December 11, 2003

DECISION AND ORDER

OF THE DEPARTMENT OF ENERGY

Application for Refund

Name of Petitioner: Vessels Gas Processing Company/

Koch Hydrocarbon Company

Date of Filing: April 10, 1996

Case Number: RF354-0001

On December 21, 1995, the Office of Hearings and Appeals (OHA) of the Department of Energy (DOE) issued a Decision and Order instituting special refund procedures for distribution of a fund obtained by the DOE through a Consent Order entered into with Vessels Gas Processing Company (Vessels) of Colorado.(1) See Vessels Gas Processing Company, 25 DOE ¶ 85,085 (1995)(Vessels). The Consent Order settled an enforcement proceeding initiated when the DOE’s Economic Regulatory Administration (ERA) performed an audit of Vessels’ business records. Under the terms of the Consent Order, Vessels agreed to remit $1,564,222.74 to the DOE in order to settle all claims and disputes between Vessels and DOE regarding Vessels’ compliance with DOE price regulations in sales of Natural Gas Liquids (NGLs) and Natural Gas Liquid Products (NGLPs) during the period from September 1, 1973 through December 31, 1977 at the firm’s Irondale gas plant and April 1, 1975 through December 31, 1977 at its Brighton gas plant.

This determination involves an Application for Refund in the Vessels refund proceeding filed on behalf of Koch Hydrocarbon Company (Koch), a natural gas liquid products reseller located in Wichita, Kansas.

In Vessels, the DOE established procedures for the distribution of the funds held in the Vessels escrow account. Applicants for refunds from that account must certify that they purchased NGLs or NGLPs from Vessels during the audit period from one of the two Vessels gas plants. Vessels requires applicants to demonstrate that they were injured by Vessels’ pricing practices in order to receive a refund. In order to establish injury an applicant must show that the Vessels overcharges were absorbed by the applicant rather than simply passed along to the applicant’s customers.

In order to distribute the funds in the Vessels escrow account, the OHA determined for simplicity that refunds should be calculated on a volumetric basis. The volumetric methodology assigns a uniform, per-gallon refund amount to all purchases of covered products made from either gas plant during the Consent Order period. This methodology assumes that the Vessels overcharges were dispersed equally over all gallons of price-controlled NGLs/NGLPs marketed by Vessels during the audit period, a reasonable assumption because DOE price regulations generally required regulated firms to account for increased product costs on a firm-wide basis when establishing maximum lawful selling prices. The volumetric factor of $0.0261 per gallon was computed by dividing $1,564,222.74 by 59,913,647 gallons, the approximate number of gallons of price-controlled NGLs and NGLPs Vessels sold to its customers during the audit period from the two gas plants ($1,564,222.74/59,913,647 gallons = $0.0261 per gallon).(2) A claimant’s “allocable share” (or, “volumetric share”) is equal to $0.0261 per gallon multiplied by the combined volume of NGLs and NGLPs purchased by the claimant from the two gas plants during the audit period.

In Vessels the DOE established a number of injury presumptions which permit firms advancing refund claims for less than $10,000 to be able to avoid making a detailed demonstration of injury. However, the Koch refund claim is in excess of $300,000 so these injury presumptions do not apply in this proceeding. For large claims, the DOE outlined a two-step requirement for applicants attempting to make an injury showing. First, a claimant must show that it maintained banks of unrecovered increased product costs large enough to justify the amount of refund claimed. Second, it must show that market conditions forced it to absorb the alleged overcharges. Id. at 88,214.

In order to determine the degree to which market conditions forced an applicant to absorb the alleged overcharges, we apply a three part competitive disadvantage analysis that has been upheld by the courts. See Behm Family Corp. v. DOE, 903 F.2nd 830 (Temp. Emer. Ct. App. 1990); Atlantic Richfield Co., v. DOE, 618 F. Supp. 1199 (D. Del. 1985). Under this methodology, we infer that purchases made at above average market prices indicate that the firm was unable to pass through the alleged overcharges. Conversely, we infer that purchases made at prices below the market average placed a firm at a competitive advantage and did not injure the firm. The analysis produces three measures, which the OHA uses as guidelines in determining the claimant’s level of injury. The first measure, “gross excess costs,” represents the sum of the applicant’s purchase costs for the product that was priced above the market average; only costs in excess of market price are measured. The second measure, “net excess costs,” is derived by subtracting the sum of the applicant’s below- market-price costs from the gross excess costs. This provides an indication of the cumulative impact of the alleged overcharges, balancing the adverse effect of the comparatively expensive purchases against the positive effect of comparatively cheap purchases. The third measure, “above-market volumetric share” is the number of gallons purchased at prices which exceed market prices multiplied by the volumetric factor. This measure is indifferent to the magnitude of the excess costs incurred, accounting only for the number of gallons of uncompetitively priced product purchased by the applicant. We consider all of these indicators of competitive disadvantage in determining whether, and to what extent, an applicant was injured by its purchases, and thereby to calculate an appropriate refund amount. See Texas Oil and Gas Corp./Gulf Oil Corp., 13 DOE ¶ 85,135 (1985). Koch, a NGL/NGLP retailer/reseller with headquarters located in Wichita, Kansas, has advanced a refund claim based upon its documented purchase of 18,918,512 gallons of Vessels butane lifted from the Irondale and Brighton gas plants. Koch’s refund claim is accompanied by an injury analysis and cost bank data for the period covered by the Vessels consent order. If granted in whole, Koch would be awarded a refund of $493,773. As explained below, we have determined Koch has successfully demonstrated that it was injured by Vessels’ pricing practices and is entitled to receive the maximum volumetric refund.

