Case No. RF340-00136
July 22, 1998
DECISION AND ORDER
OF THE DEPARTMENT OF ENERGY
Application for Refund
Name of Petitioner: Enron Corp./Apex Oil Company
Date of Filing: April 29, 1992
Case Number: RF340-136
This Decision and Order concerns an Application for Refund filed by Apex Oil Company (Apex) in the Enron Corporation (Enron) refund proceeding. As explained below, we have determined that Apex was not injured as a result of its purchases of Enron product and, therefore, its application should be denied.
I. Background
A. The Enron Refund Proceeding
The purpose of the Enron refund proceeding is to make restitution to firms that were injured by alleged Enron overcharges in sales of natural gas liquids (NGLs) and natural gas liquid products (NGLPs). 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. See 10 C.F.R. Part 205, Subpart V. The consent order resolved DOE allegations that Enron violated the mandatory petroleum regulations in 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.
Enron adopted a presumption that the alleged Enron overcharges attributable to NGLs and NGLPs were dispersed equally in all sales of refined product made by Enron during the consent order period. Enron, 21 DOE at 88,959. As a result, Enron adopted a presumption that each gallon of Enron product bore a $.00601 overcharge.(1)Enron stated that, in the absence of a specific demonstration of a greater overcharge, we would allocate the consent order funds on the basis of $.00601 per gallon of covered Enron product purchased. Id. We refer to the dollar amount derived by multiplying the $.00601 per gallon presumed overcharge by the applicant's purchase volume as the applicant's allocable share of the consent order funds.
Enron generally requires a claimant to demonstrate that it was injured by Enron's alleged overcharges. However, Enron adopted several presumptions of injury that allow certain types of claimants to receive a refund without a detailed demonstration of injury. Enron adopted a small claims presumption of injury, under which we presume that a reseller, retailer or refiner seeking a refund of $10,000 or less was injured by Enron's pricing practices. Id. at 88,960. Such an applicant need demonstrate only its purchase volume of covered Enron products in order to receive a refund of its full allocable share. Id. Enron further adopted a medium range presumption of injury, under which a reseller, retailer or refiner whose allocable share of the Enron consent order funds exceeds $10,000 may elect to receive as its refund the larger of (i) $10,000 or (ii) 60 percent of its allocable share up to $50,000. Id. Accordingly, an applicant relying on the medium range presumption of injury need demonstrate only its purchase volume of covered Enron products in order to receive a refund of 60 percent of its allocable share up to $50,000.
As indicated above, if an applicant does not rely on the small or medium range presumption of injury, the applicant must demonstrate that it was injured with respect to its Enron purchases. A number of Enron applicants have succeeded in making such a demonstration. See, e.g., Enron Corp./Solar Gas, Inc., 27 DOE ¶ 85,007 (1998); Enron Corp./Ferrellgas, Inc., 27 DOE ¶ 85,002 (1998); Enron Corp./Chevron U.S.A., Inc., 26 DOE ¶ 85,048 (1997); Enron Corp./Unocal Corp., 26 DOE ¶ 85,041 (1997).
Generally, a firm which had a long term purchasing arrangement with Enron must meet a two-step requirement to demonstrate injury. Enron, 21 DOE at 88,960. First, the firm must demonstrate that it accumulated banks of unrecovered increased product costs large enough to justify the amount of the refund claimed during the period when it purchased from Enron through the end of the banking period. Second, the firm must show that market conditions, rather than discretionary business decisions, caused it to absorb the alleged overcharges. In this regard, the OHA relies on 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 the competitive disadvantage methodology, the OHA infers that purchases at above average market prices generally indicate that the firm was unable to pass through the alleged overcharges. Conversely, the OHA infers that purchases made at prices below the market average placed a firm at a competitive advantage and did not injure the firm.
In addition, however, a reseller or refiner which made only spot purchases of Enron product must overcome a rebuttable presumption that it was not injured as a result of its purchases. Enron, 21 DOE at 88,961. Enron states that a claimant is a spot purchaser if it made "only sporadic purchases of significant volumes of covered Enron product." Id. In order to receive any refund in the Enron proceeding, such a claimant must rebut the spot purchaser presumption of non-injury by submitting specific and detailed evidence aimed at establishing the extent to which it was injured as a result of its spot purchases from Enron. Id. (citing Sauvage Gas Co., 17 DOE ¶ 85,304 (1988)(Sauvage)).
B. The Apex Refund Application
Apex requests a refund based on 23,962,680 gallons of propane and butane purchased from two Enron subsidiaries, UPG and Northern. Apex seeks a refund of its full allocable share, which is $144,015 ($.00601 per gallon x 23,962,680 gallons = $144,015) plus interest. Accordingly, Apex attempts to demonstrate that it was injured as a result of its Enron purchases.
In its application, Apex provided information concerning its participation in the NGLP market and its Enron purchases. Apex entered the NGLP market in December 1978. During the regulatory period, Apex bought and sold approximately 1.7 billion gallons of NGLPs. See Application, Ex. B (the sum of the monthly sales volumes listed in Apexs bank calculation).
Apex purchased Enron propane in eight months of the refund period, and Enron butane in five months of the refund period. Apexs Enron purchases were for large volumes of product, generally ranging from 1 million to 2 million gallons per purchase. Each purchase was individually negotiated and called for delivery F.O.B. in pipelines or at storage facilities at one of five locations: Mt. Belvieu, Texas; Bushton, Conway, or Hutchison, KS; or Hattiesburg, MS. A schedule of Apexs purchases is set forth in the Appendix to this decision.
