Case No. RF352-00002
November 7, 1997
DECISION AND ORDER
OF THE DEPARTMENT OF ENERGY
Application for Refund
Name of Petitioner: Eason Oil Company/
Koch Hydrocarbon Company
Date of Filing: June 17, 1994
Case Number: RF352-2
On February 5, 1992, 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 between the DOE and Eason Drilling Company, formerly Eason Oil Company (Eason), and Eason's former parent corporation, ITT Corporation (ITT).(1) See 10 C.F.R. Part 205, Subpart V. The Consent Order resolved DOE allegations that Eason violated the mandatory petroleum regulations in its sales of natural gas liquids (NGLs) and refined crude oil condensate during the period November 1, 1973 through December 31, 1979 (the Consent Order period). On June 1, 1993, the OHA issued a Decision and Order setting forth final procedures for disbursing the Consent Order funds and accrued interest to qualified purchasers of Eason's covered products. Eason Oil Company; ITT Corp., 23 DOE ¶ 85,073 (1993) (Eason). In accordance with the goals of 10 C.F.R. Part 205, Subpart V, Eason implements a process for refunding the Consent Order funds to purchasers of Eason NGLs and refined crude oil condensate who are able to demonstrate that they were injured as a result of the Eason's alleged overcharges. This Decision and Order renders a determination upon the merits of an Application for Refund submitted by Koch Hydrocarbon Company (KHC), a division of Koch Industries, Inc., which fractionated Eason NGLs for resale to third parties.
I. Background
In Eason we adopted a presumption that the alleged overcharges attributable to NGLs and refined crude oil condensate had been dispersed equally in all sales of refined product made by Eason entities during the Consent Order period. Eason, 23 DOE at 88,182. 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 $.02353 per gallon of covered Eason 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.
Eason generally requires a claimant to demonstrate that it was injured by Eason's alleged overcharges in order to receive a refund equal to its full allocable share. However, in Eason, 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 Eason's pricing practices. Id. at 88,183. Under this "small claim" presumption of injury, an applicant whose total Eason purchases correspond to an allocable share of $10,000 or less need only document their purchases of covered Eason products in order to receive a refund of their full volumetric share. Id.
In Eason, we also established that a reseller, retailer or refiner whose volumetric share of the Eason 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. at 88,184. Accordingly, a claimant in that group need only establish the volume of Eason covered products that it purchased during the refund period to receive a refund of 60 percent of its allocable share up to $50,000 under the "mid-range" presumption of injury.
KHC has chosen not to rely upon these presumptions of injury. Instead, the firm has submitted information concerning its business operations aimed at showing that it suffered a real injury with respect to the product that it purchased from Eason and resold to third parties. Accordingly, we will consider granting KHC a refund for its volumes of Eason purchases based on our analysis of this information concerning injury.
II. KHC's Business Operations
In its June 6, 1994 Application for Refund, KHC described its business as follows:
The primary business activities of [KHC] are the following: (1) natural gas gathering, processing and sales; and (2) natural gas liquids transportation, fractionation, and marketing. [KHC] purchases and sells propane, butane, natural gas, and ethane. It also transports and fractionates these products for third parties.
KHC Application at 1. In letters to the firm dated June 21 and October 11, 1996, we asked KHC to provide more specific information concerning its business operations and its use of Eason products. In response, KHC describes its business as "a multifaceted NGL company with its primary focus being on the fractionation of NGLs for redelivery into the major markets of Conway, Kansas and Mont Belvieu, Texas." KHC states that its purchase of Eason's gas plant production "facilitated the distribution and consumption of NGLs by KHC's fractionation of Eason's production and its resale of the fractionated products in the Conway market." KHC July 24, 1996 submission at 1-3.
