The Department of Energy called up the Washington attorney for Ashland Oil late Friday afternoon and asked him to stop by the department at the end of the day. When he arrived, he was handed a document which would require Ashland to pay $52 million to the U.S. government for alleged past pricing violations.
That fine - called a proposed remedial order - is the first of its kind. It represents the efforts of a six-month-old task force of more than 500 Department of Energy accountants and lawyers - a strike force designed to go after possible violations in the complex area of oil industry regulation. And Ashland's payment, if it withstands a likely court challenge, would be the first substantial return on one of the most ambitious and extensive efforts on the part of the federal government to cope with the complexity of the oil industry.
If the government has its way, 33 other oil companies will join Ashland in forking over to both the government and some customers an estimated $1 billion in alleged overcharges resulting from violations of various DOE directives that grew out of the oil crisis of the early 1970s. And the $1 billion figure represents "only the tip of the iceberg," according to Paul Bloom, who heads up the task force under the name of the Office of Special Counsel.
DOE was not always as aggressive in scrutinizing the oil companies as it is today under Bloom. In fact, the Office of Special Counsel was created only after a special task force called Federal Energy Administration oil industry regulatory enforcement efforts a "dismal failure."
The task force, headed by securities and Exchange Commission enforcement chief Stanley Sporkin, spent two months evaluating the FEA's effectiveness in monitoring its own regulations. The conclusions of the blue-ribbon panel, published last July, were not favorable.
"Unfortunately, to date the FEA's efforts to secure compliance from our nation's major refiners have been a failure," Sporkin said in a letter accompanying his report. "There are entirely inadequate audit resources and no lawyers assigned on a full-time basis to any of the major refiners. Given the size of the problem, the limited work that has been done to date, and the enforcement problems that necessarily accompany any attempt to remedy aged violations, a major new undertaking is required."
That new undertaking was recommended in the form of the Office of Special Counsel.
"The mandate came down for an intensified audit of the 34 major refiners," Bloom remembers. "In three years, DOE had never finished an audit of one of these refiners. The oil companies were keeping our existing audit teams on a starvation diet, feeding them just enough to keep them going, but never enough to finish. DOE was a textbook example of how not to integrate the legal and audit aspects of an agency."
So Bloom was named on Dec. 4, 1977, to set up the Task Force on Compliance and Enforcement, the Office of Special Counsel for Compliance (OSC) - responsible for enforcement of the complex oil pricing and allocation regulations as they apply to the 34 major refiners.
Bloom moved quickly. On Dec. 13, only nine days after his office officially began operation, he subpoenaed financial records of all 34 major refiners. "And we began to intensify our audits of the 15 largest companies," he said.
Bloom is commited by statute to complete all of his field audits by the end of 1979 as well as to initiate all necessary enforcement actions by that time. He has about 612 slots for staffers, but is still dozens short of that number. "There are problems finding the kind of personnel that you needed for this job; it requires a very special background," he said. In fact, he has hired several highly specialized persons on a short-term contract basis that allows him maximum flexibility in using the best possible people for specific jobs.
"And many of our contract people, like some of the computer consultants, would really have nothing to do here once this investigation is over, so it works out best for everyone," Bloom said.
In an effort to concentrate resources even more, Bloom has intensified the audits on Exxon and Texaco, partly in the hope that any decisions reached there could be applied easily to the rest of the industry. "We have 65 people at the Exxon site every day," Blooms saids, "and they are poring over microfilm machines, practically going blind."
Bloom has made headway in several areas that allows him to move faster than previous audit attempts by energy regulators. For one, he has received permission from the Justice Department to move on his own in federal court against oil companies he feels are not cooperating with his investigation.
But perhaps more important was an arrangement he reached with Shell Oil Co. giving OSC auditors access to company computers and the basic business information needed to check on compliance with government regulations in areas such as pricing.
"We will have access to Shell's data processing system, which includes their pricing programs, and transaction data," Bloom says. "We can see right away, for example, whether they were overcharging anyone."
Bloom said his teams of auditors are mostly "documenting company errors of judgment in interpreting federal rules, and the dollar consequence of those errors. But where we find that there was a willful violation, where the company knew it would be breaking the law but just figured they would make more money doing so, we will bring criminal charges."
In some cases, "common sense" has told Bloom that "there were decisions by oil companies that were strongly influenced by the economic impact of disobeying a regulation." It is obvious, he said, that some oil companies violated the law because they knew they could make money doing it, and because they felt that, if they ever were punished, the reprimand would come in the form of noncriminal penalties that probably would cost considerably less than obeying the statute.
In cases of willful violation, Bloom has been going before federal grand juries with his evidence. Although no indictments have come down, one Houston-based grand jury reportedly is close to charging three oil companies and at least one chief executive with deliberately overpricing millions of dollars worth of crude oil.
In most cases, after calculating the estimated cost of alleged overcharges, bloom has filed "Notice of Probable Violations" with several oil companies. These notices inform the company that the DOE has found a violation of a regulation, and the company is given a chance to respond with its interpretation of the regulations in question before formal charges are brought.
In all, the OSC has initiated more than 30 formal enforcement proceedings (administrative and judicial), charging refiners more than $1 billion. In some cases, where the consumer who was overcharged can be identified. DOE asks for restitution to the consumer. But in other cases where it is impossible to identify the final consumer, DOE is asking the oil companies to pay the amount of the alleged overcharge to the U.S. Treasury.
In one case, OSC alleged that Atlantic Richfiled overcharged the City of Seattle $11,000 while, in another, Texaco agreed to pay $1.9 million to one unbranded jobber who had been overcharged, and the jobber then was ordered to pass $1.4 million on to his customers.
In one of its most important actions, OSC recently filed a complaint against Exxon in federal court here, charging the world's largest refiner with selling "old oil" at "new oil" prices. Because the FEA was attempting to increase domestic oil production to reduce dependence on the oil-rich Arab countries, oil companies were allowed to charge several dollars more per barrel for all new oil produced above previous quantities.
But the DOE charged that Exxon merely was shifting output from one rig to another to make it appear that the new rig was pumping new oil when in fact, according to DOE, that was oil that would have come out of a now-closed old pump under normal production.
The issue is more complex than that, and Exxon has strongly denied any overcharges. Exxon is also on record as challenging the Department of Energy's interpretation of its own rules.
But the important fact to note is that Bloom decided to go to court instead of taking the more cumbersome administrative route.
About three-fourths of the $1 billion in alleged overcharges already discovered by the DOE Task Force is attributable to Exxon and Texaco, Bloom said. His troops are gearing up to move more extensively against other bigger firms, but he still wants to build strong cases against the first two giants.
"If we can get those two, we can do anything," he asserts.