Prenalta Corp. v. Colorado Interstate Gas Co., 90-8005

• Citation: 944 F.2d 677
• Decision Date: 04 September 1991
• Docket Number: No. 90-8005,90-8005
• Parties: , 15 UCC Rep.Serv.2d 854 PRENALTA CORPORATION, a Florida corporation; Spelman Prentice, an individual; James A. Masterson, an individual; Frederick R. Hickok, as Executor of the Estate of Clifford P. Hickok, Deceased; Ellis W. Manning, Jr., an individual; Elmer S. Parson, Jr., an individual; Gordon Van Fossen, an individual; Doris F. Johnson, an individual; Roland W. Hart, an individual; J. Adrian Padon, an individual; Gary Van Fossen, an individual; Frederick R. Hickok, an individual; and William C. Hickok, an individual, and the Spelpren Company, Plaintiffs-Appellants, v. COLORADO INTERSTATE GAS COMPANY, a Delaware corporation, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

Page 677

944 F.2d 677

60 USLW 2204, 15 UCC Rep.Serv.2d 854

PRENALTA CORPORATION, a Florida corporation; Spelman Prentice, an individual; James A. Masterson, an individual Frederick R. Hickok, as Executor of the Estate of Clifford P. Hickok, Deceased; Ellis W. Manning, Jr., an individual Elmer S. Parson, Jr., an individual; Gordon Van Fossen, an individual; Doris F. Johnson, an individual; Roland W Hart, an individual; J. Adrian Padon, an individual; Gary Van Fossen, an individual; Frederick R. Hickok, an individual; and William C. Hickok, an individual, and the Spelpren Company, Plaintiffs-Appellants, v. COLORADO INTERSTATE GAS COMPANY, a Delaware corporation Defendant-Appellee.

No. 90-8005.

United States Court of Appeals, Tenth Circuit.

Sept. 4, 1991.

As Amended on Denial of Rehearing

Dec. 6, 1991.

J. Alan Galbraith of Williams & Connolly, Washington, D.C. (Gretchen VanderWerf of Hawley & VanderWerf, Denver, Colo., with him on the brief), for plaintiffs-appellants.

Jeffrey M. Goldsmith, Colorado Interstate Gas Co., Colorado Springs, Colo. (William J. Hornbostel and Rebecca H. Noecker of Colorado Interstate Gas Co., Colorado Springs, Colo., and Marilyn S. Kite of Holland & Hart, Cheyenne, Wyo., with him on the brief), for defendant-appellee.

Before HOLLOWAY, Chief Judge, TACHA, Circuit Judge, and BRETT, District Judge. ^*

BRETT, District Judge

This diversity action arises out of a series of six gas purchase contracts between the sellers, Prenalta Corporation, twelve individuals, ¹ and The Spelpren Company, who own working interests in various natural gas wells located in Sweetwater County, Wyoming ("Prenalta"), and the buyer, Colorado Interstate Gas Company ("CIG"), an interstate gas pipeline company. Prenalta brought this action for declaratory relief against CIG concerning the price of deregulated gas under Contracts 422 and 516, and for damages due to breach of the "take-and-pay" clauses under Contracts 321, 323, 324, 327 ("300 Series Contracts") and the "take-or-pay" clauses under Contracts 422 and 516. CIG counterclaimed for declaratory judgment as to the price of deregulated gas under Contracts 422 and 516 and for restitution of payments made to Prenalta in excess of that required under Contracts 422 and 516. The parties agree that the law of Wyoming applies to this dispute.

On cross-motions for partial summary judgment, the district court found in favor Prenalta presents the following issues on appeal:

                of CIG on the price of deregulated gas, holding that CIG was obligated to pay the escalated base price for deregulated gas under Contracts 422 and 516.   Prenalta does not appeal this ruling.   The district court also granted CIG's second motion for partial summary judgment holding that CIG was entitled to a refund of payments made since January 1, 1985 in excess of the escalated base price for deregulated gas under Contracts 422 and 516, totaling $1,100,032.99, and that Prenalta was precluded from recovering damages for the alleged breach of CIG's take-and-pay obligations under the 300 Series Contracts and CIG's take-or-pay obligations under Contracts 422 and 516 because Prenalta failed to plead the proper measure of damages
                

(1) Is CIG entitled to a refund of money paid after January 1, 1985 in excess of the escalated base price for deregulated gas under Contracts 422 and 516?

(2) What is the proper measure of damages for breach of the take-or-pay clauses of Contracts 422 and 516? and

(3) What is the proper measure of damages for breach of the take-and-pay clauses of the 300 Series Contracts?

Prenalta contends that as to (1) there are at least controverted issues of material fact, and as to (2) and (3), the trial court erroneously determined the measure of damages and erred in not permitting Prenalta to proceed with a trial on the merits, whatever the proper measure of damages.

For the reasons set forth below, the summary judgment of the district court in favor of CIG is vacated and the case is remanded for jury trial consistent with this opinion.

