Petition — Cities Service Co. v. Federal Energy Administration

{ —

| FEB 27 976

| MICHAEL RODAK, JR. Crem |

4 ET wR K i

IN THE ——aad

Supreme Court of the United States

OctToBeR TERM, 1975

No. 25-1230

Citres SERVICE COMPANY

Cities SERVICE Or CoMPANY,

Petitioners

Vv.

FEDERAL ENERGY ADMINISTRATION

FRANK G. ZARB, ADMINISTRATOR,

Respondents

PETITION FOR A WRIT OF CERTIORARI TO THE

TEMPORARY EMERGENCY COURT OF APPEALS

OF THE UNITED STATES

Paut A. LENZINI

1709 New York Avenue, N.W.

Washington, D.C. 20006

CHARLES V. WHEELER

Box 300

Tulsa, Oklahoma 74102

Attorneys for Petitioners

Dated: February 27, 1976

Press or Byron S. ADAMS PRINTING, INC., WASHINGTON, D. C.

~~ re ee eee

INDEX i

Page

Ee CT eT ee ee eee ae 1

SEE. vec cccutcranhwenseseuens Peake denen 2

TT Ne rE ey a 2

ConstTITUTIONAL Provisions, STATUTES AND ReGuta-

EE EEE ics onc n05'gt.tnansonediadenase es 3

SN OS eek dc snk nade bbe raeueen ene 3

The Two-Tier Price System for Crude Oil ......... 3

Other Measures Stenmuing From the Two-Tier Sys-

PR er eer ee or eee Te eT ete Peer 5

The Cost Equalization Program ................. 8

ey I IN, oo oo oc cee ced eecdeunsas 10

Reasons ror GRANTING THE Writ oF CERTIORARI ...... 10

1. Does the CEP Constitute the Exaction of a Tax

by an Administrative Agency? ...............6: 11

2. Does the CEP Constitute a Taking of Private

Property Without Just Compensation in Violation

of the Piste Dmmemementy 2... cc ciccscccccdee’ 15

3. Was Resort by the Court Below to General Con-

gressional Objectives in Order to Sustain the CEP

Proper When the Enabling Provision of the

HE PAA, Relied Upon by Respondents to Justify the

CEP Did Not Explicity er Implicity Authorize

oe, A Meee ey aircrney Meike 17

SINE ava g ua be oh na cdent ony casendbeneeecuien 20

il INDEX—Continued

Page

a Ae rrr rr rrr r rrr rrr rE re la

Opinion of the Temporary Emergency Court of Ap-

DOMED cc ccccrecccecccctcesecesncenesscsvecss la

Order Denying Rehearing .........0.60eeee eee eee Wa

Findings of Fact and Conclusions of Law of the Dis-

We GS an. boc ha ccassbonevunceeescasseucss 24a

Order of the District Court .......... 0c e eee eee 37a

b . MPTEPESETETELETETETTIE TIT Cee 38a

Constitutional Provisions Involved .............4. 38a

Statutory Provisions Involved .........6.-00eees 39a

Regulations Involved ..........ee eee e eee ee eeees 4la

AUTHORITIES CITED

CASES:

Armstrong v. United Siates, 364 US. 40 (1960) 2.6... 15

Cincinnati Soap Co. v. United States, 301 U.S. 3808

> g ee eee re eee rrr per re rer rt ee 14

Grimaud vy. United States, 220 U.S. 506 (1911) ...... 14

Hampton & Co. v. United States, 276 US, 894 (1928). 12

Moon v. Freeman, 379 F.2d 382 (9th Cir. 1967) ....... 13

National Cable Television Ass'n v. United States, 415

Pe Se MED cn bccn decade unsnadwndeesensady 12

Regional Rail Reorganization Act Cases, 419 U.S. 102

SED én kcuuas povdisccnssbhassncaseeseennnsas 15

Rodgers v. United States, 138 F.2d 992 (6th Cir. 1943) 18

United States v. Causby, 328 U.S. 256 (1946) ........ 16

United States v. Constantine, 296 U.S. 287 (1935)... 12, 18

United States v. General Motors Corp., 323 U.S. 373

(| errr rrr re TT rc cTeTert Tet TT). 16

United States v. Kansas City Life Ins. Co., 339 US.

(> 6 a Pewrreryrrrrrrr Tore errr TTT Tr 16

United States vy. Stangland, 242 F.2d 8438 (7th Cir.

| eeereerr rr re rrrres Terre rer TT re ere 13

INDEX—Continued iii

. Page

ConsTITUTION, STATUTES:

U.S. Constitution, Article 1, Section 8, Clause 1 .. 3, 10, 12

U. S. Constitution, Amendment V 3, 10, 15

eee © oe ee eee eee

Kmergency Petroleum Allocation Act of 1973, 87 Stat.

627, 15 U.S.C. $§ 751-756

CE Go lia c ss shut ed suaaGauwes ean os 3,17

I OED VU adn ON on ébasbesdexkes ve 3, 17,18

REGULATIONS:

a OI an 6 ceduWs hu Gaedieuécudesds 6

ey EE 6 hes Kau ec eceosedusducduxckiedunes 7

es EEE 6 badass CA eR decode ebherdeudid eae 9

ADMINISTRATIVE DecIsions:

Jacksonville Electric Authority, 2 FIA, § 80,553, CCH

Federal Energy Guidelines (March 21, 1975) .... 20

Swann Oil, Ine., 2 FEA, § 80,505 (Jan. 9, 1975) 2.2.0... 20

Jacksonville lectrie Authority, 2 FIA, § 83,008 (Jan.

cen evesiedtedetechvedulle skdonsdiciaece 20

Better Ilome Heat Council, Ine., as modified, CCH

Kederal nergy Guidelines, {| 20,131 (July 24,

ST +446 eu taden wiesccecend tases 4 ebeaedcdeewks 20

IN THE

Supreme Court of the United States

OcToBER TERM, 1975

No.

Cirres SERVICE COMPANY

Ciries Servicer Or, COMPANY,

Petitioners

v.

FepERAL ENERGY ADMINISTRATION

Frank G. Zars, ADMINISTRATOR,

Respondents

PETITION FOR A WRIT OF CERTIORARI TO THE

TEMPORARY EMERGENCY COURT OF APPEALS

OF THE UNITED STATES

Petitioners Cities Service Company and Cities Serv-

ice Oil Company, a wholly owned subsidiary of Cities

Service Company, respectfully pray that a writ of cer-

tiorari issue to review the judgment of the Temporary

Kmergeney Court of Appeals entered on December 31,

1975.

OPINION BELOW

The opinion of the Temporary Emergency Court of

Appeals, not yet reported, appears in the appendix

hereto, p. la, infra. The findings of fact and econclu-

sions of law of the U.S. District Court for the District

2

of Columbia entered on July 10, 1975, appears at ap-

pendix p. 24a, infra.

JURISDICTION

The judgment of the Temporary Emergency Court

of Appeals was entered on December 31, 1975. Pur-

suant to Rule 6 of the Temporary Emergency Court

of Appeals, petition for rehearing was timely filed on

January 14, 1976, together with petitioners’ motion for

stay of mandate. The latter motion was granted on Jan-

uary 14, 1976. Petition for rehearing was denied on

January 28, 1976. This Court has jurisdiction under

section 211(g) of the Economic Stabilization Act of

1970, as amended, 85 Stat. 750, 12 U.S.C. § 1904 note

(Supp. 1975), which is incorporated by section 5(a) (1)

of the Emergency Petroleum Allocation Act of 1973,

87 Stat. 633, 15 U.S.C. §754(a)(1), and under 28

U.S.C, § 1254(1).

QUESTIONS PRESENTED

1. Whether the Cost Equalization Program insti-

tuted by respondents, 10 C.F.R. § 211.67, con-

stitutes a tax, which may not be exacted by an

administrative agency.

2. Whether petitioners suffer a taking of private

property without just compensation in viola-

tion of the Fifth Amendment to the U. 8. Con-

stitution by a regulation which requires that pe-

titioners each month make cash payments di-

rectly to other refiners where the regulation

mandating such cash payments contains no pro-

vision which secures to petitioners compensa-

tion for or recovery of such cash payments.

3. Whether the Emergency Petroleum Allocation

Act, 87 Stat. 627, 15 U.S.C. §§ 751-756, which

3

authorizes and directs the Federal Energy Ad-

ministration to provide by regulation for the

mandatory allocation of crude oil and refined

petroleum products at prices to be specified in

such regulation authorizes the agency to re-

quire, under pain of criminal fine and civil pen-

alty, payments of cash from petitioners to other

refiners to ‘‘entitle’’ petitioners to process cer-

tain crude oil already owned by petitioners.

CONSTITUTIONAL PROVISIONS, STATUTES

AND REGULATIONS INVOLVED

This case involves Article I, Section 8, Clause i, Con-

stitution of the United States and the Fifth Amend-

ment to the Constitution of the United States as well

as sections 4(a) and 4(b)(1) of the Emergency Petro-

leum Allocation Act of 1973, as amended, and certain

administrative regulations, viz., 10 C.F.R. §§ 211.62

and 211.67. The foregoing are reprinted at appendix

pp. 38a-5la, infra.

STATEMENT OF THE CASE

The Two-Tier Price System for Crude Oil

In August 1973, as part of an effort to control wide-

spread inflation, the President through the Cost of

Living Council (CLC) implemented Phase IV of the

Economie Stabilization Program, a mandatory pro-

gram of price and wage controls covering most sectors

of the U.S. economy including the petroleum industry.

Beginning in 1973 the petroleum industry was charae-

terized by rapidly rising world prices which had sur-

passed the domestic price of oi] and growing U. S.

dependence on foreign sources of oil. In consequence,

the Phase 1V petroleum regulations involved a mix-

4 ‘

ture of inflation control and price incentive to encour-

age new domestic production of crude oil.

For erude oil, CLC instituted a two-tier price sys-

tem under which a ceiling price was established for

production classified as ‘‘old’’ oil while all other do-

mestic production, classified as ‘*new,”’ ‘‘released,’’ and

‘*stripper’’ oil was not subject to price control and

thus could be sold at the free market price. ‘*Old’’ oil

was defined 2s crude oil produced from a property up

to that property’s 1972 base production level. ‘‘ New”’

oil was oil produced in excess of the property’s 1972

base production level. ‘‘ Released”? oil was an equiva-

lent amount of old oil for every ‘‘new”’ barrel pro-

duced, such old oil thus being released for sale at the

free market price. ‘‘Stripper’’ well oi] was oil from

wells which produce less than ten barrels per day. See

generally 38 Fed. Reg. 22536 et seq. (August 22, 1973).

The free market price was chiefly influenced by

prices for oil imported from the Middle East which

were increasing sharply. Thus, for example, the price

of Arabian light crude, a representative foreign crude

oil, had increased from approximately $3.07 per bar-

rel in August 1973 to approximately $11.65 in January

1974. Par. 14, Affidavit of FEA Associate Assistant

Administrator Vernon (hereinafter ‘‘Vernon Affida-

vit’’), Stipulated Record on Appeal, 330 (hereinafter

‘*Record’’). By contrast the ceiling price for old oil

was established by CLC at approximately $5.25 per

barrel on December 19, 1973, and remains at that level.

Ibid.

In October 1973, following outbreak of the Arab-Is-

raeli conflict, an embargo against the United States

and certain other countries resulted in sharp reduction

)

of exports of Arab oil to the United States. In re-

sponse to the resulting shortages Congress on Novem-

ber 27, 1973, enacted the Emergency Petroleum Allo-

eation Act, 87 Stat. 627, 15 U.S.C. §§ 751-756 (here-

inafter ‘‘the EPAA”’), authorizing and directing the

President to promulgate a regulation providing for

mandatory allocation of erude oil, residual fuel oil,

and refined petroleum products at prices to be speci-

fied in or determined by such regulations. §4(a), 87

Stat. 629, 15 U.S.C. § 753(a). By Executive Order

11748 dated December 4, 1973, there was established

in the Executive Office of the President the Federal

Energy Office (FEO) under the direction of an Ad-

ministrator to whom was delegated all authority vest-

ed in the President by Congress in the EPAA. 38 Fed.

Reg. 33575 (December 6, 1973). FEO on January 14,

1974, promulgated regulations in implementation of

the EPAA which adopted and continued the two-tier

pricing system for domestic crude oil previously estab-

lished by CLC, 39 Fed. Reg. 1923 et seq. (January 15,

1974).

Other Measures Stemming from the Two-Tier System

By reasoning of increasing free market prices, the

Federal Energy Administration (FEA)* conceived

that the competitive viability of small and independ-

ent refiners was threatened. The problems noted by

FEA were that (1) operating costs and capital ex-

penditures of small refiners had traditionally been

higher than those of competitors and this condition

‘FEA was established by Congress on June 27, 1974, as an

independent agency in the exeentive branch, sueceeding to the

authority and responsibility of FEO. Federal Energy Administra-

tion Act, 88 Stat. 97, 15 U.S.C. §§ 761-766. See Executive Order

11790, 39 Fed. Reg. 23185 (June 27, 1974).

6

was exacerbated by the two-tier cost disparity; (2)

small refiners had traditionally marketed their prod-

ducts at a lower price than those of major branded

refiners; (3) many small and independent refiners were

placed in a severe cost-price squeeze; (4) many small

and independent refiners were unable to absorb the

full amount of their increased crude costs; and (5)

many small and independent refiners were required

to charge higher prices for products than their com-

petitors and suffered loss of market share on account

of such higher prices.’

In an attempt to alleviate such distortions FEA and

its predecessor FEO took three steps. First, it issued on

January 14, 1974, its so-called ‘December 1’’ rule, 10

C.F.R. § 211.64 (now 10 C.F.R. § 211.63(a)), which pro-

vides in substanee that supplier/purchaser reiation-

? FEA specifically stated its concern as follows:

‘*To meet competition, however, many refiners and marketers

(with higher input costs) had to endure a severe cost-price

squeeze, Many small and independent refiners and independ-

ent marketers—unable to absorb the full amount of such costs

—were required to charge higher prices for their products

with a consequential loss of market shares.’’ Par, 17, Vernon

Affidavit, Record, 331.

‘*Moreover, since independent marketers and many small and

independent refiners were disadvantaged by this development,

the distortion threatened the competitive viability of the inde-

pendent sector of the petroleum industry.’’ Par. 18, Vernon

Affidavit, Record, 332.

‘‘FEA believes that a bias is necessary to compensate rela-

tively small refiners for higher operating costs, proportion-

ately greater capital expenditure requirements, and the fact

that such refiners must, in many cases, market their products

at a lower price than the products of the major branded re-

finers.’’ 39 Fed. Reg. 39741-742. (November 11, 1974).

?

a ee il we te a te ~~

7

ships in effect for sales, purchases and exchanges of

domestie crude oil on December 1, 1973, shall remain

in effect for the duration of the crude oil allocation

program. By freezing all crude oil supplier/purchaser

relationships as of December 1, FEO sought to prevent

moves by major integrated refiners to divert low-cost

old oil to their own refineries. Pars. 8, 19, Vernon Affi-

davit, Record, 326, 332. The December 1 rule is an ap-

propriate exercise of FEA’s authority to allocate crude

oil.

