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MT. AIRY REF. CO. v. SCHLESINGER

August 21, 1979

MT. AIRY REFINING COMPANY; PEERLESS PETROCHEMICALS, INC.; SHEPHERD OIL, INC.; VICKSBURG REFINING, INC.; GIANT INDUSTRIES, INC.; MALLARD RESOURCES, INC.; CARBONITE REFINERY, INC.; Plaintiffs
v.
JAMES R. SCHLESINGER, Secretary of Energy, and DAVID J. BARDIN, Administrator, Economic Regulatory Administration, Department of Energy, Defendants



The opinion of the court was delivered by: PENN

MEMORANDUM OPINION

 This comes before the Court on cross-motions for summary judgment which address plaintiffs' motion to enjoin the implementation of Department of Energy amendments to the domestic crude oil allocation plan, published on May 2, 1979 at 44 Federal Register 25621. *fn1"

 Plaintiffs are seven individual corporations, each of which owns a crude oil refinery plant with capacity to refine no more than 15,000 barrels of crude oil per day. Under the terms of 15 U.S.C. § 752(4), these refiners are termed "small refiners". They seek to enjoin the Secretary of Energy, and the administrator of the Department of Energy's Economic Regulatory Administration from implementing the amended regulations which are intended to revise the amount of special economic benefits made available to small refiners under the domestic crude oil allocation plans "entitlements program". *fn2" The formula for calculating those benefits is called the small refiner bias.

 The final amendments were published on May 2, 1979 (May regulations). These amendments adopted the November NPRM's approach of calculating the bias on an individual plant capacity and adopted the same numerical values for the bias benefit level. The final rules did not include, however, a fixed dollar formula for setting the bias benefit levels. Instead, DOE adopted another formula designed to automatically phase out the small refiner bias in conjunction with and in direct proportion to the President's announced gradual decontrol of all domestic crude oil production by September 30, 1981.

 In any injunction proceeding, the Court must first determine whether the four criteria set down in Virginia Petroleum Jobbers Assn. v. F.P.C., 104 U.S.App.D.C. 106, 110, 259 F.2d 921, 925 (1958) have been met. Dendy v. Washington Hospital Center, 189 U.S.App.D.C. 212, 581 F.2d 990 (1978); McGuire Shaft and Tunnel Corp. v. Local Union No. 1791, UMW, 475 F.2d 1209 (Em.App.1973) cert. denied 412 U.S. 958, 93 S. Ct. 3008, 37 L. Ed. 2d 1009 (1973). The first criteria involves the plaintiffs' likelihood of success on the merits which in this case involves an assessment of the plaintiffs' four allegations that 1) the rulemaking record made prior to the issuance of the amendments was not adequate to support the May regulations and that those amendments are arbitrary and capricious in violation of the Emergency Petroleum Allocation Act of 1973, (EPAA), 15 U.S.C. § 754(a)(1) *fn4" , 2) that the May regulations were promulgated in violation of the Department of Energy's own procedural requirements, 3) that there was a failure to submit the amendments to the Federal Energy Regulatory Council for approval and then if approved, thereafter to both Houses of Congress, and 4) that DOE failed to comply with the requirements of the National Environmental Policy Act (NEPA), 42 U.S.C. § 4321 et seq. The other three Virginia Petroleum Jobbers criteria involve the prospect of irreparable injury to the plaintiffs if relief is withheld, the possibility of harm to other interested parties if the relief requested is granted, and an assessment of the public interest.

 Once these assessments have been made, the Court must decide whether or not the balance of equities revealed by these various factors necessitate the issuance of a preliminary injunction. In this regard, the court has noted that in WMATC, Inc. v. Holiday Tours, 182 U.S.App.D.C. 220, 223, 559 F.2d 841, 844 (1977), it was stated that:

 
An order maintaining the status quo is appropriate when a serious legal question is presented, when little if any harm will befall other interested persons or the public and when denial of the order would inflict irreparable injury on the movant. There is substantial equity, and need for judicial protection, whether or not movant has shown a mathematical probability of success.

