Pasco, Inc. v. Federal Energy Administration

• Decision Date: 14 October 1975
• Docket Number: No. 10-7.,10-7.
• Parties: PASCO, INC., Plaintiff-Appellee, v. FEDERAL ENERGY ADMINISTRATION, an agency of the United States, and Frank G. Zarb, Administrator, Federal Energy Administration, Defendants-Appellants.
• Court: U.S. Temporary Emergency Court of Appeals Court of Appeals

525 F.2d 1391

PASCO, INC., Plaintiff-Appellee, v. FEDERAL ENERGY ADMINISTRATION, an agency of the United States, and Frank G. Zarb, Administrator, Federal Energy Administration, Defendants-Appellants.

No. 10-7.

Temporary Emergency Court of Appeals.

October 14, 1975.

Marvin Coan, with whom Rex E. Lee, Asst. Atty. Gen., and Stanley D. Rose, Atty., Dept. of Justice, Washington, D. C., were on the brief for appellants.

David Ginsburg, Washington, D. C., with whom Fred W. Drogula and Peter H. Rodgers, Ginsburg, Feldman & Bress, Washington, D. C., and Arlo W. Mayne, Ashland, Ky., were on the brief for the amicus curiae, Ashland Oil, Inc.

Jerry L. Shulman and Joseph Califano, Jr., Williams, Connally & Califano, Washington, D. C., Jack Speight, Hanes, Carmichael, Gage & Speight, Cheyenne, Wyo., on the brief for appellee.

Before CARTER, CHRISTENSEN and ESTES, Judges.

ESTES, Judge.

The plaintiff-appellee, Pasco, Inc., sought and obtained, in the district court, injunctive relief from enforcement of the defendants-appellants', Federal Energy Administration, et al. (FEA), Old Oil Entitlements Program, 10 C.F.R. § 211.67 (Entitlements program), 39 F.R. 42,246 (December 4, 1974), and a declaratory judgment that the Entitlements program is invalid as applied to Pasco, on the grounds that: the Entitlements program fails to exempt from entitlement purchase obligations all small refiners as defined in section 3(4) of the Emergency Petroleum Allocation Act of 1973, Pub.L. No. 93-159, 87 Stat. 628, 15 U.S.C. § 751 et seq. (1975 Supp.) (Allocation Act),¹ and similarly fails to exempt those small refiners established pursuant to federal antitrust decrees,² such failures being contrary to Congressional intent in passing the Allocation Act; the Entitlements program is arbitrary and capricious and beyond the FEA's authority, because no differentiation is made, among entitlement sellers, between those refiners running a high proportion of new, released, or stripper well oil which they produced and refiners running a high proportion of such uncontrolled oil which they purchased in the open market; the administrative modification and review of Pasco's exception application was arbitrary, capricious, and contrary to substantial evidence; and the administrative appeal process from FEA exception decisions violated the publication requirements of the Freedom of Information Act, 5 U.S.C. § 552(a)(1).

This expedited appeal is from the August 27, 1975 decision and final judgment of the United States District Court for the District of Wyoming, Cheyenne Division, which granted Pasco complete and permanent relief from its obligations, past and future, under the Entitlements program, and ordered such additional requested relief necessary for the FEA to administratively comply with the court order on an equitable basis vis a vis other participants in the program.³ The district court judgment also dismissed the counterclaim of the United States, which was seeking not only to enforce the Entitlements program as applied to Pasco, but also seeking damages for Pasco's past violations of the FEA entitlement regulation.⁴

This court has jurisdiction of FEA's appeal under section 211 of the Economic Stabilization Act of 1970, Pub.L.No. 91-379, 84 Stat. 799, as amended (Stabilization Act), 12 U.S.C. § 1904 note (1975 Supp.), as incorporated into the Allocation Act by section 5(a)(1) thereof, 15 U.S.C. § 754(a)(1) (1975 Supp.)⁵ Pasco's attack on the Entitlements regulation itself, 10 CFR § 211.67, is basically three-fold. It is contended that, contrary to Congressional intent, the FEA failed to specifically and totally exempt from all entitlement purchase obligations, first, all small refiners as defined under the Act and, second, all small refiners established pursuant to an antitrust decree. In addition, Pasco contends and the District Court held that the entire Entitlements program is arbitrary, capricious, and beyond the agency's authority, for the reason that no differentiation is made between producer-refiners and purchaser-refiners; that is, the regulation does not distinguish, in providing for the issuance of entitlements, between those refiners running low proportions of old oil due to their own high production of new, released, and stripper well oil and those refiners running low proportions of old oil due to their purchases of such new, released, and stripper well oil on the open market.

