July 16, 1997

DECISION AND ORDER

OF THE DEPARTMENT OF ENERGY

Application for Refund

Name of Petitioner: Enron Corporation/

Xcel Products Company, Inc.

Date of Filing: July 1, 1997

Case Number: RF340-203

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 Xcel Products Company, Inc. (Xcel), a wholesale marketer that purchased propane from UPG.(1) Accordingly, Xcel was a reseller of Enron products.

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. In a letter dated December 12, 1996, Xcel elected not to prove injury and requested a refund under the reseller presumption of injury.(3)

However, in Enron we also adopted a rebuttable presumption that firms that purchased Enron covered products on the spot market were not injured by Enron's alleged overcharges. A claimant is a spot purchaser if it made only sporadic purchases of significant volumes of Enron's covered products. Id. at 88,961. This presumption is based upon the general conclusion that purchasers on the spot market tend to have considerable discretion in where and when to make purchases. Therefore, a firm would not have made spot purchases of Enron product without evaluating the full financial effect of those purchases. Accordingly, we believe that a spot purchaser would not generally have made a spot purchase unless it was to its financial advantage. A spot purchaser can rebut this presumption by demonstrating that it was in fact injured by its spot purchases. See generally Sauvage Gas Co./NGL Supply, Inc., 19 DOE ¶ 85,622 (1989). In prior proceedings we have allowed applicants to rebut the spot purchaser presumption by demonstrating that: 1) they were forced to make the purchases to meet their base period supply obligations; or 2) they resold the product at a loss which was not subsequently recovered. E.g., Saber Energy, Inc./Mobil Oil Corp., 14 DOE ¶ 85,170 (1986).

In a July 1, 1996 letter to Michael O'N. Barron, Xcel's representative in this refund proceeding, we tentatively identified Xcel as a spot purchaser of Enron product. In that letter, we noted that the information in Xcel's Application indicated that Xcel made isolated purchases of significant volumes of product from Enron. Specifically, Schedule A attached to the Application showed Xcel made the following purchases:

1975 January 5,250 gallons (4)

1976 October 5,250,000 gallons

November 2,520,000 gallons

1977 December 3,780,000 gallons

1978 March 1,260,000 gallons

April 1,127,686 gallons

July 1,260,000 gallons

November 1,260,000 gallons

We stated that unless Xcel was able to demonstrate that it was not a spot purchaser or was able to show that it was injured by its spot purchases, we would be unable to grant its refund claim. See July 1, 1996 letter from Thomas L. Wieker, Deputy Director, Office of Hearings and Appeals, to Michael O'N. Barron. In a response to this letter dated December 12, 1996, Mr. Barron attempted to show that Xcel was not a spot purchaser.

Analysis

In determining whether Xcel'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 detailed explanation of the meaning of the presumption, and can provide a basis for our analysis of whether the presumption is applicable to Xcel'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. We recognize that short term, discretionary sales and purchases may have been a normal business arrangement in certain portions of the NGL industry, particularly in the producer and wholesale reseller markets. Nevertheless, we believe such spot market purchases of Enron product establish a presumption that the purchaser was not injured. 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. Accordingly, we will proceed with an evaluation of Xcel's business operations.

According to a questionnaire filled out for Mr. Barron by Mr. Casey, Xcel was incorporated in Texas in 1974 and was a wholesale marketer of NGLs. It marketed the NGLs in the Mt. Belvieu/ Gulf Coast market and, to a lesser extent, in the Midwest market in central Kansas. Xcel had three subsidiaries: Xral Storage and Terminaling Company (Xral), Butex, Inc., and Xcel of Ohio. Butex and Xcel of Ohio were both retail propane companies. Mr. Casey stated in a letter dated February 4, 1997 that Butex and Xcel of Ohio "are not involved in the Enron refund program." Xral was an operator of gas liquids storage wells and was located in Mt. Belvieu.

All of Xcel's records have been destroyed. Therefore, Mr. Casey is unable to supply all of the names of Xcel's suppliers and customers. However, Mr. Casey stated that, in general, Xcel's customers were retail marketers, refiners, petrochemical companies, utilities, other wholesale marketers, and other large users of NGLs. Mr. Casey stated that these customers included Union Carbide, Shell, Dow Chemical and Ford Motor Company.

