645 F.2d 360 (5th Cir. 1981), 79-1247, Pennzoil Co. v. F.E.R.C.

Docket Nº:79-1247, 79-1602.
Citation:645 F.2d 360
Case Date:May 20, 1981
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

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645 F.2d 360 (5th Cir. 1981)

PENNZOIL COMPANY, et al., Petitioners,



Nos. 79-1247, 79-1602.

United States Court of Appeals, Fifth Circuit

May 20, 1981

As Modified on Denial of Rehearing Aug. 21, 1981.

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Baker & Botts, Charles M. Darling, IV, Charles E. Suffling, R. Gordon Gooch, Washington, D. C., John M. Young, Pennzoil Co., Claudia J. Ramsland, Patricia A. Curran, Thomas R. McKnight, Houston, Tex., for Pennzoil Co., Ashland Exploration, Tenneco Oil Co., et al., Pogo Producing Co.

Jerome Nelson, Sol., J. Paul Douglas, Robert R. Nordhaus, Washington, D. C., for Federal Energy Regulatory Commission.

Frank X. Kelly, Gallagher, Boland, Meiburger & Brosnan, Washington, D. C., for Texas Gas Transmission Corp.

Judy M. Johnson, Larry R. Veselka, John D. Taurman, Vinson & Elkins, Houston, Tex., for Independent Producer respondents.

Harold L. Talisman, Washington, D. C., for Tennessee Gas Pipeline Co.

David C. Henri, Ray G. Groussman, Cloy D. Monzingo, Houston, Tex., Bernard A. Foster, III, Nancy J. Hubbard, Washington, D. C., for Getty Oil Co.

Marilyn O. Adamson, Tulsa, Okl., for Amerada Hess Corp.

W. B. Wagner, Jr., Houston, Tex., for Superior Oil Co.

Jeffrey G. Shrader, William T. Sperry, J. Clayton LaGrove, Tulsa, Okl., for Williams Exploration Co.

Neal Powers, Jr., Byron A. Thomas, Butler, Binion, Rice, Cook & Knapp, Arthur S. Berner, Houston, Tex., for Inexco Oil Co. and ECEE, Inc., et al.

Thomas G. Johnson, Jr. Houston, Tex., for Shell Oil Co. and Tenneco Oil Co., et al.

David M. Whitney, Houston, Tex., for Aminiol USA, Inc., et al.

Carolyn S. Hazel, Tom Burton, Houston, Tex., for Conoco, Inc.

Frederick Moring, Jennifer Waters, Dana Contratto, Washington, D. C., for Associated Gas Distributors.

C. J. Roberts, John L. Williford, Larry Pain, Bartlesville, Okl., for Phillips Petroleum Co.

Goldberg, Fieldman & Letham, P. C., Washington, D. C., for Memphis Light, Gas & Water Division.

Janice E. Kerr, J. Calvin Simpson, Lawrence Q. Garcia, San Francisco, Cal., for the People of State of Cal., et al.

Paul W. Fox, Washington, D. C., for Damson Oil Corp.

George J. Domas, New Orleans, La., for Terra Resources, Inc.

Robert D. Haworth, T. P. Hamill, R. C. Elmore, Houston, Tex., for Mobil Producing Texas & New Mexico, Inc., Mobil Oil Corp., Northern Natural Gas Producing Co. and Mobil Exploration & Producing Southeast, Inc.

Jeffrey D. Komarow, Washington, D. C., for State of Mich. and Michigan Public Service Commission.

Richard G. Harris, Oklahoma City, Okl., for Kerr-McGee Corp.

Peter W. Hanschen, Malcolm H. Furbush, Robert Ohlbach, Harry W. Long, Jr., San Francisco, Cal., for Pacific Gas and Electric Co.

Peter H. Schiff, Gen. Counsel, Albany, N. Y., Richard A. Solomon, Wilner & Scheiner, Dennis Lane, Washington, D. C., for Public Service Commission of State of N. Y.

Justin R. Wolf, George H. Rothschild, Jr., Washington, D. C., for Chevron U. S. A., Inc.

Lawrence E. Glenn, Robert W. Fuller, Gulf Oil Corp., Lauren Eaton, Houston, Tex., for Gulf Oil Corp.

Paul J. Broyles, John A. Ramsey, Karen A. Berndt, Houston, Tex., for Texaco, Inc.

C. Roger Hoffman, Martin N. Erck, D. W. Rasch, M. W. Cockrell, Jr., Houston, Tex., for Exxon Corp.

Dennis J. Roberts, II, Atty. Gen. of R. I., Providence, R. I., for Rhode Island Division of Public Utilities and Carriers.

William T. Benham, Chicago, Ill., for Amoco Production Co.

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William A. Sackmann, Marathon Oil Co., Findlay, Ohio, for Marathon Oil co.

William T. Miller, Stanley W. Balis, Miller, Balis & O'Neil, Washington, D. C., for Gas Consumers Group.

Robert R. Reis, Carmen Gonzalez, Tulsa, Okl., for Cities Service Co.

