Full opinion text
JAMESON, Judge. This is a consolidated appeal by the Department of Energy (DOE) from summary judgments in favor of 15 oil refiners, granted by the District Court for the Northern District of Ohio, Eastern Division, and the District Court for the District of Delaware. Nine suits were filed and consolidated for trial in Ohio and six in Delaware. All involved the interpretation of petroleum price control regulations issued by the Federal Energy Administration (FEA) governing the recovery by oil refiners of two categories of costs for the period January 1, 1975 through January 31, 1976. The FEA interpretation of cost pass through regulations required refiners to allocate monthly sales revenues first to the recoupment of all increased “product costs” (primarily the costs of crude oil and purchased petroleum products) and then to the recoupment of “non-product” costs (primarily operating and marketing costs). I. PROCEEDINGS IN DISTRICT COURT The suits, challenging the FEA’s interpretation of the pass through regulations and seeking declaratory and injunctive relief, were filed against the FEA after it declined to grant the plaintiff refiners a class exception from the impact of its ruling and required the refiners instead to seek individual exception relief. Both courts denied the FEA’s motions to dismiss on ripeness and exhaustion grounds and held in essence that the following legal questions were appropriate for immediate consideration: (1) whether the FEA’s interpretation of the meaning of the regulations governing refiner pass through of increased costs was (a) correct and (b) required; and (2) if so, whether the regulations were invalid because of failure to comply with the procedural and substantive statutes pursuant to which the regulations were promulgated. All parties in both cases filed cross-motions for summary judgment. The primary issue before each court was the validity of FEA’s ruling that refiners were required to recover product cost increases first. During the relevant period (i. e., January 1, 1975 through January 31, 1976) refiners used three methods of allocating cost recoveries: (1) non-product cost increases recovered first (NPCI First); (2) product cost increases recovered first (NPCI Last); and (3) the “proportional method”, product and non-product increases recovered on a prorated basis. The principal distinction between the Ohio and Delaware cases is that all of the Delaware plaintiffs recovered their product and non-product cost increases under the proportional method, while a majority of the Ohio plaintiffs used the non-product cost increases first method. In granting summary judgment in Standard Oil Company v. Federal Energy Administration (Standard Oil II), 453 F.Supp. 203, 245-46 (1978), the Ohio court held that (1) the “FEA never issued a valid all product costs first passthrough rule applicable to the time frame January 1, 1975 to January 31,1976”; (2) the “FEA never issued an all product costs first sequence rule . . . in compliance with the required rulemaking procedures and therefore any such rule is void”; (3) the “FEA did not issue the explicit rule banning the banking of non-product costs in compliance with the required rulemaking procedures”; but (4) the all product costs first rule was within the FEA’s statutory authority. The court also found constitutional questions raised by ap-pellees were substantial and certified those issues to this court. In Phillips Petroleum Co. v. Department of Energy (Phillips Pet. II), 449 F.Supp. 760, 801-02 (1978), the Delaware court held that (1) the regulations affecting prices in effect before December 1, 1974 “did not contain a tacit prohibition against NPCI banking” of non-product cost increases and “did not implicitly require the use of NPCI Last method of cost recovery”; (2) “even if the regulations reasonably could have been interpreted to require that NPCI be recovered last, they also could have been interpreted to require that product and non-product cost increases be recovered proportionally”; (3) “the FEA did not decide to require use of the NPCI Last method until the very end of the relevant period”, did not announce its decision until February 1, 1976, and this belated interpretation “did not qualify for retroactive application”; and (4) the FEA did not comply with the notice and comment provisions of the Administrative Procedure Act and the Federal Energy Administration Act in its purported adoption of either the prohibition of NPCI banking or the NPCI Last requirement. Preliminary to a consideration of the contentions of the respective parties on this appeal, we shall set forth in summary form the statutory and regulatory background and, in particular, the procedures in FEA’s promulgation of the sequence of recovery rule upon which it relies in these cases. II. THE STATUTORY AND REGULATORY BACKGROUND The petroleum pricing regulations in effect for the relevant period were derived from rules promulgated by the Cost of Living Council (CLC) under the authority of the Economic Stabilization Act of 1970, as amended, 12 U.S.C. § 1904 note §§ 201-220 and Phase IV of the Economic Stabilization Program. In July of 1973, the CLC published proposed general rules for “Phase IV” price controls to become effective at the end of a 60 day freeze imposed by executive order on June 13, 1973. Special rules — to be included as Subpart L of the regulations — were proposed for the petroleum industry. Under the proposed special rules, maximum lawful prices for refined petroleum products would consist of (1) the May 15, 1973 price to a class of customers, (2) increased costs of domestic crude oil and imports, subject to a profit margin limitation, and (3) other allowable costs, subject to pre-notification and a profit margin limitation. On August 19, 1973 the CLC added Sub-part L — Petroleum and Petroleum Products — to the Phase IV regulations, which established special rules governing the pricing of petroleum products. The key to this pricing structure was the “base price”, which was defined as the May 15, 1973 selling price plus adjustments for the increased costs of imports and domestic crude petroleum above the May 15 price. This definition, which differed substantially from that in the proposed regulations, allowed refiners to pass through their product cost increases on a dollar for dollar basis without being subject to pre-notification requirements or a profit margin rule. As to non-product costs, refiners could make price increases above base price to reflect these costs, but they remained subject to pre-noti-fication and profit margin limitations. As initially promulgated, the petroleum pricing regulations did not provide that either product cost increases or non-product cost increases unrecouped in one month could be carried forward, or “banked”, for use in the pricing equation for establishing prices in a later month. In September, 1973, the CLC amended its regulations to provide that product cost increases incurred in one month which were not recouped in the following month, could be recovered in a later month. § 150.356(c)(1); 38 Fed.Reg. 25686, 25688 (Sept. 14, 1973). There was no express provision allowing or prohibiting the banking of non-product increases until November, 1974, when banking non-product cost increases was specifically prohibited. The only public explanation for the special treatment accorded product cost