In its application, Apex maintained that the foregoing purchases were not spot purchases and, therefore, not subject to the spot purchaser presumption of non-injury. Apex maintained that the purchases occurred in too many months to be considered spot purchases. Apex attempted to demonstrate injury by showing that it had banks of unrecovered NGLP costs and that it experienced a competitive disadvantage as the result of its Enron purchases.
C. The OHA's Notification of Presumed Non-Injury to Apex
1. The OHAs July 1996 Letter
In July 1996, the OHA informed Apex that the firm was a probable spot market purchaser of NGLPs and, therefore, would be required to submit additional information to substantiate the claim that it experienced economic injury as a result of its Enron purchases. Specifically, the OHA noted the following:
In the present case, significant factors indicate that Apex was a spot purchaser of Enron product. It began its reseller operations in 1978, so it was apparently free to purchase and sell product at its own discretion, with no obligation to fulfill base period supply obligations to its customers. The sales contracts provided by Apex indicate that its purchases from Enron were characteristic of sales in the producer/wholesaler market, i.e., involving large volumes of product and a price that was negotiated for each transaction. From the available evidence, we conclude that Apex usually made its purchases from Enron only when those transactions were beneficial and provided Apex the best available terms. Thus, it is unlikely that Apex would have been injured on those purchases by Enrons pricing practices. Accordingly, we have made a preliminary determination that Apex was a spot purchaser of Enron product.
There are two ways that Apex may respond in order to receive a refund in the Enron proceeding. The first is to demonstrate that Apex was not a spot purchaser. To do this, you should submit a detailed description of Apex'[s] purchasing relationship with Enron and Apex[s] relationship with its customers, that establishes that Apex was required to make regular purchases from Enron in order to maintain supplies to base period customers. Alternatively, Apex could show that it was forced by market conditions to resell the product purchased from Enron at a loss that was not subsequently recovered.
June 16, 1996 letter from Thomas L. Wieker, Deputy Director, OHA, to William H. Bode, Esq., counsel for Apex, at 1-2.
In addition, the letter indicated that the OHA required more information from Apex concerning its business operations as an NGL wholesale marketer in order to evaluate the appropriateness of its injury claim. The OHA asked Apex to provide a description of the typical manner in which it located customers and negotiated the purchase and sale of NGLPs. The OHA also advised Apex to submit some sample sales contracts or any other documents showing the nature of the agreements between Apex and its customers during the refund period. Finally, the OHA asked Apex to identify its marketing region and describe how its purchase and sale transactions facilitated the distribution and consumption of NGLPs. Id. at 2.
2. Apexs November 1996 Submission
In a November 1996 submission, Apex responded to the OHA's June 1996 request for information. Apex included a declaration by its chief executive officer and a report by a consultant on economic issues in the petroleum industry.
In its November 1996 submission, Apex maintained that the spot purchaser presumption of non-injury does not apply because Apex was a trader, rather than a broker, of NGLPs. Apex maintained that its purchases were not part of brokered back-to-back purchase and sale transactions in which Apex was guaranteed a profit. Instead, Apex maintained, it purchased NGLPs in anticipation of changing market conditions and stored the product until prices rose. Apex also stated that one of its objectives was to have product available in times of tight supply, i.e., to be a balance wheel in the market. Apex maintained that its need to maintain an inventory to function as a balance wheel precludes a finding that its purchases were discretionary.
In its November 1996 submission, Apex also maintained that, even if the spot purchaser presumption of non-injury applies, Apex can rebut the presumption. Apex cited its bank calculation and competitive disadvantage analysis. Finally, Apex maintained that it lost money on its Enron purchases, and Apex identified purchases in three months to support that contention.
3. The OHAs December 1996 Letter
In a December 1996 letter, the OHA asked for clarification of some of the additional information provided by Apex. First, the OHA noted Apexs general assertion that it built or leased storage facilities for its NGLP business. The OHA requested documentation concerning whether Apex used those facilities to store product purchased from Enron. Second, the OHA asked for information for the year 1979 that showed how Apexs purchase and sale of Enron products comported with Apexs stated business strategy. Third, the OHA noted that Apexs assertion that it lost money in its sales of Enron product was based on a comparison of the cost of Enron purchases in each of three months with average monthly sale prices that appear to include product from other suppliers. The OHA asked for any documentation concerning whether Apex lost money in its purchase and sale of Enron product. Finally, the OHA referred to the fact that the firms bank calculation indicated that it included all NGLPs. The OHA requested an explanation of how Apex determined the permissible margin used in the calculation; the OHA also requested that the firm provide separate bank calculations for propane and butane, the products for which Apex claims a refund.
4. Apexs February 1997 Submission
In a February 1997 submission, Apex provided additional information. First, Apex stated that it could not locate documentation of storage contracts, but that, if the OHA requested, Apex could obtain statements from storage companies that Apex leased terminals for the storage of propane and butane during the relevant time period. Second, Apex provided some sales documentation for August 1979, September 1979 and September 1980, the three months in which it claims to have lost money on its Enron purchases. Finally, with respect to its bank calculation, Apex stated that during a DOE audit, the DOE had calculated a $.034 permissible margin for propane and told Apex that it could use that margin for all its NGLPs. Apex did not provide separate bank calculations for propane and butane.