A second step designed to correct supply imbalance

and to grant small and independent refiners access

to the benefits of price-controlled old oil was the Man-

datory Crude Oil Sales program, 10 C.F.R. § 211.65,

effective February 1, 1974. The purpose of this so-

called ‘‘buy/sell program’’ was to assure each small

and independent refiner preferential allocations such

that they obtained volumes of crude oil not less than

volumes obtained during 1972. Sales to small and inde-

pendent refiners are made by the fifteen largest U.S.

refiners which are neither ‘‘small’’ nor ‘‘independent”’

within the meaning of those terms as set forth in see-

tion 3 of the EPAA. Buy/sell program sales are made

at a refiner/seller’s weighted average crude oil price

thereby giving small and independent refiners some

access to the benefits of price-controlled old oil and thus

lessening to some extent the crude cost disparities

among refiners. The buy/sell program is also within

respondents’ authority to allocate crude oil.

Not satisfied that these measures would maintain the

competitive viability of small and independent refin-

ers, FEA next embarked upon a far-reaching program

of cost equalization which goes beyond allocation au-

thority and which gives rise to this litigation.

S

The Cost Equalization Program

On August 18, 1974, FEA issued a notice of pro-

posed rulemaking entitled ‘‘Allocation of Old Oil.’

39 Fed. Reg. 31650 et seq. (August 30, 1974). Under

the proposal certain refiners would be directed to make

cash payments in the nature of a subsidy to other re-

finers. As stated by FEA, ‘‘The proposed is intended

to give all refiners the financial benefits associated with

access to supplies of old oil by, in effect, allocating old

oil to each refiner in such a way so as to give such re-

finer its proportionate share of total domestie supplies

of old oil.”’ 39 Fed. Reg. at 31650. In justificat’ on of

the program the Supplementary Affidavit of John Ver-

non submitted by respondents in the trial court states:

‘“When the excessive profits reported by major inte-

grated oil companies in the recent past are contrasted

with the serious economic problems facing many small

and independent refiners and independent marketers

as a result of high input costs they are not able to pass

through ... FEA believes that the need for the equal

allocation of ‘old’ oil and resulting equalization of

input costs becomes clear and is unquestionably in the

publie interest.”’ Par, 13, Supplementary Affidavit of

John Vernon, Confidential Reeord, 55.

The mechanics of the cost equalization program

(hereinafter ‘‘the CEP’’) are that each month FEA

calculates a ratio known as the national old oil supply

ratio. The ratio is determined by comparing total old

by multiplying that refiner’s runs to stills for the month

to total crude oi runs to stills (erude oil processed)

for all refiners for the month. The number of entitle-

ments issued to a particular refiner is then determined

by multiplying that refiner’s runs to stills for the month

by the national old oil supply ratio. Thus, for example,

a es

> Ci 2 ob ek Oe ee re re me ed) ce eh tie 6 te ee eet

A OP Bs

9

if total old oil receipts nationally amount to forty per-

cent of total runs to stills, then a refiner having run

100,000 barrels per day in that month would be issued

entitlements by FEA permitting it to include in its old

oil receipts for the month 40,000 barrels per day of old

oil. If, in fact, the refiner’s actual receipts of old oil

were less than 40,000 barrels per day the refiner would

be listed in the FEA notice as a seller of entitlements

for the difference. On the other hand, if the refiner’s

actual receipts of old oil for the month exceeded 40,000

barrels per day, it would then be required to purchase

(from an entitlements seller) the right to include in

receipts the excess old oil.

The CEP issued as a final rule by FEA on Novem-

ber 29, 1974. 10 C.F.R. § 211.67, 39 Fed. Reg. 42246

(December 4, 1974). The first month for which entitle-

ments issued was November 1974 and on January 10,

1975, FEA published its notice wherein FEA issued

entitlements for the month of November 1974. 40 Fed.

Reg. 2560 (January 13, 1975). Petitioners were listed

in the notice as having more old oil receipts than en-

titlements thereby requiring purchase by petitioners

of 699,089 entitlements at #5 each, subject to non-com-

pliance sanctions in the form of eriminal fines and civil

penalties.

In each succeeding month respondents have pub-

lished entitlement notices and each notice has required

petitioner to purchase rights to include old oil in pe-

titioners’ crude oil receipts. For the first thirteen

months of the CEP, November 1974 through November

1975, petitioners have been required to purchase a

total of 14,934,556 entitlements at a total cost of $109,-

942,176.62. The CEP has been and will continue for

10

the foreseeable future to be a major part of the energy

program implemented by respondents.

The Instant Litigation

In the District Court and subsequently in the Tem-

porary Emergency Court of Appeals, petitioners chal-

lenged the legality of the CEP as applied to them on

both constitutional and statutory grounds. Jurisdiction

of the District Court was founded on section 5(a) (1)

of the EPAA, which incorporates sections 205-211 of

the Economie Stabilization Act, as amended, 85 Stat.

750, 12 U.S.C. § 1904 note (Supp. 1975). Petitioners

argued that the CEP is patently unconstitutional be-

cause it constitutes an administratively imposed tax

in violation of Article I, Section 8, Clause 1 of the Con-

stitution as well as a taking of private property with-

out just compensation in violation of the Fifth Amend-

ment and asserted also that the CEP exceeded statu-

tory authority because it constitutes neither allocation

nor the establishment of prices. As a factual matter

petitioners argued that they were seriously injured by

the CEP because the program merely affords a pros-

pect of recovery from the marketplace of sums re-

quired to be transferred to other refiners. For the first

four months of the CEP petitioners had been required

to make entitlement payments totaling $23.9 million

but had not recovered such sums from the marketplace.

REASONS FOR GRANTING THE WRIT OF CERTIORARI

The question raised in this proceeding is whether a

federal administrative agency may require one person

te subsidize another by direct cash payments for the

purpose of maintaining and financing the competitive

viability of the person subsidized. Petitioners are justi-

MEP tak A ae te

11

fied in invoking the certiorari powers of this Court for

the reason that, in answering in the affirmative the

question set forth above, the court below has gone be-

yond prior decisions of this Court in assessing the per-

missible scope of the regulatory powers of an admin-

istrative agency and in approving the CEP in light

of limits imposed hy Article I, Section 8, Clause 1 of

the Constitution and the Fifth Amendment thereto.

This case therefore calls for exercise of this Court’s

power to reconfirm or redefine powers which may be

exercised by and through administrative agencies.

The precise issues can best be stated in the form of

three questions arising from the decision below..

l. Does the CEP Constitute the Exaction of a Tax by an

Administrative Agency?

This case presents difficult and important questions

concerning whether the exaction of money payments

by an administrative agency to support an alleged

public purpose constitutes the imposition of a tax. May

an administrative agency mandate cash payments from

one sector of an industry to another and justify such

action, having the essential characteristics of a tax, as

a regulatory measure? The contours of such novel

power in an administrative agency should be charted

by this Court. If the CEP is valid then an administra-

tive agency may exact monetary payments from one

group directly to another and justify the action by

ascribing to it a regulatory effect.

The facts of this case present a classic situation in

which a sector of the national economy is faced with

economic hardship due to forces over which it has

little control. The public interest in preservation of

that disadvantaged sector demands that it not fail. As

12

most frequently has been the case the solution involves

subsidies for those enterprises comprising the disad-

vantaged sector. Invariably the subsidies, such as those

for fishing vessels, the merchant marine, and airplane

manufacturers, have been appropriated from public

funds generated by taxes levied by Congress. Here, for

the first time, an administrative agency has usurped

the authority of Congress to raise the money to support

the subsidy.

By Article I, Section 8, Clause I of the Constitution

it is Congress that has the ‘‘power to lay and collect

Taxes.’’ 'axation is thus a legislative function and,

as recently reaffirmed by this Court, Congress is ‘the

sole organ for levying taxes.’’ National Cable Tele-

vision Ass'n V. United States, 415 U.S. 336, 340 (1974).

If the exaction of a tax may be delegated by Congress,

then plainly there has been a failure by Congress to

lay down in the EPAA an intelligible principle to

which respondents are directed to conform, National

Cable Television Ass’n v. United States, supra; ef.

Hampton & Co. vy. United States, 276 U.S. 394 (1928).

The CEP constitutes a direct and involuntary mone-

tary exaction imposed on petitioners for the direct

benefit of other refiners. Indeed, since inception of the

CEP in November 1974 through November 1975, pe-

titioners have been required to transfer to other re-

finers direct cash payments aggregating $109,942,176.62

for the purchase of 14,934,556 entitlements. During the

same period all buyers of entitlements made direct

cash transfers to other refiners in a total amount of

$1,524,424,457.08.

Regardless of a designation given it, an exaction will

be classified by its purpose and operation. United

., ower. ee... 655

13

States v. Constantine, 296 U.S. 287 (1935). The pur-

pose of the entitlements program, as stated by re-

spondents, is

[T]o give all refiners the financial benefits associ-

ated with access to supplies of old oil by, in effect,

allocating old oil to each refiner in such a way so

as to give such refiner its proportionate share of

total domestic supplies of old oil.

39 Fed. Reg. 31650 (August 30, 1974). In operation,

the CEP mandates petitioners to purchase the right to

process quantities of domestic crude oil already owned.

The court below held that the CEP was not a tax

because it does not raise money for the government or

for its support and because the object of the scheme is

regulation. In this respect the court held that the CEP

regulates ‘‘refiners’ access to crude oil’’ and is thus a

regulatory measure. That determination does not sur-

vive analysis. The scheme is offered as an allocation

measure but it accomplishes results that allocation

cannot properly achieve. Thus, while petitioners may

be required to sell old oil at the controlled price, they

cannot be forced to purchase oil at the higher, free

market price. In effect the CEP requires such a pur-

chase and serves no purpose other than to distribute

to other refiners the financial benefits associated with

petitioners’ property.’ In contrast to regulation as

normally understood, the CEP neither encourages, dis-

courages, restricts or deters activity. It simply man-

* Entitlement payments are not sanctions as were the penalty

payments in Moon v. Freeman, 379 F.2d 382 (9th Cir. 1967) ;

United States v. Stangland, 242 F.2d 843 (7th Cir. 1957); and

Rodgers v. United States, 138 F.2d 992 (6th Cir. 1943), cited by

the court below. It is well settled that Congress may establish a

sanction and delegate to an agency authority to declare the type of

14

dates cash payments by petitioners to other refiners.

The condition which triggers the exaction is the re-

ceipt by petitioner of certain crude oil for processing.

In Cincinnati Soap Co. vy. United States, 301 U.S. 308

(1937), an excise tax imposed by Congress upon the

first domestic processing of coconut oil was challenged

by petitioners as not a true tax but a regulatory meas-

ure outside the field of federal power. The Court dis-

posed of the contention holding that the exaction was

purely an excise tax upon a manufacturing process for

revenue purposes ‘‘and in no sense a regulation of the

process itself.”’ 301 U.S. at 312.

The sheer size of the monetary exactions in the in-

stant case is persuasive that the CEP is designed to

raise revenue in order to fund the subsidy deemed to

be necessary for the continued viability of a segment

of the petroleum industry. If this be a public purpose

then funds for administration of such a program

should come from the general fund of the treasury. It

strains the imagination to attribute any purpose to

the CEP other than the raising of revenue. The mone-

tary exaction imposed on petitioners is not merely an

incidental feature but plainly the essential feature of

the scheme. The instant case squarely presents the im-

portant question whether such an administrative

scheme is permissible.

activity which merits the sanction, E.g., Grimaud vy. United States,

22) U.S. 506 (1911). Unlike those cases, which involved adminis-

trative imposition of monetary sanctions imposed by Congress, the

entitlement payments here are established by respondents. More-

over, entitlement payments have nothing to do with enforcement of

the CEP which is effectuated instead through the fine and penalty

sanctions established by Congress. See § 5(a)(1), Emergency Pe-

troleum Allocation Act, 87 Stat. 633, 15 U.S.C. § 754(a) (1).

15

2. Does the CEP Constitute a Taking of Private Property Without

Just Compensation in Violation of the Fifth Amendment?

The Fifth Amendment to the U.S. Constitution pro-

scribes the taking of ‘‘private property .. . for public

use, without just compensation.’’ In contradistinction

to ‘‘just compensation,’’ which has been interpreted

by this Court to mean ‘reasonable, certain, and ade-

quate provision for obtaining compensation,’’ Regional

Rail Reorganization Act Cases, 419 U.S. 102, 124-125

(1974), ‘‘taking’’ has never admitted of a ready defi-

nition. Some governmental actions result in a direct

appropriation of private property, while other actions

merely generate indirect, consequential loss of private

property. The question as to whether the loss is direct

and thus a taking, or incidental and therefore beyond

the scope of constitutional protection, has continually

troubled this Court. As noted in Armstrong v. United

States, 364 U.S. 40 (1960):

This case and many others reveal the difficulty

of trying to draw the line between what destruc-

tions of property by lawful governmental actions

are compensable ‘‘takings’’ and what destructions

ee and therefore not compen-

sable.

364 U.S. at 48. Given a governmental regulation that

admittedly has an adverse effect on private property,

how attenuated must the injury be to be rendered in-

cidental or consequential, as distinct from direct?

Lacking a rule of general applicability, this Court has

tailored ad hoe guidelines based on unique factual

premises placed before it in discrete cases. E.g., Arm-

strong Vv. United States, supra, (acquisition by govern-

ment of materials subject to unperfected materialmen’s

16

lien held a taking) ; United States v. Kansas City Life

Ins. Co., 339 U.S. 799 (1950) (destruction of agricul-

tural value of land by raising water table held a tak-

ing); United States v, Causby, 328 US. 256 (1946)

(low and frequent airplane flights t.at interfere with

enjoyment and use of land held a taking); United

States v. General Motors Corp., 323 U.S. 373 (1945)

(condemnation of right of temporary oceupancy of

leased premises held a taking).

This case presents the Court with its first oppor-

tunity to determine (a) whether a regulatory scheme

such as that described herein constitutes a taking for

a public purpose, and (b) whether petitioners have

been given their constitutional due of reasonable, cer-

tain, and adequate provision for compensation. Were

this case merely an aberration, the fact that it is one

of first impression might not, in itself, warrant the

grant of certiorari. The distinguishing characteristic

of the CEP, however, is its seductive simplicity and

the prospect that it may well serve as a model for fu-

ture programs that purport, though ‘‘equalization «

costs”? in a sector of the economy, to serve a regu.:-

tory purpose. Viewed in this light, the opinion of the

court below, which goes beyond any prior precedent

in sanctioning a confiseatory program of expropriation

without just compensation, merits the attention of this

Court.

The undisputed facts herein are that petitioners

have been required to pay huge sums of money to

competing refiners on a monthly basis. Respondents

argue that such action is sanctioned by a statute which

provides that erude oil shall be allocated at prices

specified by regulation. Yet the questions remain, does

a taking for a publie use occur where petitioners are

17

required te pay direct cash subsidies to competing re-

finers for the privilege of processing oil already

owned by petitioners? Assuming that a public purpose

obtains, have petitioners received just compensation

where they are told they might recover their costs in

the market at some future, unspecified date, but given

no guarantee of same? These questions have yet to be

addressed by this Court. This case presents the issues

squarely and they should be met.

3. Was Resort by the Court Below to General Congressional

Objectives in Order to Sustain the CEP Proper When the

Enabling Provision of the EPAA, Relied Upon by Respondents

to Justify the CEP, Did Not Explicitly or Implicitly Authorize

the Program?