increases was a statement in a press release issued by Dr. John Dunlap, Chairman of the CLC, on August 10, 1973: 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. Phillips Pet. II, 449 F.Supp. at 771-72. In November, 1973, Congress passed the Emergency Petroleum Allocation Act (EPAA), Pub.L. 93-159, 87 Stat. 627 (Nov. 27, 1973), 15 U.S.C. §§ 751 et seq. On December 4,1973, the President established the Federal Energy Office (FEO) and delegated to it the authority to implement the allocation and price stabilization provisions of the EPAA. The FEO adopted the CLC’s Phase IV petroleum pricing regulations without modification. On May 7, 1974 the Federal Energy Administration Act (FEAA) was signed into law. Pub.L. 93-275, 88 Stat. 96; 15 U.S.C. §§ 761 et seq. In June, 1974, the President abolished the FEO, replaced it with the Federal Energy Administration (FEA) and delegated to it the authority previously delegated to the FEO. On September 4, 1974, the FEA gave notice of its intent to revise the petroleum price regulations to accomplish three objectives: (1) to simplify and clarify the price regulations, while retaining the essential concepts of the regulations originally promulgated by the CLC; (2) to eliminate unnecessary regulatory restrictions; and (3) to help restore competition so that traditional market forces could begin to supplant the rigid price control regulations as the price setting mechanism. To accomplish these objectives the FEA proposed to amend the regulations to eliminate the pre-notification procedure and replace it with an automatic pass through for certain non-product cost increases similar to the procedure used for pass through of increased product costs; to provide more flexibility in the manner in which increased product costs could be applied by refiners; and to limit the extent to which increased product costs unrecouped in one month could be recouped in subsequent months. 39 Fed.Reg. 32718 (September 10, 1974). After taking oral and written comments, the FEA on November 1, 1974, issued the first of its amendments pursuant to the September 6 notice. Instead of adopting a virtual phase out of the increased product costs banking provisions as it initially contemplated, the FEA modified its position in response to opposition by the refiners and resellers and retailers. It recognized that phase out of the banking system would have had a “modest inflationary effect” by inducing sellers to recover the maximum amount of their increased product costs as soon as possible. In contrast, the banking provisions had given refiners a mechanism with which to smooth out price adjustments over a period of time. Still the FEA was concerned with the large amounts of increased product costs which refiners had banked. If a petroleum shortage occurred, pass through of the refiners’ entire bank of increased product costs at once, which was allowable under current regulations, could result in drastic price increases. Consequently, the FEA amended the regulations to restrict the amount of banked product costs which could be used to increase the base price in a particular month to 10 percent of the total amount of unrecouped increased product costs available for pass-through. § 212.83(d)(3); 39 Fed.Reg. 39259, 39260-61 (November 6, 1974). On November 29, 1974, the FEA issued further amendments to the petroleum pricing regulations. Among other things it deleted the pre-notification procedure for non-product cost increases, adopted a more specific definition of non-product costs, and made clear that the increased cost of crude oil consumed as a refinery fuel, that is oil used in the refinery processes, was a non-product cost. 39 Fed.Reg. 42368 (December 5, 1974). Additionally, it for the first time adopted an explicit rule that increased non-product costs not recouped in the current month could not be carried forward for use in computing allowable prices in excess of base prices in any subsequent month. § 212.83(e)(4); 39 Fed.Reg. at 42372. These amendments took effect on January 1,1975. III. PROMULGATION OF SEQUENCE OF RECOVERY RULE During the initial phases of petroleum price and allocation regulation by the CLC there was apparently little, if any, concern about the problem of sequence of cost recovery. David G. Wilson, Deputy General Counsel of the FEA, stated in his deposition that the draftsmen of the price regulations had not thought about the sequence question, nor had they “focuse[d] on exactly how costs would be treated as recouped in prices”. Wilson Depo. 40-41. (R. 1113-14). The draftsmen were concerned with the process of computing the base price and the maximum selling price, not with the process of accounting for and allocating sales revenues in the event less than the maximum price was being charged. There was no explicit sequence of recovery rule. Following the adoption of the amendments effective January 1, 1975, the refiners, as noted supra, used three methods of recovering increased costs: (1) the “NPCI First” method, where non-product cost increases were recovered first; (2) the “NPCI Last” method, where product cost increases were first recovered; and (3) the “Proportional” method, where cost increases were recovered pro rata. Between January 1, 1975, and January 31, 1976, several FEA officials, through instruction manuals, directives, forms and worksheets issued to FEA auditors and disseminated to refiners, indicated that the FEA construed its regulations to permit or require the use of the proportional method. On February 1, 1976, the FEA promulgated amendments to its petroleum price regulations, effective on that date. One of the new regulations (10 C.F.R. § 212.85) explicitly required refiners to use the NPCI Last method to calculate recoupment of increased costs. 41 Fed.Reg. 5111, 5113, 5120 (February 4, 1976). In the preamble the FEA asserted that this section entailed no change in the regulatory framework. Although it pointed out that the regulations “were silent as to the order in which various categories of increased costs would be deemed to have been recouped by refiners in their prices for covered products,” the FEA claimed that in essence “the order specified in the new § 212.85 is the same as that under the regulations previously in effect”. Id. at 5113. In numerous comments following the promulgation of this rule refiners objected to its application both prospectively and retroactively. The comments were nearly unanimous that the rule was a drastic change from former practice and would result in rather dire consequences. In April, 1976, after providing notice and holding public hearings, the FEA revoked retroactively to February 1, 1976 the regulation requiring use of the NPCI Last method and also the regulation prohibiting the banking of non-product cost increases. The FEA concluded that the combination of the ban on banking NPCI and the NPCI Last sequence of recovery rule would cause the following undesirable effects: (1) inflation; (2) “prices would . . . tend to wide monthly fluctuations”, (3) “a disincentive for refiners to build up inventories”, (4) an incentive to “decrease refinery production”, and (5) reconsideration, deferment, or even elimination of “capital investment to expand refinery capacity”. 