_I_-- - ‘L- I -__-_-_-.--“._(.l_... t 1rki t.wi Statw “*l-s.-l...-..l” (hnvrid Acwnnting Office Ilcport to the Ch2bxun, Subcomrnittkx ’ - .b GAO on Oversight and Investigations, C()mrni We on Energy and Commerce, House 01‘Representatives AacT’llst 1 !I90 ENERGY REGULATION Factors Relating to Oil Overcharge Settlements Need Better Documentation ,_-, E IIxlllllll ll 142298 w--Not to be released outside the General Accounting Office unless specifically approved by the Office of Congressional Relations. ‘i, WI 1 (mj .. “,, , .l_.l”“...“.. _.. _. _. . .I.- .-._ _ _ .-. . . ..--.. .._-.- _---.-_---- --_- -_-. -““-__ _--- .._..l-lll.----” _ .“I ------II ----T united states GAO General Accounting Office Washington, D.C. 20548 Resources, Community, and Economic Development Division B-238736.1 August 23,199O The Honorable John D. Dingell Chairman, Subcommitteeon Oversight and Investigations Committee on Energy and Commerce Houseof Representatives Dear Mr. Chairman: As requested, we are providing information on several aspectsof the Department of Energy’s (DOE) Economic Regulatory Administration’s (ERA) handling of the proposed settlement of the Cities Service oil over- charge litigation, including (1) the decision to allow extended payments for the settlement; (2) the analysis of the agency’srisks in pursuing the Cities litigation, which ERA used in formulating the settlement; and (3) the role of ERA’S litigating attorneys in the proposed settlement.* In addi- tion, we assessedthe adequacy of compliance with internal control stan- dards relating to documentation on certain aspectsof the proposed settlement. The proposed settlement, which ERA announcedon May 24,1989, was intended to resolve alleged violations by Cities Service of oil price and allocation regulations totaling $713.8 million, including interest. During the period when the proposed settlement of this casewas being negoti- ated, it was ERA’S largest remaining oil overcharge case.As of July 3, 1990, the proposed settlement had not been finalized by DOE. ERAhas little or no documentation for many of the significant events Results in Brief that led to the proposed settlement, including the basis for the decision to allow extended payments and the litigation risk analysis prepared by ERA. Specifically, we determined the following: l ERA had no documented basis to allow Occidental’s subsidiary, OXY USA (formerly Cities Service), an 8-year period in which to pay the proposed settlement amount, as required by ERA’s policy and the Office of Man- agement and Budget’s (OMB) and GAO’S standards. In July 1989, l-1/2 months after the proposed settlement was announcedand subsequentto GAO’S request for copies,ERA obtained data on OXY USA’s cash flow. ERA 1As agreedwith your office, other issuesrelated to ERA’shandling of the Cities caze,raisedin your letter and in subsequentdiscussionswith your staff, are beingreviewedseparately. Page 1 GAO/RCED-80-181 Documentation of 011Overcharge Settlement Factom 7 522s726.1 determined that OXY USA appeared capable of paying the settlement amount in a significantly shorter period and reopenedsettlement negotiations. . ERA'S analysis of the agency’srisks associatedwith pursuing the Cities casethrough continued litigation, which served, in part, as the basis for the proposed settlement, was not well documented.The documentation consistedof one typewritten page, which contained two sentencesdis- cussingthe basis for the risk factors included in the analysis. Another one-pagedocument, specifying possible financial remedies in the case, was prepared and supports the risk analysis. The documented analysis was not updated to reflect a decision on the caseby DOE'S Office of Hear- ings and Appeals (OHA)that affected the results of the analysis. In our view, additional documentation of such analyses is necessaryto support ERA'S decisionsto settle oil overcharge casesand comply with the internal control standards for documentation. In addition, ERA had little documentation regarding its negotiating ses- sions with Occidental and no documentation of the review of the pro- posed settlement by DOE'S Office of General Counsel(WC). ERA also did not maintain settlement-related documents in a central, readily acces- sible location, as required by OMB'S and GAO'S standards. Documentation of significant settlement-related events, such as those described above, is crucial to assurethe Secretary of Energy and the Congressthat oil overcharge casesare being settled in the government’s and public’s best interest and is required to comply with the internal control standards of the Comptroller General and OMB. Such documenta- tion is particularly important given the discretionary nature of oil over- charge settlements and their potential vulnerability to waste, fraud, and abuse. Regarding the role of ERA'S litigating attorneys, the attorneys respon- sible for presenting this casebefore OHA,we found that