As discussed below, after considering all of the information and arguments submitted by Apex, we have concluded that the spot purchaser presumption of non-injury applies to Apexs Enron purchases and that Apex has not rebutted that presumption.
II. Analysis
In determining whether Apexs purchases from Enron 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 provides a more detailed explanation of the meaning of the presumption, and can provide a basis for our analysis of whether the presumption is applicable to Apex's purchases of Enron products.
A. The Spot Purchaser Presumption of Non-Injury
The concept of spot purchaser is sufficiently well defined to allow applicants to understand the theoretical basis for the presumption. As we stated in Enron:
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. 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, 21 DOE at 88,955 (citing Sauvage Gas Company/NGL Supply, Inc., 19 DOE ¶ 85,622 at 89,142 (1989) (Sauvage/Supply).) (citations omitted from quotation). As we further stated in Enron, 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.
Enron, 21 DOE at 88,955 (citing Sauvage, 17 DOE ¶ 85,304). Short term, discretionary sales and purchases were the rule rather than the exception in certain portions of the NGL industry, particularly in the producer and wholesale reseller markets.
A spot market purchaser of product may submit information concerning its business operations to rebut the spot purchaser presumption of non-injury. As we explained 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.
Enron, 21 DOE at 88,955-56 (citing Sauvage/Supply, 19 DOE at 89,143). In Sauvage/Supply, we stated that "the determination of whether an 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." Sauvage/Supply, 19 DOE at 89,143. 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. Enron, 21 DOE at 88,955. Our determination of whether a spot purchaser has rebutted the presumption of non- injury is based similarly on a case-by-case analysis. Id. at 88,955-56.
In the Enron proceeding, the OHA has undertaken the type of case- by-case analysis discussed above. The OHA has examined whether the claimed volumes involve spot purchases and, if so, whether the firm has provided sufficient evidence to rebut the spot purchaser presumption of non-injury. In cases where the claimed volumes involved spot purchases and the applicant did not provide sufficient evidence to rebut the spot purchaser presumption of non- injury, the OHA has denied the application. See, e.g., Enron Corp./BTU Energy Corp., 26 DOE ¶ 85,070 (1997) (Enron/BTU); Enron Corp./Gulf Coast Petroleum, Inc., 26 DOE ¶ 85,053 (1997) (Enron/Gulf Coast); Enron Corp./Gulf States Oil & Refining Co., 26 DOE ¶ 85,047 (1997); Enron Corp./H.C. Oil Co., 26 DOE ¶ 85,038 (1997) (Enron/HCOC). See also Enron Corp./Moon Scott Joint Venture, 27 DOE ¶ 85,014 (1998) (Enron/NGL) and Enron Corp./Chevron U.S.A., Inc., 26 DOE ¶ 85,048 (1997) (Enron/Chevron) (denial of refund for spot purchases; grant of refund for other purchases).
After reviewing the evidence submitted by Apex, we conclude that Apex purchased from Enron on the spot market and that Apex has not rebutted the spot purchaser presumption of non-injury.
B. Apexs Enron Purchases Were Spot Purchases
As an initial matter, we address Apexs contention that its Enron purchases were not spot purchases because they were not sporadic under the OHAs holding in Sauvage Gas Co./H.C. Oil Co., 21 DOE ¶ 85,353 (1991) (Sauvage/HCOC). Apex maintains that the OHA did not apply the spot purchaser presumption of non-injury in Sauvage/HCOC, because the applicants purchases occurred in 29 percent of the months between the time the firm began selling the product and the time of decontrol of the product.
The determination that HCOC was not a spot purchaser of Sauvage product did not rest solely on the proportion of months in which HCOC purchased Sauvage product. The determination also relied on the consistency and volume of the purchase volumes. The purchase volumes were consistent from month to month and generally ranged from 55,000 to 200,000 gallons for butane, and 37,000 and 138,000 gallons for natural gasoline. Those volumes are significantly lower than the propane and butane purchases in this case, which generally range between 1 and 2 million gallons. The relatively low volumes of HCOCs purchases from Sauvage are far less indicative of discretionary spot purchases than the larger volume purchases that Apex made from Enron. Accordingly, our determination in Sauvage/HCOC weighed a number of factors, not all of which are present here.
Moreover, a firms purchases need not be sporadic in order to fall within the spot purchaser presumption of non-injury. As we stated in Enron/HCOC, the fact that a firm made isolated or sporadic purchases from a supplier merely raises a strong presumption that the purchases were discretionary and, therefore, did not result in economic injury to the purchaser. Enron/HCOC, 26 DOE at 88,092-93. A firm that made spot market purchases from a particular supplier on a frequent basis may also be a spot purchaser for purposes of the presumption if other factors, such as the firms market position, indicate that the purchases were discretionary.
As the foregoing indicates, we examine, on a case-by-case basis, whether the circumstances surrounding an applicants purchases indicate that they were discretionary, spot purchases. As explained below, we have determined that Apexs purchases were discretionary, spot purchases.
Apexs Enron purchases were individually negotiated, occurred on a irregular basis, and consisted of the transfer of large volumes of product in pipeline or storage locations. During the twenty-six month portion of the consent order period in which Apex was trading NGLPs, i.e., December 1978 through January 1981, Apex purchased Enron propane in eight months and Enron butane in five months. Most purchases were for 25,000 barrels (1,050,000 gallons) or 50,000 barrels (2,100,000 gallons).
