Louisiana Land and Exploration Co. v. F.E.R.C.

• Decision Date: 05 May 1986
• Docket Number: No. 84-4150,84-4150
• Citation: 788 F.2d 1132
• Parties: The LOUISIANA LAND AND EXPLORATION COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1132

788 F.2d 1132

The LOUISIANA LAND AND EXPLORATION COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent.

No. 84-4150.

United States Court of Appeals, Fifth Circuit.

May 5, 1986.

Bernard A. Foster, III (argued), Ross, March & Foster, Washington, D.C., H.H. Hillyer, Jr., Milling, Benson, Woodward, Hillyer, Pierson & Miller, New Orleans, La., for petitioner.

Jerome Feit (argued), Sol., F.E.R.C., Washington, D.C., Joel M. Cockrell, for respondent.

Petition for Review of Orders of the Federal Energy Regulatory Commission.

Before CLARK, Chief Judge, and BROWN and JOHNSON, Circuit Judges.

JOHN R. BROWN, Circuit Judge:

Louisiana Land and Exploration Company (LL & E) petitions for review of a refund order entered by the Federal Energy Regulatory Commission (FERC or the Commission) in accordance with FERC Opinions 772 and 772-A. LL & E contends that the agency's order is erroneous in the following respects:

(i) the Commission has arbitrarily employed August, 1976--the date on which Opinion 772 was issued--as the cutoff date for the determination of LL & E's refund liability;

(ii) the Commission has arbitrarily refused to employ actual production data, rather than estimated reserves, in performing its refund calculations; and,

(iii) the Commission has assessed interest on the refund at an incorrect rate.

We have reviewed the record and can find nothing unreasonable, arbitrary or capricious in the manner in which LL & E's refund liability was calculated. The interest assessed against the refund, however, was assessed at a rate higher than was permissible in light of the Commission's own precedents. Thus, while we affirm the order directing the payment of refunds by LL&E, we reverse that portion of the order pertaining to the interest assessment and remand so that FERC may correctly compute the amount of interest due.

If You've Got a Tough Case ...

As with most petitions for review of orders of the Federal Energy Regulatory Commission, ¹ the background of this appeal is intricate, technical and somewhat dry. ² The story began more than twenty-five years ago, in 1960, when Amoco Production Company (Amoco) sought to transfer its leasehold rights on gas properties in the Bastian Bay Field to Tennessee Gas Pipeline Company (Tennessee). LL & E was the lessor and principal royalty interest holder on these properties and it held the right to reject any assignments of the leasehold interest by Amoco. Initially, LL & E resisted Amoco's efforts to transfer the leasehold and withheld its approval of the assignment. After it was offered an increased return on its royalty interest, however, it consented to the assignment. ³

The transfer of the leasehold from Amoco to Tennessee was clearly a sale of natural gas that was subject to FERC jurisdiction. The status of the royalty transaction remained unclear, however, until FERC issued its Opinion 772. In Opinion 772, FERC held that the increased royalty exacted by LL & E in exchange for approving the Amoco/Tennessee assignment was a jurisdictional sale of gas under the Rayne Field doctrine. See United Gas Improvement Co. v. Continental Oil Co. (Rayne Field), 381 U.S. 392, 85 S.Ct. 1517, 14 L.Ed.2d 466 (1965). That jurisdictional finding was upheld by this Court in Louisiana Land & Exploration Co. v. Federal Energy Regulatory Commission, 574 F.2d 204 (5th Cir.1978) (Louisiana Land I).

As a result of the jurisdictional finding, it was necessary to determine whether LL & E owed refunds to Tennessee for the amounts by which its renegotiated royalty receipts exceeded what it would have received under a conventional, regulated pricing structure. This determination was somewhat complicated, however, because although LL & E had "sold gas" in a jurisdictional sense, it had never actually sold any gas. ⁴ FERC was faced with the task of arriving at a refund methodology which reflected the economic realities of the royalty transaction, despite the fact that as a royalty interest owner LL & E never sold gas under a conventional contract.

The method employed by Opinion 772 for calculating the amount of the refund due utilized a hypothesised, conventional gas sales contract between LL & E and Tennessee. FERC heard extensive testimony as to the estimated reserves which lay under the properties in Bastian Bay, and it adopted the estimates proffered by Tennessee as the basis for its calculations. Using those estimates, and certain other factors not here relevant, ⁵ FERC arrived at a formula which subtracted the amount LL & E would have received under the terms of a "conventional" contract from the considerably greater sum LL & E had actually received from its royalty arrangement with Tennessee. The difference yielded was the amount of the refund owed.

