Standard Oil Co. v. Federal Energy Administration (453 F. Supp. 203, 1978)

MEMORANDUM OF OPINION

MANOS, District Judge.

I.

PROCEDURAL HISTORY

On July 21, 1977, this court issued an order denying the defendants’ motions to dismiss the actions filed by each of the petroleum refiner plaintiffs. That earlier decision, which is reported, contains a detailed discussion of the procedural history of each of the nine cases up to July 21, 1977. See Standard Oil Company, et a1. v. F. E. A., 440 F.Supp. 329, 331 (N.D.Ohio, 1977) [hereinafter cited as “Standard Oil I”]. The court shall not repeat the procedural history delineated in its previous Memorandum of Opinion.

In Standard Oil I this court concluded that it sustained jurisdiction to determine three purely legal questions common to the complaints filed by all nine refiner plaintiffs. Those issues were:

(1) “Whether the FEA’s interpretation of the semantic meaning of the regulations governing refiner passthroughs of increased costs during the period January 1, 1975 through January 31, 1976, is correct.”

(2) “Assuming, arguendo, that the FEA’s current interpretation of the semantic meaning of the applicable regulations is correct, are those regulations inconsistent with the procedural . statutes pursuant to which the regulations were promulgated?” (emphasis added).

(3) “Assuming, arguendo, that the F.E. A.’s current interpretation of the semantic meaning of the applicable regulations is correct, are those regulations_ inconsistent with the . substantive statutes pursuant to which the regulations were promulgated?” (emphasis added)

On July 27, 1977 the court ordained a schedule for filing cross-motions for summary judgment on the merits of the three above-delineated legal issues, along with a schedule for filing documentary materials, and argumentative memoranda. The parties complied with that schedule, and today the court rules on their respective summary judgment motions.

II.

FACTS PERTAINING TO THE MERITS OF THE REFINER-PLAINTIFFS’ COMPLAINTS

A. THE EVOLUTION OF PETROLEUM REFINER PRICE REGULATIONS UNDER THE COST OF LIVING COUNCIL

The FEA’s regulations evolved from rules originally promulgated by the Cost of Living Council (“CLC”) under President Nixon’s Economic Stabilization Program.

The program began with Executive Order 11615, 36 Fed.Reg. 15727 (August 17, 1971), which froze prices and wages at levels existing during the 30-day period ending August 14, 1971. During the next 18 months the federal government endeavored to stop inflation with mandatory price controls, applied to the nation’s economy. In January 1973 the government instituted “Phase III,” which attacked inflation through a system of self-administered voluntary restraints, and federally promulgated wage and price guidelines which were designed to compress inflation to an annual rate of two and one-half percent.

At this time domestic crude oil production was declining, and the nation was becoming increasingly dependent on foreign crude. Foreign producers were raising their prices, and prices for home heating oil and other refined petroleum products were on the rise. On March 6, 1973, the CLC issued “Special Rule No. 1,” reintroducing mandatory price controls for refiners that had annual sales of $250 million or more. Special Rule No. 1 imposed a profit margin limitation and established a pre-notification procedure for companies that sought to increase prices more than one and one-half percent above their base prices. Base prices were defined as prices in effect during a specified historical base period.

On June 13, 1973, President Nixon issued an executive order imposing a new 60-day freeze on the prices of most commodities and services.

In July of 1973 the CLC published proposed rules for “Phase IV” price controls to become effective at the end of the 60-day freeze. Special rules — to be included in Subpart L of the regulations — were proposed for the petroleum industry. Under the proposed rules, maximum lawful prices for refined petroleum products would consist of three elements:

1. May 15, 1973 price to a class of customer (base price);

2. Increased costs of domestic crude oil and imports, subject to a profit margin limitation;

3. Other allowable costs, subject to prenotification and a profit margin limitation.

“Base price” was defined as:

“. . . the price the manufacturer charged for that product (reflecting any applicable customary price differential) on May 15, 1973.”

The Phase IV proposal retained the base price concept inherent in earlier Special Rule No. 1 — i. e., the use of base price fixed as of an historical point in time. Increased costs incurred subsequent to the base period could be added, under the proposal, to the base price to determine the maximum lawful price. Unlike Special Rule No. 1, the proposed Phase IV regulations would have permitted the recovery of increased costs of imports and domestic crude oil, /. e., product costs, without pre-notification. “Other allowable costs” would have continued to be subject to the pre-notification requirement, and all increased costs would have been subject to the profit margin limitation.

The CLC furnished no explicit notice that its proposed regulations required the various cost elements to be recovered in any particular order when selling prices were less than the lawful maximum. On its face, the proposal appears to have focused solely on the establishment of a maximum price which could not lawfully be exceeded.

On August 10, 1973 the CLC extended the price freeze for petroleum and petroleum products for one week, with the explanation that the CLC needed a week to consider the comments received on the proposed Subpart L regulations, review the methods by which the CLC’s policy decisions would be implemented, and write the regulations in final form. When Dr. John T. Dunlop, Chairman of the CLC, announced this one week extension he stressed that:

“The Council has been very concerned that the final regulations strike a delicate balance between constraining prices while at the same time encouraging the necessary increase in supplies which the country must have. The Council is aware that energy prices must be allowed to rise in order to stimulate development of new energy reserves and make possible the purchase of higher cost foreign oil. At the same time we must prevent unnecessary price increases.”

