Case No. RF340-00082
October 12, 1999
DECISION AND ORDER
OF THE DEPARTMENT OF ENERGY
Application for Refund
Name of Petitioner: Enron Corporation/
Vanguard Petroleum Corporation
Date of Filing: March 2, 1992
Case Number: RF340-82
On September 14, 1988, the Economic Regulatory Administration of the Department of Energy (DOE) filed a Petition with the Office of Hearings and Appeals (OHA) requesting that the OHA formulate and implement procedures for distributing funds obtained through a consent order with Enron Corp. (Enron). See 10 C.F.R. Part 205, Subpart V. The consent order resolved DOE allegations that Enron and all of its subsidiaries, affiliates, prior subsidiaries, predecessors and successors in interest violated the mandatory petroleum regulations in their sales of crude oil and refined petroleum products from January 1, 1973 through January 27, 1981 (the consent order period). On July 10, 1991, the OHA issued a Decision and Order setting forth final procedures for disbursing the portion of the Enron settlement fund attributable to various Enron entities' sales of NGLs and NGLPs. Enron Corp., 21 DOE ¶ 85,323 (1991) (Enron). These covered Enron entities are UPG, Inc., Northern Propane Gas Company, and Florida Hydrocarbons Company. In accordance with the goals of 10 C.F.R. Part 205, Subpart V, Enron implements a process for refunding the consent order funds to purchasers of Enron NGLs and NGLPs who are able to demonstrate that they were injured as a result of the covered entities' alleged overcharges. This Decision and Order renders a determination upon the merits of an Application for Refund submitted by Vanguard Petroleum Corporation (Vanguard), a wholesale marketer that purchased NGLs, chiefly propane and butane, from Enron. Accordingly, Vanguard was a reseller of Enron products.
I. Background
In Enron we adopted a presumption that the alleged overcharges attributable to NGLs and NGLPs had been dispersed equally in all sales of refined product made by the covered entities during the consent order period. Enron, 21 DOE at 88,959. We stated that, in
the absence of a demonstration of a disproportionate overcharge, a claimant would be allocated a share of the consent order funds on a volumetric basis. We provided that eligible claimants would receive $.00601 per gallon of covered Enron product purchased.(1)Id. We refer to the dollar amount derived by multiplying an applicant's purchase volume by the per gallon refund amount as the applicant's allocable share.
Enron generally requires a claimant to demonstrate that it was injured by Enron's alleged overcharges in order to receive a refund equal to its full allocable share. However, in Enron, we adopted several presumptions of injury that would allow certain types of claimants to receive a refund without a detailed demonstration of injury. We established that resellers, retailers and refiners seeking volumetric refunds of $10,000 or less were injured by Enron's pricing practices. Id. at 88,960. Such applicants would, therefore, only have to document their purchases of covered Enron products in order to receive a refund of their full volumetric share. Id. at 88,960.
We further established that a reseller, retailer or refiner whose volumetric share of the Enron consent order funds exceeds $10,000 may elect to receive as its refund the larger of $10,000 or 60 percent of its volumetric share up to $50,000. Id. Accordingly, a claimant in that group need only establish the volume of Enron covered products that it purchased during the refund period to receive a refund of 60 percent of its allocable share up to $50,000.
Vanguard has chosen not to rely upon these presumptions of injury. Instead, the firm has submitted information aimed at showing that it was injured with respect to the product that it purchased from Enron and resold to third parties. Accordingly, we will consider granting Vanguard a refund for its volumes of Enron purchases based on our analysis of this information concerning injury.
A reseller whose allocable share exceeds $10,000 must demonstrate that it was injured by Enron's alleged overcharges in order to receive a refund equal to its full volumetric allocation of the consent order fund. The procedures in Enron outline a two-step requirement for applicants attempting to make an injury showing. First, a claimant must show that it accumulated banks of unrecovered increased product costs large enough to justify the amount of the refund claimed during the period from either November 1973, the first month of the banking period, or the first month in which it purchased from Enron, whichever was later, through the end of the banking period. Second, it must show that market conditions forced it to absorb the alleged overcharges. Id. at 88,960.
