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Chalk one up for the permanent government; the bureaucracy took on Reagan and big oil - and won.

Chalk One Up for the Permanent Government

On February 27, 1986, the computers linking the nation's banking system glowed as a series of electronic impulses darted back and forth between accounts representing Exxon Corporation, the world's largest oil company, and the U.S. Treasury. When the electrons finished their little dance, the government's coffers had swollen by $2.1 billion. And Exxon had paid the largest civil regulatory judgment ever awarded against an American corporation.

That $2.1 billion was the climax--though hardly the end--of a long shadow war between the government and the nation's oil industry, a struggle in which the government tried to track down and prosecute violations of the federal price controls on crude oil and petroleum products that were in effect from 1973 until Ronald Reagan ended them in 1981. These overcharge cases generated blizzards of publicity when they were filed during the Carter administration in the days of $40-a-barrel oil and blocks-long gasoline lines. At the time, oil companies and conservative ideologues claimed that the charges were vastly overblown and, in any event, would never stand up in court. Today, the companies are a good deal poorer, and the critics a good deal quieter.

For a comparatively minuscule federal investment, the program has achieved spectacular success, having so far generated some $6 billion in refunds to customers, payments to the government, and other forms of restitution. Proceeds have gone to schools and hospitals, to poor people and budget-slashed state governments, and even to help whittle down the federal deficit. Yet this triumph has gotten no huzzahs from the White House spokesman, no mention in Reagan Rotary Club speeches, no lavish press conference. In fact, the program's success must gall this administration, since it flies in the face of every cherished conservative belief about the role of government in the regulation of the marketplace. Moreover, it is a program the Reagan administration did its best to gut.

The oil-overcharge program provides a classic Washington tale about the inertial forces of government--how a program accumulates enough momentum to keep going even after the people who set it in motion have left. White House officials are forever arguing, usually with justification, that permanent Washington--the "iron triangle' of interest groups, Congress, and the bureaucracy--thwarts presidential initiatives and paralyzes the political system. On occasion, though, as the oil-overcharge program shows, the iron triangle also strikes gold.

These days, with gasoline relatively cheap and oil company profits in the doldrums, it may seem uncharitable--and, the oil companies would argue, counterproductive--to force Exxon, Mobil, et al. to cough up. On the other hand, the overcharging cases provide evidence that they were less than charitable back in the days when OPEC was riding high and the blue-eyed Arabs hitched up and tagged along. Some might call it just deserts.

The regulations on the price and supply of petroleum products that spawned the overcharge cases originated with Richard Nixon's temporary wage and price controls. Although controls were soon lifted on most other goods and services, they became an all-but-permanent part of the nation's energy policy after the Arab oil embargo. The regulations were added to and modified as the energy picture changed, and problems and inconsistencies were often addressed by band-aid changes. As the rules became more complex, they became harder to enforce. By the time the Carter administration took office in 1977, they had developed into an almost impenetrable maze.

To streamline the process, the administration appointed a special counsel in the new Energy Department to investigate and prosecute violations by the country's 35 biggest oil refiners. Carter aides hoped to find a high-powered, prestigious figure to fill the job, but no one they approached seemed interested. The post ultimately fell to Paul Bloom, then a little-known, 38-year-old lawyer in the Energy Department.

"Paul Laurence Bloom loves to affect the part of a none-too-bright country lawyer lost among the city slickers,' The New York Times commented a few years later. But few of those he made miserable in the oil companies, the Justice Department, and his own Energy Department were convinced by the pose.

Bloom inherited a program that was demoralized and all but dysfunctional. For example, one team auditing Mobil had been allowed to remain in New York even though the company's oil operations had moved to Houston. Bloom moved quickly to reorganize and expand. The Mobil team was dispatched, kicking and screaming, to Houston. He added hundreds of new auditors and lawyers, and won the right to draft--or dragoon--personnel from various corners of the far-flung department. Pitched battles were fought with other DOE operations over the control of certain field offices.

By the time the Iranian revolution triggered the great 1979 oil shock, the government had 600 investigators poking and probing the major companies, requisitioning space in their offices, and demanding company records, microfilm, and computer printouts.

