Union Oil Co. of Cal. v. US DEPT. OF ENERGY

• Decision Date: 25 January 1982
• Docket Number: No. 81-1961.,81-1961.
• Citation: 530 F. Supp. 717
• Court: U.S. District Court — Central District of California
• Parties: UNION OIL COMPANY OF CALIFORNIA, Plaintiff, v. UNITED STATES DEPARTMENT OF ENERGY and James B. Edwards, Jr., Secretary of Energy, Defendants.

530 F. Supp. 717

UNION OIL COMPANY OF CALIFORNIA, Plaintiff, v. UNITED STATES DEPARTMENT OF ENERGY and James B. Edwards, Jr., Secretary of Energy, Defendants.

No. 81-1961.

United States District Court, C. D. California.

January 25, 1982.

Paul J. Mode, Jr., William J. Perlstein, Wilmer, Cutler & Pickering, Washington, D. C., for plaintiff, Union Oil.

Peter Aron, Takoma Park, Md., Kathrine L. Henry, Dept. of Energy, Washington, D. C., for defendant, Dept. of Energy.

OPINION

HATTER, District Judge:

Union Oil seeks to have Department of Energy (DOE) Ruling 1981-1 of February 19, 1981 declared unlawful. That ruling was made in the wake of President Reagan's Executive Order of January 28, 1981, which ended price controls on domestic crude oil. Union claims the ruling is unlawful because it extended incentives available for the recovery of tertiary oil beyond this cutoff date. Because of the complexity of this issue some discussion of the background and history of crude oil price controls and the tertiary incentive program is necessary.

I FACTUAL BACKGROUND

In 1973, Congress enacted the Emergency Petroleum Allocation Act, which imposed price controls on most of the crude oil produced in this country. Imported oil was not covered by this Act and could be sold at market prices.

After the 1973 Arab Oil Embargo, the market price of imported crude rose dramatically. Prices for controlled domestic oil, on the other hand, remained relatively stable. Refiners whose primary source of supply was imported crude were placed at a competitive disadvantage.

To rectify this problem, the Federal Energy Administration (FEA and predecessor to the Department of Energy) enacted a system of regulations known as "the entitlements program". (See 10 C.F.R. § 211.67 (1981).) One entitlement gave a refiner the right to purchase one barrel of cheaper domestic crude oil. The number of entitlements issued was determined as follows. The FEA computed the percentage of controlled domestic oil in the market for each month. A refiner's monthly production was then multiplied by this percentage to arrive at the number of entitlements it should receive.

For example, assume the market consisted of 40% domestic controlled crude. If a refiner processed 1,000,000 barrels of oil under such market conditions, it would be allocated 400,000 entitlements. Thus, each refiner received a number of entitlements equal to its imputed pro rata share of the domestic crude market.

The entitlements program then equalized pricing disparities in the following manner. Assume the refiner mentioned above (referred there as refiner A) actually purchased only 20% or 200,000 of its 1 million barrels of oil from controlled domestic sources. It would therefore need only 200,000 of its 400,000 entitlements. Refiner A would then sell its surplus 200,000 entitlements to refiners who were in a deficit position (i.e., those whose actual purchases of controlled oil exceeded their monthly entitlement allowance).

The money paid for these entitlements by "deficit" refiners would subsidize or reimburse Refiner A for the higher prices it paid when it had purchased a greater proportion of more expensive imported crude oil. In this way all refiners would be placed on an equal competitive footing.

Entitlement data was compiled monthly by the FEA and later by its successor DOE. Monthly entitlement notices were then published in the Federal Register. Because of the administrative lag time involved, these notices were published two months after the data had been collected. The two month lag was a recognized part of the system, and while it did create temporary inequities, these were theoretically balanced out over the long haul. See generally Diamond Shamrock Corp. v. Edwards, 510 F.Supp. 1376, 1379-80 (D.Del.1981).

A. The Tertiary Incentive Program

In 1976, Congress recognized the need to give domestic oil producers greater incentives in order to reduce this nation's dependence on imported oil. Of particular concern was the recovery of petroleum which could only be extracted by "tertiary" or enhanced oil recovery (EOR) techniques. These included the injection of hydrocarbons, steam, alkalines, or displacement by miscible fluids or non-hydrocarbon gases. 10 C.F.R. § 212.78(d) (1981). Congress, therefore, amended the Emergency Petroleum Allocation Act to permit additional incentives for tertiary oil. Energy Conservation and Production Act, § 122, Pub.L.No. 94-385, adding EPAA § 8(j)(1)(A) (codified at 15 U.S.C. § 757(j)(1)(A) (1976)). The Department of Energy then enacted a series of regulations which enabled tertiary producers to sell their oil at prevailing market prices. See 10 C.F.R. § 212.78 (1981); 42 Fed.Reg. 2647 (1977).

