Full opinion text
MEMORANDUM OPINION AND ORDER FUSTE, District Judge. These are eight consolidated cases filed by gasoline refineries and wholesalers against the Secretary of the Puerto Rico Department of Consumer Affairs, hereinafter referred to as the Secretary and DACO, respectively. The various cases request declaratory judgment pursuant to Fed.R.Civ.P. 57 and 28 U.S.C. Sec. 2201, and injunctive relief pursuant to Fed.R. Civ.P. 65. Some plaintiffs claim violations to 42 U.S.C. Sec. 1983 and relief is requested accordingly. It is claimed that certain orders fixing gross margins of profit and establishing a tax antipass-through provision at a given level of the industry, entered by the defendant Secretary of DACO after March 18, 1986 are tantamount to a deprivation under color of state law of plaintiffs’ civil and constitutional rights secured by the fifth and/or the fourteenth amendments, United States Constitution. It is further claimed that the orders under attack are unconstitutional acts of deprivation of property without due process of law and, thus, are confiscatory in character. The margin-fixing/regulatory orders relate to the sale of gasoline at the wholesale level. The challenged state action coincides in time with the enactment of Law No. 5, of March 18, 1986, 13 L.P.R.A. Sec. 4030C, which law imposed an additional excise tax on the importation of crude oil on a per-barrel basis. The excise tax, variable in amount depending on the price of crude oil, is a legitimate exercise of Puerto Rico’s fiscal autonomy. Law of Federal Relations art. 3 (1917), 1 L.P.R.A. Sec. 3. The excise tax is not under attack; however, the same has been ordered to be absorbed by those plaintiffs which are gasoline wholesalers. One of the margin-fixing/regulatory orders, the first of two orders issued on April 23, 1986, contains an antipass-through provision whereby the excise tax is to be charged against the allegedly exorbitant income of the gasoline wholesalers. The antipass-through provision assumes that the ultimate price paid by consumers at the gasoline pumps shall not be increased by reason of the excise tax. Plaintiffs claim that the mentioned price control order containing the antipassthrough provision, and two additional orders of April 23 and May 20, 1986, are invalid for the reasons already mentioned. These two orders determine gross margins of profit at 8.6 cents per gallon for wholesalers and 17.7 cents per gallon for retailers. Specifically, the May 20 order fixes margins of 8.6 cents and 3.6 cents per gallon for wholesalers, depending on whether they are “big” companies or “small” companies, as defined in the order under Class 1 and Class 2. In addition, it is claimed that the field of gasoline price regulation is preempted by federal policy, embodied in existing federal law, of an unregulated market. The plaintiffs reinstate their arguments of taking of property without due process of law through confiscatory orders, deprivation of equal protection rights, nullity of the regulations for failure to accomplish a legitimate statutory purpose and for vagueness. The substantive due process violations as alleged are compounded by claims of procedural due process violations that, seen in the context of the regulatory scheme, equate to substantive due process violations. It is alleged that the orders are null and void for the Secretary of DACO’s failure to comply, for their issuance, with statutory requirements, nullity of the orders because of their retroactive character, arbitrariness, and capriciousness of the Secretary's actions, and gross constitutional deprivations under color of state law impermissible under the constitutional system of government. Jurisdiction has been pleaded under 28 U.S.C. Secs. 1331 and 1343. We find that the pleadings in the consolidated cases raise substantial federal question under the Constitution and laws of the United States and, therefore, jurisdiction is present. The Puerto Rico Manufacturers’ Association (PRMA), a prominent, non-partisan entity in this jurisdiction, has been allowed to appear as amicus curiae. PRMA’s position is against the regulatory scheme. Preemption is alleged to be present. The court declined to permit a limited number of consumers to file their permissive intervention under Fed.R.Civ.P. 24(b). Said consumers appealed our refusal to allow them to intervene. Appellate emergency relief was denied by the United States Court of Appeals for the First Circuit on May 21, 1986, Misc. No. 86-8022. Based on our analysis of the testimony and evidence received at trial, we hereby ENTER our Findings of Fact as required by Fed.R.Civ.P. 52. We note for the record that a large portion of the documentary evidence was received in Spanish. We dispensed of the strict application of the local rule regarding translation of documents in order to expedite and have the matter heard and resolved. FINDINGS OF FACT The Parties The gasoline business in Puerto Rico is best defined as a three-level business composed of the refineries, the wholesalers, and the retailers. There are two refineries in Puerto Rico at the present time, one operated by Phillips Puerto Rico Core, Inc. (PHILLIPS), and the other operated by Caribbean Gulf Refining Corporation (CARECO). PHILLIPS only refines gasoline so as to make it available to the next level of distribution, the wholesaler. CARECO operates as a refinery and as a wholesaler of gasoline. Plaintiffs are properly identified as follows: (a) Isla Petroleum Corporation (ISLA) and Gasolinas de Puerto Rico Corporation (GASOLINAS) are corporations organized and existing under and by virtue of the laws of the Commonwealth of Puerto Rico. They operate in the Puerto Rico market since 1981. ISLA is engaged in the business of wholesale distribution of gasoline to its dealers throughout Puerto Rico. GASOLINAS is engaged in the business of retail sales and wholesale distribution of gasoline throughout Puerto Rico through its stations and dealers. (b) Phillips Puerto Rico Core, Inc. (PHILLIPS) is a corporation duly organized and existing and authorized to do business in the Commonwealth of Puerto Rico, which operates a petrochemical plant in Guayama, Puerto Rico, where it uses naphtha, a petroleum derivative, as a raw material to produce various petrochemicals. Gasoline is indirectly generated during PHILLIPS’ petrochemical manufacturing process, and PHILLIPS sells the gasoline in Puerto Rico to wholesalers which, in turn, distribute it to the retailers. (c) Texaco Puerto Rico, Inc. (TEXACO) is a corporation organized and existing under and by virtue of the laws of one of the States of the Union and/or the Commonwealth of Puerto Rico. Said corporation is a gasoline wholesaler which, in turn, supplies its network of retailers who operate gasoline service stations. (d) Cia. Petrolera Caribe, Inc. (CAR-IBE) is a corporation organized and existing under and by virtue of the laws of the Commonwealth of Puerto Rico since 1976. CARIBE is involved in the wholesale of gasoline to its network of retailers who operate gasoline service stations in Puerto Rico. (e) The Shell Company (Puerto Rico) Ltd. (SHELL) is a corporation organized under the laws of England. The same is authorized to do business in Puerto Rico. Mobil Oil Caribe, Inc. (MOBIL) is a company organized under the laws of the Republic of Panama. The same is duly authorized to do business in Puerto Rico. SHELL and MOBIL are separate and independent legal