Phillips Pet. Co. v. Department of Energy

• Decision Date: 09 March 1978
• Docket Number: 77-131,77-155 and 77-407.,77-130,Civ. A. No. 77-90,77-144
• Citation: 449 F. Supp. 760
• Parties: PHILLIPS PETROLEUM COMPANY, Plaintiff, v. DEPARTMENT OF ENERGY, Defendant. TENNECO OIL COMPANY, Plaintiff, v. DEPARTMENT OF ENERGY et al., Defendants. PENNZOIL COMPANY, Plaintiff, v. DEPARTMENT OF ENERGY et al., Defendants. COASTAL STATES GAS CORPORATION, Plaintiff, v. DEPARTMENT OF ENERGY et al., Defendants. CONTINENTAL OIL COMPANY, Plaintiff, v. DEPARTMENT OF ENERGY et al., Defendants. AMERADA HESS CORPORATION, Plaintiff, v. DEPARTMENT OF ENERGY, Defendant.
• Court: U.S. District Court — District of Delaware

449 F. Supp. 760

PHILLIPS PETROLEUM COMPANY, Plaintiff, v. DEPARTMENT OF ENERGY, Defendant.

TENNECO OIL COMPANY, Plaintiff, v. DEPARTMENT OF ENERGY et al., Defendants.

PENNZOIL COMPANY, Plaintiff, v. DEPARTMENT OF ENERGY et al., Defendants.

COASTAL STATES GAS CORPORATION, Plaintiff, v. DEPARTMENT OF ENERGY et al., Defendants.

CONTINENTAL OIL COMPANY, Plaintiff, v. DEPARTMENT OF ENERGY et al., Defendants.

AMERADA HESS CORPORATION, Plaintiff, v. DEPARTMENT OF ENERGY, Defendant.

Civ. A. Nos. 77-90, 77-130, 77-131, 77-144, 77-155 and 77-407.

United States District Court, D. Delaware.

March 9, 1978.

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S. Samuel Arsht and William O. LaMotte, III, of Morris, Nichols, Arsht & Tunnell, Wilmington, Del., for all plaintiffs.

Paul J. Mode, Jr., Michael S. Helfer, Stewart A. Block, William J. Perlstein, and Paul Koffsky of Wilmer, Cutler & Pickering, Washington, D.C., for Phillips Petroleum Co.

John P. Mathis and Thomas J. Eastment of Baker & Botts, Washington, D.C., for Tenneco Oil Co. and Pennzoil Co.

David J. Beck, Laurance C. Mosher, Jr., and O. David Stephens of Fulbright & Jaworski, Houston, Tex., for Coastal States Gas Corp.

Rush Moody, Jr., Michael J. Henke, Mary Jane Reynolds and F. Shaun Burns of Vinson & Elkins, Washington, D.C., for Continental Oil Co.

Kenneth L. Bachman of Cleary, Gottlieb, Steen & Hamilton, Washington, D.C., for Amerada Hess Corp.

James W. Garvin, Jr., U.S. Atty. and John H. McDonald, Asst. U.S. Atty., Wilmington, Del., Barbara Allen Babcock, Asst. Atty. Gen., Dennis Linder and C. Max Vassanelli, Attys., Dept. of Justice, Washington, D.C., Scott H. Lang, Atty., Dept. of Energy, Washington, D.C., for defendants.

OPINION

LATCHUM, Chief Judge.

Six oil companies¹ instituted these actions to challenge the Federal Energy Administration's ("FEA") belated interpretation of a regulatory scheme affecting prices from January 1, 1975 to February 1, 1976 ("the relevant period"). That interpretation required refiners to allocate monthly sales revenues first to the recoupment of all increased "product costs" (primarily the costs of crude oil and purchased petroleum products) and then to the recoupment of increased "non-product costs" (most operating and marketing costs). See 41 Fed.Reg. 5111, 5113 (February 4, 1976). The defendants are the Department of Energy ("DOE") and its Secretary, as successors in interest of the FEA and its Administrator.² In their complaints³ the plaintiffs sought (1) a declaratory judgment concerning the meaning and validity of the regulations during the relevant period, (2) an injunction against the FEA's anticipated application of its interpretation of the regulations, (3) an estoppel against FEA enforcement of its interpretation against the plaintiffs on the basis of their good faith reliance on the conduct and statements of various FEA officials, and (4) a determination whether the plaintiffs' constitutional claims are substantial and should be certified to the Temporary Emergency Court of Appeals ("TECA").

On August 11, 1977, 435 F.Supp. 1239, the Court granted in part and denied in part the FEA's motion⁴ to dismiss the actions or stay them pending completion of administrative consideration.⁵ The Court held that the following legal issues were appropriate for immediate consideration:⁶

(1) What is the meaning of the applicable regulations in effect during the relevant period, e. g., did they permit or require the use of the Proportional Method to recover increased costs, (2) If the regulations were in effect as now interpreted by the FEA, are such regulations invalid because they (a) exceeded FEA's statutory authority, (b) were issued without notice and applied retroactively in violation of the Administrative Procedure Act, 5 U.S.C. ? 553, or (c) were . . . issued without first obtaining an inflationary impact statement in violation of Executive Order No. 11821, 39 Fed.Reg. 41501 (Nov. 29, 1974).

