Case No. RF340-00001-

March 28, 1997

DECISION AND ORDER

OF THE DEPARTMENT OF ENERGY

Application for Refund

Name of Petitioner: Enron Corporation/

H. C. Oil Company, Inc.

Date of Filing: July 16, 1991

Case Number: RF340-1

On September 14, 1988, the Economic Regulatory Administration of the Department of Energy (DOE) filed a Petition with the Office of Hearings and Appeals (OHA) requesting that the OHA formulate and implement procedures for distributing funds obtained through a consent order with Enron Corp. (Enron). See 10 C.F.R. Part 205, Subpart V. The consent order resolved DOE allegations that Enron and all of its subsidiaries, affiliates, prior subsidiaries, predecessors and successors in interest violated the mandatory petroleum regulations in their sales of crude oil and refined petroleum products from January 1, 1973 through January 27, 1981 (the consent order period). On July 10, 1991, the OHA issued a Decision and Order setting forth final procedures for disbursing the portion of the Enron settlement fund attributable to various Enron entities' sales of NGLs and NGLPs. Enron Corp., 21 DOE ¶ 85,323 (1991) (Enron). These covered Enron entities are UPG, Inc. (UPG), Northern Propane Gas Company (Northern), and Florida Hydrocarbons Company. In accordance with the goals of 10 C.F.R. Part 205, Subpart V, Enron implements a process for refunding the consent order funds to purchasers of Enron NGLs and NGLPs who are able to demonstrate that they were injured as a result of the covered entities' alleged overcharges. This Decision and Order renders a determination upon the merits of an Application for Refund submitted on behalf of H. C. Oil Company, Inc. (HCOC), a wholesale marketer that purchased propane, butane and natural gasoline from UPG.(1) Accordingly, HCOC was a reseller of Enron products.

I. Background.

In Enron we adopted a presumption that the alleged overcharges attributable to NGLs and NGLPs had been dispersed equally in all sales of refined product made by the covered entities during the consent order period. Enron, 21 DOE at 88,959. We stated that, in the absence of a demonstration of a disproportionate overcharge, a claimant would be allocated a share of the consent order funds on a volumetric basis. We provided that eligible claimants would receive $.00601 per gallon of covered Enron product purchased.(2)Id. We refer to the dollar amount derived by multiplying an applicant's purchase volume by the per gallon refund amount as the applicant's allocable share.

Enron generally requires a claimant to demonstrate that it was injured by Enron's alleged overcharges in order to receive a refund equal to its full allocable share. However, in Enron, we adopted several presumptions of injury that would allow certain types of claimants to receive a refund without a detailed demonstration of injury. We established that resellers, retailers and refiners seeking volumetric refunds of $10,000 or less were injured by Enron's pricing practices. Id. at 88,960. Such applicants would, therefore, only have to document their purchases of covered Enron products in order to receive a refund of their full volumetric share. Id. at 88,960.

We further established that a reseller, retailer or refiner whose volumetric share of the Enron consent order funds exceeds $10,000 may elect to receive as its refund the larger of $10,000 or 60 percent of its volumetric share up to $50,000. Id. Accordingly, a claimant in that group need only establish the volume of Enron covered products that it purchased during the refund period to receive a refund of 60 percent of its allocable share up to $50,000.

The applicant has chosen not to rely upon these presumptions of injury. Instead, he has submitted information aimed at showing that HCOC was injured with respect to the product that it purchased from UPG and resold to third parties. Accordingly, we will consider granting the applicant a refund for HCOC's volumes of UPG purchases based on our analysis of HCOC's business operations and the information that the applicant has submitted concerning injury.

II. Resellers Must Show Injury to Receive an Enron Refund.

A reseller whose allocable share exceeds $10,000 must demonstrate that it was injured by Enron's alleged overcharges in order to receive a refund equal to its full volumetric allocation of the consent order fund. Enron at 88,960. Generally, a reseller who had a long term purchasing arrangement with Enron must meet a two- step requirement to make an injury showing. First, in order to determine the degree to which market conditions forced an NGL reseller or retailer to absorb the alleged overcharges, we determine whether the firm accumulated banks of unrecovered increased product costs large enough to justify the amount of the refund claimed during the period when it purchased from Enron through the end of the banking period. Next, the firm must show that market conditions forced it to absorb the alleged overcharges. Id. at 88,960. In this regard, the OHA applies a three part competitive disadvantage analysis that has been upheld by the courts. See Behm Family Corp. v. DOE, 903 F.2d 830 (Temp. Emer. Ct. App. 1990); Atlantic Richfield Co. v. DOE, 618 F. Supp. 1199 (D. Del. 1985). Under the competitive disadvantage methodology, we infer that where the firm was required to make purchases at above average market prices, it generally indicates that the firm was unable to pass through the alleged overcharges. Conversely, we infer that purchases made at prices below the market average placed a firm at a competitive advantage and did not injure the firm.(3)