KHC states that its fractionator, located in Medford, Oklahoma, began operation in 1972 with an original fractionation capacity of 25,000 barrels per day (BPD) that was gradually increased to 90,000 BPD by the end of 1979. KHC states that 95 percent of the product that it purchased from Eason was a mixed gas liquids stream, commonly referred to as rawfeed, and that KHC had to transport this rawfeed to its Medford fractionator, separate it into purity products, and deliver it to a market location. The remaining five percent of the product KHC purchased from Eason consisted of purity product that had already been fractionated by Eason. However, because KHC commingled both the rawfeed and the purity product into the same pipeline for transportation to the Medford fractionator, the purity product, along with the rawfeed, had to be fractionated prior to being delivered to market. Thus, KHC fractionated 100 percent of the product it purchased from Eason. KHC November 27, 1996 submission at 1-2. Based on these statements, we conclude that KHC depended upon Eason as a source of product for both its refining and its NGL marketing activities.
Throughout the refund period, KHC purchased a majority of the NGL production from Eason gas plants, with most of these plants being connected to KHC's pipeline gathering system. Where Eason owned production at plants not physically connected to KHC's pipeline, the NGLs were trucked into KHC's system. Pursuant to contracts, KHC was obligated to purchase Eason's product on a long term basis. However, Eason appears to have possessed the ability to raise its prices on a frequent basis. For example, in October 1973 KHC contracted to purchase Eason's Crescent Plant production for one year at 8 cents per gallon. However, six months later, this contract was superseded by a contract specifying a purchase price of 9 cents per gallon. The final purchase contract during the refund period committed KHC to purchase Eason's Crescent Plant production for a five year period, from December 17, 1975 through December 16, 1980. This contract specifically allowed for a "price review" by Eason every 90 days. Accordingly, we conclude that KHC's contractual agreements with Eason did not protect it from being overcharged by Eason in sales of product. See Eason Sales Contracts attached to KHC's July 26, 1996 submission.
Finally, KHC states that it generally transported the Eason product that it fractionated at its facility in Medford, Oklahoma to the major NGL storage facilities in Conway, Kansas for resale. It states that it primarily resold product on the spot market, and that its customers included chemical plants, refineries and propane retailers. In its sales transactions, KHC states that it was subject to market fluctuations on the price of product that it purchased through its long-term agreements with Eason.
Through its gathering, fractionation, transportation and resale activities, KHC performed significant economic functions associated with the operation of the NGL market. It also appears that KHC was neither insulated from the impact of price increases by Eason or assured of achieving a complete pass through of the price it paid Eason. Accordingly, we will proceed to evaluate KHC's banks of unrecouped increased product costs and its information concerning competitive disadvantage to determine whether KHC has demonstrated that the prices that it paid to Eason resulted in an economic injury to KHC.
III. The Bases for Showing Injury in this Proceeding.
A reseller whose allocable share exceeds $10,000 must demonstrate that it was injured by Eason's alleged overcharges in order to receive a refund equal to its full volumetric allocation of the Consent Order fund. Once a refund applicant has documented the volume of its Eason purchases, the procedures in Eason outline a two-step requirement for the applicant who is 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 Eason, whichever was later, through the end of the banking period. Second, it must show that market conditions forced it to absorb the alleged overcharges. Eason, 23 DOE 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).
IV. Analysis of KHC's Injury Showing
A. The Volume of KHC's Purchases from Eason
During the refund period, KHC purchased large volumes of Eason NGLs from seven gas plants in Oklahoma and one in Louisiana. In its application, KHC submitted purchase records which establish that during the period January 1, 1976 through December 31, 1979, it purchased 92,783,121 gallons of NGLs from Eason. KHC states that it does not retain records that permit it to fully document its purchases from Eason during the portion of the refund period from November 1973 through December 1975. KHC provides estimates for this earlier period based on the pattern of its Eason purchases from six of the Oklahoma gas plants. These estimates indicate that KHC purchased an additional 21,815,545 gallons of NGLs in this earlier period, for a total claim of 114,598,666 gallons. We have reviewed the materials submitted by KHC in support of its estimates and conclude that these estimates do not overstate KHC's purchases from Eason, and are therefore reasonable and acceptable for purposes of calculating this refund. See Moore Regional Hospital, 17 DOE ¶ 85,122 (1988).
