American Louisiana Pipe Line Co. v. Gulf Oil Corp., Civ. A. No. 16427.

• Decision Date: 30 December 1959
• Docket Number: Civ. A. No. 16427.
• Citation: 180 F. Supp. 155
• Parties: AMERICAN LOUISIANA PIPE LINE COMPANY, Plaintiff v. GULF OIL CORPORATION, Defendant.
• Court: U.S. District Court — Western District of Michigan

180 F. Supp. 155

AMERICAN LOUISIANA PIPE LINE COMPANY, Plaintiff v. GULF OIL CORPORATION, Defendant.

Civ. A. No. 16427.

United States District Court E. D. Michigan, S. D.

December 30, 1959.

COPYRIGHT MATERIAL OMITTED

A. D. Ruegsegger, Detroit, Mich., Charles V. Shannon, Washington, D. C., Arthur R. Seder, Jr., Chicago, Ill., Dyer, Meek, Ruegsegger & Bullard, Detroit, Mich., Sidley, Austin, Burgess & Smith, Chicago, Ill., May, Shannon & Morley, Washington, D. C., of counsel for plaintiff.

Laurence M. Sprague, Fischer, Sprague, Franklin & Ford, Detroit, Mich., Merle E. Minks, Houston, Tex., Jesse P. Luton, Jr., Fort Worth, Tex., Charles E. McGee, Washington, D. C., of counsel, for defendant.

LEVIN, Chief Judge.

This is an action instituted by American Louisiana Pipe Line Company (hereinafter referred to as American Louisiana) against Gulf Oil Corporation (hereinafter referred to as Gulf), seeking a declaratory judgment (28 U.S.C. § 2201) that Gulf's cancellation of a contract entered into with American Louisiana in December 1955 was unlawful.¹

American Louisiana is a Delaware corporation which owns and operates an interstate natural gas pipe line extending from the gas producing areas in southern Louisiana to Detroit, Michigan. Gulf is a Pennsylvania corporation which owns and operates natural gas wells, pipe-line facilities, gasoline plants and other properties in various states throughout the United States. The 1955 contract, details of which will be set out and discussed, provided for the sale of gas to American Louisiana from Gulf's Krotz Springs field located in St. Landry Parish, Louisiana, the reserves of which have an estimated value of over $100,000,000. The contract imposed obligations upon each of the parties to be performed within a given time, and provided that if either party did not satisfy its obligations within that time, the other party, at its option, could cancel the contract. American Louisiana in this action asserts that it fully performed its obligations and that Gulf therefore did not have the right to cancel. Gulf moved to dismiss on the ground that the action was local in nature and could only be tried in the United States District Court for the Western District of Louisiana and, in the alternative, moved to transfer the case to that District Court. This motion was denied. American Louisiana Pipe Line Co. v. Gulf Oil Corp., D.C., 158 F.Supp. 13. A motion for summary judgment by Gulf was also denied.

Although the present controversy involves a contract entered into in 1955, the factual and legal issues require a consideration of the prior dealings between the parties with reference to the sale of the Krotz Springs gas.

On November 10, 1953, American Louisiana filed an application under Sec. 7 (c) of the Natural Gas Act, 15 U.S.C.A. § 717f(c), with the Federal Power Commission for a certificate of public convenience and necessity to construct and operate a natural gas pipe-line system from southern Louisiana to the Detroit area. The gas supply to support this project was to be provided by six independent producers of natural gas with whom American Louisiana had entered into gas purchase contracts covering gas reserves in southern Louisiana. One of these contracts entered into on October 26, 1953, covered the Gulf reserves in the Krotz Springs field. Under a provision of the contract Gulf had the right to terminate it if American Louisiana had not given notice to Gulf by October 1, 1954, that it had received a certificate of public convenience and necessity from the Federal Power Commission acceptable to Gulf or if any federal regulatory body took formal action to exercise or extend its jurisdiction to declare Gulf a natural gas company, or to regulate the price Gulf was to receive for the gas it delivered under the contract.