the Director of ERA'S Administrative Litigation Division, Office of Enforcement Litiga- tion, was, according to ERA records, the only litigating attorney who par- ticipated in negotiating the settlement. Further, while she participated in internal discussionspertaining to the negotiations, her role in the dis- cussionswith Occidental was very limited. The settlement negotiations were primarily handled by the Administrator of ERA and the Chief Counselof ERA'S Office of Enforcement Litigation, the two top ERA officials. Page 2 GAO/BCEDB@1S1Documentation of Oil Overcharge Settlement Factors I * I -* 0288786.1 Background Cities Service Oil and GasCorporation, now called OXY USA, Inc., a wholly owned subsidiary of the Occidental Petroleum Corporation, was an oil-“refiner,” “ producer,” and “reseller” under the oil price and’allo- cation regulations. As such, Cities was subject to the jurisdiction of DOE. Through ERA, DOE issued a proposed order in March 1986 alleging that Cities violated the regulations. The alleged violations totaled about $264 million in principal, plus interest totaling about $460 million as of May 19,1989. ERA, under authority delegatedby the Secretary of Energy, is responsible for resolving oil overcharge casesunder the Emergency Petroleum Allocation Act of 1973.2 On May 24,1989, ERA announcedin the Federal Register a proposed set- tlement between DOE and Occidental of the Cities Service litigation. Under the proposed settlement, Occidental tentatively agreedto pay DOE about $206 million over 8 years.3The notice also requestedpublic com- ment on the proposed settlement. On August 26,1989, after reviewing the comments filed, ERA published a secondFederal Register notice seeking additional public comment on certain issuesrelating to the pro- posed settlement. In addition, on September27, 1989, ERA held a public hearing on the proposed settlement. ERA informed us on February 23, 1990, that it was reopening negotia- tions on the proposed settlement with Occidental. According to ERA, this decision was based,in part, on the nature and volume of adversecom- ments ERA received on the proposed settlement. Also a factor was ERA’s conclusion that OXY USA appeared capable of paying the proposed set- tlement amount in significantly less time than the 8 years called for in the proposed settlement. Compliance with internal control standards are especially important for Internal Control discretionary decisions.The Comptroller General and OMB require that Standards Call for executive branch agenciesdevelop and maintain an adequatesystem of Documentation managementcontrols. One of the purposes of such a system, according to OMB Circular A- 123, is to provide managementwith reasonableassur- ance that assetsare safeguarded against waste, loss, unauthorized use, and misappropriation. The adequacy of ERA’Ssystem of internal controls 2App.I providesbackgroundinformation on ERA’sresponsibilitiesfor identifying and collectingoil overchargesand on the Cities oil overchargecase. 3According0~ERA’scalculations,the presentvalue of the proposedsettlementamountwas about $160million as of May 1989. Page 3 GAO/RCED-90-181 Documentation of Oil Overcharge Settlement Factmu h’. 7 B-288726.1 is especially important becauseof the discretionary nature of the enforcement decisionsERA is responsible for making. One of the specific internal control standards prescribed by the Comp- troller General and listed in Circular A-123 states that “all transactions are to be clearly documented, and the documentation is to be readily available for examination.” Another standard states that “transactions and other significant events are to be promptly recorded and properly classified.” This secondstandard further states that “the standard armlies to the entire urocessor life cvcle of a transaction or event and *. * I includes the initiation and authorization, all aspectsof the transaction while in process,and its final classification and summary records.” [Emphasis added.] These standards are especially important to the operations of ERA becausemany of its decisionsare discretionary and because,in some cases,these decisionsresult in the settlement of oil overcharge casesfor amounts considerably less than the alleged violation. We emphasizedthe vulnerability of ERA’S enforcement program in a 1986 report to the Sec- retary of Energy on DOE’S second-yearimplementation of the Federal Manager’s Financial Integrity Act.4 In that report, we noted that ERA’S enforcement program may be more susceptible to external pressures that circumvent internal controls than someother programs are because of the significant financial impact enforcement activities can have on oil companies. GAO and the WE Office of Inspector General have repeatedly found problems regarding the documentation ERA maintains on oil overcharge cases.”For example, in an April 1984 report, we found that ERA did not maintain audit and compliance histories on each major oil refiner and thus could not provide complete histories showing the disposition of bil- lions of dollars in alleged oil overcharge violations by those refiners6 The M)E Special Counsel at the time told us that the disposition process was too fast-paced to require complete documentation on all issues affecting refiners. More recently, our December16,1988, letter to you 4Departmentof Energy’sSecond-YearImplementationof the FederalManager’sFinancial Integri~ -Act(GAO/ltcEFgG -,14 Ott . 