Shell Oil Co. v. Federal Energy Administration

• Decision Date: 05 April 1978
• Docket Number: No. 3-12.,3-12.
• Citation: 574 F.2d 512
• Parties: SHELL OIL COMPANY, Plaintiff-Appellee, v. FEDERAL ENERGY ADMINISTRATION, an agency of the United States, and John F. O'Leary, Administrator, Federal Energy Administration, Defendants-Appellants.
• Court: U.S. Temporary Emergency Court of Appeals Court of Appeals

574 F.2d 512

SHELL OIL COMPANY, Plaintiff-Appellee, v. FEDERAL ENERGY ADMINISTRATION, an agency of the United States, and John F. O'Leary, Administrator, Federal Energy Administration, Defendants-Appellants.

No. 3-12.

Temporary Emergency Court of Appeals.

Argued January 24, 1978.

Decided April 5, 1978.

Peter Buscemi, with whom Barbara Allen Babcock, Asst. Atty. Gen., Dept. of Justice, and Scott H. Lang and Nancy C. Crisman, Dept. of Energy, Washington, D. C., of counsel, were on the brief for defendants-appellants.

William E. Wickens, Washington, D. C., with whom William Simon and Frederick S. Frei, Howrey & Simon, Washington, D. C., Richard J. Abrams, Richards, Layton & Finger, Wilmington, Del., and William G. Winters, Jr. and Albert D. Bowers, Houston, Tex., of counsel, were on the brief for plaintiff-appellee.

Before ANDERSON, BECKER and BONSAL, Judges.

BONSAL, Judge:

This is an appeal from the United States District Court for the District of Delaware. Shell Oil Company ("Shell") brought this action seeking review of a Decision and Order of the Federal Energy Administration ("FEA"), which found Shell in violation of a pricing rule for unleaded gasoline, and ordered restitution for gasoline sales overcharges. The District Court granted summary judgment to Shell on the grounds that the pricing rule (hereinafter referred to as "the July regulation") was adopted in violation of the Federal Energy Administration Act ("FEAA") and was therefore void. We affirm.

Shell contends, and the District Court agreed, that two basic rulemaking requirements under the FEAA were not met in the adoption of the July regulation. The Government concedes that one of the requirements was not met but argues that an opportunity for Shell to comment on a temporary rule (the June interim rule) promulgated prior to the July regulation permitted sufficient participation in the rulemaking process to preclude invalidation of the rule here.

In January of 1973, the Environmental Protection Agency ("EPA") published regulations requiring that on or before July 1, 1974 unleaded gasoline be made available to retail outlets selling more than 200,000 gallons per year. Belatedly aware of this in the spring of 1974 and there being no price regulations in effect, the Federal Energy Office¹ ("FEO") hastily issued on May 29, 1974 an interim price rule for unleaded gasoline effective only for the month of June, 1974 ("June interim rule"), during which month the FEO could more accurately determine what the price rule should be. Accordingly, the preamble to the June interim rule invited comments for a rulemaking proceeding "as to what the final price rule for unleaded gasoline should be." (The June interim rule itself was held invalid for failure to meet the then applicable Administrative Procedure Act's ("APA") requirements of proper notice and opportunity to comment. Consumers Union of United States, Inc. v. Sawhill, 393 F.Supp. 639 (D.D.C.), aff'd per curiam, 523 F.2d 1404 (Em.App.1975).)

The June interim rule provided that the price of unleaded gas be calculated in reference to "the weighted average price at which premium grade gasoline was lawfully priced . . . on May 15, 1973." 39 Fed.Reg. 18638 (May 29, 1974). On June 10, 1974, Shell submitted comments to the June interim rule, indicating that the premium gas price formula was generally acceptable. Later in June, it came to Shell's attention that the FEO was considering a formula which would have calculated unleaded gas prices in reference to regular gas, instead of premium gas. In a letter to the FEO dated June 25, 1974, Shell objected to the regular gas formula and suggested a variable pricing system designed to permit oil companies to produce more than one grade of unleaded gasoline.

On July 1, 1974, the FEA² issued the July regulation which is the subject of this action. The July regulation determined unleaded gasoline prices by a new and not previously announced formula which provided that the price of unleaded gasoline be based on "the weighted average price at which leaded gasoline of the same or nearest octane number was lawfully priced . . on May 15, 1973, plus 1 cent." 10 C.F.R. 212.112(b)(1).³ Not only had there been no effective opportunity to comment on this formula, but the FEA did not request specific data "reflecting differences between leaded and unleaded refining costs" until after the July regulation was issued, when it invited additional comments, extending the comment period until July 22, 1974. (In December, 1976, based on information received after July, 1974, the FEA determined that the 1 cent increment did not "accurately reflect the special costs associated with the refining of unleaded gasoline" as the fixed increment was too low in some cases, too high in others. 41 Fed.Reg. 54775 (December 15, 1976).)⁴

On or about September 15, 1974, a "Notice of Probable Violation" was served on Shell by the FEA because it had been overcharging for unleaded gasoline owing to its misinterpretation of the July regulation.⁵ On October 16, 1974, Shell filed a reply to the FEA's notice, seeking its withdrawal.