In addition, however, a reseller who made only spot purchases of Enron product must overcome a rebuttable presumption that it was not injured as a result of its purchases. Id. at 88,961. Enron states that a claimant is a spot purchaser if it made "only sporadic purchases of significant volumes of covered Enron product." In order to receive a refund, such a claimant must rebut the spot purchaser presumption by submitting specific and detailed evidence aimed at establishing the extent to which it was injured as a result of its spot purchases from Enron. Id., citing Sauvage Gas Company, 17 DOE ¶ 85,304 (1988)(Sauvage).

III. Notification of Presumed Non-injury and HCOC's Response.

As noted above, the applicant is attempting to show that HCOC was injured by its purchases from UPG, an Enron subsidiary, in order to receive a full volumetric refund for the 22,382,808 gallons of product that it claims to have purchased from UPG during the refund period. In the original application, the applicant submitted information aimed at establishing that HCOC had banks of unrecovered increased product costs sufficient to support its refund claim, and that a price comparison indicated that it was placed at a competitive disadvantage when it purchased product from UPG.

On January 16, 1996, the OHA received a supplemental submission from the applicant explaining how HCOC calculated its banks of unrecovered, increased product costs with reference to the requirements of the "new item/new market" price rule for resellers of NGL products at 10 C.F.R. § 212.111. This submission included HCOC purchases and sales of NGL products for March and May, 1977. The OHA reviewed these records and, in a June 27, 1996 letter, informed the applicant that HCOC, as a spot market purchaser of NGL products, must submit additional information to substantiate its claim that HCOC experienced economic injury as a result of its purchases from UPG. Specifically, we stated that:

The HCOC business records that you submitted with HCOC's refund claim indicate that HCOC operated at the wholesale marketer level of NGL distribution. As indicated in your submission in RF340-82 (Vanguard Petroleum Corporation), the characteristics of sales in the producer/wholesaler market often involve large volumes and a price that is usually negotiated for each transaction. See Statement of P. E. Goth, Jr. at 2.

Accordingly, we find strong indications that HCOC purchased Enron product primarily on the spot market. Spot purchasers are generally presumed not to have been injured by the alleged overcharges. The OHA has adopted this presumption because firms usually made spot purchases only when those transactions were beneficial to them and provided the best available terms. Thus, it is unlikely that they would have been injured on those purchases by the consent order firm's pricing practices.

There are two ways that your firm may respond in order to receive a refund in the Enron proceeding. The first is to demonstrate that it was not a spot purchaser. To do this, you should submit a detailed description of HCOC's purchasing relationship with Enron and HCOC's relationship with its customers, that establishes that HCOC was required to make regular purchases from Enron in order to maintain supplies to base period customers. Alternatively, HCOC could establish that it was forced by market conditions to resell the product purchased from Enron at a loss that was not subsequently recovered.

In addition, we require more information concerning the business operations of HCOC as an NGL wholesale marketer in order to evaluate the appropriateness of HCOC's injury claim. Please provide a description of the typical manner in which HCOC located customers and negotiated the purchase and sale of NGLs. It would be very helpful if HCOC could submit some sample sales contracts or any other documents showing the nature of the agreements between HCOC and its customers during the refund period. Please identify HCOC's marketing region and describe how HCOC's purchase and sale transactions facilitated the distribution and consumption of NGLs.

June 27, 1996 letter from Thomas L. Wieker, Deputy Director, OHA, to Michael O'N. Barron, Esq.

In a submission received on October 31, 1996, the applicant responded to this inquiry. In this submission, he presented his position concerning the role that HCOC and other wholesale marketers played in the NGL industry. The applicant also reviewed OHA's spot purchase decisions and challenged our tentative determination that HCOC was a spot purchaser. Specifically, he maintained that the OHA has not viewed "any and all short-term transactions" as spot purchases.

In a letter dated November 12, 1996, Deputy Director Wieker stated that the monthly summaries of HCOC's purchases and sales for January and February 1980 required additional clarification. The OHA's review of these summaries indicated that in many instances HCOC may have participated in a chain of product purchases and sales that did not promote the distribution of that product.

We acknowledge that there may be instances where HCOC purchased product from UPG, Inc. and sold it to customers who were in a direct path of market distribution. In such instances, HCOC may have a valid claim that it absorbed overcharges and is entitled to a refund. However, given the strong indications of large volume activity between the same firms evidenced by HCOC's transaction summaries, we request additional information from HCOC with respect to each volume of product that it purchased from UPG, Inc. for which it seeks a refund. This information should indicate that it is likely that the volume of product purchased from UPG, Inc. moved directly toward its ultimate destination as a result of HCOC's involvement, or that HCOC performed an economic function or bore an economic risk.