On June 7, 1954, while the American Louisiana certificate proceedings were in progress, the Supreme Court handed down its decision in Phillips Petroleum Company v. State of Wisconsin, 347 U.S. 672, 74 S.Ct. 794, 98 L.Ed. 1035, holding that independent producers of natural gas who make sales to interstate pipeline companies are natural gas companies subject to Federal Power Commission regulation under the Natural Gas Act. Pursuant to that decision, the Commission subsequently issued regulations requiring producers who were making interstate sales to apply for certificates of public convenience and necessity by December 1, 1954. This decision presented to the Commission the problem of how to deal with the American Louisiana certificate application. It was essential to the survival of the American Louisiana project that a certificate of public convenience and necessity be issued on or before October 1, 1954, since all of American Louisiana's contracts could be cancelled if American Louisiana had not by that time received the certificate. None of the producers had as yet applied for or received certificates authorizing the sales to American Louisiana. On October 1, 1954, the Commission issued an opinion and an accompanying order, granting a conditional certificate of public convenience and necessity to American Louisiana authorizing the construction of the facilities covered by its application, subject to the condition that American Louisiana could not undertake the construction of such facilities

"unless there have been filed with the Commission prior to December 1, 1954, applications for certificates of public convenience and necessity to supply gas sufficient to support this project, and until such certificates have been issued and accepted by the respective applicants."

The Commission's order of October 1, 1954, also included a condition limiting the quantity of gas which American Louisiana could transport and sell to 111,946,000 Mcf per year, being an average daily purchase capacity of 306,700 Mcf per day.² Following the issuance of this order, four of the six producers with whom American Louisiana had contracts filed applications with the Federal Power Commission for certificates of public convenience and necessity and after hearings thereon, the Commission issued certificates to them. Gulf and one other producer cancelled their contracts. Thereupon American Louisiana proceeded with construction of the project and the initial facilities were completed in August, 1956.

Article XX of the 1953 contract between American Louisiana and Gulf provided that in the event of the cancellation of the contract by Gulf,

"in order to allow Buyer American Louisiana sufficient time and opportunity to negotiate with Seller Gulf for a new contract, it is agreed that Seller shall not, for a period of two years from such termination, sell any gas from leases covered by this Agreement to any one, other than those to whom it now has written commitment without first having obtained written consent from Buyer, which consent shall be granted unless withheld for such reasonable cause."

Pursuant to this provision, American Louisiana and Gulf negotiated a new contract for the purchase and sale of the Krotz Springs reserves and on December 7, 1955, Gulf transmitted signed copies of the contract with which we are here concerned, to American Louisiana with a covering letter which stated that the contract would not become effective until American Louisiana executed similar contracts for the purchase of gas from three other fields owned by Gulf in southern Louisiana, known as Washington, Hayes and Church Point fields. American Louisiana executed the Krotz Springs contract on December 10, 1955, and in January and February of 1956 American Louisiana executed contracts covering the Washington, Hayes and Church Point fields as well as a fourth field also owned by Gulf known as West Little Chenier.

Following the execution of these contracts, American Louisiana on May 14, 1956, filed an application for a certificate of public convenience and necessity with the Federal Power Commission. American Louisiana's application sought authority to install additional compressor stations and additional compressor engines at its existing stations which would increase its daily delivery capacity from 300,000 Mcf per day to 400,000 Mcf per day. This was to be accomplished in two steps. The first step would increase the daily delivery capacity to approximately 360,000 Mcf per day, which is approximately 370,000 Mcf per day of purchase capacity, by the construction of two new compressor stations and the addition of horsepower at two existing stations. The second step would provide an additional capacity of 40,000 Mcf per day by the construction of two additional compressor stations. Gulf filed its application for a certificate of public convenience and necessity to make the deliveries under the contracts on the same day.

On July 13, 1956, the Federal Power Commission having not as yet acted on these certificate applications, American Louisiana filed an application for a temporary certificate of public convenience and necessity under Sec. 717f(c) of the Natural Gas Act in which it requested authority to construct and operate the first step facilities described in its permanent certificate application.

A temporary certificate granting the authority requested was issued on August 8, 1956. By virtue of this temporary certificate, the certificated purchase capacity of American Louisiana's pipe line was increased from 306,700 Mcf per day to approximately 370,000 Mcf per day. American Louisiana completed this construction in December of 1956 at a cost of approximately $8,000,000.

On August 20, 1956, the Commission set the Gulf and American Louisiana certificate hearings for October 9, 1956. On October 4, 1956, the Commission postponed the hearing set for October 9, 1956, to a date to be fixed by further notice. On October 11, 1956, American Louisiana filed a motion for prompt hearing on the certificate application and on October 19, 1956, Gulf filed a concurrence in this motion. The Commission granted the...