Koch Refining Co. v. US Dept. of Energy

• Decision Date: 21 August 1981
• Docket Number: 8-11.,No. 8-10,8-10
• Citation: 658 F.2d 799
• Parties: KOCH REFINING COMPANY, Ashland Oil, Inc., and State of Minnesota, Plaintiffs-Appellees, v. UNITED STATES DEPARTMENT OF ENERGY, and Mobil, Oil Corporation, Defendants-Appellants.
• Court: U.S. Temporary Emergency Court of Appeals Court of Appeals

658 F.2d 799

KOCH REFINING COMPANY, Ashland Oil, Inc., and State of Minnesota, Plaintiffs-Appellees, v. UNITED STATES DEPARTMENT OF ENERGY, and Mobil, Oil Corporation, Defendants-Appellants.

Nos. 8-10, 8-11.

Temporary Emergency Court of Appeals.

Argued June 30, 1981.

Decided August 21, 1981.

Thomas A. Schweitzer, Dept. of Energy, Washington, D. C., with whom Nancy C. Crisman and Paul G. Wallach, Washington, D. C., were on the brief, for appellant Dept. of Energy.

Michael J. Madigan, Akin, Gump, Strauss, Hauer & Feld, Washington, D. C., with whom Edward L. Rubinoff and David A. Holzworth, Washington, D. C., and William C. Streets, Fairfax, Va., and Warren H. Greene, Jr., New York City, of counsel, were on the brief for appellant Mobil Oil Corp.

James Hamilton, Ginsburg, Feldman, Weil & Bress, Washington, D. C., Joe A. Walters, O'Connor & Hannan, Minneapolis, Minn., with whom William E. Flynn, Minneapolis, Minn., James B. Loken and John F. Beukema, Faegre & Benson, Minneapolis, Minn., and John Dee Roper, Koch Refining Co., Wichita, Kan., and Robert H. Compton, Ashland Petroleum Co., Ashland, Ky. of counsel, were on the brief for appellees Koch Refining Co. and Ashland Oil, Inc.

Dwight S. Wagenius, William P. Donohue, and James Lackner, Sp. Asst. Attys. Gen., and Warren R. Spannaus, Atty. Gen., St. Paul, Minn., were on the brief, for appellee State of Minnesota.

Before LARSON, PECK and POINTER, Judges.

JOHN W. PECK, Judge.

In 1974 Canada announced that it would reduce and eventually terminate exports of crude oil to the United States. In response to this announcement, the Federal Energy Administration (FEA), predecessor to the Department of Energy (DOE), promulgated the Canadian Crude Oil Allocation Program (CAP), 10 C.F.R. §§ 214.1 et seq. CAP's stated purpose was the mitigation of the adverse effects of reductions in Canadian crude oil exports to U. S. firms that were dependent on Canadian crude oil.¹

Pursuant to CAP, the Economic Regulatory Administration (ERA), that arm of DOE with responsibility for administering the allocation of crude oil, allocated Canadian crude oil to two categories of refineries. The initial determinations of the category status of various refineries were made in accordance with 10 C.F.R. §§ 214.21 and 214.33. Section 214.21 defined a "first priority refinery" as a refinery whose base period crude oil "runs to stills" including at least 25% Canadian crude oil and whose volume of Canadian oil that constituted 25% of the runs was not "currently replaceable" with non-Canadian oil by reason of "lack of access to" either pipelines with "adequate" current surplus or through "adequate" port facilities. A second priority refinery was defined as any refinery that processed Canadian crude oil during the base period but was not a first priority refinery. First priority refineries under CAP were allocated a larger share of available Canadian oil than were second priority refineries. Canadian crude oil was significantly less expensive than oil available from alternative sources. Appellees Koch Refining Co. and Ashland Oil, Inc. were designated first priority refineries under CAP. Appellant Mobil Oil was designated second priority.

Changes in CAP priority status subsequent to initial priority determinations were governed by 10 C.F.R. § 214.34(a), which provided:

Supplemental affidavits and changes in initial designation. Refiners and other firms that own or control priority refineries shall correct any errors contained in affidavits filed pursuant to Subpart D of this part by filing a supplemental affidavit pursuant to § 214.41(b). Affidavits shall be so supplemented to reflect any changes in the access of the refiner or other firm to alternative sources of crude oil. Based on information set forth in any such supplemental affidavit or in any affidavit filed after February 10, 1976, the FEA may change its initial priority designation as to a refinery or other facility, may determine that a particular refinery or other facility is no longer eligible to receive Canadian crude oil rights under this part or may make an initial priority designation as to that refinery or other facility. Any such action taken by the FEA under this paragraph (a) may be based, in whole or in part, on information available to the FEA from sources other than the affidavits filed pursuant to Subpart D of this part. Emphasis added.

