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AIR TRANSP. ASSN. OF AMERICA v. FEDERAL ENERGY OFF

September 25, 1974

AIR TRANSPORT ASSOCIATION OF AMERICA, Plaintiff, National Air Carrier Association, Inc., Plaintiff-Intervenor,
v.
FEDERAL ENERGY OFFICE et al., Defendants


William B. Jones, District Judge.


The opinion of the court was delivered by: JONES

This is an action challenging as unlawful, arbitrary and capricious certain price control regulations of the Federal Energy Administration. *fn1" 10 C.F.R., Part 210 and Part 212, 39 Fed.Reg. 1924 et seq. (Jan. 15, 1974). In particular, the complaint challenges the "special product""other than special product" classifications and the cost carry-over provisions of the regulations as they are applied to aviation fuel. Declaratory and injunctive relief is sought.

 The challenged regulations were promulgated pursuant to authority vested in the President in the Emergency Petroleum Allocation Act of 1973, P.L. 93-159, 15 U.S.C. § 751 et seq.

 The defendant, Federal Energy Office (FEO/FEA), was established in the Executive Office of the President of the United States by Executive Order No. 11748 of December 4, 1973 [ 38 Fed.Reg. 33575 (Dec. 6, 1973)] under which the President (a) delegated to the Administrator of FEO (i) all the authority vested in the President by the Emergency Petroleum Allocation Act of 1973, (ii) all the authority vested in the President by Section 203(a)(3) of the Economic Stabilization Act of 1970, as amended (12 U.S.C. § 1904 note), and (iii) the authority vested in the President by the Defense Production Act of 1950, as amended (50 U.S.C. App. § 2061 et seq.), as it relates to production, conservation, use, control, distribution, and allocation of energy; and (b) directed the Cost of Living Council to delegate certain of its authority under the Economic Stabilization Act of 1970 to the Administrator of FEO. On December 26, 1973, the Cost of Living Council delegated to FEO the authority to administer the petroleum pricing regulations issued under the Economic Stabilization Act of 1970 (COLC Order No. 47, December 26, 1973). As detailed in footnote 1, the FEO has since become the Federal Energy Administration (FEA). The identity and position of the other defendants appear sufficiently in the caption.

 This matter is presently before the Court on cross-motions for summary judgment. *fn2"

 I. THE STATUTE

 The Emergency Petroleum Allocation Act of 1973 (hereinafter the "EPAA") was enacted by Congress and approved by the President on November 27, 1973. Findings of an impending energy crisis and possibly deleterious effects resulting therefrom are made and the purpose of the Act is then set forth as follows:

 
(b) The purpose of this Act is to grant to the President of the United States and direct him to exercise specific temporary authority to deal with shortages of crude oil, residual fuel oil, and refined petroleum products or dislocations in their national distribution system. The authority granted under this Act shall be exercised for the purpose of minimizing the adverse impacts of such shortages or dislocations on the American people and the domestic economy.

 EPAA § 2(b), 15 U.S.C. § 751(b).

 To achieve this purpose, the Act authorizes and directs the President to adopt within 15 days of enactment and to implement 15 days thereafter a program providing for the mandatory allocation of crude oil, residual oil, and refined petroleum products in amounts and at prices specified in (or determined in a manner prescribed by) the regulations effecting the program. EPAA § 4(a), 15 U.S.C.A. § 753(a). The Act further requires that, to the maximum extent practicable, the program, as set forth in the regulations, be so constructed as to accomplish specific congressionally defined objectives. In this respect, Section 4(b)(1) of the Act, 15 U.S.C. § 753(b)(1), provides:

 
(b)(1) The regulation under subsection (a), to the maximum extent practicable, shall provide for --
 
(A) protection of public health, safety, and welfare (including maintenance of residential heating, such as individual homes, apartments, and similar occupied dwelling units), and the national defense;
 
(C) maintenance of agricultural operations, including farming, ranching, dairy, and fishing activities, and services directly related thereto;
 
(D) preservation of an economically sound and competitive petroleum industry; including the priority needs to restore and foster competition in the producing, refining, distribution, marketing, and petrochemical sectors of such industry, and to preserve the competitive viability of independent refiners, small refiners, nonbranded independent marketers, and branded independent marketers;
 
(E) the allocation of suitable types, grades, and quality of crude oil to refineries in the United States to permit such refineries to operate at full capacity;
 
(F) equitable distribution of crude oil, residual fuel oil, and refined petroleum products at equitable prices among all regions and areas of the United States and sectors of the petroleum industry, including independent refiners, small refiners, nonbranded independent marketers, branded independent marketers, and among all users;
 
(G) allocation of residual fuel oil and refined petroleum products in such amounts and in such manner as may be necessary for the maintenance of exploration for, and production or extraction of, fuels, and for required transportation related thereto;
 
(H) economic efficiency; and
 
(I) minimization of economic distortion, inflexibility, and unnecessary interference with market mechanisms.

