National Fuel Gas Distribution Corp. v. TGX Corp., CIV-84-1372E.

• Decision Date: 07 November 1990
• Docket Number: No. CIV-84-1372E.,CIV-84-1372E.
• Citation: 749 F. Supp. 466
• Parties: NATIONAL FUEL GAS DISTRIBUTION CORPORATION, Plaintiff, Public Service Commission of the State of New York, Plaintiff-Intervenor, v. TGX CORPORATION and Paragon Resources, Inc., Defendants.
• Court: U.S. District Court — Western District of New York

749 F. Supp. 466

NATIONAL FUEL GAS DISTRIBUTION CORPORATION, Plaintiff Public Service Commission of the State of New York, Plaintiff-Intervenor, v. TGX CORPORATION and Paragon Resources, Inc., Defendants.

No. CIV-84-1372E.

United States District Court, W.D. New York.

November 7, 1990.

Heino H. Prahl, Buffalo, N.Y., for plaintiff.

Jonathan Feinberg, Albany, N.Y., for plaintiff-intervenor.

Alan Lipman, Buffalo, N.Y., for defendants.

MEMORANDUM AND ORDER

ELFVIN, District Judge.

This Court presently revisits the question whether a state regulatory agency which "disapproves" a contract between a public utility and a private person pursuant to its statutory authority but without affording notice of its accompanying proceedings to the person violates such person's Fourteenth Amendment due process rights.

Briefly and by way of background, the plaintiff, National Fuel Gas Distribution Corporation ("NFG"), is a New York corporate gas distributor with its principal place of business in this state. Defendants TGX and Paragon Resources, Inc. ("Paragon") are gas producers incorporated under Delaware law with their principal places of business outside New York.¹ See 28 U.S.C. § 1332. They are parties to a gas-purchasing agreement ("the Agreement") which contains an "escalation clause" whereby the price for gas purchased thereunder by NFG is to increase annually by an amount equivalent to the yearly escalated increase in NFG's weighted average cost of gas purchased from three specific interstate pipelines.²

New York's Public Service Commission ("the PSC"), a state regulatory agency empowered to "disapprove" of gas purchase contracts involving unjust and unreasonable charges — see sections 4 and 110(4) of New York's Public Service Law ("NYPSL") —, issued an order in 1983 ("the Opinion") finding that, because of the escalator provisions, NFG's procurement contracts (including the Agreement) "require, expressly and implicitly, that NFG pay excessive prices for gas" and that therefore such contracts "are not consistent with the public interest." PSC Opinion No. 83-26, Case 28447, National Fuel Gas Distribution Corp. — Gas Rates (December 20, 1983) at p. 14.³ Confronted with a question as to "what steps to take to `transform' the three-pipeline escalator clause into an acceptable one," the PSC observed that "a proposal that we effectively rewrite the contracts to include a ceiling on gas cost recoveries may not comport with NYPSL § 110(4)" — bid. — and concluded:

"We have found the current local production contracts to be unacceptable, and we conclude that the better course is simply to disapprove the contracts. NFG appears to believe that such disapproval would enable it to rescind the contracts, in which case it might negotiate more acceptable agreements. Regardless of what the company does, however, our disapproval of the contracts constitutes notice that we shall not allow it, in the future, to recover from its customers any charges for locally-produced gas that exceed just and reasonable charges for such gas." Id. at p. 15.

NFG challenged the Opinion by commencing a state proceeding under Article 78 of New York's Civil Practice Law and Rules. The New York State courts upheld the PSC's Opinion as having a rational basis and as being supported by substantial evidence in the record. See National Fuel Gas Distrib. Corp. v. Public Service Comm'n, 107 A.D.2d 357, 487 N.Y.S.2d 150, 151 (3rd Dept.), aff'd without opinion, 66 N.Y.2d 956, 498 N.Y.S.2d 798, 489 N.E.2d 767 (1985).

This suit was instituted to determine the rights and liabilities of the parties under the Agreement in light of the Opinion. NFG has alleged that the Agreement was thereby effectively voided or "cancelled" and that NFG was under no continuing liability to the defendants. See Amended and Supplemental Complaint, ¶ 29. The defendants have counterclaimed, inter alia, for a declaration that the PSC had lacked jurisdiction to issue an order respecting them, that their Fourteenth Amendment due process rights were violated in that they were never given notice of the PSC's proceedings with respect to the Agreement, that the Opinion did not by its terms purport to void or cancel the Agreement and that the Agreement remained and remains in full force and effect. See Answer and Counterclaim to Amended and Supplemental Complaint. The PSC was permitted to intervene (pursuant to Fed.R.Civ.P. rule 24) in 1986 because, in this Court's stated view at the time,

"a decision that the gas purchase agreement is valid, that the PSC had no power to affect the gas purchase agreement or that the PSC's procedure had violated the defendants' rights would impede the PSC's interest in enforcing Opinion No. 83-26 and would likely affect the PSC's future ability to regulate." Memorandum and Order, dated November 7, 1986, at p. 3, 1986 WL 12486.