However, in Enron we also adopted a rebuttable presumption that firms that purchased Enron covered products on the spot market were not injured by Enron's alleged overcharges. A claimant is a spot purchaser if it made only sporadic purchases of significant volumes of Enron's covered products. Id. at 88,961. This presumption is based upon the general conclusion that purchasers on the spot market tend to have considerable discretion in where and when to make purchases. Therefore, a firm would not have made spot purchases of Enron product without evaluating the full financial effect of those purchases. Accordingly, we believe that a spot purchaser would not generally have made a spot purchase unless it was to its financial advantage. A spot purchaser can rebut this presumption by demonstrating that it was in fact injured by its spot purchases. See generally Sauvage Gas Co./NGL Supply, Inc., 19 DOE ¶ 85,622 (1989). In prior proceedings we have allowed applicants to rebut the spot purchaser presumption by demonstrating that: 1) they were forced to make the purchases to meet their base period supply obligations or to supply regular retail or end-user customers; or 2) they resold the product at a loss which was not subsequently recovered. E.g., Saber Energy, Inc./Mobil Oil Corp., 14 DOE ¶ 85,170 (1986).
II. Vanguard Identified as a Possible Spot Purchaser from Enron
In a June 4, 1996 letter to Mr. Michael ON. Barron, Vanguards legal representative, we tentatively identified Vanguard as a spot purchaser of Enron product. In that letter, we noted that information in Vanguards Application indicated that Vanguard operated at the wholesale marketer level of NGL distribution. In addition, we noted that Vanguards Application includes a statement by Mr. P. E. Goth, Jr., who states that the characteristics of sales in the producer/wholesaler marketer market are large volumes and a price that is usually negotiated for each transaction. Statement of P. E. Goth, Jr. at 2. We arrived at the following conclusions from Mr. Goths analysis:
Mr. Goth appears to be saying that wholesale marketers such as Vanguard purchased product primarily on the spot market. Such purchasers are generally presumed not to have been injured by the alleged overcharges. The OHA has adopted this presumption because firms usually made spot purchases only when those transactions were beneficial to them and provided the best available terms. Thus, it is unlikely that they would have been injured on those purchases by the consent order firms pricing practices.
June 4, 1996 letter from Thomas L. Wieker, Deputy Director, OHA to Michael Barron at 1. We further stated that unless Vanguard was able to demonstrate that it was not a spot purchaser or was able to show that it was injured by its spot purchases, we would be unable to grant its refund claim.
In that letter, we indicated that there are two ways that Vanguard could respond in order to receive a refund in the Enron proceeding. The first was for Vanguard to demonstrate that it was not a spot purchaser. To do this, we indicated that Vanguard should submit a detailed description of its purchasing relationship with Enron and Vanguard's relationship with its customers, that establishes that Vanguard was required to make regular purchases from Enron in order to maintain supplies to base period customers. Alternatively, we indicated that Vanguard could establish that it was forced by market conditions to resell the product purchased from Enron at a loss that was not subsequently recovered.
In addition, we requested that Vanguard provide more information concerning its business operations as an NGL wholesale marketer so that we could evaluate the appropriateness of Vanguard's injury claim. We asked Vanguard to provide us with a description of the typical manner in which Vanguard located customers and negotiated the purchase and sale of NGLs. We also asked Vanguard to identify its marketing region and describe how Vanguard's purchase and sale transactions facilitated the distribution and consumption of NGLs. Id. at p. 2.
In a submission dated December 2, 1998, Mr. Barron responded to the OHAs tentative identification of Vanguard as a spot purchaser of Enron products and to our request for additional information regarding Vanguards role in the wholesale marketer industry. The submission includes a memorandum from Mr. Barron regarding the spot purchaser presumption and its relation to the instant Application (the Memorandum). Attached to the Memorandum are a number of exhibits, including statements from Vanguard officials and others, additional company records, and analyses of OHA decisions involving spot purchase and cost bank issues.
As discussed below, the information provided to us by Vanguard is insufficient to establish that the firm was injured by its purchases from Enron.
III. Analysis
In determining whether Vanguard's purchases from Enron were spot purchases, it is important to first understand the purpose and scope of the presumption, so that it may be correctly applied to the facts of this case. In this regard, Enron's extensive discussion of the spot purchaser presumption in the context of responding to comments on the proposed Enron implementation order provides a more detailed explanation of the meaning of the presumption, and can provide a basis for our analysis of whether the presumption is applicable to Vanguard's purchases and sales of Enron products.