 With respect to the specification of prices, the Act further requires:

 
(A) a dollar-for-dollar pass-through of net increases in the cost of crude oil, residual fuel oil, and refined petroleum products to all marketers or distributors at the retail level; and
 
(B) the use of the same date in the computation of markup margin, and posted price for all marketers or distributors of crude oil, residual fuel oil and refined petroleum products at all levels of marketing and distribution.

 EPAA § 4(b)(2), 15 U.S.C. § 753(b)(2).

 II. THE FEA PRICE REGULATIONS

 The FEA price regulations provide that refiners may not charge to any class of purchaser a price in excess of a "maximum lawful price," which is the "base price" plus "increased product costs." The "base price" is the weighted average price at which the product was lawfully priced in transactions with the particular class of customer on May 15, 1973. 10 C.F.R. § 212.82(f). "Increased product costs" equal the sum of net increases over May, 1973 costs for purchases of domestic and foreign petroleum products for resale. 10 C.F.R. § 212.83(b)(c).

 The mechanism for allocation of these costs is divided into two categories -- "special products" and "other than special products." "Special products" include gasoline, No. 2 heating oil, No. 2-D diesel fuel and propane. Each of these "special products" may be allocated, at a maximum, the increased product costs proportionate to their percentage of the refiner's sales. 10 C.F.R. § 212.83(c)(i).

 Aviation fuel is a member of the "other than special products" category. This category also includes such products as No. 1 heating oil, No. 4 fuel oil, Nos. 1-D and 4-D diesel fuel and kerosene. Allocation of costs in this class is not restricted by the "special product" rules. Indeed, a refiner is permitted to increase the May 15, 1973 price of an "other than special product" by apportioning the total amount of his increased costs both for "other than special products" and, to the extent he chooses not to allocate a full proportionate share of costs to any "special product," for "special products" in "whatever amount he deems appropriate." 10 C.F.R. § 212.83(c)(ii).

 FEA regulations require that "the amount of increased product costs included in computing base prices of a particular covered product other than a special product be applied equally to each class of purchaser." 10 C.F.R. § 212.83(c)(ii). "Class of purchaser" is defined as "purchasers or lessees to whom a person has charged a comparable price for comparable property or service pursuant to customary price differentials between those purchasers or lessees and other purchasers or lessees." 10 C.F.R. § 212.31.

 Where a refiner charges some "class of purchasers" less than the maximum lawful price in transactions during a particular month, because of contractual commitments or other commercial considerations, FEA regulations permit the difference between the maximum lawful price and the lower price actually charged to be treated as "unrecovered cost" available for pass-through in subsequent months. These "banked costs" may then be used to calculate the maximum lawful price in subsequent months provided they are applied equally to each class of purchasers in computing maximum lawful prices in that month. 10 C.F.R. § 212.83(d); see generally FEO Ruling 1974-12, 39 Fed.Reg. 18423 (May 26, 1974).

 The treatment of unrecovered costs was modified when FEA, on August 30, 1974, promulgated an emergency amendment to Part 212 of its Mandatory Petroleum Price Regulations. Specifically, 10 C.F.R. §§ 212.83(d) and 212.93(e) were amended, effective September 1, 1974, to provide that if, as a result of market considerations or contracts entered into after September 1, 1974, a refiner elects to apply a lesser amount of costs to one class of purchaser than another, each class will be deemed to have been allocated the largest amount of costs actually allocated to any one class for purposes of determining which costs may be carried over. However, this change has no immediate effect on contracts entered into on or before September 1, 1974, since it does not affect costs "banked" as a result of the earlier contracts. 39 Fed. Reg. 32396 et seq. (Sept. 5, 1974).

 III. APPLICATION OF THE FEA PRICE REGULATIONS TO AVIATION FUELS

 Aviation fuel is not subject to "special product" treatment under the FEA regulations. Thus, theoretically, up to 100% of all "increased product costs" could be allocated to the price of aviation fuels. This does not, however, present an accurate description of the aviation fuel marketplace. In fact, it appears from the data submitted by the parties that, on average, refiners have recouped less than the volumetric share of the total increased product costs "attributable" to aviation fuel. The principal factor explaining this under-recoupment is the traditional existence of long term fuel contracts negotiated by most civil air carriers with their refiner-suppliers. While many of these contracts contain price escalator provisions which allow for some fuel cost increases, the contracts nevertheless appear to provide a barrier to disproportionate or even full recoupment by refiner-suppliers. Also, because of the "banking" rules and the requirement that any price increase be equally applied to each "class of purchaser," the ...


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