MGPC, INC. v. Duncan

Decision Date28 February 1984
Docket NumberNo. C79-0279-B.,C79-0279-B.
Citation581 F. Supp. 1047
PartiesMGPC, INC., a Wyoming corporation, Plaintiff, v. Charles DUNCAN, Secretary of the Department of Energy, et al., Defendants.
CourtU.S. District Court — District of Wyoming



Richard T. Williams, Kadison, Pfaelzer, Woodard, Quinn & Rossi, Los Angeles, Cal., Blair J. Trautwein, Hathaway, Speight & Kunz, Cheyenne, Wyo., David L. Huard, Los Angeles, Cal., for plaintiff.

Don W. Crockett, John L. Gurney, Dept. of Energy, Washington, D.C., for defendants.


BRIMMER, Chief Judge.

This matter having come on for hearing before the Court upon the Plaintiff's Motion for Summary Judgment and upon Defendants' Motion to Strike, or in the Alternative for Further Discovery, Richard T. Williams, Esq., Blair J. Trautwein, Esq., and David L. Huard, Esq., for the Plaintiff, and Don W. Crockett, Esq., and John L. Gurney, Esq., for the Defendants, and the Court, having heard and considered the arguments of counsel, the pleadings, and the record of administrative proceedings filed with the Court, as well as the depositions taken in this matter, and being fully advised in the premises, makes the following Findings of Fact and Conclusions of Law:


1. The Plaintiff is a natural gas processing company, is incorporated under the laws of Wyoming, with offices in Los Angeles, California, and natural gas processing plants and operations in South Dakota, Montana, Texas and Wyoming. Plaintiff purchased "raw" casing-head natural gas under long-term purchase agreements which often continued in effect for the life of the well from which the gas was purchased. Plaintiff then transported such natural gas through its pipeline facilities to its processing plants, and extracted therefrom natural gas liquid products (NGLPs), primarily propane and butane, for sale to its wholesale customers. Due to the volatility of natural gas prices, and in accordance with historic practices, Plaintiff purchased such gas supplies under "net back" contracts by which the Plaintiff returned to the producer a set percentage of the sales price received for products processed from purchased raw natural gas, rather than using "fixed price" agreements.

That portion of the natural gas not consumed by processing, (referred to as residue gas) was sold by the Plaintiff in interstate commerce, and was therefore subject to regulatory control by the Federal Energy Regulatory Commission. The Plaintiff was a "refiner" as that term was used in Department of Energy (DOE) price regulations, 10 C.F.R. Section 212.31, and therefore sales of its NGLPs were subject to the regulatory control of Defendant Department of Energy (DOE) and its predecessor agencies under the Economic Stabilization Act of 1970, 12 U.S.C. Section 1904 NOTE, P.L. 91-379, (ESA) and the Emergency Petroleum Allocation Act of 1973, 15 U.S.C. Section 751 et seq. (EPAA).

2. Defendant DOE is a federal agency and is charged with the duty and authority to enforce relevant provisions of the ESA and the EPAA and regulations promulgated thereunder. Such authority was initially vested in the Cost of Living Council (CLC) under the provisions of the ESA. It was delegated to the Federal Energy Office (FEO) by Executive Order No. 11,748, 39 F.R. 33,575 (December 6, 1973). After passage of the Federal Energy Administration Act of 1974, 15 U.S.C. Sections 761 et seq., FEO's rulemaking and enforcement functions on June 27, 1974 were transferred to the Federal Energy Administration (FEA) by Executive Order No. 11,790, 39 F.R. 185. Such authority was then transferred to Defendant DOE on February 7, 1978 after passage of the Department of Energy Organization Act, 42 U.S.C. Sections 7101 et seq. by Executive Orders Nos. 12,099, 42 F.R., 46,267 (9-15-77) and 12,038, 43 F.R. 957. Defendant DOE's price control authority was terminated on January 28, 1981 by Executive Order No. 12,287, 46 F.R. 9909. Defendant Duncan at the time of commencement of this action was the Secretary of DOE, and its primary administrator. Defendant Goldstein was the Director of DOE's Office of Hearings and Appeals (OHA). Both remaining individual Defendants were sued in their official capacities only, as officers and employees of Defendant DOE. Their successors have not been substituted as Defendants herein.