Paul W. Hicks, Dallas, Tex., for Placid Oil Co.

James P. Holland, Charleston, W. Va., for Columbia Gas Transmission Corp.

Becky McGee, James D. Olsen, Dallas, Tex., for Sun Oil Co. (Delaware).

Robert W. Henderson, Dallas, Tex., for Hunt Oil Co.

Robert G. Hardy, Thomas F. Ryan, Jr., Joseph A. Cannon, Washington, D. C., for Transcontinental Gas Pipe Line Corp.

Kenneth L. Riedman, Jr., Los Angeles, Cal., for Union Oil Co. of California.

Edward J. Kremer, Jr., David Aston, Dallas, Tex., for Atlantic Richfield Co.

Gary G. Sackett, Salt Lake City, Utah, for Mountain Fuel Supply Co.

Thomas D. Clarke, John S. Fick, Los Angeles, Cal., for Southern California Gas Co.

Petitions for Review of the Orders of the Federal Energy Regulatory Commission.

Before HENDERSON, ANDERSON and SAM D. JOHNSON, Circuit Judges.

SAM D. JOHNSON, Circuit Judge:

The continuing battle between producers and consumers over natural gas prices is once again before this Court. The issue in this controversy can be simply stated: May "area rate clauses" 1 in existing interstate gas purchase contracts escalate the contract price to the maximum lawful price provided in the Natural Gas Policy Act of 1978? NGPA, 15 U.S.C.A. §§ 3301-3432. In the orders on review, the Federal Energy Regulatory Commission 2 (FERC) held that the NGPA was no bar to that escalation and that area rate clauses as a general rule constituted sufficient contractual authority to collect NGPA ceiling prices. FERC then established a procedure whereby interstate pipelines, FERC Staff, state regulatory commissions, local distribution companies, and consumer groups could contest the contractual sufficiency of specific area rate clauses. Most producers complain that FERC did not go far enough, while consumers think that FERC went too far in providing a presumption in favor of area rate clause escalation to NGPA ceiling prices. This case raises questions concerning the meaning of the NGPA and its interrelationship with the Natural Gas Act of 1938. NGA, 15 U.S.C.A. §§ 717-717w. It also raises a question concerning the application of the constitutional reasoning in Erie Railroad v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). This Court for the most part affirms and in small part sets aside and modifies the FERC orders. 3


A. Escalator Clauses and the NGA

Seven years after the Supreme Court's decision in Phillips Petroleum Co. v. Wisconsin,

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347 U.S. 672, 74 S.Ct. 672, 98 L.Ed. 1035 (1954), brought interstate gas producers within NGA rate regulation, the Federal Power Commission (FPC) in 18 C.F.R. § 154.93 prohibited the operation of certain indefinite price escalator clauses in interstate gas purchase contracts. 4 These clauses permit upward price adjustments on the occurrence of some specified triggering event. The most common of these were favored nation clauses, which generally provided that the contract price would automatically escalate to any higher prices that the pipeline purchaser, or another pipeline in a described geographic area known as the contract pricing area, paid for gas from that same defined area. 5 The FPC prospectively prohibited these clauses as contrary to the public interest because they increased the contract price by reference to events that had no economic significance to the particular sale of gas the price one particular producer receives has no bearing on another producer's revenue needs or costs of production. 6

The FPC amended section 154.93 to allow certain indefinite price escalator clauses to operate. One of these, the so-called "area rate clause," was made permissible by the addition of section 154.93(b-1). Order No. 329, 36 F.P.C. 925 (1966). This allowed the use of "(p)rovisions that permit a change in price to the applicable just and reasonable area ceiling rate which has been, or which may be, prescribed by the Commission for the quality of the gas involved." The permissible escalation was in the public interest since the area ceiling rate a just and reasonable rate since it was derived by a cost-based methodology did have economic significance to the gas in question.

To sell gas interstate, a producer must receive permission in the form of a certificate of public convenience and necessity. Under NGA § 7, 15 U.S.C.A. § 717f, the Commission has the power to condition the grant of the certificate. This power gave the FPC the ability to further enforce its prohibition in section 154.93 by rejecting any contract executed after April 2, 1962, that contained an impermissible clause. 7 Because many contracts contained clauses that were prohibited, the Commission later adopted the practice of attaching "waivers" of section 154.93 to the certificates. This allowed the clauses to operate, but only as area rate clauses. The Commission thus did not have to reject these contracts and require their refiling after the parties negotiated amendments to expunge a clause that, under a literal application of the regulation, would deprive the producer of the applicable just and reasonable rate.

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The FPC later abandoned its approach to producer rate regulation of prescribing rates for particular areas and instead adopted nationwide rates of general applicability. 8 Despite the literal language of section 154.93(b-1) and the language of area rate clauses that literally tracked the regulation, the FPC permitted producers and interstate pipelines to rely on area rate clauses to escalate the contract price to the national ceiling rates. The FPC also allowed area rate clauses to escalate the contract price to ceiling rates for qualifying sales of small producer gas, 9 rollover contract gas, 10 and flowing but undedicated gas. 11


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