Until he left office, Bloom waged a relentless campaign of investigation, litigation, and publicity. Bloom's initial approach was to file a series of industry-wide court cases, but continuing clashes with the Justice Department, which has primary responsibility for litigation involving the federal government, led to a change of plans. The new strategy was to bring cases first as administrative complaints that only in later stages might reach the courts. As it turned out, going this route increased Bloom's control over how the cases were handled and how they were presented to the American people. Every few weeks, his department would, with great fanfare, announce a new batch of charges that would further fuel public resentment against the oil companies. The issues raised were often highly technical. An $888 million complaint against Texaco, for instance, involved a dispute over whether a "property' was defined as a tract of land or as the oil under it. A $311 million charge accused Gulf of retroactively allocating too many of its costs to price-controlled products alone rather than spreading them over all products.

American consumers were already frustrated by the industry's inability to supply gasoline and enraged at its wildly rising profits. Now, on top of everything else, the government told them the companies were price-gouging. No wonder the industry regarded Bloom with a mixture of anger, terror, and loathing.

Oil executives were especially enraged by Bloom's canny manipulation of the press. "Bloom was an absolute genius,' remembers one of his former subordinates. "He recognized that the office had to generate attention in order to generate results.' One weapon in his arsenal was the dollar amount attached to alleged violations. Often a company's interpretation of a disputed regulation might allow it to charge a higher price than it could actually charge in the real world. Thus, there could be a difference of hundreds of millions of dollars between how much it did overcharge, and how much it might have overcharged. By including the potential amounts in the total dollar value of the complaint, critics charged, the government was presenting a vastly inflated impression of the overcharges. But for headline-hungry journalists, the bigger the number, the better. "Energy Dept. Accuses 9 Refiners of $1.18 Billion Oil Overcharges,' read the page-one headline in The New York Times. "7 Oil Firms Accused of Overcharging; U.S. to Seek $1.7 Billion in Refunds,' trumpeted The Washington Post. No matter that, in his many press conferences, Bloom would carefully point out that not all of the alleged violation was passed on to consumers. That was a distinction most likely lost on the average TV viewer or newspaper reader.

The industry was just as often outraged by the manner in which it learned of new charges. Often, word would reach a company late in the day-- through a reporter calling for comment on allegations it had yet to see. Worse, executives sometimes wouldn't learn of complaints against them until they read their morning newspaper. On at least one occasion, news of a major batch of charges against Gulf Oil leaked on a day when the company's board of directors was meeting. The enraged chairman telephoned Energy Secretary Charles Duncan and complained bitterly. But Bloom, armed with a broad charter, was relatively insulated from such pressures.

The Grinch

The companies had some legitimate complaints. The price-control regulations were complex, and in many areas, murky. A frequent complaint was that the department had grown tougher over the years in its own reading of the regulations. But there was also reason in many cases to doubt that the companies had even made a good-faith effort to comply.

Investigators found evidence that some oil classified at the wellhead as "old'--and thus subject to tight price controls--would be mysteriously reclassified as "new,' higher-priced oil on the way to the refinery. In other cases, new wells might be opened in a field, or the field's boundaries redrawn, in an effort to decrease the average per-well production and thereby qualify the output for higher, "stripper' prices. A few such cases were criminally prosecuted. Far more, however, were left to the special counsel's civil proceedings.

In selecting which cases to pursue, Bloom went for the most egregious example--"the ones where you could make the biggest bang' and those that had the best chance of being upheld if they ever got to court. But his obvious goal, in many instances, was to force the companies into settlement negotiations and extract some of their profits in the form of price rollbacks, refunds to customers, and other restitution. Those companies that were willing to settle some charges, such as Getty and Gulf, were often able to escape for only a fraction on the dollar--a concession on the government's part that the regulations were virtually untried in court. But many of the biggest companies, led by Exxon, vowed all-out war. The government lost an early court test-case, and the companies professed little doubt that further challenges would end the same way. "Bloom's cases are built on pillars of sand,' one industry attorney was quoted as saying in 1980. Said another: "In two to three years, the regulations will just fall apart in the courts.'

Others put their faith in the Reagan administration. Ronald Reagan's 1981 abolition of the remaining price controls gave them hope that the entire enforcement effort would simply wither away. Some ideologues pushed for an immediate end to the investigations. "Now that oil prices have been decontrolled, there is no excuse for continuing this farce,' The Wall Street Journal's editorial page intoned. "Some might argue that dropping further action would be unfair to the companies that paid up, but that is hardly an argument. Such "unfairness' might remind companies to fight harder the next time government tries a similar heist.' But the companies that listened paid a heavy price for their gullibility.