BACKGROUND

The Prenalta parties are the owners of working interests in approximately thirty gas-producing wells in Sweetwater County, Wyoming. CIG is an interstate gas pipeline company engaged in the business of purchasing, gathering, transporting and selling natural gas. From 1966 through 1973 Prenalta and CIG entered into six long-term contracts for the sale and purchase of natural gas produced from Prenalta's wells--the 300 Series Contracts and Contracts 422 and 516 ("subject contracts"). As of the filing of this appeal, CIG continued to purchase natural gas from Prenalta under these contracts.

When the terms were negotiated and the subject contracts executed, the prices to be paid for gas produced under the contracts were regulated by the federal government--initially, the Federal Power Commission and later, the Federal Energy Regulatory Commission (FERC). The prices for gas under the 300 Series Contracts continue to be regulated by FERC. However, pursuant to Section 121 of the Natural Gas Policy Act of 1978 (NGPA), 15 U.S.C. § 3331, the price for gas sold from two of the wells under Contract 422 and from all of the wells under Contract 516 was deregulated on January 1, 1985. The regulatory environment within which these contracts were formed, therefore, is pertinent to an adequate understanding of the contracts' purpose and effect.

At the time Prenalta and CIG entered into the subject contracts, the regulatory price ceilings on natural gas sold in the interstate market had contributed to conditions of decreased production and, ultimately in the early 1970s, natural gas shortages. Mobil Oil Exploration & Prod. S.E., Inc. v. United Distribution Co., --- U.S. ----, ----, 111 S.Ct. 615, 620, 112 L.Ed.2d 636 (1991) ("severe shortages persisted in the interstate market because low ceiling prices for interstate gas sales fell considerably below prices the same gas could command in intrastate markets, which were as yet unregulated"); Pierce, Natural Gas Regulation, Deregulation, and Contracts, 68 Va.L.Rev. 63, 67-68 (1982). During this period of limited supply, long-term gas purchase contracts became even more advantageous to the pipeline/purchaser. While the market and supply security of long-term contracts continued to be valuable to both producers and pipelines in attracting the required large capital investment associated with the cost of production and transportation of natural gas, long-term contracts further assured pipelines a continuous delivery of gas during a time of shortage. See Amoco Prod. Co. v. Stauffer Chem. Co., 612 P.2d 463, 468 (Wyo.1980); Pierce, supra, at 77-79. These factors were undoubtedly considered by Prenalta and CIG when they contracted in Article VI of the subject contracts to sell and buy gas for a "term of 20 years and so long thereafter as gas is capable of being produced in commercial quantities from the gas leases and gas rights committed to the performance of this Agreement."

Not only did regulatory price ceilings help create market conditions advantageous to the execution of long-term gas purchase contracts, but they also affected the negotiation of specific provisions of these contracts due to the limitation of price as a bargaining term. In order to compete in a market of limited supply, pipelines were forced to grant producers benefits other than price. Because the present allocation of the risk of future events is endemic to long-term contracts, producers negotiated price-substitute benefits which shifted the risk of a decline in market demand for natural gas to the pipelines through the contract inclusion of take-and-pay or take-or-pay clauses. See generally Pierce, supra, at 77-82.

Under a take-and-pay clause, the pipeline is required annually to take and pay for a minimum contract quantity of gas. A take-and-pay clause benefits the producer by maximizing revenue through the steady depletion of gas reserves. Johnson, Natural Gas Sales Contracts, 34 Inst. on Oil & Gas L. & Tax'n 83, 108 (1983). Under a take-or-pay clause, the pipeline is required annually to take and pay for a minimum contract quantity of gas or pay for a specified quantity. A take-or-pay clause differs from a take-and-pay clause in that it assures the producer a constant cash flow rather than the actual purchase of the contract quantity of gas over the term of the contract. Johnson, supra, at 110. In addition, a take-or-pay clause adds some measure of flexibility in a long-term gas purchase contract by allowing the pipeline to pay for a specified quantity in lieu of taking the contract quantity without endangering its long-term source of supply. ² 4 H. Williams, Oil and Gas Law § 724.5, at 665 (1990). Under both provisions, however, the pipeline assumes the risk that a market for the contract quantity of natural gas might fail during the contract term. The take-and-pay provision in the 300 Series Contracts and the take-or-pay provision in Contracts 422 and 516 are typical of such clauses in the natural gas purchase contracts of the early 1970s.

While regulation of natural gas prices encouraged the formation of these long-term take-and-pay and take-or-pay contracts, deregulation encouraged their modification or breach. The enactment of the NGPA in 1978 permitted the gradual deregulation of natural gas which resulted in a dramatic rise in natural gas prices. The rise in natural gas prices, in turn, provided incentive for both energy conservation and for new gas exploration and, by the 1980s, natural gas supplies were abundant. ³ The supply of gas for which the pipelines initially contracted assumed a demand that no longer existed. Pipelines generally responded to these market conditions by renegotiating existing take-and-pay and take-or-pay contracts with producers, and, failing that, reducing gas "takes" by making payment only on gas that could be marketed, in breach of such contracts. Arbaugh, Take or Pay Clauses: Pandora's...