Tenneco Oil Co. v. Dept. of Energy

• Decision Date: 06 July 1979
• Docket Number: Civ. A. No. 77-486.
• Citation: 475 F. Supp. 299
• Parties: TENNECO OIL COMPANY, Plaintiff, v. DEPARTMENT OF ENERGY and James R. Schlesinger, Secretary, Department of Energy, Defendants.
• Court: U.S. District Court — District of Delaware

475 F. Supp. 299

TENNECO OIL COMPANY, Plaintiff, v. DEPARTMENT OF ENERGY and James R. Schlesinger, Secretary, Department of Energy, Defendants.

Civ. A. No. 77-486.

United States District Court, D. Delaware.

July 6, 1979.

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William O. LaMotte, III, Morris, Nichols, Arsht & Tunnell, Wilmington, Del., for plaintiff; John P. Mathis and Thomas J. Eastment, Baker & Botts, Washington, D.C., of counsel.

James W. Garvin, Jr., U.S. Atty., John H. McDonald, Asst. U.S. Atty., Dept. of Justice, Wilmington, Del., Barbara Babcock, Asst. Atty. Gen., David A. Engels, Arthur Gowran, George Kielman and Neal Tonken, Dept. of Energy, Washington, D.C., for defendants.

OPINION

MURRAY M. SCHWARTZ, District Judge.

Tenneco Oil Company ("Tenneco") seeks judicial review of various orders issued by the Department of Energy ("DOE") and its predecessor agencies, the Federal Energy Administration ("FEA") and the Cost-of-Living Council ("CLC"). DOE determined that Tenneco had failed to comply with regulations of the FEA and the CLC governing the calculation of price for certain products subject to petroleum industry price control, as authorized by the Emergency Petroleum Allocation Act of 1973, 15 U.S.C. § 751, et seq. and the Federal Energy Administration Act of 1974, 15 U.S.C. § 761, et seq. Having concluded that Tenneco was not in compliance with the terms of the pricing regulations, the Department also denied Tenneco's application for exception relief, in which the Company argued that it should be exempted from the regulations as interpreted by the DOE in the enforcement proceedings, because their literal application to Tenneco produced an inequitable result contrary to the intent of the regulations and their enabling statutes.

Tenneco's complaint in this action challenges the decisions reached in the enforcement and exception proceedings and raises eight separate grounds upon which Tenneco urges this Court to overturn the results of the proceedings below. Presently before the Court is DOE's motion to dismiss Counts II, V, VII and VIII of the complaint, on the theory that the arguments raised therein were never presented in the administrative agency's proceedings and therefore must be deemed waived.¹ Because defendants' motion references portions of the administrative record of the proceedings below, and therefore requires the Court to consider matters outside the pleadings, the motion will be treated as a motion for partial summary judgment, as contemplated by F.R.Civ.P. 12(b). See Moreland v. Western Pennsylvania Interscholastic Athletic League, 572 F.2d 121 (3d Cir. 1978); 5 C. Wright & A. Miller, Federal Practice & Procedure § 1366 (1969). Also presented for resolution by the the Court is the parties' dispute concerning the proper scope of discovery in this action. Tenneco has served interrogatories upon DOE and filed a motion to compel answers, and DOE has filed a motion for a protective order; the parties have mutually agreed to stay all discovery pending this Court's disposition of the defendants' motion to dismiss. Before addressing the questions presented by the pending motions, it is appropriate to provide a brief overview of the statutory scheme and the administrative proceedings that have given rise to this lawsuit.

I. BACKGROUND

The CLC "Phase IV" Price Regulations, as incorporated by the Mandatory Petroleum Price Regulations of the FEA, established a comprehensive system for regulating the price of products produced in the petroleum industry.² The pricing mechanism applicable to refiners such as Tenneco permitted a refiner to "increase its May 15, 1973 selling price to each class of purchaser each calendar month beginning with February, 1976 by an amount to reflect the increased product costs plus the increased non-product costs attributable to sales of that covered product using the differential between the month of measurement and the month of May 1973 . . .." 10 C.F.R. § 212.83(c)(1)(i)(A). Increased product and non-product costs were to be calculated in accordance with formulae set forth in the regulations and were defined in such a manner as to permit the refiner to pass on to the purchaser its increased costs of petroleum or petroleum products, as well as increased costs for transportation, import fees, etc. See 10 C.F.R. § 212.82.