entities, managed by their respective officers. SHELL, through a Servicing Agreement entered into with MOBIL, manages and services MOBIL’s business in Puerto Rico. Both entities act as wholesalers of gasoline. SHELL at times imports gasoline. The product is sold to the SHELL/MOBIL network of retailers that operate SHELL/MOBIL service stations in this jurisdiction. (f) Esso Standard Oil Co. (P.R.) (ESSO) is a corporation duly organized and existing under the laws of the Commonwealth of Puerto Rico. ESSO is involved in the wholesale of gasoline to its network of retailers who operate service stations in Puerto Rico. (g) Caribbean Gulf Refining Corporation (CARECO) is a corporation organized under the laws of the State of Delaware, duly authorized to do business in the Commonwealth of Puerto Rico. CARECO is primarily engaged in the refining of crude oil and the production and sale of refined petroleum products, including gasoline. CARECO’s refining division sells the gasoline to various wholesalers, such as SHELL, MOBIL, CAR-IBE, and TEXACO. CARECO’s marketing division, as wholesaler, sells gasoline and other petroleum products directly to over 270 independent dealers or retailers operating gasoline stations in Puerto Rico under the registered trademarks of “GULF” and “CHEVRON”. Both CARECO and PHILLIPS have gasoline exchange agreements in full force and effect. (h) Tenoco Oil Company, Inc. (TENOCO) and Distribuidora de Gasolina El Coquí, Inc. (COQUI) are the most-recently organized wholesalers of gasoline in the Puerto Rico market. TENOCO is a corporation duly organized and existing under and by virtue of the laws of the Commonwealth of Puerto Rico since 1982. It purchases gasoline from PHILLIPS and sells the same to retailers who operate independent service stations in Puerto Rico. TENOCO also sells wholesale to jobbers in the market. COQUI is a corporation duly organized and existing under and by virtue of the laws of the Commonwealth of Puerto Rico since 1982. COQUI’s business is similar to that of TENOCO. The incumbent of the Department of Consumer Affairs of the Commonwealth of Puerto Rico is Pedro Ortiz-Alvarez. Mr. Ortiz-Alvarez became Secretary of the Department on March 26,1986. His predecessor, Carlos J. López-Feliciano, was Secretary of DACO commencing in January 1985. He was appointed Superintendent of Police and left DACO on March 3, 1986. The Department’s Organic Act is contained in 3 L.P.R.A. Secs. 341-341v (1973). The gasoline market, as it relates to DACO, is further regulated by more recent legislation containing specific legislative intent on the subject of gasoline. See 23 L.P.R.A. Secs. 1131-1135 (1978). The Secretary is being sued in his official and personal capacity as per specific allegations in the various complaints and/or amended complaints on file. Existence of Gross Margin Standards Under Federal Regulations Prior to January 20, 1981, each plaintiff, except TENOCO and COQUI, which came into being after said date, were subject to the federal petroleum pricing and allocation regulations under the Emergency Petroleum Allocation Act of 1973, 15 U.S.C. Sec. 751 et seq. (EPAA). Under regulations promulgated under the EPAA, the United States Department of Energy set maximum gross margins of profit of 8.6 cents per gallon and 17.7 cents per gallon for wholesalers and retailers, respectively. The federal regulation labeled the wholesalers as resellers under the federal regulatory scheme. 10 C.F.R. Sec. 212.93 (1980). Those regulations provided guidance regarding the methods by which acquisition costs and gross profit margins were to be calculated. 10 C.F.R. Sec. 212.92. In the case of wholesalers, the federal regulations explicitly stated that the reseller (wholesaler) could not charge a price in a sale for any type or grade of gasoline which exceeded the most recent acquisition cost, plus 8.6 cents per gallon, plus tax cost attributable to the sales of that type or grade of gasoline. Beginning June 15, 1980, the Department of Energy was to adjust semiannually the fixed cent-per-gallon amount to reflect the gross national product deflator factor. Tax cost was defined to include the cost of federal, local, and state excise, sales, and other attributable taxes related to the gasoline sales and computed on a per-gallon basis. The factor of cost was not to include federal, state, and local income, property or franchise taxes. Acquisition cost for resellers (wholesalers) was the cost of product in inventory computed pursuant to the seller’s historical accounting practices on a per-gallon basis, including transportation cost of bringing the product to inventory. 10 C.F.R. Sec. 212.92(b) (1980). By virtue of presidential executive order, President Reagan lifted federal price controls on crude oil and refined petroleum products effective January 28, 1981. Exec. Order No. 12287, 46 Fed. Reg. 9,909 (1981). Before federal deregulation became effective, and specifically on August 29, 1975, DACO promulgated Regulation No. 45, which intended to implement certain authority of the Secretary of DACO under 23 L.P.R.A. Sec. 734 and DACO’s enabling act, 3 L.P.R.A. Sec. 341e, to regulate the prices of gasoline, kerosene, and diesel fuel. The regulation classifies the products as of “prime necessity”. Obviously, at that time DACO lacked authority to control the prices of petroleum and petroleum-derived products, inasmuch as the EPAA had preempted the field. 15 U.S.C. Sec. 751. Puerto Rico was treated as a state under said federal law. 15 U.S.C. Sec. 752(7). Price Regulation No. 45 was amended on July 23, 1976 by its Amendment No. 1 to reflect and accept the preempted status of the industry. Amendment No. 1 provided that the authority there contained would not become effective until the lifting of federal price controls and allocation controls. Thereafter, Regulation No. 45, Amendment No. 1, was the document to which the local industry and DACO referred to in the field of local gasoline regulation. (See footnote 4 to this Order). By its express terms, the regulation became effective upon the lifting of federal price controls on January 28, 1981. Our examination of Regulation No. 45 and its Amendment No. 1, seen in light of the evidence received at trial, shows that the same does not contain a specific price/margin-of-profit regulation. The regulation does not set specific margins of profit. In this sense, articles 2, 3, and 4 of the regulation are most important. They show that after January 28, 1981, DACO understood it could regulate prices as per articles 2, 3, and 4, to wit: Article 2 — Purposes This regulation controls the prices and maximum margins of profit in the sale of gasoline, kerosene, and diesel fuel at all levels of distribution, including refineries, by establishing the mechanism by means of which the Secretary will set and revise said prices. In addition, the prior regulation related to this matter is repealed. Article 3 — Declaration of Sale Prices: Once the federal price controls over products regulated herein cease, and while the Secretary has not set the maximum prices of the product in question, no person can increase the sale price of the product unless he informs the Secretary in writing of the proposed change with at least 15 days’ prior notice to the date the change comes into force. Article 4 — Price Orders: On his own initiative or at the request of an interested party, the Secretary can issue orders fixing prices and maximum margins of benefit