Consolidated Oil & Gas, Inc. v. F.E.R.C., 85-1191

Decision Date05 December 1986
Docket NumberNo. 85-1191,85-1191
Citation806 F.2d 275
PartiesCONSOLIDATED OIL & GAS, INC., Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Southern Union Gathering Company, Intervenor.
CourtU.S. Court of Appeals — District of Columbia Circuit

Charles W. Garrison, with whom Richard G. Morgan and Peter C. Kissel, Washington, D.C., were on brief, for petitioner.

Andrea Wolfman, Atty., F.E.R.C., Washington, D.C., for respondent. William H. Satterfield, Gen. Counsel, Barbara J. Weller, Deputy Sol., and Leslie J. Lawner, Atty., F.E.R.C., Washington, D.C., were on brief for respondent.

Robert J. Haggerty, Washington, D.C., was on brief for intervenor. Bruce E. Henderson, Dallas, Tex., also entered an appearance for intervenor.

Before WALD, Chief Judge, SCALIA * and STARR, Circuit Judges.

Opinion for the Court filed by Chief Judge WALD.

WALD, Chief Judge:

Consolidated Oil & Gas, Inc. (Consolidated), an independent oil and gas producer, petitions in this case for review of orders by the Federal Energy Regulatory Commission (FERC or Commission) asserting jurisdiction over certain sales of natural gas. Consolidated contends that the FERC misapplied the "commingling" doctrine in finding that it had jurisdiction, lacked substantial evidence for reaching that conclusion, and deprived Consolidated of both procedural and substantive due process. We affirm the Commission in all respects.

BACKGROUND

This case began with a state law contract dispute between Consolidated and Southern Union Gathering Company (Gathering Company) over favored nations pricing provisions. Gathering Company owns and operates gas gathering facilities in the San Juan Basin of New Mexico. It reports that it purchases gas from Consolidated and other New Mexico producers, commingles the gas from the various producers in its gathering facilities, and resells some of this gas intrastate and some of it interstate. In 1974, Consolidated sued Gathering Company in state court, arguing that gas purchase prices paid by Gathering Company to other producers activated favored nations clauses of contracts between Consolidated and Gathering Company. The parties settled their dispute in 1976 with regard to ten contracts in question. When Gathering Company refused to honor the settlement price with regard to four of these contracts,

                Consolidated, in 1979, again brought suit.  Gathering Company argued in this second state court lawsuit that the gas purchased by it from Consolidated under the four contracts in question was gas sold by Consolidated in interstate commerce for resale and thereby was subject to FERC jurisdiction over price under the Natural Gas Act (NGA), rendering the higher settlement price illegal.  The state court referred the question of FERC jurisdiction to the Commission, Consolidated Oil & Gas, Inc. v. Southern Union Co., No. SF 79-2161(c) (N.M.Dist.Ct. Aug. 4, 1980), Joint Appendix (J.A.) at 97, 98, and Gathering Company also asked the FERC for a declaratory order regarding jurisdiction. 1   The FERC entered an order declaring the gas sales in question to be subject to federal price ceilings under the NGA, 28 Fed. Energy Reg.Comm'n Rep.  (CCH) 61,424 (p 61,225) (Aug. 20, 1984), J.A. at 123, and affirmed this order on rehearing.  30 Fed.Energy Reg.Comm'n Rep.  (CCH) 61,708 (p 61,349) (Mar. 22, 1985), J.A. at 185.  Because this assertion of federal jurisdiction would reduce the settlement price it could receive from Gathering Company, Consolidated petitioned this court for review of the FERC's orders.  We now affirm the Commission
                

NATURAL GAS ACT JURISDICTION

The Natural Gas Act provides, in part, for regulation of "the sale in interstate commerce of natural gas for resale for ultimate public consumption for domestic, commercial, industrial, or any other use." 15 U.S.C. Sec. 717(b). In California v. Lo-Vaca Gathering Co., 379 U.S. 366, 85 S.Ct. 486, 13 L.Ed.2d 357 (1965), Lo-Vaca, an intrastate gathering company, sold gas to El Paso Natural Gas Co., an interstate pipeline, under contracts restricting that gas to intrastate use. The pipeline mixed, or commingled, Lo-Vaca's gas with gas purchased from other sources, and then sold some of the commingled gas interstate. The Federal Power Commission (FPC), the FERC's predecessor agency, held that it had NGA jurisdiction over Lo-Vaca's sales to El Paso because "whether a transaction is in interstate commerce is determined by the essential character of the commerce, not necessarily by the contract." 26 F.P.C. 606, 612 (1961). The FPC noted that were it not to assert jurisdiction in a commingling case like this,

[i]t would be possible for a pipeline to discriminate among producers by giving certain ones the privilege of selling to it the gas which by agreement would be deemed to be segregated from the interstate stream.... This may increase the cost to interstate customers and at the same time put them at a competitive disadvantage in obtaining additional supplies of gas.