Based upon these volumes, KHC could receive a maximum volumetric
refund of $2,696,507 for its purchases of Eason NGLs, plus a proportionate share of the interest that has accrued on the Eason escrow account.
B. KHC's Banks of Unrecovered Costs
KHC has submitted data which purport to document banks of unrecovered increased product costs for the product purchased from Eason and fractionated at KHC's Medford, Oklahoma facility. Under the price regulations, the calculation of cost banks is based on a firm's May 15, 1973 maximum lawful selling prices for its products.
KHC's banks of unrecovered costs were calculated contemporaneously and were subject to review by the Federal Energy Administration (FEA) and the DOE. From 1973 through 1981, FEA and DOE audit personnel conducted a thorough and detailed audit of KHC. An April 24, 1981 Consent Order between the DOE and KHC notes that the DOE reviewed all matters relating to the firm's compliance with the price and allocation regulations. While the Consent Order provides that KHC make payments totaling fourteen million dollars to certain classes of customers, it does not provide for any adjustments to KHC's banks, and acknowledges that KHC possesses considerable discretion in utilizing its unrecovered (banked) costs.
Our review of KHC's banks, which are based on the firm's contemporaneous Form FEO-96 Reports, also indicates that they appear to have been reasonably calculated. In its Application for Refund, KHC has submitted its cumulative banks for "Other Covered Products and General Refinery Products", approximately 80 percent of which are attributable to NGLs. These banks are in excess of the firm's full allocable share of the Eason Consent Order fund for these products for the entire period from August 1973 through the end of price controls in January 1981. At the end of the refund period, KHC's banked costs were $234,871,360. Accordingly, we find that it is likely that KHC maintained banks throughout the period of its refund claim (November 1973 through December 1979) that are in excess of the firm's full allocable share of the Consent Order fund. KHC also reports that it has received refunds from the DOE in the amount of $6,995,881 (principal amount only). Reducing KHC's banks by this amount would leave significant banked costs. As a result, KHC 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 Co./Gast Fuel and Service, Inc., 20 DOE ¶ 85,127 (1990).
C. KHC's Competitive Disadvantage Analysis
Next, utilizing the competitive disadvantage methodology applied in other, similar cases, we must determine whether market conditions forced KHC to absorb the alleged overcharges resulting from its Eason purchases. For purposes of applying this test, KHC originally submitted pricing data contained in the Monthly Petroleum Product Price Report that was published by the Energy Information Administration (EIA). Although KHC'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 Co./Phillips Petroleum Co., 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 Co./BTU Energy Corp., 22 DOE ¶ 85,074 at 88,231 (1992)(ARCO/BTU). For the products butane and natural gasoline, 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.
Accordingly, on May 2, 1997, we requested that KHC recompute its competitive disadvantage analysis for the years 1976 through 1979 using comparative prices drawn from Platt's data. Virtually all of the Eason product purchased by KHC consisted of mixed NGLs produced at Eason plants located in Oklahoma and delivered by pipeline delivery to KHC's Medford, Oklahoma fractionator. Therefore, for price comparison purposes, we provided KHC with the Platt's average wholesale prices for propane for Oklahoma (Group 3), the nearest market area surveyed, and available EIA nationwide data. Because there are no Platt's prices for butane and natural gasoline, we also provided KHC with extrapolated regional prices for butane and natural gasoline using the Platt's data. We compared Platt's propane prices for the period 1976 through 1979 to EIA prices for propane, butane, and natural gasoline during that period. Using the ratio between EIA prices for propane and butane for each month of this period, we extrapolated a Platt's butane price using this ratio and the monthly Platt's propane price. By a similar means, we also extrapolated monthly prices for natural gasoline using the Platt's propane data. (3)
In a submission dated June 25, 1997, KHC submitted a revised competitive disadvantage analysis based on these monthly prices for propane, butane and natural gasoline. However, KHC reduced these prices by $0.025 per gallon. KHC contends that this adjustment is necessary because it purchased a mixed stream of NGLs which required fractionation to be comparable to the product priced in the Platt's survey. According to KHC, the $0.025 represents KHC's estimated average fractionation fee for the Consent Order period. KHC explains that
[a]lthough the base fees in KHC's fractionation agreements ranged from $0.02 to $0.025, some of these fees, pursuant to the agreements, escalated to as high as $0.031 during this time period. Such escalation was based upon KHC's fuel costs and an index published by the Department of Labor.