As originally structured, this exemption from price controls only applied to the sale of tertiary oil after it had been produced by one of the enhanced recovery techniques. It did not help crude oil producers who wanted to initiate new tertiary projects, but who lacked the capital to overcome prohibitively high start-up costs. Until tertiary oil could be produced and sold, no benefits could be derived under this program.

The Department of Energy remedied this situation by allowing a potential tertiary producer to reclassify or recertify its other sales of price-controlled domestic crude as tertiary oil. This could be done at the time the producer incurred additional expenses from the use of advanced recovery techniques. This reclassified oil could then be sold at higher prevailing market prices. The producer, thus, recouped most of his or her advanced recovery expenses as they were incurred. 44 Fed.Reg. 51148-49 (1979).¹

Because large amounts of crude oil were reclassified from controlled to decontrolled oil under this program, the amount of controlled oil deemed to be in the national supply was significantly reduced. This, in turn, had a major impact on the entitlements program. With less controlled crude deemed to be in production, the overall percentage of controlled oil used to calculate the monthly allotment of entitlements dropped. As a result, refiners received a smaller share of monthly entitlements. Many, who had previously been entitlement creditors, now found themselves in a deficit position and forced to buy into the entitlement market. 46 Fed.Reg. 25315 (May 6, 1981).

B. The Executive Order Ending Crude Oil Price Controls

On January 28, 1981, President Reagan announced the immediate decontrol of domestic petroleum prices in Executive Order No. 12287. The Order stated in part that:

All crude oil and refined petroleum products are exempted from the price and allocation controls adopted pursuant to the Emergency Petroleum Allocation Act of 1973, as amended. The Secretary of Energy shall promptly take such action as is necessary to revoke the price and allocation regulations made unnecessary by this Order.

Notwithstanding Section 1 above paragraph of this Order:

(a) All reporting and record-keeping requirements in effect under the Emergency Petroleum Allocation Act, as amended, shall continue in effect until eliminated or modified by the Secretary of Energy. The Order then enumerated three specialized "sub-programs" not to be immediately dismantled. They were: state set aside for middle distillates, middle distillates for surface passenger mass transit, and the Canadian Allocation Program.

Following the Executive Order, numerous questions arose concerning its implementation. Most of these concerned how long producers could continue to recertify price controlled oil sold immediately prior to the Executive Order. Because of the two-month lag built into the reporting system, it was possible for producers to have qualified for exemptions from price controls prior to the January 28th decontrol order, but unable to recertify their sales until some time after that date.

In response to a question regarding recertification in general, the Department of Energy replied that:

If crude oil would have otherwise qualified for lawful recertification ... prior to the implementation of the Executive Order, a producer may recertify ... crude oil sold in the months of December 1980 and January 1981 ... within the consecutive two-month period immediately following the month in which the sale was made.

46 Fed.Reg. 12947 (February 19, 1981) (Answer # 5). Emphasis added.

But DOE changed its tune when asked specifically about tertiary incentive oil. In Answer Number 7, it noted that:

Executive Order 12287 is intended to provide for an immediate decontrol of crude oil and refined petroleum products. The Order does not abrogate the right that accrued to a firm to establish prices for crude oil prior to January 28, 1981. Thus, a firm may become a qualified producer ... on or after January 28, 1981. A qualified producer may also recover allowed expenses through the recertification of crude oil sold in the months of December 1980 and January 1981, respectively, as long as the producer has incurred, paid, and reported those expenses prior to February 28 and March 31, 1981.

DOE Ruling 1981-1, 46 Fed.Reg. 12947 (1981). Emphasis added.

Under this interpretation, new tertiary projects could be qualified after January 28 as long as a producer "incurred, paid and reported" its expenses prior to the February 28 or March 31 cutoff dates. Numerous producers took advantage of this extra grace period by initiating new tertiary projects and recertifying oil that had previously been sold at controlled prices.²

DOE's extension of the tertiary program had a dramatic impact on the entitlements program. Because of the increased number of recertifications allowed, a greater proportion of the overall petroleum production was reclassified as decontrolled rather than controlled oil during the last two months, or "mop-up" phase of price controls. Oil that would normally have been sold at cheaper controlled prices was retroactively marked-up to reflect a sale at higher market levels....