41 Fed.Reg. 15330, 15331 (1976). The rules would compel refiners to recover all costs currently to minimize absorption and would lead them to rely more on imported, purchased products, since refinery production cost increases (labor, fuel, etc.) could not be banked. Despite its findings with respect to the deleterious effects which would result from a prospective application of the NPCI Last rule combined with the ban on NPCI banking, the FEA continued to maintain that the NPCI Last sequence had been implicit in the price regulations effective for the period from January 1, 1975 through January 31, 1976. On August 3, 1976, however, the FEA proposed to grant a “class exception” to permit all refiners who were not constrained by the profit margin limitation to recompute their increased cost recoveries during the relevant period using “the ‘proportional’ cost recovery approach”, 41 Fed. Reg. 33282, 33283 (August 9, 1976). The FEA noted that “many — perhaps even a majority of — refiners” had used either the proportional or NPCI First method and “acknowledge[d] that refiners might have concluded in good faith that recoupment on a proportional basis was permitted as a result of possibly ambiguous language in § 212.-83(d) and certain information disseminated by FEA”. Id. at 33283. Information relating to a survey conducted by the FEA in connection with the proposed “class exception”, which appeared in an article in the Wall Street Journal, resulted in a critical response from the Honorable John D. Dingell, Chairman of the Subcommittee on Energy and Power of the House Committee on Interstate and Foreign Commerce. Following further criticism from Congressman Dingell and discussions between the Congressman and FEA Administrator Zarb and his subordinates, the FEA changed its position and announced that it would not grant the proposed class exception, but would require each refiner to “establish . . . that it is subject to a serious hardship or gross inequity as a result of the FEA regulatory requirement”. The FEA’s later decision that it would not review the correctness of its interpretation of the regulations in the exception proceedings led to the filing of these lawsuits. IV. ISSUES ON APPEAL The issues presented by the respective parties may be summarized as follows: (1) Should the suits have been dismissed for want of justiciability? (2) Did the applicable regulations require recovery of all increased product costs before the recovery of any increased non-product costs and preclude the use of (a) the proportional method of recovery and (b) the recovery of increased non-product costs first? (3) Did the district courts accord proper deference to the FEA’s interpretation of its own regulations? (4) Did the FEA comply with the procedural requirements of the Administrative Procedure Act and Federal Energy Administration Act in promulgating (a) its cost recovery rule and (b) the non-product cost banking prohibition? (5) Could the rule requiring the recovery of non-product cost increases last properly be given retroactive effect? (6) Did the district courts resolve issues of fact in deciding the cases on cross-motions for summary judgment? V. JUSTICIABILITY FEA first contends, as it did in the district courts, that the cases were not “ripe” for judicial review under standards set forth in Abbott Laboratories v. Gardner, 387 U.S. 136, 87 S.Ct. 1507, 18 L.Ed.2d 681 (1967); Toilet Goods Association, Inc. v. Gardner, 387 U.S. 158, 87 S.Ct. 1520, 18 L.Ed.2d 697 (1967); and Gardner v. Toilet Goods Association, Inc., 387 U.S. 167, 87 S.Ct. 1526, 18 L.Ed.2d 704 (1967). The basic rationale of the ripeness doctrine is “to prevent the courts, through avoidance of premature adjudication, from entangling themselves in abstract disagreements over administrative policies, and also to protect the agencies from judicial interference until an administrative decision has been formalized and its effects felt in a concrete way by the challenging parties”. Abbott Laboratories, 387 U.S. at 148^49, 87 S.Ct. at 1515. In deciding whether a case is “ripe” for judicial resolution it is necessary to determine (1) the fitness of the issues for judicial decision and (2) the hardship to the parties of withholding court consideration. Id. An evaluation of the fitness aspect involves the following factors: whether the agency action was final or whether further administrative proceedings were contemplated; whether the issue presents a purely legal question; and whether judicial determination of the issue “is likely to stand on a much surer footing in the context of a specific application of [the] regulation .....” Toilet Goods Association v. Gardner, 387 U.S. at 162-64, 87 S.Ct. at 1524. In evaluating the hardship aspect, a court must consider whether the regulations have an immediate and direct impact upon the plaintiffs’ conduct of their affairs, with serious penalties attached to non-compliance with the regulations. Abbott Laboratories, 387 U.S. at 153, 87 S.Ct. 1507. Both district courts, following a careful analysis of all of the factors set forth in Abbott Laboratories and both Toilet Goods cases, concluded that the questions now before this court, were ripe for judicial review. See Standard Oil I, 440 F.Supp. at 357-370; Phillips Pet. I, 435 F.Supp. at 1245-48. We agree. The questions presented are purely legal: (1) a challenge to the FEA’s interpretation of the regulations, and (2) a challenge to the procedures followed by the FEA in adopting certain of the regulations. Although the FEA did institute exception proceedings, it also made clear it would not allow refiners to challenge the agency’s interpretation of the regulations at these proceedings. We find this insistence on the NPCI Last sequency of recovery rule to be a “final” decision. Unless this court takes jurisdiction, these legal questions will be left unadjudicated while the regulations will still apply with full force and effect. These issues are fit for judicial decision. The test of hardship is also satisfied. The district courts identified these adverse consequences which would result in hardship to the refiners: (1) the impact of the FEA’s interpretation on the refiners’ budgeting and planning functions; (2) the exposure to multiple private, civil enforcement court litigation; (3) the burdensome expense and discovery strategy which the exception proceedings would entail; and (4) the damage to the refiners’ reputations and good will stemming from the FEA’s public announcement of its interpretation and the consequent conclusion by the public of an overcharge by the refiners. See Standard Oil I, 440 F.Supp. at 365-70; Phillips Pet. I, 435 F.Supp. at 1247-48. We conclude that these cases are ripe for judicial resolution on the legal questions which the district courts decided. VI. INTERPRETATION OF THE REGULATIONS The FEA concedes that the regulations in effect during the relevant period did not explicitly impose a non-product cost increase last rule governing the sequence of cost recovery. It argues, however, that the base price concept combined with the prohibition on banking non-product cost increases implicitly required such a sequence of recovery rule. Both the Ohio and the Delaware courts concluded that for the courts to uphold the FEA’s interpretation, the FEA must establish two points: (1) that the base price was “fixed”, that is, for a particular product and class of purchaser in a given month the base price was equal to the May 15, 1973 selling price plus all product cost increases allocated to that product; and (2) that the base price rule established a sequence for determining prices which also governed the recovery of costs from revenues at the end of the month. Standard Oil II, 453 F.Supp. at 222; Phillips Pet. II, 449 F.Supp. at 774. The Ohio court held that the base price formulation was flexible in that it did not require refiners to include all available product cost increases in their base prices before they could apply increased non-product costs over their base price. 