17I 1985). ‘%upportingDocumentationand Control Over EixmomicRegulatoryAdministration Cases,U.S Departmentof Energy,Office of InspectorGeneral(DOE/IG-O222, Nov. 19,1085). BImprovementsNeededin the Departmentof Energy’sPetroleumPricing and Allocation Compliance Program(GAO-84-61, Apr. 18,1984). Page 4 GAO/RCED@O-181 Documentation of 011 Overcharge Settlement Factom R-288786.1 noted that ERA dropped a casealleging violations of well over $300 mil- lion without fully documenting its rationale for doing so.7 ERA has littleor no documentation for many of the significant events and Significant Aspects of decisionsleading to the proposed settlement with Occidental. ERA did not the ProcessLeading to document the basis for its preliminary decision to allow an 8-year period the Proposed for payment of the proposed settlement amount. ERA had little documen- tation to support its written litigation risk analysis and did not update Settlement Not Well the written risk analysis after a decision by OHA that affected the results Documented of the analysis. Documentation was lacking for many of the negotiating sessionsbetween Occidental and ERA. ERA and ooc did not document the results of OGc’sreview of the proposed settlement. Finally, ERA doesnot maintain settlement-related documentsin a central, readily accessible location. We believe that this lack of documentation constitutes noncom- pliance with OMB’S and GAO’S standards becauseit was not sufficient to allow us to trace and analyze these events. Basis for Allowing In the proposed settlement, ERA agreedto allow Occidental an 8-year Extended Payments Not period to pay the proposed settlement amount without documenting its reason for doing so. ERA now cites OXY USA’s ability to pay the pro- Documented posed settlement amount in significantly less time as a reason for its reopening negotiations with Occidental. The proposed consentorder between ERA and Occidental provides for Occidental’s paying the settlement amount, plus interest, over an 8-year period. The proposed consentorder doesnot addressthe basis for this provision. However, basedon our review of documentation relating to the proposed settlement, the time payment provision in the proposed settlement was permitted as a result of financial considerations related to OXY USA, against whom DOE’S causeof action is legally directed. According to the documentation, OXY USA did not have sufficient cash reservesto immediately pay $160 million, but could reasonably meet such payment obligations over a period of time. ERA sought to reduce the risks associatedwith payments over time by seeking and obtaining a guarantee of payment from OXY USA’s parent company, Occidental. In a July 21, 1989, meeting, ERA’S Chief Counselconfirmed that OXY USA’s inability to pay the settlement amount immediately was the basis for allowing extended payments. Occidental, in its responseto DOE’S ‘Letter to the Chairman,Subcommitteeon Oversightand Investigations,HouseCommitteeon Energy and Commerce,ComptrollerGeneralof the United States(B-228982,Dec.16,1988). Page 5 GAO/RCED90-181 Documentation of Oil Overcharge Settlement Factors August 26, 1989, request for public commentson the proposed settle- ment, stated that it was willing to enter into the proposed settlement only if it could satisfy the payment obligations from the estimated future earnings of OXY USA, necessitating,in its view, the &year pay- ment provision of the proposed settlement. Even though ERA cited financial considerations as the basis for allowing the extended payments, ERA did not require Occidental to submit OXY USA’s financial statements and tax returns for ERA'S analysis before agreeingto the proposed settlement. Such an analysis is required by a June 30,1986, internal memorandum on long-term settlements, The memorandum contains guidance on factors that should be consideredin determining the efficacy of long-term payment provisions in proposed oil overcharge settlements. ERA'S Chief Counseltold us ERA assumedthat the cash-flow information put forth verbally by Occidental during the negotiations was accurate. However, he said that after the proposed settlement was announced,ERA asked Occidental to provide financial data on OXY USA’s cash flow. Occidental provided this information to ERA in July 1989, l-1/2 months after the proposed settlement was announcedand subsequentto GAO'S request for copies of any financial analysis of OXY USA conducted by ERA. In January 1990, the Chief Counseltold us that the data indicated OXY USA could reasonably pay the settlement in a significantly shorter period than the 8 years provided for in the proposed settlement. As a result, ERA is renegotiating the extended payment provision with Occidental. ERA.