in the sale of the regulated products at any distribution level in accordance with the following criteria: (h) gross reasonable benefit to the wholesaler and the dealer (1) reasonable margin for operational costs; (2) reasonable net benefit margin; (3) turnover of the product; (4) adjustment to the gross benefit margin considering the turnover of the product. (translation ours). As it can be plainly seen from Regulation No. 45, as amended, the Secretary understood that he had the power to issue price/regulatory orders. Regulation No. 45 per se was not a price order or price regulation. DACO’s policy regarding the implementation of Regulation No. 45, as amended, accrued and commenced to be expressed after January 28, 1981, when federal controls under the EPAA ceased to exist. The credible evidence is to the effect that former Secretary Héctor Ricardo Ramos-Diaz informed the public of the existence of Regulation No. 45, as amended, as a result of the expiration of federal controls. However, our careful examination of defendants’ exhibits 8, 9,10, 11, 12, 13, 14, 15, 16, 17, and 18, does not support the conclusion that a formal order was ever entered by DACO adopting the 8.6 and 17.7-cent margins last enforced by federal regulation. The testimony received by the Court from former Secretary Carlos J. López-Feliciano and from the vast majority of the witnesses so confirms. However, there is evidence that DACO and the wholesalers/retailers adopted informally as a reference point for future regulation the federal margins as they existed on January 28, 1981. As a matter of fact, the press release of former Secretary Ramos-Diaz, dated February 23, 1983, defendants’ Exhibit 14, at page 10, leaves no room to doubt that as of that date DACO had only made use of Article 3 of Regulation No. 45, as amended, seen in light of the guidelines existing at the time of federal deregulation. The press release states in its page 10, first and second paragraphs: The price system that we have imposed can be summarized in the two basic mechanisms that Regulation 45 (amendment 1) provides, to wit: (1) that no person can raise the prices at which he sells the products mentioned without notifying the Secretary of the proposed increase with 15 days’ prior notice (Reg. 45, amend. 1, art. 3), and (2) that on its own initiative or at the request of an interested party, the Secretary can issue orders fixing and revising the prices and margins of maximum benefit of the regulated products at any or all the levels of distribution following a series of guidelines (Reg. 45, amend. 1, art. 4). Up to the present, this Agency has only made use of the first of these — that established in article 3 of the Regulation — adhering to the same the margins of benefit that were enforced at the time the federal controls ceased. In this way we supervise that the prices of sale of gasoline be maintained within the established margins and that any increase be notified accordingly. (Translation ours). The truth of the matter is that DACO never approved a price order in accordance with the procedural requirements of Commonwealth law to implement and enforce the federally-established 8.6 and 17.7 cent-per-gallon gross margins of profit for wholesalers and retailers as a standard in reviewing wholesale or retail prices. Our notes of the testimony of former Secretary Carlos J. López-Feliciano so confirm unequivocally. The actual Secretary and defendant had to admit, when put in a non-elusive position, that this was the case. However, there is no doubt in our mind that the 8.6 and 17.7 cent-per-gallon margins were used to overlook the industry as if their presence in the historic legal context could result in actual price regulation under Regulation No. 45, as amended. Subsequent to the lifting of federal petroleum pricing regulations, the petroleum industry in Puerto Rico did not comply with Regulation No. 45, Article 3, by submitting proposed price increases to DACO fifteen days prior to the requested effective date of such increases. There are, however, a few instances where DACO flexed muscle against the industry on the basis of Article 3 and some cases where the industry came to DACO to confess having gone beyond the former guidelines. To that effect, we received in evidence defendants’ Exhibits 10, 11, 12, 13, 19, 20, 34, 35, and 36, where, on a very limited number of occasions, DACO exchanged correspondence with the companies on the subject. On two occasions, in 1982 and 1983, SHELL pleaded mea culpa and voluntarily adjusted its prices. Defendants’ Exhibits 19, 20. On one occasion, ESSO threatened a retailer with contract cancellation for charging high prices for gasoline. Defendants’ Exhibit 33. In summary, only Article 3 of Regulation No. 45 was in force. No price/margin-fixing orders as per Article 4 of Regulation No. 45 were ever approved. The industry played the game with DACO by not going overboard on price setting, bearing in mind the historical federal margins and DACO’s announced power to regulate. For the period 1981 to 1986, the industry in this sense was a free-competing market subject to the caveats mentioned herein. During the period of 1983-1984, there was by no means a vigorous enforcement of Regulation No. 45. Enforcement became more of a monitoring effort on the part of DACO. Prices remained relatively stable. The personnel to gather data, conduct economical studies, regulate, and monitor simply was not available. DACO never withdrew Regulation No. 45, as amended. DACO never formally implemented enforcement procedures to penalize offenders. There is evidence that no offenders were charged or fines imposed or paid. There is evidence that DACO conducted no study directed to implement Article 4 of Regulation No. 45, as amended, during the years 1981 to 1984. The industry relied on the fact that they had at least a de facto -protected margin of profit of at least 8.6 and 17.7 cents at the wholesale and retail levels, presumably as these margins were defined in the federal regulations that ceased to exist in January 1981. Be it remembered that the federal margins allowed for the given margins to be gained on the basis of the most recent acquisition costs plus the taxes attributable to the transaction, including the cost of federal, local, and state excise and sale taxes and other attributable taxes related to the gasoline sales, but not including federal, state or local income, property or franchise tax. There is evidence that DACO up to the end of year 1984 was not in a position to enter a price/margin-fixing order related to margins of profit. The court was not presented with such an order or with studies that would enable DACO as of 1984 to enter said orders taking into consideration gross reasonable benefit to the wholesaler or dealer, reasonable margin for operating costs, reasonable net benefit margins, turnover of the product or adjustment as a result thereof. No evidence of an adjustment based on the GNP deflator factor was presented in evidence. With this background in mind, we now look at the historic legal events of 1985-1986 which bring about this litigation. In January 1985, Carlos J. López-Feliciano became the Secretary of DACO. By mid-July 1985, Mr. López-Feliciano determined that DACO should resume active enforcement of the policy of the previous administration regarding the fifteen-day notice requirement of change in prices as per Regulation No. 45, Article 3. To that effect, Secretary