In Enron, we concluded that the concept of spot purchaser is sufficiently well defined to allow applicants to understand the theoretical basis for the presumption.
The term spot purchase is commonly used and understood in the petroleum industry to mean a contract for the purchase and sale of petroleum products on a short term basis. [Sauvage Gas Company/NGL Supply, Inc., 19 DOE ¶ 85,622 at 89,142 (1989)(Supply)] The OHA has interpreted the term spot purchaser to mean any firm that purchased significant volumes of covered products from a supplier on a sporadic or isolated basis outside of a long term supply obligation.
Enron at 88,955. It is clear from this discussion that the purchaser's discretion in selecting its supplier of product is a key element underlying the presumption of non-injury.
We have consistently determined that spot purchasers tend to have considerable discretion in where and when to make purchases and therefore would not have made spot market purchases from a firm at increased prices unless they were able to pass through the full price of the purchases to their own customers. The OHA has utilized this spot purchaser presumption of non-injury in numerous special refund proceedings.
Id., citing Sauvage, 17 DOE ¶ 85,304. It should be noted that short term, discretionary sales and purchases were the rule rather than the exception in certain portions of the NGL industry, particularly in the producer and wholesale reseller markets.
Although such spot market purchases of Enron product establish a presumption of non-injury to the purchaser, such a purchaser may submit additional information concerning its business operations to rebut the presumption on a case-specific basis. As we noted in Enron,
The OHA examines the circumstances of each case to make an initial determination whether the applicant's purchases were likely to have been spot purchases. Where it appears likely that an applicant's purchases were spot purchases, the applicant is generally notified of our tentative conclusion and offered an opportunity to show either that it was not a spot purchaser or that it was injured by its spot purchases. Since this analysis focuses on the fundamental refund issue, viz., whether the applicant was injured, there is no merit to the claim that it is based on an impermissibly vague definition. ...
In Supply, ... we stated that "the determination of whether an individual's purchases from a particular supplier are spot purchases is a question of fact and therefore must be made on a case-by-case basis." Id. at 89,143.
Id. at 88,955-56. This case-by-case injury analysis is a broad one. Under this method, "we consider the circumstances under which a claimant made its purchases and any information submitted by the applicant that might aid our determination concerning whether its purchases were spot purchases." Our determination of whether a spot purchaser was injured is similarly based on a case-by-case analysis of information submitted by the claimant. Id. at 88,956- 57.
In its December 2, 1998 Memorandum, Vanguard argues that "OHA's application of the spot purchase presumption [is] arbitrary and inconsistent." In support of this argument, Vanguard submitted an analysis of other Applications for Refund which were denied due to the spot purchase presumption. See Memorandum at 11-15 and Exhibit 11. We have previously addressed this issue in the Enron refund proceeding. See e.g. Enron Corp./ H.C. Oil Co., Inc., 26 DOE ¶ 85,038 (1997). We have found that the determination of whether a firm incurred injury rests on our evaluation of the unique set of facts arising in each case. In Mobil Oil Corp./ NGL Supply, Inc., 17 DOE ¶ 85,186 (1988) (Mobil/ Supply), we rejected the argument that OHA could not apply the spot purchaser presumption where it had previously granted refunds to firms with similar or more sporadic patterns in those instances. We found that the determination of whether a firm's purchases from a particular supplier are spot purchases is a question of fact and therefore must be made on a case-by-case basis. Mobil/ Supply at 88,368. We also noted that "as in any adjudicative process, the case law is undergoing constant evolution and refinement . . . ." Id. at 88,368.
After reviewing the evidence submitted by Vanguard, we conclude that it has not rebutted our finding that it purchased from Enron on the spot market, nor has it made the showings of injury required of spot market purchasers. As discussed below, the information provided by Vanguard concerning its purchasing relationship with Enron and its relationship with its customers is not sufficient to establish that, during the period of price controls, Vanguard was required to make specific purchases from Enron in order to maintain supplies to established customers or for other essential business reasons.