In addition to challenging the CEP as unconstitu-

tional, petitioners also asserted in the court below that

the CEP is in excess of statutory authority. If statutory

authority therefor exists, it must be found within see-

tion 4(a) of the EPAA. It is that section of the EPAA

which vests the executive with the specific means to

accomplish the litany of objectives set forth by Con-

gress in section 4(b)(1). The court below character-

ized this argument as a ‘‘misinterpretation of Section

4(a) of the Allocation Act”? and as an unreasonable

‘‘bifureation of the authority conferred on the FEA

under Section 4(a) from the objectives of 4(b).” Ap-

pendix, pp. 8a, 9a, infra. The court below held instead

that ‘‘authority under Section 4(a) must be read to-

gether with the objectives which the exercise of that

authority is to obtain.’’ Ibid. This interpretation is

manifestly improper.

While the specific means or powers bestowed by

Congress on an agency may be exercised to achieve the

18

objectives to be accomplished by a statute, whether

agency action is permissible must depend upon whether

such action is channeled through the powers conferred

and not whether particular action might attain a stated

objective. Aceordingly, respondents’ authority under

section 4(a) may not expand, aecordion-like, to accom-

plish the objectives laid down in section 4(b)(1) as if

respondents had been authorized to ‘‘take such action

as necessary’’ to accomplish such broad, virtually un-

limited objectives as protection of ‘‘national defense.”’

EPAA, §4(b)(1)(A), 87 Stat. 629, 15 U.S.C. § 753

(b)(1)(A).* To the contrary, section 4(a) authorizes

regulations providing for mandatory allocation of

covered products at prices to be specified in the regu-

lations, and thus respondents are limited to allocation

and price regulation in seeking to accomplish congres-

sional objectives.

This is the view of the case taken both by petitioners

and respondents in the District Court and before the

Temporary Emergency Court of Appeals and, indeed,

considerable effort was made by both sides in arguing

that the CEP does or does not constitute allocation or

price control. Remarkably, the court below did not

* Indeed, section 102 of S. 1570 as reported by the Senate Com-

mittee on Interior and Insular Affairs provided that ‘‘In imple-

menting the authority granted under this Act the President shall

take such actions as are necessary to achieve the following specific

objectives... .’’ S. Rep. No. 53-159, 2 (1973) (Emphasis added.)

The foregoing was deleted in the committee of conference and the

conference substitute generally followed the provisions of the House

amendment. IH. Rep. No. 93-628, 11 (1973). As eventually enacted,

section 2(b) of the EPAA provided that ‘‘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... .”’ § 2(b), 87 Stat. 628, 15 U.S.C. § 751(b). (Emphasis

added. )

Po

. on

19

decide that crucial question, resorting instead to a

bottom-line determination that the CEP is ‘‘clearly

within the authority conferred on the FEA under the

Alloeation Act”’ because petitioners’ ‘‘insistence upon

the bifurcation of the authority conferred on the FEA

under Section 4(a) from the objectives of 4(b), in

their endeavor to assert the lack of specific authority

under the Aijlocation Act is unwarranted and unrea-

sonable.’’ Appendix, p. 9a, infra.

The CEP is neither an exercise of allocation nor

price authority because it yields results that allocation

and price regulation could not yield. Thus while peti-

tioners may be mandated to sell erude oil at the con-

trolled price they may not be forced to purchase high-

priced crude oil. Respondents argue that the CEP is

an exercise of allocation authority because the program

achieves the ‘‘same result’’ as a physical transfer of

erude oil. It is thus argued by respondents that under a

physical allocation program FEA could have directed

each refiner with more than its proportionate share of

old oil to transfer its excess barrels to a less favored

refiner in exchange for an equal number of barrels

of uncontrolled crude oil with the selier of old oil

charging approximately $5.25 per barrel and the seller

of uncontrolled oil charging the free market price.

Par. 22, n., Vernon Affidavit, Record, 334. But plainly

this justification is unsound because there is not, and

could not properly be, any authority in the EPAA to

permit FEA to mandate a forced purchase of crude oil.

It is inconceivable that Congress contemplated that

persons for whose protection the EPAA was enacted,

viz., purchasers at equitable prices, be forced to pur-

chase covered products allocated to them. Indeed, re-

spondents’ own decisions have uniformly held that the

20

FEA regulations do not prohibit any purchaser from

declining to purchase an allocated product from any

supplier. Jacksonville Electric Authority, 2 FEA

80,533, CCH Federal Energy Guidelines (March 21,

1975); Swann Oil, Inc., 2 FEA 80,505 (January 9,

1975) ; Jacksonville Electric Authority, 2 FEA 183,008

(January 9, 1975) ; Better Ilome Heat Council, Inc., as

modified, CCIL Federal Energy Guidelines, {! 20,131

(July 24, 1974). Yet it is evident that a physical trans-

fer of old oil for uncontrolled oil could yield the results

obtained under the substitute CEP only if a refiner

ean be forced to purchase high-priced erude oil. Ac-

cordingly, petitioners submit that the CEP aecom-

plishes more than allocation or price control could ac-

complish and is therefore in excess of authority.

CONCLUSION

For the foregoing reasons this petition for writ of

certiorari should be granted.

Respectfully submitted,

Paut A, LENZINI

1709 New York Avenue, N.W.

Washington, D.C. 20006

CuirLtes V. WHEELER

Box 300

Tulsa, Oklahoma 74102

Attorneys for Petitioners

Dated: February 27, 1976

APPENDIX

la

APPENDIX

Opinions Below

TEMPORARY EMERGENCY COURT OF APPEALS

OF THE UNITED STATES

No. DC-34

Cities Service Company anp Cities Service Or Company,

Plaintiff s-A ppellants,

Guur On Corporation, Exxon Corporation, MARATHON O1L

Company ano Hunt On. Company, Amici Curiae,

v.

FeperaL Enercy ADMINISTRATION AND Frank G. Zarp,

Defendants-A ppellees,

and

AsuHianp Om, Inc., Amicus Curiae.

(Fitrep December 31, 1975)

Appeal from the United States District Court

for the District of Columbia

(Civ. 75-0653)

Before Curistensen, Estes, and Jounson, Judges.

Estes, Judge.

This suit was commenced in the United States District

Court for the District of Columbia by Cities Service Com-

pany and its wholly-owned subsidiary Cities Service Oil

Company (Cities Service), plaintiffs-appellants, to obtain

injunctive reliet from all or part of their purchase obli-

gations under the Old Oil Entitlements Program,’ 10 CFR

1 Cities Service sought to enjoin the imposition or enforcement

of any entitlement purchase obligations based on its refining more

old oil than the national average or, in the alternative, to enjoin

the imposition or enforcement of any entitlement purchase obliga-

tions based on its refining its own old oil production.

2a

§ 211.67 (Entitlements Program), 39 FR 42,246 (Dee. 4,

1974), and a declaratory judgment that the actions of the

Federal Energy Administration,’ et al. (FEA), defend-

ants-appellees, in promulgating the Entitlements Program

were unlawful on the grounds that such actions were: in

excess of the agency’s statutory authority; arbitrary, ca-

pricious, and an abuse of discretion; not in accordance

with the governing statute; and an unconstitutional bur-

den on the plaintiffs.*

Cities Service based these contentions on its allegations

that the program fails to physically allocate any crude

oil or set the prices for such oil; that Cities Service is

unable to pass through its increased costs under the pro-

gram on a dollar-for-dollar basis as mandated by section

4(b)(2)(A) of the Emergency Petroleum Allocation Act

* Congress established the Federal Energy Administration under

the Federal Energy Administration Act of 1974, 88 Stat. 97, 15

U.S.C. § 761 (1975 Supp.), ‘‘to assure a coordinated and effective

approach to overcoming energy shortages. . . .’? 15 U.S.C. § 761(b).

* Pursuant to 10 CFR § 205 ~ bpart D, Cities Service filed an

application with the Office of Exceptions and Appeals of the FEA

for exception relief from the Entitlements program for purchase

obligations arising out of the erude oil runs to stills made by

Cities Service in November. Cities Service Company, Case No. FEE

1443 (filed 2-7-75, decided 2-20-75), 3 CCH Energy Management

{| 83,043. Subsequently, Cities Service filed an application for com-

plete exception relief from the Entitlements program for the dura-

tion of the regulations’ existence, Cities Service Company, Case

No. FEE 1459 (filed 2-13-75, decided 3-27-75), 3 CCH Energy

Management © 83,100. Both applications for relief were denied by

the FEA. Under 10 CFR § 205.58 and § 205.100(b), a party ag-

grieved by an order issued by the FEA under, inter alia, 10 CFR

$205 subpart D, has not exhausted its administrative remedies

until an appeal has been filed pursuant to 10 CFR § 205, subpart

If, and an order granting or denying the appeal has been issued.

Cities Service filed an appeal from the February 20, 1975 decision

of the FEA, which was also denied. Cities Service Company, Case

No. FEA 0385 (filed 3-24-75, decided 4-8-75), 3 CCH Energy

Management § 80,568,

3a

of 1973, 87 Stat. 628, as amended, 15 U.S.C. § 753(b) (2) (A)

(1975 Supp.) ; that the classification of buyers and sellers

under the program lacks a rational basis; the program

causes further market distortions; that the small refiner

bias is arbitrary and capricious; that under the program

Cities Service is required to make cash payments to its

refiner-competitors which is not mandated by the Alloca-

tion Act and constitutes an unconstitutional taking of

property for private purposes without just compensation

prohibited by the Fifth Amendment, and that the pro-

gram is an unconstitutional tax prohibited by Article I,

See. 8, cl. 1 of the Constitution.

On July 10, 1975, the district court consolidated the

hearing on plaintiffs’ motion for a preliminary injunction

with a plenary hearing on the merits; denied the plain-

tiffs injunctive relief; refused to certify plaintiffs’ consti-

tutional claims, finding them insubstantial and without

merit;* and entered judgment for the defendants. Cities

Service Company, et al. v. F.E.A,, et al. (D.D.C. CA No.

75-653, July 10, 1975), 3 CCH Energy Management

{| 26,024. Most of plaintiffs’ contentions were rejected by

the district court for the reasons three district courts had

held that FEA’s Entitlements program was authorized by

the governing statute and the constitutional questions pre-

sented were without merit. Exxon Oil Company v. F.E.A.

*Under section 211(c) of the Economie Stabilization Act of

1970, 84 Stat. 799, as amended (Stabilization Act), 12 USC § 1904

note (1975 Supp.), as incorporated into the Allocation Act by

section 5(a)(1) thereof, 15 USC § 754(a)(1) (1975 Supp.), in any

action where the district court determines that a substantial con-

stitutional issue exists, the court must certify such issue for reso-

luticn by the Temporary Emergency Court of Appeals. As the

district court stated, citing Delaware Valley Apartment House

Owners’ Ass’n v. U.S., 350 F.Supp. 1144 (E.D.Pa. 1972), aff’d,

482 F.2d 1400 (TECA 1973): ‘‘[s]uch [constitutional] questions

are not substantial if they are plainly without merit or if previous

Suprenie Court decisions appear to foreclose the subject.’’ 3 CCH

Energy Management { 26,024 at p. 26,224.

4a

(D.N.J. CA No. 75-150, Jan. 30, 1975), dismissed for lack

of jurisdiction, 516 F.2d 1397 (TECA, 1975), 3 CCH En-

ergy Management {| 26,019; Marathon Oil Co. v. F.E.A.

(N.D. Ohio CA No, 75-36, Jan. 31, 1975), 3 CCH Energy

Management { 26,015, dismissed for lack of jurisdiction,

916 F.2d 1397 (TECA, 1975), 3 CCH Energy Management

1 26,019; Gulf Oi Corporation v. F.E.A., 391 F.Supp. 856

(W.D.Pa. 1975), 3 CCH Energy Management {| 26,014, dis-

missed for lack of jurisdiction, F.2d —— (TECA

Slip Opinion No, 3-6, June 20, 1975). Notice of appeal was

filed in this court by Cities Service on July 18, 1975.

Exxon, Marathon, and Gulf, respectively, have filed

briefs £n support of Cities Service’s position.

Cities Service is an integrated petroleum company en-

gaged in producing, transporting, refining, purchasing, and

selling crude oil and petroleum products. A high propor-

tion of the erude oil Cities Service refines is its own ‘‘old”’

oil production, i.e., crude oil the price of which is controlled

by the FEA at approximately $5.25 under the two-tier

price system, 10 CFR § 212.73.° The two-tier price system

was upheld by this court in a comprehensive opinion dis-

cussing the validity and effects of the system in Consumers

Union v. Sawhill, -—— F.2d , rehearing en bane (Slip

Opinion No. DC-26, July 7, 1975), 3 CCH Energy Man-

agement § 26,011, vacating 512 F.2d 1112 (TECA, 1975).

r > . . . . . .

lhe two-tier price system effectively minimized the in-

flationary impact of rising world-wide oil prices and pro-

vided necessary incentives for increased domestic produe-

° The Cost of Living Council originated the ‘‘two-tier”’ pricing

system for crude oil as a part of Phase IV of the Stabilization Pro-

gram. 6 C.PLR. § 150, Subpart L, 38 F.R. 22,536 (Aug, 22 1973)

These rules were subsequently adopted by the Federal Energy

Office as 10 CFR § 212, Subpart D, 39 F.R. 1924 (Jan, 15 1974),

The Federal Energy Office became the Federal Energy Administra-

tion on June 27, 1974, pursuant to the Federal Energy Administra-

tion Act of 1974, Pub, L. 93-275, 88 Stat. 97, 15 U.S.C. § 761 (1975

Supp.).

5a

tion. However, with the end of the Arab oil embargo and

emergence of adequate crude oil supplies, the in-put cost

of crude oil to refiners assumed crucial significance. Con-

sumers could buy gasoline from stations with the lowest

prices, rather than from stations with the shortest wait-

ing lines. Thus, the great disparity between the price of

controlled and uncontrolled erude oil was having an un-

equal impact on all refiners * and, contrary to other objec-

tives of the Allocation Act, contained in sections 4(b)(1)

(A)-(I), economie distortions, interference with the com-

petitive viability of the small and independent sectors of

the petroleum industry, and inequitable prices to consum-

ers developed in certain areas of the country under the

two-tier system due to the varying reliance of the geo-

graphic region in which they made gasoline and petroleum

product purchases on uncontrolled domestic and imported

oil.

Seeking to remedy this situation without losing the ben-

eficial aspects of the two-tier price system, the FEA pro-

mulgated the Entitlements Program.’ The basic purpose

® As this court stated in Pasco, Inc. v. F.E.A., —— F.2d

(TECA Slip Opinion No. )-7, Oct. 14, 1975), 3 CCH Energy

Management { 26,031 at p. 26,252, ‘‘During the base period of May,

1973, composite crude oil costs of all refiners were approximately

equal; however, with the pricing system in effect, the major inte-

grated oil companies, who as a class had far greater aecess to old

oil, had significantly lower composite erude oil costs in refining

their products than did the small and independent refiners.’’ Prior

to the advent of the two-tier price system, Cities Service had higher

weighted average crude oil costs than the weighted average cost

for all major refiners; however, the circumstances necessitating

implementation of the two-tier system and passage of the Alloca-

tion Act resulted in the composite crude oil costs of Cities Service

falling below that of other majors and the small and independent

refiners.

