RF340-00055
April 17, 1998
DECISION AND ORDER
OF THE DEPARTMENT OF ENERGY
Application for Refund
Name of Petitioner: Enron Corporation/
Solar Gas, Inc.
Date of Filing: January 28, 1992
Case Number: RF340-55
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 Solar Gas, Inc. (Solar Gas). Solar Gas purchased Enron propane for resale to its customers. Accordingly, Solar Gas 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.(1)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.
Solar Gas 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 Solar Gas 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 generally 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. The Business Operations of Solar Gas.
Solar Gas maintains that it purchased large quantities of propane from Northern throughout the refund period. In its application, Solar Gas describes its business operations as follows:
Solar Gas is a wholly-owned subsidiary of Amerada Hess Corporation. It was a Nevada corporation established on December 8, 1966 and later converted to a Minnesota corporation. ... Solar operated as a reseller/retailer, with over 80 retail locations with approximately 100,000 residential and commercial retail customers primarily in the North Central and Midwest areas, and with reseller activity throughout the country. Solar had contractual agreements throughout Enron's consent order period and made regular purchases monthly from Enron.
July 15, 1997 Solar Gas submission at 2.
With the exception of Solar Gas' exchange or "buy/sell" agreements with Enron, which are discussed below, we believe that the firm's explanation and supporting data are sufficient to establish the likelihood that Solar Gas was overcharged and was injured by its purchases from Enron. Solar Gas appears to have depended on Enron as a supplier of propane in order to meet its allocation requirements to its regular wholesale and retail customers, regardless of the prices being charged by Enron for that product. Since the prices that Solar Gas paid Enron for product were not fixed, and in fact varied considerably from month to month, it is clear that Solar Gas' contracts and other purchase agreements with Enron did not insulate the firm from the impact of excessive price increases by Enron. Because much of Solar Gas' purchased product was stored and used as needed to supply base period customers, Solar Gas appears not to have engaged routinely in the type of back to back purchase and sale transactions that would tend to insure some level of profit on its resales of Enron product. In addition, Solar Gas' retail and wholesale marketing operations facilitated the movement of propane from Enron's gas plants to residential and commercial end-users of that product.
Through its propane marketing activities, Solar Gas appears to have performed significant economic functions associated with the operations of the NGL market. With the exception of its exchange or "buy/sell" agreements with Enron, Solar Gas was not assured of achieving a complete passthrough of the price it paid Enron for propane. Accordingly, we will proceed to evaluate Solar Gas' banks of unrecouped increased product costs and its information concerning competitive disadvantage to determine whether Solar Gas has demonstrated that the prices that it paid to Enron for propane resulted in an economic injury to Solar Gas. However, as discussed below, we believe that we must first adjust Solar Gas' refund claim to exclude certain volumes of Enron purchases made prior to the refund period or pursuant to exchange or "buy/sell" agreements.
IV. Adjustments to Solar Gas' Claimed Gallonage.
Solar Gas has submitted monthly purchase summaries and supporting data that indicate that it purchased 89,740,721 gallons of Enron propane from January 1973 through January 1981. Based upon this claim, Solar Gas could receive a maximum volumetric refund of $539,342, plus a proportionate share of the interest that has accrued on the Enron escrow account.
Solar Gas' gallonage claim includes volumes of propane purchased from Enron beginning in January 1973. However, Enron specifically provides that the refund period in this proceeding only covers product purchased between June 13, 1973 and January 27, 1981. Id. at 88,959. Accordingly, we have eliminated the gallons claimed by Solar Gas for the period prior to June 13, 1973 in order to exclude gallonage purchased outside the refund period (5,821,158 gallons). With this adjustment, the total gallonage of this claim is 83,919,563 (89,740,721 - 5,821,158 = 83,919,563).
We also believe that Solar Gas' gallonage claim should be adjusted to exclude the volumes of propane that it received from Enron pursuant to exchange or "buy/sell" agreements. In this case, Solar Gas engaged in exchange or "buy/sell" transactions with Enron on a regular basis throughout the refund period, with volumes from these transactions totaling 22,709,395 gallons of product. This is not unusual, since exchange or "buy/sell" agreements are a common practice in the oil industry, and are used principally to increase efficiency and minimize transportation costs when the parties to the agreement own products situated in different locations that are mutually advantageous. As a result of such an agreement, each party is able to obtain product at a location closer to the market area in which it needs the product. Most exchange or "buy/sell" agreements involve like volumes of identical products. However, the quantities, products and delivery dates involved in such transactions are not always alike. In the case of "unlike" exchange or "buy/sell" agreements, cash "differentials" may be paid from one party to the other in order to balance the transaction so that each party receives consideration of the same value that it gave up. Economic "balancing" is a fundamental aspect of these agreements. See Mobil Oil Corp./Vanguard Petroleum Corp., 18 DOE ¶ 85,905 (1989).