As an initial matter, we note that Vanguard was incorporated in August 1975, and that its first sales of NGLs took place in that month. Accordingly, it is clear that Vanguard was not operating as a reseller during the period April 1972 through March 1973, the regulatory "base period" for purposes of the DOE allocation regulations. Consequently, Vanguard had no regulatory obligation to furnish any "base period" customers with a steady supply of product. Nor has Vanguard specifically identified any base of traditional customers to whom it supplied product over any regular, historic time period. It is also therefore certainly true that Vanguard has submitted no evidence establishing that it maintained regular business relationships with its customers to the extent that it was compelled to purchase Enron products at unfavorable prices in order to maintain a steady supply of product to long- term, regular customers of Vanguard.
The purchase records provided by Vanguard indicate that Vanguard purchased 61,509,384 gallons of Enron propane during the refund period, and that it made propane purchases from Enron in twenty- five of the sixty-six months that Vanguard was in operation during that period. The records further indicate that Vanguard purchased 13,761,258 gallons of Enron butane in thirteen months of this sixty-six month period, and 3,135,900 gallons of Enron natural gasoline in six months of this period. With the exception of an August 1979 butane purchase of 9,004 gallons, all of Vanguards monthly Enron purchases of propane, butane or natural gasoline exceed 168,000 gallons, and many of the monthly purchase volumes exceed two million gallons of product.
While it is true that Vanguard purchased significant quantities of NGLPs from Enron, this high volume of purchases does not in itself refute our preliminary finding that Vanguard is a spot purchaser. While some spot purchasers clearly make only isolated or sporadic purchases from a supplier, a firm that makes spot market purchases from a particular supplier on a frequent basis may also be a spot purchaser if other factors, such as the size and pattern of purchases, the prices paid, and the purchaser's market position, indicate that the purchases were discretionary. Enron Corp./Gulf States Oil & Refining Co., 26 DOE ¶ 85,047 at 88,128-29 (1997). When the first refund procedures were established in Office of Enforcement (Vickers Energy Corp.), 8 DOE ¶ 82,597 (1981)(Vickers), OHA recognized that the situation of spot market purchasers often contrasted sharply with that of other customers of a consent order firm. Vickers, 8 DOE at 85,396-97. In Supply, we found that OHA's adoption of the spot presumption rested on our observation that a firm's position in the petroleum industry often determined whether it was likely to have incurred injury as a result of its supplier's alleged regulatory violations. As we noted above, steady, base period customers such as small gasoline retailers were often tied to a supplier by the federal allocation regulations, a supply contract, and state branding laws. Firms purchasing product consistently from an allocated supplier under these conditions lacked the flexibility to take advantage of lower prices by making discretionary purchases on the spot market, and were much more likely to have been "stuck" with any overcharges that occurred. In contrast, firms purchasing significant volumes of product on the spot market tended to be larger and to have considerable discretion to determine whether to purchase and, if so, to select product that they were able to resell at a profit. This distinction between different kinds of purchasers forms an important part of the basis for adopting the spot market presumption of non-injury. Supply, 19 DOE at 89,141.
Vanguard's pattern of purchases from Enron, as evidenced by the records described above, indicates that Vanguards purchases were large and made on a sporadic, discretionary basis rather than pursuant to supply agreements that would have committed Vanguard to purchasing a particular monthly volume of propane, butane or natural gasoline from Enron. The discretionary nature of these purchases is also evidenced by the month to month variations in the prices that Vanguard paid to Enron for these products. See Vanguards March 2, 1992 Application for Refund (Enron purchase prices contained in Vanguards competitive disadvantage analyses).
Our determination that Vanguard purchased Enron product on the spot market on a discretionary basis also is supported by available information concerning the Vanguards overall business operations during the price control period, including the descriptions of its business transactions provided by Vanguard officials and the market level at which it did business with its suppliers and customers. In its December 2, 1998 submission, Vanguard describes its purchases and sales of NGLPs as follows:
Vanguard concentrated its marketing efforts on the two largest natural gas liquids markets in the US ---- the Texas Gulf Coast market with its refineries, petrochemical plants and storage located in Mt. Belvieu, Texas, and the refiners, retailers and pipelines in central Kansas. Vanguards first office was located in Houston, Texas, the business center for the petroleum industry, and an office was opened in Tulsa in 1978 because of its proximity to the Kansas market.
