A newly discovered 1975 Union Oil Co. internal memorandum reveals that at least one major oil company deliberately ignored certain federal pricing regulations because the government was not enforcing them.
The memo has given Department of Energy attorneys the first hard evidence to support their contention that at least some oil companies understood the complex pricing regulations imposed after the 1973 Arab oil embargo - a fact the oil companies have disputed continuously in court.
And, the memo reveals Union Oil deliberately refrained from seeking guidance in understanding the regulations from the Department of Energy in an apparent attempt to maximize profits by using its interpretation of what new costs could automatically be passed on to consumers.
"It would not be good strategy to request an FEA [Federal Energy Administration] interpretation." the memo from Union Oil official Thomas B. Sleeman to other company officials stated. "Rather, we shlould file our next reports using interpretation 2" - a second translation of a federal pricing law more favorable to oil companies. "The worst that can happen is they will force us back to No. 1" - an interpretation Union Oil admitted was "supported by a literal reading of the regulations. "No price reduction would be required."
Later in the memo, Sleeman wrote: "We cannot blame the government for low profits in refining and marketing - they will allow us to earn more."
The document surfaced in the discovery process of an abscure lawsuit filed bu gas station retailers against Union Oil for allegedly raising gas prices unfairly.
The Department of Energy had joined that suit on the side of the gas station owners. When the memo was discovered, it was immediately made available to DOE attorneys working on several other oil company cases concerning the controversial pricing regulations.
Despite the fact that distribution of the memo was subject to court restrictions in Minnesota, government attorneys succeeded in securing court permission to share the document with attorneys working on other cases.
Last week, the DOE legal team working on a lawsuit filed by several oil companies against the government over its attempt to clarify its regulations submitted the memo in new mo- tions filed here with the Temporary Emergency Court of Appeals of the United States.
The new document "casts considerable doubt on the validity of certain factual assertions made by the refiner-plaintiffs in their allegations concerning the refining industry's general lack of any contemporaneous understanding of the FEA cost pass-through regulations," said the government filing.
The document supports its contention, the government claims, "that refiners, particularly the majors, understood far more about the cost pass-through regulations than plaintiffs have admitted in these proceedings and that they silently, and in some cases deliberately, exploited the failure of the agency's compliance personnel to enforce the correct. . . rule.
"Government counsel believe that the Union memorandum illustrates how the district courts improperly relied uopn the representations of the plaintiff refiners that the regulations were vague and that their meaning could not be understood by the industry."
The regulations in question involve passing costs through to company customers. Essentially, the oil companies were ordered to set their prices for refined gas at the May 15, 1973, price, and were told they would be allowed to pass on any product-cost increases automatically. That meant that if their raw material cost went up, they could automatically increase their final product price by the same amount.
And if the price for a raw material went up in one month, the oil company could "bank" that increse if it wanted, and not apply it until later. This would become necessary because there were certain ceilings set on how much gas prices could rise in one month.
But the controversy rose over non-product costs increases. The energy regulators said that these costs - which included such things as management overhead, marketing and advertising costs and other variable costs - would not be automatically passed on."The whole point of the regulations was to keep those costs down," said one DOE official.
While the nonproduct cost increases would, in some cases, be allowed to be passed on, the government would not allow them to be "banked" and thus used to increase costs later.
But some oil companies found two ways to include nonproduct costs increases in their pass-through increased - which in 1975 were limited to about 10 percent a month.
The first group "proportionalized" the costs. That is, they took some product cost increases and some nonproduct cost increases - totaling 10 percent - and banked the remaining product cost increases until later.
The second gruop became known as the "reversers." These firms took what was a more economically favorable stance by first applying 100 percent of their nonproduct costs to pass-through increases and then filling the rest of the allowable 10 percent increase with product costs. Then the companies would "bank" the remaining product costs for later price increases.
Then in 1976, when the federal government became aware that many oil companies were involves in these two pricing schemes, the FEA published a legal statement of policy that refiners were mandated to pass through all product cost increases first, before beginning to pass through any nonproduct costs, citing the original purpose of the regulations - to help keep nonproduct costs down.
But the oil companies balked, and several got together and sued FEA in federal courts in Wilmington and Cleveland. (Union Oil is not a plaintiff in that case.) In both jurisdictions the oil companies won with their argument that the regulations were so unclear, and so devoid of any hint that product cost increases had to be put ahead of nonproduct costs, that there was no fair notice of the rule.
And, the oil companies showed lower-level FEA auditors had given them interpretations to do what they did.
The government has appealed those cases. But until last week government attorneys were unable to show that any oil company did, in fact, understand the regulations. The memo has been filed in the government's appeal of those cases.
The Union Oil memo shows there was an understanding of the regulation, and that in company's case, "Union decided to take its chances and recover all of its NPCI (nonproduct cost increases) first," according to the government filing.
"Significantly," the filing continues, "FEA's failure to enforce the NPCI. Last rule is the ONLY basis which Union referred to in support of the NPCI First "interpretation."
The government filing further charges "that at least one major refiner was playing a deliberately game of cat and mouse with the agency - silently taking advantage of a possible loophole created by the compliance auditors' erroneous administration of the cost pass-through regulations and deliberately refraining from seeking any authoritative guidance from the agency."
Union oil officials were unavailable for comment yesterday, but attorneys for some of the oil companies involved in the lawsuits said they could not comment because the appeal is scheduled for oral arguments on August 9.
Similarly, DOE attorneys working on the case said they could not commentbecause the litigation was pending.