Case No. RF350-00001
August 13, 1997
DECISION AND ORDER
OF THE DEPARTMENT OF ENERGY
Application for Refund
Name of Petitioner:Permian Corporation/Kona Corporation
Date of Filing: May 17, 1993
Case Number:RF350-1
This Decision and Order concerns an Application for Refund that the Kona Corporation (Kona, now d/b/a LDM, Inc.) filed in the Permian Corporation (Permian) special refund proceeding. Kona requested a refund based upon actual overcharges which it alleges occurred in sales of Permian crude oil to Kona during December 1980 and January 1981. The firm has not been able to provide material showing the existence of actual overcharges and, consequently, we are unable to grant Kona's specific request. Based upon the Kona submissions, however, we will grant the firm a pro rata share of the Permian consent order fund based upon its crude oil purchases from Permian during December 1980 and January 1981, as well as for recertifications of crude oil purchased in prior months that it received during or after January 1981.
I. Background
Under the terms of a June 25, 1982 Consent Order entered into between the DOE and Permian, the firm paid a total of $21,500,000 in settlement funds.(1) In 1982, Permian paid $7,000,000 which the DOE Economic Regulatory Administration (ERA), pursuant to its policy at that time, deposited with the U.S. Treasury. Permian paid the remaining $14,500,000 into an escrow account which funded (subject to ERA approval) settlements of certain litigation claims. On July 24, 1991, the ERA petitioned the Office of Hearings and Appeals to distribute the funds remaining in the escrow account, $10,953,665, in accordance with 10 C.F.R. Part 205, Subpart V. On April 15, 1993, the Office of Hearings and Appeals instituted special refund procedures for the distribution of those funds. Permian Corp., 23 DOE ¶ 85,034 (1993) (Permian).
In Permian, this Office determined that 93 percent of the firm's business during the consent order period involved sales of crude oil and seven percent involved sales of natural gas liquids and refined petroleum products. Accordingly, we directed in Permian that seven percent of the consent order fund be made available in the Permian special refund proceeding to firms that purchased refined petroleum products from Permian. The remaining 93 percent of the consent order fund was directed to be distributed in accordance with the DOE's Modified Statement of Restitutionary Policy in Crude Oil Cases, 51 Fed. Reg. 27899 (August 4, 1986). Permian, 23 DOE at 88,072. That policy provides that 40 percent of crude oil funds will be remitted to the federal government, another 40 percent to the states, and 20 percent placed in the crude oil pool for distribution in this Office's crude oil refund proceeding.
Evaluating applications in the Permian special refund proceeding involves both an allocation of an appropriate portion of the consent order fund to each applicant and an evaluation of economic harm or injury suffered by that applicant. Id. at 88,077-78. In the Permian refund proceeding, we assumed that Permian overcharges were distributed equally over every gallon of regulated products sold by Permian during the consent order period and allocated the consent order monies accordingly, i.e., by dividing the value of the fund by Permian's total sales of covered products during the period. Permian at 88,077-78. This calculation produces a "volumetric factor" of $0.008744 per gallon of refined products or crude oil purchased from Permian. When that factor is multiplied by an applicant's total eligible purchases, the result is a claimant's allocable share of the consent order fund. Permian also recognized that with respect to some applicants, Permian's alleged overcharges may have had a greater impact than would be reflected in a volumetric refund. Accordingly, we stated that we would allow any purchaser to file a refund application based on a claim that it sustained a disproportionate share of Permian's alleged overcharges. Id. at 88,077. To the extent that a claimant can make this showing and show that it absorbed any resulting overcharges, it may receive a refund above the per gallon volumetric refund level.(2)
II. The Kona Refund Request
In its Application Kona requests a refund of $650,000 based upon alleged overcharges by Permian in sales of crude oil to Kona during December 1980 and January 1981. In support of the request, Kona has provided material contrasting the prices and "tier" composition of the crude oil it purchased from Permian during September, October and November, 1980, with Kona's purchases during the following months of December and January. This data shows that Kona's purchases during the September through November period were made at an average per barrel price of $30.41, and that the crude oil was certified by Permian as consisting of 26 percent upper and lower tier price controlled crude oil.(3) For December and January, the Kona data shows that its purchases from Permian cost an average of $35.91 per barrel (an increase of $5.50) and were certified by Permian as consisting of ten percent price controlled crude oil in December and seven percent in January. In addition, Kona states that during and after January 1981, it received a number of crude oil recertifications that changed the regulatory classification of much of the crude oil it purchased in December 1980, as well as some crude oil purchased in prior months, from lower or upper tier to stripper well crude oil, with a corresponding increase in price. This data is the sole basis for the Kona request for an above volumetric refund.
