaintiff argues (1) that the Supplier/Purchaser Rule, by its terms, clearly encompasses exchange agreements; (2) that the regulatory scheme supports that construction; and (3) that the Court should accord considerable weight to the administrative decisions which unanimously hold that exchange transactions create supply obligations.

 Exxon argues that the Supplier/Purchaser Rule was not intended to apply to exchange transactions and that the regulatory scheme as a whole compels that conclusion. Exxon further argues that the agency interpretations upon which HTT relies are not entitled to deference because they are both belated and inconsistent with the agency's contemporaneous construction of the rule. For the reasons which follow, plaintiff's motion is granted.

 The Supplier/Purchaser Rule obligates a supplier to supply a customer with product if that customer has "purchased or obtained" that product from that supplier during the base period. 10 C.F.R. § 211.9(a). Two inferences can fairly be drawn from the face of the rule. First, since the words "or obtained" appear, it is clear that the regulation was intended to encompass transactions other than cash purchases. Moreover, since "obtain" means to gain or attain, the word "obtain" is clearly broad enough to encompass exchange transactions, such as those at issue where HTT obtained title to the product. See id.; Pester Refining Co., 4 DOE P80,164 (1979).

 Exxon's argument that the Supplier/Purchaser Rule does not apply to dissimilar product exchange transactions must be rejected. *fn6" Not only has Exxon failed to proffer any authority in support of that proposition but the authority that does exist is to the contrary. *fn7" The administrative interpretations have consistently held that unlike product exchanges such as those at issue are subject to the supply allocation regulations. See, e.g., Interpretation 1981-14, 46 Fed. Reg. 27,. 198 (May 18, 1981) ("Northville Interpretation"); Interpretation 1980-39, 45 Fed. Reg. 76,045 (November 17, 1980) ("Amoco Interpretation"). Moreover, since the parties clearly intended to pass title to the products exchanged, there can be no merit to Exxon's claim that what would otherwise clearly be a sale should not be so regarded merely because the parties may have entered into the transaction to relieve short term operational problems. See Memorandum in Opposition to Plaintiff's Motion for Partial Summary Judgment at 18-20.

 Furthermore, other provisions in the regulatory scheme also support the conclusion that Exxon was obligated to supply product to HTT in this case. For example, the definitions of "supplier" and "wholesale purchaser-reseller" are clearly broad enough to encompass exchange partners. *fn8" Even more significantly, 10 C.F.R. § 211.10(b)(2)(ii) expressly excludes from a purchaser's Base Period Volume product obtained through an exchange of equal volumes of the same product. The fact that equal volume exchanges of the same product were specifically excluded affords a strong inference that dissimilar exchanges which were not so excluded are part of the Purchaser's Base Period Volume and are consequently part of the supplier's base period obligation.

 Exxon also relies on sections 211.223 and 211.25(b) which provide as follows:

 211.23. Nothing in this part is intended to exclude or supersede exchange or borrow/payback operations which are normal operating procedures provided these procedures are not used to circumvent the intent of this part.

 10 C.F.R. § 211.23 (1980).

 211.25(b). In order to alleviate imbalances, suppliers may make normal business exchanges among themselves.

 10 C.F.R. § 211.25(b) (1980).

 This reliance is misplaced. While these regulations do encourage suppliers to enter into exchanges, they do not purport to insulate them from the supply obligations which may arise therefrom. See Northville Interpretation, 46 Fed. Reg. 27,298; Amoco Interpretation, 45 Fed. Reg. 76,045. Moreover, even assuming arguendo that these regulations could be construed as exempting exchange transactions from the Supplier/Purchaser Rule, these regulations so construed would be in conflict with section 211.9(a). That conflict would have to be resolved in favor of section 211.9(a). The regulations specifically provide that, where there is an inconsistency between a subpart F provision, wherein section 211.9(a) is contained, and a subpart A provision, such as sections 211.23 and 211.25(b), the provisions of subpart F shall prevail. 10 C.F.R. § 211.101(a) (1980).

 Finally, imposing supply obligations on exchange transactions is consistent with the objectives of the statutory scheme, to wit, insuring the equitable distribution of product and preserving the competitive viability of independent marketers. See 15 U.S.C. § 753(b)(1)(D) and (F). Exchanges are a common method of distributing product in the petroleum industry. Affidavit of J. Roger Chenoweth, sworn to on May 6, 1981, at para. 3, Exhibit C to Defendant's Affidavits in Support; Plaintiff's Memorandum of Law in Support of its Motion for Summary Judgment at 4. Indeed, as much as thirty-six percent of a purchaser-supplier's monthly supply of product can come from such agreements. Bramlett Affidavit at para. 7. If such large volumes of product were excluded from Base Period Volume, base period distribution patterns would be distorted and purchaser-suppliers would experience shortages which could both jeopardize their ability to compete and adversely impact their customers' ability to obtain product. By imposing supply obligations on dissimilar exchanges these consequences are avoided. See Amoco Interpretation, 45 Fed. Reg. 76,045; see also Ruling 1974-25, 39 Fed. Reg. 32,091 (September 12, 1974).