453 F.Supp. at 228. The Delaware court concluded that regardless of whether the base price was fixed or flexible, the base price rule did not require the use of a particular sequence of cost recovery. 449 F.Supp. at 774. We conclude that the regulations on their face are ambiguous. While the FEA’s interpretation of the regulations as requiring a NPCI Last method of cost recovery is a reasonable interpretation, in our opinion it is not compelled and the district courts could properly conclude that the NPCI Last method was not required. (a) Base Price Rule When the Subpart L regulations governing the pricing of petroleum and petroleum products were adopted by the CLC in August, 1973, the base price concept formed the key to the pricing regulations. At the time base price for the sale of covered products was defined as the May 15, 1973 selling price plus adjustments for the increased costs of imports and domestic crude petroleum. § 150.358(g); 38 Fed.Reg. 22536, 22541 (August 22, 1973). Refiners could pass through these increased costs automatically each month without regard to any of the restraints imposed on the economy’s manufacturing sector by the Phase IV general regulations. Refiner price increases to recover cost increases unrelated to increased costs of imports and domestic crude petroleum remained subject to the anti-inflationary and cost absorption rules of the Phase IV regulations applicable to the general manufacturing sector of the economy; that is, these costs could only be passed through after refiners pre-notified the CLC of their intent to increase prices, and then only as a percentage price increase “in excess of the base price”. During the relevant period a refiner could not charge a price for a covered product in excess of the base price established for that product except as specified in the regulations. § 212.82(a); 39 Fed.Reg. 42368, 42369 (December 5, 1974). Base price for the sale of a covered product was the “weighted average price ... on May 15, 1973, plus increased product costs . measured pursuant to the provisions of § 212.83”. § 212.82(b); 39 Fed.Reg. at 42369. Section 212.83, entitled “Allocation of refiner’s increased costs”, prescribed the requirements governing the inclusion of a refiner’s increased product cost in the computation of base prices and the inclusion of increased non-product costs in the computation of allowable prices in excess of base prices. Section 212.83 provided that in computing the base price for the sale of a special product “a refiner may increase its May 15, 1973 selling prices . . . once each calendar month ... by an amount to reflect the increased product costs attributable to the sales of that special product . . . provided that the amount of increased costs used in computing a base price is calculated by use of the general formula set forth in paragraph (c)(2)(i) of this section”. § 212.83(e)(l)(i); 39 Fed.Reg. at 42370. “Increased product costs” was defined as “the sum of (1) the difference between the total cost of crude petroleum during the month of measurement and the total cost of crude petroleum during the month of May, 1973 plus (2) the difference between the total cost of petroleum product during the month of measurement and the total cost of petroleum product during the month of May, 1973.” § 212.82(b); 39 Fed.Reg. at 42369. The dollar increase of increased product costs which could be added to the May 15, 1973 selling price for special products was represented in the specified formula by the figure “d¡u”. This was defined as “[t]he dollar increase that may be applied to the May 15, 1973 selling price of the special product . . . to compute the base price. . . . ” § 212.83(c)(2)(i); 39 Fed.Reg. at 42370. The FEA contends that these regulations compel the conclusion that the base price was a “fixed” rather than a “flexible” concept. Because § 212.82(b) defined “increased product costs” to mean the “total cost” of crude petroleum and petroleum product, the FEA argues that the refiners were required to add all available product cost increases to the May 15, 1973 price to determine a base price. The amount of increased product cost to be added to the May 15, 1973 selling price had to be calculated according to a specified formula, that this formula “yielded one answer”, represented by the figure “diu”, and that this amount was “the total amount of PCI available for recovery . . . .” (DOE Br. at 22) The FEA concludes that the price calculated by adding the “d¡u” dollar increment to the May 15, 1973 selling price of the relevant product was the base price of that product. Only after the calculation of base price was arrived at in this manner could a refiner add into the pricing equation non-product cost increases to obtain a price in excess of base price. The Ohio plaintiffs argued, and the Ohio court found, that the “base price” was a flexible rather than a fixed concept. The formulas established the maximum allowable base price rather than the sole base price. In arriving at this conclusion the court focused on the regulations as adopted by the CLC. The allocation of increased costs provision, § 150.356(c)(1), provided that a refiner “may increase” its May 15, 1973 selling prices to reflect increased costs of imports and domestic crude petroleum provided the amount of increase included was calculated according to a specified formula. In addition, § 150.356(c)(1) was amended in September, 1973, to incorporate a rule for banking unrecouped increased costs. This rule provided that if any firm “establishes a base price for any covered product . . . which does not include the entire amount of increased costs calculated pursuant to [the required] formula ., the unused portion may be added to the May 15, 1973, selling price to compute” the base price for a subsequent month. Because these sections were both couched in terms of “may”, the Ohio court concluded that the refiners were vested with discretion “to either pass through increased product costs by adding them to base prices under § 150.356(c) or to bank increased product costs and pass them through at some future date, under § 150.