  Applying this analytical framework to the instant case, the Court concludes that one section of the May regulations *fn5" was promulgated in violation of DOE's own procedural requirements as well as in violation of the procedural requirements of NEPA. Plaintiffs have established therefore, success on the merits with respect to this aspect of the May regulations. In addition, these procedural violations do involve irreparable harm, and the issuance of an injunction at this time with regard to this particular section of the regulations would serve both the public interest and cause little, if any, harm to other interested parties.

 With regard to all other aspects of the regulations, the Court concludes that the balance of the factors involved does not make it appropriate for equitable relief to issue. These conclusions are discussed more fully below.

 I

 The first criteria set forth in Virginia Petroleum Jobbers is whether the plaintiffs have made a substantial showing of probable success on the merits. Since this case is before the Court on cross motions for summary judgment, the Court will enter a final judgment on the merits.

 The plaintiffs have offered four substantive objections to the validity of the May regulations each of which is assessed below. The Court notes at the outset, however, that there is a judicial presumption of the validity of administrative action and that the burden of overcoming that presumption is on the plaintiffs. Udall v. Washington, Virginia & Maryland Coach Co., 130 U.S.App.D.C. 171, 398 F.2d 765 (1968), cert. denied 393 U.S. 1017, 89 S. Ct. 620, 21 L. Ed. 2d 561 (1969).

 1. The plaintiffs' first objection to the May regulations is that the rulemaking record is not adequate to support the issuance of the amendments and that the regulations are arbitrary and capricious.

 Plaintiffs attack the May regulations by alleging that 1) DOE misused the Gordian Report, a private study commissioned by DOE to assess the small refiner bias program, *fn6" 2) DOE gave inadequate consideration to the evidence concerning the issue of cross-subsidization, and 3) DOE did not adequately consider the effects of the Iranian political crisis and the Organization of Petroleum Exporting Countries (OPEC) increases in the cost of crude oil.

 In reviewing DOE's promulgation of the May regulations, the Court must review the entire administrative record to determine whether the agency's actions have a rational basis in the evidence. Ethyl Corporation v. Environmental Protection Agency, 176 U.S.App.D.C. 373, 541 F.2d 1 (1976), cert. denied, 426 U.S. 941, 96 S. Ct. 2663, 49 L. Ed. 2d 394 (1976). "The function of the court is to assure that the agency has given reasoned consideration to all the material facts and issues". Greater Boston Television Corp. v. Federal Communications Commission, 143 U.S.App.D.C. 383, 393, 444 F.2d 841, 851 (1970) cert. denied, 403 U.S. 923, 91 S. Ct. 2229, 29 L. Ed. 2d 701 (1971).

 (i) Misuse of the Gordian Report

 Plaintiffs argue that DOE primarily relied on the Gordian Report in reaching its conclusions concerning the small refiner bias levels despite warnings by the report that it should not be so used. The specific warnings cited to the Court by the plaintiffs are taken from the report itself:

 
Development of an appropriate policy with regard to future government assistance to small refiners involves a number of considerations. This study does not attempt to address all of these in detail. Its primary purpose is to provide an appreciation of important factors influencing refining economics. (Ad.Rec. Vol. I, p. 11). This study is principally an analysis of plant economies of scale. The results of such a study are of interest for a number of possible reasons. We do not view them, however, to form the sole or even primary basis of definition of a future small refiner subsidy program. (Ad.Rec. Vol. I, p. 17.)

 The Gordian Report recognized that myriad factors could be taken into account with regard to formulating the scope and extent of a subsidy program for small refiners:

 
The present program operated by DOE is in response to a charge from Congress to preserve the competitive viability of small and independent refiners. This is a broad mandate that DOE can interpret in a number of ways. (Ad.Rec. Vol. I, p. 17)

 The report also warned that all the different factors which could go into the formulation of a bias program were not considered therein. For example, the report stated that:

 
Analysis of the extent or even existence of disadvantages arising from non-competitive conditions is beyond the scope of this study. (Ad.Rec. Vol. I, p. 17; see also Vol. I, p. 12 for further recognized limitations of the report.)

