Proposed Implementation of Special Refund Procedures

DEPARTMENT OF ENERGY

Office of Hearings and Appeals

Proposed Implementation of Special Refund Procedures

AGENCY: Office of Hearings and Appeals, Department of Energy.

ACTION: Notice of proposed implementation of special refund procedures.

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SUMMARY: The Office of Hearings and Appeals (OHA) of the Department of

Energy announces the proposed procedures for disbursement of

$770,280.18 (plus accrued interest) in alleged or adjudicated crude oil

overcharges obtained by the DOE from Brio Petroleum, Inc. (Case No.

VEF-0017), Merit Petroleum Company (Case No. VEF-0018), Texas American

Oil Corp. (Case No. VEF-0019), Transcontinental Energy Corp. (VEF-0020)

and Utex Oil Co.(Case No. VEF-0021). The OHA has determined that the

funds obtained from these firms, plus accrued interest, will be

distributed in accordance with the DOE's Modified Statement of

Restitutionary Policy in Crude Oil Cases, 51 Fed. Reg. 27899 (August 4,

1986).

DATE AND ADDRESS: Comments must be filed in duplicate February 23,

1996, and should be addressed to the Office of Hearings and Appeals,

Department of Energy, 1000 Independence Avenue, SW., Washington, DC

20585-0107. All comments should conspicuously display a reference to

Case Nos. VEF-0017, et al.

FOR FURTHER INFORMATION CONTACT: Richard W. Dugan, Associate Director,

Office of Hearings and Appeals, 1000 Independence Avenue, SW.,

Washington, DC 20585-0107, (202) 586-2860.

SUPPLEMENTARY INFORMATION: In accordance with 10 C.F.R. 205.282(b),

notice is hereby given of the issuance of the Proposed Decision and

Order set forth below. The Proposed Decision and Order sets forth the

procedures that the DOE has tentatively formulated to distribute a

total of $770,280.18, plus accrued interest, remitted to the DOE by

Brio Petroleum, Inc., Merit Petroleum, Inc., Texas American Oil Corp.,

Transcontinental Energy Corp., and Utex Oil Co. The DOE is currently

holding these funds in interest bearing escrow accounts pending

distribution.

The OHA proposes to distribute these funds in accordance with the

DOE's Modified Statement of Restitutionary Policy in Crude Oil Cases,

51 FR 27899 (August 4, 1986) (the MSRP). Under the MSRP, crude oil

overcharge monies are divided among the federal government, the states,

and injured purchasers of refined petroleum products. Refunds to the

states will be distributed in proportion to each state's consumption of

petroleum products during the price control period. Refunds to eligible

purchasers will be based on the volume of petroleum products that they

purchased and the extent to which they can demonstrate injury.

Because the June 30, 1995, deadline for crude oil refund

applications has passed, we propose not to accept any new applications

from purchasers of refined petroleum products for these funds. As we

state in the Proposed Decision, any party who has previously submitted

a refund application in the crude oil refund proceeding should not file

another Application for Refund. The previously filed crude oil

application will be deemed filed in all crude oil proceedings as the

proceedings are finalized.

Any member of the public may submit written comments regarding the

proposed refund procedures. Commenting parties are requested to submit

two copies of their comments. Comments should be submitted within 30

days of publication of this notice in the Federal Register, and should

be sent to the address set forth at the beginning of this notice. All

comments received in these proceedings will be available for public

inspection between the hours of 1:00 p.m. to 5:00 p.m., Monday through

Friday, except federal holidays, in the Public Reference Room of the

Office of Hearings and Appeals, located in Room 1E-234, 1000

Independence Avenue, SW., Washington, DC 20585-0107.

Dated: January 16, 1996.

George B. Breznay,

Director, Office of Hearings and Appeals.

Implementation of Special Refund Procedures

Names of Firms: Brio Petroleum, Inc., Merit Petroleum Company,

Texas American Oil Corporation, Transcontinental Energy Corporation,

Utex Oil Company.

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Date of Filings: September 1, 1995.

Case Numbers: VEF-0017, VEF-0018, VEF-0019, VEF-0020, VEF-0021.

In accordance with the procedural regulations of the Department of

Energy (DOE), 10 C.F.R. Part 205, Subpart V, the Office of General

Counsel, Regulatory Litigation (OGC) (formerly the Economic Regulatory

Administration (ERA), Office of Enforcement Litigation), filed five

Petitions for the Implementation of Special Refund Procedures with the

Office of Hearings and Appeals (OHA) on September 1, 1995. The

Petitions request that OHA formulate and implement procedures to

distribute funds received by the DOE from Brio Petroleum, Inc. (Brio),

Merit Petroleum Company (Merit), Texas American Oil Corporation (Texas

American), Transcontinental Energy Corp. (Transcontinental), and Utex

Oil Company (Utex), pursuant to bankruptcy proceedings in which the DOE

was a creditor as a result of enforcement proceedings against the

firms. This Proposed Decision and Order sets forth the OHA's tentative

plan to distribute these funds.