Apex was not forced to buy Enron product in order to fulfill any regulatory supply obligation, because Apex had no such obligation. As stated above, Apex did not enter the NGLP market until December 1978. Accordingly, Apex was not operating as a reseller during the period April 1972 through March 1973, the regulatory "base period" for the allocation of NGLPs. Consequently, Apex had no regulatory obligation to furnish any "base period" customers with a steady supply of product.
Similarly, Apex was not forced to buy Enron product in order to maintain a steady supply to established customers. Apex speculated in the NGLP market and did not have any contractual supply obligations except for those negotiated for a particular transaction in a particular month. Similarly, Apex did not have established customers to which it supplied a steady stream of product. Thus, Apex was not forced to purchase Enron products at unfavorable prices in order to satisfy contractual obligations or otherwise maintain a steady supply of product to long-term, regular customers.
As the foregoing indicates, Apexs Enron purchases were discretionary, spot purchases. They were individually negotiated, occurred on an irregular basis, and consisted of the transfer of large volumes of product in pipeline or storage locations. They were not made in order to supply base period customers, meet contractual supply obligations, or maintain a steady supply stream to regular, established customers. Accordingly, the timing, volume, location, and purpose of Apexs Enron purchases indicate that they were discretionary spot purchases.
C. The Spot Purchaser Presumption of Non-Injury Applies to Apexs Spot Purchases of Enron Product
Apex has argued that even if its Enron purchases were spot purchases, the spot purchaser presumption of non-injury does not apply. Apex argues that the nature of the NGLP market and Apexs role in that market make the application of the presumption inappropriate. As discussed below, we disagree.
1. The Producer/Wholesaler NGLP Market
Apex maintains that short term purchases in the NGLP producer/wholesaler market were not discretionary. In support of this position, Apex maintains that short term purchases were the norm in this market.
Whether or not short term purchases were the norm in the producer/wholesaler NGLP market is irrelevant to whether particular short term purchases were discretionary. The spot purchaser presumption of non-injury does not apply to all short term purchases; rather, it applies, on a case-by-case basis, to those short-term transactions which are discretionary.
Apex also maintains that, even if short term purchases in the producer/wholesaler NGLP market can be considered discretionary, it is unreasonable to presume that they were beneficial. In support of this argument, Apex maintains that the cost banks submitted by other wholesale purchasers of NGLPs indicate that as a general matter the purchases were not advantageous. Apex cites a memorandum on this issue filed by another attorney in other Enron cases, which we hereinafter refer to as the spot purchaser memorandum.
In Enron/BTU, we discussed the spot purchaser memorandum. Enron/BTU, 26 DOE at 88,203. The memorandum cites banked cost information submitted to OHA in other refund proceedings by wholesale marketers of NGLPs.(2) Based on that information, the memorandum argues spot purchases made by different types of marketers were no more or less beneficial than purchases made under long-term contracts. Id.
Whether or not wholesalers of NGLPs had significant banked costs is irrelevant to whether it is reasonable to presume that discretionary purchases were advantageous. As explained below, banked cost calculations include non-discretionary purchases, and, in any event, do not reflect injury.
As just indicated, the existence of banked costs among NGLP wholesalers would not mean that those banks were accumulated in connection with discretionary spot purchases. The function of NGLP wholesalers was to facilitate the movement of the product from the producer to the end-user. Thus, wholesalers that purchased NGLPs in order to fulfill regulatory or contractual supply obligations or to maintain a steady stream of supply to long-term, regular customers were not making discretionary purchases. Accordingly, the claimed existence of significant banked costs among NGLP wholesalers does not warrant a conclusion that banks were accumulated with respect to discretionary spot purchases.
Moreover, as we stated in Enron/BTU, banked costs are not evidence of injury. Enron/BTU, 26 DOE at 88,203-04. Banked costs merely indicate that a firm was not charging its maximum lawful selling price. As a general matter, the existence of significant banked costs across a market would suggest that market forces, rather than the price regulations, were exerting downward pressure on margins. Indeed, part of the rationale for the decontrol of butane, effective January 1980, was that market forces, rather the price regulations, were limiting butane prices. Fed. Energy Guidelines [Regulations Preambles] ¶ 40,476, 44 Fed. Reg. 70118 (December 6, 1979).
As the foregoing indicates, we reject the argument that the characteristics of the NGLP market make it inappropriate to apply the spot purchaser presumption of non-injury to discretionary spot purchases in that market. Accordingly, we now turn to Apexs argument that the characteristics of Apexs business make it inappropriate to apply the presumption.
2. Apexs Spot Purchases of Enron Purchases
Apex argues that the spot purchaser presumption of non-injury does not apply to its Enron purchases because, at the time Apex made the purchases, it did not know whether they would be profitable or not. Apex maintains that it did not engage in back-to-back purchase and sale transactions and, therefore, did not know whether a purchase would turn out to be advantageous. Instead, Apex maintains, it traded NGLPs with the hope that it would profit from changing market conditions. Accordingly, Apex concludes, it did not have the foreseeability of profitability that is characteristic of back- to-back purchase and sales.