On July 8, 1975, almost nine months later, the FEA served a "Remedial Order" upon Shell, ordering it to reduce its prices for unleaded gasoline in compliance with the July regulation and to make restitution to customers of unleaded gas between July 10, 1974 and July 8, 1975.⁶

On July 18, 1975 Shell appealed to the Office of Exceptions and Appeals of the FEA. On January 6, 1976, Shell's appeal was denied in a Decision and Order.⁷

Shell then brought this suit in the District Court on February 4, 1976, seeking to invalidate the July regulation and enjoin enforcement of the Order. The District Court granted summary judgment in favor of Shell on the grounds that the July regulation was adopted in violation of the FEAA and was therefore void. This appeal followed.

Shell contends that the July regulation failed to comply with two sections of the FEAA. The first section, 15 U.S.C. § 766(i)(1)(B), requires that an opportunity to comment be permitted for at least 10 days after a proposed rule is noticed in the Federal Register. That section provides:

"Notice of any proposed rule, regulation, or order . . . shall be given by publication of such proposed rule . . . in the Federal Register. In each case, a minimum of ten days following such publication shall be provided for opportunity to comment; except that the requirements of this paragraph as to time of notice and opportunity to comment may be waived where strict compliance is found to cause serious harm or injury to the public health, safety, or welfare, and such finding is set out in detail in such rule, regulation or order."

No finding requisite for a waiver of the notice and opportunity to comment was made. Shell contends that it was not afforded the opportunity to comment on the July regulation before it became effective.

The other section, 15 U.S.C. § 766(i)(1)(C), requires that in cases where the rule is likely to have a substantial impact on the economy, an opportunity for oral presentation be permitted. It provides:

". . . if any rule, regulation, or order . . . is likely to have a substantial impact on the Nation's economy or large numbers of individuals or businesses, an opportunity for oral presentation of views, data, and arguments shall be afforded. To the maximum extent practicable, such opportunity shall be afforded prior to the issuance of such rule, regulation, or order, but in all cases such opportunity shall be afforded no later than forty-five days after the issuance of any such rule, regulation, or order. A transcript shall be kept of any oral presentation." (Emphasis added.)

Neither party contends that there was compliance with this section, although they do not now dispute that the July regulation would have a "substantial impact on the Nation's economy."

The Government contends that the July regulation should not be voided. It argues that Shell was not prejudiced by any non-compliance with the FEAA because the opportunity to comment on the June interim rule permitted Shell to participate in the rulemaking process. Moreover, the Government claims that the June interim rule served as the proposed rule to which Section 766(i)(1)(B) required an opportunity to comment; thus, the promulgation of the resulting July regulation was in compliance with that section.

We cannot agree. "A plethora of cases hold that an administrative rule which is not promulgated in accordance with rulemaking procedures is void." City of New York v. Diamond, 379 F.Supp. 503, 516 (S.D.N.Y.1974). Admittedly, where defects in the compliance with procedural requirements do not defeat the rulemaking process, many courts are unwilling to invalidate the resulting rule. See, e. g., Common Carrier Conference—Irregular Route v. United States, 175 U.S.App.D.C. 244, 246, 534 F.2d 981, 983 (1976) ("Even where there is technical flaw in the notice, it can be overcome if the actual conduct of the proceeding provides notice to the participants of what is under contemplation."); Nader v. Sawhill, 514 F.2d 1064 (Em.App.1975) (agency neglected to set forth the reasons for the good cause necessary to dispense with certain procedural requirements but because good cause in fact existed, reversal was not warranted); People of the State of California, State Lands Commission v. Simon, 504 F.2d 430 (Em.App.1974), cert. denied, 419 U.S. 1021, 95 S.Ct. 496, 42 L.Ed.2d 294 (1974). However, the deficiencies in the rulemaking procedures in the instant case were more than technical; they defeated the process. Congress recognized that the FEA's final judgment could only be as good as the information upon which it drew, and prescribed certain procedures—stricter than those of the Administrative Procedure Act ("APA")—which would permit it to be educated by the most interested and therefore, hopefully, the most knowledgeable parties. See Texaco v. Federal...