Case No. RF340-00130

April 23, 1997

DECISION AND ORDER

OF THE DEPARTMENT OF ENERGY

Application for Refund

Name of Petitioner: Enron Corporation/

Unocal Corporation

Date of Filing: April 29, 1992

Case Number: RF340-130

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 by Unocal Corporation (Unocal), a refiner that purchased butane from Enron to manufacture finished petroleum products.(1)Accordingly, Unocal was a refiner 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.

Unocal has chosen not to rely upon these presumptions of injury. Instead, the firm has submitted information aimed at showing that it was injured with respect to the product that it purchased from Enron and resold to third parties. Accordingly, we will consider granting Unocal a refund for its volumes of Enron purchases based on our analysis of this information concerning injury.

II. The Bases for Showing Injury in this Proceeding.

A refiner 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. The procedures in Enron outline a two-step requirement for applicants attempting to make an injury showing. First, a claimant must show that it accumulated banks of unrecovered increased product costs large enough to justify the amount of the refund claimed during the period from either November 1973, the first month of the banking period, or the first month in which it purchased from Enron, whichever was later, through the end of the banking period. Second, it must show that market conditions forced it to absorb the alleged overcharges. Id. at 88,960.

In order to determine the degree to which market conditions forced an applicant to absorb the alleged overcharges, we apply 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 this methodology, we infer that purchases made at above average market prices indicate 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. The 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) (Oakwood).

III. Unocal's Business Operations.

Unocal's application maintains that it purchased large quantities of iso and normal butane from Enron entities (UPG or Northern) to manufacture finished petroleum products at Unocal's refinery in Lemont, Illinois. Specifically, Unocal states that

[a] supply agreement was entered into with UPG to supply butane through a pipeline that [UPG] built and funded. In addition, UPG built a storage facility near the Union refinery in order to provide better service. This obligated Union [i.e., Unocal] to purchase butane from UPG in order to meet required purchase quantities at a market related price. During the period of price controls, Union looked [at] the control mechanism to insure that the price paid was correct.

Unocal Attachment D at 6. The firm further states that

Union was forced into continuing our existing relationship as of May, 1973 with UPG due to the existing pipeline transportation system, prior purchase agreements, and UPG was our base period supplier. Even if lower cost suppliers might have been available, Union was not in a position to purchase from them. It would also appear that there was probably not a lower cost supplier available. Union relied on the regulatory process to insure the correct price from UPG. The appropriate share of the overcharges by UPG would redress the damage that Union incurred.

At OHA's request, Unocal submitted copies of its contractual agreements with UPG and Northern for the supply of butane. These agreements verify that UPG was Unocal's base period supplier of iso and normal butane at its Lemont, Illinois refinery, and that, throughout the refund period, Unocal depended upon UPG and Northern as the primary source of butane for operations at that refinery.

Unocal submitted to the DOE a copy of its April 1, 1973 contract with Northern, entitled "Iso Butane and Normal Butane, Sales and Exchange Agreement." This contract indicates that Unocal entered into a three year purchasing agreement with Northern for the period May 15, 1973 through April 30, 1976 whereby Unocal agreed to purchase all of Northern's iso butane production from its Bushton, Kansas gas plant. With respect to the pricing of iso butane, Northern agreed that for the first year of the contract, it would sell its iso butane production to Unocal for 11.948 cents per gallon delivered to Unocal's Lemont, Illinois refinery. For the second and third contract years, the contract called for a renegotiation of the selling price, with provisions for arbitration if no agreement could be reached. The contract also provided for Unocal to purchase 200,000 barrels of normal butane during the period June 1, 1973 through March 31, 1974 at a fixed price of $.1225 per gallon.

On July 3, 1975, the contract, which by that time had been reassigned to UPG, was extended indefinitely and amended to become a contract for the sale of iso butane only and to permit UPG to renegotiate its selling price to Unocal at the beginning of each quarter of the calendar year. On June 18, 1976, the contract was further amended to permit UPG to renegotiate its selling price on a month-to-month basis. See Sales Contracts attached to Unocal's August 21, 1996 submission.

These contractual agreements indicate that for most of the refund period, Northern or UPG appears to have possessed the ability to raise its price to Unocal on a frequent basis. However, during the period from May 15, 1973 through May 15, 1974, Northern and UPG were required to provide Unocal with iso butane at a price negotiated prior to the period of the price regulations. We therefore conclude that Unocal has demonstrated that it was not overcharged by UPG and Northern for butane purchased prior to May 15, 1974, and we will subtract this volume of Unocal's purchases from its refund claim.(3)After May 15, 1974, Unocal's contractual agreements with Northern and UPG clearly did not protect it from being overcharged by UPG and Northern for purchases of butane.