In the present case, it is not clear that the volumes of product involved in Solar Gas' "buy/sell" transactions with Enron were actual "sales" of Enron product that would indicate an allocation of the overcharge and thus qualify for a refund in this proceeding. While a "buy/sell" transaction sometimes may differ from an exchange transaction by involving full cash payment for the volumes being purchased and sold by the parties, it is not clear that Solar Gas' exchange and "buy/sell" transactions can be differentiated in this way. The contemporaneous business records submitted by the Solar Gas indicate transactions labeled as "Solar Gas Xchg," "Northern Propane Exchange," and "Northern Propane Buy-Sell," with no apparent distinction made between these titles. For example, in Solar Gas' "Supply and Distribution" summary for February 1977, there is a monthly and a "year to date" listing for volumes of product labeled "Northern Propane Buy-Sell." However, this "year to date" figure includes volumes of product identified in the January 1977 listing as "Northern Propane Exchange". In addition, two of the sample invoices submitted by Solar Gas indicate that Solar Gas was billed only for price differentials in the buy/sell transactions with Northern that they document. See id., Northern invoices dated 3/7/79 and 11/6/79 attached to the firm's January 15, 1998 submission.
Moreover, the nature of exchange or "buy/sell" transactions makes it extremely unlikely that Solar Gas suffered economic injury as a result of overcharges. Firms enter into such transactions because it is economically advantageous to do so. As stated above, these agreements minimize each firm's transportation costs, while allowing each firm to obtain product at its most competitively advantageous location. It is a mutually beneficial endeavor, structured so that the economic value of the product given up balances the value of the product received. Nor do we believe that the competitive disadvantage analysis submitted by Solar Gas in this proceeding provides a valid means of determining whether the firm was injured in these transactions. In this type of analysis, the OHA compares Solar Gas' purchase prices to average market prices to determine the extent to which Solar Gas involuntarily absorbed alleged Enron overcharges. Besides the issue of whether such a comparison is relevant to a transaction based on the exchange of product rather than a cash payment, the "purchase" prices submitted by Solar Gas are inadequate. They appear to be based solely on the firm's regular purchases from Enron. See, e.g., Solar Gas January 22, 1998 submission (attached March 1978 listing of purchase price and volume information). Accordingly, Solar Gas' analysis fails to show that the "cash differentials" at issue in its exchange and "buy/sell" transactions were affected by Enron's alleged overcharges.
We therefore will exclude the 22,709,395 gallons of Enron product attributable to these transactions from Solar Gas' refund claim. A monthly listing of these gallons is presented in the Appendix to this decision.(2) With this correction, Solar Gas' refund claim totals 61,210,168 gallons of Enron product. Solar Gas could receive a total refund of $367,873, plus applicable interest, for this volume of Enron product.
V. Analysis of Solar Gas' Injury Showing.
As noted above, Solar Gas purchased large quantities of propane from Enron for sale at its retail outlets and for resale to other classes of customers. On July 15, 1997 Solar Gas submitted a reconstruction of its cost banks for propane. This reconstruction uses Solar Gas' firm-wide gross margin and purchase volume data in each month of the refund period to calculate its monthly product costs and profit margins in sales of propane. It then compares this information to its May 1973 gross profit margin for propane to calculate its banked product costs. We find that this method convinces us that Solar Gas has significant banks of unrecovered increased product costs throughout the refund period. See Little America Refining Company/Rio Vista Oil, Ltd., 15 DOE ¶ 85,510 at 88,925 (1987). Accordingly, Solar Gas 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).
In its Application for Refund, Solar Gas also has performed the three step competitive disadvantage analysis outlined above. As its source of data, the firm initially used regional prices published in Platt's Oil Price Handbook and Oilmanac (Platt's). In a later submission, Solar Gas submitted an alternative analysis with respect to its purchases of propane using the Energy Information Administration's (EIA) Monthly Petroleum Product Price Report (MPPPR). However, in that submission and in a later telephone conversation, Solar Gas states that it continues to believe that Platt's Oklahoma Group 3 prices best represent its competitive situation, since Solar Gas purchased Enron product chiefly in Oklahoma and Kansas. See Solar Gas September 29, 1995 submission; see also Memorandum of April 13, 1998 telephone conversation between Ms. Shelia Crouse of Energy Refunds, Inc. (Solar Gas filing agent) and Kent Woods, Esq., of the OHA.