The Entitlements Program originated in a notice of proposed

rulemaking issued by the FEA on August 28, 1974, 39 F.R. 31,650

(Aug. 30, 1974), following which publie hearings were held and

over 600 comments were received by the FEA. A second notice of

Ea

of the Entitlements Program was to spread the benefit of

access to old price-controlled oil and the burden of depen-

dence on uncontrolled oil among all sectors of the petro-

leum industry, all regions of the country, and among all

consumers of petroleum products,’ while retaining the in-

centives for increased production and anti-inflationary

measures which the two-tier price system provided.

The Entitlements Program essentially requires petro-

leum refiners to shift their over-all reliance on controlled

or uncontrolled oil to a more balanced position among all

the refiners. A refiner must, under the Entitlements Pro-

gram, have one entitlement for each barrel of old oil which

it refines during any month. The FEA issues a certain

number of entitlements to each refiner each month, based

on that refiner’s proportionate share of all old oil refined

on a nation-wide basis, adjusted somewhat by the small

refiner bias.° The program thus commenced on the prem-

ise that all refiners should be including an equal propor-

tionate share of price-controlled oil in their refinery runs

each month.

proposed rulemaking was issued by the FEA on November 7, 1974,

39 F.R. 39,740 (Nov. 11, 1974), following which the FEA received

over 175 comments on the proposed rule. On November 29, 1974,

the FEA issued the Entitlements regulation in its final form. 39

FR. 42,246 (Dee. 4, 1974).

* This court has previously stated with regard to a small refiner

that: ‘‘Paseo, a profitable producer-refiner, operating in the pe-

troleum industry, must accept its fair and equitable share of the

burdens as well as the benefits of the programs implementing the

Allocation Act which the national energy crisis necessitated.’’

Pasco, Inc. v. FEA, —— F.2d (TECA Slip Opinion No, 10-7,

Oct. 14, 1975), 3 CCH Energy Management § 26,031 at p. 26,256.

° The small refiner bias provides additional entitlements to small

refiners in an amount based on a designated percentage of each

small refiner’s average daily volume of crude oil runs to stills. 39

F.R. 42,246 (Dee. 4, 1974).

7a

Entitlement purchase obligations are imposed en a re-

finery when, on the basis of information supplied to the

FEA, it has been determined that the refiner was running

more old oil as a percentage of its total crude oil refinery

runs than the national average and consequently does not

have sufficient entitlements for all of the old oil it has

refined during that month. Those refiners with less old

oil in their refinery runs than the national average would

receive more entitlements than necessary for compliance,

which they may sell to those refiners which have purchase

obligations under the regulations. Thus,

[b]y requiring refiners and importers who sell entitle-

ments to reduce their crude oil or product costs by

the amount of the entitlement sales proceeds, and al-

lowing a purchaser of entitlements to include the cost

of entitlements in its crude oil costs, the FEA basi-

eally equalized the average weighted erude oil costs

of all refiners, thereby eliminating the inequities

caused by the ‘two-tier’ pricing me

Pasco, Ine. v. FEA, F.2d —— (TECA Slip Opinion

No. 10-7, Oct. 14, 1975), 3 CCH Energy Management

{ 26,031, at p. 26,252, rev’g —— F.Supp. -—— (D.Wy.Dkt.

No. €75-91, Aug. 27, 1975), 3 CCH Energy Management

{] 26,025.

Cities Service contends on this appeal that the Fntitle-

ments Program is not authorized by the Allocation Act

and is not within the FEA’s authority to allocate and spee-

ify prices for crude oil, residual fy! oil and refined pe-

troleum products. This contention is based upon Cities

Service’s misinterpretation of Section 4(a) of the Allo-

cation Act and a disregard of the objectives, set forth by

Congress in Section 4(b), which the regulations promul-

gated under Section 4(a) are to achieve ‘‘to the maximum

extent practicable.’’ Cities Service contends that the ob-

jectives of Section 4(b) set forth goals to be accomplished

by regulations promulgated under the Allocation Act, but

Sa

that those goals do not delegate any power or authority

to the FEA independent of that authority contained in

Section 4(a). It asserts that statutory goals such as ‘‘pro-

tection of public health, safety and welfare ... and the

national defense’’ are too broad to constitute a grant of

any authority independent of Section 4(a).

A proper interpretation of the Allecation Act and its

provisions requires recognition of the fact that the author-

ity under Section 4(a) must be read together with the ob-

jectives which the exercise of that authority is to obtain.

As stated by the Supreme Court in Richards vy. United

States, 369 U.S. 1, 11, 82 S.Ct. 585, 591 (1962) : “We believe

it fundamental that a section of a statute should not be

read in isolation from the Context of the whole Act... .”’

In Mastro Plastics Corporation v. National Labor Rela-

tions Board, 350 U.S. 270, 76 S.Ct. 349, 100 L.Ed. 309

(1956), the Supreme Court, in interpreting Section 8(d) of

the National Labor Relations Act, as amended, rejected ‘‘a

narrowly literal construction’’ of the statute and stated:

If the above words are read in complete isolation

from their context in the Act, such an interpretation is

possible. However, ‘‘In expounding a statute we must

not be guided by a single sentence or member of a

sentence but look to the provisions of the whole law

and to its object and policy.’’ United States v. Bois-

dore’s Heirs (U.S.), 8 How 113, 122, 12 L.Ed. 1009.

550 U.S. at 285, 76 S.Ct. at 359, 100 L.Ed. at 321. N.L.R.B.

v. Lion Oil Co., 352 U.S. 282, 288, 77 S.Ct. 330, 1 L.Ed.2d

351, 337 (1957); Allied Chem. & Alkali Wkrs. v. Pittsburgh

Plate Glass Co., 404 U.S. 157, 185, 92 S. Ct. 383, 400, 30

L..Md2d 341 (1971); Golden State Bottling Co., Inc. v.

N.L.R.B., 414 U.S. 168, 177, 94 S.Ct. 414, 421, 38 L.Ed.2d

388 (1973).

In a recent decision of the Supreme Court, it has reaf-

firmed these principles of statutory construction in holding

9a

that the language and meaning of Section 7602 of the In-

ternal Revenue Code of 1954 [| which authorizes the Internal

Revenue Service (IRS) to issue summons to further its tax

investigations] had to be interpreted in a manner consis-

tent with the authority to conduct broad investigatory in-

quiries conferred on the IRS under Section 7601, in order

to avoid frustrating the purpose of those inquiries. United

States v. Bisceglia, 420 U.S. 141, 150 (1975).

In the Joint Explanatory Statement of the Committee of

Conference on the Allocation Act, Conference Report 93-

628, 2 U.S. Code Cong. & Ad. News, 93 Cong., Ist Sess. 2688,

2689, the Committee stated: ‘*The President is intended to

have full flexibility in devising the most effective and effi-

cient means of meeting the priority needs of the American

people identified in Section 4(b).’’ Thus, the allocation and

pricing authority of Section 4(a) are without vitality un-

less and until the FEA exercises such authority in a man-

ner which, to the extent practicable, gives effect to the ob-

jectives of Section 4(b).

Neither was the allocation authority considered by Con-

gress as being separate and apart from the pricing author-

itv conferred on the FEA. The Conference Report states:

“The conference committee has decided to couple price

controls with the mandatory allocation authority so as to

focus in a single act decision-making authority and respon-

sibility for dealing with the fuels shortage situation ....

Congress intends to force the Administration to rationalize

and harmonize the objective of equitable allocation of fuels

with the objective of the Economie Stabilization Act.’’ Con-

ference Report 93-628, supra, 2 U. S. Code Cong. & Ad.

News, 93d Cong., Ist Sess. 2688, 2702. Therefore, plaintiff’s

insistence upon the bifurcation of the authority conferred

on the FEA under Section 4(a) from the objectives of 4(b),

in their endeavor to assert the lack of specifie authority

under the Allocation Act for the Entitlements Program, is

unwarranted and unreasonable. The Entitlements Program

10a

is clearly within the authority conferred on the FEA under

the Allocation Act.*°

Cities Service further contends on this appeal that the

Entitlements Program, 10 CFR § 211.67, as promulgated

by the FIA, violates Section 4(b)(2)(A) of the Allocation

Act by failing to provide Cities Service with an effective

means of passing through its costs resulting from the En-

titlements Program on a dollar-for-dollar basis. The Allo-

eation Act, under Section 4(b)(2)(A) mandates that the

FEA, in promulgating its regulations, provide a dollar-for-

dollar pass-through of net increases in the cost of crude oil.

The FEA has responded to this mandate through 10 CFR

§ 212.83(¢)(2). Under this regulation the cost of entitle-

* While it is not necessary to go further in finding authority for

the Entitlements program, we note that in Pasco, Inc. v. FEA,

supra, 3 CCH Energy Management at p. 26,258, n. 21, this court

stated that: ‘‘[t]he Committee Reports of the Senate and House

are quite enlightening on the FEA’s authority to promulgate the

Entitlements program.’’ During its consideration of the first exten-

sion of the Allocation Act, a Senate Committee stated that the Allo-

cation Act

provides ample authority for the F E.A. to institute a system

of price equalization to provide that a]! s.zments of the indus-

try benefit from lower-priced domestic oil. The Committee was

urged to amend the Act to achieve this objective but has been

assured that F.E.A. intends to institute a price equalization

program under existing authority in the immediate future.

S. Rep. No. 93-1082, Comm. on Interior and Insular Affairs, 93d

Cong., 2d Sess. at 2 (Ang. 9, 1974).

Further, a House Committee Report, issued two months later,

clearly indicates the FEA’s authority

to institute a system of price equalization applicable to crude

oil, residual fuel oil and refined products to eliminate the re-

gional and competitive inequities which result from a depend-

ence upon high-cost imported oils and petroleum products. The

F.E.A.’s stated commitment to Subcommittee Chairman Mace- .

donald during the hearings on this bill to move promptly on

a price equalization program has convinced the Committee

Pr eee

lla

ment purchases and the revenues from entitlement sales

must be added to or deducted from the cost of crude oil

purchased or landed in that month, for the purposes of cal-

culating the increased cost to be applied to product prices

for the following month under the ‘‘ A+’’ factor of Section

212.83(¢)(2), which is the general product pricing formula.

Cities Service argues that because it has certain banked

costs which it was unable to pass through in earlier months

prior to the promulgation of the Entitlements Program, it

cannot now pass through its entitlements costs due to the

current passing through by Cities Service of these former

banked costs. The FEA pass-through regulation provides

that specific amendments to the Act to compel such action

may prove to be unnecessary.

HI. Rep. No. 93-1443, 93d Cong., 2d Sess. at 3 (Oct. 8, 1974).

Cities Service contends that such legislative reports are ‘‘sub-

sequent legislative history’’ such as are proscribed by the Supreme

Court in Regional Rail Reorganization Act Cases, 419 U.S. 102, 132

(1974). The Court there stated, ‘‘post-passage remarks of legis-

lators, however explicit, cannot serve to change the legislative intent

of Congress expressed before the Act's passa’ e.’’ However, in this

ease the Allocation Act was directly before Congress by reason of

the expiration of the Act and the necessity of extending its provi-

sions as Congress saw fit. Therefore, the above reports are con-

temporaneous with the Act’s extension and, further, the remarks

are not being used to indicate any different legislative intent, but

rather that intent expressly found by a contemporaneous construc-

tion of the Act by the agency charged with administering it.

Courts give great deference to the construction of an Act by the

agency charged with administering it, and hence where Congres-

sional intent congruous therewith is found to have been expressed

not subsequent to the Act’s passage but contemporaneously with

the Act’s renewal, its pertinence to the court’s task in adjudging

the agency’s exercise of authority under the Act is clear. See, gen-

erally, Udall v. Tallman, 380 U.S. 1 (1965) ; Pacific Coast Meat Job.

Ass’n, Inc. v. Cost of Living Coun., 481 F.2d 1388 (T.E.C.A. 1973) ;

University of Southern California v. Cost of Living Coun., 472

F.2d 1065 (T.E.C.A. 1972).

12a

for the pass-through of costs other than those derived from

the Entitlements Program." However, Cities Service has,

during the first four months of 1975, passed through under

this regulation costs totaling more than their $23.9 million

of entitlement purchases incurred over the same period of

time.’* Whether or not the increased costs which Cities

Service passed through were banked costs or entitlement

costs, the FEA pass-through regulation is clearly effective

for the purpose for which it was promulgated.'® Whether

or not Cities Service passes through its entitlement costs

in the month following their purchase, or in a much later

month, depends on business judgments which Cities Serv-

ice must make. The Allocation Act does not guarantee that

all increased costs will be absorbed by the market place

without any change in the market shares of the respective

companies when they pass through such costs under section

4(b)(2)(A); rather, the Act merely mandates that an op-

portunity for the pass-through of such costs be provided.

This the FEA has done, and this court holds that the En-

titlements Program does not violate section 4(b)(2)(A) of

the Allocation Act.

** Under 10 CFR § 212.83, a refiner’s increased product and non-

product costs may be included to the extent provided in § 212.83,

in the computation under § 212.82 of base prices and allow. ole

prices in excess of the base prices for covered products,

** See Finding of Fact Number 25, Cities Service vy. F.E.A., —~

F.Supp. (D.D.C, CA No, 75-653, July 10, 1975), 3 CCH

Energy Management § 26,024 at p. 26,221, —

’* The district court did not, as appellant erroneously contends,

premise its finding that Cities Service had failed to show that it

could not recover its entitlement purchase costs from the market

place on the conelusion that every dollar Cities Service recovered

during the first four months of 1975 constituted a recovery of en-

titlement purchase costs. The district court found that during the

first four months of 1975 Cities Service was passing its increased

costs through under 10 CFR § 212.83 and thus a mechanism was

clearly available by which Cities Service could have passed through

its entitlement purchase costs if it had chosen to do so.

a tie sh

13a

Cities Service further contends that the Entitlements

Program is arbitrary and capricious and constitutes an

abuse of administrative discretion on the part of the FEA,

for the reasons that: the entitlements regulation faiis to

provide for a separation of those companies within the pe-

troleum industry which are integrated companies from

those which are not: the Entitlements Program impacted

on the market in such a way as to require certain further

market distortions by the FEA through its exception proc-

ess; and the small refiner bias included within the Entitle-

ments regulation, 10 CFR § 211.67(e), is arbitrary and

capricious. As stated in Pasco, Inc. y. F.E.A., supra, 3 CCH

Energy Management {| 26,031, at p. 26,256.

fiJn reviewing the discharge of an ageney’s function

in interpreting the Act, promulgating regulations

thereunder and applying and enforcing such regula-

tions, this court has recognized that where administra-

tive control has been Congressionally authorized, the

‘‘iudicial function is exhausted when there is found to

be a rational basis for the conclusions approved by the

administrative body.’’ Pacific Coast Meat Jobbers As-

sociation, luc. vy. Cost of Living Council, 481 F.2d 1388,

1391 (TECA 1973), which was quoting from Missis-

sippi Valley Barge Co. v. United States, 292, U.S. 282,

286-287, 54 S.Ct. 692, 694, 78 L.Ed. 1260 (1934).