In a submission received on January 31, 1997, the applicant provided additional documentation and explanations aimed at addressing these concerns.

IV. Analysis.

A. HCOC Engaged in Pipeline Purchases and Sales of UPG product.

HCOC was located in Billings, Montana and began its business operations in the spring of 1977, went out of business after the period of price controls, and was dissolved in the Fall of 1986. The application describes HCOC as a small regional NGL wholesale marketer specializing in purchases and sales in Montana and adjacent states, with total sales in 1978 of approximately 20 million gallons. See Applicant's October 31, 1996 submission at 8.

In a statement dated October 23, 1996, the applicant described HCOC's customers as mostly refiners, retailers and end-users in Montana, Wyoming, and North Dakota. He stated that almost all of the firm's customers had to be supplied by truck transport or railcar. According to the applicant, who stated that he joined HCOC in January 1980,(4) the product bought from UPG was loaded onto railcars at UPG's Bushton, Kansas gas plant and delivered to refineries and retailers in North Dakota and Wyoming. At that time, he believed that UPG was paid as it invoiced HCOC for the tank car loads after they were shipped. Statement of Joel Wilkinson at 4, attached to applicant's October 31, 1996 submission.

The applicant indicates that HCOC began to purchase large volumes of NGLs from UPG in 1979 when UPG determined that regulatory considerations made it more profitable to locate new purchasers for its product:

Up until 1979 UPG, Inc. [UPG], a subsidiary of Internorth, Inc. was supplying to Northern Propane Company [Northern], another subsidiary of Internorth and a large multi-state propane retailer and wholesaler, approximately 250,000,000 gallons of NGLs per year. In early 1979, Internorth, Inc. decided that UPG, Inc. could no longer supply Northern Propane with NGLs because of DOE interpretation of Mandatory Price Regulations and threatened litigation.

Consequently, UPG, Inc. was required to find purchasers of 250,000,000 gallons of propane and butane that it had been supplying to Northern Propane Company. UPG, Inc. salesmen contacted [HCOC] and [HCOC] became a regular purchaser of UPG, Inc. product beginning in March 1979. Thereafter, it purchased 22,382,808 gallons of propane and butane directly from UPG, Inc. between March 1979 and October 1980. It continued to purchase butane and natural gasoline from UPG, Inc. after these products were decontrolled.

July 16, 1991 HCOC refund application at 2.

However, HCOC's available schedules of its sales of product purchased from UPG do not indicate that product purchased from UPG by HCOC was shipped by HCOC to customers who were refiners, retailers and end-users in Montana, Wyoming, and North Dakota. In response to our request for additional schedules of HCOC purchases and sales, the applicant states that the only additional existing HCOC records that identify HCOC's suppliers of NGLs are some purchase schedules for the months of January 1980 through October 1980.(5) An attached letter from the applicant describes these schedules as follows:

This record of sales covers only one aspect of H.C.'s business - the sales H.C. bookkeepers apparently called "Pipeline Sales." These records may have been prepared to analyze the profitability of these sales and could have been prepared anytime between 1981 and 1985 - long after price controls were terminated.

January 24, 1997 letter of Joel Wilkinson at 2. Although these schedules cover only the "pipeline sale" aspect of H.C.'s business, UPG records provided to the DOE indicate that they document all of HCOC's propane purchases from UPG in 1980. Indeed, after reviewing these records, the applicant expresses some doubt concerning his earlier assertion that HCOC transported NGLs purchased from UPG for resale in Montana, Wyoming and North Dakota.

In my earlier letter about H.C.'s business, I wrote that I thought most of the product that it bought from UPG went to our northern plains customers. I said that because that is where most of our customers were and the bulk of the sales were made. A lot of the product that H.C. bought at Mapco or in the different pipelines was moved and sold up north. After looking at these records, I am not certain that I was right but I am also not certain that H.C.'s bookkeepers were correct. I still think some of the UPG product was sold in the northern plains, but I have no records to prove it and only my memory of conversations with H.C. employees.

Id. at 2-3.

Under these circumstances, we believe the weight of the available evidence rests with the schedules purportedly generated by HCOC bookkeepers rather than the uncertain impressions of the applicant, who has made conflicting statements even concerning when in 1980 he first worked for HCOC. Moreover, although no records exist to specifically identify HCOC's suppliers of propane and butane in 1979, existing records documenting HCOC's classes of purchaser in that year support the conclusion that HCOC's purchases of propane and butane in 1979 also occurred within the NGL pipeline system (i.e., were "in-line" transactions). The volumes of purchases of propane and butane in HCOC's "pipeline" classes of purchasers in 1979 are more than sufficient to cover HCOC's purchases from UPG in that year. See 1979 Class of Purchaser information attached to the applicant's January 31, 1997 submission.