LL & E disputed the validity of this methodology in the first appeal in this case, Louisiana Land I. After concluding that FERC's assertion of jurisdiction was proper, the Court in Louisiana Land I turned to LL & E's contention that the refund determination was not supported by substantial evidence on the record. The Court concluded that the Commission's refund calculus was a reasonable exercise of its administrative discretion and affirmed both FERC's methodology and its refund order.

LL & E filed a petition for rehearing in our court and a motion in the alternative for leave to adduce additional evidence before the Commission. As with most such petitions, the request for rehearing took issue with the Court's whole opinion in Louisiana Land I. It was summarily denied. The motion for leave to adduce additional evidence, however, was of greater significance because in it LL & E contended that, using the Commission's own methodology, no refunds were actually due. In that motion, LL & E represented that:

Using the criteria established by FPC Opinion No. 772, and extending the refund calculations so as to take into account actual production volumes through the year 1977, and the actual amounts received by Land Company as royalties for the same period, there are now no refunds due. ⁶

The Court, in response to this motion, stated "the Commission should ... allow additional hearing on whether refunds should be recalculated as urged in the alternative motion." Id. at 972.

Following our denial of rehearing in Louisiana Land I, the Commission entered an order on September 21, 1983, directing the payment of refunds by LL & E for a period commencing with the effective date of the renegotiated royalty arrangement with Tennessee ⁷ and ending on the date on which Opinion 772 was issued. ⁸ LL & E filed for reconsideration by the Commission and contended that the order of September 21 was in error in the following four respects:

(1) The decision to terminate the refund calculation as of the date on which Opinion 772 issued was not supported by the text of that opinion;

(2) The Commission's calculation was factually in error because it attributed to LL & E royalty volumes belonging to another royalty owner, Delta Development;

(3) the Commission had acted without allowing the "additional hearing" granted to LL & E in this Court's denial of rehearing in Louisiana Land I; and (4) the Commission had improperly assessed interest on the refund principle.

The Commission granted reconsideration, but subsequently entered an order denying rehearing on February 6, 1984. It is the denial of rehearing which gives rise to the present appeal.

... Argue the Law ...

LL & E's first complaint is with the decision by FERC to terminate the refund calculation as of the date on which Opinion 772 was issued. The Commission determined that LL & E incurred refund liability in July of 1960, when the renegotiated royalty arrangement took effect, and that that liability continued until August of 1976, when LL & E's royalty receipts were limited to the just and reasonable rate under the mandate of Opinion 772. LL & E contends that that decision is not supported by Opinion 772. To the contrary, we have reviewed FERC's analysis of this issue and find its reasoning to be persuasive.

Opinion 772 held that "refunds should be recalculated and paid up to the effective date of the new rates" that were to be imposed as a result of the jurisdictional finding. The Delta Development Company, 56 F.P.C. 922, 930 (1976). The new rate schedules required by Opinion 772 were to be filed within 120 days of its issuance "for the period from July 15, 1960 ... until the present time reflecting rates that are the lesser of the respective contract rates or the rates required by the applicable area rates." Id. at 930-31 (emphasis added). LL & E was then to file, again within 120 days "a computation of a refund to be made to Tennessee for the period July 15, 1960 ... until the date the rates prescribed by [this opinion] go into effect." Id. at 931 (emphasis added).

In light of the holding and orders in Opinion 772, FERC could properly determine that the refund calculations should terminate as of the date the unlawful pricing arrangement was ended. As of August 6, 1976, when Opinion 772 was issued, LL & E was prohibited from receiving excessive revenues from its royalty arrangement with Tennessee. When those excessive charges ceased, the necessity for a remedial refund likewise disappeared. The Commission's construction of its own order is entitled to great weight and commensurate deference on judicial review, ⁹ and we hold that FERC's construction of its own order "is clearly reasonable in this context." National Labor Relations Board v. Transportation Management Company, 462 U.S. 393, 103 S.Ct. 2469, 2475, 76 L.Ed.2d 667 (1983). Thus, the Commission's decision that the refund calculation must terminate as of August 6, 1976 is affirmed.

... Then Argue the Facts ...

LL & E next mounts a two-pronged attack on the Commission's refusal to employ actual production data in computing its refund calculation. LL & E's primary objection is that the use of production estimates in the...