June 25, 1997 Submission at 2.
We agree that since KHC purchased a mixed stream of NGLs of Eason, it should be permitted to reduce the Platt's prices by the approximate cost of fractionation. We have reviewed provisions from four fractionation agreements submitted by KHC that reflect the fractionation fees. We have also ascertained that these fees do not include other costs, such as pipeline or other transportation expenses. Accordingly, we conclude that it is appropriate for KHC to reduce the Platt's prices for propane and the extrapolated Platt's prices for butane and natural gasoline by $0.025 per gallon to produce the best comparison with the delivered cost of the mixed NGL stream that KHC purchased from Eason.(4)
KHC's revised competitive disadvantaged analysis, as summarized in the following table, shows that KHC was charged uncompetitively high prices for 59 percent of the NGLs that it purchased from Eason in 1976, 1977, 1978 and 1979.(5)
Results of Competitive Disadvantage Analysis
92,783,121 Gallons with Documented Price
Allocable Share for those Gallons: $2,183,186
Total Gross Excess Cost$4,158,701
Total Net Excess Cost$2,859,595
Above-Market Volumetric Share$1,290,156
Volumetric Share [59%]
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. For the period 1976 through 1979, KHC's net excess cost is 1.3 times the firm's full allocable share of the Eason Consent Order funds and KHC's gross excess cost is 1.9 times the value of the firm's full allocable refund share. In previous cases, the gross and/or net excess costs of refund applicants has frequently been more than ten times the applicants' full allocable share of the refund. In such instances, it is clear that an applicant experienced a substantial and consistent competitive disadvantage as a result of its purchases. See Enron Corp./Unocal Corp., 26 DOE ¶ 85,041 at 88,104 (1997); Atlantic Richfield Co./Coast Gas, Inc., 24 DOE ¶ 85,136 (1995) (analysis of propane and butane purchases); Total Petroleum/Mid States Petroleum, Inc., 19 DOE ¶ 85,665 (1989) (analysis of motor gasoline purchases); Conoco, Inc./Power Pak Co., Inc., 17 DOE ¶ 85,016 (1988); Marathon Petroleum Co./Acme Oil Co., 17 DOE ¶ 85,634 (1988); Mobil Oil Corp./Hughes Oil Co., 17 DOE ¶ 85,510 (1988).
This Office has granted only partial refunds to firms whose competitive disadvantage analyses fail to indicate a substantial and consistent competitive disadvantage. For example, in several previous instances where an applicant's net excess cost for covered product is less than 100 percent of its full volumetric refund for that product, we have granted a refund only for the gallons of covered product that the competitive disadvantage analysis indicates were purchased by the applicant at above-market prices. See Atlantic Richfield Company/Coast Gas, Inc., 24 DOE ¶ 85,136 (1995) (analysis of natural gasoline purchases); Total Petroleum/Mid States Petroleum, Inc., 19 DOE ¶ 85,665 (1989) (analysis of No. 2 Oil purchases); Marathon Petroleum Co./Acme Oil Co., 17 DOE ¶ 85,634 (1988); Mobil Oil Corp./Perry Oil Co., 17 DOE ¶ 85,074 (1988). Also, in several instances where even the applicant's gross excess cost of covered product was less than 100 percent of the volumetric refund for its above market purchases, we
have limited the applicant's refund to its gross excess cost. See Eason Oil Company/Presidio Exploration, Inc., 26 DOE ¶ 85,046 (1997) (analysis of propane purchases); Aminoil U.S.A., Inc./Mornes, Walter J., 18 DOE ¶ 85,564 at 88,924 (1989); see also Kansas-Nebraska Natural Gas Co., Inc./Cities Service Oil and Gas Corp., 14 DOE ¶ 85,231 at 88,434-35 (1986) (in a case involving a large, negative, net excess cost and a gross excess cost much smaller than the firm's allocable share, the applicant's refund was limited to 50 percent of the gallons that it purchased at above market prices multiplied by the per gallon refund rate).