When determining competitive injury, the OHA generally relies on 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 information 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). Accordingly, we will rely on Solar Gas' analysis of its propane purchases from Enron that utilizes Platt's Oklahoma Group 3 postings for comparative purposes. As noted above, however, we have excluded certain volumes of Enron product claimed by Solar Gas. Accordingly, we have revised Solar Gas' competitive disadvantage analysis to reflect only the volumes of Enron product approved in this decision.
Our competitive disadvantage analysis, as detailed in the Appendix to this Decision and Order and summarized in the Table below, shows that Solar Gas experienced some level of injury in its sales of propane purchased from Enron. However, as shown in the Table, the level of injury demonstrated by the competitive disadvantage analysis is insufficient to qualify Solar Gas for a full volumetric refund based on its propane purchases from Enron.
TABLE
Propane
61,210,168 Gallons
Allocable Share for those Gallons: $367,873
Total Gross Excess Cost $850,657
Total Net Excess Cost $621,730
Above-Market Volumetric Share $231,757
Volumetric Share [63%]
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 as a whole, Solar Gas' net excess cost for propane is 1.7 times the value of the firm's full allocable refund share of the Enron refund. Solar Gas' gross excess cost is 2.3 times the value of the firm's full allocable refund share. In previous cases, the gross and/or net excess costs of refund applicants have 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 Enron Corporation/Ferrellgas, Inc., 27 DOE ¶ 85,002 (1998) (analysis of propane purchases); 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, Solar Gas' competitive disadvantage analysis for propane indicates that its net excess and gross excess costs for propane purchases are, respectively, only 1.7 and 2.3 times its full allocable share of the Enron Consent Order funds. These figures, although indicative of some level of injury, do not clearly establish that Solar Gas experienced the level of substantial and consistent competitive disadvantage from its purchases of Enron propane that would justify a refund based on its full volume of Enron purchases. Nor are Solar Gas' net and gross excess costs sufficiently low to limit Solar Gas to a refund based solely on its above-market purchases of propane from Enron. Under these circumstances, we believe it is appropriate to grant Solar Gas a refund based on 81.5 percent of the volume of its Enron purchases approved in this decision, the average of its total Enron approved purchases (100 percent) and its above market Enron purchases (63 percent). See Eason Oil Company/Koch Hydrocarbon Company, 26 DOE ¶ 85,065 at 88,188-89 (1997) (firm granted a refund based on 79.5 percent of its Eason purchases, the average of its total Eason purchases and its above market purchases).
Based upon the foregoing competitive disadvantage analysis, and in view of our finding that the firm possessed substantial banks of unrecovered increased product costs for propane during the relevant time period, we have concluded that Solar Gas should receive a refund equal to 81.5 percent of its maximum potential refund for its purchases of 61,210,168 gallons of propane from Enron, or $299,817 (61,210,168 x $.00601 x .815 = $299,817). In addition, Solar Gas will receive a proportionate share of the interest accrued on the consent order fund, or $221,805.(3)Solar Gas will therefore receive a total refund of $521,622 ($299,817 principal and $221,805 interest) for the volumes of propane that it purchased from Enron.
Accordingly, the total volume approved in this Decision and Order is 61,210,168 gallons of Enron product and the total refund, including interest, is $521,622.
Although we have examined Solar Gas' 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 Solar Gas, Inc. (Case No. RF340-55) 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 a total of $521,622 ($299,817 principal and $221,805 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:
Solar Gas, Inc.
or Energy Refunds, Inc.
Highway 80 East
31 Small Lane
Hardin, Kentucky 42048
(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 17, 1998
(1)1/ 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.
(2)2/ For the year 1976, the information provided by Solar Gas includes only a yearly total of the firm's exchange of "buy/sell" volumes involving Enron. In order to revise the firm's Competitive Disadvantage Analysis to exclude these volumes, we calculated the ratio between Solar Gas' overall regular Enron purchases and its exchange or "buy/sell" Enron purchases in 1976. We then used that fraction to reduce the firm's gallonage claim for each month of 1976 where it recorded purchases from Enron.
(3)3/ 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. The current ratio of interest to principal in the Enron account is roughly seven to ten.