United States v. Exxon Corp., Civ. A. No. 78-1035.

Citation561 F. Supp. 816
Decision Date25 March 1983
Docket NumberCiv. A. No. 78-1035.
PartiesUNITED STATES of America, Plaintiff, v. EXXON CORPORATION, Defendant.
CourtUnited States District Courts. United States District Court (Columbia)

Larry P. Ellsworth, Frank W. Krogh, Daniel F. Shea, Arthur S. Weissbrodt, Ellen Rosenberg-Blatt, Gary A. Gegenheimer, Dennis M. Moore, Office of Gen. Counsel, Dept. of Energy, C. Max Vassanelli, Richard A. Levie, Dept. of Justice, George Kielman, Dean S. Cooper, Joseph L. Gibson, Gilbert T. Renaut, Office of Solicitor, Economic Regulatory Adm., Dept. of Energy, Washington, D.C., for plaintiff.

Rene P. Lavenant, Jr., Ronald D. Secrest, Houston, Tex., David R. Johnson, John M. Simpson, Maury S. Epner, Washington, D.C., Barbara Finney, Houston, Tex., for defendant Exxon Corp.

MEMORANDUM OPINION

FLANNERY, District Judge.

This matter is before the court on cross-motions for summary judgment. Plaintiff Department of Energy ("DOE")1 alleges that defendant Exxon Corporation ("Exxon") from January 1975 to January 1981 violated federal two-tier oil price-control regulations by selling as higher-priced "new" oil what should properly have been sold as lower-priced "old" oil. DOE alleges Exxon overcharged crude oil purchasers by failing properly to establish a unit-wide base production control level — the basis for calculations of "new" and "old" oil — for the Hawkins Field Unit, which it operates near Hawkins, Texas. DOE asks that Exxon be ordered to pay into the United States Treasury the alleged amount of overcharges — some $895 million — with interest from the date of overcharge, and that Exxon be assessed civil penalties of about $38 million.

In support of its cross-motion for summary judgment, Exxon argues that it is guilty of no overcharge because the rule DOE seeks to enforce against it is invalid as beyond the agency's statutory authority, arbitrarily and capriciously applied, issued without proper procedure, and finally, in any event, not applicable before September 1, 1976. In opposition to DOE's motion, Exxon argues that the regulations at issue, if valid, require the establishment of a unit base production control level only upon the occurrence of a "significant alteration in producing patterns", which occurred at the Hawkins Field no earlier than March 1977 and which, in any event, presents a disputed question of fact which may not be resolved on a motion for summary judgment.

For the reasons expressed below, plaintiff's motion for summary judgment is granted in part and denied in part. Defendant's motion is denied.

I. Background
A. The Regulatory Framework

In 1970 Congress passed the Economic Stabilization Act, Pub.L. No. 91-379, 84 Stat. 799, as amended 12 U.S.C. § 1904 note, authorizing the President to issue such orders as he felt appropriate in order to stabilize prices. In the summer of 1971 the President imposed wage and price controls and delegated their enforcement to the newly-created Cost of Living Council ("CLC"). During the next few years these controls were gradually phased out, but because prices of petroleum products continued to climb, the CLC in August 1973 promulgated regulations applicable only to the oil industry. 6 C.F.R. Part 150, Subpart L (1974); 38 Fed.Reg. 22,536 (1973).

Just a few months later, after the Arab oil embargo had caused oil prices to jump sharply, Congress in November 1973 passed the Emergency Petroleum Allocation Act ("EPAA"), Pub.L. No. 93-159, 87 Stat. 628, 15 U.S.C. § 751 et seq. (1976), requiring the promulgation of regulations within 15 days. EPAA § 4(a). In January 1974, the new Federal Energy Office ("FEO") reissued the CLC price regulations, with only minor changes, at 10 C.F.R. Part 212, Subpart D (1975), 39 Fed.Reg. 1924, 1952 (1974) where they remained until the decontrol of petroleum prices in January 1981.

