Pennzoil Co. v. Federal Energy Regulatory Commission
| Decision Date | 22 March 1982 |
| Docket Number | No. 80-2174,80-2174 |
| Citation | 671 F.2d 119 |
| Parties | PENNZOIL COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. . Unit A * |
| Court | U.S. Court of Appeals — Fifth Circuit |
Stephen L. Teichler, Charles M. Darling, IV, Charles E. Suffling, Baker & Botts, Washington, D. C., Patricia Curran, Julie Langdon, Houston, Tex., for Pennzoil Co.
George H. Williams, Jr., Washington, D. C., for Federal Energy Regulatory Com'n.
Thomas G. Johnson, Robert A. Hasty, Jr., Houston, Tex., for intervenor Shell Oil Co.
Frederick Moring, Jennifer N. Waters, Washington, D. C., for Associated Gas Distributors.
Petition for Review of Orders of the Federal Energy Regulatory Commission.
Before CHARLES CLARK, GARZA and SAM D. JOHNSON, Circuit Judges.
The single question here presented is whether the Federal Energy Regulatory Commission (FERC) may refer to private contract pricing provisions to assist it in identification of natural gas whose production entails such extraordinary risks or costs that it would not be undertaken absent the availability of a special incentive price. We hold both that it has the authority to do so, and that it has in this instance used that authority in a manner neither arbitrary nor capricious, but reasonably related to attainment of the controlling, congressionally-defined, objective. FERC's orders are, therefore, affirmed.
Section 107 of the Natural Gas Policy Act of 1978 (NGPA), 15 U.S.C. § 3317, grants authority to FERC to
(b) by rule or order, prescribe a maximum lawful price, applicable to any first sale 1 of any high-cost natural gas, which exceeds the otherwise applicable maximum lawful price to the extent that such special price is necessary to provide reasonable incentives for the production of such high-cost natural gas.
In NGPA § 107(c)(1)-(4), 15 U.S.C. § 3317(c)(1)-(4), the Congress specifically identified four sources from which gas produced would be deemed "high-cost natural gas." 2 These sources are not, however, exclusive. NGPA § 107(c) (5) provides that the term "high-cost natural gas" may be extended to include gas "produced under such other conditions as the Commission determines to present extraordinary risks or costs," 15 U.S.C. § 3317(c)(5). By rulemaking proceedings initiated shortly after President Carter's July 16, 1979, address to the Congress, encouraging creation of incentives for the development of gas from tight formations, 3 FERC set about identifying tight formation gas for which a special price would be "necessary" to induce production, and establishing a maximum lawful price adequate to provide "reasonable" incentive to such production.
Petitioner Pennzoil Company and intervenor Shell Oil Company have asked this Court to set aside the orders developed in these proceedings 4 because these orders tie the availability of the newly established incentive price for "tight formation" gas 5 to the presence of specified pricing provisions in the private contracts governing the production and sale of such gas. These orders allow the incentive price only to tight formation gas sold pursuant to governing contract pricing terms stating either a specified fixed rate, or a rate determined by operation of a fixed escalator clause, or a rate set by reference to FERC's authority to prescribe a maximum lawful price for such high cost natural gas under NGPA § 107, 15 U.S.C. § 3317. Pennzoil and Shell contend that this requirement, referred to as the "negotiated contract price requirement," effectively deems indefinite price escalator clauses to be inadequate contractual authority to collect the maximum lawful price for sales of gas which otherwise properly qualify as "high cost natural gas produced from tight formations" under the terms of the orders. In their view, the negotiated contract price requirement, by partially abrogating private authority to set natural gas prices at any price not exceeding the duly prescribed maximum lawful price, exceeds the limitation on FERC's authority over contractual pricing provisions imposed by the codification of the Mobile-Sierra "ceiling price" doctrine in section 101(b)(9) of the NGPA, 15 U.S.C. § 3311(b)(9), Pennzoil Co. v. FERC, 645 F.2d 360, 374 (5th Cir. 1981), cert. denied, --- U.S. ----, 102 S.Ct. 1000, 70 L.Ed.2d ---- (1982). 6 Pennzoil and Shell buttress their argument by noting that congressional restrictions on the use of indefinite price escalator clauses, found in sections 105 and 313(a) of the NGPA, 15 U.S.C. §§ 3315, 3373(a), 7 do not bar the use of such clauses in contracts governing the sale of high cost natural gas. 8
FERC, joined by intervenor Associated Gas Distributors, 9 asserts that Pennzoil and Shell have misconstrued the purpose of the negotiated contract price requirement. FERC 10 contends that the disputed requirement does not act to disallow the incentive price to gas which concededly qualifies as "high-cost natural gas produced from tight formations." Rather, FERC argues, the negotiated contract price requirement is an essential element of its method for identifying the tight formation gas which, absent the availability of an incentive price, would not be produced.