‘sRisk Analysis Not ERA's litigation risk analysis was not well documented.In addition, the Well Documented written analysis was not updated following a decision by OHA on the case,even though the decision was issued several months before the proposed settlement was reached, and the decision affected the analysis results. The written litigation risk analysis, which served, in part, as the basis for the proposed settlement, consistedof one typewritten page and contained little narrative to support its calculations, For example, only two sentencesdiscussedthe basis for the litigation risks attributed to pursuing violations. According to ERA'S Chief Counsel,one other docu- ment was prepared that supports his analysis. This was a one-pagedoc- ument specifying possible financial remedies in the case.The Chief Counselsaid that the reason no additional documentation was prepared was that he did not intend for the assessmentto be the primary support for the proposed settlement. Instead, he intended it to be for his own use Page 0 GAO/RCEDgO-181 Documentation of Oil Overcharge Settlement Factors in confirming an approximate reasonablesettlement amount and in assessinghow various coursesOHA might take in its remedial order might affect ERA’Schancesof ultimately winning the case.In this regard, ERA’sAdministrator noted there is no requirement he is aware of that written litigation risk analyses be prepared prior to settling oil over- charge cases.Such analyses are typically done at ERA, he said, only when casesare referred to outside agencies,such as the Department of Justice, for action. While the litigation risk analysis was not signed or dated, ERA'S Chief Counseltold us that he prepared it in June 1988, several months before the September 1988 decision by OHAin the case.The risk analysis reflected his assessmentof the probabilities of ERA'S winning the case under several scenarios,depending on the results of OHA’Sdecision. The analysis estimated for the scenariosthe likelihood (expressedas a per- centage)that ERA'S March 1986 order would be upheld at each of the four levels at which the casewould be subject to a hearing and review- at OHA, the Federal Energy Regulatory Commission,the federal district court, and the Temporary Emergency Court of Appeals. Thesepercent- ageswere totaled and used to calculate the settlement value of the Cities case. ERA did not prepare a written update of its risk analysis following OHA’S decision even though the decision affected the analysis. However, both the Chief Counsel and ERA'S Administrator said that the impact of OHA’S decision on their perceived litigation risks was discussedon various occasions.After the proposed settlement was agreedto, ERA did develop a more detailed narrative discussionof the risks associatedwith liti- gating the case,which was included in the May 24, 1989, Federal Reg- ister notice containing the proposed consentorder. Other Aspects of Proposed We identified three other aspectsof ERA's handling of the Cities Service Settlement Not casethat also did not comply with internal control standards on docu- mentation. Specifically, ERAdid not (1) document many of its key negoti- Documented ating sessionswith Occidental, (2) document the review of the proposed settlement by DOE's CGC,and (3) maintain files of settlement-related doc- uments at a central location, where they would be easily available for examination. A chronology of settlement-related discussionsprovided to us by ERA shows that there were at least 24 meetings or telephone conversations on the proposed settlement from March 24,1988, to January 31,1989, Page 7 GAO/RCED-90-101 Documentation of Oil Overcharge Settlement Factau when agreementwas reached.Twenty of these meetings and telephone contacts involved Occidental representatives while four were internal ERA meetings. ERA was able to provide documentation for 10 (7 meetings and 3 telephone conversations),of the 20 contacts (9 meetings and 11 telephone conversations) between Occidental’srepresentatives and ERA that were listed in the chronology provided by ERA. ERA officials said that somemeetings were not documentedbecausethey did not appear to be serious steps toward reaching a settlement or were only incidental. However, we noted that there was no documentation for any of the sevenmeetings or telephone conversationswith Occidental’srepresenta- tives that took place between December14,1988, and January 23,1989. Basedon our review of available documentation and discussionswith ERA officials, it is clear that ERA and Occidental officials reached an agreementin