Finally, Unocal states that it used the butane purchased from Enron to manufacture finished petroleum products. Through its manufacturing activities, Unocal performed significant economic functions associated with the operation of the NGL market. With the exception noted above, it also appears that Unocal was neither insulated from the impact of price increases by Enron or assured of achieving a complete pass through of the price it paid Enron in the sale of its finished petroleum products. Accordingly, we will proceed to evaluate Unocal's banks of unrecouped increased product costs and its information concerning competitive disadvantage to determine whether Unocal has demonstrated that the prices that it paid to Enron for iso butane resulted in an economic injury to Unocal.

Unocal has submitted monthly purchase summaries that indicate that it purchased 256,896,731 gallons of butane from Enron from September 1973 through December 1979. This volume claim is substantially confirmed by information submitted by Enron to the DOE concerning sales of product by UPG. However, as we indicated above, Unocal has shown that it was not overcharged by UPG for butane purchased prior to May 15, 1974. Accordingly, we will subtract from Unocal's claim the 21,109,371 gallons of butane purchased by Unocal from UPG prior to that date, reducing Unocal's claim to 235,787,360 gallons of butane.

Based upon this claim of 235,787,360 gallons of butane, Unocal could receive a maximum volumetric refund of $1,417,082, plus a proportionate share of the interest that has accrued on the Enron escrow account.

IV. Analysis of Unocal's Injury Showing.

As noted above, Unocal purchased large quantities of iso and normal butane from UPG and Northern to manufacture finished petroleum products at Unocal's refinery in Lemont, Illinois. Unocal has submitted data which documents banks of unrecovered increased product costs for its petroleum products. These banks of unrecovered costs were calculated contemporaneously and were subject to review by the Federal Energy Administration (FEA) and the DOE. From February 1974 through January 1981, FEA and DOE audit personnel were stationed on a full-time basis at Unocal's premises. A June 15, 1982 Consent Order between the DOE and Unocal notes that the DOE reviewed all matters relating to the firm's compliance with the price and allocation regulations, and concluded that Unocal maintained procedures reasonably adapted to insure compliance with those regulations. While the Consent Order provides that Unocal make payments totaling $25,000 to certain classes of customers, it does not provide for any adjustments to Unocal's banks, which totaled $399,895,000 at the end of 1980.

Our review of Unocal's banks also indicates that they were reasonably calculated. Accordingly, we conclude that Unocal's banks are substantially in excess of the firm's full allocable share of the consent order fund. As a result, Unocal has satisfied the first part of the two-part injury requirement by demonstrating that it incurred increased costs that it was unable to pass through to its customers. See Atlantic Richfield Company/Gast Fuel and Service, Inc., 20 DOE ¶ 85,127 (1990)(ARCO/Gast).

In its Application for Refund, Unocal also has performed the three step competitive disadvantage analysis outlined above. As its source of data, the firm used the Energy Information Administration's (EIA) Monthly Petroleum Product Price Report. Although Unocal's analysis is otherwise consistent with the competitive disadvantage methodology used by the OHA, we cannot accept the firm's use of EIA data. When determining competitive injury, the OHA generally relies on Platt's Oil Price Handbook and Oilmanac (Platt's) as the best source of regional average market price data for the purpose of determining the months in which an applicant purchased refined products at prices higher than the regional average. See Atlantic Richfield Company/Phillips Petroleum Company, 22 DOE ¶ 85,217 (1992)(ARCO/Phillips), and cases cited therein at 88,575. We believe that price data assembled on a nationwide basis (like the EIA prices) does not adequately reflect competitive conditions characterizing the regional product markets. See Atlantic Richfield Company/BTU Energy Corp., 22 DOE ¶ 85,074 at 88,231 (1992)(ARCO/BTU). For a product like butane, where Platt's prices are not available, we have extrapolated regional prices from the nationwide data compiled by the EIA, based on our belief that butane follows a regional pricing pattern similar to propane, the most widely used NGL product. ARCO/BTU and cases cited therein at 88,231.

Unocal purchased butane from UPG and Northern by pipeline delivery to its Lemont, Illinois refinery. Accordingly, for price comparison purposes, we extrapolated regional prices for butane using the Platt's average wholesale prices for propane in the Chicago, Illinois region, the nearest market area surveyed, and available EIA nationwide data.(4)As shown in Appendix A, we compared Platt's propane prices for the period June 1974 through December 1979 to EIA prices for propane and butane, which are available for the period July 1975 through December 1979. Based on our findings, we extrapolated regional butane prices for the June 1974 through December 1978 period. We used a conversion factor of 1.0027 to convert regional propane prices into regional butane prices for the period from July 1974 through December 1978, a period when EIA price data indicates that propane and butane were similarly priced. For 1979, a period when average national butane prices exceeded propane prices, we used a conversion factor of 1.34.(5)

Our analysis, as detailed in the Appendix to this Decision and Order and summarized in the following table, shows that Unocal was charged uncompetitively high prices for butane by UPG and Northern in every month in which Unocal can document its purchase prices.(6)