López-Feliciano sent a July 1985 report to the interagency committee created to study the gasoline industry as per 23 L.P.R.A. Sec. 1131. We carefully examined the report, defendants’ Exhibit 31, in light of the September 1985 communication to wholesalers, excepting TENOCO and COQUI, Exhibits 22-32. There, we find a restatement of the historical deregulation described in these findings. At page 5 of the report, Exhibit 31, we find a restatement that only Article 3 of Regulation No. 45, as amended, was in full force and effect and that DACO kept its vigilance and/or watchfulness of the wholesalers and retailers so as to avoid them from exceeding the historic federal margins of 8.6 and 17.7 cents per gallon. There, at pages 6 to 9, inclusive, Secretary López-Feliciano renders to the interagency committee an update on the status of the industry as of July 1985. The status of the pricing situation of gasoline was not to be blamed on the wholesalers or on any wrongdoing on their part. It was stated that prices for the period 1982 to March 1985 declined to then increase slightly due to causes mainly attributable to world market conditions. He further expressed his concern that due to world market conditions and low inventory of gasoline kept by stateside refineries, the prices were not coming down as expected. He further suggested that mechanisms be studied to allow the consumer to participate in the savings represented by lower crude costs. Most important, it was stated that the Puerto Rico retailers were not pleased with the fact that some retailers were selling their gasoline at retail costs lower than 17.7 cents, that the retailers’ margin of profits was ranging from 3.12 cents per gallon to 12.4 cents per gallon, and that this sector of the industry was depending on competitive pricing. As a result thereof, the retailers wanted an order to fix minimum prices for the sale of gasoline and that the incentive programs by wholesalers to retailers on the sale be evaluated. The memorandum rested by stating that the interagency committee was to establish public policy to follow in the future to guide the industry accordingly. Although we do not have the benefit of the resulting interagency committee recommendations on future policy, it is a known fact that in the latter part of 1985, DACO commenced to look into the profit margins that were being realized by wholesalers. Information requests were sent to all companies at the wholesale level. Information was gathered and, even though at the beginning of 1986 the study was not complete, DACO concluded that the margins of profit of wholesalers ranged from a low figure of 6.90 cents per gallon to a high of 16.76 cents per gallon. As stated before, in response to a request by the Retail Gasoline Dealers’ Association, hearings were convened on January 30, 1986, to obtain information from the companies as to the level of their margins and the reasons therefor. While the Retail Gasoline Dealers’ Association withdrew its request, DACO held the hearings and continued to examine the margins of profit of wholesalers. DACO concluded and so informed the Legislature of Puerto Rico, that while the price of a representative grade of crude oil had declined between November 1985 and February 1986 and the average refiner price had also declined, the average price of Puerto Rico’s wholesalers had not declined as expected. It was concluded that the wholesalers’ margins of profit were excessive. To that effect defendants presented in evidence a series of exhibits as summaries under Fed.R.Evid. 1006, only admitted by the Court for limited purposes under Fed.R.Evid. 105. The summaries were offered without laying the proper foundation and without making the supporting documents available for inspection. In any event, the Court admitted the summaries for the limited purpose of proving that the Secretary considered the summaries in the rulemaking process. These are defendants’ Exhibits 1, 2, 3, and 6. These exhibits were prepared by an employee of DACO, Carlos Lasanta. Mr. Lasanta holds a Bachelor’s Degree in Business Administration from the Interamerican University. He directs the Division of Economic Studies of DACO. During the tenure of Carlos J. López-Feliciano as Secretary of DACO and after January 1985, he became involved in the gasoline regulation. His testimony shows that the witness is a well-intended person, but not a person qualified to conduct studies on the economics of the petroleum industry for regulatory purposes. We find that Mr. Lasanta’s testimony was of little assistance to the Court. He gave no solid ground upon which we could find that DACO had studies of value to rely upon. This particular situation motivated our ruling not to depart from the strict compliance with Fed.R.Evid. 1006. If the nonavailable supporting data to the summaries was primarily Mr. Lasanta’s work, the reliability of that evidence was to be put in question. Relying on the information supplied by DACO and considering rapidly-declining crude oil prices and the alleged failure of cost reductions to be passed through fully to Puerto Rico’s consumers, the Puerto Rico Legislature enacted Law No. 5, of March 18, 1986, 13 L.P.R.A. Sec. 3040C, to impose an additional excise tax to the existing 16-cent excise per gallon of gasoline. 13 L.P.R.A. Secs. 4010(b) and 4030. The new excise tax is imposed on crude oil and refined petroleum products. The amount of the tax was designed to vary, depending on world prices of crude oil, as determined by certain specified indices, in the second month prior to the month in which the tax is imposed. For the month of April 1986, the tax was set at $5.00 per barrel or $0.119 cents per gallon of gasoline. In May 1986, the tax was set at $6.00 per barrel or $0.1429 cents per gallon of gasoline. For the wholesalers who purchase gasoline from PHILLIPS and CARECO as refineries, the tax is included in the price of the gasoline purchased. Those wholesalers who import gasoline into Puerto Rico, such as SHELL, are required to pay the tax on such imports directly. The level of the tax in future months is at present unknown, inasmuch as it varies inversely with world crude prices. The record indicates that world oil prices have increased in the past two months. The legislative intent behind Law No. 5 provides, in its pertinent part, as follows: [S]ince the descent in the world price of crude oil began, and today it is below $13.00 per barrel, no pattern whatsoever has been observed that indicates that the reduction has also been favorable to the Puerto Rican consumer. On the contrary, in Puerto Rico the price of gasoline, among other consumer goods, has remained stable. This means that petroleum importers or distributors have increased their profits without a sufficient part of that price savings having been transferred to the consumer. Faced with this reality, the State has the obligation of adopting measures for guaranteeing that the benefit obtained from the drastic drops in world petroleum prices is also transferred to the entire Puerto Rican public. This will be achieved in part through the imposition of the excise provided in this law, whose purpose is to channel resources for social welfare works and services, and on the other hand, vising governmental mechanisms for price control, if the businesses do not channel them on their own initiative. Therefore, the purpose of this law is to transfer a portion of the benefits represented by