The Council received 272 written comments on Subpart L, and “each comment was reviewed by the attorneys and economic analysts responsible for the subpart.” In addition, the CLC staff “conducted numerous meetings with affected parties and made an intensive re-examination of the regulations. . . . ”

The final Phase IV petroleum price regulations were issued on August 17, 1973. That regulatory framework, on its face, appeared to focus solely on the establishment of a maximum lawful price. The price was comprised of the same cost elements previously identified in the notice of proposed rulemaking. However, the definition of base price was expanded to include the cost of imports and domestic crude oil. This change effectively removed the profit margin limitation from recovery of all costs associated with the procurement of raw petroleum products, i. e., “product costs.”

The original Subpart L proposal would have waived the pre-notification requirement for price adjustments reflecting certain increases in the cost of crude petroleum and imported petroleum products. In the final version of Subpart L, this concept was translated into a re-definition of the base price “to cover both the historical price, plus increased costs in the raw material.” Nothing in the regulations published in the Fall of 1973 affirmatively suggests that the expansion of the definition of “base price,” to include product costs, was crafted to embrace an unarticulated sequence of recovery rule.

In September of 1973 the CLC amended its Phase IV petroleum regulations to spell out the refiners’ right to “bank” product cost increases for recovery in the future. This amendment also made it clear that in calculating base prices, refiners were not required to include the full amount of their increased product costs; they could exclude from base prices such portion of their product cost increases as they chose to bank. The amendment pertinently provided:

“If, in any month beginning with September 1973, a firm establishes a base price for any covered product . which does not include the entire amount of increased [product] costs . . the unused portion may be added to the May 15,1973, selling price to compute the respective base price for a subsequent month.” (emphasis supplied)

The flexibility afforded refiners in determining the quantity of increased product costs that could be included in the base price was a prominent feature of the Phase IV regulations. A similar feature permitted refiners discretion to allocate increased product costs among various product categories.

The Phase IV regulations singled out gasoline, No. 2 heating oil and No. 2 diesel fuel for special treatment in this regard. In computing base prices with respect to each of these “special products,” a refiner could include no more than that particular product’s proportionate share (by volume) of increased crude oil costs. With respect to other covered products, however, the refiner could use as much of its increased crude oil costs as it desired, including costs allocable to gasoline, No. 2 heating oil and No. 2 diesel fuel. Should the refiner so elect, it could use all its increased crude oil costs in computing base prices for “other covered products.” The regulations thus created a flexible base price that permitted a refiner to recover a disproportionate amount of its increased crude oil costs on sales of other covered products or to bank such costs for recovery at a later date.

The Phase IV regulations also afforded refiners flexibility with respect to the allocation of non-product cost increases. By a notice of proposed rulemaking published in October of 1973, the CLC proposed adoption of a formula designed to provide for the allocation of non-product cost increases in a manner similar to that used in allocating increased product costs. The proposed formula was simplified in a notice of proposed rulemaking published in November, 38 Fed.Reg. 31686 (November 16,1973), and this simplified version was adopted without change.

The non-product cost formula provided a means whereby a pre-notified non-product cost increase expressed in percentage form could be translated into a total dollar amount reflecting projected sales for a 12-month period. The regulations provided that all increased non-product costs could be allocated to covered products other than special products, at the refiner’s option, and the total pool of non-product cost increases so allocated was available for recovery over a 12-month period.

B. THE EVOLUTION OF REFINER PRICE RULES UNDER THE FEDERAL ENERGY OFFICE

In 1973 Congress passed the Emergency Petroleum Allocation Act. Pub.L. 93-159, 87 Stat. 628 (November 27, 1973), 15 U.S.C. §§ 751 et seq. [hereinafter “EPAA”]. The EPAA conferred petroleum product price control authority on the President of the United States who was to exercise that authority “for the purpose of minimizing the adverse effects of such [petroleum] shortages . . ..”

Section 4(b)(1) of the EPAA set forth nine objectives that were to be achieved “to the maximum extent practicable” in the allocation and pricing regulations that the President was to promulgate. The price control authority conferred by the EPAA was further qualified by § 4(b)(2) of the Act, which required the regulations to provide a “dollar-for-dollar” passthrough of net increases in petroleum product costs.

On December 4,1973 the President established the Federal Energy Office [hereinafter FEO] and delegated authority to implement the allocation and price stabilization provisions of the EPAA to the Administrator of the FEO. On December 11, 1973, the FEO proposed adopting, without modification, the CLC’s Phase IV petroleum price regulations applicable to refiners. Those regulations were adopted by reference on December 27,1973, and two weeks later they were republished and renumbered.

On May 7, 1974 the Federal Energy Administration Act of 1974 was signed into law. Pub.L. 93-275, 88 Stat. 96, 15 U.S.C. §§ 761, et seq.

On May 21, 1974, the FEO issued Ruling 1974-12. Illustrating the flexibility of the regulations with respect to base price calculations, the Ruling gave an example which assumed that a refiner allocated product cost increases of 17 cents per gallon to jet fuel, and also assumed the refiner’s jet fuel price to have been 20 cents per gallon on May 15, 1973. Thus, Ruling 1974-12 assumed a lawful jet fuel base price of 37 cents. However, Ruling 1974-12 also assumed that if the refiner used only five cents of product cost increases in the current month, it would lawfully arrive at “a base price of 25