Accordingly, we conclude that the applicant has not demonstrated that any substantial volumes of the UPG product were shipped north for sale to HCOC's regional customers in Montana, Wyoming and North Dakota. The documented transactions involving UPG product all were in-line transactions, and fully cover HCOC's propane purchases from UPG for the documented period. Accordingly, we will evaluate HCOC's arguments concerning injury in light of our conclusion that HCOC's purchases and sales of UPG product consisted chiefly of in- line transfers of product.

B. HCOC's In-line Transactions Were Spot Purchases.

In determining whether HCOC's purchases from UPG were spot purchases, it is important to first understand the purpose and scope of the presumption, so that it may be correctly applied to the facts of this case. In this regard, Enron's extensive discussion of the spot purchaser presumption in the context of responding to comments on the proposed Enron implementation order provides a more detailed explanation of the meaning of the presumption, and can provide a basis for our analysis of whether the presumption is applicable to HCOC's purchases and sales of UPG products.

In Enron, we concluded that the concept of spot purchaser is sufficiently well defined to allow applicants to understand the theoretical basis for the presumption.

The term spot purchase is commonly used and understood in the petroleum industry to mean a contract for the purchase and sale of petroleum products on a short term basis. [Sauvage Gas Company/NGL Supply, Inc., 19 DOE ¶ 85,622 at 89,142 (1989)(Supply)] The OHA has interpreted the term spot purchaser to mean any firm that purchased significant volumes of covered products from a supplier on a sporadic or isolated basis outside of a long term supply obligation.

Enron at 88,955. It is clear from this discussion that the purchaser's discretion in selecting its supplier of product is a key element underlying the presumption of non-injury.

We have consistently determined that spot purchasers tend to have considerable discretion in where and when to make purchases and therefore would not have made spot market purchases from a firm at increased prices unless they were able to pass through the full price of the purchases to their own customers. The OHA has utilized this spot purchaser presumption of non-injury in numerous special refund proceedings.

Id., citing Sauvage, 17 DOE ¶ 85,304. It should be noted that short term, discretionary sales and purchases were the rule rather than the exception in certain portions of the NGL industry, particularly in the producer and wholesale reseller markets. Although such spot market purchases of Enron product establish a presumption of non-injury to the purchaser, such a purchaser may submit additional information concerning its business operations to rebut the presumption on a case-specific basis. As we noted in Enron,

The OHA examines the circumstances of each case to make an initial determination whether the applicant's purchases were likely to have been spot purchases. Where it appears likely that an applicant's purchases were spot purchases, the applicant is generally notified of our tentative conclusion and offered an opportunity to show either that it was not a spot purchaser or that it was injured by its spot purchases. Since this analysis focuses on the fundamental refund issue, viz., whether the applicant was injured, there is no merit to the claim that it is based on an impermissibly vague definition. ...

In Supply, ... we stated that "the determination of whether a [sic] individual's purchases from a particular supplier are spot purchases is a question of fact and therefore must be made on a case-by-case basis." Id. at 89,143.

Id. at 88,955-56. This case-by-case injury analysis is a broad one. Under this method, "we consider the circumstances under which a claimant made its purchases and any information submitted by the applicant that might aid our determination concerning whether its purchases were spot purchases." Our determination of whether a spot purchaser was injured is similarly based on a case-by-case analysis of information submitted by the claimant. Id. at 88,956- 57.

After reviewing the evidence submitted by the applicant, we conclude that he has not rebutted our finding that HCOC purchased from UPG on the spot market, nor has he made the showings of injury required of spot market purchasers. The detailed information provided by the applicant concerning HCOC's purchasing relationship with UPG and HCOC's relationship with its customers does not establish that HCOC was required to make regular purchases from UPG in order to maintain supplies to established customers. As discussed above, the available evidence indicates that HCOC's purchases and sales of UPG products occurred outside of the firm's market area and did not involve the transportation of product to its regular customers. HCOC's purchases from UPG were completely discretionary; it had no base period supply obligations that required it to purchase product for its customers. Nor was it using UPG product to maintain existing supply relationship with regular customers in its market area. In exercising its discretion to purchase UPG products, we must conclude that HCOC made a rational business decision. It must have determined that the UPG products were priced so it could realize an acceptable amount of profit from the resale of those products.