Mr. Casey stated that UPG bought several of Xral's storage wells. Xcel and UPG operated these wells under a joint operating committee. In a letter dated December 6, 1996, Roger Helgoe, the former vice president of supply and marketing for UPG, stated that Xcel's wholesale marketing operation was completely separate from the storage well partnership. Mr. Casey said his familiarity with UPG led Xcel's wholesale marketing operation to buy propane from UPG. Mr. Casey also stated, however, that UPG did not have any production facilities in the Mt. Belvieu/ Gulf Coast area and did not have a great deal of product available in Xcel's principal market area. Mr. Casey stated that "the purchase agreements were short-term contracts. The long-term or annual contract was something of a dinosaur in the mid-1970's."

Based on the description of Xcel's business activities provided by Mr. Casey, we find it likely that a large portion of the NGLs that Xcel purchased from UPG were sold to other wholesale marketers rather than to Xcel's retail and end user customers. Since UPG did not have production facilities or a large amount of available product in Xcel's principal market area, it is unlikely that Xcel relied on UPG product to supply its regular retail customers or high volume end users in that region. Under these circumstances, it appears likely that the large volumes of UPG product purchased by Xcel were sold to other wholesale marketers who bought and sold product throughout the NGL pipeline system. See H.C. Oil Company, 26 DOE at 88,090-91 (purchases and sales made outside a reseller's region of operation are likely to have occurred within the NGL pipeline system). Accordingly, we conclude that the applicant has not demonstrated that any substantial volumes of this UPG product was used to supply Xcel's regular retail and end user customers in the Mt. Belvieu/ Gulf Coast area.

Xcel Has Not Rebutted the Spot Purchaser Presumption.

In his submission, Mr. Barron presented his position concerning the role that Xcel and other wholesale marketers played in the NGL industry. Mr. Barron also reviewed OHA's spot purchase decisions and challenged our tentative determination that Xcel was a spot purchaser. Specifically, he maintained that the OHA has not viewed "any and all short-term transactions" as spot purchases. The OHA has previously considered this position as presented by Mr. Barron and has found that it does not rebut the spot purchase presumption. Enron Corporation/ H.C. Oil Company, 26 DOE ¶ 85,038.

As discussed above, there are several reasons why we believed that Xcel was a spot purchaser. First, Xcel made large purchases from UPG in seven months of the refund period and a small purchase in one month of the refund period. These purchases were not made on any particular schedule or in any set amount. Therefore, we believed that these purchases were for large volumes and made in an isolated and sporadic manner. We therefore believe the logic of the spot purchase presumption should apply.

Xcel did not begin operations until 1974, after the refund period began. Therefore, it did not have base period customers to whom it was obligated to provide NGLs under the DOE's price and allocation regulations. This situation gave Xcel the freedom to buy NGLs only when the price terms were favorable.

After reviewing the evidence submitted by Mr. Casey, we conclude that he has not rebutted our finding that Xcel purchased from UPG on the spot market, nor has he made the showings of injury required of spot market purchasers. The unsubstantiated assertions of Mr. Casey concerning Xcel's purchasing relationship with UPG and Xcel's relationship with its customers do not establish that Xcel was required to make regular purchases from UPG in order to maintain supplies to established customers. Xcel's purchases from UPG appear to have been completely discretionary; it had no base period supply obligations that required it to purchase product for its customers. Moreover, as we discussed above, most of the Enron purchases were likely to have been outside Xcel's regular market area and its customers for this product were likely to have been other wholesale marketers. In exercising its discretion to purchase UPG products, we must conclude that Xcel made a rational business decision. It must have determined that the UPG products were priced so that it could reasonably anticipate an acceptable amount of profit from the resale of those products.

In view of the circumstances discussed above, we have determined that Xcel 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 Xcel Application for Refund should be denied.

It Is Therefore Ordered That:

(1) The Application for Refund filed by Larry J. Casey of Xcel Products Company (Case No. RF340-203) is hereby denied.

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

George B. Breznay

Director

Office of Hearings and Appeals

Date: July 16, 1997

(1)The Xcel application was submitted by Larry J. Casey (hereinafter "the applicant"). Mr. Casey submitted documents showing that he and his wife, Irene Casey, were the only shareholders of the corporation at the time of its dissolution in 1983. Mr. Casey is represented in this proceeding by Michael O'N. Barron.

(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)Mr. Barron stated that Xcel did not have sufficient records to prepare a claim of injury. See December 12, 1996 letter from Mr. Barron to Mr. Wieker.

(4)Xcel's purchase of NGLs in January 1975 is extremely small. We do not know the circumstances surrounding this purchase. We do not believe that it was a spot purchase.