Mobil Oil Corp. v. Dept. of Energy, 2-40

• Court: U.S. Temporary Emergency Court of Appeals
• Writing for the Court: METZNER, PECK and LACEY
• Citation: 728 F.2d 1477
• Parties: MOBIL OIL CORPORATION, Exxon Corporation, Gulf Oil Corporation, and Marathon Oil Corporation, Plaintiffs-Appellees, v. The DEPARTMENT OF ENERGY and James B. Edwards, Defendants-Appellants. and NAPH-SOL REFINING COMPANY, Plaintiff-Appellant, v. MURPHY OIL CORPORATION, Defendant-Appellee.
• Docket Number: No. 2-40,6-31.,2-40
• Decision Date: 20 December 1983

728 F.2d 1477

MOBIL OIL CORPORATION, Exxon Corporation, Gulf Oil Corporation, and Marathon Oil Corporation, Plaintiffs-Appellees,
v.
The DEPARTMENT OF ENERGY and James B. Edwards, Defendants-Appellants. and
NAPH-SOL REFINING COMPANY, Plaintiff-Appellant,
v.
MURPHY OIL CORPORATION, Defendant-Appellee.

Nos. 2-40, 6-31.

Temporary Emergency Court of Appeals.

Argued April 15, 1983.

Decided December 20, 1983.

Rehearing and Rehearing Denied February 10, 1984.

Certiorari Denied June 18, 1984.

728 F.2d 1478

COPYRIGHT MATERIAL OMITTED

728 F.2d 1479

David A. Engels, Dept. of Energy, Washington, D.C., with whom Thomas C. Newkirk, Larry P. Ellsworth, Floyd I. Robinson, Thomas A. Schweitzer and Dennis M. Moore, Washington, D.C. were on brief for appellants in No. 2-40

Donald B. Craven, Miller & Chevalier Chartered, Washington, D.C., with whom Jay L. Carlson, James P. Tuite and Scott E. Pickens, Washington, D.C., Jay W. Wason, Mackenzie, Smith, Lewis, Mitchell & Hughes, Syracuse, N.Y., Barbara Finney, Robert F. Ochs and J. Ronald Sandberg, Houston, Tex., Andrew J. Kilcarr and James P. Shaughnessy, Donovan, Leisure, Newton & Irvine, Washington, D.C., Thomas R. Trowbridge III, Donovan, Leisure, Newton & Irvine, New York City, John M. Freyer, Bond, Schoeneck & King, Syracuse, N.Y., Charles S. Lindberg and Francis A. Rowen, Jr., New York City, Daniel Joseph, Warren E. Connelly and Edward L. Rubinoff, Akin, Gump, Strauss, Hauer & Feld, Washington, D.C., Donald L. Nicholas, Costello, Cooney & Fearon, Syracuse, N.Y., and John A. Evans, Findlay, Ohio, were on brief for appellees in No. 2-40.

Neva T. Campbell, Schwabe, Williamson, Wyatt, Moore & Roberts, Portland, Or., on brief for amici curiae Richard W. Dyke, dba Western Stations Co., Colvin Oil Co. and F.O. Fletcher, Inc., dba Fletcher Oil Co.; Steven Schaars and Joan Goldfrank, Collier, Shannon, Rill & Scott, Washington, D.C., on brief for amici curiae Go-Tane Service Stations, Inc., Kickapoo Oil Co., Inc. and Lake Shore Oil Co.; James F. Flug and Mark Hessel, Lobel, Novins & Lamont, Washington, D.C., on brief for amici curiae Attys. Gen. of Mich., Ala., Ill. and Pa., and the Controller of Cal.; and Charles W. Petty, Jr., Anthony J. Thompson, Charles E. Sliter, Robert F. Reklaitis and Janet E. Pitterle, Hamel, Park, McCabe & Saunders, Washington, D.C., on brief for amicus curiae Growmark, Inc., in No. 2-40.

William H. Bode, Spriggs, Bode & Hollingsworth, Washington, D.C., with whom John E. Varnum and Tobey B. Marzouk, Washington, D.C., were on brief for appellant in No. 6-31.

Daniel Joseph, Akin, Gump, Strauss, Hauer & Feld, Washington, D.C., with whom R. Bruce McLean, Edward L. Rubinoff and Phyllis R. Anderson, Washington, D.C., William K. Holmes, Warner, Norcross & Judd, Grand Rapids, Mich., and H.Y. Rowe and W. Bayless Rowe, El Dorado, Ark., of counsel, were on brief for appellee in No. 6-31.

Thomas C. Newkirk, Larry P. Ellsworth, David A. Engels, Floyd I. Robinson, Thomas A. Schweitzer and Dennis M. Moore, Dept. of Energy, Washington, D.C., on brief for amicus curiae The U.S. Dept. of Energy in No. 6-31.

Before METZNER, PECK and LACEY, Judges.

Rehearing and Rehearing En Banc Denied February 10, 1984.

Certiorari Denied June 18, 1984. See 104 S.Ct. 3545.

LACEY, Judge.

