Cities Service Co. v. FEA

• Decision Date: 31 December 1975
• Docket Number: No. DC-34.,DC-34.
• Citation: 529 F.2d 1016
• Parties: CITIES SERVICE COMPANY and Cities Service Oil Company, Plaintiffs-Appellants, Gulf Oil Corporation et al., Amici Curiae, v. FEDERAL ENERGY ADMINISTRATION and Frank G. Zarb, Defendants-Appellees, and Ashland Oil, Inc., Amicus Curiae.
• Court: U.S. Temporary Emergency Court of Appeals Court of Appeals

529 F.2d 1016

CITIES SERVICE COMPANY and Cities Service Oil Company, Plaintiffs-Appellants Gulf Oil Corporation et al., Amici Curiae, v. FEDERAL ENERGY ADMINISTRATION and Frank G. Zarb, Defendants-Appellees, and Ashland Oil, Inc., Amicus Curiae.

No. DC-34.

Temporary Emergency Court of Appeals.

December 31, 1975.

COPYRIGHT MATERIAL OMITTED

Paul A. Lenzini, with whom Lawrence I. Abrams and Carl W. Ulrich, Chapman, Duff & Lenzini, Washington, D. C., and Charles V. Wheeler and Jack W. Wertz, Cities Service Oil Co., Tulsa, Okl., were on the brief for plaintiffs-appellants.

Jesse P. Luton, Jr., with whom Catherine C. McCulley, Gulf Oil Corp., Houston, Tex., were on the brief as amicus curiae Gulf Oil Corp.

William H. Allen, with whom John A. Hodges, Covington & Burling, Washington, D. C., and Robert L. Norris, Jr., Exxon Corp., Houston, Tex., were on the brief as amicus curiae Exxon Corp.

George Blow, with whom John Oberdorfer and Gail F. Borden, Patton, Boggs & Blow, Washington, D. C., and Kent B. Hampton, Marathon Oil Co., Findlay, Ohio, and Ralph S. Spritzer, Philadelphia, Pa., of counsel, were on the brief as amicus curiae Marathon Oil Co.

Ray B. Williamson, Shank, Irwin, Conant, Williamson & Grevelle, Dallas, Tex., on the brief as amicus curiae Hunt Oil Co.

Patricia N. Blair, Dept. of Justice, with whom Rex E. Lee, Asst. Atty. Gen., and Stanley D. Rose, Washington, D. C., were on the brief for defendants-appellees.

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

Before CHRISTENSEN, ESTES and JOHNSON, Judges.

ESTES, Judge.

This suit was commenced in the United States District Court for the District of Columbia by Cities Service Company and its wholly-owned subsidiary Cities Service Oil Company (Cities Service), plaintiffs-appellants, to obtain injunctive relief from all or part of their purchase obligations under the Old Oil Entitlements Program,¹ 10 CFR § 211.67 (Entitlements Program), 39 FR 42,246 (Dec. 4, 1974), and a declaratory judgment that the actions of the Federal Energy Administration,² et al. (FEA), defendants-appellees, in promulgating the Entitlements Program were unlawful on the grounds that such actions were: in excess of the agency's statutory authority; arbitrary, capricious, and an abuse of discretion; not in accordance with the governing statute; and an unconstitutional burden on the plaintiffs.³

Cities Service based these contentions on its allegations that the program fails to physically allocate any crude oil or set the prices for such oil; that Cities Service is unable to pass through its increased costs under the program on a dollar-for-dollar basis as mandated by section 4(b)(2)(A) of the Emergency Petroleum Allocation Act of 1973, 87 Stat. 628, as amended, 15 U.S.C. § 753(b)(2)(A) (1975 Supp.); that the classification of buyers and sellers under the program lacks a rational basis; the program causes further market distortions; that the small refiner bias is arbitrary and capricious; that under the program Cities Service is required to make cash payments to its refiner-competitors which is not mandated by the Allocation Act and constitutes an unconstitutional taking of property for private purposes without just compensation prohibited by the Fifth Amendment, and that the program is an unconstitutional tax prohibited by Article I, Sec. 8, cl. 1 of the Constitution.