-356(c)(1), when the refiners ‘may’ deem it appropriate to do so”. Standard Oil II, 453 F.Supp. at 225. The FEA counters that the Ohio court placed too heavy an emphasis on the use of the word “may”, that its reliance upon the wording of the provision for banking product cost increases was misplaced, and that the Ohio court did not give proper deference to the contemporaneous construction given the base price regulations by the CLC and its successors. While the FEA’s arguments have some merit, we do not think that the regulations were so clear as to compel a “fixed” base price definition. First, the FEA asserts that while the word “may” in the regulations “clearly gave refiners discretion to increase their May 15, 1973 selling prices by adding available PCI, it should have been clear to all who operated under these regulations that the word ‘may’ was not also intended to grant refiners discretion to vary their base prices by including therein less PCI than the value given for ‘d¡u’ or ‘Du¡’ in the formulas”. (DOE Br. at 23) (Emphasis in original.) How this “should have been clear” to refiners the FEA itself does not make clear. It asserts that if refiners could vary the amounts of PCI used in their base price calculations, “there would have been little purpose in having such formulas”. It ignores the fact, however, that the formulas still would have had a purpose — to set the maximum allowable price that refiners could charge. We recognized that the interpretation of the word “may” is not constant: in one instance it may be discretionary, while in another it may be mandatory. One must look to the background circumstances and context in which the word is used and the intention of the administrative body which used it to determine its meaning in a particular instance. United States v. Reeb, 433 F.2d 381, 383 (9 Cir. 1970); Wilshire Oil Co. v. Costello, 348 F.2d 241, 243 (9 Cir. 1965). But here we find no circumstances which compel the conclusion that the FEA intended its use of the word “may” to be mandatory. Even though refiners were allowed discretion in adding available PCI to the May 15, 1973 selling prices to determine a base price, the pricing formulas still had a purpose: to establish the maximum price refiners were allowed to charge. Second, the FEA contends that the banking regulation was not intended to alter the requirement to include all available PCI in base prices. The FEA argues that the banking provision as initially adopted was intended to provide a mechanism for recovering PCI in a subsequent month when a refiner’s estimate of its current month’s sales volume proved too low. It asserts the language in the first banking provision was “merely descriptive of this failure of a base price predicated upon an estimated sales volume to pass through the entire amount of PCI available for recovery”. (DOE Br. at 25.) (Emphasis added.) It is apparent, however, from an examination of the language of this provision that this construction is not required. As initially adopted the regulation provided: “If in any month ... a firm establishes a base price for any covered product . . . which does not include the entire amount of increased costs calculated pursuant to the [required] formula . , the unused portion may be added to the May 15, 1973, selling price to compute the respective base price for a subsequent month.” § 150.356(c)(1); 38 Fed.Reg. 25686, 25688 (September 14, 1973). Under the regulation a refiner established a base price at the beginning of the current month. It would not know until the end of the month whether the sales volume it estimated at the beginning of the month (and upon which it based its selling price) would result in an under-recovery of PCI. But the regulation allowed a refiner which had not used all of its increased product costs in establishing a base price to include the unused portion in the following month’s calculation. The “unused portion” refers to that portion unused in establishing a base price, a computation which had to be made before a refiner knew if it had an under-recovery of PCI. Thus this regulation clearly contemplated a situation in which a refiner within its discretion did not include all available PCI in computing its base price. Third, the FEA points to its decision in the Gulf Oil Corp. decision as evidence that it contemporaneously construed the base price rule to be a “fixed” concept. The appeal in Gulf Oil arose out of a condition that the FEA attached to its approval of a July 11, 1974, pre-notification request by Gulf to charge a price for gasoline in excess of base price. Thomas Músico, an FEA official in the pre-notification department of the FEA, interpreted this condition as requiring refiners to recover all available PCI before they could recover any NPCI. Gulf challenged this interpretation, alleging that the regulations imposed no such sequence of recovery. In its Decision and Order of November 25, 1974 the FEA concluded that Gulf’s contention was without merit (R. 2715, 2716). The FEA reasoned that allowable, pre-notified non-product cost increases were to be applied to base prices and “base prices by definition include[d] increased product costs . . ..” Consequently, “Gulf could not use the price increase authorized by the order to increase the price of any covered product which was then being sold below base price levels.” (R. 2219). The FEA could only have reached this conclusion by interpreting the base price to be “fixed”. Its position here, however, is undercut by the fact that the FEA did not include this condition in all of the pre-noti-fication requests submitted to it during the pre-notification period. Of the twenty pre-notification requests submitted to the FEA between September, 1973, and October, 1974, the FEA inserted this condition in only half of them. See Affidavit of Thomas F. Músico, 1i 6 (September 14, 1977) (R. 2537, 2539-40). Notice of this condition was never published in the Federal Register. In addition the FEA allowed some refiners to pre-notify and pass through at least some non-product costs before fully exhausting all of their product costs, banked and unbanked. This action does not jibe with a “fixed” base price interpretation which would require base price to include all available PCI in the base price computation. We, therefore, conclude that the FEA’s interpretation of the base price rule was inconsistent with some of its actions and that a “fixed” base price interpretation was not compelled. (b) Sequency of Recovery The Delaware court concluded that neither the base price rule, the product cost banking provision, nor the prohibition against non-product cost increases required the use of a particular sequence of cost recovery. Phillips Pet. II. 449 F.Supp. at 774, 777, 778. 1. Base Price and Profit Margin Rules The FEA argues that permitting refiners to recover their increased product and non-product costs in a sequence other than NPCI Last would vitiate both the “base priee/price in excess of base price” and the profit margin limitation rules. The Delaware court found “absolutely no indication in the regulations that the base price concept applie[d] to anything other than pricing”. Phillips Pet. II, 449 F.Supp. at 775. The intent of § 212.82(c), part of the “Price rule” regulation, was to keep prices down. It explicitly prohibited a refiner from implementing a price increase for any reason other than to recoup increased costs, but it did “not address the issue of cost recovery”. Id. Neither did the FEA contemporaneously construe the regulations to require a particular sequence of cost recovery. Id. at 783. The FEA claims that the Delaware court’s ruling is “squarely contradicted” by the FEA’s decision in the Gulf Oil Corp. Appeal. In the Gulf Appeal, Gulf claimed that the petroleum pricing regulations did not require recovery of all available product cost increases prior to recovering any pre-notified increased non-product costs. (R. 2699, 2700-01) This question was raised in the context of a pre-notification request by Gulf to charge a price in excess of base price. Upon examination of that decision the Delaware court concluded that the decision “never explicitly addressed the method of cost recovery”. Id. at 776. We agree. The Gulf decision held that “under the provisions of Section 212.82 . . . , Gulf could not use the price increase authorized by the Order to increase the price of any covered product which was then being sold below base price levels”. (R. 2715, 2719) (Emphasis added.) This clearly speaks to what prices the FEA would allow Gulf to charge and not to the sequence of cost recovery. Significantly, top officials at Gulf also concluded that the FEA’s decision did not resolve the question raised in its appeal, and thought this and other circumstances confirmed their belief that no order of recovery was required. Affidavit of L. G. Armel, Is 14-27 (September 27, 1977) (pp. 2997, 3001-10). The FEA contends that the Delaware court’s holding “would open a judge-made loophope in the profit margin limitation”. (DOE Br. at 32). The profit margin limitation provided: A refiner which charges a price for any item in excess of the base price for that item in any fiscal year may not for the fiscal year in which the price in excess of the base price is charged, exceed its base period profit margin, as defined in § 212.