The Justice Department has rejected a request from the Department of Energy that it seek criminal indictments against two major oil companies on a variety of charges, including conspiracy to overcharge crude oil customers.
Documents obtained by The Washington Post reveal that on June 30, 1978, DOE General Counsel Lynn Coleman recommended that Justice charge Texaco Inc. and the Sun Oil Co. and some of their employes with willfully circumventing federal regulations aimed at controlling crude oil prices.
The case involved the Signal Hill West oil fields in Los Angeles County, where DOE alleges that Texaco, the owner and largest operator of wells in the field, and Sun, which had the second largest working interest, conspired in 1975-76 to charge more for crude oil than allowed.
DOE contends, in papers given to the Justice Department and obtained by The Post, that the two companies decided to open up several otherwise inoperative wells solely to bring the average production per well in the field down below 10 barrels a day.
By getting the average production down that far, the companies allegedly were able to reclassify the entire field as "stripper well property" -- which is exempt from price controls -- and thus from that point on to charge about $10 a barrel for 400,000 barrels of their oil instead of $4.50 a barrel.
This resulted, DOE claimed, in overcharges of about $2.2 million.
"It is our recommendation," DOE wrote to Justice, "that the matter be presented to a grand jury with a view towards the prosecution of Texaco, Sun and certain employes for willfully circumventing the FEA price regulations and for making a false statement, as well as for mail fraud and conspiracy."
But after a year of consideration, and despite considerable DOE documentation, Justice decided to decline to prosecute. "We just couldn't find the evidence that there was a deliberate attempt to get around the regs," said a top Justice official.
That decision, along with a similar one last week on a separate case, effectively killed two of the seven DOE recommendations for criminal charges against major oil companies.
The five other cases remain under consideration at Justice.
Congressional sources blame both DOE and the Justice Department for what they say is a failure to prosecute criminal activity in the oil industry.
The complexity of the cases, and a Justice Department policy leaving much of the decision on whether to prosecute up to local U.S. attorney's around the country, are seen by these sources, as key reasons behind the inability of the federal government to bring criminal charges.
The problem is that to prosecute such complex cases properly, a U.S. attorney would have to devote a lot of time and manpower, resources he may feel could be better used on other matters.
Energy Department sources blame the Justice Department, which they say has allocated only eight persons to work in its energy section, thus preventing the kind of massive effort needed to bring complex cases to trial.
Justice Department sources acknowledge that they have had problems handling the complex cases in the past, but claim that they have ironed out those problems and are back on track.
"In the cases we turned down, we did so only because these were not sound cases," said one Justice source.
The question of whether there has been adequate effort on the part of the various departments to prosecute energy regulation violations has attracted congressional attention. Chairman John Conyers (D-Mich.) of the House Judiciary subcommittee on crime held hearings last June at which a number of witnesses criticized both Energy and Justice.
In the Texaco-Sun case, DOE's Coleman and its special counsel, Paul Bloom, wrote a 49-page memorandum to Justice outlining the case for criminal prosecution. Bloom's office discovered the evidence cited for prosecution while doing civil audits of the companies.
"Based on information developed in the course of its special investigation," the memo states, DOE "believes that certain [federal] regulations were willfully circumvented by Texaco, Inc. and Sun Oil Co. and certain of their employes."
"Federal criminal sanctions are provided for such misconduct," the memo goes on. "In addition, there is evidence that other federal criminal statues, namely, the making of false statements, mail and fraud and conspiracy, have been violated."
In the typewritten memorandum to Justice, DOE outlined the results of a "full-scale investigation" it had conducted with two attorneys and two accountants from Washington and another attorney from Dallas over a 4 1/2-month period.
Dozens of individuals were interviewed, and several subpoenas issued, the DOE records show. "The facts . . . indicate that beginning in the fourth quarter of 1975, Texaco, and certain of its employes, under pessure from other unit working interest owners, particularly Sun, began a concerted effort to circumvent the price regulations by bringing idle wells into production for the purpose of manipulating the unit's ADP [average Daily Production] calculation," DOE said.
"In fact," the DOE documents continue, "the evidence shows that there was no economic justification for this activity other than the financial benefit that would accrue to all working interest owners in 1976 if the unit's crude oil production could be sold at the higher price."
DOE quoted the sworn testimony of then Texaco engineer Richard Hill, who said "we put the [formerly inoperative] wells on basically to -- my understanding was to achieve stripper status."
There are other quotes cited from tape recordings of meetings of officials working at Signal Hill that indicate a general understanding that the old wells would be reactivated to change the field's regulatory status.
Following several pages of information gathered from the investigation was the sentence: "All of the above activities clearly demonstrate a fraudulent scheme on the part of Texaco, Sun [and eight named officials] to circumvent FEA [Federal Energy Administration] regulations."
Following that were several pages of specific charges that DOE felt should be brought against the companies and named individuals. The involvement of other oil companies with an interest in the Signal Hill unit was also discussed.
After recommending tough prosecutions, DOE concluded its memo to Justice with:
"It is our veiw that the egregious conduct of several major oil companies in willfully circumventing price regulations in the manner described here, it condoned, can only serve to seriously undermine the entire DOE compliance effort."
On two later dates, key DOE officials wrote additional memos supporting the case for prosecution.
Still, Justice Department officials say, the U.S. attorney's office in Los Angeles concluded in June 1979 that "it just wasn't a sound case." After further review by justice higher-ups that decision was upheld.
The case is now back at the Energy Department, which next week will begin administrative proceedings against the two companies in an effort to recover the alleged overcharges.