principle on the settlement in one of the discussionsduring this period. While DOE's ooc reviewed the proposed settlement and ERA'S basis for entering into it, neither ERA nor c@ccould furnish documentation showing the review of the proposed settlement and the resolution of any comments or concerns.According to ERA officials, ooc’s review of the proposed settlement was not documentedbecausethe review was informal in nature and ooc presented its commentsorally at a meeting. The ERA Administrator told us that he asked OGCto review the proposed settlement becausehe wanted an independent assessmentof its reasonableness. ERAdoesnot maintain central files of settlement-related documents.In responseto the Chairman’s and our requests for documents related to the settlement negotiations, ERAhad to question the individual ERA staff involved and have them review their personal files for documents.Such procedures are not sufficient to ensure that a complete and lasting record of the basis for a settlement is maintained, especially given the fact that ERA is winding down its operations. ERA doesmaintain central casefiles of documents related to ongoing litigation but doesnot main- tain files of settlement-related documents at a central location because, according to the Chief Counsel and Director, Administrative Litigation Division, ERA has never found such files useful or necessary.ERA offi- cials also said that maintaining all settlement-related documents in a central location would be inconvenient becauseof the volume of such documentation and becauseERA staff are located throughout the DOE headquarters building. Page f3 GAO/RCED-90-181 Documentation of Oil Overcharge Settlement Factors B288798.1 litigating attorneys’ participation in the negotiations leading to the The Role of EM’s ERA's proposed consent order was very limited. Rather, the settlement was Litigating Attorneys in primarily handled by ERA'S Administrator and ERA'S Chief Counsel,the the Proposed tW0 top ERA OffiCialS. Settlement The chronology of settlement-related discussionsprovided to us by ERA identified 24 discussionsduring the negotiations of the proposed settle- ment, of which 20 were meetings or telephone conversationsbetween officials of DOE or ERA and Cities representatives. Our review of the chro- nology and our discussionswith ERA officials disclosedthat one of the two principal litigating attorneys assignedto the case,the Director, Administrative Litigation Division, Office of Enforcement Litigation- the attorney primarily responsible for litigating the case-participated in the negotiations. According to the chronology, the Director attended meetings with Cities representatives on three occasionsbetween March and June 1988. According to the Director and the chronology, she did not participate in any meetings with Cities representatives after June 1988, although she was informed of the results of the settlement negotiations and partici- pated in internal discussionswithin ERA relating to negotiations of the proposed settlement. According to the chronology, there were a total of nine meetings between ERAand Occidental representatives, six of which occurred after June 1988. The Director told us that she did not know why she was not actively involved in settlement negotiations after the June 1988 meetings, although she did not think it is unusual for the principal litigating attorney not to be involved in every negotiating ses- sion, especially when someof the sessionsinvolved telephone discus- sions with higher-level ERA officials. The Chief Counseland the ERA Administrator told us that there was little or no dialogue at the later meetings concerning the litigation issuesor merits and that they were quite aware of the allegations and defensesin the Cities case.Further, they said, in such circumstances,the litigating attorneys typically do not attend negotiation sessions. Documentation of significant events relating to the settlement of oil Conclusions overcharge casesis necessaryboth to provide assurancethat these cases are being settled in the government’s and the public’s best interest and to comply with the internal control standards of the Comptroller Gen- eral and OMB. Such documentation is especially crucial given the size of the alleged violations, the discretionary nature of the settlements, and Page 9 GAO/RCED-90-181 Documentation of Oil Overcharge Settlement Factors B-238736.1 id the oft-stated concernsregarding the vulnerability of ERA's enforcement activities to fraud and abuse. We found that ERA lacks sufficient documentation for many of the major events relating to the proposed settlement of the Cities case.Events for which there was little or no documentation include the decision to allow OXY USA an extended payment period, ERA'S analysis of the agency’s litigation risks, 10 of the 20 negotiating sessionsbetween ERA and Occi- dental, and the DOE General Counsels review of the