-31. § 212.82(d); 39 Fed.Reg. 42368, 42369 (December 5, 1974) The FEA argues that if refiners were not required to charge a price in excess of base price as a precondition to recovery of NPCI, the refiners could “finagle” with the profit margin limitation rule. FEA recognition of this ability to finagle with the profit margin limitation was brought to light in a meeting on October 22, 1975, between representatives of FEA’s Office of General Counsel and Office of Compliance. This meeting resulted in a memorandum from Gordon Harvey, Director of the Office of Compliance Program Development, to J. Peter Luedtke, the Deputy General Counsel for Pricing. Although Harvey recognized that the pro-rata method of recovery, which many refiners used, permitted some finagling with the profit margin limitation rule, he concluded that that method of recovery was a permissible interpretation of the regulations and that rule-making would be required to clarify the cost recovery sequence if the FEA intended to require a PCI first method of recovery. Memorandum, Non Product Cost Recoveries (November 12, 1975) (R. 3593). This conclusion of the FEA’s Director of Compliance is hardly consistent with its contention that the regulations compelled an NPCI Last sequence of recovery rule. The profit margin limitation itself does not expressly refer to methods of cost recovery. It simply places a limitation upon the amount of NPCI a refiner may include in calculating the prices it may charge. If the regulations permitted methods of recovery which would result in manipulation of the profit margin limitation, it was incumbent upon the FEA to articulate and publish a sequence of recovery rule. This is what Harvey recognized in proposing formal rulemaking. 2. The Product Cost Banking Provision Subsection (e)(1) of § 212.83, entitled “Carryover of Costs”, provided that if in any month the prices charged resulted in the recoupment of less than the entire amount of increased product costs, the amount not recouped “may be added to the May 15, 1973 selling prices for that special product for a subsequent month”. 39 Fed. Reg. 42368, 42372 (December 5, 1974). The FEA implemented this provision through Form FEO-96, a “Monthly Cost Allocation Report”. (See R. 2736 and n. 26, supra). Part IV of that form dealt with the price adjustment data pertaining specifically to gasoline. The instructions to this part directed refiners to compute their banks for product cost increases allocable to gasoline by subtracting “the total amount of revenues received, during the Period of Measurement, in excess of applicable May 15, 1973 selling prices of gasoline” from “the total number of dollars of increased costs which were attributable to gasoline and available for recovery in the Period of Measurement”. (R. 2934, 2939). The FEA argues that § 212.83(e), Form FEO-96, and the instructions thereto, “clearly prohibited a refiner from computing its product cost banks by subtracting an amount less than the ‘total revenues’ recouped through price increases from that month’s ‘entire amount’ of available PCI”. (DOE Br. at 34). On the face of it the language of the instructions tends to support the FEA’s argument that a refiner’s monthly revenues in excess of the May 15, 1973 selling price had to be subtracted from all PCI available for recovery in that month. In turn this lends credence to the FEA’s interpretation that the PCI banking provision required a NPCI Last method of cost recovery. What the FEA ignores, however, are the circumstances under which the refiners operated during the relevant period, which confused the procedure they were to follow in completing this form. During the period prior to January 1, 1975, refiners were required to report their increased product costs and increased non-product costs on two separate forms — Form FEO — 96 (for product costs) and Form CLC — 22 (for non-product costs). In September, 1974, the FEA recognized that the procedure for pre-notifying non-product cost increases had not proved to be “particularly well-suited” for application to refiners. It proposed to drop the pre-notification requirement and to allow refiners to pass through allowable non-product cost increases. To implement this a new Form FEA-96 was to be issued to replace the Forms FEA-96 [FEO-96] and CLC-22. After the requirement to pre-notify proposed non-product cost increases was deleted from the regulations, Form CLC — 22 became obsolete. Significantly, however, the new form to replace Forms FEO-96 and CLC-22, which the FEA first mentioned in September, 1974, was not finally adopted until April, 1976, after the relevant period. Thus Form FEO — 96 was used throughout the relevant period and was never amended to specify a method for computing the amount of non-product cost increases to be recovered each month. In light of these circumstances we find FEO-96 to be an incomplete picture of all of the computations required of the refiners. In its opinion the Delaware court posited a hypothetical situation demonstrating the FEA’s interpretation of the PCI banking provision. Under the FEA’s interpretation of this provision a refiner charging a price above base price was required to apply all revenues received in excess of the May 15, 1973 selling price toward recovery of available product cost increases before applying any portion of those revenues toward recovery of non-product cost increases. A refiner, therefore, that “(1) had a total of $1,000,000 in PCI available for recovery in the current month, (2) had $200,000 in approved pre-notified NPCI, (3) had established a selling price at the beginning of the current month which included all those costs, and (4) as a result, had received revenues in excess of the May 15, 1973 selling price totaling $1,100,000, would recover all $1,000,000 of its PCI and $100,000 . of the available NPCI”. The district court pointed out that contrary to the FEA’s interpretation this hypothetical situation would not result in $100,000 of recovered NPCI. The computations required by section 212.