Case No. RF340-00035

January 12, 1999

DECISION AND ORDER

OF THE DEPARTMENT OF ENERGY

Application for Refund

Name of Petitioner: Enron Corp./

Petroleum Fuels, Inc.

Date of Filing: December 9, 1991

Case Number: RF340-35

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. (UPG), Northern Propane Gas Co. (Northern), and Florida Hydrocarbons Co. 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 on behalf of Petroleum Fuels, Inc. (PFI), a

reseller of petroleum products that purchased NGLs from UPG and Northern.(1) Accordingly, PFI 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.(2)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. In a telephone conversation with the OHA on November 3, 1998, PFI elected not to prove injury and requested a refund under the reseller presumption of injury.(3)

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).

In an October 23, 1998 letter to Mr. Barron, we tentatively identified PFI as a spot purchaser of Enron product. In that letter, we noted that the information in PFI's Application indicated that PFI made isolated purchases of significant volumes of product from Enron. Specifically, Schedule A attached to the Application showed PFI made the following purchases from UPG:

Butane

1975 Second Quarter 2,100,000 gallons

1976 Fourth Quarter 2,100,000 gallons

1977 Second Quarter 3,150,000 gallons

1978 Second Quarter 1,064,994 gallons

Fourth Quarter 2,310,000 gallons

1979 Fourth Quarter 840,000 gallons

Propane

1978 First Quarter 8,735,234 gallons

Second Quarter 1,260,000 gallons

Fourth Quarter 2,859,438 gallons

1980 Third Quarter 91,320 gallons

Natural Gasoline

1978 First Quarter 1,260,000 gallons

Second Quarter 210,000 gallons

PFI also made three purchases of propane from Northern:

1978 November 1,470,000 gallons

1979 February 705,600 gallons

March 2,814 gallons

We stated that unless PFI 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. See October 23, 1998 letter from Thomas L. Wieker, Deputy Director, Office of Hearings and Appeals, to Michael O’N. Barron. In a response to this letter dated December 11, 1998, Mr. Barron attempted to show that PFI was not a spot purchaser.

II. Analysis

In determining whether PFI's purchases from UPG and Northern 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 detailed explanation of the meaning of the presumption, and can provide a basis for our analysis of whether the presumption is applicable to PFI's purchases and sales of UPG and Northern 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 Co./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. We recognize that short term, discretionary sales and purchases may have been a normal business arrangement in certain portions of the NGL industry, particularly in the producer and wholesale reseller markets. Nevertheless, we believe such spot market purchases of Enron product establish a presumption that the purchaser was not injured. 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 a [sic] 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. Accordingly, we will proceed with an evaluation of PFI's business operations.

According to the Application, PFI was established in Texas in July 1974 and was a reseller of petroleum products. It discontinued business operations after the period of price controls (May 1973 through January 1981). In a letter to us dated December 11, 1998, Mr. Barron stated that PFI has no records from the refund period and "since we do not have any sales information, it is impossible for us to determine anything about the resale of Enron product including the probable purchaser and the price at which it was sold."

Because PFI did not exist before the price control period, it clearly did not have base period customers to whom it was obligated to sell NGLs. We know nothing else about PFI's customers. Accordingly, we conclude that PFI has not demonstrated that any substantial volumes of the Enron product purchased was used to supply regular retail or end user customers.

In his submission, Mr. Barron argued that "OHA's application of the spot purchase presumption [is] arbitrary and inconsistent." In support of this argument, Mr. Barron submitted an analysis of other Applications for Refund which were denied due to the spot purchase presumption. 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 caselaw is undergoing constant evolution and refinement . . ." Id. at 88,368.

As discussed above, there are several reasons why we believed that PFI was a spot purchaser. First, PFI made large purchases from UPG and Northern in nine of the twenty-seven calendar quarters that it was in business during the refund period. These purchases were not made on any particular schedule or in any set amount. Therefore, we believed that these purchases were for large volumes and made in an isolated and sporadic manner. We therefore believe the logic of the spot purchase presumption should apply.

PFI did not begin operations until 1974, after the refund period began. Therefore, it did not have base period customers to whom it was obligated to provide NGLs under the DOE’s price and allocation regulations. This situation gave PFI the freedom to buy NGLs only when the price terms were favorable.

After reviewing the evidence submitted by Mr. Barron, we conclude that he has not rebutted our finding that PFI purchased from UPG and Northern on the spot market, nor has he made the showings of injury required of spot market purchasers. PFI's purchases from UPG and Northern appear to have been completely discretionary; it had no base period supply obligations that required it to purchase product for its customers. Nor has it shown that its Enron purchases were necessary to provide product to regular retail or end-user customers. In exercising its discretion to purchase UPG and Northern products, we must conclude that PFI made a rational business decision. It must have determined that the UPG and Northern products were priced so that it could reasonably anticipate an acceptable amount of profit from the resale of those products.

In view of the circumstances discussed above, we have determined that PFI has not shown injury from its spot market purchases from UPG and Northern and has therefore failed to rebut the spot purchaser presumption. Accordingly, we conclude that the PFI Application for Refund should be denied.

It Is Therefore Ordered That:

(1) The Application for Refund filed on behalf of Petroleum Fuels, Inc., (Case No. RF340-35) is hereby denied.

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

George B. Breznay

Director

Office of Hearings and Appeals

Date: January 12, 1999

(1)The PFI application was submitted by Ron Brown (hereinafter "the applicant"). Mr. Brown signed the application as president of PFI. PFI is represented in this proceeding by Michael O’N. Barron.

(2)2/ 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.

(3)Mr. Barron stated that PFI did not have sufficient records to prepare a claim of injury.