Initial affidavits filed pursuant to Subpart D were required to certify detailed information concerning the subject refinery's historical use of non-Canadian crude oil, characteristics of such supplies, and availability and utility of such supplies. Initial affidavits were also required to describe in detail all transportation facilities that might be used by the applicant refinery to obtain non-Canadian oil supplies, and "any factors that might affect or limit utilization thereof to transport crude oil." The affidavits were also to include descriptions of any "transportation facilities or methods not considered economically feasible ... and the reasons therefor."

In 1978 ERA conducted a hearing to determine whether Koch and Ashland should be reclassified as second priority. At the conclusion of that hearing, ERA determined not to reclassify Koch and Ashland "because, on the balance, it appears that the disadvantages of reclassifying the Koch and Ashland refineries outweigh any discernible benefits of such regulatory action." 43 Fed.Reg. 28537. ERA noted that reclassification of Koch and Ashland would simply permit Chicago area refineries with greater access to Gulf Coast oil supplies via pipelines to receive more Canadian oil while the two Minnesota refineries would receive less Canadian oil and be forced to seek supplies via barges from the south. While noting that the definition of a first priority refinery, 10 C.F.R. § 214.21, would take account of the availability of non-Canadian oil barged to Minnesota, ERA nonetheless concluded that § 214.34 afforded ERA the discretion to maintain the first priority status of Koch and Ashland, although they might be able to barge alternative oil supplies from the south, "if that result appears justified under all of the circumstances."

Mobil, as one of the Chicago area refineries that would have received more Canadian oil if Koch and Ashland had been reclassified, appealed ERA's decision to DOE's Office of Hearings and Appeals (OHA), that arm of DOE with responsibility to issue decisions regarding administrative appeals of DOE orders. The State of Minnesota was permitted to intervene. After hearing and argument, OHA reversed the judgment of ERA on the ground that ERA had no "discretion to consider equitable factors in determining first priority status" and that "ERA erred in basing its decision to maintain the first priority status of the Minnesota refineries on factors other than their practical access to replacement crude oil from non-Canadian sources." OHA concluded:

The regulatory language contained in Section 214.34 does not support the ERA position. ERA seems to suggest that because the term "may" is used in Section 214.34, redesignation is not mandatory even if the refinery has sufficient access to non-Canadian crude oil. That interpretation is incorrect. The term "may" is used to indicate that the ERA may on the basis of the information available to it take one of three actions. If "shall" had been used instead of "may" the provision would have been meaningless — it would have directed the ERA to take three contradictory actions. Thus, the term "may" was not used to give ERA discretion to ignore the specific criteria set forth in the CAP regulations, but rather was used to convey the options available to ERA when a refiner's access to non-Canadian crude oil changes. Although the provision states that the ERA may base its decision on information it obtains from sources other than the affidavits, the provision does not state, nor in any way suggest, that the alternative sources of information should relate to anything other than access to non-Canadian crude oil.

5 DOE ¶ 80,171. Thus, OHA refused to consider "equitable" factors in favor of maintaining the questioned priorities, found that Koch and Ashland now had access to sufficient non-Canadian oil to take them out of the first priority definition, and ordered ERA to reclassify Koch and Ashland.

Koch filed suit against DOE in district court challenging OHA's order. Ashland and Mobil intervened. Minnesota filed a separate suit challenging the OHA order. Motions by Mobil and DOE to dismiss for improper venue were denied. Mobil intervened in Minnesota's suit, and motions by Mobil and DOE to dismiss that suit for lack of standing were denied. A motion to consolidate the cases was granted.

The district court granted a preliminary injunction prohibiting reclassification. DOE filed a motion to dismiss for failure to exhaust administrative remedies, or in the alternative for summary judgment. Koch, Ashland and Mobil each moved for judgment on the merits. The district court entered judgment for Koch, Ashland and Minnesota solely on the ground that OHA had committed plain error in concluding the ERA had no discretion under § 214.34 to consider equitable factors in reclassification decisions. The district court concluded that OHA's interpretation of § 214.34 was inconsistent with the clear language of that regulation. The court did not decide any other issues before it. The district court 504 F.Supp. 593, reversed and remanded to DOE, and both Mobil and DOE have appealed.

The primary question raised on appeal is whether the district court erred in reversing the OHA order on the ground that OHA plainly erred in interpreting 10 C.F.R. § 214.34. Appellants Mobil and DOE have argued that the district court erred in reversing the OHA decision interpreting § 214.34 because OHA's decision was within the authority of the agency and was supported by substantial evidence. The appellants contend that...