Determining the extent to which Koch was injured by Vessels’ pricing practices was simplified in this instance by the fact that Vessels butane was priced at such high levels that its prices exceeded the average, regional butane prices for every region in the nation, for every month covered by the Vessels consent order. This is true whether we rely upon price data published by the DOE in the Energy Information Administration’s Monthly Petroleum Price Reports, or if we refer to product prices published in the Platt’s Oil Price Handbook and Oilmanac. This means that our traditional computation of gross and net excess costs to assess the competitive impact upon Koch of product overcharges is not necessary. Koch incurred a competitive disadvantage with every gallon of Vessels butane it purchased during the consent order period, since every gallon of Vessels butane was priced in excess of all regional product price averages. For our purposes, regional average product prices serve as a proxy in Subpart V proceedings for the cost of product incurred by Koch’s competitors. Since Koch purchased Vessels butane priced above what we infer are its competitors product costs, Koch was disadvantaged by every transaction with Vessels during the consent order period.

Having established that Koch received no competitive advantage from any of its butane purchases from Vessels during the consent order period, we must also examine the applicant’s unrecouped product cost ?bank.’ The cost bank provides a measure of the extent to which product overcharges were actually injurious to the applicant since product overcharges that are passed through to customers via higher resale prices do not actually injure the seller, nor do they accumulate in the seller’s product cost bank. Product costs not passed along to customers accumulate in the seller’s unrecouped product cost ?bank,’ hence the name.

According to the documentation submitted by Koch in support of its refund claim, the firm had accumulated, unrecouped product costs for butane in excess of $216 million at the end of the price control period, far in excess of its volumetric refund of $493,773. We shall therefore grant Koch the firm’s full volumetric refund of $493,773 (18,918,512 gallons x $0.0261 per gallon), plus accrued interest of $398,672 for a total refund of $892,445.

Although we have carefully scrutinized the Koch refund claim and purchase volume claim documentation, the determination reached in this Decision and Order is based on the presumed validity of the presentations made in the Koch Hydrocarbon Company, Application for Refund. If the factual basis underlying our determination in this Decision is later shown to be inaccurate, this Office has the authority to order appropriate remedial action, including rescission or reduction of the refund ordered.

It Is Therefore Ordered That:

(1) The Application for Refund filed by Koch Hydrocarbon Company, (Case No. RF354-0001) is hereby granted as set forth in Paragraph (2) below.

(2) The Director of Special Accounts and Payroll, Office of the Controller, of the Department of Energy shall take appropriate action to disburse a total of $892,445 ($493,773 principal and $398,672 interest) from the DOE deposit fund escrow account maintained at the Department of the Treasury and funded by Vessels Gas Processing Company, Consent Order No. 999DOE035W, to:

Koch Hydrocarbon Company

or Energy Refunds, Inc.

31 Small Lane

Hardin, KY 42048

(3) The determination made in this Decision and Order is based upon the presumed validity of statements and documentary material submitted by the applicant. This determination may be revoked or modified at any time upon a determination that the factual basis underlying the applicant’s Application for Refund is incorrect.

(4) This is a final order of the Department of Energy.

George B. Breznay

Director

Office of Hearings and Appeals

Date: December 11. 2003

.

(1)In this proceeding “Vessels” refers to Vessels Gas Processing Company (VGPC) and Vessels Gas Processing, Limited (VGPL). In addition, “Vessels” refers to the operations of Halliburton Resource Management (HRM) at the Irondale and Brighton plants on behalf of VGPC and VGPL. Vessels operated under a contract with HRM, a division of Halliburton Company.

(2)On August 13, 1997, the DOE issued a Supplemental Decision and Order increasing the per gallon volumetric factor for the Vessels refund proceeding from $0.0185 to $0.0261. The modification was necessary because of an error OHA made in its initial calculation of the volumetric factor in Vessels. See Vessels Gas Processing Company, 26 DOE ¶ 85,052 (1997).