This court, in Pasco, found that the plaintiffs in that case

had failed to establish that the Entitlements Program was

arbitrary, capricious, or beyond the agency’s authority due

to its failure to make a differentiation within the regulation

between refiners producing their own crude oil and those

refiners purchasing their refining needs. In so holding, we

stated:

The regulation, [10 C.F.R. 211.67] by granting en-

titlements to those refiners with old oil ratios below

the national ratio due to their own high production of

l4a

new, released and stripper well oil, merely provides

for the continuation of the monetary incentive which

was a fundamental part of the ‘‘two-tier’’ pricing

system. The correction of economic distortion and un-

fair competitive conditions occasioned by the ‘‘two-

tier’’ system was considered essential by Congress and

the FEA. ... This court finds ample support for the

entitlements regulation as promulgated by the FEA

and, considering the urgent need for action, the im-

plementing agency’s program for achieving the varied

objectives of the Allocation Act was certainly rational

and neither arbitrary, capricious, nor beyond the au-

thority of the agency.

Pasco, Inc. v. F.E.A., supra, 3 CCH Energy Management

{| 26,031, at p. 26,258.

We therefore hold that the Entitlements regulation is a

rational response to the changing conditions under which

the objectives of section 4(b) must be read, and that the

regulation is not arbitrary, capricious or an abuse of ad-

ministrative discretion.

In accord with the decisions of three district courts

which had previously faced the question of the constitu-

tionality of the Entitlements Program, Exxon Oil Com-

pany Vv. F.E.A., supra; Marathon Oil Co. v. F.E.A., supra;

and Gulf Oil Corporation v. F.F.A., supra, the district

court in this case found that the contentions of Cities Serv-

ice as to the unconstitutionality of the program did not

present susbtantial constitutional questions requiring certi-

fication to this court. Cities Service contends on this appeal

that the entitlement purchase obligations imposed on it

under 10 CFR § 211.67 are ‘‘a prima facie case of taking

private property and direct bestowal upon another’’; that

Cities Service is being deprived of its secure access to do-

mestic oil; that the Entitlements regulation constitutes a

taking without just compensation; and that it is an uncon-

stitutional tax.

Be 8 ee et nee ame. 8 Bed

ae Re UR Rn ees

ee ee en ee

15a

Claims for compensation from the government based

upon the Fifth Amendment to the Constitution require a

direct appropriation by the government of the claimant’s

property and do not encompass ‘‘consequential injuries re-

sulting from the exercise of lawful power.’’ Knox v. Lee,

79 U.S. 457, 551 (1870). In reviewing an order of the War

Production Board which required the shut-down of non-

essential gold mines due to the short supply of equipment

and resources, the Supreme Court, in United States v.

Central Eureka Mining Co., 357 U.S. 155, 168 (1958), ree-

ognized that action under a regulation may so diminish

the value of property as to constitute a taking, but stated:

‘*(T]he mere fact that the regulation deprives the property

owner of the most profitable use of his property is not

necessarily enough to establish the owner’s right to com-

pensation.’’ **

Cities Service and the amici curiae ardently contended

that Thompson v. Cons "idated Gas Utilities Corp., 300

U.S. 55 (1937), ‘‘closely ; arallels’’ or ‘‘controls’’ this ap-

peal and mandates a finding that the Entitlements program

is unconstitutional. For the reasons discussed below we re-

ject this contention.

In Thompson, the Supreme Court held invalid a gas pro-

ration order issued by the Texas Railroad Commission

which limited the production of sweet gas from the plain-

tiffs’ wells to an amount below their production levels,

transportation and marketing capacities, and contractual

market requirements. This order was issued December 10,

1935, pursuant to House Bill No. 266 (Acts of Texas 1935,

ce. 120, Vernon’s Ann. Civ Stats. Texas, art. 6008), which

‘ This court had previously held, with regard to the Economic

Stabilization Program, that the imposition of price ceilings on beef

or the freezing of beef prices was not a ‘‘taking of their property

without just compensation in violation of the due process clause of

the fifth Amendment.’’ Western States Meat Packers Ass’n Ine. v.

Dunlop, 482 F.2d 1401, 1403 (TECA 1974).

16a

was enacted as ‘‘a comprehensive conservation statute.’’ *

Consolidated Gas Utilities Corp. v. Thompson, 14 F.Supp.

318, n. 3, 319-321 (W.D.Tex. 1936). The Supreme Court

stated that the statute,

construed as authorizing regulations to prevent waste,

and to create and protect correlative rights of owners

in a common reservoir of gas ..., is a valid exercise of

the State’s undoubted power to legislate to those ends.

... But, obviously, the proration orders would not be

valid if shown to bear no reasonable relation either to

the prevention of waste or the protection of correlative

rights....

300 U.S. 55, 69. Finding that plaintiffs had amply demon-

strated that their operations were free of waste and that

continued operations would not be prejudicial to any public

1° The Commission order in question indicated that because of the

lack of any market demand for natural gas, ‘‘intolerable waste ‘

was occurring and ‘‘by the fall of 1934, in excess of one billion

cubic feet of gas was being blown into the air daily.’’ Consolidated

Gas Utilities Corp. v. Thompson, 14 F.Supp. 318, n. 3, p. 319-321

(W.D. Tex. 1936). The Supreme Court, quoting from special find-

ings of the lower court, found adequate support for plaintiff's

assertions that House Bill 266 was a conservation statute intended

to prevent waste and that the plaintiffs were not committing any

wasteful acts. Phe Court stated:

‘‘Before House Bill 266 went into effect, grossly wasteful

practices in the production of natural gas in the Panhandle

field were occurring,’’ but ‘‘most of this waste was due to the

extravagant production of natural gas from oil wells and to

the production of gas from gas wells and processing such gas

for the extraction of a very smal! quantity of natural gasoline

therefrom and popping or wasting to the air the residue gas,

which constituted 97% of the fuel value of the gas in its orig-

inal state. .. . No evidence was offered—indeed, it was not even

seriously claimed—that anything complainant had done or

contemplated doing has, in the slightest degree, contributed or

will contribute to that waste.’

Thompson v. Consolidated Gas Utilities Corp., 300 U.S. 55, 70

(1937).

l7a

interest or private property rights, the Court concluded

that the ‘‘sole purpose’? of the orders limiting the plain-

tiff’s production was ‘‘to compel complainants to afford

markets to those having none,’’ 300 U.S. 55, 77-8, and as

such, the orders were invalid.

However, in Railroad Com. v. Rowan & Nichols Oil Co.,

310 U.S. 575 (1940), the Supreme Court upheld an oil pro-

ration order of the Texas Railroad Commission for the

East Texas oil field against a Fourteenth Amendment at-

tack that by virtue of allowances made to ** marginal wells”

(which would have had to be prematurely abandoned had

the proration formula restricted their low productive ea-

pacity), ‘*[t}he Commission’s proration formula as applied

permits other leaseholders, more leniently treated, to cap-

ture oil at a more rapid rate than is possible for the re-

spondent, thereby draining away oil which underlies re-

spondent’s leased lands.’? 310 U.S. 577, 578. The individual

interests of the small well operators and their effect on

the state’s economy, as well as the general problem of pro-

rating the oil and gas production in the state, were consid-

ered by the Court to be within the province of the Com-

mission.”” The Court particularly noted, at 310 U.S. 577,

O83 n. 1, that:

*® Referring to the complex “‘ brood of litigation’’ challenging the

administrative determinations which developed out of the states’

attempts to adjust leasehold owners’ interests with the ‘‘rule of

eapture,’’ the Court, in Railroad Com. v. Rowan & Nichols Oil Co.,

310 U.S. 573, 580-584 (1940), stated:

[S]uch cases are only episodes in the evolution of adjustment

among private interests and in the reconciliation of all these

private interests with the underlying public interest in such

a vital source of energy for our day as oil. Certainly so far

as the federal courts are concerned the evolution of these

formulas belongs to the Commission and not to the judiciary.

A controversy like this always calls for fresh reminder that

courts must not substitute their notions of expediency and

fairness for these which have guided the agencies to whom the

18a

We are here not concerned with a statute, or orders

under it, not thought to enforce state policy **for the

prevention of waste, and the protection of correlative

rights of owners in the common pool,’’ but directed

solely **to compel those who may legally produce, be-

‘ause they have market outlets for permitted uses,

to purchase gas from potential producers whom the

statute prohibits from producing because they lack

such a market for their possible product.’’ Thompson

vy. Consolidated Gas Utilities Corp., 500 U.S. 55, 69, 77,

81 L ed 510, 517, 522, 57 S Ct 364, [Emphasis added]

The differences between the circumstances and _ princi-

ples considered and discussed in Thompson and the rele-

vant considerations before us now are abundantly clear.

Girossly excessive production in the Hast Texas oil fields

twice drove the price of East Texas oil down to ten cents

or less per barrel during the early 1930's." In Cities Serv-

ice Gas Co. v. Peerless Oil & Gas Co., 540 US. 179 (1950),

formulation and execution of policy have been entrusted... .

It is not for the Federal courts to supplant the Commission's

judgment even in the face of convincing proof that a different

result would have been better.

? Hardwicke, Legal History of Proration of Oil Production in

Teras, 56 Tex. Bar Ass’n Proceedings 99, 111, 120 (Tex. i.R. 1937).

By 1932, oil and gas were ‘‘universally recognized by courts and

Legislatures as natural resources; and legislation looking to their

conservation and the prevention of .. . [their waste had] been

enacted in practically every state where these resources .. . [were]

discovered.’’ Danciger Oil & Refining Co. v. Railroad Commission,

49 S.W.2d 837, 840 (Tex. C.A.—Austin 1932). It was legislation

dealing with these interests of conservation which spawned con-

tumacious production and voluminous litigation for many years.

For a background of the Texas experience and the litigation of the

oil and gas legislation enacted there, referred to by the Supreme

Court in Railroad Com. v. Rowan & Nichols Oil Co., 310 U.S. 573,

580 (1939), as an example of the litigation following administra-

tive efforts to solve the adjustment of state and private interests

in natural resources, see the Special Order in question and quoted

in Consolidated Gas Utilities Corp. v. Thompson, 14 F.Supp. 318,

n. 3, 319-321 (W.D. Tex. 1936).

19a

the Supreme Court upheld orders of the Oklahoma Cor-

poration Commission which required Cities Service to

make a connection with, and take natural gas ratably from,

a Peerless Oil & Gas Company well at a price no less than

seven cents per thousand cubic feet. Finding the minimum

price-fixing order lawfui as it was substantially related to

the alleviation of ‘‘existing low field prices [which] were

‘resulting in economic waste and conducive to physical

waste,’ ’’ the Court rejected Cities Services’ Due Process

and Equal Protection attacks on the Commission orders as

being *‘ virtually without substance.’’ 340 U.S. 179, 185-6.

The factual background which preceded enactment of the

Allocation Act evidences the increasingly demanding and

complex problems facing the country and its governing

bedies. The United States unquestionably has become peri-

lously dependent on foreign produced oil, the supply of

which is very unstable. By 1975, before the Arab oil em-

bargo, the percentage of crude oil imported for consump-

tion in the United States had reached 35 per cent."* The

Emergency Petroleum Allocation Act of 1973, as amended,

was enacted to meet this and other related energy prob-

lems.

While the nation’s supply of domestie and imported

crude oil is presently adequate, there is a severe shortage

of domesticaily produced crude oil. The availability of im-

ported crude oil is uncertain, and it can be purchased only

at drastically higher prices. Greater aecess to lower cost

domestic crude oil by the larger refiners as a class, leaving

the small and independent refiners as a class to fend for

themselves in purchasing the higher priced imported or

domestically produced ‘‘new’’ oil, brought about the ne-

cessity for the Entitlements program.

1® Project Independence, Executive Summary, 3 CCH Energy

Management {] 25,005, at p. 25,012 (Fall 1974).

20a

We repeat that the Entitlements program, like others

under the Allocation Act, is a temporary program. Condor

Operating Co. v. Sawhill, 514 F.2d 351 (TECA 1975), cert.

denied, 421 U.S. 976 (1975)."* It composes one segment of

an over-all emergency program designed to alleviate the

inflationary-recessionary effects on the United States of

the Arab oil embargo and the four-fold increase in world

oil prices, while the nation prepares itself for energy self-

sufficiency and recovery of its econoinie stability and free-

dom. The smaller refiners and independent marketers were

hit much harder by these world events than were the larger

and often integrated oil companies. The fact that Cities

Service cannot now capitalize upon these events and refine

its own much lower priced oil at will and thereby gain a

larger market share or even higher profit margins does not

render the program unconstitutional. As stated in Condor

Operating Co. v. Sawhill, supra, at 361:

The regulation of future action based on rights previ-

ously acquired by the person regulated is not per se

prohibited by the constitution. Fleming v. Rhodes, 331

U.S. 100 (1947). Reasonable and practical regulations

which are generally fair and equitable, although not

necessarily so as applied to a particular person, are

not unconstitutional when general regulations are nec-

essary to accomplish an appropriate congressional

purpose. Bowles vy. Willingham, 321 U.S, 505 (1944),

Wilson v. Brown, 137 F.2d 348 (Em.Ct. App, 1945).

'° The Allocation Act was originally scheduled to expire on Feb-

ruary 28, 1975, but on December 5, 1974 it was extended to August

31. 1975. Pub.L. 93-511, 88 Stat. 1608, 1 U.S. Code Cong. & Adm.

News, 93rd Cong., 2nd Sess. 1852 (1974). The Allocation Act was

extended by Congress again on September 29, 1975 until the 15th

of November, Pub. L. 94-99, 89 Stat. 481, 94th Cong., Ist Sess., 121

Cong. Rec. 11 $193 (Sept. 26, 1975). On November 14, 1975, Presi-

dent Ford signed Public Law 94-133, which extends the Allocation

Act until December 15, 1975. 94th Cong., Ist Sess., 121 Cong. Ree.

S. 20046 (Nov. 14, 1975).

2la

In determining the validity of the stabilization authority

granted the President under the [economic Stabilization

Act, the three-judge court in Amalgamated Meat Cuiters

& Butcher Work. v. Connally, 337 ¥. Supp. 737, 754 (D.D.C.

1971), noted the relevance of the time frame imposed upon

that Act. See Fry v. United States, —— U.S. ,95 S.Ct.

1792, 1796 (1975). This court has recognized time re-

straints on the Allocation Act. In Condor Operating Co. v.

Sawhill, supra, at p. 562, this court said:

Essential powers of government to meet this or

other crises in perilous tiines would be frustrated by

the adoption of an excessively rigid and unprecedented

construction inhospitable to broad realities. ** A limit

in time, to tide over a passing trouble, well may justify

a law that could not be upheld as a permanent

change.’’ Block vy. Hirsch, 256 U.S. 135, 157 (1921).

... Whether the challenged regulation and enforce-

ment order would pass muster as a long continuing

response to chronic energy problems need not be de-

cided.*”

7° A comparable price equalization pooling program, instituted

by the Secretary of Agriculture under the Agricultural Marketing

Agreement Act of 1937, was upheld by the Supreme Court against

contentions that it was contrary to the Fifth and Fourteenth

Amendments to the Constitution and an improper delegation of

legislative power, in United States v. Rock Royal Co-Operative,

307 U.S. 533 (1939). The program was implemented to insure an

adequate supply of milk while providing a fair division of this

most profitable market among producers, All milk producers re-

ceived a uniform price under the regulation for milk sold to milk

handlers even though the value of the milk to the milk handler

varied considerably, depending on the particular use made of the

milk. However, those handlers putting their milk to a more profit-

able use were required, under a formula described by appellants

herein as being ‘‘nearly as complex as the CEP [Entitlements

Program],’’ to pay money through a pooling arrangement to those

handlers using their milk in a less projitable fashion. While the

regulation as originally applied and upheld by the Supreme Court

did not regulate producer-handlers in their capacities as handlers,

22a

Further, it is well established that a regulatory scheme

will not constitute a tax within the meaning of Article I,

Section 8, Clause 1 of the Constitution, unless the real pur-

pose and effect of the statute and regulations promulgated

thereunder is to raise revenues for the general support of

the government. Head Money Cases (Edye v. Robertson),

112 U.S. 580, 595, 5 S.Ct. 247, 28 L.Ed, 798, 805 (1884) ;

Moon v. Freeman, 379 F.2d 382, 391 (9th Cir. 1967) ; United

States v. Strangland, 242 F.2d 8438, 848 (7th Cir. 1957);

Rodgers v. United States, 138 F.2d 992, 995 (6th Cir. 1943).