Tenneco contends that the use of May 1973 as the base period of reference in establishing the pricing regulations "produced a bizarre result, because the month of May 1973 was not representative of Tenneco's normal gasoline resale operations."³ The Company asserts that in April and May of 1973 it had purchased and accumulated a large quantity of gasoline priced considerably higher than that which it had been accustomed to purchasing. This gasoline was to be sold in connection with a new sales program that was to begin on June 1, 1973, and therefore the prices in effect in May, 1973 did not reflect the increased costs Tenneco had incurred in acquiring the more expensive gasoline. Tenneco contends that, under DOE's interpretation of its regulations, the Company was required to take into account the more expensive reserves it had purchased and to calculate the cost of purchased gasoline during the base period at a level higher than the Company's posted wholesale selling price on May 15, 1973. Tenneco argues that under a regulatory system aimed at maintaining a constant cents-per-gallon profit, it has effectively been locked into a loss on every gallon of gasoline it sold. Immediately recognizing a potential problem when May, 1973 was designated the base period for the pricing regulations, Tenneco pursued two basic avenues of relief. First, allegedly relying upon advice and assurances given by CLC officials, Tenneco excluded part of the more expensive reserved oil from its calculations of the May 1973 base cost. This approach permitted Tenneco to show a lower base cost, to treat part of the higher cost of the remaining high-priced gasoline as increased cost of petroleum products in subsequent months and to reflect that higher cost in its pricing. Second, Tenneco applied to the FEA's Office of Exceptions and Appeals, seeking relief from application of the Phase IV regulations on the grounds that they produced a special inequity or hardship in Tenneco's case. Tenneco's two-pronged approach to its problem ultimately resulted in two tracks of DOE and FEA proceedings, the outcomes of which Tenneco now challenges.

The agencies' enforcement proceedings against Tenneco began with the issuance of a Notice of Probable Violation on November 25, 1975, in which the FEA asserted that Tenneco had overcharged its customers in the amount of $12,216,000 because it had underestimated its base costs as of May 1973. A Remedial Order was issued on February 2, 1977, directing Tenneco to refund the overcharges to its customers. Tenneco appealed the Remedial Order, advancing essentially two alternative grounds. First, Tenneco argued that it had calculated its base costs in reliance on the advice received from CLC officials, and that therefore FEA was estopped from challenging the Company's costs calculations. Second, Tenneco asserted that the regulations permitted it to reallocate its increased costs for petroleum products other than gasoline, as well as increased non-product costs, in order to raise its calculations of gasoline cost increases, and that the Company would have engaged in such reallocation had it known that the original base cost calculations would be unacceptable to FEA.⁴ Tenneco's appeal was denied on June 17, 1977 on the grounds, inter alia, that the Company had failed to demonstrate that it in fact had accumulated banks of unrecouped cost increases (either product or non-product) that it could reallocate. Tenneco then filed a Request for Modification in which it sought to demonstrate that it indeed had product and non-product cost increases available for reallocation. On November 15, 1977 a Decision and Order issued holding that the regulations permitted no retroactive reallocation of product cost increases, and remanding to the regional office the question whether Tenneco should be permitted retroactively to reallocate non-product costs. Pursuant to the remand a Revised Remedial Order was issued on February 15, 1978, permitting Tenneco to reallocate its non-product costs and thereby to reduce the total amount of overcharges by $328,000. Tenneco took an appeal from the Revised Remedial Order, in which it challenged the decision prohibiting its reallocation of costs increases attributable to "other covered products" to permit a showing of higher gasoline cost increases. This appeal also raised a question whether non-product costs (reallocable under the Revised Remedial Order) could be applied according to the "reverse sequential" method of cost recovery.⁵ On August 14, 1978 DOE issued a Decision and Order denying Tenneco's appeal from the Revised Remedial Order and holding that retroactive reallocation of product costs from other covered products to gasoline was impermissible. DOE also refused to consider the propriety of using the reverse sequential method of reallocation of non-product costs, noting that Tenneco had previously failed to raise the argument that it was entitled to use this method.

Contemporaneously, FEA and DOE were considering Tenneco's Request for Exception Relief, filed March 10, 1976 and supplemented May 12, 1976. The exception request was denied on October 1, 1976, and the appeal therefrom was also denied on March 31, 1977. Thereafter Tenneco filed a Request for Reconsideration and Modification, which was denied on November 2, 1978. As will be discussed presently, the parties disagree on precisely what issues were raised in the exception proceedings, but it is apparent that the gravamen of Tenneco's claim for exception relief was that application of the...