Pennzoil Co. v. F.E.R.C.
| Citation | 789 F.2d 1128 |
| Decision Date | 14 May 1986 |
| Docket Number | No. 84-4296,84-4296 |
| Parties | PENNZOIL COMPANY, et al., Petitioners v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. |
| Court | United States Courts of Appeals. United States Court of Appeals (5th Circuit) |
Joel M. Cockrell (argued), Andrea Wolfman, Jerome M. Feit, Sol., F.E.R.C., Washington, D.C., for F.E.R.C.
Charles M. Darling, IV (argued), Stephen L. Teichler, Washington, D.C., John Chapman, Houston, Tex., for Pennzoil Oil Co.
Thomas G. Johnson, Shell Oil Co., Houston, Tex., Robert A. Hasty, Jr., for Shell Oil Co.
Jon L. Brunenkant, Washington, D.C., for Hunt Oil Co.
Baker & Botts, Houston, Tex., Cecil W. Talley, Stephen M. Hackerman, for United Gas Pipe Line Co.
Hargrove, Guyton, Ramey & Barlow, Shreveport, La., Thomas J. Wyatt, for Norton Oil Co., Huggs, Inc., Par Oil Corp.
Sherman S. Poland, Washington, D.C., for Logue and Patterson Inc.
Grant & Dean, Walter C. Dunn, Jr., Monroe, La., for Sho-Van Gas Producing Co., Inc., Primos.
Baker & Botts, Stephen L. Teichler, Washington, D.C., for Tenneco Oil Co., Et Al.
Gail S. Gilman (argued) Sutherland, Asbill & Brennan, Washington, D.C., for M.D. Abel Co.
Minard & Mixon, Columbia, La., James E. Mixon, for John H. McCarter, Jr.
Allan W. Anderson, Jr., Washington, D.C., for The Maurice L. Brown Co.
J. Paul Douglas (argued), Michael Maloney, Arco Oil & Gas Co., Dallas, Tex., Grove, Jaskiewicz, Gilliam & Cobert, Washington, D.C., for Arco Oil & Gas Co.
Edmunds Travis, Jr., Exxon Corp., Houston, Tex., Douglas W. Rasch, for Exxon Corp. Grove, Jaskiewicz, Gilliam, Washington, D.C., Steven R. Severy, Marathon Oil Co., Findlay, Ohio, for Marathon Oil.
Ronald D. Hurst, Paul W. Hicks, Dallas, Tex., for Placid Oil Co.
Craig W. Hulvey, Washington, D.C., for Relco Exploration Co. and The Harold L. Woods Group.
Gail S. Gilman, Washington, D.C., Paul W. Fox., for Clemco, Inc. and Tyler Oil and Gas, Inc.
Albert Sylvia, III, Lois Ellen Gold, Los Angeles, Ca., for Union Oil of California.
Carmen Chidester Farrell, Tulsa, Okl., for Cities Service Oil and Gas Corp.
Anthony V. Sorrentino, Houston, Tex., David R. Stevenson, for Gulf Oil Corp.
Jennifer A. Cates, C.J. Roberts, Larry Pain, Bartlesville, Okl., for Phillips Petroleum Co.
Robert D. Haworth, Edgar K. Parks, Houston, Tex., for Mobil Oil Corp.
Karen A. Berndt, Merrill E. Fliederbaum, Houston, Tex., for Texaco, Inc.
Lawrence E. Glenn, Houston, Tex., for Robert W. Anderson.
Thomas H. Burton, Carolyn S. Hazel, Houston, Tex., for Conoco, Inc.
Petitions for Review of Orders of the Federal Energy Regulatory Commission.
Before Clark, Chief Judge, and BROWN and JOHNSON, Circuit Judges.
Certain natural gas producers and other intervenors in this action 1 (hereinafter "the producers") seek review of two orders 2 of the Federal Energy Regulatory Commission ("the Commission") 3 which involve a case specific application of third-party protest procedures adopted by the Commission in the "Order 23 Series" 4 and affirmed in part and modified in part by this Court in Pennzoil Co. v. FERC, 645 F.2d 360 (5th Cir.1981), cert. denied, 454 U.S. 1142, 102 S.Ct. 1000, 71 L.Ed.2d 293 (1982) (). The central issues in this appeal focus on whether the Commission's decision, which sustained third-party protests to certain producer-sellers' contractual authorization to collect the stripper well price established under section 108 of the Natural Gas Policy Act of 1978, 15 U.S.C. Sec. 3318, properly applies this Court's decision in Pennzoil, and whether it is supported by substantial evidence. Finding that the Commission has fundamentally misconstrued this Court's decision in Pennzoil, this Court grants the petitions for review. The agency orders are vacated and the proceedings remanded for reconsideration in light of this opinion.