 This does not mean, however, that the conclusions which the report did reach with regard to a limited number of factors formulating the small refiner bias are in any way invalid. Nor does it mean that any revision of the small refiner bias must necessarily take every conceivable factor into account. Rather than attempting a comprehensive study, the Gordian Report isolated one factor which helped dictate the bias levels and analyzed that one factor in detail:

 
. . . a significant part of FEA's (Federal Energy Administration) rationale for inclusion of small refiner bias provisions in the entitlements program was to compensate for differences that were believed to exist in refining costs between large and small refiners. (Ad.Rec. Vol. I, p. 57.) (Matter in brackets this Court's.)

 The limited nature of the report, therefore, does not cast doubt on its availability as support for the May regulations in as much as the regulations relied on those matters actually studied.

 Plaintiffs also argue that the report cannot provide a rational basis because it is a computer model of the petroleum industry which is outdated and inaccurate in its treatment of the small refiner, reflecting no specific investigation of particular refineries, and consisting of inferences and projections based on partial, and unverified statistics. (Plf. Brief p. 3.)

 The record reveals, however, that the method which the plaintiffs would have preferred to form the basis of bias amendments was considered by the Gordian Report and was rejected as a feasible alternative. In choosing the computer model approach, the report noted that Individual refinery operations would differ but that the computer approach would yield satisfactory results:

 
As noted in Chapter 3, a significant part of FEA's rationale for inclusion of small refiner bias provisions in the entitlements program was to compensate for differences that were believed to exist in refining costs between large and small refiners. In order to provide an appreciation of these differences, this section attempts to quantify the impact on refining costs of differences in refinery size, in refinery configuration and in types of crude run.
 
In actual practice there is significant variation in refining costs due to differences in the specific circumstances of individual refineries. This makes systematic aggregate analysis difficult. In order to avoid such problems, and to delineate as clearly as possible the impact of differences in refinery size, type, and crude run, we have followed an approach of developing detailed cost and profitability analyses for a wide range of hypothetical operations. While none of the cases represents a specific actual operation, the majority of actual refinery operations are combinations of these cases, and we believe the estimated costs are realistic. (Ad.Rec. Vol. I, p. 57.)
 
Petitioners vigorously attack both the sufficiency and the validity of the many scientific studies relied upon by the Administrator, while advancing for consideration various studies allegedly supportive of their position. . . . Evidence may be isolated that supports virtually any inference one might care to draw. Thus we might well have sustained a determination by the Administrator not to regulate lead additives on health grounds. That does not mean, however, that we cannot sustain his determination to so regulate. As we have indicated above, we need not decide whether his decision is supported by the preponderance of the evidence, nor, for that matter, whether it is supported by substantial evidence. To the contrary, we must sustain if it has a rational basis in the evidence.

 In connection with the argument that the Gordian Report reflects no specific investigation of particular refineries or citation to industrywide figures, plaintiffs similarly argue that DOE wrongfully cited the Gordian Report in support of its conclusion that artificially high bias benefit levels created the proliferation of "teakettle" refineries. The agency is said to have failed to tabulate how many such operations came into existence and failed to take into account the fact that substantial numbers of small refiners do produce vital and necessary petroleum products.

 The Gordian Report itself indicated the possibility of the trend of opening "teakettle" refineries and cited to a March, 1977 FEA report to Congress. *fn7" The report concluded that:

 
DOE records indicate what appears to be an unusually large number of new small refiner entrants through the route of reactivating shutdown plants or spin- offs. Since March of 1976 there have been six spin-offs of operating plants and a total of fifteen shutdown plants reactivated as new businesses. (Ad.Rec. Vol. I, p. 35)

 In the November NPRM notice, it was noted that since February, 1976 twenty two small refineries had opened and that "several new small refineries have been created through the conversion of various kinds of industrial plants into refineries or through the reopening of previously inactive refineries." (Ad.Rec. Vol. V, p. 2818) In DOE's draft regulatory analysis, the growth of small refineries was documented:

 
DOE's refinery certification procedures reveal that a large portion of the growth in new small companies involves plants of very simple configuration, assembled largely with used equipment. Although there are exceptions, these units are generally unable to process a variety of crude oils. . . . (Ad.Rec. Vol. V, p. 2833)

 Plaintiffs, however, argue that there are no data to support this conclusion and counter it with their own examples to the contrary. In this regard, it should be noted that DOE does not deny that contrary examples exist. It merely documents the growth of particularly small inefficient refiners, which is not disproved by the existence of some new and modern small refiners. Also, aside from the figures which were published in the November NPRM, the draft regulatory analysis provided further proof of the simplistic nature of the smallest refineries:

 
The analyses in Tables 13 and 14, examined in conjunction with the scale of benefits presumed in Table 12, demonstrate the extreme simplicity of refineries owned by firms in the smallest category. (Ad.Rec. Vol. V, p. 2871. See also p. 2832)

  The administrative record reveals that the purpose of the bias level amendments was limited to address specific distortions and excesses which DOE perceived, and that the amendments were not intended to comprehensively adjust the levels of the bias to account for every aspect of a bias subsidy program or for every problem in the industry. (See Ad.Rec. Vol. V, pp. 2818, 2843-6 and 44 Fed.Reg. 25624 (1979)). To accomplish this goal, DOE adopted the Gordian Report's approach, after many comments were received concerning it, as the "most realistic and pertinent available measure of economic differentials arising from size and scope of refinery operations". (Ad.Rec. Vol. V, p. 2845). The Gordian Report recognized its own limitations, but what is crucial here is that DOE did not use the report for purposes beyond the report's limitations. The amendments are temporary and designed to address specific issues of overcompensation at some refiner size levels and the proliferation of some uneconomic plants. (Ad.Rec. Vol. V, p. 2844) The Court cannot say that DOE's use of the report to amend the regulations in this limited manner was beyond the report's intended purpose, that the report itself does not provide a rational basis for its conclusions and methodology, or that the limited revisions of the small refiner bias levels were outside the objectives of the Emergency Petroleum Allocation Act (15 U.S.C. § 751, et seq.) which is the authority under which the entitlements program was promulgated. The plaintiffs have not, therefore, carried their burden of persuasion *fn8" in showing that DOE's use of the Gordian Report in connection with the instant bias level revisions has been unreasonable, arbitrary or capricious.

 Plaintiffs also argue that DOE misused the Gordian Report by adopting its view that the available data does not support a conclusion that there is necessarily a relationship between crude oil acquisition costs and refiner size. 44 Fed.Reg. 25624, (1979). DOE is said to have ignored substantial evidence that there are significant differences in crude oil acquisition costs for small refiners when compared to such costs for large refiners, and that the inability of the Gordian Report to find a necessary relationship between refinery size and crude oil acquisition costs cannot support a finding that there is no such relationship.

 The record reveals that there was extensive comment on crude oil acquisition costs and this was acknowledged in both the November NPRM and the notice of the May regulations. From the very beginning of this rulemaking proceeding the Gordian Report conclusion on this subject was at issue. The report itself stated that:

 
. . . we view it to be difficult to draw firm conclusions with regard to any variation in the acquisition costs (for equivalent crude) that may exist as a function of company size . . . (Ad.Rec. Vol. I, p. 89) . . . In summary, we have no firm statistical bases and find it difficult to identify specific factors that would tend to give rise to significant systematic differences in the booked costs for equivalent crudes as a function of company size. (Ad.Rec. Vol. I, p. 92)

 Plaintiffs point to extensive comment in the record to the contrary *fn9" and specifically to the Bonner and Moore Report *fn10" an independent study conducted by a Texas consulting firm, as contradictory of the Gordian Report's conclusions. In the final regulations, however, DOE decided not to take crude oil acquisition cost differences into account when setting the bias benefit levels, and gave the following reasons for its action:

 
With respect to the alleged higher crude oil acquisition costs borne by small refiners, we likewise affirm the (Gordian) report's finding that available data does not support the conclusion that there is necessarily a relationship between crude oil acquisition costs and refiner size. 44 Fed.Reg. 25624.

