Amoco Production Co. v. Kansas Power & Light Co.

• Decision Date: 21 January 1981
• Docket Number: Civ. A. No. 78-1089.
• Citation: 505 F. Supp. 628
• Parties: AMOCO PRODUCTION COMPANY, Plaintiff and Counterdefendant, v. KANSAS POWER & LIGHT COMPANY, Defendant and Counterclaimant.
• Court: U.S. District Court — District of Kansas

505 F. Supp. 628

AMOCO PRODUCTION COMPANY, Plaintiff and Counterdefendant, v. KANSAS POWER & LIGHT COMPANY, Defendant and Counterclaimant.

Civ. A. No. 78-1089.

United States District Court, D. Kansas.

November 5, 1980.

On Remaining Issues January 21, 1981.

Glenn D. Young, Jr., of Gott, Young & Bogle, P.A., Wichita, Kan., R. H. Landt, of Amoco Production Company, Denver, Colo., for plaintiff and counterdefendant.

James L. Grimes, Jr., of Cosgrove, Webb & Oman, Topeka, Kan., David S. Black, of Kansas Power & Light Co., Wichita, Kan., for defendant and counterclaimant.

MEMORANDUM AND INTERIM ORDER

KELLEY, District Judge.

This matter comes now for decision on the plaintiff's claim for recovery of $2,884,000.00 plus statutory interest pursuant to a gas sales contract dated April 18, 1960, as amended by the parties' Letter Agreement No. 22. During an in-chambers conference on September 29, 1980, the litigants, Amoco Production Company and The Kansas Power & Light Company (hereinafter referred to as Amoco and KP&L), agreed and stipulated, with encouragement from the Court, to bifurcate the trial of their case. It was thus agreed the plaintiff's claim set out above should be tried first to the Court and that the defendant's counterclaim and its defenses to the plaintiff's claim involving lack of consideration, breach of contract and unconscionability should be tried after the Court's decision regarding Amoco's claim. Both Amoco and KP&L then proffered their respective suggested findings of fact and conclusions of law with respect to the plaintiff's claim, and oral argument was heard on October 1, 1980. At this hearing, all of the exhibits attached to the parties' respective suggested findings of fact and conclusions of law (Plaintiff's Exhibits Nos. 1 through 57, and Defendant's Exhibits A through I) were admitted into evidence without objection.

In 1960, the parties entered into a gas sales contract. In 1975, they amended the contract pursuant to a provision in it allowing price redetermination every five years. This amendment, i. e., Letter Agreement No. 22, is the subject of the instant litigation. More particularly, the parties are in dispute over the meaning of part five of this amendment, which contains the following price escalator clause:

Should the Federal Power Commission, or a successor regulatory body, at any time during the term hereof, authorize a price, however determined, for interstate gas sales within the geographical area in which the acreage subject hereto is located, which is higher than the price otherwise provided for in this amended Article XVI, then the price to be paid Seller hereunder shall be adjusted to the highest price so authorized.

This type of clause is generally known as a "price escalator clause" or a "F.P.C. price protection clause". This clause had no significance for the parties until July 27, 1976, the effective date for the Federal Power Commission's (hereinafter referred to as F.P.C.) Opinion No. 770. The relevant portions of F.P.C. Opinion No. 770 were reaffirmed by F.P.C. Opinion No. 770A issued November 5, 1976. See, (1979) Util.L.Rep.Fed. (C.C.H.) Secs. 2302, 03 at pp. 3906-37. In these two F.P.C. opinions the former area pricing method for natural gas was abandoned in favor of a pricing scheme based on "vintaging". Opinions 770 and 770A set a ceiling price of $1.42/MCF for gas from wells commenced ("spud in") after January 1, 1975, a lower price for gas from wells spud in after January 1, 1973, and before December 31, 1974, and a price of 29.5¢/MCF for gas from wells spud in before January 1, 1973. In July of 1976, the price paid by KP&L to Amoco pursuant to other provisions of Letter Agreement No. 22 was 54.0¢/MCF. The parties are now in court because Amoco contends F.P.C. Opinion 770 triggered the above price escalator clause in Letter Agreement No. 22 and thus raised the price of gas sold to KP&L to $1.42/MCF. KP&L, in turn, contends the escalator clause was not put into effect by Opinion 770 because the contract price then being paid Amoco, 54.0¢/MCF, was already higher than the price set by F.P.C. Opinion 770 for pre-1973 gas sold in interstate commerce. All of the gas sold to KP&L by Amoco came from wells commenced before January 1, 1973.

