City of Farmington v. Amoco Gas Co.
| Decision Date | 19 April 1983 |
| Docket Number | Civ. No. 81-0360 HB. |
| Parties | CITY OF FARMINGTON, Plaintiff and Counterdefendant, v. AMOCO GAS COMPANY, Defendant and Counterclaimant. |
| Court | U.S. District Court — District of New Mexico |
Charles F. Wheatley, Jr. and Michael J. Thompson, Wheatley & Wollesen, Washington, D.C., Felix Briones, Briones & Pittard, P.A., Farmington, N.M., for plaintiff and counterdefendant.
J. Paul Douglas, Grove, Jaskiewicz, Gilliam & Cobert, Washington, D.C., Edward B. Hinders, Houston, Tex., Kemp Garthy, Campbell, Byrd & Black, P.A., Santa Fe, N.M., for defendant and counterclaimant.
This case involves the construction and interpretation of an indefinite price escalator clause in an intrastate gas purchase contract. Trial of the factual issues has been held, the legal issues have been extensively briefed, and the case now comes before the court for final decision on its merits. This memorandum opinion constitutes the findings of fact and conclusions of law of the court.
Plaintiff City of Farmington is a municipal corporation organized and existing under the laws of New Mexico and located in San Juan County, New Mexico. Farmington is engaged in the generation, transmission and retail distribution of electric power and energy to its residents. Defendant Amoco Gas Company is a Delaware corporation that sold and distributed gas to Farmington for use in the City's electric generating plant pursuant to an "Industrial Gas Sales Contract" which the parties entered into on September 28, 1961. On September 15, 1971 Amoco and Farmington entered into an "Amendment to Gas Contract" which amended several provisions of the 1961 contract. The Amendment was for a period of ten years commencing October 1, 1971 and contained the following price provision (hereinafter referred to as "¶ B"):
Paragraph B is a provision known generically as an indefinite price escalator clause. Both parties agree that it is an "area rate" or "FPC" clause which tied price increases under the Amendment to the actions of the Federal Power Commission (after October 1, 1977, its successor, the Federal Energy Regulatory Commission). They disagree, however, as to the nature of that clause and the manner in which it operated to escalate the contract price in the context of a regulatory environment which changed after June 21, 1974.
In interpreting the contract the determinative issue is the intent of the parties at the time the contract was made. This requires the court to consider the language of the contract, its purposes, and the circumstances of its execution, i.e. its commercial and regulatory context. Pennzoil Co. v. Federal Energy Regulatory Commission, 645 F.2d 360, 388 (5th Cir.1981).
When the parties executed the Amendment in 1971 the FPC prescribed the price for gas sold in interstate commerce according to a contract vintage system. Under this system the Commission prescribed two area rates: one area rate applied to gas sold pursuant to contracts dated prior to an arbitrarily selected dividing date — "old" gas; the second, generally higher, area rate applied to gas sold pursuant to contracts dated on or after that dividing date — "new" gas. Thus, the price for gas sold under a particular contract was determined solely by the date on the face of the contract.
In Order 435, issued only two months before the parties executed the Amendment, the FPC established an initial rate of 24¢ per Mcf for gas sold under contracts dated after June 17, 1970,1 in the San Juan subarea of the Rocky Mountain Area. This was then the interstate price for "new" gas. The parties obviously drafted ¶ B with an eye to Order 435. The initial base price in ¶ B is 24¢, the area price established in Order 435. Paragraph B refers to "contract vintage," the vintaging concept employed in Order 435. The date June 17, 1970 used in the definition of "contract vintage" in ¶ B, was the dividing date between "old" and "new" gas selected in Order 435. (The closing date of the contract vintage interval in ¶ B, October 1, 1973, was possibly chosen because it was exactly one year after ¶ B became effective.) The definition of the San Juan Basin Area in ¶ B is identical to that in Order 435.
The court is convinced that the parties intended to incorporate the concept of vintaging into their price escalation clause. Farmington attempted to prove this by introducing evidence of the parties' contract negotiations, the circumstances of the parties and the testimony of three City Councillors as to their understanding of the 1971 Amendment. This evidence merely supplements what is already evident from the language of ¶ B itself and the regulatory context.
Paragraph B refers twice to the Commission area price for "gas of this contract vintage." The term "contract vintage" is particularly defined. The 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. If that date had been after October 1, 1973, the date set in ¶ B as the terminal date for their "contract vintage," the gas sold under this contract would then have become "old" gas. The parties expressed clearly their intent (1) to incorporate vintaging into the contract as vintaging was then practiced by the FPC and (2) that Amoco would receive the FPC price for "new" gas only until the FPC established a date after October 1, 1973 as the dividing date between "old" and "new" gas.
Much of Amoco's argument and evidence, in the pre-trial motions and at trial, was directed toward establishing that ¶ B was a third party favored nations clause which would allow Amoco to charge Farmington the highest price received by any seller in the San Juan Basin. Amoco now contends only that ¶ B is a "form or type" of third party favored nations clause that "was triggered whenever the Commission or successor governmental authority prescribed an area price higher than 24.0¢ per Mcf for gas of the defined `contract vintage.'" With this latter construction the court can fully agree.
The parties had no difficulty interpreting their contract, or applying the escalator clause to determine the price under the contract, until 1974 when the Commission issued Opinion Nos. 699, 699-A and 699-H.2 Issued on June 21, 1974, Opinion No. 699 established a base national rate of 42¢ per Mcf for three categories of interstate gas sales:
Opinion No. 699-A revised the "contract executed" language of the second category to read "sales initiated on or after January 1, 1973." In Opinion No. 699-H, issued December 4, 1974, the Commission increased the base national rate to 50¢ per Mcf, retained the "sales initiated" language of 699-A, and revised the third category of sales which qualified for the 50¢ national rate to read:
Sales made pursuant to contracts executed prior to or subsequent to the expiration of the term of the prior contract where the sales were formerly made pursuant to permanent certificates of unlimited duration under such prior contracts which expired of their own terms on or after January 1, 1973, or pursuant to contracts executed on or after January 1, 1973, where the prior contract expired by its own terms prior to January 1, 1973.
Opinion No. 699-H also set a base area rate of 35¢ per Mcf for sales of gas in the Rocky Mountain Area from wells commenced prior to January 1, 1973 and sold pursuant to contracts dated on or after October 1, 1968.
On the basis of the national rates established in these Opinions, Amoco charged Farmington 43.5¢ per Mcf for deliveries made from June 24, 1974 to December 4, 1974 and 51.5¢ per Mcf for deliveries made from December 4, 1974 to August 1, 1976. (All prices charged included the 1.5¢ per MMBtu differential established in ¶ B.) Farmington made all payments for deliveries from July 1, 1974 until the termination of the contract on October 1, 1981 under protest.
The Opinion 699 series marks a change in the Commission's ratemaking methodology from contract date-based vintaging to well...
To continue reading
Request your trial
-
City of Farmington, N.M. v. F.E.R.C.
...pricing dispute. Farmington filed suit in the United States District Court for the District of New Mexico, see City of Farmington v. Amoco Gas Co., 568 F.Supp. 1265 (D.N.M.1983), aff'd, 777 F.2d 554 (10th Cir.1985), alleging that Amoco Gas had overcharged Farmington and that it improperly a......
-
City of Farmington v. Amoco Gas Co., 83-2523
...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......
- Loggins v. Schnurr