5. Prior Court of Appeal Decision
In 1986, the California Attorney General, the City of Long Beach and the State of California (collectively, the State) filed suit against various oil companies, including Chevron (the State Action).2 In the State Action, the State asserted that Texaco Inc. (later acquired by Chevron) - then the owner of the 20" Pipeline - was operating the pipeline as a common carrier based on the same allegations now being made by Chevron in its complaint before this Commission.3 The gravamen of the complaint was that buy/sell agreements were "sham" transactions used for the sole purpose of evading Commission regulation. The complaint further alleged that, by providing transportation services through the use of buy/sell agreements, Texaco had dedicated the 20" Pipeline to public use.
In 1991, most of the parties to the State Action settled, with five defendant oil companies agreeing to dedicate their crude oil pipelines in California as common carriers subject to Commission regulation. However, the settlement did not include the 20" Pipeline or two other heated crude oil pipelines. The parties disputed whether the three pipelines were private property exempt from Commission regulation or public utilities subject to such regulation. The parties agreed to litigate the status of the three pipelines in Superior Court.
In the State Action, plaintiffs sought a judicial declaration finding that the 20" Pipeline was operated as a public utility. That relief rested primarily on the following allegation:
Each defendant has continued regularly during the period after 1980 to transport crude oil through its pipelines for others for compensation. In these pipeline operations defendants have each entered into sham crude oil purchase and sale or exchange agreements designed to disguise the fact that the pipelines are actually transporting oil for others. Pursuant to these sham transactions, defendant pipeline owners purport to purchase and take title to the crude oil offered for shipment at the pipeline entry point, with an agreement that similar quantities of crude oil will be resold to the original seller at the desired point of delivery.4
Similarly here, Chevron alleges in its complaint:
By purporting to provide transportation services on the Shell Pipeline pursuant to the Shell Trading Contracts, Defendants are attempting to create the impression that they are merely buying and selling crude oil rather than providing public utility pipeline transportation service on the Shell Pipeline. The buy-sell arrangement on the Shell Pipeline is a subterfuge, lacking economic substance, devised for the sole purpose of evading Commission jurisdiction.5
In Superior Court, the defendants (including Chevron) asserted that the buy/sell agreements were legitimate, arm's-length transactions that resulted in the oil company being the true owner of the crude oil in its pipelines. They stated that the transfer of title under the buy/sell agreements had genuine legal and economic consequences, including the transfer of risk of loss, risk of property damage, and the risk that the purchaser of the crude oil might be unwilling to accept oil when it was tendered for delivery.6 Moreover, the defendants (including Chevron) maintained that the fact that these transactions were intended to avoid regulation was irrelevant as under California law any entity is permitted to structure its business activities so as to avoid falling within the purview of a particular regulatory scheme.7
The California Court of Appeal decided in favor of Chevron, Mobil and Texaco. In its August 3, 1994 decision8 (the Court of Appeal Decision), the Court held that "the oil companies' conduct here establishes these pipelines [including the 20" Pipeline] were private, not common carriers subject to PUC regulation."9 The Court's conclusion was based on findings that (1) the pipeline companies always owned the crude oil in the pipelines and suffered any risk of loss, (2) crude oil purchases from other producers were made through legitimate arm's-length transactions, (3) the companies never offered to transport oil, but rather bought and sold based on their own needs and available pipeline capacity, and (4) the percentage of crude oil bought from other producers was very low. The Court analogized the transactions to that of a supermarket company:
[I]f a large supermarket company produced some agricultural products on its own farms, and shipped them to market in its private trucks, but occasionally bought other produce from independent producers to fill its trucks when its own harvest could not, whether bought with cash or a promise to give produce to the other company at a later time, the supermarket's trucks would not thereby become common carriers, whether the trucks delivered the produce only to the supermarket's stores or delivered it to others for resale.10
Citing Richfield Oil Corp. v. Public Util. Com. (1960) 54 Cal.2d 419 and Associated etc. Co. v. Railroad Commission (1917) 176 Cal. 518, the Court noted that the California Supreme Court held that similar transactions did not render the pipelines common carriers.11
The Court of Appeal Decision is not certified for publication, and under Rule 977 of the California Rules of Court, "[e]xcept as provided in (b), an opinion of a California Court of Appeal or superior court appellate division that is not certified for publication or ordered published must not be cited or relied on by a court or a party in any other action." However, under Rule 977(b), "[a]n unpublished opinion may be cited or relied on...when the opinion is relevant under the doctrines of law of the case, res judicata, or collateral estoppel..." The Commission thus may rely on the decision if defendants' motion to dismiss implicates one or more of these three doctrines.
2 The People of the State of California, the City of Long Beach, as Trustee for the State of California, and the State of California, as Beneficiary v. Chevron Corporation, et al., Los Angeles Superior Court Case No. C587912, Consolidated with Case No. C661310 (the State Action).
3 In October 2001, Chevron Corp. acquired Texaco Inc. as a wholly owned subsidiary and changed its name to ChevronTexaco Corporation. In February 2002, ChevronTexaco Corporation sold its interest in Equilon to Shell Oil Company. In May 2005, ChevronTexaco Corporation changed its name to Chevron Corporation. Complainant Chevron Products Company is a division of Chevron U.S.A. Inc. Chevron U.S.A. Inc. is a major subsidiary of Chevron Corporation.
4 Long Beach Complaint, at 34.
5 Chevron Complaint, at 10.
6 Submission of Chevron, Mobil and Texaco Pursuant to Court Order of May 28, 1992, filed July 30, 1992, at 20-22) (Joint Submission).
7 Joint Submission at 18, citing Thayer v. California Development Co. (1912) 164 Cal. 117 and People v. Duntly (1932) 217 Cal. 150.
8 Attachment 13 to the defendants' Request for Official Notice.
9 Court of Appeal Decision, at 11.
10 Id., at 12.
11 Id., at 13.