 Finally, every branch of the Department of Energy which has considered the question has concluded that exchange agreements create supply obligations. The Office of the General Counsel of the Department of Energy, which is responsible for interpreting the MPAR, has issued an interpretation which concludes that an exchange of gasoline for No. 2 heating oil creates a mandatory supplier/purchaser relationship. Northville Interpretation, 46 Fed. Reg. 27,298; Amoco Interpretation, 45 Fed. Reg. 76,045. Further, the Economic Regulatory Administration, which is charged with promulgating the MPAR, rejected a request by Chevron, U.S.A., Inc. to amend the MPAR so as to provide that exchanges would be exempt from the Supplier/Purchaser Rule unless the parties agreed in writing that the transaction created purchase rights and supply obligations. Letter to Paul M. Premo, Chevron, U.S.A., Inc. from F. Scott Bush, Assistant Administrator, Regulations and Emergency Planning, Economic Regulatory Administration, dated July 31, 1980, Exhibit C to Index of Authorities in Support of Plaintiff's Memorandum of Law in Support of its Motion for [Partial] Summary Judgment (hereinafter "Plaintiff's Index of Authorities"); Letter to Office of General Counsel of DOE from Paul M. Premo, Chevron, U.S.A., Inc., dated June 3, 1980, Exhibit D to Plaintiff's Index of Authorities. *fn9" Moreover, the Office of Hearings and Appeals, the adjudicative branch of the Department of Energy ("DOE"), also has indicated that exchanges create supply obligations when title to product is transferred. See Time Oil Co., 1 FEA P20,701 (1974); see also Pester Refining Co., 4 DOE 80,164 (1979); Ruling 1974-21, 39 Fed. Reg. 24, 359 (July 2, 1974).

 Exxon contends, however, that the Northville and Amoco Interpretations are not entitled to deference both because they were rendered more than six years after the promulgation of section 211.9 and because they are inconsistent with the agency's contemporaneous and long-standing practical construction of the regulation. In support of its contention Exxon has proffered the affidavit of Robert K. Huffman, which affidavit states that the affiant had several telephone conversations with Gordon W. Allott, Jr., a former Regional Counsel of the Federal Energy Office ("FEO"), a predecessor of the DOE, who told him that, on at least one occasion in 1974, a senior official of the FEO's Office of General Counsel, David Wilson, told him that the amendments to the MPAR should not be drafted so as to impose supply obligations as a result of product exchanges during the base period. The affidavit further asserts that Mr. Allott advised the affiant that, while acting as Regional Counsel, he consistently took the position that the MPAR did not impose supply obligations arising out of product exchanges during the base period. *fn10" Affidavit of Robert K. Huffman, sworn to February 12, 1982, at para. 2, Exhibit A to Affidavits in Support of Defendant Exxon Corporation's Supplemental Memorandum in Opposition to Plaintiff's Motion for Partial Summary Judgment ("Defendant's Affidavits in Support of Supplemental Memorandum").

 Exxon also has submitted the affidavits of Gary Gisser, Executive Vice President of Supreme Petroleum Corporation, and Kerry R. Brittain, Attorney for Union Pacific Corporation, which affidavits state that the affiants were advised by DOE officials that "the allocation regulations did not impose supply obligations on account of product exchanges during the base period." Exhibits B and C to Defendant's Affidavits in Support of Supplemental Memorandum. Finally, Exxon also has proffered the affidavits of other industry members, which affidavits state, inter alia, (1) that the regulations were consistently understood as not applying to like or unlike product exchanges of equal volumes; (2) that all such exchanges that occurred during the base period were excluded in determining the Supplier's supply obligations; (3) that the DOE and its predecessor agencies, the Federal Energy Administration and the FEO, audited the company's compliance with the MPAR; and (4) that at no time did the agency's auditors take issue with the company's treatment of product exchanges or inform the company that unlike product exchange gave rise to supply obligations. E.g., Affidavit of Larry C. Ross, sworn to May 5, 1981, Exhibit F to Defendant's Affidavits in Support. This argument lacks merit.

