MGPC, INC. v. Department of Energy, 10-52.

• Decision Date: 03 May 1985
• Docket Number: No. 10-52.,10-52.
• Citation: 763 F.2d 422
• Parties: MGPC, INC., a Wyoming corporation, Plaintiff-Appellee, v. DEPARTMENT OF ENERGY, et al., Defendants-Appellants.
• Court: U.S. Temporary Emergency Court of Appeals Court of Appeals

763 F.2d 422

MGPC, INC., a Wyoming corporation, Plaintiff-Appellee, v. DEPARTMENT OF ENERGY, et al., Defendants-Appellants.

No. 10-52.

Temporary Emergency Court of Appeals.

Argued December 10, 1984.

Decided May 3, 1985.

COPYRIGHT MATERIAL OMITTED

Don W. Crockett, with whom John L. Gurney, Dept. of Energy, Washington, D.C., and Richard K. Willard, Dept. of Justice, Washington, D.C., were on briefs for defendants-appellants.

Richard T. Williams, with whom Howard J. Bressler and David L. Huard of Kadison, Pfaelzer, Woodard, Quinn & Rossi, Los Angeles, Cal., were on the brief for plaintiff-appellee MGPC, Inc.

Before JAMESON, CRAIG and McNICHOLS, Judges.

McNICHOLS, Judge.

The United States Department of Energy (DOE), the defendant below, brings the present appeal from an order of the United States District Court for the District of Wyoming granting Summary Judgment to MGPC, Inc., (MGPC) the plaintiff below. See MGPC v. Duncan, 581 F.Supp. 1047 (1984). For reasons stated and discussed below, we reverse.

I. FACTUAL BACKGROUND

Pursuant to the Economic Stabilization Act of 1970, 12 U.S.C. Section 1904, note (ESA) and the Emergency Petroleum Allocation Act of 1973, 15 U.S.C. Section 751 et seq. (EPAA), the Department of Energy and its predecessor agencies¹ promulgated, in 1973, regulations governing the maximum selling prices at which crude oil refiners and natural gas processors could sell their products.

At all times material herein, MGPC (formerly known as McCulloch Gas Processing Corporation, Inc., see MGPC, Inc. v. Department of Energy, 673 F.2d 1277, 1279 (1982)) was a processor of natural gas. MGPC purchased "raw" natural gas under "net back" contracts. Pursuant to the "net back" contracts MGPC would refine or process the natural gas into natural gas liquids (NGL) or natural gas liquid products (NGLP), such as propane and butane, for sale to commercial and residential customers. MGPC paid the "raw" gas producer a set percentage of the proceeds of the sale of the NGLP with an allowance for the residue gas in exchange for the "wet" gas. As a processor of NGLP, MGPC was, as of 1974, subject to the Department of Energy's price regulations set-out in Subpart E of Part 212, 10 C.F.R. See 10 C.F.R. Section 212.31.

On June 6, 1974 MGPC applied to the Office of General Counsel (OGC) and Office of Exceptions and Appeals (OEA) of the Federal Energy Administration (FEA) (a predecessor agency of the Department of Energy) for exception relief from the FEA's pricing regulations set forth in 10 C.F.R. Section 212.82. These regulations restricted MGPC to MGPC's May 15, 1973 base price of 6.88 cents per gallon. MGPC petitioned the OEA to allow MGPC to charge a weighted average of 27.7 cents per gallon for MGPC's NGLPs. MGPC submitted financial statements to the OEA which statements evidenced a projected operating loss for MGPC of $764,000 during 1974 if MGPC were bound by the May 15, 1973 base price.

MGPC's requested price increase of 20.82 cents per gallon would more than compensate MGPC for its projected $764,000.00 loss. MGPC maintained, however, that the 20.82 cent per gallon increase was necessary to compensate MGPC for a competitive disadvantage MGPC suffered as a result of the price regulations. The competitive disadvantage arose because the price regulations imposed in Subpart E of Part 212 of 10 C.F.R. were tailored to controlling the prices at which producers of crude oil sold their product and were ill-suited for processors of NGLPs. The Subpart E regulations were ill-suited for natural gas processors because natural gas processors, using the net-back supply contracts, were unable to pass through their increased production costs and were, as a result, locked into their May 15, 1973 base prices. Integrated crude oil refiners, on the other hand, could average prices for NGLPs, whether produced from crude oil or natural gas, and thus could pass through increased product costs for crude oil up to the maximum lawful selling price for their NGLPs. The integrated crude oil refiners, who also used net-back contracts in purchasing new natural gas supplies, could, therefore, pay producers of natural gas more than natural gas processors could pay for new natural gas supplies. Processors of natural gas, therefore, could not compete for new gas reserves. Consequently, MGPC could not obtain enough new gas reserves to operate at full capacity.

