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TEXACO, INC. v. DOE

August 29, 1978

TEXACO, INC., et al., Plaintiffs,
v.
DEPARTMENT OF ENERGY et al., Defendants. CLARK OIL AND REFINING CO. et al., Plaintiffs, v. DEPARTMENT OF ENERGY et al., Defendants. INDEPENDENT REFINERS ASSOCIATION OF AMERICA, Plaintiff, v. DEPARTMENT OF ENERGY et al., Defendants



The opinion of the court was delivered by: RICHEY

 I. THE STATUTORY SCHEME

 The Old Oil Allocation Program (or "Entitlements Program"), 10 C.F.R. § 211.67, is part of the comprehensive program administered by the DOE for the mandatory allocation and pricing of crude oil, residual fuel oil and each refined petroleum product under its mandate found at § 4(a) of the Emergency Petroleum Allocation Act of 1973 ("EPAA"), as amended, 15 U.S.C. § 751, § 753. The Entitlements Program is designed to correct certain economic distortions arising from the two-tier pricing system for crude oil, 10 C.F.R. § 212.71, Et seq. Under the two-tier system, a ceiling price is imposed on crude oil produced from a particular property when production was equal to or less than the level of production from that property in the same month of 1972 (i. e., lower-tier or "old" oil). Crude oil produced in excess of 1972 production levels from the same property (i. e., upper-tier or "new" oil) as well as newly discovered oil and certain imported oil is permitted to be sold at a much higher price. The disparity between the price of upper tier and lower tier crude oil did not have an equal impact on all refiners. Crude cost differentials were translated into significant price differentials which in turn caused competitive disparities in the marketplace. The Entitlements Program is a Cost equalization mechanism promulgated to correct the consequences of inequitable allocation of low-cost old oil by allocating those supplies on a proportionate basis.

 An "entitlement" represents the right to refine a barrel of low-cost old oil. Under the program a refiner is required to have an "entitlement" for each barrel of old oil it refines each month. Every refiner is issued on a monthly basis a number of entitlements equal to its proportionate share of the national monthly old oil supply. A refiner with a greater proportion of old oil than the national proportion of old oil is required to buy entitlements to cover its amount of old oil in excess of the national average. A refiner with more entitlements than it needs sells the entitlements at a price, calculated each month, that is roughly the difference between the price of upper tier and lower tier oil. These transactions achieve the same purpose as the allocation of lower-priced crude oil without requiring the physical transfer of the oil.

 The DOE's authority to grant entitlements relief is found at § 504(a) of the DOE Organization Act, 42 U.S.C. § 7194:

 The exceptions procedures referred to in § 504(a) provide for the grant of exceptions relief in some cases of "serious hardship or gross inequity." 10 C.F.R. § 205.50(a)(1).

 Because of certain undesirable properties of California crude oil, the imposition of price controls has a very negative effect upon sales and production of California crude oil. The DOE has for some time sought to relieve this problem through adjustments to the Entitlements Program.

 On June 15, 1978, the Office of Hearings and Appeals (OHA) of the DOE issued a Notice of Public Hearing and Soliciting Comments concerning applications for exception relief. This notice announced the intention of OHA to provide, on a case-by-case basis, an administrative method to alleviate obstacles found to inhibit non-California refiners from processing California heavy crude oil. The notice proposed to grant relief where, for example, a producer or refiner demonstrated that relief is necessary to offset high transportation and other costs and where there is the danger that continued production of the crude oil involved would be uneconomical in the absence of the requested relief.

 II. BACKGROUND

 On June 22, 1978, defendant Commonwealth Oil Refining Company, Inc. (CORCO) applied to the DOE for exception relief. By filing this application, CORCO sought to take advantage of the special procedure which DOE established for providing exception relief to domestic refiners located outside of California who could establish to the satisfaction of the Department that such relief is necessary to provide them with the economic incentive to use California crude oil. After a consideration of the application of CORCO, the OHA determined that CORCO qualified for exception relief.

 Specifically, the Proposed Decision and Order issued on June 30, 1978, granted CORCO two types of relief. First, it granted CORCO exception relief worth $ 4.41 for each barrel of California crude oil that it purchased for processing in its Puerto Rican refinery. Second, it partially excepted CORCO from the entitlements penalties assessed against refiners producing residual fuel sold into the East Coast market. Texaco, Mobil and Exxon, among others, have filed Notices of Objection to this proposed decision and order.

 On July 17, 1978, CORCO filed an application for interim relief. In its application, CORCO cited the fact that it would be able to commence transporting significant volumes of California crude oil for processing within the next 30 days, but noted that it would not be economically feasible to do so unless the Department would implement the relief contained in its Proposed Decision and Order while it evaluated the merits of the objectors' Statements of Objections. After consideration of CORCO's application, on July 20, 1978, the OHA granted CORCO's application for interim relief and ...


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