proposed settlement. Additional documentation of these events, prepared as they occurred, would have, in our view, provided a clearer understanding of ERA'S rationale for agreeing to the proposed settlement of the case,which would have reduced concernsand forestalled somequestions regarding the proposed settlement. We recommendthat the Secretary of Energy instruct the Administrator, Recommendations ERA, to develop and implement explicit requirements for documenting significant events relating to the settlement of oil overcharge cases, including (1) settlement negotiations, (2) the factors consideredin litiga- tion risk analyses, (3) reviews of and commentson proposed settlements by other DOE officials, and (4) the basesfor agreeing to allow long-term payments of proposed settlement amounts. A requirement should be included that all documentation be maintained at a central location, where it is readily available for examination. In reviewing the three issuesraised in your letter, we examined avail- able documentation from ERA and OHAand interviewed agency personnel who were responsible for the matters discussedin this report. We attended the September 27,1989, public hearing held on the proposed consent order and obtained and reviewed a copy of the hearing record. We also reviewed DOE's Federal Manager’s Financial Integrity Act reports for fiscal years 1986 through 1989 and observedthat the internal control problems found through this review were not identified as material weaknesses.Seeappendix II for further details on our methodology. We discussedfactual information contained in this report with ERA offi- cials. These officials generally agreed with the information presented although they did provide additional information and clarification on issuesdiscussedin this report, which we have incorporated where appropriate. Further, ERA officials raised a number of concerns Page 10 GAO/RCED-W181 Documentation of Oil Overcharge Settlement Factora B-288798.1 regarding the sensitivity of someof the factual information we intended to include in our report. We have revised the draft report in responseto these concernsto omit information that we believe could be considered sensitive. As agreed with your office, we did not obtain formal agency comments.We performed our review between July 1989 and June 1990 in accordancewith generally acceptedgovernment auditing standards. As arranged with your office, unless you publicly announceits contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time we will send copiesto the Secretary, of Energy and make copies available to others upon request. This work was performed under the direction of Victor S. Rezendes,Director, Energy Issues,who may be reached at (202) 275-1441.Major contribu- tors to this report are listed in appendix III. Sincerely yours, u J. Dexter Peach Assistant Comptroller General Page 11 GAO/WED-90-181 Documentation of Oil Overcharge Settlement Factors “.~,b ,- Contents Letter 1 Appendix I Background ERA’s Handling of Oil OverchargeCases The Cities Service Case Appendix II Scopeand Methodology Appendix III 19 Major Contributors to This Report Abbreviations DOE Department of Energy ERA Economic Regulatory Administration FERC Federal Energy Regulatory Commission GAO General Accounting Office Office of General Counsel OHA Office of Hearings and Appeals OMB Office of Managementand Budget PRO ProposedRemedial Order Page 12 GAO/RCED-@O-181Documentation of Oil Overcharge Settlement Factors Page 18 ~~0/RC~98.181 Documentation of Oil Overcharge Settlement Factom Appendix I Background The Cities Service oil overcharge caseresulted from Cities’ alleged viola- tion of petroleum pricing and allocation regulations. The Department of Energy’s (DOE) Economic Regulatory Administration (ERA)is responsible for identifying and resolving violations of these regulations. In late 1973 and early 1974, the Organization of Petroleum Exporting ERA’s Handling of Oil Countries embargoedcrude oil exports to the United States and substan- Overcharge Cases tially increased its crude oil prices. To minimize adverse repercussions from these actions, the Emergency Petroleum Allocation Act of 1973 (16 USC. 761 et seq.) was enacted.The act was intended to, among other things, . prevent price gouging by domestic crude oil producers and l ensure fair allocation of crude oil supplies and petroleum products to all in the marketing chain. Regulations applicable to the sale of petroleum products covered under the act were originally issued in August 1973 and expired in January 1981. DOE, and its predecessoragencies,enforced the act’s controls on oil companies’ allocation and pricing of crude oil and refined petroleum products. DOE has authority and responsibility for (1) identifying violations of the petroleum pricing and allocation regulations, (2) recovering overcharges,and (3) obtaining restitution for injured parties. DOE'S ERA is