INTRODUCTION

The Department of Energy ("DOE") and Naph-Sol Refining Co. ("Naph-Sol") appeal from orders entered by, respectively, the District Court for the Northern District of New York and the District Court for the Western District of Michigan that, inter alia, invalidated the "deemed recovery rule" as procedurally defective. Mobil Oil Corp. v. DOE, 547 F.Supp. 1246 (N.D.N.Y.1982),¹ is a declaratory judgment action brought to challenge the validity of a "three cent" retail price equalization rule and, alternatively, of the "deemed recovery rule."

728 F.2d 1480

Naph-Sol Refining Co. v. Murphy Oil Corp., 550 F.Supp. 297 (W.D.Mich.1982), is an action for recovery of overcharges with respect to Naph-Sol's purchase of gasoline from Murphy Oil Corporation ("Murphy") at prices allegedly in excess of those permitted by the petroleum price regulations, 10 C.F.R. pt. 212, including the "deemed recovery rule," and by the supply contracts existing between the parties. Although, as will become apparent, other issues are also before this court, the invalidation of the "deemed recovery rule" was pivotal to both district court rulings and resulted in the consolidation of these appeals

I. Background

A. Regulatory Background

We first survey the various regulations involved, deferring until a subsequent section any detailed presentation of the procedural aspects of the rulemakings here in issue.

1. Petroleum Price Regulations

Prior to the rulemakings involved here, the Mandatory Petroleum Price Regulations,² 10 C.F.R. pt. 212, established limitations on the maximum prices refiners could charge in the sale of "covered products" or of "special products," such as motor gasoline.³ Under the "price rule," a refiner could "not charge to any class of purchaser a price in excess of the base price" of the covered product except under certain specified conditions. 10 C.F.R. § 212.82 (1975). A "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 those purchasers . . . and other purchasers...." 10 C.F.R. § 212.31 (1975). One purpose of these price rules was to maintain the supplier-purchaser relationships as they existed in 1972-73, prior to the statutory regulation of the petroleum industry.

The "base price" was "the weighted average price at which the item was lawfully priced in transactions with the class of purchaser concerned on May 15, 1973, plus increased product costs incurred between the month of measurement and the month of May 1973 ...." 10 C.F.R. § 212.82(f)(1)(i) (1975). To calculate its base price for a given month, therefore, a refiner had to: 1) establish its classes of purchaser; 2) compute its increased product costs and apportion these among the various products it sold; and 3) allocate the increased costs for each product among its classes of purchasers of that product.

The "refiner cost allocation formula" governed apportionment of increased product costs.⁴ As it operated in January 1974, this

728 F.2d 1481

formula yielded a cents per gallon figure, referred to as "diu," that represented the maximum amount of increased product cost that a refiner might apportion to a given special product

diu = the dollar increase that may be applied in the period "u" (the current month) to the May 15, 1973, selling price of the 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) (1975).

The diu calculation established the maximum increment of increased product costs a refiner could pass through to each class of purchaser of a particular special product. Since diu was a single number, the result of the formula was the equal application of increased product costs among classes of purchasers when the maximum was passed through. This rule was designed to distribute the burden of increased costs as uniformly as feasible.

The Regulations, however, did not require refiners actually to charge the base price. In certain market conditions, refiners might choose to set prices below base price by not immediately passing on some of the increased product costs. Whether, as of January 15, 1974, refiners were obligated to pass through increased product costs equally to each class of purchaser when selling prices were below base price is a matter in issue.

As noted, the Regulations did not require a refiner to recover all of its increased product costs for a given month in that month. The "cost bank rule," 10 C.F.R. § 212.83(e)(1) (1975), allowed the refiner to carry over, or "bank," its unrecovered increased product costs for inclusion in the calculation of base prices in a later month:

(e) 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 products costs not recouped may be added to the May 15, 1973 selling prices to compute the base prices for that special product for a subsequent month.

Whenever a refiner added previously unrecouped costs to its current price, of course, it had to reduce its "bank" of these costs.⁵

In addition, the refiner could add to the base price certain increases in non-product costs incurred since May 1973 but only if 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 approval. 10 C.F.R. § 212.87 (1975). The sum of the base price and allowable nonproduct cost increases was the refiner's maximum lawful price.

2. April 1974 Three-Cent Rule⁶

The "retail price equalization," or "three-cent," rule, promulgated in April 1974, was a response to an unintended price disparity that had developed between independent and refiner-operated gasoline stations. See 39 Fed.Reg. 12013, 13013-14 (April 2, 1974).

728 F.2d 1482

In January and February 1974, the FEO authorized independent and refiner-operated retailers of motor gasoline to increase their retail selling prices by up to three cents a gallon to reflect increases in nonproduct costs incurred in the marketing of gasoline. See 39 Fed.Reg. 809 (Jan. 3, 1974); 39 Fed.Reg. 7795 (Feb. 28, 1974). Since refiner-operated stations were subject to profit margin and pre-notification restrictions, however, they generally did not attempt to recover the three cent marketing cost allowance. As a result, independents were faced with either foregoing the three cent allowance or being...