 In reviewing DOE's action in this regard, it is not up to the Court to substitute its judgment for the agency's expertise, *fn11" rather the Court must simply determine whether the agency's choice has a rational basis in the record. Ethyl Corp. v. Environmental Protection Agency, supra. On the basis of the record before the Court, it is satisfied that this issue was adequately identified, was the subject of extensive comment, that the agency identified the reason for its action, and that this reason does have a rational basis in the record.

 The reason for DOE's not taking crude oil acquisition costs into account was stated in the May regulations. DOE simply did not think that the available evidence necessarily demonstrated a relationship between costs and refiner size. This conclusion was supported by reference to the Gordian Report, which itself outlined its reasoning, including a further analysis of objections to its conclusions found in the Review of Technical Criticism of Small Refiner Bias Analysis. (Ad.Rec. Vol. III, pp. 1336, 1346)

 The Court cannot find that DOE's reliance on the Gordian Report is clearly erroneous or lacking a rational basis. At best, this can be termed a choice between two competing economic analyses. Significantly, the most important source of objection to the Gordian Report's conclusion, the Bonner and Moore Study, was itself unable to assign any special significance to crude oil acquisition cost variations between refiners of less than 10,000 bø up to a level of 100,000 bø. (Ad.Rec. Vol. III, p. 1470). A review of the comments submitted by interested parties also reveals that while cost differences were documented, none were related solely to differences as a function of refiner size, which was the principal concern of the bias benefit revisions. The Court, therefore, concludes that DOE's consideration of this issue was neither arbitrary and capricious nor unreasonable.

 (ii) Cross-subsidization

 Plaintiffs argue that DOE did not give adequate consideration to the relevant factor of cross-subsidization. This activity involves the alleged downstream subsidy of major oil companies' refining operations from other profitable petroleum related activities. Plaintiffs attack as arbitrary and capricious the following DOE conclusion regarding cross-subsidization:

 
Many comments urged that the bias levels should reflect other factors in addition to representative operating margin differentials, particularly the alleged cross-subsidization by the major integrated refiners of their refining activities . . . Despite numerous comments received on the cross-subsidization issue, there is no substantive data presented in the record to support these allegations. Based on the information available to date, we are unable to conclude that cross-subsidization occurs and should therefore be reflected in the bias values. 44 Fed.Reg. 25624.

 The Gordian Report focused on refinery economics as a basis for setting the small refiner bias, and clearly did not attempt to assess the extent to which large integrated petroleum companies subsidized downstream operations (Ad.Rec. Vol. I, p. 12). Therefore DOE did not consider cross-subsidization when assessing small refiners' competitive disadvantages. The record reflects, however, many comments on this issue and an active debate on whether such subsidies existed.

 The Bonner and Moore Study inferred the existence of cross-subsidization by noting large oil companies' high exploration and production profits compared with low refinery operations profits. (Ad.Rec. Vol. III, p. 1381 et seq.) Bonner and Moore was also cited by many individual small refiners as the basis of their cross-subsidization claims. Contrary to Bonner and Moore, however, was a report submitted by Texaco, Inc. which was compiled at the University of Michigan (Ad.Rec. Vol. VIII, at 5064). In addition, the Department of Justice directly criticized Bonner and Moore's conclusions and drew a contrary opinion on the cross-subsidization issue. (Ad.Rec. Vol. VI, p. 3152, 4019).

 It is clear that cross-subsidization was squarely before DOE as an issue relevant to the rulemaking proceedings and the Court is satisfied that DOE's conclusions have a rational basis in the record.

 In the notice of the May regulations, DOE noted:

 
The (Department of Justice) questioned whether the major refiners subsidized their refining operations with crude oil production profits citing a lack of evidence and economic reasons that undermine this contention. 44 Fed.Reg. 25623-24, (1979).

 The Department of Justice conclusions were further amplified in the record:

 
In the absence of any credible explanation of why the majors would engage in such conduct, there is no reason to believe that those firms are subsidizing their refining operations. . . . The evidence offered to establish that integrated firms do in fact subsidize downstream operations ...

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