III. Analysis
A. Above Volumetric Refund Claim
Where, as here, the applicant is not relying upon a presumption, but is seeking an above volumetric refund, it must present evidence sufficient to convince a reasonable person that it was overcharged by a disproportionate amount. The burden of demonstrating the right to such a refund rests with the claimant. This is not an easy matter. Refund proceedings are not adversary in nature and are not designed to resolve complicated regulatory questions. Consequently, the burden of proof is on the claimant that seeks an above volumetric refund. Evidence received from claimants of this type must be considered carefully, as it typically presents only one side of what may be a complicated story. For these reasons, most successful above volumetric claims have included substantial supporting evidence such as a Remedial Order or other formal, written enforcement document containing at least a preliminary determination by DOE of a regulatory violation. See, e.g., Texaco Inc./Time Oil Co., 23 DOE ¶ 85,115 (1993) (applicant's alleged overcharge specifically identified in schedule attached to Notice of Proposed Violation issued by ERA); Mobil Oil Corp./Atchison, T. & S.F. Ry., 20 DOE ¶ 85,788 (1990) (consent order firm admitted that the applicant had been overcharged, and ERA had issued an NOPV); Amtel, Inc./Whitco, Inc., 19 DOE ¶ 85,319 (1989) (ERA audit specifically found that applicant had been overcharged); Standard Oil Co./Army & Air Force Exchange Serv., 12 DOE ¶ 85,015 (1984) (applicant specifically identified as being overcharged in the NOPV). The difficulty of demonstrating injury is one of the reasons why applicants primarily rely upon presumptions of injury in refund cases.
We have spent a considerable period of time working with the applicant in this matter in an attempt to develop sufficient factual information to support Kona's above volumetric refund request. While Kona appears sincere in its belief that Permian overcharged it by an above average amount, there is simply no evidence to show that actual overcharges by Permian led to the increases in prices Kona paid for crude oil or to changes in the regulatory tier composition. For example, there is nothing to show that the increase in Permian's selling prices between September November 1980 and December 1980 January 1981 reflected anything other than higher prices that Permian paid to its own suppliers of crude oil. In all probability, a number of events affecting the crude oil market place led to the changes in the price and composition of crude oil sold by Permian.(4) For example:
- Higher prices accompanied the progressive regulatory decontrol of crude oil, as well as lower production of price controlled crude oil as properties became depleted.
- Supplies of "stripper well" crude oil increased as production from some marginal properties declined.(5)
- Supplies of newly discovered crude oil from new leases increased, and that crude oil could be sold at uncontrolled prices. 10 C.F.R. § 212.97.
- Crude oil priced under the "Tertiary Incentive Program" expanded dramatically. That program allowed otherwise price controlled crude oil to be sold at higher uncontrolled prices. 10 C.F.R. § 212.78.
For a discussion of these factors see Cornell Oil Co., 7 DOE ¶ 81,088 (1980); Brock Exploration Corp., 7 DOE ¶ 81,087 (1980); and Cobb Bridewell, 9 DOE ¶ 83,029 (1982). As a result of these changes in the market, average nationwide crude oil prices were increasing significantly during the final stages of the controls period.(6) Without linking the higher crude oil prices that Kona has documented to actual improper pricing practices by Permian,(7) there is no basis in fact upon which we could approve the $650,000 above volumetric refund requested by Kona.