As the court stated in Rodgers vy. United States, supra, at

p. 994:

The test to be applied is to view the objects and pur-

poses of the statute as a whole and if from such exam-

ination it is concluded that revenue is the primary pur-

pose and regulation merely incidental, the imposition

is a tax and is controlled by the taxing provisions of

the Constitution. Conversely, if regulation is the pri-

mary purpose of the statute, the mere fact that inci-

dentally revenue is also obtained does not make the

imposition a tax, but a sanction imposed for the pur-

pose of making effective the congressional enactment.

Clearly, the Entitlements program does not, even inciden-

tally, raise any revenue for the government or for its sup-

port. The entitlements regulation furthers the objectives

and purposes of the Allocation Act by regulating refiners’

access to crude oil, the price of which has been set below its

market value in furtherance of other objectives of the Al-

location Act. In addition, the Allocation Act and FEA reg-

ulations permit Cities Service to pass through its increased

costs under the program and provide measures for the alle-

i.e., it did not impose any payment obligation on a handler which

was handling or processing its ‘‘own-produced’’ milk, such was

subsequently required under an amendment to the regulation issued

in 1957. The regulation as amended was upheld in /deal Farms, Inc.

v. Benson, 288 F.2d 608 (3 Cir. 1961), cert. denied, 372 U.S. 965

(1963) ; Freeman v. Vance, 319 F.2d 841 (5th Cir. 1962).

ee

23a °

viation of extreme hardship through the exemption proe-

ess, and the regulatory exceptions from its operations.

We hold that the Entitlements Program, promulgated

under the authority of the Alloeation Act, is valid and con-

stitutional; that the contentions of Cities Service are re-

jected; that the judgment of the District Court was correct;

and it is affirmed. SO ORDERED.

(Caption Omitrep 1x Printine)

Upon consideration of Appellants’ Petition for Rehear-

ing, Ir Is Orverep that said Petition is denied.

For tHe Court

/s/ Rutu H. Jacosson

Ruth H. Jacobson

Clerk

January 28, 1976

24a

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

Civil Action No. 75-653

Crtres Service Company, et al., Plaintiffs,

v.

FeperaL Enercy ApMInistration, et al., Defendants.

(Fmep Juiy 10, 1975)

Findings of Fact and Conclusions of Law

This matter came before the court on plaintiffs’ motion

for a preliminary injunction and defendants’ opposition

thereto. Plaintiffs interposed no objection to this court

consolidating this hearing with a plenary hearing on the

merits. (Tr. 12). Defendants objected only in the event

that the effectiveness of the passthrough provision was

important to plaintiffs’ constitutional argument. (Tr. 53).

Under the circumstances the court has concluded that this

is a proper case for consolidation of the motions hearing

with the hearing on the merits. See Fed. R. Civ. P. 65(a)

(2). In particular, this will allow expeditious appellate

review of the important entitlements program. Accord-

ingly, the following findings of fact and conclusions of

law pertain both to plaintiffs’ motion for preliminary in-

junction and also to a ruling on the merits. For the reasons

which follow plaintiffs’ motion will be denied and judg-

ment shall be entered for defendants.

Finpinos or Fact

1. Plaintiff Cities Service Company is a corporation

organized and existing under the laws of the state of Dela-

ware with its principal office and principal place of busi-

ness at the Cities Service Building in Tulsa, Oklahoma.

Plaintiff Cities Service Oil Company is also a corpora-

tion organized and existing under the laws of the state

2a

of Delaware with its principal office and principal place of

business at the Cities Service Building in Tulsa, Oklahoma.

Plaintiff Cities Service Oil Company is a wholly-owned

subsidiary of Ciites Service Company. (The plaintiffs here-

inafter will be referred to as ‘‘Cities Service’’).

2. Cities Service is engaged in the business of produc-

ing, transporting, refining and selling crude oil and refined

petroleum products in the United States. Cities Service

has a total refinery capacity of 268,000 barrels of erude

oil per day.

3. Defendant Federal Energy Administration (FEA)

is an ageney and instrumentality of the United States

under the Federal Energy Administration Act of 1974, 15

U.S.C. § 761 ef seq; and was established by Executive Or-

der No. 11,790 (June 27, 1974). The FEA is charged with

administering the Emergency Petroleum Allocation Act of

1973, (*‘Alloeation Act’’) (Pub. L. No. 93-159, November

27, 1973; as amended, Pub. L. No. 93-511, December 5,

1974).

4. Defendant Frank G. Zarb is the Administrator of

FEA.

5. The Allocation Act requires FEA, as the delegate

of the President, to promulgate a regulation for the man-

datory allocation and pricing of crude oil, residual fuel

oil and refined petroleum products produced in or imported

into the United States (§4(a)). Those regulations are to

implement ‘‘to the maximum extent practieable’’, the ob-

jectives set forth in Section 4(b)(1) of the Allocation Act.

6. The Section 4(b)(1) objectives are: the protection of

public health, safety and welfare; maintenance of all pub-

lic services and agricultural operations; preservation of

an economically sound and competitive petroleum indus-

try, including the priority need to preserve the competi-

tive viability of independent refiners, small refiners, non-

branded independent marketers, and branded independent

26a

marketers; the allocation of crude oil for refiners in the

United States to enable such refiners to operate at full

capacity; equitable distribution of crude oil, residual fuel

oil, and refined petroleum products at equitable prices

among all regions and areas of the United States, sectors

of the petroleum industry and among all users; economic

efficiency; and minimization of economic distortion, inflex-

ibility, and unnecessary interference with market mechan-

isms.

7. To fulfill these objectives, the President first estab-

lished the Federal Energy Office (‘‘FEO’’) which adopted

fuel allocation rules in December, 1973 and revised Petro-

leum Allocation and Price Regulations on January 14,

1974. (39 F.R. § 1924 et seq.)

8. The regulations adopted by FEO, the predecessor of

FEA, incorporate a two-tier pricing system for erude oil,

which was established by the Cost of Living Council

(“*CLC’’) in August, 1973, during Phase IV of the Eco-

nomic Stabilization Program (6 C.F.R. § 150, Subpart L).

9. The two-tier pricing system on crude oil is designed

to effectuate two purposes: (1) to curb the inflationary

impact on the United States economy of rising erude oil

prices caused by the concerted action of certain Arab oil

producing nations; and (2) to encourage the development

of new sources of domestic oil in order to reduce depend-

ence on foreign supplies. The two-tier pricing system seeks

to effectuate those dual purposes, basically, by placing a

ceiling price on what is termed ‘told’? domestic oil, thereby

combating inflationary prices, while permitting newly dis-

covered domestic oil to sell at the market price, thereby

encouraging the development of domestic supplies.

10. More specifically, the two-tier pricing system im-

poses a ceiling price of approximately $5.25 per barrel on

all ‘‘old’’ domestic crude oil, which is that amount of oil

produced from a given property at or below the level of

production from the same property in 1972. Crude oil pro-

27a

duced in excess of 1972 production levels from the same

property (‘‘new”’ oil) is sold at market prices, and each

barrel of ‘‘new’’ oil produced releases from the ceiling

_ price a barrel of old oil (‘‘released’’ oil). The first sale

of imported crude oil into the United States remains free

from price controls under FEA regulations, and the first

sale of crude oil produced from ‘‘stripper’’ wells (wells

producing less than 10 barrels per day) also is exempted

from price controls under Section 4(e)(2)(A) of the Allo-

cation Act.

11. Domestic crude oil which is not subject to a ceiling

price, i.e., new, released and stripper well oil, presently

sells at approximately $11.28 per barrel, while foreign

crude oil now sells at approximately $12.63 per barrel. Ap-

proximately 60 percent of all crude oil runs to stills in the

United States consists of oil not subject to an FEA ceil-

ing price, while the balance, FEA price-controlied old oil,

represents approximately 40 percent of all crude oil runs

to stills.

12. The great disparity between the price of ‘‘old’’ oil

and all other forms of oil in the United States, which is a

direct result of FEA’s two-tier pricing system was not,

however, having an equal impact on all vefiners, marketers

and consumers. Instead, there existed uneven access to

price controlled ‘‘old’’ oil, with most major integrated oil

companies having far greater access to old oil than did

the small and independent refiners, as a class. Thus, those

refiners, including some majors, which were forced to rely

more heavily on uncontrolled domestic or foreign crude

oil incurred higher composite crude costs in the refining

of products than those which had greater access to price-

controlled old oil. The uneven distribution of old oil among

refiners which created significant input crude cost differ-

entials was translated into significant price differentials

among refiners in their sales of refined petroleum products

under applicable FEA price regulations. The end result

28a

was that marketers and consumers were paying signifi-

cantly different prices for the same refined product.

13. With the termination of the Arab oil embargo and

a reemergence of adequate supplies, many of those re-

finers with higher input costs due to their low proporiion

of old oil, and those marketers to whom they sell, have

had to endure a severe cost-price squeeze in order to re-

main competitive. A significant number of small and in-

dependent refiners and independent marketers—unable to

absorb the full amount of such costs—were forced to charge

higher prices for their products than their competitors.

14. Since the two-tier prieing system made price-con-

trolled old oil more valuable to refiners than other types of

uncontrolled domestic and foreign erude oil, FEA con-

cluded that it was necessary to allocate the benefits of low

priced old oil equitably throughout all segments of the

petroleum industry, all regions of the country, and all

users of petroleum products. Accordingly, on August 30,

1974, FEA published a notice of proposed rulemaking

which culminated in the Cost Equalization Program (also

referred to as the ‘‘CEP”’’, ‘‘Entitlements Program’’ or

‘Qld Oil Allocation Program’’) at issue in this proceed-

ing. 10 C.F.R. § 211.67.

15. Under the cost equalization program, FEA issues

monthly to each domestie refiner that number of ‘‘entitle-

ments’’ which is equal to the refiner’s proportionate share

of the monthly national old oil supply, with an upward ad-

justment in the number of entitlements issued to those

refiners qualifying for a ‘‘small refiner bias’’. An ‘‘entitle-

ment’’ is defined as the right of a refiner owning the en-

titlement to include one barrel of old oil in its adjusted

crude oil receipts in a particular month.

16. Entitlements issued in January 1975, the first month

of the program, apply to November 1974 crude oil runs to

stills. Similarly, entitlements issued in February 1975 ap-

~~

29a

ply to December 1974 data, and the same sequence con-

tinues for each subsequent month of the program.

17. Refiners with more than their proportionate share

of the national old oil supply must purchase entitlements

for their excess supply from refiners with less than their

proportionate share. Since FEA establishes the price of

an entitlement each month with reference to the difference

between the controlled and uncontrolled price of crude oil

($5.00 per entitlement for January and February; $6.00

per entitlement for March; $6.75 for April; and $7.31 for

May), the net effect of the program is to give all refiners

an equitable share of the benefits of price-controlled old oil.

18. To determine the precise number of entitlements

issuable to a refiner (a refiner’s proportionate share of

the total old oil supply in a given month), FEA computes

an ‘‘adjusted national old oil supply ratio’’ for each month.

This ratio is the volume of old oil included in the aggre-

gate crude oil receipts for all domestic refiners, expressed

as a percentage of the total volume of crude oil runs to

stills for all domestic refiners for that month. For exam-

ple, if the total number of barrels of old oil was 200 million

and the total number of crude runs is 500 million bar-

rels, the old oil supply ratio is 2/5 or 40 percent. Thus, if

all old oil were equitably allocated among all domestic re-

finers, each refiner would have crude oil runs which con-

sist of 40 percent old oil. Since, however, FEA also issues

entitlements to small refiners in a number adjusted up-

ward in accordance with a ‘‘small refiner bias’’, the total

volume of old oil used to caleulate the national old oil

supply ratio must be reduced by the number of additional

entitlements so issued. Having established an adjusted

national old oil supply ratio in the above manner, FEA

applies this ratio to each domestic refiner’s volume of

crude oil runs and then issues to each refiner a sufficient

number of entitlements to cover that percentage of its

crude runs to stills.

30a

19. In addition to the number of entitlements it would

otherwise receive as a refiner, a small refiner receives a

further number of entitlements under a small refiner bias.

Small refiners with a daily average volume of crude oil

runs to stills of less than 175,000 barrels for a particular

month are issued additional entitlements for each day of

that month in a number equal to a designated percentage

of its average daily volume, with the percentage basis be-

coming greater as crude oil runs become simaller. 10 C.F.R.

§ 211.67(2).

20. All refiners that sell entitlements are required to

count their proceeds on entitlements sales as a reduction in

crude oil or product costs.

21. All refiners that buy entitlements are permitted to

count the cost thereof as an addition to crude oil costs.

FEA rules further permit these increased crude oil costs

to be passed through to the ultimate consumer on a dollar

for dollar basis (the decision on whether to pass the costs

along is left to the individual refiner).

22. Each month FEA publishes a list setting forth the

name of each refiner to which entitlements have been

issued; the number of entitlements issued to each such

refiner ; the number of entitlements to be purchased or sold

by each such refiner; and the number of barrels of old oil

ineluded in each refiner’s crude oil receipts. Entitlement

purchases must be concluded by the last day of the month

in which the entitlement list is published. Plaintiffs have

been listed as a purchaser in each entitlement notice pub-

lished since the advent of the program and up to mid-June,

1975 have purchased entitlements at a total amount of

$23,901,194. Pursuant to the Entitlements Notice published

on June 23, 1975 (40 F.R. 26498), plaintiffs are required to

have purchased an additional 1,116,232 entitlements at a

cost of $7.29 per entitlement by June 30, 1975.

23. On February 7, 1975, Cities Service filed with the

FEA Office of Exceptions and Appeals its application for

ae ST

dla

exception to the provisions of 10 C.F.R. § 211.67, relating

to allocation of old oil, on grounds that the program is

unlawful. By decision and order dated February 20, 1975,

the Office of Exceptions and Appeals denied Cities Service’s

application for exception. Cities Service Company, 2 FEA

{| 83,043 (February 20, 1975).

24. On Mareh 24, 1975, Cities Service filed with the

IEA Office of Exceptions and Appeals its appeal of the

decision and order denying Cities Service’s application for

exception. By decision and order dated April 8, 1975, the

Office of Exceptions and Appeals denied Cities Service’s

appeal. Cities Service Company, 2 FEA {§ 80,568 (April 8,

1975).