Results of Competitive Disadvantage Analysis

Butane

198,197,360 Gallons with Documented Price

Allocable Share for those Gallons: $1,191,166

Total Gross Excess Cost$27,761,180

Total Net Excess Cost$27,761,180

Above-Market Volumetric Share$1,191,166

Volumetric Share [100%]

While none of these figures is intended to represent an absolute measure of the injury suffered by the firm, taken together they reveal whether an applicant was placed at a competitive disadvantage by its refined petroleum product costs during the period in which it was allegedly being overcharged. Unocal's gross excess costs and net excess costs greatly exceed the firm's full allocable share of the Enron consent order funds. Moreover, 100% of Unocal's purchases from Enron for which price information exists were made at above-market prices. Collectively, the three measures used in the competitive disadvantage analysis strongly suggest that Unocal experienced a substantial and consistent competitive disadvantage as a result of its purchases of butane from Enron. See, e.g., ARCO/Gast, 20 DOE at 88,253; Marathon Petroleum Co./Acme Oil Co., 17 DOE ¶ 85,634 (1988); Conoco Inc./Power Pak Co., 17 DOE ¶ 85,016 (1988).

Based upon the foregoing competitive disadvantage analyses, and in view of our finding that the firm possessed substantial banks of unrecovered increased product costs for propane and butane during the relevant time period, we have concluded that Unocal should receive a refund equal to its maximum potential refund for its purchases of 235,787,360 gallons of butane from Enron, or $1,417,082. In addition, Unocal will receive a proportionate share of the interest accrued on the consent order fund, or $911,751.(7)The firm will therefore receive a total refund of $2,328,833 ($1,417,082 principal and $911,751 interest) for the volumes of butane that it purchased from Enron.

Accordingly, the total volume approved in this Decision and Order is 235,787,360 gallons of Enron product and the total refund, including interest, is $2,328,833.

Although we have examined Unocal's claim and supporting data, the determination reached in this Decision is based on the representations made in the application. If the factual basis underlying our determination in the Decision is later shown to be inaccurate, this Office has the authority to order appropriate remedial action, including rescission or reduction of the refund.

It Is Therefore Ordered That:

(1) The Application for Refund submitted by Unocal Corporation (Case No. RF340-130) is hereby granted as specified below.

(2) The Director of Special Accounts and Payroll, Office of the Controller, of the Department of Energy shall take appropriate action to disburse by wire transfer a total of $2,328,833 ($1,417,082 principal and $911,751 interest) from the DOE deposit fund escrow account maintained at the Department of the Treasury and funded by Enron Corporation, Consent Order No. 730V00221Z, to:

Unocal Corporation

c/o Scott E. Aubrecht

Manager, Accounting & Administration

Commodity Trading and Risk Management

Unocal Corporation

14141 Southwest Freeway

Sugar Land, Texas 77478

(3) The determinations made in this Decision and Order are based on the presumed validity of the statements and documentary material submitted by the applicant. Any of those determinations may be revoked or modified at any time upon a determination that the factual bases underlying the Application for Refund are incorrect.

(4) This is a final Order of the Department of Energy.

George B. Breznay

Director

Office of Hearings and Appeals

Date: April 23, 1997

(1)Unocal is the holding company for Union Oil Company of California, a fully integrated energy resources company whose operations comprise many aspects of energy production. Union Oil Company of California's Union 76 Division purchased the Enron product for which the present refund is claimed.

(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)Northern's contract with Unocal fixed the price of its sales of normal butane only through March 31, 1974. However, Unocal has not specifically identified any of its butane purchases between April 1, 1974 and May 15, 1974 as normal butane. Accordingly, we will exclude all of Unocal's butane purchases for this period from its refund claim.

(4)To arrive at extrapolated regional prices for butane from Platt's regional propane prices, we calculated two conversion factors using the EIA's national propane and butane price data. Each factor was derived by dividing the average EIA price for butane during a portion of the refund period by the average EIA price for propane during the same period. Each factor was then multiplied by the Platt's prices for propane in the Chicago region for the applicable months to yield extrapolated monthly butane prices for the Chicago region.

(5)Several earlier OHA decisions calculated conversion factors by comparing the Platt's regional propane prices with national EIA prices for butane. See ARCO/Phillips, ARCO/BTU, and cases cited therein. We believe that the relationship between propane and butane prices in this case can be more accurately understood by assessing comparable national EIA price data for propane and butane. The conversion factors from propane to butane derived from this relationship may then be applied to the Platt's regional propane prices to calculate regional prices for butane.

(6)Unocal's records are incomplete, but it has provided price information concerning 198,197,360 gallons of the 235,787,360 gallons of UPG and Northern butane that it purchased between June 1974 and December 1979. We believe that this amount of information is sufficient for our analysis.

(7)Interest has accrued on the Enron consent order funds since July 27, 1988, the date that Enron remitted the consent order funds to the DOE. Almost all of this money earns interest at rates established in auctions of six month treasury bills. Currently, this rate is approximately 5 percent. The current ratio of interest to principal in the Enron account is roughly three to five.