the drop in crude oil prices to all consumers, through public works and services. At the same time, without affecting today’s prices in the marketplace, nor the fair, reasonable profit margin of the petroleum producing and distributing companies, each Puerto Rican consumer will receive, in an adequate fashion, the benefit of a substantial drop in the price of gasoline and other derivative products. Law No. 5 at 1 (emphasis added). Faced with the legislative intent, whereby an excise tax was being imposed and, on the other hand, governmental mechanisms for price control were to be exercised to prevent the consumer from having to pay for the tax, DACO and the Department of Treasury implemented a plan to accomplish such legislative intent. Be it remembered that up to this time, Regulation No. 45, Article 3, was in effect only requiring a fifteen-day notice on price increases. No price fixing order per se existed as of the date the law came into effect on March 18, 1986. The evidence shows that the general public was fearful of the tax and its consequences. There had been public debate on whether the legitimate exercise of the power of fiscal autonomy would eventually freeze or reduce gasoline cost to consumers. The evidence shows that faced with strong public concern, the Department of Treasury published the following advisory in the local newspapers: March 17, 1986. IMPORTANT FACTS REGARDING THE REDUCING EXCISE TAX FOR PETROLEUM Background Between November, 1985 and February of this year, the price of petroleum went down on a worldwide level from $30 to $14 per barrel. This has caused a dramatic reduction in the price of gasoline worldwide. Notwithstanding, until recently Puerto Rico had not noticed a proportional reduction in the price of gasoline. By means of new legislation, an excise tax has been enacted to reduce the excessive profits of the dealers in oil (“petrol-eras”) and wholesaling companies which are being derived as a result of the reduction in the cost of petroleum. What is the purpose of the reducing excise tax? That the people of Puerto Rico share in the benefits of the decrease in the price of petroleum. Who is going to pay this reducing excise tax? The dealers in oil (“compañías petroleras”) will pay the Government of Puerto Rico part of their excessive earnings due to the reduction in the price of petroleum. What use will be given to the funds collected through the reducing excise tax? The collected funds shall be for the benefit of citizens through public works and government services. How are the electricity rates to be affected? With the decrease in the price of petroleum, the consumer is already receiving the benefit. The tariffs have decreased in 15% and it is expected that they will go down 40%. Will the price of gasoline increase as a result of this reducing excise tax? No, DACO mil make sure that the price of gasoline is not raised. What is the position of the Gasoline Retailers’ Association? “Contrary to the position taken in these public hearings by the petrochemical companies in opposing this bill, we, in just recognition of the need of resources by the Government of Puerto Rico, and recognizing that it is a better alternative that the money earned in excess by the petrochemical companies, the moneys earned and those to be earned if the Government does not stop them, be used for the benefit of our Government to realize those public works beneficial to the people of Puerto Rico. This measure, coupled with adequate supervision over the abusive earnings of the petrochemical companies, taking as an example the present situation whereby they are earning more than 20 cents in excess per gallon, allows the Government to obtain the 9.5 cents of the excise tax and more so, the gasoline should decrease more than 10 additional cents per gallon at this moment.” Statement Gasoline Retailers’ Association of Puerto Rico before the House Committee on Finance, Commerce, and Industry. The citizen will not pay more for gasoline; and the funds collected by means of this reducing excise tax will be for the benefit of the people of Puerto Rico. Orientation Message Commonwealth of Puerto Rico DEPARTMENT OF TREASURY (Translation ours; emphasis added). Thereafter, on March 26, 1986, DACO, through defendant Secretary Pedro Ortiz-Alvarez, issued an order where it reasserted that pursuant to regulation No. 45, Article 3, no price increase could take effect unless it had been submitted to DACO for approval fifteen days prior to the effective date of the increase. On April 23, 1986, DACO issued two orders. The first order determined that the Law No. 5 new excise tax imposed on crude oil and derivatives like gasoline could be passed through by the refineries to the gasoline wholesalers. The gasoline wholesalers were forbidden, by virtue of the order, to treat as a tax cost chargeable to retailers, the import of the excise tax. The net result was a determination by DACO that the parties chosen to absorb the tax were the wholesalers with an antipassthrough provision operating against them. This order was, for all material purposes, a price-fixing/regulatory order. The second order of April 23, 1986 issued by DACO forbade wholesalers to sell at any price higher than the price they had charged on March 31, 1986, without the express approval of the Secretary. The April 23 orders, as well as the March 26 order, were issued without notice and hearing as required by 23 L.P.R.A. Sec. 341g(a), 3 L.P. R.A. Secs. 1041-1059, and/or 3 L.P.R.A. Sec. 341e, seen in light of Sec. 341g(a). A hearing was to be held a posteriori to allow wholesalers to present evidence and argument on, among other things, the course that future regulation on the subject was to take. The plaintiffs received the April 23 orders. Although there is no evidence that at any time before the April 23, 1986 orders any wholesaler was forced to sell the gasoline under cost, there is overwhelming evidence on this record that the timing of the April 23 orders coincided with increased acquisition costs for all wholesalers and these increases in cost, coupled with the imposition of the tax at the wholesale level by DACO, and the freezing of prices as of March 31, 1986, as per the two orders of April 23, did cause plaintiffs to have to sell below their acquisition cost of gasoline on a current basis, beginning in late April and up and until the date of trial. Plaintiffs TENOCO and COQUI sought administrative relief from the April 23 orders by petition dated April 28, 1986. The Secretary responded in an order issued directed to those two companies, dated April 29, 1986. There, the Secretary admitted publicly that these two companies did not increase their per-gallon gross margins during the first three months of 1986. The Secretary further noted that these two companies had added an important competitive element in the gasoline market. Two orders, similar in text, were issued, one directed to TENOCO and the other to CO-QUI, both bearing the date April 29, 1986. The orders are most revealing and their identical text is transcribed herein: RESOLUTION AND ORDER The above captioned company is engaged in the distribution of gasoline in Puerto Rico. It has objected the application to it of the Order issued by the Department of Consumers Affairs to gasoline wholesalers, published on April 23, 1986.a The situation set forth by this company deserves special attention. It is a small company, economically weak, that distributes