Upon NFG's motion for summary judgment and the defendants' cross-motion for partial summary judgment, it was declared by this Court that the Opinion voided the escalation provisions but that the remainder of the Agreement continued in force. Memorandum and Order, dated October 1, 1987, at p. 15, 1987 WL 17863. At the same time, the defendants' constitutional counterclaim was rejected. Id. at 14-15. The very brief discussion of the basis for the dismissal was, in its entirety, as follows:

"The defendants assert that the PSC improperly exercised its power under NYPSL section 110.4 by having failed to provide them with notice of the hearing concerning the Agreement and with an opportunity to be heard and, thus, that their procedural due process rights had been violated. However, the PSC's decision concerning the three-pipeline escalator provisions arose during a rate making proceeding. Whether the three-pipeline escalator clause was in the public interest as well as the rate making procedure itself concerned rulemaking by the PSC and were not adjudicatory. See section 102 of New York's Administrative Procedure Act. In the context of rulemaking, the defendant had not been entitled to formal notice. See Bi-Metallic Co. v. Colorado, 239 U.S. 441, 445 36 S.Ct. 141, 142, 60 L.Ed. 372 (1915). No due process violation is found." Ibid.

No challenge was made by the defendants to the dismissal of their counterclaim, but NFG moved for clarification and/or reconsideration of the October 1, 1987 declaration and, upon reconsideration, this Court arrived at a "non-binding conclusion" that the disapproved escalation provision had been an essential element of the Agreement and that therefore such Agreement is unenforceable absent its pricing provision. It was "tentatively declared" that the Agreement is void. Tentative Memorandum, dated March 18, 1988, at p. 5, 1988 WL 27583. This Court's tentative views were subsequently solidified into a declaration that the Agreement had been voided by the Opinion and that the Agreement "is no longer of any force or effect." Memorandum and Order, dated December 10, 1988, at p. 8, 1988 WL 132557.

In a pair of subsequent rulings, it was determined that the Johnson Act, 28 U.S.C. § 1342, which forbids federal challenges to state regulatory orders affecting rates chargeable by a public utility, does not divest this Court of jurisdiction over either NFG's declaratory action or the defendants' constitutional counterclaim. Memorandum and Order, dated May 10, 1990, 1990 WL 66231, reconsideration denied, Memorandum and Order, dated July 2, 1990, 1990 WL 98433. In a footnote in the earlier of such rulings this Court invited re-argument of the due process claim, which claim had been summarily dispensed with in October 1987. It was said,

"The defendants' due process claim has been rejected by this Court, it having been found that in the context of non-adjudicatory administrative proceedings formal notice is not required by the Constitution. Memorandum and Order, dated October 1, 1987, at pp. 14-15 (citing Bi-Metallic Co. v. Colorado, 239 U.S. 441 36 S.Ct. 141, 60 L.Ed. 372 (1915)). On re-examination such conclusion may have been based on a dubious assessment of antiquated case law. Bi-Metallic Co. v. Colorado, a `Lochner era' decision, was a suit to enjoin the Colorado state tax commission from enforcing its order increasing the valuation of all taxable property in the city of Denver on grounds that the city's real property owners had not received an opportunity to be heard prior to the order's issuance. The challenge was rejected by the United States Supreme Court because `where a rule of conduct applies to more than a few people it is impracticable that every one should have a direct voice in its adoption.' Bi-Metallic Co. v. Colorado, supra, at 445 36 S.Ct. at 142. The order was deemed legislative rather than adjudicatory, and thus, `to put the question was to answer it. There must be a limit to individual argument in such matters if government is to go on.' Ibid. Here, by contrast, the PSC's order was limited to an evaluation of a small set of agreements between discrete and readily-identified parties. While offering no view respecting whether Bi-Metallic Co. v. Colorado has survived the marked evolution of due process jurisprudence in this century, this Court considers its facts plainly inapposite. The due process claim may be reargued * * * if the defendants are so inclined." Memorandum and Order of May 10th, supra, at p. 13 fn. 10.

The defendants have since taken up the invitation and moved for reconsideration of the October 1987 ruling insofar as it had dismissed their due process counterclaim. The defendants argue in support of their motion that they had not received notice of the PSC hearings which had preceded the issuance of the Opinion, that the Opinion "destroyed" their economic interests under the parties' disapproved gas purchase agreement and, therefore, that they were deprived of property without due process of law. See Defendants' Memorandum of Law, filed June 21, 1990. NFG counters that the defendants had...