Memorandum at 3. In a statement attached as Exhibit 1 to the Memorandum, Mr. C. Phillip Trotter, Vice President of Vanguard, relates that he worked as President of Hideca Petroleum (Hideca), a wholesale marketer located in Houston, Texas prior to a incorporating Vanguard with two other individuals in 1975. He describes Vanguards initial business strategy as follows:
We intended to concentrate on the customers that we had known at Hideca, UPG and Val Cap - the refiners, large retailers and industrial users who purchased at Mt. Belvieu, Texas and Conway, Kansas, and the pipelines and storage areas connected to those facilities. Then when we established reliable sources of supply, we would expand our customer base.
Statement of C. Phillip Trotter at 3. Mr. Trotter describes Vanguards purchases from Enron affiliates UPG and Northern as follows:
Almost all of the purchases that we made from UPG and Northern were either at Mt. Belvieu, Texas, or in Kansas at UPGs Bushton plant, the HTI or Mapco pipelines and storage areas located in Kansas.
Id. at 6. Our conclusion that Vanguard purchased and sold NGLPs through spot transactions in the wholesale reseller market is supported by these descriptions and by Mr. Trotter's acknowledgment that a significant portion of Vanguards customers were other wholesale resellers who apparently had no retail operations. Id. at 8. While Vanguard asserts that many of its customers were refiners, retailers and end users, we note that some reseller/retailers and some large end users, such as utilities and cooperatives, were active participants in the wholesale spot market. In fact, information submitted by Vanguard concerning its purchases and sales of Enron products identifies twenty-five companies that were Vanguard customers. Without exception, they appear to be refiners, resellers and large scale retailers of NGLPs who customarily bought and sold product on the wholesale reseller market. See Memorandum Exhibit 7. In fact, it is likely that many of these customers also sold product to Vanguard.(2)Thus, there is no indication that, during the price control period, any NGLP customer of Vanguard was operating outside of the spot market.
In its Memorandum, Vanguard contends that although the firm operated in the wholesale market, its intention to establish itself as a steady and reliable source of NGLPs required it to make purchases from producers such as Enron.
It was [Vanguards founders] plan to become a steady and reliable market source of supply to customers by becoming a steady and reliable market for producers. Thus, Vanguards founders envisioned an operation in which they would purchase natural gas liquids from producers and others, and hold the NGLs for sale to refiners, retailers, petrochemicals and other wholesale marketers. . . . They also recognized that the market did not need and ultimately would not support another firm of brokers or back-to-back resellers. A reselling or brokering business was viable only in the short term and to survive Vanguard needed to distinguish itself from these kinds of businesses by maintaining an inventory of product ready for delivery. This meant leasing storage facilities, becoming a shipper in NGL pipeline systems, and purchasing production from natural gas processing plants.
Memorandum at 4. Vanguard therefore asserts that its Enron purchases were part of a long-term business arrangement with Enron which were not discretionary because [Vanguard] was dependent on Enron as one of its two largest suppliers. Id. at 24.
Although Vanguard maintains that it always intended to develop its business away from brokered transactions and toward steady supplier and customer relationships, there is little or no evidence that this development occurred prior to the end of the Enron refund period in January 1981. Vanguard asserts that it eventually acquired storage and transportation facilities, and that it also invested in pipelines, oil and gas production, and NGL processing plants to become a fully integrated petroleum company. Memorandum at 5 and 7. However, Vanguard has not established that any of these developments occurred during the refund period. For example, the following discussion of leased storage space refers to the 1970's and the 1980's together and gives no indication of when the actual leasing of storage space began.
Vanguards leasing of storage began modestly, probably less than 50,000 barrels to start. Corporate records of leased storage in the 1970's and 1980's are no longer available, but [Vanguard] estimates leased storage could have been as much as 100,000 barrels. This increased steadily, and by 1994, Vanguards records show storage of 700,000 barrels.
Memorandum at 5, fnt. 1.