B. Eligibility for a Volumetric Refund
We next consider whether the firm is eligible for a volumetric refund based upon the presumption of injury. As a rule, refiners are assumed not to have been injured by overcharges in their purchases of crude oil. This is because the Old Oil Entitlements Program tended to equalize the cost of crude oil to all refiners. 10 C.F.R. § 211.67. See generally New York Petroleum/Ashland Oil, Inc., 16 DOE ¶ 85,613 at 89,220 (1987). As a result, overcharges in purchases of crude oil were spread among all refiners which, in turn, could pass through the increased crude oil cost in their sales of refined petroleum products. In other words, firms that were overcharged on crude oil purchases would have received greater entitlements benefits under the DOE regulatory program to offset the overcharges. This presumption of non-injury for crude oil purchasers is, however, rebuttable. To receive any refund for purchases of crude oil, an applicant must demonstrate that it sustained a financial injury as a result of the alleged overcharges. A showing of injury generally requires that an applicant show (1) that it had an adequate bank of unrecouped costs,(8) and (2) that it was unable to pass the overcharges through to either the entitlements program or its customers. We generally assume that a firm was unable to pass overcharges through to its customers when its product costs were higher than those of its competitors. See id. at 89,221; Behm Family Corp., 903 F.2d 830 (Temp. Emer. Ct. App. 1990) (affirming method of determining injury). Kona has met this burden with respect to crude oil it purchased from Permian during December 1980 and January 1981.
Following termination of the regulatory program on January 28, 1981, the DOE decided not to issue either an entitlements list for January 1981 or a final entitlements list. As a result, any overcharges resulting from incorrect tier certifications of crude oil purchased in January 1981 would not have been equalized by the entitlements program. Nor would the entitlements program allow firms to pass through overcharges resulting from recertifications received during or after January 1981 of crude oil purchased in prior months. We have approved refunds for crude oil purchases in the past where the entitlements program did not operate to equalize costs. See New York Petroleum/Ashland Oil, Inc., 16 DOE ¶ 85,613 (1987) (refiner eligible for refund for crude oil purchased before entitlements program instituted).(9)
Following all recertifications received by Kona, the firm had an average crude oil cost of $35.25 per barrel in December 1980. While the entitlements program did not compensate for recertifications that Kona received during or after January 1981 for the crude oil it purchased during December 1980, the firm did receive an entitlements benefit ("runs credit") for that month. As a result, its post-entitlements cost for December 1980 was $33.07 per barrel. The firm's January 1981 crude oil cost was $36.08 per barrel. Kona's crude oil costs during these months were significantly higher than the average nationwide refiner crude oil cost for December 1980 and January 1981 of $31.39 and $33.40 per barrel, respectively.
Consequently, the record indicates that Kona had post-entitlements crude oil costs in December 1980 and January 1981 that were significantly higher than the national average. This tends to confirm that Kona was injured by any Permian overcharges that occurred. We generally assume that a refund applicant which had higher than average product costs could not recover overcharges by passing them on to its customers. See, e.g., Tesoro Petroleum Corp./Fletcher Oil Co., 24 DOE ¶ 85,131 at 88,404 (1995). We therefore conclude that Kona did sustain a financial injury as a result of any Permian overcharges that might have occurred in December 1980 and January 1981. Accordingly, we find that Kona is eligible for a volumetric refund with respect to the 145,797 barrels of crude oil it purchased from Permian during December 1980 and January 1981. Similarly, we find that the firm is entitled to a volumetric refund for a small amount (825 barrels) of crude oil purchased in prior months that was recertified upward during or after January 1981.
IV. Refund Approved
Accordingly, Kona shall be granted a volumetric refund based upon its purchases of 145,797 barrels of crude oil in December 1980 and January 1981, and 825 barrels of crude oil for which it received upward recertifications in January 1981 or succeeding months. The total amount of this refund is $53,847 (146,622 barrels x 42 gallons/barrel x $0.008744 per gallon). In addition, the firm will receive a proportionate share of the interest accrued on the consent order funds since they have been deposited with DOE. The total refund approved is $68,094, representing $53,847 in principal and $14,247 in interest.(10)
Although we have carefully examined Kona's claim and supporting data, the determinations reached in this Decision are based on the representations made in the application. If the factual basis underlying any of our determinations is later shown to be inaccurate, this Office has the authority to order appropriate remedial action, including rescission or reduction of the refund ordered.
It Is Therefore Ordered That:
(1) The Application for Refund filed by Kona Corporation on May 17, 1993 is hereby granted as set forth in Paragraph (2) below.