An examination of Letter Agreement No. 22, and especially the F.P.C. price escalator clause in part five, does not appear to lead to confusion at first glance. Indeed, most laymen could understand its meaning. However, when paragraph five is applied to the circumstances existing after July, 1976, an ambiguity becomes apparent. See, 4 Williston, Contracts, pp. 895-901 (3d ed., 1961). An ambiguity results because collateral facts exist, namely the F.P.C.'s adoption of vintaging and the demise of national pricing, and these facts make part five obviously ambiguous. When Letter Agreement No. 22 was signed on March 24, 1975, the F.P.C. employed a national price scheme to control gas prices. The concept of vintage pricing, as adopted in July, 1976 in F.P.C. Opinion 770, was a material deviation from the F.P.C. pricing policy existing when Letter Agreement No. 22 was formulated, and this deviation caused a potentially substantial price increase for KP&L due to the price escalator clause.

The plaintiff's claim is before the Court on the defendant's oral motion for summary judgment. After careful consideration of the parties' briefs, proposed statements of fact and oral argument, the Court finds part five of Letter Agreement No. 22 to be ambiguous. An examination of the extrinsic facts surrounding Letter Agreement No. 22 leads us to conclude that although the parties did not foresee nor provide specifically for F.P.C. Opinions 770 and 770A, they did clearly contemplate and provide for price escalation based on F.P.C. action and that "the price ... shall be ... the highest price so authorized". Consequently, we hold that judgment shall be entered in favor of Amoco on its breach of contract claim. The following are the Court's narrative findings of fact and conclusions of law.

The plaintiff is a Delaware corporation transacting business in the State of Kansas. The defendant is a Kansas corporation having its principal place of business therein. Amoco's business, among other things, involves the production and sale of natural gas. KP&L is a public utility company which buys natural gas for its own uses and also for eventual resale to its customers.

The gas sales contract entered into between the parties (Amoco was preceded by the Pan-American Petroleum Corp.) on April 18, 1960 (hereinafter referred to as the 1960 Contract) involved the sale of natural gas from wells all made operational prior to January 1, 1973. All of the wells are located in the Kansas counties of Haskell, Morton, Stanton and Stevens. The contract was originally for a term of twenty (20) years. In essence the 1960 Contract is an "output" contract whereby KP&L agreed to purchase all of the gas produced by Amoco from the acreage under contract up to a specified maximum and according to certain conditions not relevant to the matter before the Court. Until Letter Agreement No. 22 was agreed to by the parties in 1975, the 1960 Contract provided one price for gas to be used in KP&L's electrical power plants and another price for all other gas. The 1960 Contract also provided for price redeterminations every five years upon the request of Amoco.

The events giving rise to the present litigation began in 1973 when the parties began discussing the feasibility of price escalation on the condition that Amoco would rework certain gas wells to make additional gas reserves available to KP&L. The discussions carried into 1974. By letter dated May 7, 1974, Armour of Amoco gave written notice to KP&L that Amoco sought a redetermination of the contract price of gas from January 1, 1975 through December 31, 1980 pursuant to Section 4, Article XVI of the 1960 Contract. On May 9, 1974, Armour of Amoco again wrote to Benignus of KP&L regarding the possibility of Amoco's increasing reserves in exchange for price upgrading, and in this letter Armour stated such an agreement would only be effective to January 1, 1975, because new prices resulting from Amoco's redetermination request would be effective then. Williamson of KP&L responded to Armour's letter of May 7, 1974 regarding a price redetermination request and suggested the parties' price redetermination negotiations also include the subject of price upgrading for additional reserves.

On June 24, 1974 Benignus of KP&L by telephone notified Clayton Meadows of Amoco that KP&L did not want to agree to price increases prior to January 1, 1975 in exchange for Amoco's reworking existing gas wells to increase reserves. However, the possibility of Amoco reworking existing wells or drilling new ones to increase gas available to KP&L remained a part of the parties' negotiations of a price redetermination effective January 1, 1975. Williamson of KP&L mentioned this factor to Armour of Amoco in a July 31, 1974 letter summarizing the discussions of representatives of the parties on July 25, 1974. Nevertheless, a requirement that Amoco must rework existing wells or drill additional wells to increase gas supplies to KP&L was not made a condition in the writing culminating the parties' price redetermination negotiations, Letter Agreement No. 22, signed March 24, 1975. Also, Amoco in fact never reworked nor drilled any new wells from which to sell additional gas to KP&L.

Before further discussion of the dispute between Amoco and KP&L, a short history of vintaging is helpful. An enlightening historical discussion of vintaging was provided by Judge Barrett in his concurring opinion in Superior Oil Co. v. Western Slope Gas Co., 604 F.2d 1281, 1291 (10th Cir., 1979). Vintaging is a method of price control in which prices are determined by taking into account the costs of production and exploration for gas from wells commenced in the past and for...