25. As of December 31, 1974, Cities Service had sig-

nificant amounts of increased product costs which it had

banked and which it hoped to recover during 1975. The

precise figures are set forth in the Affidavit of Charles

D. Head, Jr. Because that affidavit contains arguably con-

fidential information, the court will not quote precise fig-

ures. During the first four months of 1975 Cities Service

has incurred further increased costs; as of April 30, 1975,

its increased costs due to entitlement purchases amounted

to $23,901,194. In the first four months of 1975 Cities Serv-

ice has been able to recover significant amounts in increased

product costs. The precise amount is set forth in the Head

Affidavit and is in excess of the amount paid for entitle-

ments over the same period. From the foregoing the court

finds that Cities Service has not shown that it cannot re-

coup its entitlement costs from the marketplace.

26. A refiner with more than its proportionate share of

the national old oil supply may sell its old oil and thereby

avoid the need to purchase entitlements.

Concuiusions or Law

1. This court has jurisdiction of this action under Sec-

tion 5(*)(1) of the Emergency Petroleum Allocation Act,

32a

which incorporates §4 205-211 of the Economic Stabiliza-

tion Act of 1970, (‘‘Stabilization Act’’), as amended, P.L.

92-210, 85 Stat. 743.

2. Under Section 211(d) of the Stabilization Act, Dis-

trict Courts of the United States may enjoin, temporarily

or permanently, the application of a regulation only if the

regulation was in excess of the agency’s authority, was

arbitrary or capricious, or was otherwise unlawful under

5 U.S.C. 706(a).

3. To qualify for the extraordinary relief of a prelim-

inary injunction, plaintiffs must demonstrate: (1) a sub-

stantial likelihood of success on the merits; (2) that with-

out immediate injunctive relief plaintiffs will suffer irrep-

arable harm; and (3) that the public interest will not be

impaired by the granting of injunctive relief. Virginia Pe-

froleum Jobbers Ass’n vy. Federal Power Commission, 259

F.2d 921, 925 (D.C. Cir. 1958); MeGuire Shaft & Tunnel

Corp. v. Local Union Co. 1791, U.M.W., 475 F.2d 1209,

1216 (T.E.C.A.), cert. denied, 412 U.S. 958 (1973). Plain-

tiffs have failed to establish any of those elements.

4. The cost equalization program is a valid exercise of

FEA’s allocation authority under Section 4(a) of the Allo-

cation Act. Through the issuance of entitlements, the pro-

gram distributes old oil and uncontrolled oil among do-

mestie refiners and, therefore, constitutes an ‘‘alloeation’’

regulation within the plain meaning of Section 4(a) of the

Act. As three District Courts already have held, the fact

that the program does not require a physical transfer of

oil is irrelevant since the program achieves the same result

as a physical allotment of oil without the disruptive physi-

eal element. Marathon Oil Co. v. FEA, Civil Action No.

73-36, N.D. Ohio, Western Division, January 31, 1975, dis-

missed for lack of jurisdiction, —— F.2d , T.E.C.A.

No. 6-8, April 21, 1975; Exron Oil Company v. FEA, Civil

Action No. 75-150, D.N.J., January 30, 1975, dismissed for

lack of jurisdiction, —— F.2d , T.E.C.A. No. 3-5, April

—— om . on hs

30a

21, 1975; Gulf Oil Corporation v. FEA, Civil Action No. 75-

157, W.D. Pa., February 4, 1975, dismissed for lack of

jurisdiction, —— F.2d ——, T.E.C.A. No. 3-6, June 20,

1975.

5. The principle of a cost equalization program was ap-

proved by both Houses of Congress at the time they ex-

tended the Allocation Act S. Rep. 93-1082, Comm. on In-

terior and Insular Affairs, 93d Cong., 2d Sess. at 2, August

9, 1975; and H. Rep. No. 93-1443, 93d Cong., 2d Sess. at 3,

October 8, 1974.

6. The scope of judicial review of FEA’s regulations is

a narrow one under Section 706 of the Administrative Pro-

cedure Act, 5 U.S.C. § 706. The issue before the reviewing

court is not whether the agency’s decision was the best

one possible or whether the reviewing court agrees with

the decision. Instead, the agency’s decision must be sus-

tained if on all the facts it had a rational basis. E.g., Pa-

cific Coast Meat Jobbers Ass’n v. Cost of Living Council,

481 F.2d 1239 (T.E.C.A. 1974); Condor Operating Co. v.

Sawhill, F.2d —— (T.E.C.A. February 5, 1975), cert.

denied, US. (1975); Exxon Corp., et al v. FEA,

et al., Civil Action Numbers 74-1617; 74-1658; 74-1705

(D.D.C. June 17, 1975) (Slip op. at 13-14). The Condor

court stated:

Where the obvious intent of Congress is to give the

resident and his delegates broad power to do what

reasonably is necessary to accomplish legitimate pur-

poses rendered necessary by a recognized emergency,

and regulations are fashioned to implement the Con-

gressional mandate, the court should not interfere with

the prerogative of the agency to select the remedy

which for rational reasons is deemed most appropri-

ate. ...

Exercising of the administrative authority and the

accomplishment of purposes enumerated by Congress

under the recognized emergency conditions are exceed-

34a

ingly complicated undertakings. The petroleum indus-

try itself is a complicated one. By reason of its inti-

mate and convoluted relationship with the whole econ-

omy of the country it also tends to take upon itself the

myriad problems besetting marketing and business ac-

tivities generally It would be the height of folfy and

grievously incompatible with the rule of deference...

mvyopically to ‘solve’ these problems solely on the basis

of [plaintiff's] situation or by the court’s off-hand

ideas of regulatory alternatives differing from the ra-

tional approach set by the agency.

[Plaintiff] considers only its own situation, But

agency orders are not te be read in a vacuum but

rather must be interpreted in the entire context in

which they arise.

7. FEA’s responsibility to effectuate ‘‘to the maximum

extent practicable’? the goals set forth in Section 4(b)(1)

of the Allocation Act is a difficult one, and appropriate

deference must be accorded agency expertise in light of the

often-conflicting objectives of Section 4+ (b)(1). Union Oil

Company of California vy. FEA, Civil Action No, CV-74-

1943-MML (C.D. Calif., July 25, 1974); Reeves v. Simon,

F.2d , (T.E.C.A. November 27, 1974); Condor

Operating Co., supra.

8. The cost equalization program’s allocation of old oil,

working in conjunction with FEA’s regulations on the

pass-through of increased costs, is a rational attempt by

FEEA to remove the inequities which have occurred under

the two-tier pricing system. In so doing, the program effec-

tuates the Congressional objectives of minimizing inter-

ferences with market mechanisms and of fostering com-

petition, including the priority need to preserve the com-

petitive viability of the small and independent sector.

%. The fact that some major integrated oil companies,

and a few large independents, are entitlement sellers does

35a

not affect the rationality of the program. Rather the in-

clusion of large refiners as entitlement sellers properly ef-

fectuates the Section 4(b)(1)(2.) Congressional objective

of equitable product prices among all sectors of the indus-

try and among all users of product, while preserving the

competitive viability of the independent sector of the pe-

troleum industry (Section 4(b)(1)(D)). Marathon, supra;

Exxon, supra; Gulf, supra,

10. The small refiner bias in the issuance of entitlements

is a rational attempt to effectuate the Allocation Act's goal

of preserving the competitive viability of the small and

independent sector of the petroleum industry.

Il. The cost equalization program does not violate the

**dollar-for-dollar passthrough’? provision of Section 4(b)

(2)(A) of the Allocation Act. he Act mandates only that

FicA provide refiners with the opportunity to passthrough

increased costs. The cost equalization program (10 C.F.R.

§ 211.67(e)(2) and FEA refiner price regulations (10

C.FLR. § 212.83), which provide for the passthrough of in-

creased costs, meet that requirement. Gulf, supra; Exxon,

etal. v. FEA, et al., supra, Slip op. at 15-17.

12. The FEA’s method of determining the price of en-

titlements is not unlawful. Consumers Union v. Sawhill,

No. DC-26 (T.E.CLA. Juiy 7, 1975) (en bane).

13. Insofar as plaintiffs’ constitutional challenges are

concerned, this court is without power to decide those is-

sues. See § 211(¢)(2) of the Stabilization Act. This court,

however, must certify constitutional questions to the Tem-

porary Emergency Court of Appeals if it finds the issues

to be substantial, Such questions are not substantial if they

are plainly without merit or if previous Supreme Court

decisions appear to foreclose the subject. See Delaware

Valley Apartment House Owner’s Ass’n v. United States,

350 F. Supp. 1144 (B.D. Pa. 1972), aff'd, 482 F.2d 1400

(T.K.C.A. 1973) and California Water Service v. City of

36a

Redding, 304 U.S. 252 (1958); see also, Local Union No.

300, Amalgamated Meat Cutters and Butcher Workmen of

North America, AFL-C1O vy. McCulloch, 428 F.2d 396 (5th

Cir, 1970).

14. As three district courts already have held, plaintiffs’

claim that the cost equalization program violates the Fifth

Amendment does not raise a substantial constitutional

question, Marathon, supra; Faron, supra; Gulf, supra. The

program effeetuates the important public purposes set

forth in Section 4(b)(1) of the Allocation Act through a

fair and equitable regulatory scheme (Condor Operating

Co., supra); does not result in a direct appropriation of

property by the Government (**Legal Tender Cases’’;

Knox v. Lee, 12 Wall. (79 ULS.)) 457 (1870)): and at its

worst, causes a restriction on profits which is not unlawful

since such a restriction results from a valid regulatory

scheme. (Western States Meat Packers Ass'n v. Dunlop,

482 F.2d 1401 (TLELCLA. 1973) and Local Union No. 11 v.

Boldt, 481 V.2d 1392 (T.ELC.A.), cert. dewied, 414 US. 1092

(1975). Moreover, as a valid regulatory scheme, the cost

equalization program does not violate the Fifth Amend-

ment even though it may deny the owner of the most prof-

itable use of its property. United States v. Central Eurcka

Mining Co. 257 US. 155 at 168 (1958): United States vy.

Rock Royal Cooperative, Inc., 307 US. 585, 571-75 (1989) ;

and Thompson v. Consolidated Gas Utilities Corp., 300 US.

55 (1997). Finally, the cost equalization program does not

lose its publie character merely because it is implemented

through the use of private parties. Berman v. Parker, 348

U.S. 26 (1954).

15. The cost equalization program is not a tax in viola-

tion of Article 1, © 8, CL 1 of the Constitution primarily be-

enause the program does not raise revenues for the govern-

ment, Rodgers v. United States, 138 F.2d 992, 994-995 (6th

Cir. 1943); United States v. Stangland, 242 F.2d 843, 848

37a

(7th Cir, 1957); Moon v. Freeman, 379 F.2d 382, 390-391

(9th Cir. 1967) but is, instead, a regulatory scheme.

16. Cities Service has failed to establish that it is likely

to suffer irreparable harm.

17. Plaintiffs have not established that they have not

been or will not be able to recover their entitlement costs

through increased prices in the marketplace. Such specula-

tive injury is not the basis of finding irreparable harm.

Union Oil, supra.

18. Finally, the court concludes that the grant of a pre-

liminary or permanent injunction would be contrary to the

public interest by exacerbating existing disparities caused

by the two-tier pricing system; by creating new inequities

in the industry and the marketplace; by seriously imposing

unnecessary and unfair burdens on entitlement sellers;

and by generally impeding the public interest in securing

the goals of the Allocation Act.

/s/ Tuomas A. FLANNERY

Thomas A. Flannery

United States District Judge

July 10, 1975

Date

(Caption Omirrep 1X PRINTING)

(Finep Jeniy 10, 1975)

Order

Pursuant to Rule 65(a)(2) of the Federal Rules of Civil

Procedure it is by the court this 9th day of July, 1975,

Orperrp that the court’s consideration of plaintiff’s mo-

tion for a preliminary injunction he, and the same hereby

is, consolidated with the court’s consideration of the merits

of this case.

/s/ Tromas A, FLANNERY

Thomas A. Flannery

United States District Judge

J8a

(Caption Omitrep IN PRINTING)

(Firep Jury 10, 1975)

Judgment

For the reasons stated in the Findings of Fact and Con-

clusions of Law filed with this Judgment, it is by the court

this 10th day of July, 1975,

OrpereD, Apsvpcep and Drecreep that plaintiffs’ motion

for a preliminary injunction be, and the same hereby is,

denied; and it is further

Orperep, Apsupcep and Decreep that judgment he en-

tered for defendants.

/s/ Tuomas A, FLANNERY

Thomas A. Flannery

United States District Judge

Constitutional Provisions Involved

Article 1, Section 8, Clause 1 of the Constitution of the

United States provides:

The Congress shall have Power To lay and collect

Taxes, Duties, Imposts and Excises, to pay the Debts

and provide for the common Defence and general Wel-

fare of the United States; but all Duties Imposts and

Iixcises shall be uniform throughout the United States

The Fifth Amendment to the Constitution of The United

States provides:

No person shall be held to answer for a capital, or

otherwise infamous crime, unless on a presentment or

indictment of a Grand Jury, except in cases arising in

the land or naval forces, or in the Militia,fwhen in

actual service in time of War or public danger; nor

shall any person be subject for the same offence to be

twice put in jeopardy of life or limb; ner shall be com-

tii eaceiaaesd hacia

39a

pelled in any criminal case to be a witness against him-

self, nor be deprived of life, liberty, or property, with-

out due process of law; nor shall private property be

taken for public use, without just compensation.

Statutory Provisions Involved

Section 4(a) of the Emergency Petroleum Allocation

Act, 87 Stat. 627, 15 U.S.C. § 753(a), provides:

Not later than fifteen days after the date of enact-

ment of this Act, the President shall promulgate a reg-

ulation providing for the mandatory allocation of

erude oil, residual fuel oil, and each refined petroleum

product, in amounts specified in (or determined in a

manner prescribed by) and at prices specified in (or

determined in a manner prescribed by) such regula-

tion. Subject to subsection (f), such regulation shall

take effect not later than fifteen days after its promul-

gation. Except as provided in subsection (e) such reg-

ulation shall apply to all crude oil, residual fuel oil,

and refined petroleum products produced in or im-

ported into the United States.

Section 4(b)(1) of the Emergency Petroleum Allocation

Act, supra, provides:

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;

(B) maintenance of all public services (including

facilities and services provided by municipaily, coop-

eratively, or investor owned utilities or by any State

or local government or authority, and including trans-

40a

portation facilities and services which serve the public

at large) ;

(C) maintenance of agricultural operations, includ-

ing farming, ranching, dairy, and fishing activities, and

services directly related thereto;

(D) preservation of an economically sound and com-

petitive petroleum industry; including the priority

needs to restore and foster competition in the pro-

ducing, refining, distribution, marketing, and _ petro-

chemical sectors of such industry, and to pre erve the

competitive viability of independent refiners, small re-

finers, 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 independ-

ent refiners, small refiners, nonbranded independent

marketers, branded independent marketers, and among

all users;

(G) allocation of residual fuel oil and refined petro-

leum products in such amounts and in such manner

as may be necessary for the maintenance of explora-

tion for, and production or extraction of, fuels, and

for required transportation related thereto;

(H) economie efficiency; and

(I) minimization of economie distortion, inflexibility,

and unnecessary interference with market mechanisms.

