City of Farmington v. Amoco Gas Co., 83-2523

• Decision Date: 12 November 1985
• Docket Number: No. 83-2523,83-2523
• Parties: CITY OF FARMINGTON, Plaintiff-Appellee, v. AMOCO GAS COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 554

777 F.2d 554

CITY OF FARMINGTON, Plaintiff-Appellee, v. AMOCO GAS COMPANY, Defendant-Appellant.

No. 83-2523.

United States Court of Appeals, Tenth Circuit.

Nov. 12, 1985.

J. Paul Douglas, Grove, Jaskiewicz, Gilliam & Cobert, Washington, D.C. (Edward B. Hinders, Amoco Gas Co., Houston, Tex., and Kemp W. Gorthey, Austin, Tex., with him on briefs), for defendant-appellant.

Charles F. Wheatley, Jr., Wheatley & Wollesen, Washington, D.C. (Michael J. Thompson, Wheatley & Wollesen, Washington, D.C., and Dwight D. Arthur, City

Atty., City of Farmington, N.M., with him on brief), for plaintiff-appellee.

Before HOLLOWAY, Chief Judge, MOORE, Circuit Judge, and THOMPSON, District Judge. ^*

JOHN P. MOORE, Circuit Judge.

Appellant, Amoco Gas Company (Amoco), appeals from a judgment entered by the United States District Court for the District of New Mexico in favor of appellee, the City of Farmington (Farmington). City of Farmington v. Amoco Gas Co., 568 F.Supp. 1265 (D.N.M.1983). The controversy between the parties arose out of a long-term contract for the intrastate sale of natural gas by Amoco to Farmington. Claiming that Amoco breached the contract, Farmington filed suit, seeking damages for alleged overcharges from June 21, 1974, through October 1, 1981, the contract termination date. Amoco denied the overcharges and filed a counterclaim for alleged undercharges to Farmington. After a bench trial, the district court allowed the charges claimed by Amoco from June 21, 1974, through July 26, 1976, awarding Amoco damages plus interest on its counterclaim. For July 27, 1976, to October 1, 1981, the district court held that, under the terms of the contract, Amoco overcharged Farmington. On appeal, Amoco challenges the court's finding of overcharges, its corresponding judgment in favor of Farmington for damages, and its award of prejudgment interest to Farmington. ¹ Because Amoco failed to establish that the district court's interpretation of the contract was clearly erroneous or that its award of prejudgment interest was an abuse of discretion, we affirm.

On September 28, 1961, Amoco and Farmington entered into an agreement entitled "Industrial Gas Sales Contract" in which Amoco agreed to sell and distribute, and Farmington agreed to purchase, certain quantities of natural gas. The contract contemplated an intrastate sale of gas produced in the San Juan Basin Area of New Mexico which was to be used solely in Farmington's electric generating plant. ² On September 15, 1971, the parties executed an amendment to the contract covering the period October 1, 1971, through October 1, 1981. Among other changes and additions to the contract, the 1971 amendment included the following pricing provision, known as p B:

B. Commencing October 1, 1972, and thereafter to October 1, 1981, the price per MMBtu specified in Paragraph A above shall be increased but not decreased from time to time to maintain a minimum price differential of [1.5 cents] in relation to and higher than the then current Federal Power Commission (FPC) area price in cents per MCF for gas of this contract vintage and same quality as sold in the San Juan Basin Area as set forth by the FPC consisting of San Juan, Rio Arriba, McKinley, and Sandoval Counties, New Mexico; and Montezuma, La Plata, Archuleta, Mineral, Hinsdale, San Juan, Dolores, San Miguel, Ouray and Montrose Counties, Colorado. As used herein, the term "contract vintage" shall mean contracts entered into after June 17, 1970, and before October 1, 1973. Accordingly, should the FPC, or any successor governmental authority having similar jurisdiction, allow, by order following hearing, or by settlement, for the San Juan Basin Area a just and reasonable area price higher than [24.0 cents] per MCF for gas of this contract vintage, then the price to be paid by Buyer to Seller for gas under this contract shall be increased as hereinabove provided to be effective on the date such order is issued or settlement agreement approved by the Commission.

The parties agree that p B is an indefinite price escalator clause, a provision which permits "upward price adjustments on the occurrence of some specified triggering event." Pennzoil Co. v. Federal Energy Regulatory Commission, 645 F.2d 360, 366 (5th Cir.1981), cert. denied, 454 U.S. 1142, 102 S.Ct. 1000, 71 L.Ed.2d 293 (1982). More specifically, the parties characterize p B as an "area rate clause," a form of indefinite price escalator clause which "authorizes an escalation in the contract price whenever there is an increase in the applicable just and reasonable wellhead ceiling price for the category of gas involved." Id. note 1, at 365. In this case, the area rate clause tied increases in the contract price to adjustments by the FPC (or its successor) in the allowable price for San Juan Basin Area gas sold under interstate contracts of a defined contract vintage. The operation of the clause following several unanticipated changes in the pricing mechanism employed by the FPC and its successor, ³ is the source of the current controversy between Amoco and Farmington.