responsible for pursuing violations of the pricing/allocation regula- tions subject to the provisions of the Petroleum OverchargeDistribution and Restitution Act of 1986. When ERA, through audits of oil company records, allegesviolations of the allocation and/or pricing regulations, it may negotiate a settlement with the oil company; initiate administrative action separate from, or concurrent with, the settlement negotiations; or recommendinitiation of judicial action to resolve the alleged violations. Subject to the provisions of the Petroleum OverchargeDistribution and Restitution Act of 1986, in cases where ERA finds that a company may have violated petroleum pricing/allocation regulations, ERA can issue a proposed remedial order (PRO) specifying the violations and recom- mending remedial action. The company may then file a statement of objections with DOE'S Office of Hearings and Appeals (OHA)describing its position regarding DOE'S allegations, thereby initiating administrative lit- igation of the alleged violations. Page 14 GAO/RCED-@O-181Documentation of Oil Overcharge Settlement Factors - - If OHAconcludesthat a violation occurred, it issuesa final remedial order to the company, which can appeal the order to the Federal Energy Regulatory Commission(FERC). The Commissioncan wholly or partially affirm or dismiss the remedial order issued by OHA.If either OHAor the Commissionfinds in favor of the company, ERA may not further appeal such an adverse determination. If the Commissionaffirms the remedial order, the company may appeal to the appropriate federal district court. A district court decision unfavorable to either party may be appealed to the Temporary Emergency Court of Appeals. On March 6,1986, ERA issued a PRO to Cities Service contending that The Cities Service Cities’ practices relating to 91 transactions violated provisions of the oil Case pricing regulations. According to ERA,this resulted in overchargesof about $264 million, plus interest. The Cities caseinvolves 91 reciprocal crude oil transactions between Cities and 13 crude oil resellers in which Cities sold price-controlled crude oil to resellers and concurrently pur- chaseddiscounted exempt-certified crude oil from those resellers1 ERA allegesthat the discounts Cities received on the crude oil it purchased are extra consideration to be added to the price Cities received for the crude oil it sold and, as such, should be consideredin determining whether the price Cities received exceededthe allowable price under the regulations. ERA sought a remedial order from OHArequiring Cities to make restitu- tion in the amount of the alleged overcharges,plus interest. Cities Ser- vice objected to the PRO on several grounds. After holdii evidentiary hearings, OHAissued,on September30,1988, a remedial order, which found that Cities Service had violated petroleum price regulations and, accordingly, owed the government $263.8 million, plus interest, as resti- tution for the overcharges.As of May 19, 1989,the interest totaled approximately $460 million. In April 1988, before the remedial order was issued, ERAmoved to amend the PROto also allege that Cities had violated a provision of the regulations relating to the reporting of information on crude oil under ‘DOE’soil pricing regulationsset price rules applicableto the “fix@ sale” of domeSticallyproduced crude oil. The rules were generallybasedon three tiers of crudeoil-old crudeoil, new crudeoil, and exemptcrude oil. Old and new crudeoil were subjectto separateceiling price roles,while exempt crudeoil was exemptfrom the ceilii price rules. Page 16 GAO/R~~l81 Docunentatlon of OJI Overcharge Setiement Factom Appendix I -md the Entitlements Program.2In the remedial order, OHAcited evidence that Cities had violated the petroleum allocation regulations. OHA remanded the portion of the PRO relating to such violations to ERA so that ERA could specify a remedy with respect to the violations and Cities could fully litigate the relevant issuesthrough a new PRO proceeding. Cities subsequently appealed 0x4’s decision to PERC. On May 24, 1989, while the casewas pending at FERC, ERA gave notice in the Federal Register of a proposed consent order between DOE and Occi- dental Petroleum Corporation, including its wholly owned subsidiary OXY USA, Inc., which was formerly Cities Service Oil and GasCorpora- tion, to settle the case.The proposed settlement agreementwould require Occidental to pay DOE $206.08 million, which includes interest, over 8 years to resolve matters relating to Occidental’s compliance with the federal petroleum price and allocation regulations from October 1, 1979, through January 27,198l. Action on Cities’ appeal at FERC has been stayed pending resolution of the proposed consent order. 