With respect to Vanguards business activities during the refund period, the firms transactions involving Enron product fail to indicate that Vanguard moved product into storage or moved it to a particular location for delivery to a customer. Vanguard acknowledges that as much as 14.85% of the propane, 36.62% of the butane, and 13.39% of the natural gasoline that it purchased from Enron were purchased in back-to-back transactions where the supplier and purchaser were located in advance and title to the product passed almost immediately from Enron to Vanguards customer. Vanguard refers to its other Enron purchases as inventory transactions, but that does not mean that Vanguard took physical possession of this product. At the time of purchase, this product was located in pipeline or storage facilities or in UPGs Bushton, Kansas plant, and there is no indication that Vanguards ownership of the product in any way altered its movement or location.
Although Vanguard purchased large volumes of Enron product, the firm has not shown that it was required to make these purchases to supply regular customers. While all wholesale resellers of NGLPs need sources of supply in order to operate, they are generally free to select product at the best price from a number of competing sellers. Only when a reseller must purchase a particular volume of product at a specific time in order to maintain a supply relationship with a regular customer, would it be forced to acquire overpriced product from a particular supplier. While Vanguard asserts that it cultivated Enron as a steady source of NGLPs in order to establish a reputation as a steady source of supply for its customers, there is no indication that Vanguard was ever constrained to make a particular purchase of overpriced product from Enron. Except for 1978, when Vanguard purchased propane from Enron in all months except for June and November, the firms purchases of NGLPs from Enron were sporadic, and do not indicate that Vanguard purchased product from Enron on a regular basis to meet the demands of specific customers. It appears from the record that Vanguards frequent use of Enron as a supplier may have been more a function of convenience than necessity. In his statement, Mr. Trotter indicates that the difficulties of obtaining credit from a supplier encouraged resellers to become repeat customers.
Going through the process of establishing credit with a supplier was a time-consuming process that was a necessary but sometimes tedious part of the business. As a result, once credit was established with a company, we wanted to keep that relationship alive and use the company as a regular supplier. It was much easier to buy from one supplier on a monthly basis than it was to buy from twelve different suppliers, each of whom needed letters of credit and financial information from Vanguard.
Memorandum Exhibit 1, p. 4.
As discussed above, the available evidence indicates that Vanguards purchases and sales of Enron products were completely discretionary; it had no base period supply obligations that required it to purchase product for its customers. Nor is there any indication that it was required to purchase particular volumes of Enron product in order to maintain existing business relationships with regular customers or for other essential business purposes. In exercising its discretion to purchase Enron products, we must conclude that Vanguard made a rational business decision. It must have determined that the Enron products were priced so that it could realize an acceptable amount of profit from the resale of those products on the wholesale market.
In the absence of special circumstances that would have required a refund applicant to purchase particular product from a consent order firm on the spot market, we have consistently held that a claimant seeking to demonstrate economic injury in order to overcome the spot purchaser presumption must submit evidence to establish that it was unable to recover the price it paid to the consent order firm. Standard Oil Co. (Indiana)/Cities Service Co., 12 DOE ¶ 85,114 at 88,336 (1984); Tenneco Oil Co./J.O. Cook, Inc., 9 DOE ¶ 82,580 at 85,427 (1982)(Tenneco/Cook). This position rests on our view that where a firm is exercising its discretion to purchase and sell product on the spot market, the recovery of its costs and any level of profit on the transactions is sufficient to demonstrate that the firm did not experience injury. In Tenneco/Cook, for example, Cook attempted to claim a refund for gasoline that it purchased and sold on the spot market at a low profit margin.
We brokered all of this gasoline at ½ to 1 cent above our cost. . . . We did not pick up the gasoline and sell it ourselves at retail.
Tenneco/Cook, 9 DOE at 85,427. The OHA concluded that these were "precisely the type" of transactions that are not eligible for a refund. The OHA found that Cook "suffered no injury from Tenneco's regulatory practices" because it was "able to not only pass through all of any alleged overcharges, but was able to make a profit on all of its sales of Tenneco gasoline." Id. By contrast, in Waller Petroleum Company, Inc./Wooten Oil Company, 13 DOE ¶ 85,110 (1985), the OHA found that Wooten had successfully demonstrated injury in its purchases of Waller product because it bought and sold Waller product at a loss in order to meet its allocation obligations to its customers. Id. at 88,297.