4la

Regulations Involved

10 C.F.R. § 211.62 contains the following definitions:

‘*Adjusted crude oil receipts’? means the erude oil

receipts of a refiner in a particular month the com-

position of which has been adjusted to reflect any in-

voice which is received in that month for crude oil

(including crude oil sold under § 211.65) delivered to

that refiner in any previous month (excluding, how-

ever, months prior to November 1974), and which has

the effect of increasing or decreasing the volume of

old oil received by that refiner in such previous month,

‘*Crude oil receipts’? means, as to a particular re-

finer, the volume of crude oil (i) booked into its re-

fineries in accordance with accounting procedures gen-

erally accepted and consistently and historically ap-

plied by the refiner concerned, for its own account or

for the account of a firm other than a refiner or (ii)

if not previously so booked into its refineries, delivered

by that refiner for its account to another refiner pur-

suant to a processing agreement with that other re-

finer. Crude oil receipts shal! not include crude oil re-

ceived by a refiner for the purpose of processing at its

refineries for the account of another refiner. A partie-

ular crude oil receipt shall be deemed to have oceurred

when the related cost is booked into refinery inventory

in accordance with accounting procedures generally ac-

cepted and consistently and historically applied by the

refiner concerned, whether or not such erude oil has

been actually received by that refiner, except that crude

oil delivered by one refiner to another refiner pursuant

to a processing agrement will be deemed to have been

delivered by the delivering refiner to the other refiner

when the risk of loss passes to the other refiner under

the particular processing agreement or when the crude

oil is received at the refinery of the other refiner,

whichever occurs first. Crude oil which has been added

42a

by a refiner to its inventory and which is thereafter

sold or otherwise disposed of without processing for

the account of that refiner shall be deducted from its

crude oil receipts at the time when the related cost is

deducted from refinery inventory in accordance with

accounting procedures generally accepted and consist-

ently and historically applied by the refiner concerned.

The volume of old oil included in a refiner’s crude oil

receipts shall be evidenced by and consistent with in-

voices received with respect to such crude oil receipts.

‘*Entitlement’’ means, for a particular month, the

right of a refiner owning the entitlement to include

one barrel of old oil in its adjusted crude oil receipts

in such month. The issuance and transfer of entitle-

ments shall be evidenced on records maintained by the

FEA.

10 C.F.R. § 211.67, Allocation of Old Oil, provides as

follows:

(a) Issuance of entitlements.

(1) For each month, commencing with the month of

November 1974, each refiner shall be issued entitle-

ments by the FEA to include in its adjusted erude oil

receipts for that month a specific number of barrels

of old oil which will result in an old oil supply ratio for

that refiner equal to the adjusted national old oil sup-

ply ratio for that month, subject to the entitlement

adjustment for small refiners set forth in paragraph

(e) of this section.

(2) Refiners to which entitlements shall be issued

under this section shall include all refiners classified

as iefiner-buyers or refiner-sellers as of December 1,

1974 for purposes of § 211.65. Any refiner that is not

so classified, or the refinery capacity of which is not

certified by the FEA for purposes of 4 211.65, shall

apply to the FEA for certification of its refinery ca-

43a

pacity for purposes of qualifying to receive entitle-

ments under this section. With respect to the granting

of any such application for certification, the FEA shall

consider the factors set forth in § 211.65(b)(v) and

(vi).

(b) Required purchases of entitlements by refiners.

For each month, commencing with the month of No-

vember 1974, each refiner that has been issued fewer

entitlements for that month than the number of bar-

rels of old oil included in its adjusted crude oil receipts

shall purchase a number of entitlements effective for

that month equal to the difference between the number

of barrels of old oil included in that refiner’s adjusted

crude oil receipts for that month and the number of

entitlements issued to and retained by that refiner.

Entitlement purchases required under this paragraph

(b) with respect to a particular month shall be effected

by the close of the second month following that month.

(c) Refiners and other firms with excess entitle-

ments. For each month, commencing with the month of

November 1974, each refiner that has been issued a

greater number of entitlements for that month than

the number of barrels of old oil included in its ad-

justed crude oil receipts shall sell such excess entitle-

ments and any~eligible firm (other than a refiner) that

has been issued entitlements shall sell such entitle-

ments.

(ad) Adjustments to volume of crude oil runs to

stills.

(1) A refiner’s volume of crude oil runs to stills

shall (i) include (A) the volume of crude oil processed

by another refiner for that refiner pursuant to a proc-

essing agreement and (B) the volume of crude oil

processed by that refiner for a person other than a

4ta

refiner pursuant to a processing agreement, and (ii)

exclude the volume of erude oil processed by that re-

finer for another refiner pursuant to a processing

agreement.

(2) The volume of a refiner’s crude oil runs to stills

for purposes of calculating its old oil supply ratio and

the adjusted national old oil supply ratio shall be re-

duced by that refiner’s volume of export sales in that

month of refined petroleum products (except refined

lubricating oils), including sales to a domestie pur-

chaser which certifies the product is for export.

(3) The volume of a refiner’s crude oil runs to stills

in a particular month for purposes of calculating its

old oil supply ratio and the adjusted national old oil

supply ratio shall include the total number of barrels

of plant condensate and the total number of barrels of

synthetic crude oil made from tar sands which are

imported from Canada and are utilized in that month

as inputs to distillation units by a refiner, measured in

accordance with the Bureau of Mines Form 6-1300-M.

Neither plant condensate nor synthetic crude oil made

from tar sands which are imported from Canada shall

be eligible for inclusion in the volume of a refiner’s

crude oil runs to stills under this subparagraph (3)

unless payment has been made in accordance with

Presidential Proclamation No. 3279 of any import li-

cense fees applicable to ernde oil as defined for pur-

poses of this section, which is imported for refining.

(e) Entitlement adjustment for small refiners. In

addition to the number of entitlements issuable under

paragraph (a) of this section, each small refiner with

a daily average volume of crude oil runs to stills of

less than 175,000 barrels for a particular month shall

be issued the following number of additional entitle-

ments for each day of that month: (i) for each small

refiner with a daily average volume of crude oil runs

45a

to stills of 100,000 to 175,000 barrels, 1,258 entitlements

less the number of entitlements obtained by multiply-

ing the difference between that small refiner’s daily

average volume of crude oil runs to stills (in thou-

sands of barrels) and 100 by 16.7733; (ii) for each

small refiner with a daily average volume of erude oil

runs to stills of 30,000 to 100,000 barrels, 1,690 entitle-

ments less the number of entitlements obtained by mul-

tiplying the difference between that small refiner’s

daily average volume of crude oil runs to stills (in

thousands of barrels) and 30 by 6.1714; (iii) for each

small refiner with a daily average volume of crude oil

runs to stills of 10,000 to 30,000 barrels, 1,238 entitle-

ments plus the number of entitlements obtained by

multiplying the difference between that small refiner’s

daily average volume of crude oil runs to stills (in

thousands of barrels) and 10 by 22.6; and (iv) for each

small refiner with a daily average volume of crude oil

runs to stills of zero to 10,000 barrels, 123.8 entitle-

ments for each 1,000 barrels of that small refiner’s

daily average volume of crude oil runs to stills.

(f) Transactions under § 211.65. (1) Each sale by a

refiner-seller under § 211.65 shall be deemed to include

a volume of old oil proportionate to the volume of old

oil included in the deliveries of crude oil to that refiner-

seller that determine the price at which the sale is

made under § 212.94 of part 212. Any volumes of old

oil so included in any sale under § 211.65 shall be re-

flected in the erude oil receipts of the refiner-buyer

concerned. As to each such sale, each refiner-seller shall

certify to the refiner-buyer the volume of old oil in-

cluded in the volume of crude oil sold within twenty-

five (25) days following the month in which the crude

oil is delivered to or for the account of the refiner-

buyer in accordance with the provisions of § 212.131

of part 212.

46a

(2) In determining the weighted average price of

all crude oil delivered to a refiner-seller in a month

in the specified PAD District or Districts pursuant to

§ 212.94 of part 212, the cost of any required purchases

or revenues from any sales of entitlements by that re-

finer-seller shall not be taken into account.

(g) Exchanges of crude oil. In any exchange of

crude oil in which only quality and location differen-

tials are given effect in the calculation of the exchange

ratio, or in any matching purchase and sale transac-

tion which has the same effect as such an exchange, no

volumes of old oil shall be deemed to have been trans-

ferred. Any volumes of old oil delivered pursuant to

any such exchange or transaction shall be considered

as having been retained hy the refiner that has ex-

changed away or sold such volume, regardless of the

volume of crude oil received or purchased by that re-

finer in such an exchange or transaction.

(h) Averaging of crude oil receipts. Upon applica-

tion by a refiner in accordance with the procedures

established under Subpart G of Part 205 of this chap-

ter within twenty (20) days following the close of a

month, the FEA may adjust the erude oil receipts of

that refiner for that month to permit the portion of

such crude oil receipts specified by the FEA to be in-

cluded in the crude oil receipts of that refiner for one

or more subsequent months, if the volume of erude oil

receipts in that month is significantly disproportionate

to the volume of that refiner’s crude oil] runs to stills

for that month due to shutdowns or other mechanical

failures resulting in a fifty percent (50%) or greater

portion of that refiner’s refinery capacity not having

been operable for the duration of that month.

(i) Issuance and transfer of entitlements. (1) The

first month with respect to which entitlements shall be -

issued is November 1974. The entitlements for the

47a

month of November 1974 shall be issued by the FEA

on January 10, 1975, pursuant to the notice specified

in subparagraph (2) below. As to each month subse-

quent to November 1974, FEA shall issue entitlements

pursuant to a notice published 40 days after the close

of that month.

(2) Each notice published by the FEA evidencing

the issuance of entitlements under this section shall

specify as to a particular month the adjusted national

old oil supply ratio, the name of each refiner and other

eligible firm to which entitlements have been issued,

the number of entitlements issued to each such refiner

or other firm, the number of barrels of old oil included

in each refiner’s adjusted crude oil receipts and the

price at which or price range within which entitlements

shall be sold.

(3) No transfer of an entitlement shall be effective

if made to (i) any person other than a refiner, or (ii)

any refiner that is not purchasing such entitlement to

fulfill such refiner’s obligations under paragraph (b)

of this section.

(4) The price at which entitlements shall be sold

and purchased shall be fixed by the FEA for each

month. Such price may be fixed in terms of a price

range in which entitlement transactions shall be ef-

fected or in terms of a single price at which all entitle-

ment transactions shall take place. Such price or price

range shall be fixed by the FEA with reference to the

differential between the weighted average costs to re-

finers of old oil and of new and released crude petro-

leum, imported crude oil and crude oil produced from

stripper well leases.

(5) Refiners and eligible firms shall correct any er-

rors contained in reports filed pursuant to paragraphs

(h) and (j) of § 211.66 by filing an amended report for

48a

the particular month. Based on any reporting errors

so corrected, FILA in its discretion may adjust entiile-

ment issuances to the refiner or eligible firm in a month

or months subsequent to the month in which the

amended report is filed with the FIZ A, by issuing fewer

entitlements than the number otherwise issuable or by

requiring the refiner or eligible firm to purchase en-

titlements in order to correct for excess entitlements

issued in a prior month or by issuing entitlements over

and @ove the number otherwise issuable to compen-

sate for too few entitlements having been issued in

such prior month. Amended reporis setting forth cor-

rections which would result in adjustments favorable

to a refiner or eligible firm shall be filed no later than

the 28th day of the second month following the month

in which the report being corrected is required to be

filed. Refiners and eligible firms which seek corrections

in their favor subsequent to the two month period al-

lowed for filing amended reports may apply to FEA

for an exception from the provisions of this subpara-

graph in accordance witn the procedures established in

subpart D of part 205 of this chapter. All entitlement

issuances or purchase requirements shall give effect to

any differential between the entiileinent price for the

month in which any correction is reflected as compared

with the entitlement price for the month as to which

the reporting error was made and such other factors

as the FEA deems appropriate.

(6) Notwithstanding the provisions of paragraph

(i) of . 211.66, eligible firms which failed to report any

volumes of eligible products imported for the month of

November or December, 1974 and which were other-

wise eligible to receive entitlements in accordance with

the provisions of this subpart in effect with respect to

those months may report those volumes of eligible

products on or before February 28, 1975. Any volumes

so reported to the FEA shall be reflected, to the extent

49a

determined by FEA after consideration of such fac-

tors as it deems appropriate, in the entitlement issu-

ances to those eligible firms either for the month of

December 1974 (if the amended report reflecting the

correction has been filed with the FEA by February 3,

1975) or for January 1975.

(j) Failure to consummate transactions. The FEA

may direct refiners that have not purchased the re-

quired number of entitlements under paragraph (b)

of this section for a particular morth to purchase such

required number of entitlements at a price specified

by the FIA from any refiner or eligible firm that has

entitlements for such month available for sale. The

FEA may direct refiners or eligible firms that have

entitlements available for sale to sell such entitlements

at a price specified by the FEA to refiners that have

not purchased their required number of entitlements

under paragraph (b) of this section.

(k) Certification of old oil by non-refiners. Within

twenty (20) days following each month, commencing

with the month of November 1974, each person other

than a refiner that has delivered crude oil to a refiner

for processing for the account of such person pursuant

to a processing agreement in that month shall certify

to that refiner the volume of old oil contained in the

crude oil so delivered to that refiner.

(1) Adjustments to Crude Oil Costs. (1) Computa-

lions. (i) Entitlements purchased. The cost of entitle-

ments purchased in a particular month pursuant to

this section by refiners shall be added to the cost of

crude oil purchased or landed in that month (which is

the period ‘‘t’’ (the month of measurement), for pur-

poses of calculating the increased cost to be applied to

product prices in the following month under the ‘‘ A ‘”’

factor of the general formulae of § 212.82(c)(2) of this

chapter) ; provided, that, to the extent that the obliga-

50a

tion of a refiner to purchase entitlements is reduced by

volumes of crude oil processed by a refiner for a firm

other than that refiner pursuant to a processing agree-

ment, and that the monetary value of that reduced

purchase obligation is used to reduce the processing

fee otherwise payable by that firm under the process-

ing agreement, or is otherwise passed on to that firm,

such monetary value may also be added by that refiner

to its cost of crude petroleum purchased or landed in

that month, but shall be subtracted from the cost of

crude oil purchased or landed in that month by the firm

to which the monetary value of the reduced purchase

obligation is passed on pursuant to this paragraph.

(ii) Entitlements sold. The sales revenues from en-

titlements sold in a particular month pursuant to this

section by refiners shall be subtracted from the cost of

crude oi] purchased or landed in that month (which is

the period **t’’ (the month of measurement), for pur-

poses of calculating the increased costs to be applied

to all product prices ir the following month under the

‘**A '’? factor of the general formulae of § 212.83(¢) (2)

of this chapter); provided, that, to the extent that the

sales revenues from entitlements which are issued for

volumes of crude oil processed by a refiner for a firm

other than that refiner pursuant to a processing agree-

ment are used to reduce the processing fee otherwise

payable by that firm under the processing agreement.

or are otherwise passed on to that firm, such sales rev-

enues shall not be subtracted by that refiner from its

cost of crude petroleum purchased or landed in that

month, but shall be subtracted from the cost of crude

oil purchased or landed in that month by the firm te

which the entitlement sales revenues are passed on

pursuant to this paragraph.

(2) Timing. The date of purchase or sale of entitle-

ments for purposes of determining the date on which a

dla

cost or a cost reduction is incurred under § 212.83/~) of

this chapter shall be the date on which the transaction

is reported to have taken place on the monthly trans-

action report filed with the FEA under paragraph (i)

of § 211.66.