In response to our preliminary designation of HCOC as a spot purchaser, the applicant contends that our designation was incorrect because OHA ignored the substantial number of spot market purchases that HCOC made from UPG in 1979 and 1980. He contends that OHA may apply the spot purchaser presumption only to refund applicants who made isolated or sporadic purchases from Enron affiliates.

... OHA now proposes to abandon the "isolated or sporadic" test after 15 years of the refund process and expand the spot purchase presumption to include all short-term purchases. Not only is there no support for this in its past decisions, but there is no authority for this approach in OHA's Final Decisions and Order in the Enron refund program.

HCOC October 31, 1996 Submission at 15.(6)

We do not agree that there is any rigid requirement concerning frequency of purchases that underlies the spot purchaser presumption. The fact that a firm made isolated or sporadic purchases from a supplier merely raises a strong presumption that the purchases were discretionary and therefore did not result in economic injury to the purchaser. A firm that made spot market purchases from a particular supplier on a frequent basis may also be a spot purchaser for purposes of the presumption if other factors, such as the firm's market position, indicate that the purchases were discretionary. When the first refund procedures were established in Office of Enforcement (Vickers Energy Corp.), 8 DOE ¶ 82,597 (1981)(Vickers), OHA recognized that the situation of spot market purchasers often contrasted sharply with that of other customers of a consent order firm. Vickers, 8 DOE at 85,396- 97. In Supply, we found that OHA's adoption of the spot presumption rested on our observation that a firm's position in the petroleum industry often determined whether it was likely to have incurred injury as a result of its supplier's alleged regulatory violations. Steady customers such as small gasoline retailers were often tied to a supplier by the federal allocation regulations, a supply contract, and state branding laws. Firms purchasing product consistently from an allocated supplier under these conditions lacked the flexibility to take advantage of lower prices by making discretionary purchases on the spot market, and were much more likely to have been "stuck" with any overcharges that occurred. In contrast, firms purchasing significant volumes of product on the spot market tended to have considerable discretion to determine whether to purchase and, if so, to select product that they were able to resell at a profit. This distinction between different kinds of purchasers forms an important part of the basis for adopting the spot market presumption of non-injury. Supply, 19 DOE at 89,141.

Also, the determination of whether a firm incurred injury rests on our evaluation of the unique set of facts arising in each case. In Mobil Oil Corp./NGL Supply, Inc., 17 DOE ¶ 85,186 (1988)(Mobil/Supply), we rejected the argument that OHA could not apply the spot purchaser presumption where it had previously granted refunds to firms with similar or more sporadic patterns of purchases, and failed to raise the spot purchaser presumption in those instances. We found that the determination of whether a firm's purchases from a particular supplier are spot purchases is a question of fact and therefore must be made on a case-by-case basis. Mobil/Supply at 88,368. We also noted that "as in any adjudicative process, the caselaw is undergoing constant evolution and refinement . . . ." Id. at 88,368.(7)

Accordingly, we find no merit in HCOC's contention that our findings in Sauvage Gas Company, Inc./Joel Wilkinson, Assignee of H.C. Oil Company, 21 DOE ¶ 85,353 (1991)(Sauvage/Wilkinson), are determinative in this case. In Sauvage/Wilkinson, we found that HCOC was a regular (as opposed to a spot) purchaser of butane from Sauvage Gas Company based on information that HCOC purchased butane from Sauvage in 12 of the 34 months between March 1977 and December 1979, and natural gasoline from Sauvage in 10 of those 34 months. However, we did not base our finding in Sauvage/Wilkinson solely on the frequency of HCOC's purchases. We also noted that the purchase volumes of butane and natural gasoline were consistent from month to month, and generally ranged between 55,000 and 200,000 gallons for butane and between 37,000 gallons and 138,000 gallons for natural gasoline. 21 DOE at 89,056. The volume level of these purchases is significantly lower than the propane and butane purchases at issue in the present case. For example, in 1980, HCOC's propane purchases from UPG ranged between 630,000 gallons and 2,520,000 gallons. HCOC appears to have purchased butane from UPG in a similar volume range. See "Schedule C Price Comparison" attached as Exhibit E to the applicant's November 27, 1996 submission. The relatively low volumes of HCOC's purchases from Sauvage are far less indicative of discretionary spot purchases than the larger volume purchases that HCOC made from UPG. Accordingly, our determination in Sauvage/Wilkinson weighed a number of factors in reaching its conclusion, not all of which are present in the present case. The analysis in Sauvage/Wilkinson underlines the importance of evaluating the spot purchaser issue based on the specific facts of each case.