We do not accept the argument that the lack of a guaranteed profit renders a purchase non-discretionary. Apexs own description of its purchases indicates that it purchased NGLPs, including Enron NGLPs, when it concluded that it was likely advantageous for the firm to do so. Accordingly, it is reasonable for OHA to presume that the purchases were likely advantageous to Apex.
Apex also argues that its goal of being the balance wheel in the producer/wholesaler NGLP market required that it maintain an inventory of product. Accordingly, Apex argues, sometimes it bought product to assure that it would be able to meet any supply requests that might arise. In this sense, Apex argues, its purchases were not discretionary and, therefore, should not be presumed advantageous.
Apexs argument is too general to permit a conclusion that its Enron purchases were not discretionary. First, this argument is limited to those periods in which the firm believed its inventories were too low to accomplish its business objectives. Moreover, there is nothing in the record to suggest that such an objective was a factor in Apexs purchases of Enron product. Accordingly, there is nothing to suggest that Apexs asserted desire to maintain an inventory played any role in its Enron purchases.
As the foregoing indicates, we have concluded that the spot purchaser presumption of non-injury applies to Apex's Enron purchases. Those purchases were individually negotiated, large volume transactions that occurred on an irregular basis and were not made in order to fulfill regulatory or contractual supply obligations, or to maintain a steady stream of supply to established, regular customers. Under these circumstances, we believe that Apex's purchases from Enron are precisely the sort of transactions that the spot purchaser presumption of non-injury was intended to cover. Accordingly, in order to qualify for a refund, Apex must rebut the presumption that it was not injured by its spot purchases of Enron products.
D. Apex Has Not Rebutted the Spot Purchaser Presumption of Non- Injury
The spot purchaser presumption of non-injury may be rebutted by the submission of evidence sufficient to establish that: 1) the purchases were necessary to maintain a steady stream of supply to established customers; or 2) the claimant was forced by market conditions to resell the product at a loss which was not subsequently recovered. See Quaker State Oil Refining Co./Certified Gasoline Co., 14 DOE ¶ 85,465 (1986); Amtel Inc./Highway Oil, Inc., 14 DOE ¶ 85,143 (1986). These are not the only grounds for rebutting the spot purchaser presumption of non- injury. Any convincing evidence establishing that a spot purchaser was in fact injured by the alleged overcharges of a consent order firm would suffice to rebut the presumption. Sauvage/Supply, 19 DOE at 89,141 n.2.
Apex does not argue that its Enron purchases were necessary to maintain a steady stream of supply to established customers. Similarly, Apex does not argue that it was forced by market conditions to resell Enron product as a loss which it was not able to recover subsequently.
Apex does, however, make several arguments in support of its position that it was injured by its Enron purchases. Apex argues that its bank calculation and competitive disadvantage analysis demonstrate that it was injured by its Enron purchases. In addition, Apex argues that it lost money on Enron purchases.
1. Apexs Bank Calculation and Competitive Disadvantage Showing
As an initial matter, we note our concerns about Apexs bank calculation. The Apex bank calculation includes all Apexs NGLPs, of which Apexs Enron purchases constitute a mere one percent. (3)Thus, the calculation does not reveal the extent to which sales of propane and butane generated the banked costs, whether any such banks were accumulated during the months of Apexs Enron purchases of propane and butane, or the size of any such banks relative to Apexs Enron purchases of propane and butane. We requested that Apex provide separate propane and butane calculations, but Apex declined to provide them.
A related concern is the disparity between Apexs reported margin for December 1978, the month in which it entered the NGLP market, and its maximum permissible margin. Apexs bank calculation indicates that Apexs December 1978 margin was $.0215 per gallon. That margin is $.0125 per gallon less than Apexs claimed maximum permissible margin of $.034 per gallon. According to Apex, the ERA derived its maximum permissible margin by subtracting Apexs December 1978 cost of propane in an exchange from the December 1978 selling price of propane at Apexs nearest comparable outlet. The disparity between the firms actual average margin of $.0215 and its $.034 maximum permissible margin suggests that Apexs banked costs overstate the amount by which Apex was not receiving its historical margin.
More importantly, however, we have repeatedly rejected the argument that the existence of banked costs indicates that a spot purchaser was injured by overcharges. See, e.g., Enron/BTU, 26 DOE at 88,203-04. As stated above, the existence of banked costs merely indicates that a firm was selling at less than its maximum lawful selling price. A firm might make a discretionary decision to purchase product that it would be forced by market conditions to sell at less than its maximum lawful selling price because the sale was profitable (although less profitable than permitted by DOE regulations) or because the firm wished to increase market share or cultivate a particular customer. Accordingly, the existence of banked costs has never been sufficient to establish that a firm was injured by overcharges if other factors, such as the size and pattern of purchases, the prices paid, and the purchaser's market position, indicated that the firm's purchases were discretionary. When the first refund procedures were established in Office of Enforcement (Vickers Energy Corp.), 8 DOE ¶ 82,597 (1981) (Vickers), the OHA recognized that the situation of spot market purchasers often contrasted sharply with that of other customers of a consent order firm. Vickers, 8 DOE at 85,396-97. In Sauvage/Supply, we found that the OHA's adoption of the spot purchaser presumption rested on our observation that a firm's position in the petroleum industry often determined whether it was likely to have incurred injury as a result of its supplier's alleged regulatory violations. Steady, base period customers such as small gasoline retailers were often tied to a supplier by the federal allocation regulations, a supply contract, and state branding laws. Firms purchasing product consistently from an allocated supplier under these conditions lacked the flexibility to take advantage of lower prices by making discretionary purchases, and were much more likely to have been injured by any overcharges that occurred. In contrast, firms purchasing significant volumes of product on the spot market tended to have considerable discretion to determine whether to purchase and, if so, to select product that they were able to resell at a profit. This distinction between different kinds of purchasers, independent of the existence of banked costs, forms an important part of the basis for adopting the spot purchaser presumption of non-injury. Sauvage/Supply, 19 DOE at 89,141.