Resolution of these contentions requires that the negotiated contract price requirement be understood in the context of the rule-making proceedings in which it was developed. A review of the course of those proceedings is in order.
The starting point for the proceedings, as for our review of their result, was the few, terse instructions with which the Congress committed the development of an incentive price regulatory scheme to the expertise and judgment of FERC. Congress ordered that any such scheme could extend only to gas whose production "present(s) extraordinary risks or costs," NGPA § 107(c)(5), 15 U.S.C. § 3317(c)(5), and then only "to the extent that such special prices are necessary to provide reasonable incentives for the production of such high-cost gas," NGPA § 107(b), 15 U.S.C. § 3317(b) (emphasis added). The Conference Report accompanying the NGPA indicates the Congress considered such gas to include gas "produced from tight formations with little permeability," Joint Explanatory Statement of the Committee on Conference, Natural Gas Policy Act of 1978, H.R.Rep.No.95-1752, 95th Cong. 2d Sess., 87 (1978), reprinted in (1978) U.S.Code Cong. & Ad.News, 8800, 8983, 9004. The statutory language, however, is both explained and limited by this illustration. Section 107(b)'s restriction of the right to claim the incentive price to situations where availability of a higher price was necessary to spur production made clear that the incentive price was not to be made indiscriminately available to any gas produced from geological formations having the high density sedimentation and low permeability characteristic of "tight formations." 11 Rather, it was to be made available only to gas recovered from wells whose development could be made economically feasible solely by application of "enhanced production techniques," R. at 1, such as hydraulic fracturing and explosive fracturing, id. at 2. Accordingly, the first task confronting FERC was devising methods of identifying gas wells whose increased production necessitated application of enhanced recovery techniques.
FERC's original proposal conditioned the availability of the incentive price, also referred to as the section 107 price, on a showing that the gas was recovered from a designated tight formation by means of a well which had been subject to an enhanced recovery technique, R. at 16-20. Comments received in the initial phase of rule-making convinced it to eliminate the requirement of well-by-well proof of actual application of an enhanced recovery technique, both because the qualification would pose difficult problems of administration, and because it could, by allowing the price only in retrospect, dampen interest in exploration of reserves the development of which was not certain to entail greater risks and costs. 12 Elimination of the enhanced recovery technique requirement, however, opened a deficiency in FERC's plan for identification of gas qualifying for the incentive price under the restrictive criteria of section 107. FERC corrected this deficiency by substituting the negotiated contract price requirement.
That the negotiated contract price requirement was designed to achieve indirectly the congressionally-mandated purpose previously served by the enhanced recovery technique requirement is apparent from the explanation of the requirement accompanying its introduction. FERC stated
This requirement serves the purpose of insuring that the incentive maximum lawful price is extended as an incentive for the production of additional new tight formation gas, rather than just as a windfall to the sellers.... The Commission expects that purchasers will pay a higher price in return for increased production.
The Commission must limit the appliction (sic) of the incentive ceiling to those contracts which specifically refer to it (or to the extent permitted under a fixed rate or a fixed escalator clause) because its pricing authority is limited to setting incentive prices "necessary" to encourage additional production.
R. at 58-59. FERC adhered to this explanation of the purpose of the negotiated contract price requirement throughout the remainder of the exchanges which concluded the rule-making proceeding. 13
The requirement evoked "overwhelming," R. at 124, opposition. The cause of the dissention is apparent: by restricting eligibility for the incentive price to gas sold pursuant to contracts which set a fixed price, or apply a fixed escalator, or reference FERC's incentive pricing authority under section 107, the requirement denied the incentive price to gas sold under indefinite price escalator clauses which make no reference to § 107. Commentors, including petitioner Pennzoil and intervenor Shell, charge that FERC, in...
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