435 F.Supp. at 1249. The parties have filed cross-motions for summary judgment⁷ and this opinion addresses the issues raised by those motions.

One other prefatory remark is in order, however. The United States District Court for the Northern District of Ohio recently granted summary judgment against the FEA on issues 1 and 2(b) above in nine related actions brought in that District ("the Ohio litigation")⁸. This Court previously denied a motion by the FEA to transfer the instant actions to the Northern District of Ohio, or, alternatively, to stay the cases sub judice until a decision was rendered in the Ohio litigation.⁹ The principal distinction between these cases and the Ohio litigation is that all of the plaintiffs here recovered their product and non-product cost increases on a pro-rata basis, while the majority of the Ohio plaintiffs recovered their non-product cost increases first.¹⁰ The underlying facts are the same in both instances and have been set forth in detail in the two opinions filed by Judge Manos of the Northern District of Ohio.¹¹

I. BACKGROUND FACTS

On August 19, 1973, the Cost of Living Council ("COLC") adopted a complex set of price regulations specifically applicable to the petroleum industry.¹² The regulations were promulgated under the Economic Stabilization Act of 1970, as amended, 12 U.S.C. ? 1904 note, and Phase IV of the Economic Stabilization Program. In December 1973, the Federal Energy Office ("FEO") assumed the pricing authority of the COLC as it related to energy,¹³ and on January 14, 1974, the FEO recodified the COLC's Phase IV Petroleum Price Regulations.¹⁴

The regulations in effect in January 1974 imposed a ceiling on the prices that the plaintiffs and other refiners could charge based on each refiner's selling prices on May 15, 1973. However, at the beginning of each month a refiner could increase its selling prices for the coming or "current" month to reflect the increased product costs it incurred in the preceding month ("the month of measurement"). The regulations permitted a refiner complete discretion to charge any price to a particular class of purchasers in the current month up to a price equal to the sum of (1) the weighted average price charged to the same class of purchasers on May 15, 1973 and (2) the increased product costs¹⁵ incurred between the month of measurement and the month of May 1973. See 10 C.F.R. ? 212.83(f), 39 Fed.Reg. 1953 (January 15, 1974). The latter price was known as the "base price" for a product. Thus a refiner could pass through its product cost increases ("PCI") on a dollar-for-dollar basis by charging a selling price equal to the base price in the month following the month in which the PCI were incurred. Any product cost increases which a refiner was unable to recover in a price increase in the current month, because of competitive market conditions or other reasons,¹⁶ could be carried over or "banked" for use in determining base prices for a subsequent month.¹⁷

Besides enabling refiners to pass through increased product costs automatically as part of their base prices, the regulations authorized the pass-through of increases in non-product costs, such as labor and marketing costs, subject to certain limitations. Refiners could use their non-product cost increases ("NPCI") to justify a price exceeding the base price as long as they continued to incur those increases. However, a refiner first had to "prenotify" the FEO and then wait a minimum of thirty days before implementing the price increase.¹⁸ The regulations also precluded a refiner from charging a price in excess of the base price in any fiscal year in which its profit margin exceeded the profit margin achieved during the base period (May 1973).¹⁹ Non-product cost increases were computed using a "rate of increase" approach in contrast to product cost increases, which were computed using a "dollar amount" concept.²⁰ Finally, the regulations did not explicitly state whether NPCI could be banked.

The FEO became the Federal Energy Administration in June 1974.²¹ In a notice of proposed rulemaking published on September 10, 1974, the FEA announced a "comprehensive revision" of the petroleum price regulations.²² With respect to non-product cost increases, the FEA proposed to eliminate the "prenotification" procedure and to replace it with an automatic pass-through system similar to that used for the pass-through of increased product costs.²³ Effective December 1, 1974, the FEA adopted these changes and others which limited the categories of increased non-product costs that could be passed through to purchasers.²⁴ The base price concept was not altered.

In addition to finalizing several of the proposed amendments, the December 1974 rulemaking added a new provision 10 C.F.R. ? 212.83(e)(4), which prohibited the banking of unrecovered non-product cost increases.²⁵ This provision required refiners to absorb any non-product cost increases which they failed to recover through price increases in the month following the month in which the NPCI were incurred. The amount of NPCI a refiner would have to absorb in a given month depended, however, on the method or sequence used to allocate recoveries between product and non-product cost increases. The regulations did not explicitly specify a particular sequence of recovery;²⁶ consequently, refiners used at least three different methods. One method, the non-product cost increase first method ("NPCI First"), treated all non-product cost increases as having been recovered first, and the product cost increases as having been recovered last. A second method, the "NPCI Last" method, treated all product cost increases as having been recovered first, and non-product cost increases as having been recovered last. A third method, the "Proportional Method," treated product and non-product cost increases as having been recovered pro rata.²⁷Phillips Petroleum Co. v. FEA, 435 F.Supp. 1239 (D.Del.1977). The example in the footnote²⁸ below illustrates the effect...