We will now determine, on a product-by-product basis, whether HCOC's purchases from UPG were spot purchases. Accord Sauvage/Wilkinson, 21 DOE at 89,055; Murphy Oil Corp./Williamson Spur Oil, 20 DOE ¶ 85,494 (1990); Murphy Oil Corp./Texaco, Inc., 20 DOE ¶ 85,365 (1990); Mobil Oil Corp./Atlantic Richfield Co., 18 DOE ¶ 85,096 (1988) (product-by-product evaluation of spot purchases). In the present case, we find that our invocation of the spot purchaser presumption with respect to HCOC is consistent with the language and intent expressed in Enron. Enron identifies a spot purchaser as a firm making "only sporadic purchases of significant volumes of covered Enron products." Id., 21 DOE at 88,961. Webster's Ninth New Collegiate Dictionary defines "sporadic" as "occurring occasionally, singly, or in scattered instances." This definition certainly fits HCOC's documented purchases of propane from UPG in 1979 and 1980. The records indicate that in 1979 HCOC purchased propane in only three months, i.e. in April, October and December. The six purchases of UPG propane made by HCOC in 1980 occurred in only four months of that year - January, April, September and December. As noted above, these purchases involved significant volumes of product. Moreover, the volumes purchased in the four months of 1980, 630,000 gallons, 3,150,000 gallons, 2,100,000 gallons, and 420,000 gallons, provide no evidence of a consistent pattern of purchases. We believe that these purchases were made after HCOC evaluated its ability to profitably sell this product. Accordingly, we conclude that in 1979 and 1980, HCOC appears to have purchased propane from UPG in a sporadic and discretionary manner.

With respect to butane, HCOC purchased that product from UPG in only seven months of 1979. Following regulatory decontrol of butane, HCOC also purchased butane from UPG in January, May and September of 1980, and in January 1981. Although HCOC's 1979 purchases were fairly consistent during the brief period of March through December, 1979, there is no evidence in the record that they resulted from any continuing commitment on the part of HCOC to purchase UPG butane. There is reason to believe that each of HCOC's 1979 purchases of butane was negotiated separately, based on HCOC's business judgment of its ability to profitably sell the product. This conclusion is supported by the significant volumes of butane purchased in each transaction and by the monthly price figures for HCOC's UPG purchases. The prices paid for butane (and propane as well) vary widely and are never consistent from month to month. See "Schedule C Price Comparison" attached as Exhibit E to the applicant's November 27, 1996 submission. Accordingly, we reject the applicant's argument that OHA improperly ignored the frequency of HCOC's purchases from UPG when it stated its view that the spot purchaser presumption applied to the firm.

C. HCOC Has Not Shown Injury from Its Spot Purchases from UPG.

Based on these considerations, we find that HCOC's purchases of propane and butane from UPG were sporadic and discretionary, and were not necessitated by any need to supply the firm's established customers.(8) Under these circumstances, we believe that HCOC's purchases from UPG are precisely the sort of transactions that the spot purchaser presumption was intended to cover. Accordingly, in order to qualify for a refund the applicant must rebut the presumption that HCOC was not injured by its spot purchases of UPG products. This presumption may be rebutted by the submission of evidence sufficient to establish that: 1) the purchases were necessary to maintain supplies to base period customers; and 2) the claimant was forced by market conditions to resell the product at a loss which was not subsequently recovered. See Quaker State Oil Refining Co./Certified Gasoline Co., 14 DOE ¶ 85,465 (1986); Amtel Inc./Highway Oil, Inc., 14 DOE ¶ 85,143 (1986). These are not the only grounds for rebutting the spot purchaser presumption. Any convincing evidence establishing that a spot purchaser was in fact injured by the alleged overcharges of a consent order firm would suffice to rebut the presumption. Supply, 19 DOE at 89,141 n. 2.

In demonstrating economic injury in order to overcome the spot purchaser presumption, we have consistently held that a claimant must submit evidence to establish that it was unable to recover the price it paid to the consent order firm. Standard Oil Co. (Indiana)/Cities Service Co., 12 DOE ¶ 85,114 at 88,336 (1984); Tenneco Oil Co./J.O. Cook, Inc., 9 DOE ¶ 82,580 at 85,427 (1982)(Tenneco/Cook). This position rests on our view that where a firm is exercising its discretion to purchase and sell product on the spot market, the recovery of its costs and any level of profit on the transactions are sufficient to demonstrate that the firm did not experience injury. In Tenneco/Cook, for example, Cook attempted to claim a refund for gasoline that it purchased and sold on the spot market at a low profit margin.

We brokered all of this gasoline at 1/2 to 1 cent above our cost. . . . We did not pickup the gasoline and sell it ourselves at retail.