-83(d) and the instructions to Form FEO-96 would produce a PCI over-recovery of $100,000 which would have to be subtracted from the May 15, 1973 selling price to compute a base price for the subsequent month. Phillips Pet. II, 449 F.Supp. at 777. The FEA counters that the language of the banking regulation must be reconciled with the language of the price rule permitting NPCI recovery when a refiner charges a price in excess of the base price. It contends that “[t]hese two provisions are easily reconciled by allowing a refiner to offset what otherwise would be a PCI over-recovery with available NPCI when the refiner recovered more than its base price”. (DOE Br. at 35). It may well be that this construction of the two regulations would have been permissible had the FEA articulated a cost recovery rule. Clearly, however, it is not compelled. As appellees point out, the FEA’s “offset” required a departure from Form FEO-96 and controverts its own banking regulations. Section 212.-83(e)(1) expressly required PCI over recoveries to be deducted from the May 15, 1973 selling prices in the subsequent month; it did not permit refiners to offset the over-recoveries against NPCI available for recovery in the current month. We agree with the district court that “the agency’s silence on the method of cost recovery is ambiguous” and “the banking provision and Form FEO-96 do not require the use of the NPCI Last method”. 449 F.Supp. at 777. 3. Prohibition Against Banking Non-product Cost Increases The FEA argues that the refiners should have recognized the existence of a NPCI Last method of cost recovery from the ban against banking non-product cost increases. It contends that this ban, “if not alone sufficient to compel refiners to recover NPCI Last, was [at the least] an integral part of a regulatory scheme carefully designed to permit refiners to pass through NPCI only on top of base prices (which included all PCI) and to force refiners to absorb these cost increases when current market conditions would not support prices in excess of base prices”. (DOE Br. at 37). The ban on NPCI banking stated in pertinent part: Increased non-product costs calculated pursuant to § 212.87 for the month of measurement which are not recouped in the current month (which is the month immediately succeeding that month of measurement) may not be carried forward for use in computing allowable prices in excess of base prices in any subsequent month. § 212.83(e)(4); 39 Fed.Reg. 42368, 42372 (December 5, 1974). Although this ban was not part of the petroleum pricing regulations as initially adopted by the CLC (it was promulgated as part of the December 1, 1974 rulemaking), the FEA argues that it was implicit in the regulations from the first. When the FEA did expressly adopt the ban, it did so without complying with the notice and comment provisions of either the Administrative Procedure Act or the Federal Energy Administration Act. Accordingly, as hereinafter set forth, we hold the rule invalid. Even if we were to find that the regulation was properly promulgated, we would still conclude that it does not compel a NPCI Last sequence of recovery. The FEA argues that the ban was part of a “carefully designed” scheme of regulations governing cost recovery. We cannot agree. In his deposition David G. Wilson, Deputy General Counsel of the FEA and one who was primarily responsible for drafting many of the regulations, testified that when the initial petroleum pricing regulations were adopted, alternative methods of cost recovery were not considered. Nothing surrounding the adoption of the express ban on banking NPCI leads to a different conclusion. Prior to December, 1974, the general pricing formulas provided different methods by which refiners calculated allowable price increases for product cost increases and for non-product cost increases. The non-product cost calculation was based upon the “rate of increase” of non-product costs in the month preceding pre-notification over the same costs incurred during the historical base period. The product cost calculation was based upon a “dollar-cost pool” in which the allowable product cost increase was determined by the dollar amount of cost increases incurred rather than a rate or percentage of increase. While the dollar amount that could be used to justify a product cost increase had to be recalculated on a monthly basis, the dollar amount used to justify a non-product cost increase (thus resulting in a price in excess of base price) could be used in recovering increased non-product costs over a 12 month period subject to the limitation that the non-product cost increases which supported that price in excess of base price continued to be incurred. As the Ohio court recognized, the provision allowing recovery of non-product costs to be spread out over a 12 month period did not require recovery of non-product costs to match actual cost increases on a month-to-month basis. Standard Oil II, 453 F.Supp. at 234. Thus a refiner had some discretion in deciding how to allocate these cost recoveries over the 12 month period. See Wilson Depo. 37-40 (R. 1073, 1110-1113). In addition, the rulemaking proceeding which led to the adoption of the NPCI banking ban did not indicate that the ban would force refiners to absorb substantial amounts of non-product cost increases. Yet this is precisely what would have occurred with respect to the cost of refinery fuel if the FEA in fact intended the NPCI banking ban to impose a NPCI Last sequence of cost recovery. Refinery fuel, which was fuel used to operate a refinery, amounted to a substantial cost item for refiners. Prior to December 1974 many refiners had treated refinery fuel as a product cost rather than a non-product cost. As such, refiners were able to pass through this cost item in the base price of their products, without the pre-notification and profit margin limitation requirements applying to it. Two of the modifications, proposed in the September 6, 1974, notice of proposed rule-making, affected the treatment of refinery fuels. First, the FEA intended to delete the requirement that refiners pre-notify their proposed non-product cost price increases. It advocated a single method of calculating cost pass through for both product and non-product cost increases, with non-product costs remaining subject to the profit margin limitation. Second, refinery fuel costs were to be treated by all refiners as a non-product cost. A NPCI Last sequence of cost recovery would have forced many refiners to absorb their refinery fuel costs rather than to pass through and recover them. Although the FEA recognized refining fuel as an “important cost item” and sought “equitable treatment” for the refiners, it gave no indication that classification of refinery fuel as a non-product cost could have a substantial effect on refiners. Instead it assured refiners that the proposed changes with respect to the passthrough of non-product cost increases would “permit refiners generally to pass through such increased costs of refinery fuels, subject to a profit margin limitation”. Preamble, 39 Fed.Reg. 32718, 32725 (September 10, 1974). In marked contrast to its silence regarding the effect of treating refinery fuel as a non-product cost is what the FEA said concerning its redefinition of “non-product costs”. While recognizing that the new definition would “limit the increased non-product costs which a refiner may pass through in price increases”, it concluded that the change would have “little overall impact”, as the omitted costs comprised a relatively small proportion of most refiners’ overall costs. Preamble, 39 Fed.Reg. 32721-22. Still, if any significant cost item had been omitted from the cost pass through provisions, the FEA was willing to consider amending the regulations. Id. These comments plus the failure to consider the impact of making refinery fuel a non-product cost are hardly consistent with a conclusion that the FEA intended the ban on NPCI banking to impose a NPCI Last sequence of recovery. 