Moreover, we have repeatedly rejected the notion that a combination of banked costs and a competitive disadvantage analysis is sufficient to rebut the spot purchaser presumption of non-injury. See, e.g., Enron/BTU, 26 DOE at 88,204. As we stated in Enron/BTU,
As discussed above, [this argument] ignores the importance of assessing the discretionary nature of spot market purchases in determining whether BTU experienced injury. In the case of discretionary, spot market purchases of Enron product, BTU may freely determine to accept a lower margin of profit than its base period margin as opposed to simply foregoing the purchase of higher priced Enron product and seeking less expensive product elsewhere. To the extent that BTU made any profit on the sale of such product, it was not injured by Enron's pricing policies.
Id. We referred to our analysis with respect to similar purchases by another Enron refund applicant:
In exercising its discretion to purchase Enron products, Gulf Coast made a voluntary business decision that we can only presume was in the best interests of the firm. As such, we also logically presume that Gulf Coast purchased these large volumes of Enron product at times that were advantageous to Gulf Coast (i.e., when it could realize a profit from the resale of the products on the wholesale market).
Id. (quoting Enron/Gulf Coast, 26 DOE at 88,153). On the other hand, we stated, if some form of business necessity, such as supplying product to regular customers, impels a firm to purchase higher priced Enron product that was immediately available, then the purchaser was indeed injured by the higher price of that product, even if the purchaser realized some small amount of profit on a given sale. Enron/BTU, 26 DOE at 88,204.
A spot purchaser such as Apex, which did not purchase to maintain a steady stream of supply to established customers, could attempt to rebut the spot purchaser presumption of non-injury by demonstrating a pattern of not recovering the price it paid the consent order firm. See Standard Oil Co. (Indiana)/Cities Service Co., 12 DOE ¶ 85,114 at 88,336 (1984); Tenneco Oil Co./J.O. Cook, Inc., 9 DOE ¶ 82,580 at 85,427 (1982) (Tenneco/Cook). In Tenneco/Cook, the OHA held that a firm which made any profit on the transaction was not injured because the firm had not only passed through the selling price, including the alleged overcharge but also made a profit. Id. By contrast, in Waller Petroleum Company, Inc./Wooten Oil Company, 13 DOE ¶ 85,110 (1985), the OHA held that Wooten had successfully demonstrated injury in its purchases of Waller product because it bought and sold Waller product at a loss in order to meet its obligations to its customers. Id. at 88,297.
The fact that Apex was a trader, rather than a broker, does not lessen the required injury showing. In Enron/BTU, we addressed the argument that unpredictable fluctuations in the NGLP spot market produced a constant risk that product in inventory would be sold at a loss, and that higher purchase prices clearly injured resellers.
It is not sufficient for BTU to demonstrate injury by attempting to show that higher prices charged by Enron diminished the amount of profit that it realized on its sales of Enron product. We have consistently rejected the idea that a reseller making discretionary purchases on the spot market was entitled to any particular margin of profit, and that its failure to achieve that level of profit constitutes proof that it experienced economic injury as a result of the prices that it paid for product. Enron/HCOC, 26 DOE at 88,094-95, and cases cited therein. The fact that such purchases were discretionary and made within an actively fluctuating spot market strongly indicates that the spot purchaser was buying product that it believed would be profitably resold. The profit margin on such sales would fluctuate naturally depending on various factors affecting the supply and demand of product. Under these circumstances, a lower profit margin does not demonstrate that a particular reseller was injured by the price charged by a particular seller. As we stated in Tenneco/Cook, spot market purchases resulting in some level of overall profitability strongly demonstrate that the purchaser suffered no injury from the seller's regulatory pricing practices. Id., 9 DOE at 85,427.
Enron/BTU, 26 DOE at 88,206. Accordingly, Apexs banked costs and competitive disadvantage analysis are insufficient to establish that it was injured as a result of its Enron purchases.
As indicated above, Apex has argued that even if its banked costs and competitive disadvantage analysis are insufficient to rebut the spot purchaser presumption of non-injury, Apex can rebut the presumption. Apex maintains that it lost money on its Enron purchases and submits information on three months.
2. Apexs Alleged Loss on its Enron Purchases
In support of its claim that it lost money on its Enron purchases, Apex cites its Enron propane purchases in two months, September 1979 (claimed loss of $.0035 per gallon) and September 1980 (claimed loss of $.0102 per gallon). Apex also cites its Enron butane purchases in one month, August 1979 (claimed loss of $.0363 per gallon).
Apex has not demonstrated that it lost money on its Enron purchases in the three identified months. We will consider each of the three months separately.