I. Background

As indicated by the following summaries of the relevant enforcement

proceedings, all of the funds that are subject to this Decision were

obtained through enforcement actions involving alleged or adjudicated

crude oil overcharges.

A. Brio

Brio 1 was a reseller of crude oil during the period May 1,

1978 through December 31, 1979 (the audit period), and was subject to

the crude oil reseller regulations set forth at 10 C.F.R. Part 212,

Subpart L. As the result of an ERA audit of Brio's operations, on

November 20, 1984, the ERA issued a Proposed Remedial Order (PRO) to

the firm alleging that it had engaged in layered crude oil transactions

in violation of 10 C.F.R. Sec. 212.186, by charging prices for crude

oil in excess of actual purchase prices without providing any service

or other function traditionally and historically associated with the

resale of crude oil during the audit period. After denying a Statement

of Objections filed by White, Brio was issued a Remedial Order (RO) by

the OHA on April 16, 1987. Brio Petroleum, Inc., 15 DOE para. 83,033

(1987).2 Subsequently, the matter was referred to the U.S.

Department of Justice (DOJ) for enforcement of the RO. Although

judgment was entered against Brio, the firm had previously filed for

bankruptcy. The firm possessed assets insufficient to satisfy claims of

general unsecured creditors, including the DOE. On July 14, 1993, the

DOJ compromised the claim against White for $5,000. As of November 30,

1995, the Brio Consent Order fund contained $5,000 in principal plus

accrued interest.

\1\ References to Brio in this Decision include L.B. White,

President, Treasurer, and a Director (White), who maintained a

controlling interest in the firm during the price control period.

\2\ The RO found that the firm alone was liable for refunding

$1,093,548, plus accrued interest, for the layering violations that

occurred from May through July 1978. White and the firm were jointly

liable for the layering violations which occurred after August 1,

1978, that resulted in overcharges amounting to $849,570.

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B. Merit

Merit 3 was a reseller of crude oil, and was subject to the

crude oil reseller regulations set forth at 10 C.F.R. Part 212, Subpart

L. As the result of an ERA audit of Merit's operations, on October 20,

1986, the ERA issued a PRO to the firm alleging that during the period

November 1978 through December 1980, the firm engaged in layered crude

oil transactions in violation of 10 C.F.R. Sec. 212.186, by charging

prices for crude oil in excess of actual purchase prices without

providing any service or other function traditionally and historically

associated with the resale of crude oil. Merit submitted a Statement of

Objections to the PRO. After considering and rejecting Merit's

objections, the OHA issued an RO to Merit on January 31, 1990. Merit

Petroleum, Inc., 20 DOE para. 83,002 (1990). The RO found that Merit's

layered transactions resulted in overcharges amounting to

$48,290,793.17. The RO was affirmed by the Federal Energy Regulatory

Commission (FERC). Merit Petroleum, Inc., 65 FERC para. 61,175. During

the course of a subsequent federal district court proceeding, Merit and

the DOE stipulated to an Agreed Judgment, which resolved the Merit

enforcement proceeding. Pursuant to the Agreed Judgment, Merit agreed

to pay to the DOE the sum of $64,715. Merit has fulfilled its financial

obligation to the DOE. As of November 30, 1995, the Merit Consent Order

fund contained $64,715 in principal plus accrued interest.

\3\ References to Merit in this Decision include Thomas H.

Battle, President and a Director of Merit, and Anton E. Meduna, Vice

President, a Director, General Manager and Secretary of Merit.

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C. Texas American

During the price control period, Texas American was engaged in

crude oil refining and reselling. The firm was therefore subject to

regulations governing the pricing and allocation of crude oil set forth

at 10 C.F.R. Parts 211 and 212 of the Mandatory Petroleum Price and

Allocation Regulations. In an audit which covered the period from

October 1976 through February 1977, the ERA identified instances in

which it found that Texas American misreported certain crude oil

subject to ``processing agreements'' in its Refiners' Monthly Reports,

and thereby received excessive small refiner bias benefits under DOE's

Entitlements Program, 10 C.F.R. 211.66, 211.67. As a result of the ERA

audit, a PRO was issued to Texas American on September 30, 1986. Texas

American filed a Statement of Objections on April 14, 1987. On

September 19, 1988, the OHA denied the Statement of Objections,

affirmed the findings of the PRO, and issued an RO to Texas American.