2Thepurposeof the EntitlementsProgramwas to generallyequalizethe benefitsto refiners of access to price-controlledcrudeoil. The programwas basedon the premisethat all refiners should be including an equal proportionateshareof price-controlledoil in their refinery runs eachmonth. The programrequired refiners with a greater-than-average numberof barrelsof pricecontrolled crudeoil to purchaseentitlementsfrom thoserefiners with a less-than-average numberof barrelsof price- controlled crudeoil. The programwas terminat& in December1980. Page 16 GAO/RCED-90.181 Documentation of Oil Overcharge Settlement Facbm . “. Appe( ;ix II Scopeand Methodology To determine the basis for ERA's agreeing to allow extended payments for the proposed settlement, we reviewed ERG’S guidance on allowing extended payments; interviewed ERA’S Administrator and Chief Counsel, both of whom were directly involved in negotiating and drafting the proposed settlement; and attended and reviewed the transcript of a Sep- tember 27,1989, public hearing, where an attorney for Occidental who was directly involved in negotiating the proposed settlement spoke on this issue. With regard to ERA's litigation risk analysis, we examined draft and final versions of the analysis; examined a related document; interviewed ERA'S Chief Counsel,the author of the analysis; and interviewed the Director of ERA’S Office of Administrative Litigation, who reviewed the analysis. To determine the role of ERA'S litigating attorneys in the proposed settle- ment, we interviewed the Director of ERA’S Office of Administrative Liti- gation, Enforcement Litigation Division, who was the principal litigating attorney for the Cities case.We also interviewed an attorney, formerly with ERA, who was assignedto the Cities case;the ERA Chief Counsel, Enforcement Litigation Division; and the ERA Administrator. In addition, we reviewed all available documentation of negotiating sessions involving officials of ERA and Occidental in order to determine the roles of the participants. In addition, we interviewed cognizant officials in DOE’S Office of Hear- ings and Appeals (OHA). We reviewed the formal record of the litigation between Cities and ERA, including the transcripts of OHA’shearings on the case,the remedial order issued by OHA,the proposed consent order published by ERA, and public commentson the proposed consentorder between ERA and Occidental. We also interviewed representatives for Occidental Petroleum. We reviewed GAO'S and the Office of Management and Budget’s standards and guidance on internal control systems and applied them to certain aspectsof ERA'S handling of the proposed settle- ment. Finally, we reviewed DOE'S Federal Manager’sFinancial Integrity Act reports for fiscal years 1986 through 1989 and observedthat the internal control problems found through this review were not identified as material weaknesses. As discussedwith the requester’s office, we excluded from our report certain information that ERA believes is sensitive, According to ERA, the public disclosure of this information could adversely affect its ability to Page 17 GAO/RCEDM-181 Documentation of Oil Overcharge Settlement Factom APpendLr n Scope and Methodology litigate or settle this and other similar oil overcharge cases.The infor- mation we have excluded includes . the deliberative content of ERA'S written litigation risk assessment, including information on ERA’sestimates of the probabilities of pre- vailing in continued litigation of the Cities caseunder different scenarios basedon OHA’sdecision in the caseand ERA'S estimate of the settlement value of the case; l the conclusionsreached by DOE'S Office of General Counselafter reviewing the proposed settlement; l information on Occidental’s representations during confidential settle- ment negotiations and DOE'S internal deliberations concerning payment terms under the proposed consentorder; and . information on the specific factors consideredby ERA in determining when a company entering into a financial settlement with ERA should be allowed an extended period in which to pay the settlement amount, as they relate to settlement strategies employed by ERA. Page 18 GAO/RCEXWO-111 Jhcumentation of Oil Overcharge Settlement Factors t Ap&;,r;x III Major Contributors to This Report Judy A. England-Joseph,Associate Director Resources, Richard A. Hale, Assistant Director Community, and Jonathan N. Kusmik, Evaluator-in-Charge Economic Development Division, Washington, D.C. Martin J. Fitzgerald, Special Assistant to the General Counsel Office of General SusanW. Irwin, Attorney Counsel (308611) Page 19 GAO/RCEDBO-181 Documentntion of Oil Overcharge Settlement Factors j 4 ,l~ -... - .._.. - / -.- --.-_ -._-----_- ---_--.---.-.--...-..-__- ~--__--- --- _ 1’ _- _--_-__ ~._.“_~.-.-~“..~ ._- .._ -.._ - _-.. -l____*“-._.__x . l--l---.ll _..- I-- Y- ‘
Energy Regulation: Factors Relating to Oil Overcharge Settlements Need Better Documentation
Published by the Government Accountability Office on 1990-08-23.
Below is a raw (and likely hideous) rendition of the original report. (PDF)