With respect to its claim that it lost money on its September 1979 Enron propane purchases, Apex identifies three agreements, two agreements for the purchase of Enron propane, and one agreement for the sale of propane. The three agreements show the following:
Date Agreement Month/Location VolumePrice
Negotiated of Delivery (bbls.)(gal.)
Purchases
09/13 (Enron) 09/Conway, KS- Mapco 145 50,000 $.42
09/18 (Enron) 09/Mt. Belvieu, TX - TET 30,000 $.485
Sale
09/24 (Ferrell) 10/Conway KS - Mapco 145 15,000$.445
November 1996 Submission, Ex. B. Apex maintains that its average Enron propane purchase price was $.4485 per gallon and that its selling price was $.445 per gallon and, therefore, it lost $.0035 per gallon. November 1996 Submission at 3 and Ex. B.
The three identified agreements do not demonstrate that Apex lost money on its September 1979 Enron propane purchases. Apex has failed to identify all of its propane purchases and sales for September and October 1979 and, therefore, it is unclear what happened to the Enron product. Apex purchased a total of 80,000 barrels at two locations, and sold 15,000 barrels at one of those locations. Thus, it is unclear what happened to the remaining 65,000 barrels. If some or all of those barrels were sold at prices in excess of $.445 per gallon, Apexs overall posture on its September 1979 propane sales would be rosier than that indicated by the 09/24 sale. Moreover, the data that has been provided does not support Apexs argument that it lost money. If Apexs 09/13 purchase at Conway, KS, was used to satisfy Apexs 09/24 sale, also at Conway, KS, Apex made a $.025 per gallon profit on those 15,000 barrels, i.e., $15,750 ($.025 per gallon x 15,000 barrels x 42 gallons/barrel). Even under Apexs methodology, which subtracted the per gallon sale price for 15,000 barrels from the per gallon average purchase price for 80,000 barrels, Apexs sale shows a profit. The weighted average purchase price of the two identified Enron propane purchases is $.4444, not the $.4485 identified by Apex. Using an average per gallon cost of $.4444 price would result in a $.005 per gallon profit on the identified sale. Accordingly, there is nothing in Apexs submission that suggests, let alone demonstrates, that Apex lost money on its September 1979 Enron propane purchases.
With respect to its September 1980 Enron propane purchases, Apex identifies agreements for two purchases of Enron propane, and ten agreements for the sale of propane. The documentation shows the following:
Date Agreement Month/Location VolumePrice
Negotiated of Delivery (bbls.)(gal.)
Purchases
09/09 (Enron) 09/Hattiesburg, MS - Delta 25,000$.435
09/26 (Enron) 10/Mt. Belvieu, TX - TET 20,000$.440
Sales
09/10 (LaJet) 09&10/Mt. Belvieu, TX - TET 25,000 $.425
09/11 (Gulf Coast) 09/ Mt. Belvieu, TX - TET 25,000 $.425
09/11 (Conoco) 09/ Conway, KS - MAPCO 145 100,000$.4175
09/19 (Xeron) 09&10/Mt. Belvieu, TX - TET 25,000 $.425 09/24 (Xeron) 10/Mt. Belvieu, TX - TET 15,000 $.43
09/25 (Mellon) 10/Mt. Belvieu, TX - TET 10,000 $.47
09/26 (Diamond) 10/Conway, KS - Mapco 145 60,000 $.4275
09/26 (Gulf Coast) 10/Conway, KS - Mapco 145 5,000 $.425
09/26 (Magnum) 10/Conway, KS - Mapco 145 20,000 $.4225
09/26 (Vanguard) 10/Hattiesburg, MS - Delta 10,000 $.4475
November 1996 Submission, Ex. B. Apex maintains its average Enron propane purchase price was $.4372 and that its average selling price was $.4270 and, therefore, it lost $.0102 per gallon. November 1996 Submission at 3.
Apexs documentation for September 1980 does not demonstrate that Apex lost money on its September 1980 Enron purchases. As we stated above, Apexs documentation is too incomplete to permit a conclusion that the identified sales were of Enron product. In order to assess the validity of Apexs contention, we would need to see information on its other September and October 1980 propane purchases and sales. Moreover, a comparison of Apexs purchases of Enron propane with the closest transactions (based on volume and location) indicates that the purchases were profitable. If Apexs 09/09 purchase at Hattiesburg, MS, was used to satisfy Apexs 09/26 sale at Hattiesburg, MS, Apex made a $.0125 per gallon profit on 10,000 barrels of the Enron purchases ($.4475 - $.435 = $.0125), i.e., $5,250 ($.0125 per gallon x 10,000 barrel x 42 gallons/barrel). Similarly, if Apexs 09/26 purchase at Mt. Belvieu, TX, was used to satisfy Apexs 09/24 and 09/25 sales at Mt. Belvieu, TX, Apex made a $.006 per gallon profit on the 20,000 barrel Enron purchase ($.446 (weighted average sale price) - $.440 = $.006), i.e., $5,040 ($.006 per gallon x 20,000 barrels x 42 gallons/barrel).
With respect to its August 1979 purchase of Enron butane, Apex identified three sales. The documentation shows the following:
Date Agreement Month/Location VolumePrice
Negotiated of Delivery (bbls.)(gal)
Purchase
08/21 (Enron) 08/Conway, KS MAPCO 145 50,000 $.500
Sales
08/14 (Xcel) 09/Mt. Belvieu, TX - TET 25,000 $.575
08/16 (Xcel) 08/Mt. Belvieu, TX - TET 12,000 $.575
08/25 (Xcel) 09/Mt. Belvieu, TX - TET 25,000 $.63
See November 1996 Submission, Ex. B. Apex maintains that it lost $.0363 per gallon on its August 1979 purchase.
