Standard Oil Co. of Ohio v. Federal Energy Admin., 6-22.

• Decision Date: 13 September 1979
• Docket Number: No. 6-22.,6-22.
• Citation: 612 F.2d 1291
• Parties: The STANDARD OIL COMPANY OF OHIO, an Ohio Corporation, Plaintiff-Appellee, v. FEDERAL ENERGY ADMINISTRATION, an agency of the United States of America, Frank G. Zarb, Administrator, Federal Energy Administration, Gorman C. Smith, Acting Assistant Administrator, Operations, Regulation and Compliance, Federal Energy Administration, Melvin Goldstein, Director, Office of Exceptions and Appeals, Federal Energy Administration, Defendants-Appellants, and United States of America, Counterclaimant-Appellant.
• Court: U.S. Temporary Emergency Court of Appeals Court of Appeals

612 F.2d 1291

The STANDARD OIL COMPANY OF OHIO, an Ohio Corporation, Plaintiff-Appellee, v. FEDERAL ENERGY ADMINISTRATION, an agency of the United States of America, Frank G. Zarb, Administrator, Federal Energy Administration Gorman C. Smith, Acting Assistant Administrator, Operations, Regulation and Compliance, Federal Energy Administration Melvin Goldstein, Director, Office of Exceptions and Appeals, Federal Energy Administration, Defendants-Appellants, and United States of America, Counterclaimant-Appellant.

No. 6-22.

Temporary Emergency Court of Appeals.

Argued May 29, 1979.

Decided September 13, 1979.

Rehearing and Rehearing Denied November 6, 1979.

Arthur E. Gowran and C. Lee Allen, Dept. of Energy, Washington, D. C., were on brief, for defendants-appellants.

Charles F. Clarke, Squire, Sanders & Dempsey, Cleveland, Ohio, with whom B. Casey Yim and Frederick L. Fisher and George J. Dunn, Standard Oil Company, Cleveland, Ohio, were on brief, for plaintiffappellee.

Before INGRAHAM, GRANT and LACEY, Judges.

Rehearing and Rehearing En Banc Denied November 6, 1979.

LACEY, Judge.

The defendant Federal Energy Administration (FEA) appeals from a decision of the district court that a Remedial Order and an Appeal Decision and Order issued by the FEA conflicted with regulations administered by the FEA and exceeded the scope of the FEA's authority.¹ We affirm.

Plaintiff Standard Oil Company of Ohio (Sohio) is an independent refiner of petroleum products. Before May 1973, Sohio bought its crude oil exclusively from domestic suppliers. Because at that point domestic demand outstripped domestic supply, in May 1973 Sohio made arrangements to obtain a new source of crude oil by engaging in a "time-trade transaction."

The "time-trade transaction" worked in the following way. Between May and December 1973, Sohio purchased from a domestic supplier and took delivery of large quantities of "sweet" domestic crude oil. "Sweet" crude oil is a type of low-sulphur, relatively scarce, crude oil. In consideration, Sohio paid $4.81 per barrel and also promised to deliver to the supplier an equal amount of the same quality oil at a set future date. This was an arm's-length transaction and its legitimacy is not challenged. In order that it would be able to comply with its obligation to deliver oil to its supplier in the future, Sohio in September 1973 contracted to buy foreign crude oil, to be paid for and delivered in February and March of 1974, at the price prevailing at the time of foreign oil delivery.

In the fall of 1973, due to the Arabs' oil embargo, the price of crude oil skyrocketed. Sohio's bookkeeping reflected these increases: The crude oil invoiced in the transaction in suit, first carried at $4.81 per barrel in September 1973, was carried at $8.55 per barrel in October and $12.62 per barrel in November and December. The higher costs carried on the books were the then current published world prices for crude oil; thus, they did not necessarily reflect the price Sohio would eventually pay its foreign supplier in 1974 pursuant to the September 1973 contract. Instead, they reflected Sohio's estimates of what it expected to pay in 1974.

The applicable regulations require that a refiner compute its prices by adding the lawful price of May 15, 1973 and the "increased product costs incurred between the month of measurement and the month of May 1973 . . .." 10 C.F.R. § 212.82(b). Higher purchase prices for crude oil constitute one type of increased product costs. Beginning in November 1973, Sohio took into account the new estimated costs of buying foreign oil in setting prices for consumers of its refined products. That is, Sohio treated the anticipated expenses that would become due in February and March of 1974 as costs "incurred" for the purpose of determining prices in the fall of 1973. At issue here is the propriety of calculating increased product costs on the basis of estimates rather than actual costs.