a small portion of gasoline which is sold in Puerto Rico. During the past years it has added an important competition element in the gasoline market and has, in effect, stimulated lower prices for the consumer. The gross margin of profits of this company has normally been under the 8.6$ per gallon, and occasionally it has been substantially lower. The evidence gathered up to now does not allow to conclude that they withheld excessive earnings during the first three months of 1986 as a result of the reduction in the prices of crude oil. Their prices for March 31, 1986 were lower than those offered by the companies with higher volumes of sales. In view of the foregoing, we hereby authorize the above-captioned company to establish their prices of sale to retailers at the same level in which the competitors sell leaded and unleaded gasoline. Their prices must not allow a margin or profit higher than 8.6$ per gallon. Experience shows us that this company makes a special effort to maintain its prices underneath those of its competitors. Nevertheless, for the purpose of verifying that it maintains that pricing policy, they are required to file at this office, on Wednesdays of every week, copies of the bills of five (5) sales carried out on Mondays and five (5) on Thursdays. Given in San Juan, Puerto Rico, on April 29, 1986. Signed Pedro Ortiz Alvarez; Pedro Ortiz Alvarez, Secretary. The orders, while recognizing the patent and obvious injustice caused as a result of the April 23 orders, did not provide satisfactory relief. This is so because TENOCO AND COQUI had been operating under Regulation No. 45, Amendment 1, under free market competition conditions. They had priced their products below the prices of the larger wholesalers in order to be competitive and the prices of these competitors were being held down by the application of the second April 23 order directly to them. In other words, the April 23 orders and the April 29 order imposed a hardship on TENOCO and COQUI directly, inasmuch as the absorption of the tax without “pass through” and the raise in costs, seen in light of the price freeze in a market that was de facto deregulated, forced them to sell under cost in order to compete with other companies and be able to supply their customers. On May 12, 1986, DACO conducted ex post facto hearings to deal with the April 23, 1986 regulation. Plaintiffs TENOCO and COQUI participated in the hearings in a meaningful way. The other plaintiffs announced that they would not participate because they had filed their complaints in the instant proceeding. On May 15, 1986, we entered an order in the consolidated proceedings, entitled “Minutes of Proceedings and Order”, Docket Document No. 14. There, we denied the second request by TENOCO for a temporary restraining order. In so doing, we reaffirmed the earlier denial by Chief Judge Pérez-Giménez. We were of the view that the broad picture had to be presented to the court. We directed DACO to pass upon and decide on TENOCO’s request for reconsideration of resolution and order subscribed by counsel on May 8, 1986. The Court expected DACO’s prompt attention to the matter before the scheduled pretrial conference and hearing set for May 20-21, 1986. In the event that no action was taken by DACO as directed by us, we would understand that DACO had denied the requested relief. The pretrial conference was held in open court as scheduled on May 20, at 4:30 P.M. Extensive argument was heard. All kinds of proposals to solve the dispute were considered. That same day, May 20, DACO issued an order which did not address the subject matter to which we had directed their attention. The order was a new order which set aside the second April 23, 1986 order fixing margins of profit and freezing prices at levels of March 31, 1986. The new order regulated anew the gasoline wholesale sector of the industry. The May 20,1986 order stated that all wholesalers whose average gross margins from the beginning of 1986 to the date of the order did not, in effect, exceed 8.6 cents per gallon, could continue to obtain up to an 8.6 cent gross margin. The companies identified as being in this Class 1 category were TENOCO, COQUI, and CARIBE. All wholesalers whose average gross margins from the beginning of 1986 to the date of the order did, in effect, exceed 8.6 cents per gallon, were permitted to obtain up to 3.6 cents gross margin until they could show the Secretary and defendant Ortiz-Alvarez that their average gross margin from the beginning of 1986 is lowered to 8.6 cents, at which time they would be permitted to obtain an 8.6-cent margin. The companies tentatively identified as being in this Class 2 category were TEXACO, SHELL/MOBIL, ESSO, and GULP/CHEYRON. GASOLINAS/ISLA was not included in the order, presumably by inadvertent error. At the time trial concluded, no additional order was made known to the court that would cure the exclusion. In order to “stabilize” for the consumer the price impact of the order and to maintain the historical (not legal) price differential between the major companies and the small wholesalers, DACO activated a fund known as “Fund for Prime Need Articles”, 23 L.P.R.A. Secs. 734, 745, from which the gasoline prices to Class 1 wholesalers would be subsidized in the amount of ten cents per gallon, and Class 2 wholesalers would be subsidized by five cents per gallon. Secretary Ortiz-Alvarez could not explain at trial how this emergency fund would operate; however, he offered an impromptu solution when he stated that one way of solving the problem would be that the payments on the subsidy would be given in the form of credits on the excise taxes owed by the refineries and importers of gasoline under Law No. 5, so that no company would be required to make an out-of-pocket payment in order to effectuate this program. Companies could request special relief from the May 20, 1986 order and DACO would convene hearings within five days of any request. Furthermore, additional ex post facto hearings were set for June 2, 1986. On said occasion, DACO would receive comments from all interested persons on the appropriateness of the May 20, 1986 order. Surprisingly, this third price-fixing order confirms that the two April 23 pricing orders, as well as the May 20 order itself, were based on anything but soft data. The order requested parties to come forward with the hard data that any rule-making body would consider before regulating, to wit: (1) Detailed evidence of costs and operating costs; (2) evidence to demonstrate the excess profits achieved during the first three months of 1986 and evidence of how said excess profits have been reduced during the second trimester of Í986; (3) evidence of whether the operating costs of wholesalers have increased significantly since 1981 when federal controls ceased to exist and evidence of the reasons behind such increases; (4) evidence of whether there exist significant differences between the costs of operation of wholesalers in Puerto Rico versus wholesalers in Continental United States, and evidence of the reasons behind such differences; (5) evidence of why the margins of profit of wholesalers increased substantially during the first trimester of 1986 while its costs decreased, and what measures, if any, DACO should consider to avoid this from happening again; (6) evidence of how changes are to be made to the order of May 20, in order to achieve the following purposes: (a) force the wholesalers