Tenneco Oil Co. v. Federal Energy Administration, 5-40.
| Decision Date | 03 December 1979 |
| Docket Number | No. 5-40.,5-40. |
| Parties | TENNECO OIL COMPANY, Plaintiff-Appellee, v. FEDERAL ENERGY ADMINISTRATION and John F. O'Leary, Administrator, Defendants-Appellants. |
| Court | U.S. Temporary Emergency Court of Appeals Court of Appeals |
Christopher M. Was, Dept. of Energy, Washington, D. C., with whom Barbara Allen Babcock, Asst. Atty. Gen., C. Max Vassanelli and Caroline C. Mueller, Dept. of Justice, and Arthur E. Gowran, Dept. of Energy, Washington, D. C. were on the brief for defendants-appellants.
John P. Mathis, Baker & Botts, Washington, D. C., with whom Charles M. Darling, IV, and Kirk K. Van Tine, Washington, D. C., David M. Lacey, Baker & Botts, Houston, Tex., and Ralph J. Maynard, Alfred B. Smith, Jr., Tenneco Oil Company, Houston, Tex., were on the brief for plaintiff-appellee.
Before INGRAHAM, MORGAN and GEWIN, Judges.
The central issue in this case is whether the use by Tenneco of its own oil on its own oil producing properties was a "sale" under the terms of the petroleum price control regulations. The district court found, and we agree, that the Federal Energy Administration's (FEA)1 application of the price control regulations to the facts in this case was erroneous.
The regulations in question were first promulgated by the Cost of Living Council (CLC)2 under the authority granted by the Economic Stabilization Act of 1970.3 The petroleum price control authority was inherited by the FEA under the Emergency Petroleum Allocation Act of 1973, 15 U.S.C. §§ 751, et seq., and the FEA carried forward the regulations first issued by the CLC in substantially identical form.4
The regulations created a two-tier pricing system which placed a ceiling on "old" oil but exempted "new" oil from price controls.5 In simple terms, new oil represented the amount of increase in production from a well since 1972. Old oil was that portion of production that was equal to what was produced from the well in 1972. It is the language of section 212.72 of the regulations, defining new oil, that is the focus of this controversy. To calculate the amount of new oil produced in a given month, producers were to determine the amount of crude petroleum "produced and sold" from a property in that month and subtract the base production control level (BPCL) for that property. The BPCL was defined as the amount of crude petroleum "produced and sold" from that property during the same month in 1972. The purpose of the two-tier pricing system was to dampen the inflationary impact of world market oil prices while stimulating the production of additional domestic supplies of oil. New oil was exempted from price controls as an incentive for intensified domestic productions.6 These objectives were recognized approvingly by Congress in the Conference Report which accompanied the Emergency Petroleum Allocation Act.7
Tenneco is the owner and operator of an oil producing property known as the "Fee C" in Kern County, California. During 1972, Tenneco delivered oil produced from its Fee C property to West Coast Oil Company under a processing agreement. Under the terms of the Tenneco-West Coast agreement, West Coast "topped" the lightest hydrocarbons amounting to about 20 percent of the oil delivered by Tenneco, and returned the remaining 80 percent to Tenneco. Except as to the oil retained by West Coast, title to the oil delivered to West Coast remained at all times in Tenneco. The oil returned to Tenneco was used to fuel steam generators located at several of its oil producing properties, including the Fee C. The steam from these generators was injected into oil reservoirs to aid in the recovery of crude oil.
The processing agreement expired on December 21, 1973, and the parties chose not to renew it. Rather than using refined oil to fuel its Fee C generators, Tenneco at this point began to burn unprocessed crude oil produced from the Fee C. The remaining Fee C production was sold to West Coast under the terms of a new sale agreement. In August 1974, Tenneco began to sell all of its Fee C production instead of burning any crude Fee C oil on site. Tenneco took this course of action after it concluded that the oil processed by West Coast in 1972 and burned at Tenneco production sites was not "sold" and was therefore not includable in the BPCL. The effect of excluding these quantities of oil from the BPCL was that Tenneco classified most of its 1974 production from the Fee C as new oil to be sold at free market prices. Thereafter, Tenneco obtained residual fuel oil for its steam generators on the Fee C from other sources, and sold all of its Fee C oil to West Coast. In November 1974, Tenneco terminated its sales of crude oil to West Coast because of a dispute over the proper calculation of the BPCL for the Fee C property.