From the start, the Reaganites showed a lack of political skill and finesse in their efforts to gut the special counsel's office. A little more than a month after taking office, the new administration blundered into a political landmine that the departing Bloom had planted. On January 19, the day before he left office, Bloom had quietly taken $4 million from the funds collected in a settlement with Amoco Oil and given it to four charities to help poor families pay their winter heating bills. The maneuver was pure Bloom; he based his claim to authority on an opinion from his own lawyers and slipped it past his superiors, preoccupied with their own impending exit from office.

Newly ensconced Energy Department officials soon discovered the ploy and publicly demanded the return of the money--much of which had already been spent. The scene quickly--and predictably--turned into a public relations nightmare. At one point, a uniformed offical of the Salvation Army suggested to the television cameras that his organization might have to put its sidewalk Santas back on the street just to collect the money the government was demanding.

Under pressure from the White House, the depatment backed down. The charities agreed to return $1 million that hadn't been spent, and government officials grumbled vaguely about suing Bloom for the rest. Bloom, by this time in private legal practice, wound up looking like Robin Hood. The Reagan administration wound up looking like the Grinch Who Stole Christmas.

With David Stockman newly installed in the Office of Management and Budget, the administration began its most fervent attack on the enforcement program. Reagan's first budget in 1981 aimed to cut the size and budget of the special counsel's office by more than 80 percent, from $35.6 million to less than $6 million. Administration aides dutifully trooped to Capitol Hill to insist they would be just as rigorous in enforcing past violations.

Skepticism was fueled by the injudicious remarks of some administration appointees about the cases--talk that implicitly promised swift, sweetheart settlements. Rayburn T. Hanzlik, who became the department's top regulator in the fall of 1981, attacked the very cases he was overseeing, declaring in a speech to an oil region audience that some of the laws he was supposed to be enforcing were "irrational' and "flimsy.' His office preferred reaching settlements to litigating cases to their conclusion, Hanzlik said, "because we believe most of those laws and regulations would be thrown out of court.' Within the oil industry, it took no great leap of imagination to conclude that the department wouldn't be driving many hard bargains.

But the frontal assault on the program proved naive. It angered Rep. John Dingell, the Democratic chairman of the House Energy and Commerce Committee and a long-time master at making executive-branch officials of both parties quake. He orchestrated a series of hearings on the enforcement effort that kept Energy Department officials continually on the defensive. In March 1981, he accused the Reagan administration of "cutting the heart out' of the enforcement effort, "effectively granting amnesty to these price gougers and potential criminals.' In hearing after hearing, administration officials were summoned to explain and justify their plans. Other Democrats took his cue, painting the Department as overly cozy with business at the expense of the average guy. "What we have here, in fact, is an effort to fix these cases,' then-Rep. Albert Gore Jr. declared. "If in this country somebody steals $50, they will be pursued to the extent of the law and should be. However, it seems sometimes that if somebody with a coat and tie steals $100 million with a pencil and paper, they are forgiven quickly, not pursued, and just winked at.'

The administration led with its chin. Critics had a field day with the disclosure that the proposed enforcement budget didn't include enough money to pay for the layoffs the administration was seeking--let alone enough to see the investigations through.

The civil service played a key, if indirect, role during this period, as they often do during bureaucratic budget battles. A long delay by the administration in filling key political jobs had left day-to-day operation of the program in the hands of bureaucrats who had been Bloom's key aides. They weren't in any position to overtly oppose the administration's plans, but they were able to keep the program going day-to-day. Some of them kept up a steady stream of leaked documents to Dingell's aides. In one exchange, a well-briefed Gore elicited from Avrom Landesman, Bloom's former deputy and acting successor, an admission that OMB had deleted a warning from Landesman's submissions to the committee that "certain regulatory violations might be undetected' as a result of the administration's budget cut plans.

Even many antiregulation congressional Republicans couldn't swallow what appeared to be amnesty for the oil companies. While there was certainly no love among GOP legislators for price controls, there was a feeling among many that the law was the law and had to be enforced whether or not they agreed with it.

With the intense pressure from Congress, the enforcers began to notice a change in their superiors' attitudes. Budget cuts and layoffs continued, but Dingell had raised the political cost of attacking the program. "No one was going to confront Dingell or do anything to put his head in the noose,' one of the civil servants recalls. Even the energy secretary, James Edwards, was sounding like a tough cop, boasting that "my concerns about the consequences . . . for the compliance program' had convinced the OMB to give back 250 job slots it had proposed to eliminate.

Gradually, the attempt to strangle enforcement wa set aside, and the administration settled into a posture of malignant neglect. Morale plummeted, and many staff members began looking for jobs elsewhere. But after its initial effort, the administration never focused sufficiently on the office to deliver the coup de grace.

