Kerr-McGee Corp. v. Northern Utilities, Inc.

• Decision Date: 23 March 1982
• Docket Number: Nos. 80-2273,KERR-M,s. 80-2273
• Citation: 673 F.2d 323
• Parties: 33 UCC Rep.Serv. 440 cGEE CORPORATION, a Delaware corporation, Plaintiff-Appellant, v. NORTHERN UTILITIES, INC., a Wyoming corporation, Defendant-Appellee. NORTHERN UTILITIES, INC., Plaintiff-Appellee, v. AMOCO PRODUCTION COMPANY, a Delaware corporation, and Phillips Petroleum Company, a Delaware corporation, Defendants-Appellants. to 80-2275.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 323

673 F.2d 323

33 UCC Rep.Serv. 440

KERR-McGEE CORPORATION, a Delaware corporation, Plaintiff-Appellant, v. NORTHERN UTILITIES, INC., a Wyoming corporation, Defendant-Appellee.

NORTHERN UTILITIES, INC., Plaintiff-Appellee, v. AMOCO PRODUCTION COMPANY, a Delaware corporation, and Phillips Petroleum Company, a Delaware

corporation, Defendants-Appellants.

Nos. 80-2273 to 80-2275.

United States Court of Appeals, Tenth Circuit.

March 23, 1982.

Peter J. Nickles of Covington & Burling, Washington, D.C. (Stephen H. Galebach of Covington & Burling, Washington, D.C., and William T. Schwartz of Schwartz, Bon, McCrary & Walker, Casper, Wyo., with him on the brief), for Kerr-McGee Corp.

John S. Pfeiffer of Gorsuch, Kirgis, Campbell, Walker & Grover, Denver, Colo. (Ann E. DeVine of Gorsuch, Kirgis, Campbell, Walker & Grover, and Robert H. Landt, Denver, Colo., with him on the brief), for Amoco Production Co.

Houston G. Williams of Williams, Porter, Day & Neville, P.C., Casper, Wyo. (Thomas M. Blume and Frank A. Ackerman, Englewood, Colo., with him on the brief), for Phillips Petroleum Co. Wm. Bryce Arendt, of Northern Utilities, Inc., and Wm. H. Brown of Brown, Drew, Apostolos, Massey & Sullivan, Casper, Wyo. (Claude W. Martin of Brown, Drew, Apostolos, Massey & Sullivan, Casper, Wyo., with them on the brief), for Northern Utilities, Inc.

B. J. Zimmerman and Patrick F. Timmons, Houston, Tex., Joseph C. Johnson and Thomas Burton, Houston, Tex., and Robert C. Hawley and Gretchen A. VanderWerf of Dechert, Price & Rhoads, Denver, Colo., on the brief, for amici curiae for Conoco, Inc. and The Superior Oil Co.

David Crump, Professor of Law, University of Houston, Susan E. Waite of Legal Foundation of America, Keith Blinn, Professor of Law, University of Houston, Houston, Tex., on the brief for amicus curiae for Legal Foundation of America.

Steven F. Freudenthal, Atty. Gen. of Wyo., Cheyenne, Wyo., on the brief for amicus curiae for the State of Wyoming.

Before SETH, HOLLOWAY and SEYMOUR, Circuit Judges.

SEYMOUR, Circuit Judge.

In this diversity action applying Wyoming law, Kerr-McGee Corporation, Amoco Production Company, and Phillips Petroleum Company (hereinafter collectively referred to as "producers") appeal a trial court decision striking down an indefinite price escalation clause in a contract for the sale of intrastate natural gas. The district court found the clause to be against public policy and unconscionable. ¹ We reverse.

In 1957, the predecessor of Amoco contracted to sell appellee Northern Utilities, Inc. intrastate natural gas from the Beaver Creek field in Wyoming. Amoco, Kerr-McGee, and Phillips owned working interests in the field and Amoco acted as unit operator. Northern is an intrastate public utility regulated by the Public Service Commission of Wyoming. Northern obtains approximately 85% of its total supply of gas from the Beaver Creek field and sells about 40% of the Beaver Creek gas to Amoco and its affiliates at facilities in Wyoming.

The original contract term between Northern and producers was for twenty years, beginning in 1958. It provided for price increases under a two-party favored nations clause that pegged the price of gas to the price Northern paid any other seller. ² The contract also granted Northern a preferential right to negotiate "for a suitable contract and price" for excess gas which might become available from Beaver Creek. App., vol. II, at 157. Northern executed contracts with Kerr-McGee and Phillips in 1958, which were identical in all relevant respects to its contract with Amoco. ³

In 1970, Amoco notified Northern that excess gas from Beaver Creek was available for sale and invited Northern to negotiate for the purchase of the gas pursuant to its contract rights. The record indicates that Amoco, on behalf of the producers, wanted to sell the gas before the original contract was due to expire at the end of 1977. On the other hand, Northern wanted to delay production of the gas until 1978 and extend the term of the original contract.