It is not sufficient for Vanguard to demonstrate injury by attempting to show that higher prices charged by Enron diminished the amount of profit that Vanguard realized on its sales of Enron product or lessened its ability to compete in the reseller market. We have consistently rejected the idea that a reseller making discretionary purchases on the spot market was entitled to any particular margin of profit, and the idea that its failure to achieve that level of profit constitutes proof that it experienced economic injury as a result of the prices that it paid for product. Enron Corporation/H. C. Oil Company, 26 DOE ¶ 85,038 at 88,094-95 (1997) and cases cited therein. The fact that such purchases were discretionary and made within an actively fluctuating spot market strongly indicates that the spot purchaser was buying product that it believed would be profitably resold. The profit margin on such sales would fluctuate naturally depending on various factors affecting the supply and demand of product. Under these circumstances, a lower profit margin does not demonstrate that a particular reseller was injured by the price charged by a particular seller. As we stated in Tenneco/Cook, spot market purchases resulting in some level of overall profitability strongly demonstrate that the purchaser suffered no injury from the seller's regulatory pricing practices. Id., 9 DOE at 85,427.
In the present case, Vanguard freely chose to enter the wholesale reseller market for NGLPs in 1975 and to purchase large volumes of Enron products during the remainder of the refund period. This indicates to us that Vanguard's resales involving Enron products were generally profitable to Vanguard. Under these circumstances, Vanguard's purported banks of unrecovered increased product costs do not indicate that Vanguard experienced injury in its transactions involving Enron product. Whether Vanguard fully recovered its base margin of profit in its resales of Enron product is irrelevant to a showing of injury regarding discretionary, spot market purchases. Similarly, the competitive disadvantage analysis provided by Vanguard does not establish injury. Whether Vanguard paid more or less for NGLPs than its competitors is irrelevant for these purposes. There is no indication that Vanguard was injured by freely choosing to engage in discretionary reselling transactions involving spot market product.
In view of the circumstances set forth above, we have determined that Vanguard was a spot market purchaser of Enron NGLPs, and that it has not shown that it suffered injury with respect to these spot market purchases. Vanguard therefore has failed to rebut the spot purchaser presumption of non-injury in this proceeding.
As the foregoing discussion indicates, under the Petroleum Overcharge Distribution and Restitution Act of 1986, Subpart V, and applicable case law, Vanguard has the burden of demonstrating that it was injured in its Enron purchases, and Vanguard has failed to meet that burden. Vanguards inability to demonstrate injury does not surprise us. Our general knowledge of the industry indicates that the type of transaction at issue here - large transactions between NGLP wholesalers - was likely discretionary and profitable. See Enron Corp./Apex Oil Co., 27 DOE ¶ 85,016, 88,098 (1998). During the regulatory period, the price rules for NGLPs differed for gas producers and refiners. See 10 C.F.R. Subpart E (refiners), Subpart K (producers). As a result, under the rules gas producers were limited to lower selling prices. This created a two tier pricing system under which wholesale purchasers of NGLPs from gas producers could trade NGLPs with successive mark-ups and still be able to sell the NGLPs to downstream purchasers at competitive prices, i.e., under market clearing prices for NGLPs produced by refiners. Thus, firms could profitably trade NGLPs without regard to whether the transactions had any economic value, i.e., whether they facilitated the movement of NGLPs from the producer to the end-user. We therefore are not surprised that Vanguard has been unable to meet its burden of demonstrating that it was injured in its purchases.
Accordingly, the Vanguard Application for Refund will be denied.
It Is Therefore Ordered That:
(1) The Application for Refund filed by Vanguard Petroleum Corporation (Case No. RF340-82) on March 2, 1992 is hereby denied.
(2) This is a final order of the Department of Energy.
George B. Breznay
Director
Office of Hearings and Appeals
Date: October 12, 1999
(1)1/ This amount was derived by dividing the fund received from Enron allocable to refined products ($43,200,000) by the estimated volume of refined products sold by Enron from June 13, 1973 through the date of decontrol of the relevant product (7,186,265,624). Id. at n. 8.
(2)For example, a purchase and sale register for BTU Energy that was attached to an August 5, 1994 Vanguard filing indicates that BTU Energy both sold product to and purchased product from Vanguard.