26 F.P.C. at 613-14. The Supreme Court affirmed both the FPC's result and its reasoning, concluding that if the FPC could not assert jurisdiction in a case like this, an "attractive gap" would result in the regulatory scheme, because even if they had the power the producing states would "have little incentive" to regulate sales that result in higher costs to interstate customers. 379 U.S. at 370, 85 S.Ct. at 488.

In finding jurisdiction in the case at bar, the FERC relied squarely on Lo-Vaca. 28 Fed.Energy Reg.Comm'n Rep. (CCH) 61,424 (p 61,225) (Aug. 20, 1984), J.A. at 123. Indeed, the facts of the two cases are quite similar. In both cases, a number of suppliers sell gas to a middleman who commingles their gas and resells some in interstate commerce. In both cases, the litigating supplier asserts that its gas was intended by the parties to be used or resold only in intrastate commerce, thereby avoiding federal jurisdiction. Furthermore, contrary to Consolidated's argument, the fact that the Consolidated's other efforts to challenge the jurisdictional finding also fall short. First, Consolidated maintains that the Commission's decision in Columbia Gas Transmission Corp., 10 Fed.Energy Reg.Comm'n Rep. (CCH) 61,230 (p 61,111) (Feb. 8, 1980), is in conflict with its order here. In Columbia Gas, the Commission failed to assert NGA jurisdiction over the sale of gas from a producer to a local distribution company (LDC) in the same state even though the gas was transported in an interstate pipeline in which it was commingled with gas bound interstate. The sale in Columbia Gas, however, was directly between the producer and the LDC, and could clearly be regulated locally. The FERC had jurisdiction over the transportation of the gas from the producer to the LDC, since it occurred in an interstate pipeline, but not over the sale. Here, the sales involved are between the producer and the gathering company, which in turn sells some gas interstate and some intrastate. New Mexico has no authority to regulate the initial producer-to-gathering company sales since the end-users are not definably local, and the gathering company possesses the same theoretical potential to favor intrastate over interstate channels in designating the destination of particular sources of gas that the Court seemed concerned about in Lo-Vaca.

                middleman here is a gathering company that performs some functions (gathering) that cannot be federally regulated, 2 whereas in Lo-Vaca the middleman was an interstate pipeline that performed only regulable functions (transportation and sales), is a distinction without relevance for this case:  The issue here is whether the sale of gas from the supplier to the middleman is subject to NGA jurisdiction.  Whether gathering company, interstate pipeline, or producer, an entity involved in a sale in interstate commerce of natural gas for resale is, with regard to that transaction, subject to NGA jurisdiction.   See Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672, 74 S.Ct. 794, 98 L.Ed. 1035 (1954) (despite statutory exemption for the "production ... of natural gas," a natural gas producer engaged in a sale in interstate commerce of natural gas for resale is subject to NGA jurisdiction)
                

Second, Consolidated claims that the Commission's decisions declining NGA jurisdiction in City of Farmington v. Amoco, 31 Fed.Energy Reg.Comm'n Rep. (CCH) 61,599 (p 61,290) (June 7, 1985); 32 Fed.Energy Reg.Comm'n Rep. (CCH) 61,648 (p 61,280) (Aug. 21, 1985), are inconsistent with its order here. Since the Farmington ruling is currently on petition for review to this court, City of Farmington v. FERC, No. 85-1680 (D.C.Cir. filed Oct. 18, 1985; argued November 3, 1986), we note only that Farmington presents a different factual situation from this case. The commingling in that case occurred in the producer's own gathering facility; that is, the producer drew gas from various wells, stored the gas all together in one facility, and then sold some intrastate and some interstate. Whether the Lo-Vaca "commingling" doctrine must be extended to include a producer's internal operations is at issue in that case but not in this one; the FERC has characterized Farmington as a split stream sale case, where the producer chooses how much gas to dedicate to the interstate market and sells it separately from the gas it sells intrastate. The intrastate portions of split stream sales are, of course, nonjurisdictional. See, e.g., Columbia Gas Transmission Corp. v. Allied Chemical Corp., 652 F.2d 503, 516 n. 11 (5th Cir.1981); Harrison v. FERC, 567 F.2d 308 (5th Cir.1978); Amoco Production Co., 23 Fed.Energy Reg.Comm'n Rep. (CCH) 61,429 (p 61,211) (May 9, 1983). Whatever the outcome in Farmington, it does not affect our decision that the sale of gas to an independent gathering facility that first commingles that gas with gas purchased from other suppliers and then sells the commingled gas both interstate...

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