After several months of negotiation, Amoco and Northern entered into a supplemental agreement which extended the contract through the end of 1990. The two-party favored nations clause was retained, and a new clause was added which is the subject of this litigation. The new clause, paragraph 6(b), is a third-party favored nations (or indefinite price escalator) clause. Under this provision, effective January 1, 1976, a rise in the contract price was to be triggered by the price received from the sale of interstate gas by any producer in the relevant area. ⁴ The supplemental contract was presented by Northern to the Wyoming Public Service Commission and approved for filing. Substantially similar contracts were executed in 1973 between Northern and Kerr-McGee, and Northern and Phillips, after Northern wrote to Kerr-McGee and Phillips urging them to execute the supplementary agreements.

In 1975, Amoco advised Northern that the price under the new contract would be set by paragraph 6(b) beginning January 1, 1976, because the price received by producers of interstate gas in the area would then exceed the rate established under other provisions in the contract. Northern requested and received approval from the Public Service Commission for a rate increase to cover the rise in the contract price. Amoco agreed to phase in the new prices until July 1, 1978, at which time the indefinite price escalator clause would become fully operative. Kerr-McGee did not agree to phase in the price and brought suit against Northern. Northern then sued Amoco and Phillips, and the actions were consolidated below.

After a bench trial, the judge held paragraph 6(b) void. He found that the operation of the clause would result in "exorbitant prices" beyond Northern's contemplation at the time the contract was executed. He emphasized that the issue involved a substantial public interest, and concluded that enforcement of paragraph 6(b) was contrary to public policy and unconscionable. He ordered that the remainder of the contract be enforced without the operation of paragraph 6(b).

On appeal the producers contend that the clause is not contrary to federal policy as it is articulated in the Natural Gas Policy Act of 1978, 15 U.S.C. § 3301 et seq. (NGPA), or to Wyoming public policy. They also argue that the court's decision flies in the face of controlling Wyoming court pronouncements on both public policy and unconscionability. We agree and hold as a matter of law that paragraph 6(b) is not violative of public policy nor unconscionable under the facts of this case.

I. PUBLIC POLICY

A. Federal Public Policy

Prior to the enactment of the NGPA, contracts for the sale of intrastate gas were free from regulation. Thus, it was public policy to allow the competitive forces of the market place to set the price. The NGPA, however, imposed price controls on the intrastate gas market. See 15 U.S.C. § 3315. ⁵

The Act specifically permits the price under intrastate gas contracts to rise through the operation of indefinite price escalator clauses up to a maximum rate established by the Act. See id.; 18 C.F.R. § 270.205(b)(1) (1980); ⁶ Pennzoil Co. v. FERC, 645 F.2d 360, 368 (5th Cir. 1981).

The ceiling prices set by the NGPA clearly comport with the public interest as determined by Congress. Pennzoil, 645 F.2d at 379 n.37. The fact that prices under intrastate gas contracts containing indefinite price escalator clauses are high and will continue to rise does not mean that these contracts are against federal public policy. One of the primary purposes of the NGPA is to promote energy conservation. Congress believed that allowing producers to recover high prices for their gas helps implement this goal. "High energy prices provide one motivation to conserve energy. Because of these prices, an enormous range of energy conserving improvements are cost effective." S.Rep.No.409, 95th Cong., 2d Sess. 36, reprinted in 1978 U.S. Code Cong. & Ad. News 8800, 8806.

The only reason appearing in the district court's opinion to support its conclusion that the clause offends public policy is its finding of "exorbitant" cost to the consumer. ⁷ However, when Congress designed

the NGPA, "(t)he balance Congress struck already took into account the conflicting interests of producers and consumers." Pennzoil, 645 F.2d at 379. Congress was well aware of the economic impact on consumers that would result from the operation of indefinite price escalator clauses. The decision to permit contract clauses to raise prices to a ceiling constitutes a clear legislative statement that the resulting high cost to the consumer is not contrary to federal energy policy.

B. Wyoming Public Policy

We must look to the statutes and judicial decisions in Wyoming to determine that state's public policy with regard to the price escalation clause in this case. See Taylor v. State, 612 P.2d 851, 865 (Wyo.1980) (Rooney, J., concurring).

Although Congress specifically legislated in the NGPA regarding pricing of intrastate gas, it nevertheless provided that states may restrict the operation of indefinite price escalator clauses if they choose to do so. See 15 U.S.C. § 3432(a). ⁸

"The conference agreement also cedes the Federal Government's authority to further limit the operation of indefinite price escalator clauses to State governments wishing to do so. The Congress, by adoption of this section, recognizes the right of States to prescribe more stringent limitations on the operation of such clauses than those prescribed herein."

H.R. Conf. Rep. No. 1752, 95th Cong. 2d Sess. 83, reprinted in 1978 U.S. Code Cong. & Ad. News 8983, 9000.

Some states have exercised their right to alter the public policy expressed in the NGPA by enacting greater restrictions on the use of indefinite price escalation clauses. See, e.g., Kan. Stat. Ann. 1980 Supp. § 55-1401 et seq.; Energy Reserves Group v. Kansas Power & Light Co., ...