In the ensuing years, the program grimly held on, its civil service principals fighting bureaucratic brushfires as they pressed cases and negotiated settlements with companies tired of the continuing struggle. Their effort was rewarded by a development even its staunchest backers hadn't dared hope for--near total vindication in court.

Federal appellate courts are often the last stop for clashes between government and business, but, to keep wage and price control cases from clogging the judiciary, Congress had established a special court to handle such disputes. This Temporary Emergency Court of Appeals (TECA) was composed of sitting appellate and district judges, often on semi-retired status. The court turned out to be badly misnamed; long after the "emergency' had passed, the court appeared anything but "temporary.' After the Energy Department concluded administrative proceedings against a company, the case would often move into TECA. In virtually every major case involving interpretation of the price control regulations, the government won.

In some ways, the government's winning streak wasn't surprising. Only the strongest cases made it to court; weaker ones were never brought or were settled along the way. To date, the government has won well over 90 percent of the cases that reached TECA. After a while, "there was more momentum being generated than anyone ever intended,' says Carl Corrallo, a former top aid to Bloom, who had remained as a senior official in the special counsel's office.

With each win, which validated the widely derided charges, the office became a little tougher to kill, and the oil companies became a little more nervous. Some that previously had been reluctant to settle decided a deal might be chapter than an uncertain appeal.

The dollars began to mount in the special treasury account set up to hold enforcement collections until it could bedecided who was entitled to them. Settlements with Arco and Chevron brought in $400 million. Another $1.4 billion came from a court decision against a clutch of companies in a dispute over whether wells that injected water into oil fields could be counted as producing oil under the price-control formulas. With the passage of time and the miracle of compound interest, the companies most confident of ultimate victory--and hence last inclined to settle the charges against them--wound up the biggest losers. The biggest of all was Exxon, which saw one case concerning its crude oil production at a single Texas oil field grow from a $188 million complaint by Bloom into last year's massive $2.1 billion judgment.

As the money continued to accrue, would-be beneficiaries began circling like sharks: real or imagined victims of the original overcharges, state governments, consumer groups. The enforcement effort had become, in the words of one of its principals, "a spectacular money-collection program' at a time when dollars for any non-defense purpose were scarce. Even elements in the administration were happy to benefit from the flow of money, if not enough to openly acknowledge it.

The program's successes brought headaches of a new type. Given the difficulty of determining just who had been overcharged ten or more years ago and by how much, dividing the spoils proved difficult. But after years of haggling over who would get the money, the Energy Department finally began doling it out. Early last year, negotiations between the government and lawyers for claimants in the injection-well case yielded a formula, later approved by a federal judge in Kansas, for splitting the take. Of the $1.4 billion, federal and state governments shared $900 million; $45 million each went to crude oil resellers and petroleum-product retailers; $35 million to farm cooperatives; $30 million to airlines; $11 million to trucking and bus companies; and so on, down to $5.3 million to electric utilities. Ironically, nearly $300 million went to oil refiners--many of which had, in their role as oil producers, fought the losing battle against the overcharge complaints in the first place. The government figures that more than 40,000 groups, companies, government bodies, and organizations will benefit as a result of that single settlement.

In the Exxon case, state governments were the big winners: the $2.1 billion was divided among them in proportion to the volume of petroleum products they consumed during the years Exxon was found to be overcharging. The money was earmarked for a variety of energy-related programs, any of which had suffered budget cuts: weatherization of the homes of the elderly and handicapped; state and business energy-conservation plans; school and hospital programs to save energy or use alternatives sources. Some even went to help the poor pay their heating bills. This time, there was no mention of charities.

At last count, the government had collected a staggering $6 billion in settlements and judgments, which dwarfs the investigations into World War II profiteering as the biggest government restitution campaign of all time. By the time the program is wrapped up in a few years, the gifure is expected to approach, perhaps exceed, $8 billion. Two billion dollars or more may wind up in the federal treasury after all other claims are satisfied.

All this is being accomplished in near-total silence. Only in the fine print in the Federal Register and an occasional Energy Department press release does the process get any public attention. Yet a few of the old-timers watch the process and chuckle. Bloom, for one. Now a natural-resources attorney in Washington, he wistfully recalls that a skeptical superior once jocularly offered him a 10 percent commission on any recoveries his charges generated over $1 billion. "It would have been a good deal,' he says.
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Title Annotation:Exxon Corp.
Author:Jaroslovsky, Rich
Publication:Washington Monthly
Date:Oct 1, 1987
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