A controversy over treating costs as "incurred" before a final bill is presented and the total price is set and known exists as to the second transaction as well. In November and December 1973 and January 1974, Sohio bought domestic crude. Under the two-tier pricing system, "old" oil was subject to a ceiling price, but "new" oil could be sold at the prevailing market price, which, of course, was higher. 6 C.F.R. § 150.353-4.² Thus, when Sohio made these purchases domestic oil did not sell at a uniform price. The sellers of this crude oil invoiced Sohio at the "old" oil ceiling price, for they did not know at the time of sale how much was "old" and how much was "new" oil.

This made it impossible for Sohio when it received a shipment to know for sure the ultimate cost. Only later—sometimes as much as five months later—would the supplier ascertain the proportions of "old" and "new" oil and bill Sohio the true amount. Sohio, however, did not wait to get the suppliers' figures of the exact proportion of "new" and "old" oil before passing to its customers the higher price of the "new" oil. Based on production records, known "new" oil supplies, and industry reports, Sohio calculated the probable amount of "new" oil in a purchase, and then estimated the extra costs later to become payable and added those costs to its base price of May 1973. According to the FEA, using estimates violated the regulations. The FEA does not criticize the accuracy of the estimates or the manner of calculation.

On August 3, 1974 the FEA issued to Sohio a Notice of Probable Violation of the regulations. In that notice the FEA ordered Sohio to recompute its increased product costs in a way that excluded the higher prices anticipated from the "new" oil premium and the increase in foreign oil prices. Sohio was also ordered to submit a "plan outlining in detail the method by which Sohio will compensate for the effects of the violations . . .." Sohio replied on August 14, 1974, denying each of the alleged violations. On September 20, 1974 the FEA issued a Remedial Order finding that Sohio had committed the unlawful acts alleged in the Notice of Probable Violation. Sohio filed an appeal on October 2, 1974; it was denied on January 30, 1975. Sohio then filed suit in the Northern District of Ohio. The FEA counterclaimed, seeking compliance with its orders and civil penalties. Both sides moved for summary judgment. On November 20, 1978 the district judge entered judgment in favor of Sohio and against the FEA, holding that the Remedial Order was inconsistent with the governing regulations and exceeded the FEA's authority. This appeal is from that judgment.

The substantive issue before the court is a narrow one: Did the FEA exceed its authority in ordering Sohio to refund the money Sohio obtained when it estimated the future amounts that would have to be paid for oil purchased by it? In setting a price for its customers, Sohio treated its estimates of future payments as costs already incurred. For the "time-trade transaction" Sohio estimated the future cost of foreign crude oil based on the current world oil price; for the domestic oil purchases it estimated the proportions of "old" and "new" oil in each delivery. The FEA's position is that estimates are improper under the regulations because no costs are incurred until there is "a known obligation to pay a specific amount of money."

10 C.F.R. § 212.82(f) governs the permissible pricing of products by a refiner.

(1) General rule (i) The base price for sales of an item by a refiner is the weighted average price at which the item was lawfully priced in transactions with the class of purchaser concerned on May 15, 1975, plus (a) increased product costs incurred between the month of measurement and the month of May 1973 and measured pursuant to the provisions of § 212.83 . . .

The question is whether the FEA exceeded its authority in determining that under this regulation a cost is incurred only when known, or whether Sohio is correct in saying that the regulation permits estimating the future costs of present obligations.

The plaintiff argues, and the FEA does not disagree, that a promise to pay in the future can be used in computing an "increased product cost." Indeed, at oral argument the FEA acknowledged that Sohio could have charged on the basis of the higher price if the higher price for February and March 1974 deliveries had been stated in the September contract. The conclusion that future costs can be regarded as having been "incurred" before actual payment takes place is reached in the following manner:

1) 10 C.F.R. § 212.83(b) defines "increased product costs" as "the difference between the total cost of crude petroleum during the month of measurement and the total cost of crude petroleum during the month of May, 1973." Thus, increased product cost is the difference between the total cost in the base period and the total cost in the month of measurement;

2) The cost of crude petroleum is defined, both for domestic and imported crude petroleum, as the "purchase price";

3) "Price" is defined by Section 212.31 as any consideration for the sale or lease of any property or service and includes rent, commissions, dues, fees, margins, rates, charges, tariffs, fares, or premiums, regardless of form.

Sohio contends that "any consideration . . . regardless of form" encompasses its promise to redeliver oil in the future or its promise later to pay the "new" oil premium.

The FEA has not challenged this position. Its opposition is directed at "estimates," no matter how well founded. The FEA does not argue that an obligation to pay in the future cannot be incurred cost under the regulations, rather that the promise to pay must be for a sum fixed and certain before it can be considered to have been "incurred." However, once it is conceded that future obligations are a form of "increased product costs"—which one must do if one agrees that purchase price includes future obligations under 10 C.F.R....