3. On June 6, 1974 Plaintiff filed a Petition for Interpretation and Exception with FEA's Office of General Counsel (OGC) and its Office of Exceptions and Appeals (OEA), requesting, in part, an exemption from FEA's NGLP pricing regulations set forth in 10 C.F.R. Section 212.82, or in the alternative requesting exception relief under 10 C.F.R. Section 205.41 et seq., so as to enable it to charge up to 27.7 cents per gallon weighted average for NGLPs produced by it in its processing plants rather than the applicable ceiling price of approximately 8 cents per gallon permitted under such regulations. FEE-0899. Plaintiff alleged, in part, that the pricing regulations were ill-suited for natural gas processing plants, but rather were designed to govern NGLPs produced from crude oil by crude oil refiners, and that the effect of the price regulations was to lock natural gas processors in at their May 15, 1973 base prices in computing maximum lawful selling prices (MLSPs) for NGLPs since the historical practice of using net-back supply contracts effectively precluded them from incurring and passing through increased product costs. Plaintiff alleged that integrated crude oil refiners, such as its primary competitor for new supplies of natural gas, Phillips Petroleum Company, could average prices for NGLPs, whether produced from crude oil or natural gas, and thus could pass through increased product costs for crude oil in computing MLSPs for their NGLPs. Plaintiff claimed that such crude oil refiners, which also used net-back contracts in purchasing new natural gas supplies, were therefore able to pay producers up to three times as much as natural gas processors could for new gas supplies. Plaintiff further alleged that it had rapidly declining natural gas reserves, due in part to the rapid depletion rates common in the Powder River Basin, and that its inability to obtain new supplies of natural gas forced it to operate its facilities at substantially less than 100% capacity, resulting in substantial operating losses the magnitude of which were growing as its then current supplies, and thus its volumes of production, decreased. It claimed that it would have to charge 27.7 cents per gallon weighted average for NGLPs produced at its facilities at then current volumes in order to cover its operating costs, obtain new supplies, and provide an adequate return on investment (approximately 6%) on its capital facilities and therefore sought exception relief allowing it to charge up to that amount.

4. On September 10, 1974 FEA proposed new Subpart K to Part 212 of its pricing regulations, 10 C.F.R. Section 212.64 et seq. (Subpart K) 39 F.R. 32717 (9-10-74). Subpart K was to specifically address unique considerations concerning MLSPs for NGLPs produced from natural gas streams rather than from crude oil, which FEA conceded were not adequately dealt with under the original pricing regulations governing NGLPs contained in Subpart E to Part 212, 10 C.F.R. Section 212.83 et seq. (Subpart E). In the preamble to such proposed rulemaking FEA acknowledged the plight of all natural gas processors, including the Plaintiff, and the severe financial burden imposed upon them by the provisions of Subpart E. The preamble admitted that the previous provisions were ill-suited for the operations of natural gas processors, and had the effect of limiting them to May 15, 1973 base prices in computing MLSPs for their NGLPs. The preamble noted the fact that the regulations created pricing disparities as between natural gas processing plants and crude oil refiners, giving the latter a competitive advantage in obtaining new natural gas supplies under net back supply contracts, which were commonly used throughout the industry, and therefore threatened to impose substantial injury upon natural gas processors if not remedied.

5. On September 12, 1983 FEA denied Plaintiff's request for exception relief in FEA-0899 on the ground that the Plaintiff had failed to substantiate its claim that it was incurring substantial hardship or gross inequity as a result of the provisions of Subpart E. Such Decision and Order proposed that the Plaintiff could cure its financial hardships by altering its mode of acquiring new natural gas supplies by using fixed price supply contracts rather than traditional net-back arrangements.

6. Plaintiff appealed the Decision and Order of FEE-0899 in FEA-248. Plaintiff sought a stay of the applicability of Subpart E to its operations pending a decision in FEA-248, which was denied. FEA-248. On November 22, 1974 FEA's Office of Hearings and Appeals (OHA) issued a Decision and Order which reversed the denial of relief in FEE-0899, and which granted Plaintiff's request in part, allowing Plaintiff to price its NGLPs in such a way that its weighted average selling price for all NGLPs sold by it would be its MLSP under applicable pricing regulations, plus no more than 1.5 cent per gallon. McCulloch Gas Processing Corp., CCH Federal Energy Guidelines Par. 20,186 (11-22-1974).

7. On December 19, 1974 FEA adopted new Subpart K, effective January 1, 1974. 39 F.R. 44,407 (12-24-74). Between November 22, 1974 and January 10, 1975 Plaintiff's Washington, D.C. counsel, Joe W. Fleming, contacted FEA's highest ranking officials in its national office in Washington, D.C., requesting them to instruct the Plaintiff as to how it could apply the 1.5 cent per gallon relief, as this matter was not specifically set forth in the Decision and Order in FEA-248. Mr. Fleming initially believed that the relief was only prospective in nature, and felt...

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