The Allocation Act was enacted by Congress to authorize the President to deal with the present or threatened severe economic hardships caused by shortages of imported and domestically produced crude oil, all of which constituted a "national energy crisis" and a threat to the public health, safety, and welfare. It was the express intent of Congress that the President be granted "full flexibility in devising the most effective and efficient means of meeting the priority needs of the American people identified in section 4(b)." H.R.Conf.Rep.No.93-628, U.S.Code Cong. & Ad.News, 93d Cong., 1st Sess., pp. 2688, 2689 (1973).

In reviewing the exercise of that authority, it must be remembered that the "exercising of the administrative authority and the accomplishment of purposes enumerated by Congress under the recognized emergency conditions are exceedingly complicated undertakings." Condor Operating Company v. Sawhill, 514 F.2d 351, 359 (Em.App.1975), cert. denied, 421 U.S. 976, 95 S.Ct. 1975, 44 L.Ed.2d 467 (1975). The broad mandate for the equitable allocation of crude oil at equitable prices combined with the rapid rise in world oil prices left the FEA with a "gargantuan task."⁶ As stated in Condor Operating Company v. Sawhill, supra, at p. 359:

The urgency of the challenge confronting the agency upon the passage of the Emergency Petroleum Allocation Act already has been recognized. Reeves v. Simon, 507 F.2d 455 (Em. App.1974); People of State of California, State Lands Com'n v. Simon, 504 F.2d 430 (Em.App.1974); Mandel v. Simon, 493 F.2d 1239 (Em.App.1974).

To minimize the inflationary impact of world-wide oil prices and at the same time to provide an incentive for increased domestic production of crude oil, the "two-tier" pricing system for crude oil was promulgated.⁷ The "two-tier" pricing system basically imposes a ceiling price of approximately $5.25 per barrel on all "old" oil and allows new and released oil to be sold without respect to the ceiling price, i. e., at approximately $11.28 per barrel.⁸ The FEA found, however, that while the "two-tier" system met certain necessary objectives, the great disparity between the price of controlled and uncontrolled crude oil was having an unequal impact on all refiners. During the base period of May, 1973, composite crude oil costs of all refiners were approximately equal; however, with the pricing system in effect, the major integrated oil companies, who as a class had far greater access to old oil, had significantly lower composite crude oil costs in refining their products than did the small and independent refiners.

To insure that all refiners and marketers shared equally in the benefits of price-controlled crude oil and the burdens of uncontrolled crude oil, the FEA adopted the Entitlements program. Under this program, a refiner must have one "entitlement" for each barrel of old oil it refines during a particular month. All refiners are initially issued for each month an amount of entitlements equal to their proportionate share of the old oil refined during the month on a nationwide basis. Thus, a refiner running more old oil as a percentage of its total refinery runs than the national average would have to buy additional entitlements from a refiner which ran a smaller percentage of old oil during the month than the national average. The national ratio of old oil runs to total refinery runs is lowered somewhat by the issuance of additional entitlements to small refiners under the "small refiner bias" built into the regulation⁹ and to certain eligible firms which import residual fuel oil and home heating oil. By requiring refiners and importers who sell entitlements to reduce their crude oil or product costs by the amount of the entitlement sales proceeds, and allowing a purchaser of entitlements to include the cost of entitlements in its crude oil costs, the FEA basically equalized the average weighted crude oil costs of all refiners, thereby eliminating the inequities caused by the "two-tier" pricing system.¹⁰

The small refiners, as a class, were by no means overlooked in the promulgation of the Entitlements program. The notice of proposed rulemaking published by the FEA, setting forth the tentative form of the Entitlements regulation, contained a small refiner bias which was subsequently increased and adopted as a part of the final rule.¹¹ In addition to the number of entitlements a small refiner would otherwise receive for a particular month under the program, the small refiner bias provides additional entitlements to small refiners for each day of that month in an amount equal to a designated percentage of its average daily volume of crude oil runs to stills, with the percentage basis becoming greater as crude oil runs to stills become smaller. Further, an emergency amendment to the entitlements regulation, Special Rule No. 3, was issued by the FEA to provide small refiners with special relief in the form of a graduated phase-in of the program.¹²

The FEA recognized that immediate imposition of the full entitlement purchase requirements of the program could have a severe short-term economic impact on certain small refiners with a high proportion of old oil in their crude oil runs to stills as compared with the national old oil ratio, and that a special rule which would allow these refiners time to arrange any necessary financing or restructuring of their marketing operations was necessary. For the same reasons, the first phase of Special Rule No. 3 was subsequently extended to runs in ...