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)

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                                                     Factors Relating to Oil
                                                     Settlements Need
                                                     Better Documentation


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GAO                    General Accounting Office
                       Washington, D.C. 20548

                       Resources, Community, and
                       Economic Development Division

                       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

                       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

    determined that OXY USA appeared capable of paying the settlement
    amount in a significantly shorter period and reopenedsettlement
.   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
    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

    Page 2           GAO/BCEDB@1S1Documentation of Oil Overcharge Settlement Factors
     I       *




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


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
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

                         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

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
                            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

                            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
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

                               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
                  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

  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


Letter                                                                                                       1

Appendix I
Background              ERA’s Handling of Oil OverchargeCases
                        The Cities Service Case

Appendix II
Appendix III                                                                                             19
Major Contributors to
This Report


                        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


                            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
                        . 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
                            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

                     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

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
               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
    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

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
Development Division,
Washington, D.C.

                        Martin J. Fitzgerald, Special Assistant to the General Counsel
Office of General       SusanW. Irwin, Attorney

(308611)                Page 19          GAO/RCEDBO-181 Documentntion of Oil Overcharge Settlement Factors
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