Apex has not demonstrated that it lost money on its August 1979 Enron butane purchase. As we stated above, the documentation is too incomplete to permit a conclusion that the identified sales were of Enron product: Apex has not provided any information on its other August 1979 butane purchases and sales, and the Enron purchase did not occur at the same location as the identified sales. In any event, Apexs purchase price from Enron was $.50 per gallon, well below the $.575 per gallon and $.63 per gallon sale prices identified above.
As the foregoing indicates, Apex has not provided sufficient information concerning its purchases to demonstrate that it lost money in the three identified months. In fact, the information provided, if anything, lends support to the validity of the presumption that Apex was not injured in its purchase of Enron product.
Finally, it is worth noting that most of Apexs sales were made to other large NGLP wholesalers, and it is unclear how such sales facilitated the movement of NGLPs from the producer to the end- user. During the regulatory period, the price rules for NGLPs differed for gas producers and refiners. See 10 C.F.R. Subpart E (refiners), Subpart K (producers). As a result, under the rules gas producers were limited to lower selling prices. This created a two tier pricing system under which wholesale purchasers of NGLPs from gas producers could trade NGLPs with successive mark-ups and still be able to sell the NGLPs to downstream purchasers at competitive prices, i.e., under market clearing prices for NGLPs produced by refiners. Apex did not enter the NGLP market until December 1978, and it is unclear whether Apex continued to participate in the market after decontrol. In other instances, Apex participated in transactions that were inconsistent with the applicable regulations. See Apex Oil Co., 17 DOE ¶ 83,004 (1988); Lucky Stores, Inc., 14 DOE ¶ 82,505 at 85,044-50 (1986). The foregoing factors lend additional support to our conclusion that Apexs purchases of Enron product were discretionary purchases that Apex found advantageous at the time.
III. Conclusion
In view of the circumstances set forth above, we have determined that Apex was a spot market purchaser of Enron NGLPs. They were individually negotiated, occurred on an irregular basis, and consisted of the transfer of large volumes of product in pipeline or storage locations. They were not made in order to supply base period customers or maintain a steady supply stream to regular, established customers. Thus, the Apexs Enron purchases had all the indicia of discretionary, spot purchases.
We have further determined that Apex has not rebutted the spot purchaser presumption of non-injury. Apex has not demonstrated that it made the purchases in order to meet regulatory or contractual obligations or to maintain a steady stream of supply to established customers, or that Apex sold the product at a loss. In fact, the information that Apex has provided suggests that its Enron purchases were profitable.
As the foregoing indicates, Apex has not demonstrated that it suffered injury as a result of its Enron purchases. Accordingly, its refund application should be denied.
It Is Therefore Ordered That:
(1) The Application for Refund filed by Apex Oil Company (Case No. RF340-136) on April 29, 1992 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 22, 1998
(1)This presumed overcharge of $.00601 per gallon was derived by dividing the funds received from Enron allocable to NGLs and NGLPs ($43,200,000) by the estimated volume of such products sold by Enron from June 13, 1973 through the date of decontrol of the relevant product (7,186,265,624 gallons). Enron, 21 DOE at 88,959 n.8.
(2)The memorandum incorporated by reference the banked cost information contained in the applications made by other wholesale marketers in other NGL refund proceedings. Enron/BTU, 26 DOE at 88,203 n.2.
(3)We derived this number by dividing the total gallons of NGLPs reported by Apex in its bank calculation by the amount of its Enron propane and butane purchases. (1,676,725,306 gallons of NGLPs/23,962,680 gallons of Enron propane and butane =.0143).
APPENDIX
The following is a schedule of Apexs Enron propane and butane purchases:
Propane
Date Vol. (gals.) Method and Location of Delivery
05/79 1,050,000 PL/PTO Mt. Belvieu, TX - TET Storage
06/79 1,050,000 PL/PTO Mt. Belvieu, TX - TET Storage
09/79 1,386,000 PL/PTO Mt. Belvieu, TX - TET Storage
2,100,000 PL/PTO Conway, KS Mapco GP 145
11/79 3,417,120 PL/PTO Mt. Belvieu, TX
12/79 1,050,000 PL/PTO Conway, KS Mapco GP 145
07/80 1,050,000 PL/PTO Conway, KS Mapco GP 140/145
09/80 1,050,000 PL/PTO Hattiesburg, MS-Delta Storage
1,050,000 PL/PTO Mt. Belvieu, TX
10/80 655,200 PL/PTO Mt. Belvieu, TX - Warren
Butane
Date Vol. (gals.) Method and Location of Delivery
08/79 2,100,000 PL/PTO Conway, KS - Mapco Group 145
09/79 2,100,000 PL/PTO Hutchison, KS - Cities Storage
420,000 PL/PTO Mt. Belvieu, TX
420,000 PL/PTO Mt. Belvieu, TX
10/79 2,100,000 PL/PTO Hutchison, KS - Cities Storage
11/79 1,050,000 PTO Bushton, KS HTI pipeline
12/79 1,074,360 PTO Mt. Belvieu, TX - TET Storage
Application, Ex. B.