 Agency interpretations are entitled to deference provided that they constitute a reasonable construction of the regulation and are not inconsistent with other regulations and rulings by the agency. *fn11" UPG, Inc. v. Edwards, 647 F.2d 147 (Temp. Emer. Ct. App. 1981). For the reasons previously stated, the Court finds that the Northville and Amoco Interpretations are entirely consistent with the MPAR and the enabling statute and are not plainly erroneous. Moreover, they are consistent with other regulations and with the agency's prior rulings. See, e.g., 10 C.F.R. §§ 211.51, 211.10(b)(2)(ii), 211.23, 211.25; Pester Refining Co., 4 DOE P80,164 (1979); Time Oil Co., 1 FEA P20,701 (1974).

 The Court is not persuaded that Exxon's submissions have established that the DOE ever took a position contrary to that expressed in the Northville and Amoco Interpretations. None of the affidavits submitted by Exxon states that any DOE employee ever told anyone that unlike product exchanges do not give rise to supply obligations. Indeed, when Messrs. Gisser and Brittain were asked by HTT whether the allegedly inconsistent statements were made with reference to a like or unlike product exchange, each affiant stated that, while he could not recall, he believed that it was "probably" a like product exchange. See Affidavit of John B. Williams, sworn to March 16, 1982. Since like product exchanges are specifically excluded by the allocation regulations, these affidavits are essentially irrelevant.

 Moreover, the fact that other industry members did not treat unlike exchanges as giving rise to supply obligations is also irrelevant in the absence of evidence that those understandings resulted from advise given by the DOE. That evidence does not exist. Accordingly, the Court concludes that the Northville and Amoco Interpretations are entitled to deference. *fn12" See Zenith Radio Corp. v. United States, 437 U.S. 443, 57 L. Ed. 2d 337, 98 S. Ct. 2441 (1978); Pennzoil Co. v. United States Department of Energy, 680 F.2d 156 (Temp. Emer. Ct. App. 1982); UPG, Inc. v. Edwards, 647 F.2d 147 (Temp. Emer. Ct. App. 1981). Since the objectives of the enabling statute, the regulations and the administrative decisions all compel the conclusion that exchanges create supply obligations, the Court holds that HTT obtained product within the meaning of the Supplier/Purchaser Rule when it received gasoline from Exxon in 1978.

 Exxon next argues that, to the extent that section 211.9 encompasses exchanges, it is unenforceable because the DOE never gave adequate notice to members of the industry that exchanges would give rise to supply obligations and therefore deprived members of the industry of their right to comment on the proposed regulations, in violation of sections 553(b)(3) and (c) of the Administrative Procedure Act, 5 U.S.C. § 553(b)(3) and (c) (1982).

 The short answer to this claim is that Exxon itself clearly understood that the Supplier/Purchaser Rule encompassed exchange transactions. In its 1974 comments regarding the proposed revisions to the MPAR, Exxon stated, in connection with 10 C.F.R.§ 211.10(b)(2)(ii):

 Section 211.10(b)(2)(ii) states that . . . "Base period volume, however does not include any amounts of an allocated product obtained pursuant to unkindly exchange agreements involving a single product which are normal business operating procedures." This will force dissimilar product exchange agreements that were in effect between companies during the base period to be treated as mandatory buy/sell arrangements for the duration of the program. Since many dissimilar product exchanges are used simply as a means of providing spot inventory adjustments, they should not be treated as mandatory buy/sell arrangements.

 Exhibit I to Defendant's Appendix of Exhibits (emphasis added).

 In the face of these comments, Exxon may not now claim that it and others in the industry did not and could not have known that the regulations encompassed exchanges of unlike products. It follows that there is no merit to Exxon's claim that notice to the industry was inadequate. *fn13"

 Finally, Exxon contends that, assuming arguendo that the MPAR imposed a valid and enforceable obligation to supply HTT with gasoline in 1979 and 1980, it was relieved of that obligation because the price regulations required HTT to tender fuel oil in return and HTT never did so.

 It should be noted at the outset that Exxon may well be estopped from now contending that HTT's failure to tender heating oil was a condition precedent to its duty to perform. Exxon consistently took the position that exchanges did not create supply obligations and never even suggested that heating oil be tendered for the gasoline until sometime in 1980. See Ohio and Mississippi Railway Co. v. McCarthy, 96 U.S. 258, 24 L. Ed. 693 (1878); Rode and Brand v. Kamm Games, Inc., 181 F.2d 584 (2d Cir. 1950); Southwestern Electric Power Co. v. Local Union No. 738, 293 F.2d 929 (5th Cir. 1961); Holt Marine Terminal, Inc. v. United States Lines, 472 F. Supp. 487 (S.D.N.Y. 1978); Exhibit E to Bramlett Affidavit. However, the Court need not reach that issue because it is clear that Exxon's argument must be rejected on the merits.