Tenneco/Cook, 9 DOE at 85,427. The OHA concluded that these were "precisely the type" of transactions that are not eligible for a refund. The OHA found that Cook "suffered no injury from Tenneco's regulatory practices" because it was "able to not only pass through all of any alleged overcharges, but was able to make a profit on all of its sales of Tenneco gasoline." Id. By contrast, in Waller Petroleum Company, Inc./Wooten Oil Company, 13 DOE ¶ 85,110 (1985)(Waller/Wooten), the OHA found that Wooten had successfully demonstrated injury in its purchases of Waller product because it bought and sold Waller product at a loss in order to meet its allocation obligations to its customers. Id., at 88,297.

Throughout his submissions, the applicant contends that HCOC experienced economic injury as a result of its UPG purchases. As an initial matter, the applicant contends that it is sufficient for HCOC to establish injury by demonstrating that the higher prices charged by UPG diminished the amount of profit that HCOC realized on its sales of UPG product.

There is no reason to believe that [HCOC] was able to pass though any UPG overcharge to its own customers. The product purchased from UPG was a significant portion of the product sold to its customers in 1979 and 1980. Its record of banked product costs indicates that it absorbed large dollar amounts of the price increases passed along by its suppliers when it resold its product to its customers. Its experience was common to the general experience of wholesale marketers during price controls and supports the Linneman studies showing that wholesale marketers absorbed 30% to 40% of crude oil price increases during the period of controls.

October 31, 1996 Submission at 17. We have consistently rejected the idea that a reseller making discretionary purchases on the spot market was entitled to any particular margin of profit, and that its failure to achieve that level of profit constitutes proof that it experienced economic injury as a result of the prices that it paid for product. The fact that such purchases were discretionary and made within an actively fluctuating spot market strongly indicates that the spot purchaser was buying product that it believed would be profitably resold. The profit margin on such sales would fluctuate naturally depending on various factors affecting the supply and demand of product. Under these circumstances, a lower profit margin does not demonstrate that a particular reseller was injured by the price charged by a particular seller. As we stated in Tenneco/Cook, spot market purchases resulting in some level of overall profitability strongly demonstrate that the purchaser suffered no injury from the seller's regulatory pricing practices. Id., 9 DOE at 85,427.

In the present case, HCOC freely chose to enter the wholesale reseller market in 1977 and to purchase large volumes of UPG products from 1979 until the end of price controls. This indicates to us that HCOC's resales involving UPG products were generally profitable to HCOC. Under these circumstances, HCOC's purported banks of unrecovered increased product costs do not indicate that HCOC experienced injury in its transactions involving UPG product. Whether HCOC recovered its base margin of profit in its resales of UPG product is irrelevant to a showing of injury regarding discretionary, spot market purchases.(9)Similarly, the competitive disadvantage analysis provided by HCOC does not establish injury. Whether HCOC paid more or less for propane and butane than its competitors, there is no indication that HCOC was injured by freely choosing to engage in discretionary reselling transactions involving spot market product.

Finally, the applicant argues in its January 31, 1997 submission

that when HCOC's total expenses are considered, the firm most probably suffered an overall loss in its resales of UPG butane and propane.

In two out of the five butane sales and in four of the thirteen propane sales [connected to HCOC's purchases of UPG butane and propane], [HCOC] lost money. Its gross loss in its sales of butane was $256,606 with an additional expense of $2,028 in interest charges. The net loss on UPG butane (including probable interest expenses) was $110,646. Its net profit on its propane sales was $81,966 with probable interest expenses of another $21,650 for a net profit of $60,316. So it is likely that its losses exceeded $50,000 when product costs, interest charges, storage and pipeline fees are deducted from its sales income.

January 31, 1997 "Comments and Summary" submission at 10-11. We do not believe that these assertions are adequately supported by the information provided to the OHA. The alleged losses on HCOC's sales of UPG butane are based on a comparison of UPG purchase prices with HCOC's average sales price for the month in question. For example, in April 1979, HCOC purchased 2,927,400 gallons of UPG butane at $.3651 per gallon. HCOC bank records for that month indicate that in its "Pipeline" category of butane customers, HCOC sold 8,706,600 gallons of butane at an average price of $.28854 per gallon. The applicant adopts this $.28854 per gallon as the selling price for the UPG butane and calculates a loss on the transaction of $248,731, plus interest costs and storage or pipeline charges. Id., at 1-2. This calculation completely ignores the fact that HCOC's average purchase price for butane in that month was only $.28040 per gallon and that in that month HCOC's transactions yielded an average net profit of $.00814 per gallon. Accordingly, there is reason to believe that HCOC may have found a customer or customers willing to pay $.3651 per gallon or higher for the UPG product. In fact, we believe that it is likely that it found those customers prior to its purchase of the product. Moreover, with respect to the 1980 propane sales, HCOC records identify most of the firms who purchased UPG propane from HCOC and indicate that overall, HCOC's transactions involving UPG propane were profitable. Based on this information, we conclude that the applicant has not demonstrated that HCOC operated at a net loss with respect to its purchases and sales of UPG product.