to return unreasonable profits obtained during the first trimester of 1986; (b) stabilize the price for Puerto Rico consumers; (c) attain vigorous competition, including the safeguarding and viability of the small wholesalers’ survival in the market; (d) achieve free competition as soon as possible. We find as a matter of fact that in the circumstances of this case plaintiffs did not have sufficient opportunity to be heard. Advance notice and hearings of some significance were not provided. The March 26 order, seen in light of the two orders issued on April 23 and the May 20 order, dealt with matters of sufficient importance in the field of price and margins-of-profit regulation of the gasoline industry so as to require these hearings. The May 12, 1986 hearing announced in the second order of April 23, 1986 had no meaningful purpose. TENOCO and COQUI participated; DACO had the benefit of the allegations before this Court. The evidence received at trial convinces us that these hearings had no meaningful purpose of regulating gross profit margins in the wholesale/retail of gasoline. DACO and defendant Pedro Ortiz-Alvarez had their mind set on the remedies to be afforded. The orders had no legitimate regulatory purpose. They simply obeyed to DACO’s public commitment of keeping the lid tight on the gasoline industry irrespective of consequences, so as to accomplish the publicly-made promise that DACO would not allow the prices of gasoline to go up. In so doing, DACO disregarded substantive due process considerations in that the confiscatory and illogical results of the mentioned orders were imposed irrespective of the economical consequences on plaintiffs as outlined herein. In so doing, DACO disregarded procedural due process, which, as a matter of fact, compounded the substantive due process violations in issuing price fixing/regulatory orders without regard to the logic or consequences of its actions. The evidence indicates that defendant Secretary Pedro Ortiz-Alvarez relied principally on information and studies provided to him by Mr. Carlos Lasanta, whose qualifications we cannot responsibly accept. The evidence further confirms that even though defendant Pedro Ortiz-Alvarez claimed to have before him prior to entry of the April 23 orders defendants’ Exhibits 1, 2, 3, and 6, his testimony was contradicted when Mr. Lasanta had to admit that Exhibits 3 and 6 were prepared after the April 23 regulation and after the April 29 resolution and order concerning TENOCO and COQUI. The testimony of the defendant Pedro Ortiz-Alvarez and his immediate predecessor Carlos J. López-Feliciano merit a special finding. They were the two secretaries of DACO who intervened directly with the challenged regulation. The testimony of the former Secretary López-Feliciano was straightforward testimony. The same was of assistance to the Court. His answers to the questions posed were responsive. There was an obvious cooperative attitude on his part to the judicial proceeding. López-Feliciano admitted that the policy of DACO at the time he became Secretary in January 1985, was one of nonintervention. DACO was like a watchdog overlooking the industry. There were no price-fixing or margin-of-profit orders in effect at the time he assumed the duties of the office. DACO had a monitoring and surveillance policy using as guidelines the 8.6 cent-per-gallon and 17.7 cent-per-gallon margins as last enforced in 1981 under federal regulation. He followed the strategy of his predecessor, Secretary Héctor Ramos, using as a guideline Regulation No. 45, Amendment 1, of 1976. Under his leadership, DACO first began to look into the profit margins in November/December 1985. The guidelines followed had no supporting studies. They were borrowed from federal regulation. Hearings were had in January 1986. At the time he left office to become Police Superintendent, that is, on March 3, 1986, there was no report on the subject discussed herein. Contrary to the straightforward demean- or of former Secretary López-Feliciano, the testimony of the defendant Pedro Ortiz-Alvarez was defensive and biased to DACO’s position. This defendant could not tackle specifics on the subject of the underlying studies and policy which motivated the first price-fixing orders in the industry since 1981, to wit: The April 23 order and the May 20, 1986 order. Ortiz-Alvarez had to admit that the May 20 order was prepared in contemplation of trial by retained trial counsel Messrs. Coleman and Robinson, and assistants Hearing Examiner Hjalmar Flax, Evelyn Otero, Carlos Lasanta, Assistant Secretary Matilde Acevedo, and himself. However, he tried to justify the soundness of the order by stating that the same was the product of a “long process” dating back to April 23, 1986. The Secretary had no definite criteria on what would be included in acquisition costs for the purposes of the regulation or under the regulation. He went further and attempted to establish that profit margins had been frozen in Puerto Rico since 1981 by orders of former Secretary Héctor Ramos, all under Regulation No. 45. The overwhelming evidence is that no such regulation existed as confirmed by his immediate predecessor. The Secretary assumed responsibility for the decision that generated the April 23 orders which included the antipass-through provision of the tax levied by Law No. 5. When asked why the wholesalers were the chosen ones to absorb the tax by regulation, he attempted to justify the action on his own notions of what excessive or handsome profits were. He insisted that it was predetermined that the consumer would not pay the tax. He located the tax in the excessive margin of the big companies. Ortiz-Alvarez had to admit that the solution to the problem was more evidence gathering, more public hearings, and more remedies. On the issue of cost-of-operation determinations for cost accounting in the sale of wholesaler to retailer, he had to admit that acquisition cost, the previous 16 cent-per-gallon excise tax, overhead cost, certain transportation costs, and delivery costs, had to be considered. The record shows that DACO never developed evidence on the last three items mentioned. It was obvious from his testimony that the guidelines for regulation were poor, haphazardly gathered, with the result that there was no hard evidence to sustain the reasonability of the margins set or the placement of the antipass-through provision at the wholesale level. The defendant admitted that even though there were other solutions to the problem, he preferred the chosen options. The witness had to admit that the particular case of TENOCO and COQUI was such that even though charged with excessive earnings, the evidence was to the contrary. The defendant stated that he would force the plaintiffs to operate at a loss by regulation to gain back the “excessive earnings” made in January-March 1986. He had to admit that some of the so-called big companies were losing money. In his opinion, excessive profits are determined by reference to “experience”. The witness could not explain to our satisfaction if the operating expenses were to be accounted for before or after the establishment of gross margins of profit. He claimed to have retroactive price fixing/regulatory power. The witness could not tell what he expected of the order of May 20, 1986 and had to admit that the new excise tax enacted through Law No. 5 had much to do with the actual situation. When asked what accrued as a