On July 10, 1975, the district court consolidated the hearing on plaintiffs' motion for a preliminary injunction with a plenary hearing on the merits; denied the plaintiffs injunctive relief; refused to certify plaintiffs' constitutional claims, finding them insubstantial and without merit;⁴ and entered judgment for the defendants. Cities Service Company et al. v. F.E.A. et al. (D.D.C. CA No. 75-653, July 10, 1975), 3 CCH Energy Management ¶ 26,024. Most of plaintiffs' contentions were rejected by the district court for the reasons three district courts had held that FEA's Entitlements program was authorized by the governing statute and the constitutional questions presented were without merit. Exxon Oil Company v. F.E.A. (D.N.J. CA No. 75-150, Jan. 30, 1975), dismissed for lack of jurisdiction, 516 F.2d 1397 (Em.App.1975), 3 CCH Energy Management ¶ 26,019; Marathon Oil Co. v. F.E.A. (N.D.Ohio CA No. 75-36, Jan. 31, 1975), 3 CCH Energy Management ¶ 26,-015, dismissed for lack of jurisdiction, 516 F.2d 1397 (Em.App.1975), 3 CCH Energy Management ¶ 26,019; Gulf Oil Corporation v. F.E.A., 391 F.Supp. 856 (W.D.Pa.1975), 3 CCH Energy Management ¶ 26,014, dismissed for lack of jurisdiction, 521 F.2d 810 (Em.App.1975). Notice of appeal was filed in this court by Cities Service on July 18, 1975.

Exxon, Marathon, and Gulf, respectively, have filed briefs in support of Cities Service's position.

Cities Service is an integrated petroleum company engaged in producing, transporting, refining, purchasing, and selling crude oil and petroleum products. A high proportion of the crude oil Cities Service refines is its own "old" oil production, i. e., crude oil the price of which is controlled by the FEA at approximately $5.25 under the two-tier price system, 10 CFR § 212.73.⁵ The two-tier price system was upheld by this court in a comprehensive opinion discussing the validity and effects of the system in Consumers Union v. Sawhill, 525 F.2d 1068, rehearing en bane (1975), 3 CCH Energy Management ¶ 26,011, vacating 512 F.2d 1112 (Em.App.1975).

The two-tier price system effectively minimized the inflationary impact of rising world-wide oil prices and provided necessary incentives for increased domestic production. However, with the end of the Arab oil embargo and emergence of adequate crude oil supplies, the in-put cost of crude oil to refiners assumed crucial significance. Consumers could buy gasoline from stations with the lowest prices, rather than from stations with the shortest waiting lines. Thus, the great disparity between the price of controlled and uncontrolled crude oil was having an unequal impact on all refiners⁶ and, contrary to other objectives of the Allocation Act, contained in section 4(b)(1)(A)-(I), economic distortions, interference with the competitive viability of the small and independent sectors of the petroleum industry, and inequitable prices to consumers developed in certain areas of the country under the two-tier system due to the varying reliance of the geographic region in which they made gasoline and petroleum product purchases on uncontrolled domestic and imported oil.

Seeking to remedy this situation without losing the beneficial aspects of the two-tier price system, the FEA promulgated the Entitlements Program.⁷ The basic purpose of the Entitlements Program was to spread the benefit of access to old price-controlled oil and the burden of dependence on uncontrolled oil among all sectors of the petroleum industry, all regions of the country, and among all consumers of petroleum products,⁸ while retaining the incentives for increased production and anti-inflationary measures which the two-tier price system provided.

The Entitlements Program essentially requires petroleum refiners to shift their over-all reliance on controlled or uncontrolled oil to a more balanced position among all the refiners. A refiner must, under the Entitlements Program, have one entitlement for each barrel of old oil which it refines during any month. The FEA issues a certain number of entitlements to each refiner each month, based on that refiner's proportionate share of all old oil refined on a nation-wide basis, adjusted somewhat by the small refiner bias.⁹ The program thus commenced on the premise that all refiners should be including an equal proportionate share of price-controlled oil in their refinery runs each month.

Entitlement purchase obligations are imposed on a refinery when, on the basis of information supplied to the FEA, it has been determined that the refiner was running more old oil as a percentage of its total crude oil refinery runs than the national average and consequently does not have sufficient entitlements for all of the old oil it has refined during that month. Those refiners with less old oil in their refinery runs than the national average would receive more entitlements than necessary for compliance, which they may sell to those refiners which have purchase obligations under the regulations. Thus,

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.

Pasco, Inc. v. F.E.A., 525 F.2d 1391 at p. 1395 (Em.App.1975), 3 CCH Energy Management ¶ 26,031 at p. 26,252, rev'g (D.Wy.Dkt. No. C75-91, Aug. 27, 1975), 3 CCH Energy Management ¶ 26,025.

Cities Service contends on this appeal that the Entitlements Program is not authorized by the Allocation Act and is not within the FEA's authority to allocate and specify prices for crude oil, residual fuel oil and refined petroleum products. This contention is based upon Cities Service's misinterpretation of Section 4(a) of the Allocation Act and a disregard of the objectives, set forth by Congress in Section 4(b), which the regulations promulgated under Section 4(a) are to achieve "to the maximum extent practicable." Cities Service contends that the objectives of Section 4(b) set forth goals to be accomplished by regulations promulgated under the Allocation Act, but that those goals do not delegate any power or authority to the FEA independent of that authority contained in Section 4(a). It asserts that statutory goals such...