As noted above, KHC's competitive disadvantage analysis indicates that its net excess and gross excess costs for NGL purchases are, respectively, only 1.3 times and 1.9 times its full allocable share of the Eason Consent Order funds. These figures, although indicative of some level of injury, do not clearly establish that KHC experienced the level of substantial and consistent competitive disadvantage from its purchases of Eason product that would justify a refund based on its full volume of Eason purchases. Nor are KHC's gross and net excess costs sufficiently low to limit KHC to a refund based solely on its above market purchases from Eason. Under these circumstances, we believe it is appropriate to grant KHC a refund based on 79.5 percent of its Eason purchases, the average of its total Eason purchases (100 percent) and its above market Eason purchases (59 percent).
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 NGLs and butane during the relevant time period, we have concluded that KHC should receive a refund equal to 79.5 percent of its maximum potential refund for purchases of 114,598,666 gallons of NGLs from Eason during the period November 1973 through December 1979, or $2,143,723 (114,598,666 x $.02353 x .795 = $2,143,723). In addition, KHC will receive a proportionate share of the interest accrued on the Consent Order fund, or $740,442.(6)The firm will therefore receive a total refund of $2,884,165 ($2,143,723 principal and $740,442 interest) for the volumes of NGLs that it purchased from Eason.
Accordingly, the total volume approved in this Decision and Order is 114,598,666 gallons of Eason product and the total refund, including interest, is $2,884,165.
Although we have examined KHC'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 Koch Hydrocarbon Company (Case No. RF352-2) 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 $2,884,165 ($2,143,723 principal and $740,442 interest) from the DOE deposit fund escrow account maintained at the Department of the Treasury and funded by Eason Oil Company, Consent Order No. 740S01314Z, to:
Koch Hydrocarbon Company
c/o Lisa F. Dahlgren
Legal Department
Koch Industries, Inc.
P.O. Box 2256
Wichita, Kansas 67201
(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: November 7, 1997
(1)Eason was acquired by International Telephone and Telegraph Company (now ITT) on August 20, 1977. In December 1984, ITT sold Eason to Sohio Petroleum Company and Sonat, Inc. On July 22, 1985, ITT stipulated that it assumed liability for all violations arising from Eason's activities. Consequently, references to Eason in this Decision also refer to ITT.
(2)This amount was derived by dividing the fund received from Eason ($7,000,000) by the estimated volume of covered products sold by Eason from November 1, 1973 through December 31, 1979 or the date of decontrol of the relevant product (297,504,619 gallons). Id. at n. 3.
(3)Several earlier OHA decisions extrapolated regional prices for butane by directly comparing the Platt's regional propane prices with national EIA prices for butane. See ARCO/Phillips, ARCO/BTU, and cases cited therein. In this instance, we calculated the relationship between comparable national EIA prices for propane and butane and for propane and natural gasoline. We then established regional prices for butane and natural gasoline using these ratios and the Platt's
regional propane prices.
(4)For cost comparison purposes, reducing the Platt's prices by this amount is equivalent to raising the prices KHC paid Eason for a mixed NGL stream to approximate the additional value of the fractionated NGL products priced by Platt's.
(5)At our request, KHC only submitted a revised analysis for the years 1976 through 1979. In those years, KHC purchased 81% of the Eason product for which it is claiming a refund. Accordingly, we believe that KHC's revised analysis is sufficient for us to evaluate KHC's overall experience of injury concerning its purchases from Eason.
(6)Interest has accrued on the Eason consent order funds since July 29, 1991, the date that Eason 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 Eason account is roughly one to three.