In view of the circumstances discussed above, we have determined that HCOC has not shown injury from its spot market purchases from UPG and has therefore failed to rebut the spot purchaser presumption. Accordingly, we conclude that the HCOC Application for Refund should be denied.

It Is Therefore Ordered That:

(1) The Application for Refund filed by Joel Wilkinson, assignee of H. C. Oil Company, on July 16, 1991 is hereby denied.

(2) This is a final order of the Department of Energy.

George B. Breznay

Director

Office of Hearings and Appeals

Date: March 28, 1997

(1)The HCOC application was submitted by Joel Wilkinson (hereinafter "the applicant"). Mr. Wilkinson states that he is the former president and sole shareholder of the corporation, which is now dissolved.

(2)2/ This amount was derived by dividing the fund received from Enron allocable to refined products ($43,200,000) by the estimated volume of refined products sold by Enron from June 13, 1973 through the date of decontrol of the relevant product (7,186,265,624). Id. at n. 8.

(3)This analysis produces three measures which the OHA uses as guidelines in determining the claimant's level of injury. The first measure, "gross excess cost," is the sum of the amounts by which an applicant's monthly purchase costs exceeded the market average. The second measure, "net excess cost," equals an applicant's gross excess cost minus the sum of the amounts by which its purchase costs were below the market average in other months. This measure provides an indication of the cumulative impact of the alleged overcharges, balancing the adverse effect of the comparatively expensive purchases against the positive effect of comparatively inexpensive purchases. The third measure, the "above-market volumetric share," is the number of gallons purchased at prices which exceed market prices multiplied by the volumetric factor. This measure is indifferent to the magnitude of the excess costs incurred, accounting only for the number of gallons of uncompetitively priced product purchased by the applicant. We consider all of these indicators of competitive disadvantage in determining whether, and to what extent, an applicant was injured by its purchases, and thereby to calculate an appropriate refund amount. See Texas Oil and Gas Corp./Gulf Oil Corp., 13 DOE ¶ 85,135 (1985); see also Texaco Inc./Oakwood Oil Co., 22 DOE ¶ 85,262 (1993).

(4)In a later submission, dated January 24, 1997, Mr. Wilkinson states that he joined HCOC in July 1980.

(5)The applicant had previously submitted these schedules, covering the period January 1980 through January 1981, in a submission dated November 18, 1992 concerning HCOC's cost banks.

(6)The applicant quotes the statement in Enron that "[a] claimant is a spot purchaser if it made only sporadic purchases of significant volumes of covered Enron products." 21 DOE at 88,961.

(7)Even if the OHA determines that a reseller's situation did not comport with the circumstances previously held to establish the spot market purchaser presumption of non-injury, the OHA must still find that the reseller has established the likelihood of injury in order to award the reseller a refund. Where a reseller applicant's operations are atypical of the

normal reseller-retailer operations upon which presumptions of injury and established standards for showing injury are based, the OHA must make a specific finding that the applicant was injured by its purchases of covered product. See Marathon Petroleum Company/Oasis Petroleum Company, 22 DOE ¶ 85,068 at 88,194 (1992).

(8)Although not listed in the applicant's submissions, UPG records made available to the DOE by Enron also indicate that HCOC purchased 3,633,000 gallons of natural gasoline from UPG in 1980. These purchases appear to be listed on the schedule of "pipeline sales" included in the applicant's January 24, 1997 submission, and consist of five purchases with an average volume of about 700,000 gallons. Accordingly, we conclude that these also were spot purchases of UPG product.

(9)With regard to HCOC's banks, we note that the applicant does not rely on contemporaneously calculated banks of unrecovered costs, but on recent bank calculations performed by Mr. Barron. Because HCOC began its business operations in 1977, it was required to establish its maximum selling price for each type of product by referring to the selling prices of a similarly situated firm (the "nearest comparable outlet") already operating in the market. See "New Item/New Market Price Rule," 10 C.F.R. § 212.111. Mr. Barron selected Liquid Petroleum Corporation (LPC), a reseller based in Tulsa,

Oklahoma, as HCOC's "nearest comparable outlet." Using LPC's selling prices, Mr. Barron arrives at imputed base profit margins for HCOC of $.0894 for propane and $.0450 for normal butane. These imputed margins appear excessive when compared with actual profit margins among wholesale resellers. For example, HCOC's actual profit margins on its first sales were $.02 for propane and $.013 for normal butane. Accordingly, even if HCOC were not a spot purchaser, the bank calculations resting on these imputed HCOC profit margins could not be accepted as the basis for an injury showing.