Phillips Petroleum Co. v. Federal Energy Administration

• Decision Date: 11 August 1977
• Docket Number: 77-130,77-144 and 77-155.,Civ. A. No. 77-90,77-131
• Citation: 435 F. Supp. 1239
• Parties: PHILLIPS PETROLEUM COMPANY, Plaintiff, v. FEDERAL ENERGY ADMINISTRATION, Defendant. TENNECO OIL COMPANY, Plaintiff, v. FEDERAL ENERGY ADMINISTRATION et al., Defendants. PENNZOIL COMPANY, Plaintiff, v. FEDERAL ENERGY ADMINISTRATION et al., Defendants. COASTAL STATES GAS CORPORATION, Plaintiff, v. FEDERAL ENERGY ADMINISTRATION et al., Defendants. CONTINENTAL OIL COMPANY, Plaintiff, v. FEDERAL ENERGY ADMINISTRATION et al., Defendants.
• Court: U.S. District Court — District of Delaware

435 F. Supp. 1239

PHILLIPS PETROLEUM COMPANY, Plaintiff, v. FEDERAL ENERGY ADMINISTRATION, Defendant.

TENNECO OIL COMPANY, Plaintiff, v. FEDERAL ENERGY ADMINISTRATION et al., Defendants.

PENNZOIL COMPANY, Plaintiff, v. FEDERAL ENERGY ADMINISTRATION et al., Defendants.

COASTAL STATES GAS CORPORATION, Plaintiff, v. FEDERAL ENERGY ADMINISTRATION et al., Defendants.

CONTINENTAL OIL COMPANY, Plaintiff, v. FEDERAL ENERGY ADMINISTRATION et al., Defendants.

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

United States District Court, D. Delaware.

August 11, 1977.

COPYRIGHT MATERIAL OMITTED

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, and Alan B. Sternstein of Wilmer, Cutler & Pickering, Washington, D. C., for Phillips Petroleum Company.

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

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

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

James W. Garvin, Jr., U. S. Atty., and John H. McDonald, Asst. U. S. Atty., Wilmington, Del., Barbara Allen Babcock, Asst. Atty. Gen., Stanley D. Rose, C. Max Vassanelli, and Robert E. Richardson, Attys., Dept. of Justice, Washington, D. C., for defendants.

OPINION

LATCHUM, Chief Judge.

Plaintiffs, five oil companies¹ seeking declaratory and injunctive relief, have each brought a suit challenging the defendant, Federal Energy Administration's ("FEA")² interpretation and contemplated application of a regulatory scheme governing the method by which the plaintiffs priced their petroleum products as a result of increased costs incurred during a thirteen-month period from January 1, 1975 to February 1, 1976.

The FEA, invoking the doctrines of ripeness, exhaustion of administrative remedies and primary jurisdiction, has moved to dismiss these actions or to stay them pending completion of administrative consideration. This is the Court's opinion on FEA's pending motions.³

A. The Background of the Dispute.

In 1973, the FEA acting pursuant to the Emergency Petroleum Allocation Act ("EPAA"), 15 U.S.C. § 751 et seq. and prior legislation, adopted detailed regulations imposing profit margin limitations and direct ceilings on prices that plaintiffs and other refiners could charge for refined petroleum products. 10 C.F.R. Part 212, Subpart E. Under these regulations each refiner's price ceilings were based on prices it charged in May 1973. However, a refiner could raise the prices of its products to recover increases, on a dollar-for-dollar basis, in its "product costs" (principally the cost of crude oil) and its "non-product costs" (which encompass most operating expenses). These increased costs could be recovered either (1) by raising the refiners' selling prices in the month following the month during which the increased costs occurred or (2) by saving or "banking" the increased costs for use in justifying a later selling price increase in subsequent months.

On November 29, 1974, the FEA issued a new regulation that purported to prohibit the banking of unrecovered non-product costs increases, effective as to costs incurred on and after December 1, 1974.⁴ 39 Fed.Reg. 42368, 42372 (Dec. 5, 1974). These regulations continued to permit the banking of unrecovered product cost increases. The result of prohibiting the banking of non-product cost increases meant that if such cost increases were not recovered through a higher selling price in the month following the month in which the non-product cost increases were incurred, they could never be recovered.

For those months in which a refiner failed to pass through all its available cost increases, the refiner was required to calculate the amount of non-product cost increases it did recover, and the amount of non-product cost increases it did not recover, and therefore lost. Various refiners, in making these calculations under these regulations, apparently used 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 non-product cost increases and product cost increases as having been recovered pro rata. The method of calculations used by a refiner determined the amount of non-product cost increases the refiner was permanently precluded from recovering.⁵

During the period that the regulations here at issue affected prices — between January 1, 1975 and February 1, 1976 — FEA officials, through public pronouncements, private statements to refiners, instruction manuals, directives, forms and worksheets, indicated that the agency construed its regulations to permit or require the use of the Proportional Method.⁶ (Docket Item 1, par. 11 in C.A. 77-90); 41 Fed.Reg. 33283 (Aug. 9, 1976); 41 Fed.Reg. 43953 (Oct. 5, 1976).

