Case No. RR272-00247

February 25, 1997

DECISION AND ORDER

OF THE DEPARTMENT OF ENERGY

Motion for Reconsideration

Name of Applicant: Allied Signal, Inc.

Date of Filing: September 11, 1996

Case Number: RR272-247

On July 1, 1996, the Office of Hearings and Appeals (OHA) of the Department of Energy (DOE) granted an Application for Refund for part of the volume claimed by Allied Signal, Inc. (Case No. RF272- 77990). Allied Signal now requests in this Motion for Reconsideration that we grant a refund for the remaining volume. As explained below, we will partially grant the Motion for Reconsideration.

Allied Signal applied for a refund based on its purchases of petroleum products during the crude oil price control period (August 19, 1973 through January 27, 1981). In its Application, Allied Signal estimated it purchased 327,870,000 gallons of No. 2 Fuel Oil, 582,750,000 gallons of No. 6 Fuel Oil, and 748,694,000 gallons of cumene. In our July 1 Decision, we granted a refund to Allied Signal based upon its purchases of No. 2 and No. 6 Fuel Oils, but found that Allied Signal had not shown cumene to be a product that is eligible for a refund in this proceeding. Allied Signal's Motion for Reconsideration attempts to show that it should receive a refund for its purchases of cumene.

Allied Signal makes two arguments to show that it should receive a refund for cumene. These arguments are: 1) cumene meets the standard for eligibility established by DOE, and 2) even if cumene were not otherwise an eligible product, Allied Signal's contracts with its cumene suppliers during the 1973 - 1981 period tied cumene prices directly to the prices of benzene and fuel oil, such that crude oil overcharges were passed on to Allied Signal through the price of cumene.

Argument 1

The Office of Hearings and Appeals has adopted a standard for considering the products for which an applicant can claim a refund in this proceeding. In a Notice published in the Federal Register on July 10, 1992, we announced that we would accept applications based on products that were either (a) designated as covered products in regulations promulgated pursuant to the Emergency

Petroleum Allocation Act of 1973 (EPAA), 15 U.S.C. §§ 751-760; (b) purchased from a crude oil refinery; or (c) originated in a crude oil refinery and purchased from a reseller who did not substantially change the products' form.

Allied Signal claims that cumene is an eligible product because it "fits within the definition of ?special naphthas (solvents)' under the regulations promulgated pursuant to the ... EPAA." In order for a product to be a special naphtha, however, it must first be a naphtha. A naphtha is a petroleum fraction whose boiling point falls within the temperature range of 85 degrees to 430 degrees Fahrenheit. 40 Fed. Reg. 2795 (January 16, 1975). Although Allied Signal has shown that cumene boils within the specified range, it has not shown that it is a petroleum fraction. In fact, Exhibit 7 of Allied Signal's Motion shows that cumene is manufactured outside of the refinery unit in which crude oil is fractionated. Allied Signal suggests that it may be possible to find traces of cumene in the gasoline fraction of crude oil. These traces, however, do not represent the method by which cumene is commercially produced. Therefore, we find that cumene is not a special naphtha.

Allied Signal also claims that "even if cumene were not a covered product [i.e. a special naphtha], it would still be eligible for a refund under DOE's standard for ?non-covered' products." In support of this claim, Allied Signal attempts to show that cumene was produced in a crude oil refinery. It uses as evidence a letter from Mr. Robert R. LeGros, Senior Counsel for Sun Company, Inc., the current owner of a plant which supplied Allied Signal with the majority of its cumene during the refund period.

Mr. LeGros makes three arguments to support Allied Signal's claim. First, he argues that "cumene production is a necessary part of the plant's production of propane and gasoline." This statement, however, does not demonstrate that the cumene was produced in a crude oil refinery. In fact, Mr. LeGros explains that the "cumene production unit" combines benzene and a mixture of propane and propylene. The combination causes a chemical reaction in which benzene and propylene molecules combine to form cumene which is later separated from the remaining propane. This process is clearly not crude oil refining, and we therefore find that cumene is not produced in a crude oil refinery.