On September 12, 1974 the FEA denied plaintiff's requested exception relief on the ground that the MGPC failed to substantiate its claim that it was incurring substantial hardships or gross inequities different in kind than all natural gas processors. MGPC appealed the FEA's Decision and Order and on November 22, 1974 the OEA of the FEA reversed the September 12 denial of exception relief. (Record on Appeal at 1567; hereinafter cited (R. ____)). In the November 22, 1974 Decision and Order, the OEA acknowledged that the FEA had indicated, in a preface to proposed Subpart K of Part 212 of 10 C.F.R., that the FEA was aware Subpart E of 10 C.F.R. Part 212 was ill-suited to the customs and needs of the natural gas processing industry and, as a result, many independent natural gas processors' were experiencing operating difficulties which could, if they had continued, have had serious adverse long-time consequences. (R. 1571). The OEA declined to award exception relief to MGPC on the basis that Subpart E was ill-suited to natural gas processors because "it would be inappropriate for exception relief to be granted at this time in view of the fact that the present regulatory system applies in the same way to all independent natural gas processors." (R. 1571). The OEA declined to award exception relief because of the ill-suited regulations for the further reason that the FEA had recognized the problem natural gas processors faced and was preparing to issue the Subpart K regulation to remedy the inequity.

On the other hand, the OEA recognized that MGPC would suffer a serious financial hardship in 1974. The OEA determined, therefore, that MGPC was entitled to "interim exception relief" as follows:

In order to alleviate the serious hardship found to exist the FEA has determined that interim exception relief should be provided at this time pursuant to which MGPC would be permitted to adjust its May 15, 1973 selling prices for the purpose of Section 212.82 so that if the resultant price increases were apportioned over the course of 1974 MGPC would not have experienced the $764,000 operating loss which it projects it will incur during its 1974 fiscal year. A further determination has been made that the FEA Office of Exceptions and Appeals should retain jurisdiction over this matter so that MGPC may petition for further exception relief in the event the FEA regulations which are generally applicable to independent natural gas processors are not revised by December 15, 1974 so as to alleviate any gross inequity or further serious hardship which MGPC alleges that it is experiencing. (R. 1572).

In light of the OEA's determination that MGPC was entitled to 1.5 cents of exception relief the OEA ordered:

(4) Notwithstanding contrary provisions in 10 CFR, Part 212 MGPC may determine its May 15, 1973 selling price for propane, butane and natural gasoline for purposes of Section 212.82 by determining the weighted average price at which each such product was lawfully sold to each class of customer on May 15, 1973 and by then adding to each of those prices an amount necessary to increase the overall weighted average selling price for the covered products which MGPC obtains for natural gas by no more than 1.5 cents per gallon of natural gas liquids processed.

The OEA conditioned the 1.5 cents of exception relief as follows:

(5) In the event the FEA promulgates new generally applicable regulations which govern the determination of the maximum permissible selling prices of propane, butane and/or natural gasoline, the FEA may by written order rescind this interim exception approval in whole or in part; provided that, prior to taking any such action, the FEA shall inform the McCulloch Gas Processing Corporation of the proposed action and afford MGPC of an opportunity to comment upon that proposed action.

As indicated in the portions of the November 22, 1974 Decision and Order previously quoted, the OEA was willing to reconsider MGPC's request for exception relief if the FEA did not issue new regulations generally applicable to natural gas processors by December 15, 1974. The FEA did not promulgate the new regulations prior to December 15, 1974 and, as a result, MGPC renewed its request for further exception relief. Before the FEA was able to act upon MGPC's request, the FEA promulgated the new generally applicable regulations. The regulations, set out in 10 C.F.R. Part 212, Subpart K, were issued on December 24, 1974 and were to become effective on January 1, 1975. The Subpart K regulations permitted MGPC to raise its prices for propane by 7.8 cents per gallon.

As a result of the promulgation of the Subpart K regulations the OEA, on January 13, 1975, informed MGPC, via a letter from the Assistant Director of OEA Richard Tedrow, that MGPC's December 16, 1974 request for further exception relief was denied. The letter stated that if MGPC determined that the provisions of 10 C.F.R., Part 212, Subpart K, were "insufficient to alleviate the serious hardship or gross inequity which MGPC was experiencing prior to the promulgation of Subpart K, the firm should request an exception from that regulation." (R. 1679).

Pursuant to the January 13, 1975 letter, MGPC filed on January 15, 1975, an application for exception relief from the new Subpart K regulations. In MGPC's application for relief from Subpart K, MGPC stated that the regulated sales price per gallon was insufficient to allow MGPC to pass through MGPC's increasing costs to its customers. In the application MGPC claimed the regulated sales price as of...