Effective February 1, 1976, the FEA issued a new set of refiner pricing regulations, one of which explicitly thereafter required the use of the NPCI Last Method. However, in the course of its announcement of these new regulations, the FEA, for the first time, took the position that the NPCI Last Method had also been required under the regulations affecting pricing during the period between January 1, 1975 and February 1, 1976. 41 Fed.Reg. 5111, 5113 (Feb. 4, 1976). This action provoked immediate and widespread criticism from the refiners. Within a few weeks, the FEA announced a rulemaking directed to the immediate repeal of these new amendments. 41 Fed. Reg. 9199, 9200 (Mar. 3, 1976).

Following public hearings in which the plaintiffs and other refiners participated, the FEA retroactively revoked to February 1, 1976 both the new regulation requiring the use of NPCI Last Method and the preexisting regulation prohibiting the banking of unrecovered non-product cost increases. 41 Fed.Reg. 15330 (April 12, 1976). The FEA found that these two regulations, if in effect at the same time, would spur inflation, cause widely fluctuating prices for petroleum products, discourage refiners from building product inventories, reduce refinery production, and diminish capital investments. Id. at 15331. Based on these findings, the FEA adopted new regulations which permitted the banking of non-product cost increases on essentially the same basis of product cost increases and made these new regulations retroactive to February 1, 1976.

Despite these findings, the FEA with respect to the period between January 1, 1975 and February 1, 1976, has on numerous occasions, since February 4, 1976, officially expressed in public records the view that the regulations then in effect required the use of the NPCI Last Method and prohibited the banking of unrecovered non-product cost increases. See 41 Fed.Reg. 5111, 5113 (Feb. 4, 1976); 41 Fed.Reg. 9199 (Mar. 3, 1976); 41 Fed.Reg. 15330 (April 12, 1976); 41 Fed.Reg. 33282 (Aug. 9, 1976); 41 Fed. Reg. 40559 (Sept. 20, 1976); Public Letter of Sept. 23, 1976, from FEA Administrator, 122 Cong.Rec. E 5298, E 5299 (daily ed., Sept. 27, 1976); 41 Fed.Reg. 43953 (Oct. 5, 1976); Apco Oil Corp., 5 FEA ¶ 83,100, FEE-3399 (Mar. 23, 1977); 42 Fed.Reg. 21315 (April 26, 1977); Gov. Main Brief, p. 2 (Docket 21 in C.A. 77-90).

Recognizing that "refiners might have concluded in good faith that recoupment on a proportional basis was permitted as a result of possibly ambiguous language in the regulations and certain information disseminated by FEA", the FEA, on August 3, 1976, issued a Notice of Proposed Class Exception and Public Hearing in which it proposed to provide refiners a "class exception" validating the use of the Proportional Method during the period in issue.⁷ 41 Fed. Reg. 33282, 33283 (Aug. 9, 1976).

However, before the FEA could act, the Honorable John D. Dingle, Chairman of House Subcommittees on Energy and Power of the House Committee on Interstate and Foreign Commerce, strongly criticized the FEA's proposed class exception at a hearing before the Subcommittee on September 20, 1976 (Transcript of Hearing, Attachment B, Docket Item 21 in C.A. 77-90) and again in a statement released on September 23, 1976. See 112 Cong.Rec. E 5298 (daily ed., Sept. 27, 1976). In a September 23, 1976 letter from FEA's Administrator to Mr. Dingle, the FEA reiterated its intention "to enforce the NPCI Last Method interpretation of the regulation in all instance sic other than those in which a firm has applied for and been granted relief by FEA's Office of Exceptions and Appeals" and also made plain that FEA would not grant exceptions on the ground of "good faith reliance on erroneous guidance from FEA personnel." 112 Cong.Rec. E 5298, 5299 (daily ed., Sept. 27, 1976). On October 5, 1976, the FEA announced that it would not grant the proposed class exceptions but would require each refiner to "establish on an individual basis that it is subject to a serious hardship or gross inequity as a result of the FEA regulatory requirements" and in addition called upon all applicants to participate in "a consolidated exceptions proceeding" even though "there may not be any common class which is similarly affected by FEA's regulations." 41 Fed.Reg. 43953, 43954 (Oct. 5, 1976).

Thereafter, despite the imprecise nature of the exception proceedings, various refiners began filing applications for exception relief in late 1976 and early 1977. In February, the FEA sought applications from "consumer representatives" to intervene in the proceedings, 42 Fed.Reg. 10891 (Feb. 23, 1977), and it granted such an application...