Texas American Oil Corp., 17 DOE para. 83,017 (1988). Texas American

had filed a petition of bankruptcy on July 2, 1987, and the petition

was still pending when the RO was issued. After protracted litigation,

the Bankruptcy Court for the Northern District of Texas, Dallas

Division, entered a Final Consent Order that had been agreed to by the

parties concerning the DOE's proof of claim, and ordered $48,307.13 to

be distributed to the DOE in full satisfaction of its claim. Texas

American has fulfilled its financial obligation to the DOE. As of

November 30, 1995, the Texas American Consent Order fund contained

$48,307.13 in principal plus accrued interest.

D. Transcontinental

Transcontinental was a producer of crude oil during the period of

January 1975 through December 1980, and was subject to the Federal

petroleum price and allocation regulations. On March 30, 1979, the ERA

issued a Notice of Probable Violation to Transcontinental alleging

$372,151.67 in crude oil overcharge violations from several properties

it operated. Transcontinental had filed a petition in bankruptcy on

October 14, 1977, and had been adjudicated bankrupt on October 5, 1978.

The trustee appointed by the Bankruptcy Court opposed DOE's claim, but

the United States District Court in Nevada on appeal ruled in favor of

the DOE. In re Transcontinental Energy Corp. v. United States

Department of Energy, 3 Fed. Energy Guidelines para. 26,638 (D. Nev.

1990), aff'd, 950 F.2d 733 (Temp. Emer. Ct. App. 1991).

Transcontinental's estate was insufficient to satisfy completely the

claims of unsecured creditors, including the DOE. As a result, DOE

received $231,335.32. As of November 30, 1995, the Transcontinental

settlement fund

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contained $231,335.32 in principal plus accrued interest.

E. Utex

During the period of Federal petroleum price controls, Utex was

engaged in producing and selling crude oil. Utex was therefore subject

to the regulations governing the pricing of crude oil set forth at 10

C.F.R. Parts 205, 210, 211, and 212 of the Mandatory Petroleum Price

and Allocation Regulations. On June 16, 1982, the ERA issued a PRO to

the firm in which it alleged that during the period from July 1, 1975

through April 30, 1980, Utex improperly classified and priced crude oil

produced from several properties it operated. In addition, the PRO also

alleged that Utex disregarded the current cumulative deficiency rule,

erroneously computed the base production control level, and erroneously

applied the stripper well lease exemption to certain properties. As a

result of these violations, the PRO alleged that Utex overcharged its

customers by $502,833.21. Utex filed a Statement of Objections to the

PRO on September 29, 1982. On February 19, 1985, the OHA issued the PRO

as a RO. Utex Oil Co., 12 DOE para. 83,031 (1985). The RO was affirmed

by the FERC. Utex Oil Co., 36 FERC para. 61,099 (1986). In the course

of an appeal to the United States District Court in Utah, Utex and the

DOE entered into a Stipulation for Withdrawal of Appeal and Judgment on

Counterclaim and Order (Stipulation). Accepting the Stipulation, the

Court granted DOE a judgment against Utex of $884,794.01. The judgment

provided the basis for DOE's claim in the bankruptcy proceeding

initiated by Utex on August 1, 1986. Utex's estate was insufficient to

satisfy completely the claims of general unsecured creditors, including

the DOE. As a result, DOE received distributions totalling $420,922.73.

As of November 30, 1995, the Utex settlement fund contained $420,922.73

in principal plus accrued interest.

II. Jurisdiction and Authority

The Subpart V regulations set forth general guidelines which may be

used by the OHA in formulating and implementing a plan of distribution

of funds received as a result of an enforcement proceeding. The DOE

policy is to use the Subpart V process to distribute such funds. For a

more detailed discussion of Subpart V and the authority of the OHA to

fashion procedures to distribute refunds, see Petroleum Overcharge

Distribution and Restitution Act of 1986, 15 U.S.C. Secs. 4501 et seq.;

see also Office of Enforcement, 9 DOE para. 82,508 (1981), and Office

of Enforcement, 8 DOE para. 82,597 (1981).

We have considered the OGC's petitions that we implement Subpart V

proceedings with respect to the five settlement funds and have

determined that such proceedings are appropriate. The following section

of this Proposed Decision and Order sets forth the OHA's tentative plan

to distribute these funds. Before taking the actions proposed in this

Decision, we intend to publicize our proposal and solicit comments from

interested parties. Comments regarding the tentative distribution

process set forth in this Proposed Decision and Order should be filed

with the OHA within 30 days of its publication in the Federal Register.