Mr. LeGros also argues that cumene production is an integral part of the crude oil refinery economics. This argument, however, is irrelevant. It does not demonstrate in any way that cumene was produced through the refining process.

Mr. LeGros' final argument is that the cumene unit is located centrally within the crude oil refinery, without any physical or administrative separation from the rest of the crude oil refinery operation. At our request, Mr. LeGros submitted a map of the refinery complex. In a telephone conversation with Matthew Comeau of the OHA, Mr. LeGros stated that the unit in which fractionation of crude oil occurs is Unit Number 137. This unit is located in the northeast corner of the refinery complex. The map also shows that the cumene unit is located in the center of the complex, several city blocks away from Unit Number 137. Therefore, we find that cumene production is not part of the basic refining process. This is consistent with our findings regarding cumene in the Gulf Oil Corporation overcharge refund proceeding. Gulf Oil Corporation/ Aristech Chemical Corporation, 22 DOE ¶ 85,009.

Argument 2

Allied Signal argues that its cumene purchases are eligible for a refund because the price it paid for cumene was tied to the prices of benzene and No. 6 fuel oil on a dollar for dollar basis. In support of its argument, Allied Signal submitted contracts it entered into during the refund period with Gulf Oil Corporation and Texaco, Inc., for purchases of cumene. These contracts show that the price Allied Signal paid for cumene was directly affected by the prices of both benzene and No. 6 fuel oil. As explained below, we will grant Allied Signal a refund for crude oil overcharges which it paid as a result of cumene price escalation clauses that were based on the price of benzene. We will not, however, grant a refund based on pure escalation in the price of No. 6 fuel oil.

Benzene

The OHA has previously granted refunds based on purchases of a product which is otherwise ineligible for a refund in this proceeding if the purchase price was subject to an escalator clause tied to the price of a petroleum component of the product. See State of Montana, 21 DOE ¶ 85,290 (1991). As discussed earlier, benzene is a component used in the manufacturing of cumene. It is a covered product under the EPAA and is therefore eligible for a refund in this proceeding. Although Allied Signal did not purchase benzene directly, it has shown that it incurred the overcharges presumed in benzene through escalator clauses in contracts with its cumene suppliers. The contracts clearly show that the price Allied Signal paid for cumene increased on a dollar for dollar basis with the price of benzene. Therefore, Allied Signal is eligible for a refund based on the gallons of benzene used to produce the cumene it purchased.

No. 6 Fuel Oil

Unlike benzene, No. 6 fuel oil is not a component of cumene. The price Allied Signal paid for cumene was indexed to the price of No. 6 fuel oil. In order to receive a refund based on an escalator clause, however, the clause must be tied to the price of an eligible product which is also a component of the product which was purchased. See State of Montana. Since No. 6 fuel oil is not a component of cumene, Allied Signal's escalator clause which is indexed to No. 6 fuel oil does not meet this requirement.

Allied Signal states that the No. 6 fuel oil escalator clause was intended to account for changes in the cost of propylene, which is a component of cumene. Propylene, however, is not a covered product under the EPAA and Allied Signal has not shown that propylene is produced in a crude oil refinery. Therefore, we cannot grant Allied Signal a refund based on the propylene component of cumene.

Calculation of Allied Signal's Refund

Allied Signal estimated that it purchased 748,694,000 gallons of cumene during the refund period. Allied Signal stated in a letter dated December 11, 1996 that 91,000,000 gallons were resold as phenol. The phenol sales involved price escalator clauses which passed through the overcharges to Allied Signal's customers. Therefore, Allied Signal requested that 91,000,000 gallons be subtracted from its gallonage claim. Allied Signal's revised gallonage claim is 657,694,000 gallons (748,694,000 - 91,000,000 = 657,694,000).

The escalator clause involving benzene which Allied Signal used in its contract for cumene purchases from Texaco was determined as follows:

Cumene price to increase/decrease $0.001 per pound for each $0.01 per gallon increase/decrease in market price of benzene.