(2) The Director of Special Accounts and Payroll, Office of Departmental Accounting and Financial Systems Development, Office of the Controller, of the Department of Energy shall take appropriate action to disburse from the DOE deposit fund escrow account maintained at the Department of the Treasury denominated Crude Tracking-Claimants 4, Account No. 999DOE010Z, $68,094, made payable and sent to:
Kona Corporation
or L.D.M., Inc.
P.O. Box 2328
Coppell, TX 75019
(3) The determinations made in this Decision and Order are based upon the presumed validity of statements and documentary material submitted by the applicant. The determinations may be revoked or modified at any time upon a finding that the factual basis underlying the Application for Refund is incorrect.
(4) This is a final Order of the Department of Energy.
George B. Breznay
Director
Office of Hearings and Appeals
Date: August 13, 1997
(1)The Consent Order settled, except for certain matters specifically excluded, all claims regarding Permian's compliance with the Federal Petroleum Price and Allocation Regulations during the period August 19, 1973, through January 27, 1981 (the consent order period).
(2)Above volumetric refund claimants are not necessarily entitled to a refund equal to the full amount of their injury. For example, the Consent Order was a compromise that settled all of Getty's regulatory violations at a fraction of their value. Accordingly, the amount of an above volumetric refund is prorated by the ratio which the consent order amount bears to the aggregate overcharge amount. Texaco Inc./Guttman Oil Co., 24 DOE ¶ 85,116 at 88,365-66 (1994); Amtel, Inc./Whitco, Inc., 19 DOE ¶ 85,319 (1988).
(3)Crude oil prices during this period were highly sensitive to the regulatory tier. Lower and upper tier crude oil were priced at about $7.00 and $15.00 per barrel respectively, while stripper well and other uncontrolled crude oil commanded prices of about $35.00 per barrel.
(4)To obtain an above-volumetric refund, a claimant must show a strong likelihood that it was overcharged by an amount that was higher than the average overcharge sustained by Permian's customers. See, e.g., Mobil Oil Corp./Cantro Petroleum Corp., 19 DOE ¶ 85,076 (1989). There is also no evidence in this case that the price and tier composition of the crude oil Permian sold to Kona in December 1980 and January 1981 differed from that it sold to other customers.
(5)When production from a property declined to an average of less than 10 barrels per well per day, the production from that property could be sold at market prices. 10 C.F.R. § 212.54.
(6)Between the September through November 1980 period and December 1980 to January 1981, average domestic crude oil prices increased by $3.69 per barrel. Similarly, the fraction of crude oil that was lower and upper tier crude oil had declined to nine percent by January 1981. It is true that Kona experienced a greater price increase over this period. However, that fact alone does not prove that it was overcharged.
(7)Overcharges, if any, might also have resulted due to the actions of others in the chain of distribution including the crude oil producer or a crude oil reseller. See, e.g., Osborne Energy Corp, 14 DOE ¶ 83,013 (1986). We note that the DOE's audit of Permian alleged primarily the sale of "wash" crude oil at uncontrolled prices, not this type of crude oil overcharges, i.e., tier miscertifications.
(8)Although Kona has not submitted detailed calculations of banks of unrecouped costs, evidence submitted by the firm indicates that it had adequate banks at the end of the regulatory period.
(9)Nearly all refiners filed claims for a portion of the Refiners Escrow established in the stripper well refund proceeding in Kansas that was established by the U.S. District Court to implement the terms of the Stripper Well Settlement Agreement. In Re: The Department of Energy Stripper Well Exemption Litigation, 653 F. Supp. 108 (D. Kan. 1986). Applicants in the stripper well refund proceeding waived all rights to future Subpart V refunds based upon overcharges in the sale of crude oil. See Celanese Fibers, Inc., 22 DOE ¶ 85,053 (1992). Consequently, most refiners are ineligible for refunds based upon the purchase of crude oil. Kona, however, did not file a Refiners Escrow claim in the stripper well proceeding, and therefore, did not waive its right to a Subpart V refund based upon its purchases of crude oil from Permian.
(10)As this refund is based upon Kona's purchases of Permian crude oil, it shall be paid out of the funds set aside for payment of claims in the crude oil refund proceeding, into which the portion of the Permian consent order fund applicable to crude oil overcharges was deposited.