III. Proposed Refund Procedures

A. Crude Oil Refund Policy

We propose to distribute the monies remitted pursuant to the five

enforcement proceedings in accordance with DOE's Modified Statement of

Restitutionary Policy in Crude Oil Cases (MSRP), 51 Fed. Reg. 27899

(August 4, 1986), which was issued as a result of the Settlement

Agreement approved by the court In re The Department of Energy Stripper

Well Exemption Litigation, 653 F. Supp. 108 (D. Kan. 1986). Shortly

after the issuance of the MSRP, the OHA issued an Order that announced

that this policy would be applied in all Subpart V proceedings

involving alleged crude oil violations. Order Implementing the MSRP, 51

FR 29689 (August 20, 1986) (the August 1986 Order).

Under the MSRP, 40 percent of crude oil overcharge funds will be

disbursed to the federal government, another 40 percent to the states,

and up to 20 percent may initially be reserved for the payment of

claims to injured parties. The MSRP also specified that any funds

remaining after all valid claims by injured purchasers are paid will be

disbursed to the federal government and the states in equal amounts.

In April 1987, the OHA issued a Notice analyzing the numerous

comments received in response to the August 1986 Order. 52 Fed. Reg.

11737 (April 10, 1987) (April 10 Notice). This Notice provided guidance

to claimants that anticipated filing refund applications for crude oil

monies under the Subpart V regulations. In general, we stated that all

claimants would be required to (1) document their purchase volumes of

petroleum products during the August 19, 1973 through January 27, 1981

crude oil price control period, and (2) prove that they were injured by

the alleged crude oil overcharges. Applicants who were end-users or

ultimate consumers of petroleum products, whose businesses are

unrelated to the petroleum industry, and who were not subject to the

DOE price regulations would be presumed to have been injured by any

alleged crude oil overcharges. In order to receive a refund, end-users

would not need to submit any further evidence of injury beyond the

volume of petroleum products purchased during the period of price

controls. See City of Columbus Georgia, 16 DOE para. 85,550 (1987).

The amount of money subject to this Proposed Decision is

$770,280.18 plus accrued interest. In accordance with the MSRP, we

propose initially to reserve 20 percent of those funds ($154,056.04

plus accrued interest) for direct refunds to applicants who claim that

they were injured by crude oil overcharges. We propose to base refunds

to claimants on a volumetric amount which has been calculated in

accordance with the description in the April 10 Notice. That volumetric

refund amount is currently $0.0016 per gallon. See 60 FR 15562 (March

24, 1995).

Applicants who have executed and submitted a valid waiver pursuant

to one of the escrows established by the Stripper Well Settlement

Agreement have waived their rights to apply for a crude oil refund

under Subpart V. See Mid-America Dairyman Inc. v. Herrington, 878 F.2d

1448, 3 Fed. Energy Guidelines para. 26,617 (Temp. Emer. Ct. App.

1989); In re Department of Energy Stripper Well Exemption Litigation,

707 F. Supp. 1267, 3 Fed. Energy Guidelines para. 26,613 (D. Kan 1987).

Because the June 30, 1995, deadline for crude oil refund applications

has passed, we propose not to accept any new applications from

purchasers of refined petroleum products for these funds. See Western

Asphalt Service, Inc., 25 DOE para. 85,047 (1995). Instead, these funds

will be added to the general crude oil overcharge pool used for direct

restitution.4

\4\ A crude oil refund applicant is only required to submit one

application for its share of all available crude oil overcharge

funds. See, e.g., Ernest A. Allerkamp, 17 DOE para. 85,079 at 88,176

(1988).

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B. Payments to the States and Federal Government

Under the terms of the MSRP, the remaining 80 percent of the

alleged crude oil violation amounts subject to this Proposed Decision,

or $616,224.14 plus accrued interest, should be disbursed in equal

shares to the states and federal government, for indirect restitution.

Refunds to the states will be

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in proportion to the consumption of petroleum products in each state

during the period of price controls. The share or ratio of the funds

which each state will receive is contained in Exhibit H of the Stripper

Well Settlement Agreement. When disbursed, these funds will be subject

to the same limitations and reporting requirements as all other crude

oil monies received by the states under the Stripper Well Agreement.

It Is Therefore Ordered That: The refund amounts remitted to the

Department of Energy by Brio, Merit, Texas American, Transcontinental

and Utex pursuant to their respective settlement agreements or

judgments will be distributed in accordance with the foregoing

Decision.

[FR Doc. 96-903 Filed 1-23-96; 8:45 am]

BILLING CODE 6450-01-P