It is undisputed that gross production from the Fee C declined from 1972 to 1974. The "new" oil produced by the Fee C is merely that amount of oil consumed by Tenneco in 1972 but sold by Tenneco in 1974.
The administrative history of this case begins on December 5, 1974, when West Coast filed a complaint against Tenneco at the FEA's national compliance office. In a letter dated January 7, 1975, Thomas Bianconi, the FEA's national director of compliance, informed West Coast that Tenneco had properly calculated its prices for the Fee C oil. Six months after the Bianconi letter, however, and after further efforts by West Coast to obtain FEA action against Tenneco, the FEA issued a Notice of Probable Violation (NOPV) against Tenneco. In the NOPV, the FEA took the position that the 1972 processing agreement between Tenneco and West Coast and the use by Tenneco of its own oil on its property constituted a sale for purpose of the "produced and sold" standard in the price control regulations. Following oral and written submissions by Tenneco to the FEA, the FEA issued a Remedial Order to Tenneco on June 8, 1976. In the Remedial Order, the FEA concluded, inter alia, that Tenneco had miscalculated its BPCL and had overcharged West Coast for deliveries of old oil between September 1973 and November 1974. The order required Tenneco to refund the overcharges with interest to West Coast. On July 19, 1976, Tenneco filed an appeal of the Remedial Order with the FEA's Office of Exceptions and Appeals (OEA). On December 21, 1976, the OEA denied Tenneco's appeal.8
Seeking judicial review of the December 21, 1976 Appeal Decision, Tenneco filed a complaint against the FEA in the United States District Court for the Southern District of Texas on February 1, 1977. The parties filed cross-motions for summary judgment, and on April 11, 1979, the district court entered summary judgment for Tenneco.
A precise statement of the issues is essential to the resolution of this case. In defining the issues, we look first to the administrative orders which are the basis of the FEA's action against Tenneco. The Remedial Order issued by the FEA in June 1976 stated the "fundamental questions" to be "whether the processing of crude oil into fuel oil and the consumption of crude oil as fuel on a property are 'sales' of crude oil." Processing and consumption are sales, the FEA concluded, because "these activities confer value upon a party. . . ."
The FEA reiterated this theory of the case in its appeal decision of December 1976, in which it stated:
A producer such as Tenneco receives value when its crude oil is exchanged for the payment of money, other crude oil, refined petroleum products, or services. Consequently, even though a transfer did not occur in title to the Fee C crude oil which was processed in 1972 and returned to Tenneco to be burned on the property, it is clear that Tenneco received sufficient "value" within the meaning of the phrase "produced and sold" for the quantity of crude oil involved to properly be included in the BPCL. It is undisputed that Tenneco burned the crude oil on the site as a fuel for the thermal stimulation process and that this process was an essential element of its crude oil extraction operation. Moreover, Tenneco would have accounted for the value involved as an operating expense if the firm had purchased the residual fuel oil from a third party for the identical purpose.
Clearly, the FEA has grounded its position on the hypothesis that, for purposes of the price control regulations, the requirement of a "sale" is met whenever a person derives value from property. Under this view of the regulations, Tenneco derived value from its Fee C oil and thereby "sold" Fee C oil either when West Coast processed and returned the oil in a more useful form, or when Tenneco used the oil to fuel the steam generators located on Tenneco's oil producing properties. That the mere use of oil may be a sale under the FEA's view is confirmed by the FEA's Notice of Appeal, which describes the issue in this case as:
Whether the agency's interpretation, that volumes of crude oil produced from a property and burned on the lease as fuel for production purposes in steam generators are considered to be "produced and sold" and, therefore, included in the calculation of that property's BPCL, is correct as a matter of law.9
It must be emphasized that the FEA does not argue that the processing agreement between Tenneco and West Coast ever worked a transfer of title, in form or substance, as to the oil that was processed and returned to Tenneco. To the contrary, the FEA makes the bold assertion that a sale may occur without a transfer of title. Nor does the FEA contend that West Coast must be viewed as having owned the Fee C oil even momentarily. The sale was complete, according to the FEA, when the oil was processed for Tenneco, or when Tenneco used the oil for its own benefit.
In reviewing the orders of an administrative agency, a court can only affirm or reverse the agency's decision based on the agency's stated grounds for the decision. A...
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