As explained in great detail in this Court's opinion in Pennzoil, 645 F.2d at 365-71, the adoption of the Natural Gas Policy Act, 15 U.S.C. Secs. 3301-3432 ("NGPA"), on November 9, 1978, substantially modified the structure of federal natural gas regulation then existing pursuant to the Natural Gas Act, 15 U.S.C. Secs. 717-717w ("NGA"). Prior to the NGPA, the Commission prescribed just and reasonable rates through Commission rate proceedings. 5 The NGPA, in contrast, provided for congressionally set rates promulgated by statute. 6
Under the Mobile-Sierra doctrine, 7 the Supreme Court required that any rate increase filed under section 4 or 5 of the Natural Gas Act must be authorized by the contract between the producer-seller and the pipeline-purchaser. Contractual authority is also a prerequisite to collection of rates established in the NGPA. 8 Over the years, producer-sellers and pipeline-purchasers relied on various indefinite price escalator clauses in their contracts, generically termed area rate clauses, 9 to authorize increases to new rates as such rates were set by the Commission. This Court discussed the historical foundations of area rate clause use in detail in Pennzoil, and this Court need not repeat that discussion here. It is sufficient to note that when the Commission abandoned area-based rates and adopted nationwide rates of general applicability, the Commission permitted producers and interstate pipelines to rely on area rate clauses to escalate the contract price to the national ceiling rates. 10
After enactment of the NGPA, the question arose whether area rate clauses also authorized escalation of rates to those set in the NGPA. The Pennzoil case reviewed the Commission's Order 23 series which addressed that issue. In Order 23, the Commission concluded that neither the language of the NGPA nor Commission regulations precluded authorization of NGPA rates through area rate clauses. Nevertheless, the Commission also concluded that it could not dispositively construe all such area rate clauses. Rather, the Commission concluded that it would ascertain and give effect to the contracting parties' intent and that it would not object generally to the parties' reliance on area rate clauses as authority to collect NGPA prices.
Order 23-B established procedures which allowed interstate pipelines and certain third-party protestors to protest producers' assertion of contractual authority to collect the higher NGPA rates. 11 Of particular importance to this proceeding, Order 23-B and the Order on Rehearing of Order 23-B, adopted a bifurcated procedure for third-party protests. If the contracting parties submit that it was their mutual intent to authorize the NGPA rates, then the Chief ALJ summarily dismisses the third-party protest unless (1) the contractual language is inconsistent with the parties' mutual interpretation, or (2) the protestor submits other specific evidence that explains or modifies the text of the contract. Pennzoil, 645 F.2d at 370. If either of these two requirements is met, an evidentiary hearing before another ALJ is scheduled.
As summarized in Pennzoil, this procedure creates a rebuttable presumption (hereinafter referred to as "the Order 23 presumption"):
In other words, the protestor has the burden of coming forward with substantial evidence of the lack of contractual authority to overcome the presumption that the contracting parties' assertion regarding their intent is accurate and not unreasonable. If the protestor meets the burden of production, the contracting parties bear the burden of persuasion at the hearing to show by a preponderance of the evidence that contractual authority exists.
Id. 12
In Pennzoil, this Court essentially affirmed the Order 23 procedures. Nevertheless, this Court held that the Erie doctrine 13 required the Commission to apply state law principles of contract construction rather than general principles of contract construction developed by the Commission. Pennzoil, 645 F.2d at 383-84. The instant case involves petitions for review of a case specific application of these third-party protest procedures.
On August 27, 1979, 14 United Gas Pipe Line Company ("United") filed an evidentiary submission pursuant to 18 C.F.R. Sec. 154.94(j) which covered 365 natural gas producers and approximately 775 contracts. In this submission, United represented that the contracting parties mutually intended to authorize all NGPA rates through the use of area rate clauses. Third-party protests were filed by the Commission Staff and others.
The Chief ALJ summarily dismissed the majority of the protests on the basis of the Order 23 presumption which attached to the contracting parties' assertion of mutual intent. 15 Nevertheless, the Chief ALJ found that the third-party protestors presented extrinsic evidence challenging the parties' contractual authorization to collect the NGPA rate for stripper well gas. 16 The Chief ALJ based this ruling on an April 23, 1979, letter from United to its producers stating that United's contracts did not require United to pay stripper well rates because the rate of production from a well had never been a criterion for determining rates. 17 United, however, retracted the April 23, 1979, letter in August 1979, four months after it was issued. 18 The Chief ALJ, therefore, ordered an evidentiary hearing to decide the factual question whether the parties intended area rate clauses to authorize collection of stripper well gas prices. The case was assigned to another ALJ (hereinafter "the presiding ALJ").
The presiding ALJ considered the live testimony, deposition testimony, and the documentary evidence presented before issuing an opinion in which the presiding ALJ adopted the suggestion of Commission Staff that this proceeding involved eight types of area rate clauses. The presiding ALJ then construed these eight types of area rate clauses by taking into account both the language of the clauses 19 and the extrinsic evidence presented at the hearing. The presiding ALJ held that clauses types I and IV did...
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