The Departments of Energy and Justice were accused on Capitol Hill yesterday of repeatedly mishandling and failing to prosecute crude-oil repricing frauds said to have bilked consumers of billions of dollars since 1975.
DOE and its predecessor, the Federal Energy Amdinistration, bore the brunt of the accusations, some of which were made by rebel DOE attorney Joseph D. McNeff of Dallas.
"No matter what the true reason is for the FEA's and DOE's failure to police the oil industry," McNeff testified, "one fact is certain: confronted by massive, continuing frauds, [their] criminal investigations could not have been more effectively limited if they had been subcontracted to the American Petroleum Institute."
His charges were indirectly reinforced by the testimony of two federal prosecutors who said information from the press - not from DOE or Justice - led them to launch criminal proceedings.
Rep. John D. Dingell (D-Mich.), chairman of the House Commerce energy and power subcommittee, said the two departments have achieved "precisely one successful criminal prosecution" after spending "millions of taxpayer dollars." He estimated that the frauds have cost the public billions.
Defending DOE, Herbert F. Buchanan, a top department official in Dallas, said it had to overcome "growing pains," but now is preparing to mount a huge assault on the frauds.
But Rep. John Conyers Jr. (D-Mich.), chairman of the House Judiciary crime subcommittee, rejected the defense as the kind of "song and dance" he's heard all too often.
He cited the testimony of the prosecutors, U.S. Attorney J.A. (Tony) Canales of Houston and Assistant U.S. Attorney Marvin L Rudnick of Tampa, that expert auditors are indispensable to prosecutions.Yet, he said, DOE's budget request seeks a reduction in its staff of auditors - from 600 to 250.
"It's totally impossible for me to believe that there's some resurgence of interest in enforcement," Conyers said.
Dingell and Conyers presided over a seven-hour joint hearing at which they, members of their subcommittees, the General Accounting Office and other witnesses accused DOE and the Justice Department of laxity, or worse.
At DOE, spokesman James Bishop denied the charges, saying that the department has obtained jail sentences in some cases and will persist "until there are no more cases to prosecute."
At issue are the huge profits to be made from phony paper conversions of price-controlled "old" crude to uncontrolled "new" oil that commands approximately $7 a barrel more.
Over the past five years, several hundred crude-oil "resellers" have sprung up. Buying crude from producers for $5 per 42-gallon barrel, they illegally inflate the price in sales to other resellers until one finally sells it for about $12 to a refinery - sometimes a refinery that normally would buy it directly from the producer for $5.
"DOE recognized this scheme in 1975 and identified criminal activity - yet it took until the spring of 1978 to make the first referral to the Justice Department and until the spring of 1979 to obtain the first indictment of a crude-oil reseller," Dingell said.
The hearing produced an outburst of allegations that some major oil companies - not merely fly-by-night resellers - have profited from the frauds.
Some of the allegations came from McNeff, who was transferred to Dallas from Houston by DOE after seeking the help of Dingell's subcommittee in exposing the alleged frauds.
To an unspecified extent, McNeff charged, refineries owned by major oil companies have abandoned their customary practices of buying $5 old crude directly from producers and selling refined products directly to traditional buyers, particularly utilities.
Instead, he testified, they have been buying crude from resellers who illegally inflated the prices and supplying products to brokers "whose only function was to 'daisy chain' the prices [i.e., raise them through a series of transactions] while the fuel was being shipped directly to the utilities.
"By these two stratagems," McNeff continued, "the major companies have been able to raise the general price of fuel to its present artificially high level, insuring that when controls are removed they will not have to boost their prices even more dramatically and suspiciously."
F. Edwin Hallman Jr., who resigned May 5 as head of DOE's Atlanta region, testified that he was stopped from pursuing an investigation involving two $75,000 payments to a former Gulf Oil Co. vice president and officials of the Commerce Department.