The precise problem presented in this case is the operation of the contract vintage pricing mechanism introduced by the parties in the 1971 amendment in the context of regulatory pricing actions which ultimately abandoned contract vintaging for other vintaging criteria, such as well commencement date or date of dedication of gas to interstate commerce. In executing the 1971 amendment, the parties embraced the vintaging concept then used by the FPC. The district court found that "[t]he parties obviously drafted p B with an eye to Order 435," which was issued by the FPC two months prior to the execution of the 1971 amendment. ⁴ City of Farmington, supra, at 1267. Order No. 435 prescribed an initial price, or area rate, of 24 cents per thousand cubic feet (MCF) for interstate sales of gas from the San Juan Basin Area for contracts dated on or after June 17, 1970. In selecting contract date as the triggering mechanism for application of the initial rates, the FPC established contract vintaging as the scheme for dividing "new" oil prices from "old" oil prices. ⁵ The district court found that the parties intended to incorporate the concept of contract vintaging as then practiced by the FPC into their price escalation clause. It went on to conclude: "[t]he parties undoubtedly anticipated that the FPC would continue to prescribe area rates solely by looking to the date on the face of a contract and that at some time in the future the FPC would issue an order establishing a new dividing date between 'old' gas and 'new' gas." ⁶ Id.

Dispute over the operation of the indefinite price escalator clause in p B first arose when the FPC issued Opinion Nos. 699, 699-A, and 699-H in 1974. ⁷ With this opinion series, the FPC abandoned its approach of prescribing rates for particular production areas and adopted instead generally applicable nationwide rates. Pennzoil, supra, at 367. The series also implemented a change from contract vintaging to vintaging determined, in part, by well commencement date. ⁸ Based on its determination that the opinions triggered the indefinite price escalator clause, Amoco charged Farmington 43.5 cents per MCF under Opinion Nos. 699 and 699-A (for the period June 24, 1974, to December 4, 1974) and 51.5 cents per MCF under Opinion No. 699-H (December 4, 1974, to August 1, 1976). ⁹ Farmington paid those rates under protest. After determining that the gas sold under the contract qualified for the 699 series prices because contracts executed between January 1, 1973, and October 1, 1973, the third category of eligibility under 699-H, fell within the contract vintage period defined in p B, the district court found that Amoco had undercharged Farmington. Accordingly, it awarded Amoco damages on its counterclaim which reflected the amount of the undercharges. ¹⁰ Farmington does not appeal that determination.

In 1976, the FPC issued Opinion Nos. 770 and 770-A, ¹¹ which established a national rate of $1.42 for gas from wells commenced after December 31, 1974, and $0.93 for gas sold from wells commenced after December 31, 1972. The rate for certain gas not qualifying under the well commencement criteria was limited to 52 cents per MCF: 1) gas from wells commenced prior to January 1, 1973, which was first dedicated to interstate commerce on or after January 1, 1973; and 2) gas sold under replacement contracts executed on or after January 1, 1973. ¹² For gas delivered between August 1, 1976, and April 1, 1980, Amoco charged Farmington 94.5 cents per MCF (93 cents plus the 1.5-cent differential in p B). Subsequently, Amoco counterclaimed for the difference between the amounts charged and the base price of $1.42 for that period. The district court denied the counterclaim and further held that Amoco was only entitled to the 52-cent base rate (times the 130% small producer differential), rather than the 93-cent base rate charged. While recognizing that the FPC's alteration of its vintaging practices prevented precise correlation of p B with Opinion No. 770-A, the court found that the categories of gas to which the 52-cent rate applied, gas sold pursuant to replacement contracts executed on or after January 1, 1973, and new dedications of gas where sales were initiated on or after January 1, 1973, most closely approximated contract vintage as defined in p B. The court concluded that its approach effectuated the parties' intent to tie increases in price to FPC price increases for gas of the defined contract vintage. Amoco appeals this determination.

The final change in natural gas pricing with implications for the current controversy occurred on November 9, 1978, with the passage of the Natural Gas Policy Act, 15 U.S.C. Sec. 3301, et seq., (the NGPA), which established maximum lawful national prices for interstate and intrastate sales of natural gas. ¹³ Section 105(b) of the NGPA (15 U.S.C....