The opinion of the court was delivered by: STANLEY SPORKIN
This action involves the enforcement of the so-called "layering rule," 10 C.F.R. § 212.186,
governing the resale of crude oil. MAPCO is a reseller of crude oil. In April of 1986, the Department of Energy issued a remedial order charging MAPCO with violations of the layering rule and ordering it to repay $ 1,765,320.59 in overcharges. MAPCO brought this action seeking to have the enforcement case remanded to the Federal Energy Regulatory Commission (FERC) with orders that the Commission consider whether the layering rule was validly adopted. In the alternative MAPCO seeks to have the remedial order vacated as arbitrary and capricious and based on an erroneous interpretation of the regulation.
The Court has granted the United States' motion seeking to intervene. Hence there are now three defendants in the case: the Department of Energy, FERC and the United States.
A. Evolution of the Layering Regulation
During the 1970's, the sale and pricing of oil was strictly regulated. At issue in this case are those regulations which governed "resales" of crude oil, that is sales made after the initial sale by the crude oil producer. In October of 1976, the Federal Energy Administration (predecessor to the Department of Energy) issued a Notice of Proposed Rulemaking in the Federal Register entitled "Clarifications to Mandatory Petroleum Price Regulations Applicable to the Resale of Crude Oil." 41 Fed. Reg. 47077 (October 27, 1976). The notice stated:
application [of petroleum pricing regulations] to crude oil resellers has raised interpretive questions because of certain significant respects in which the historic business methods of crude oil resellers differ from those generally employed by resellers of other covered products . . . . These factors have led [the Federal Energy Administration] to consider whether some clarification and/or modification of [the pricing regulations] is appropriate to recognize the unique nature of crude oil reselling. 41 Fed. Reg. 47078 (October 27, 1976).
The notice provided proposed regulatory interpretations, invited written comments, and scheduled public hearings. It did not address the practice of "layering" directly, but it did give a detailed description of the traditional and historical practices in the resale industry. Specifically, it said,
FEA understand that crude oil resellers began to enter the marketplace in the late 1940's and early 1950's in response to the need of such producers to move small and/or inconveniently located volumes of crude oil to the major pipelines. Thus, resellers have tended to serve the needs of this segment of the producing industry by accumulating production from a number of small leases so as to be able to market sufficiently large volumes to attract the refiners' buying interest, and by transporting crude oil by truck or other method from leases inaccessible to the pipelines. The purchase and resale of crude oil by such firms appears to be an important historical element in the crude oil distribution chain.
In August of 1977, the FEA issued a further Notice of Proposed Rulemaking. See 42 Fed. Reg. 41257 (August 15, 1977). This notice stated that FEA believed it needed further comments before it issued final regulations. Hence, this notice offered "proposed specific regulatory amendments," id., and indicated that after further comments were received, a final formal ruling would be issued.
In this notice, the FEA addressed the issue of layering directly. It stated,
FEA seeks to ensure that the price regulations do not permit abuses by crude oil resellers. Of particular concern to FEA is the practice commonly known as 'layering': the insertion of one or more "resellers" between the producer and refiner and the charging of one or more markups, where the 'layering' firm performs no service or other function traditionally and historically associated with the resale of crude oil. To this extent, FEA will consider the adoption of regulatory amendments and interpretive rulings to make it clear that such practices are not permitted under the Mandatory Petroleum Allocation and Price Regulations. 42 Fed. Reg. at 41262.
The notice again invited written comments and scheduled a public hearing.
FEA solicited comments on whether regulatory amendments or interpretive rulings were necessary to make it clear that the practice known as 'layering' described in the August 9 Notice, is not permitted under the price regulations. Several of the comments opposed a special rule on layering on the grounds that (1) the existing regulations make it clear that layering is prohibited; (2) competition among resellers is sufficiently strong to inhibit layering; and (3) an express provision regarding layering may interfere with crude oil exchanges between resellers. However, a relatively large number of comments offered proposals to restrict layering, and information available to [the Department] indicates that there may be a significant number of instances of layering. Accordingly, the rule adopted today includes a provision which is intended to discourage layering but which should not interfere with normal transactions among resellers. 42 Fed. Reg. 64859 (December 29, 1977).
The text of the final rule is given in footnote 1. The dispute in this case arises out of the Department of Energy's ...