The heart of the petroleum price regulations was the application to domestically produced crude oil of a two-tier pricing structure designed to further the twin goals of combatting inflation while encouraging new domestic oil production. Cities Services Co. v. FEA, 529 F.2d 1016, 1020 (Em. App.1975). Producers were required to sell "old" crude oil at the lower-tier price and were allowed to sell "new" crude oil at a higher price. 10 C.F.R. §§ 272.73, 212.74 (1975).2 Amounts of "old" and "new" oil were calculated by comparing current production at a given property to that property's production in an earlier corresponding base period, its "base production control level" ("BPCL").3 Any excess of current production above the BPCL could be sold as higher-priced new oil. All current production up to the BPCL, however, had to be sold as lower-priced old oil.4

While the regulations appear conceptually to be relatively straightforward, their application in some instances proved to be problematic. For example, the regulations required that a BPCL be established for every oil-producing "property." 10 C.F.R. § 212.72 (1975). "Property" was defined as "the right which arises from a lease or from a fee interest to produce domestic crude petroleum." Id.5 The question arose, which is now at the heart of this lawsuit, as to the proper method of calculating a BPCL for large, multilease tracts which during the base year had operated as independent, competing properties but which subsequent to 1972 had embarked upon the cooperative production process known as unitization.6 Did the regulations require that the BPCL for fields unitized after 1972 be established field-wide, by totalling the 1972 production of all properties which made up the unit, or could the BPCL be calculated on an individual, lease-by-lease basis?

To address this issue, the Federal Energy Administration ("FEA") in August 1975 issued Ruling 1975-15 interpreting the existing regulations. 40 Fed.Reg. 40,832 (1975).7 In Ruling 1975-15 the FEA emphasized that the property concept in the regulations was based on the right to produce crude oil, however arising, and on the need to ensure a meaningful comparison between current and base year production. Id. Accordingly, the FEA ruled that in the case of properties unitized after 1972, the producer was required to calculate a unit-wide BPCL by totalling the individual 1972 monthly production for each of the leases constituting the unit. Id. Lease-by-lease calculations were not allowed.

Ruling 1975-15 sparked criticism from the oil industry that the unit BPCL requirement would discourage unitization and hence retard efforts to increase domestic production. See 41 Fed.Reg. 1564, 1569 (1976).8 Furthermore, in December 1975 Congress passed the Energy Policy and Conservation Act ("EPCA"), Pub.L. No. 94-163, Title IV, 89 Stat. 871, 941 (1975), 15 U.S.C. §§ 757 et seq, which among other things directed the FEA to promulgate amendments to the oil price regulations which would stimulate domestic production while at the same time combatting inflation in the prices of petroleum products. EPCA § 401(a); S.Rep. No. 516, 94th Cong., 1st Sess. 116-17, 120-21 (1975); U.S.Code Cong. & Admin.News p. 1762. To achieve these sometimes conflicting goals, Congress directed the FEA to create different classifications of crude oil which would bear different prices. 15 U.S.C. § 757(a). The weighted average price per barrel was not to exceed $7.66. Id. To ensure that higher prices would reward only real increases in production, Congress provided specifically in Section 401(a) of the EPCA that no amendment to the regulation could allow the price of any old oil to increase above the existing ceiling, unless the President specifically found that such an amendment would give positive incentives for enhanced recovery techniques, or was necessary to take into account declining production at a property, and would likely result in production greater than what would have occurred in the absence of the amendment. EPCA § 401(a); 15 U.S.C. § 757(b)(2).9 "Old oil production" was defined in the EPCA as the average production of old oil, as defined in Section 212.72, at a particular property in the months of September, October, and November of 1975. 15 U.S.C. § 757(b)(3).

In reaction to the industry criticism, and pursuant to the Congressional directives in the EPCA, the FEA in February 1976 amended the oil price regulations. 41 Fed. Reg. 4931 (1976). In response to the Congressional desire for increased production,10 the amendments addressed three different but overlapping objectives: to provide production incentives generally, to provide incentives for the maintenance of existing units, and to remove disincentives to prospective unitization.11

The FEA noted in the preamble to the amendments that production had so declined at older properties that producers could no longer realistically expect to boost volume above 1972 levels, thereby rendering ineffective the lure of higher new oil prices. Id. at 4932. Accordingly, the FEA first amended Section 212.72 to provide producers at all properties the option of choosing a more recent, and presumably lower, BPCL based on average old oil production in 1975, rather than 1972. Id. at 4933; see n. 3, supra. In the same spirit, the FEA eliminated all deficiencies which had accumulated prior to February 1, 1976. 41 Fed.Reg. at 4933. In effect, all properties could begin afresh with a new BPCL and a more realistic chance of producing new oil. Id.

In addition, the FEA provided other incentives specifically for unitized properties. The first, applicable to both existing units and those to be formed on or after February 1, 1976, provided that Ruling 1975-15 was rescinded ab initio insofar as it required the unit operator to calculate a unit-wide BPCL as of the date of unitization. Id. at 4937. Instead, operators could continue to account for production on a lease-by-lease basis until enhanced recovery operations had begun or a significant alteration in producing patterns occurred within the unit. Id.

The agency defined "enhanced recovery" as "any method of recovering...

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