 Section 212.83 of the MPAR defines the Maximum Lawful Price a supplier may charge for regulated produced as (i) the average May 15, 1973 selling price to the class of purchaser to which the customer belongs; and (ii) permissible increases in the supplier's product and operating costs since 1973. 10 C.F.R. § 212.83 (1980).

 A "class of purchaser" is defined as:

 Purchasers to whom a person has charged a comparable price for comparable property pursuant to customary price differentials between those purchasers and other purchasers.

 10 C.F.R. § 212.31 (1980). The term "customary price differential" means:

 [A] price distinction based on a discount, allowance, add-on, premium and an extra based on a difference in volume, grade, quality, or location or type of purchaser, or a term or condition of sale or delivery.

 Id. (emphasis added).

 Exxon contends that its price to its exchange partners reflects a customary price differential which was based on an important term or condition of sale, to wit, the return of heating oil and a quality differential. It therefore argues that the class of purchaser to which HTT belongs consists of those firms with which it exchanged gasoline for heating oil plus a quality differential on or prior to May 15, 1973. *fn14"

 Having defined the class of purchaser to which HTT belongs, Exxon next argues that, since the regulations define "price" as "any consideration for the sale of any property . . . regardless of form," and since the return of heating oil and a quality differential was the consideration for the gasoline exchanged on May 15, 1973, its May 15th base price for the gasoline is an equal volume of heating oil and the May 1973 quality differential. Id. Accordingly, it concludes that since it was entitled to charge HTT its May 15, 1973 base price plus its permissible product and non-product cost increases, and since HTT failed to tender heating oil in return for the gasoline, HTT failed to pay Exxon's Maximum Lawful Price, thus relieving it of any obligation to perform. *fn15"

 This argument distorts the regulatory scheme. Part 211 of the MPAR governs the allocation of petroleum products. Part 212 governs the Maximum Lawful Price a supplier can charge for a regulated product. It is undisputed that, at the time of the exchanges in 1978, No. 2 heating oil was not subject to the allocation regulations. Accordingly, HTTR was under no obligation to continue to supply Exxon pursuant to Part 211. however, under Exxon's view of the price regulations, HTT was required to recreate the exchange each time it demanded its supply of allocated product, a construction which, of necessity, would impose a supply obligation on HTT that would not otherwise exist under Part 211. The Court concludes that it would not be consistent with the statutory scheme to construe the pricing regulations so as to impose supply obligations.

 This holding is consistent with analogous agency interpretations. Although there are no administrative decisions directly on point, DOE interpretations of the supplier/purchaser rules for both refined products and crude oil support the conclusion that exchanges need not be recreated. See, e.g., Northville Interpretation, 46 Fed. Reg. 27,298; Amoco Interpretation, 45 Fed. Reg. 76,045; Ruling 1974-21, 39 Fed. Reg. 24,359 (July 2, 1974); U.S.A. Petroleum Corp., 5 FEA P80,555 (1977); Crystal Oil Co., 3 FEA P80,514 (1975). Exxon's reliance on Interpretation 1974-2 is misplaced since, to the extent that that interpretation holds that a non-allocated product must be supplied in return for an allocated product, it appears to have been overruled. See Ruling 1974-21, 39 Fed. Reg. 24,359 (July 2, 1974); see also U.S.A. Petroleum Corp., 5 FEA P80,555 (1977); Crystal Oil Co., 3 FEA P80,514 (1975).

 Finally, Exxon itself identified another compelling reason for rejecting the argument that the price regulations mandate the return of heating oil, to wit, that the forced recreation of exchanges at a time when the circumstances prompting their making no longer exist would undermine the goals of the MPAR. Exxon's Memorandum in Opposition to Plaintiff's Motion for Partial Summary Judgment at 32-35. Under Exxon's theory of the price regulations, HTT would not have been entitled to its allocation of gasoline if it could not have tendered heating oil to Exxon. Thus, if HTT were short on heating oil in March, April and May of 1979 and 1980, it could not have purchased its allocation of gasoline for cash even though the Supplier/Purchaser Rule entitled it to an allocation. This would clearly impair the value of HTT's supply allocation right and would vitiate the protection that the MPAR was designed to afford. Moreover, under this view, Exxon would have been required to accept heating oil in consideration of the gasoline even though it might have had no need for the heating oil or no refining capacity available at that time.

 Accordingly, plaintiff's motion for partial summary judgment is granted.

 It is SO ORDERED.


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