result of the January 1986 hearings, he admitted that no decision was taken for gross margins of profit. However, three decisions were taken: It was determined that the Law No. 5 tax would not reach the consumer; that the tax would be absorbed by the excessive profits of wholesalers, and that the market, deemed highly disorganized, would be the object of regulation. We do find that the refining and wholesale gasoline markets in Puerto Rico were at all times up to April 23, 1986 highly competitive. The wholesalers were fiercely competing and the smaller wholesalers (such as CARIBE, TENOCO, and COQUI), were increasing constantly their market share. On March 26, 1986 and thereafter, DACO only had the benefit of studies of doubtful value, such as Exhibit 37, Exhibit 1, Exhibit 2, and Exhibit 6. We find, as a matter of fact, that the regulatory/price fixing orders of March 26, April 23, and May 20, were arbitrary, unreasonable, discriminatory, and confiscatory in nature. Specific Findings Regarding Plaintiffs TENOCO and COQUI TENOCO and COQUI are principally engaged in the wholesale of gasoline to their clients, the vast majority of whom are retailers who operate independent, unbranded gasoline service stations. These two companies compete in the second tier of the market, that is, as wholesalers-distributors who purchase gasoline from refineries for resale and distribution to retailers. The only supplier of these companies is PHILLIPS. TENOCO began selling gasoline in 1984; COQUI commenced the sales in 1983. They are the smallest of all wholesale distributors, followed by CARIBE and GAS0-LINAS/ISLA. TENOCO and COQUI successfully penetrated the distribution market for gasoline at the second wholesale level through aggressive competing pricing, based on streamlined overhead, which allowed them to undersell competitors. TENOCO’s share of the business grew monthly and during the month of March 1986, it sold 4.7 million gallons of gasoline, representing over 5% of the wholesale market. TENOCO and COQUI have provided, as acknowledged by the defendant in its April 29, 1986 orders, healthy competition, pursuant to specific legislative intent under 23 L.P.R.A. Secs. 1131-1135. The April 29, 1986 orders issued by defendant recognized TENOCO and COQUI’s contribution to the healthy competition in the market. It was further acknowledged that TENOCO and COQUI never had unreasonable or excessive profits in the first quarter of 1986. TENOCO and COQUI have no control whatsoever over the final resale price charged to the consumer by the retailers, the latter being independent dealers who set their own prices and determine their own profits. As a result of the decrease in crude price between January and April, 1986, TENOCO and COQUI, as well as other wholesalers, reduced their wholesale prices, thereby transferring to the next level, the retailers, savings resulting from the reduction in their purchase prices. TENOCO and CO-QUI have maintained lower prices and passed on to their retailers even greater savings than their competitors. The sale price to retailers of gasoline by TENOCO decreased from $0.96 and $0.97 per gallon for unleaded and leaded gasoline, respectively, in January 1986, to $0.74 and $0.75 per gallon in April 1986. The sale price to retailers of COQUI decreased from $0.95 per gallon for both unleaded and leaded gasoline in January 1986 to $0.78 unleaded and $0.79 leaded gasoline. The immediate effect on plaintiffs of the enactment of the Law No. 5 excise tax was to increase the purchase costs of gasoline from PHILLIPS by $0.0476 per gallon from March 31, 1986, by $0.119 per gallon in April, and by $0.1429 per gallon in May 1986. The effect of the aforesaid increases, together with the price freeze for wholesalers and the tax antipass-through provision resulting from the April 23 and April 29, 1986 orders, has been to create direct losses for TENOCO and COQUI. The cost to TENOCO and COQUI of delivering gasoline to retailers during the week from Friday, May 2, 1986 at midnight, to Friday, May 9, 1986 at midnight, was 83.25 cents per gallon for unleaded and 86.75 per gallon for leaded gasoline. TENOCO in turn sold at $0.80 and $0.81 per gallon for both unleaded and leaded gasoline. They sold 189,544 gallons of unleaded gasoline and 287,316 gallons of leaded gasoline that week and had a direct gross loss of approximately $22,680.85 during that week or about $3,240.12 per day. TENOCO’s historical gross margin is 3 cents per gallon. Therefore, plaintiff has suffered a loss of gross earnings at its already reduced volume of $14,305.80 for the first week of May, or $2,043.70 per day. Beginning Sunday, May 11, 1986, the new cost to TENOCO of gasoline delivered to retailers was $0.8725 per gallon for unleaded gasoline and $0.8975 per gallon for leaded gasoline. TENOCO sold gasoline at $0.80 and $0.81 for leaded and unleaded gasoline, respectively, with a loss of $0.725 to $0.975 for every gallon of gasoline sold with additional increased losses. The cost to COQUI of delivering gasoline to retailers was $0.8675 per gallon for unleaded gasoline and $0.8925 per gallon of leaded gasoline. CO-QUI in turn sold at $0.78 and $0.79 per gallon of leaded and unleaded gasoline, with a loss of $0.875 and $0.1025 for every gallon of unleaded and leaded gasoline sold, which losses in total and per unit increased as time went by. TENOCO and COQUI tried to minimize their loss by attempting to maintain as many of their clients as possible, even though to do so they had to sell at a loss. Being forced to be less competitive, TENOCO and COQUI have further lost clients. TENOCO’s volume of business during the month of April was reduced by 891,560 gallons. During the month of March 1986, TENOCO sold 4,725,413 gallons of gasoline which represents an average of 157,514 gallons per day. Since March, TENOCO’s volume of business has decreased to the point that during the full week of May 2 to May 9, the average daily sales were 68,123 gallons, which is a loss of 89,391 gallons per day. During the month of March, COQUI sold 2,186,500 gallons, an average of 70,532 per day, and during the first two weeks in May, the average daily sales were 59,964, that is, a loss of 40,568. TENOCO and COQUI have been purchasing all of their gasoline from PHILLIPS, which sets its gasoline prices at the levels reported in the Platt’s Oilgram Price Report at the Houston and Miami prices, whichever is higher. PHILLIPS further adds the cost of the excise tax imposed by the Law No. 5 excise tax. TENOCO and COQUI have no control on the price they must pay to PHILLIPS, or on the way the formula for determining the excise tax is applied. Yet, TENOCO and COQUI must suffer the increase in price produced by the tax, inasmuch as they are in effect prevented by the orders of April 23, April 29, and May 20, 1986 from adjusting their prices in a logical, cost-related manner. In the ordinary course of business, as it' occurred during the once-existing federal regulations, when the cost of gasoline purchased by TENOCO and COQUI increased, or when taxes were levied on gasoline, the resulting cost increase was normally to be added to the prices quoted to retailers. As soon as TENOCO and COQUI received information that the second April 23, 1986 order had decreed a freeze in prices which wholesalers charged retailers as of March 31, 1986, they sought to have the order set aside. The Presidents of TENOCO and COQUI and other authorized representativ