Allied Signal's contract with Gulf Oil determined the effect of benzene prices on the price of cumene using the same basic calculation as the Texaco contract.

In its December 11 letter, Allied Signal states that .75 gallons of benzene are used in the production of one gallon of cumene. Therefore, Allied Signal incurred a crude oil overcharge through benzene on 75 percent of each cumene gallon it purchased. Hence, Allied Signal incurred crude oil overcharges on 493,270,500 gallons of benzene (657,694,000 x .75 = 493,270,500).

Allied Signal's suppliers, however, did not pass through 100 percent of the overcharges presumed in benzene. There are approximately 7.2 pounds of cumene per gallon. If the price of a pound of cumene increases by $.001, then the price of a gallon of cumene increases by $.0072 ($.001 x 7.2 = $.0072). Therefore, according to the formula in Allied Signal's contracts, when the price of a gallon of benzene increased by $.01, then the price of a gallon of cumene increased by $.0072. Since there are .75 gallons of benzene in one gallon of cumene, a 100 percent passthrough would allow for an increase of $.0075 per gallon of cumene ($.01 increase per gallon of benzene x .75 = $.0075 increase per gallon of cumene). Therefore, Allied Signal incurred only 96 percent of the crude oil overcharges on benzene ($.0072 / $.0075 = .96).

Allied Signal's approved gallonage claim will be 96 percent of the benzene component of its cumene purchases, or 473,539,680 gallons (493,270,500 x .96 = 473,539,680). The total refund amount granted to Allied Signal, which is calculated by multiplying the approved gallonage claim by the volumetric refund amount of $0.0016 per gallon, is $757,663.

Conclusion

The evidence presented in this Motion demonstrates that cumene is produced by mixing benzene and propylene to cause a chemical reaction. This process takes place in a unit which is separate and distinct from the machinery which refines crude oil through fractionation. We find that cumene is not a covered product under the EPAA and does not originate in a crude oil refinery. Therefore, cumene is not eligible for a refund under the standard set forth in the Federal Register on July 10, 1992.

We find, however, that Allied Signal has shown it incurred crude oil overcharges through its purchases of cumene. The contracts Allied Signal had with its cumene suppliers allowed the suppliers to pass through crude oil overcharges presumed in the benzene component of cumene to Allied Signal on a dollar for dollar basis. We will therefore grant Allied Signal a refund based on the benzene component of its cumene purchases.

It Is Therefore Ordered That:

(1) The Motion for Reconsideration filed by Allied Signal, Inc., Case No. RR272-247, is hereby granted as set forth in Paragraph (2) below.

(2) The Director of Special Accounts and Payroll, Office of Departmental Accounting and Financial Systems Development, Office of the Controller of the Department of Energy, shall take appropriate action to disburse $757,663 from the DOE deposit fund escrow account denominated Crude Tracking-Applicants 4, Account Number 999DOE010Z, maintained at the Department of Treasury to Allied Signal, Inc.

(3) The refund check should be sent to "Allied Signal, Inc., c/o Troutman Sanders LLP, Attention Robert P. Williams, II, Suite 5200, 600 Peachtree Street, NE, Atlanta, GA, 30308-2216."

(4) To facilitate the payment of future refunds, Allied Signal shall notify the Office of Hearings and Appeals in the event that there is a change of address, or if an address correction is necessary. Such notification shall be sent to:

Director of Management Information

Office of Hearings and Appeals

Department of Energy

1000 Independence Avenue, S.W.

Washington, D.C. 20585-0107

(5) The determinations made in this Decision and Order are based upon the presumed validity of the statements and documentary materials submitted by Allied Signal. Any of these determinations may be revoked or modified at any time upon a finding that the basis underlying any Application for Refund is incorrect.

(6) This is a final Order of the Department of Energy.

George B. Breznay

Director

Office of Hearings and Appeals

Date: February 25, 1997