4. EPAA Objectives Section 4(b)(1) of the Emergency Petroleum Allocation Act of 1973, 15 U.S.C. § 753(b)(1) (1976), sets out nine objectives for which the petroleum pricing regulations were to provide to the maximum extent possible. Among them is “equitable distribution of [petroleum products] at equitable prices . . . .” 15 U.S.C. § 753(b)(1)(F) (1976). The FEA argues that the decisions of the Ohio and Delaware courts allowed the refiners “to contravene the spirit if not the letter of [§ 753(b)(1)(F)]”. (DOE Br. at 38). It contends that the district courts’ opinions negate the cost absorption principles of the regulations, thereby allowing refiners to charge prices which are not equitable. The district courts’ opinions do not, however, totally negate the cost absorption principles of the regulations. Additionally a balancing among the nine objectives of the EPAA is required. Other objectives require “preservation of an economically sound and competitive petroleum industry”; “economic efficiency”; and “minimization of economic distortion, inflexibility, and unnecessary interference with market mechanisms”. 15 U.S.C. §§ 753(b)(1)(D), (H) and (I) (1976). As the FEA itself realized when it allowed comment on its express adoption of the NPCI Last sequence of cost recovery, that sequence would create great economic distortion through rapid price fluctuations. Consequently it abandoned the NPCI Last method for the period subsequent to February 1, 1976. We think the district courts’ opinions reflect the EPAA objectives and do not find them contrary to the intent of Congress in adopting the EPAA. 5. Conclusion re: Sequence of Recovery Rule In both the district courts and in this court the FEA has constantly maintained that the petroleum pricing regulations established rules governing a well identified sequence by which refiners were to deem their costs recovered. It has argued that the two district courts’ opinions rendered meaningless the anti-inflationary and forced cost absorption features of those regulations, leaving them without purpose. We think this incorrect. The pricing regulations did establish a procedure for setting a maximum price refiners could charge. Through the provision for banking product cost increases, refiners could voluntarily delay price increases, thereby smoothing out price increases. As the FEA came to realize from the events that occurred after it expressly adopted a product cost increase first sequence of cost recovery in February, 1976, such a sequence of recovery combined with a ban on banking non-product cost increases was not anti-inflationary. It gave refiners incentive to accelerate recovery of all available cost increases in order to avoid having to absorb non-product cost increases. At that point the FEA concluded that the NPCI Last recovery rule, first expressly stated on February 1, 1976, should be repealed to that date. In conclusion we reiterate that the petroleum pricing regulations in effect during the relevant period did not expressly impose a sequence of recovery rule. We agree with the district courts that the regulations were ambiguous. There was confusion and uncertainty among both FEA officials and the refiners. While the regulations could reasonably be interpreted as imposing a NPCI Last sequence of recovery, in our opinion this interpretation was not compelled. The regulations could also reasonably have been construed as imposing no particular sequence of recovery. VII. DEFERENCE TO THE FEA’S CONTEMPORANEOUS CONSTRUCTION The FEA claims that throughout the relevant period it consistently construed the applicable regulations as requiring refiners to follow a NPCI Last sequence of cost recovery. Although it recognizes that lower level FEA officials issued contrary advice during this period, it maintains this advice was “unauthorized and erroneous” and should be ignored by this court. It contends that agency policy makers David G. Wilson and Gorman Smith did not become aware of the need to clarify the agency’s position on the sequence of cost recovery until December, 1975. As noted supra, the agency then included a statement in the preamble to its February 1, 1976, rulemak-ing that the regulations had always required a NPCI Last sequence of cost recovery. The FEA concludes that this court must defer to this official interpretation of the regulations as they existed during the relevant period. In resolving this issue it is first necessary to examine the various interpretations by FEA officials during the relevant period. These are set out in detail in the district courts’ opinions. We shall not repeat the findings of the two district courts, except to emphasize a few of the publications and memoranda which are most significant in determining whether this court should defer to the Agency’s present interpretation. (a) Contemporaneous Construction After the December, 1974, amendments to the petroleum pricing regulations became effective, Donald Clyman, Acting Chief of the FEA’s Refinery Audit and Review Program (RARP) directed Andrew Drance, a case analyst on his staff, to prepare an explanation of the December amendments to its field auditors. The result, Regulation Change Notice 3-1975-1 (Change Notice) was distributed to the field auditors in January, 1975, for insertion in their Compliance Audit Review Division (CARD) Audit Handbooks. The Change Notice indicated that product and non-product cost increases should be recovered proportionately. Although Clyman and Drance recognized that § 212.83(d) expressly applied only to the allocation of NPCI among the various product categories for purposes of computing allowable prices in excess of base prices, they believed the intent of that subsection was to establish a proportional mechanism for the recovery of increased product and non-product costs. They arrived at this conclusion because they perceived a conflict between § 212.83(d) and § 212.87(b), which they also viewed as prescribing a method for allocating NPCI among the various product categories for purposes of computing prices in excess of base prices. Additionally both Clyman and Drance believed that a proportional method of recovery “was reasonable as a matter of regulatory policy”. Thus, they included within the Change Notice an example problem demonstrating how to compute recoveries by a proportional method when both PCI and NPCI were used in computing price adjustments to the May 15, 1973, selling prices. On March 5, 1975, Andrew Drance and Fred Stuckwisch from the Office of Compliance, W. Mayo Lee from the Office of General Counsel, and others met to discuss revisions to Form FEO-96 necessitated by the December, 1974, amendments to the regulations. The Office of Compliance, which had previously issued the Change Notice and supplemental worksheets directing its field auditors to use the proportional method of cost recovery, advocated interpreting the regulations to require that particular sequence. Mayo Lee and others from the Office of General Counsel favored a NPCI Last interpretation. On March 26, 1975, Laura Kuitunen and Mayo Lee, bo