Petrolite Corp., Bareco Division v. Federal Energy Regulatory Commission, s. 81-1214

• Decision Date: 15 December 1981
• Docket Number: Nos. 81-1214,81-1456,s. 81-1214
• Citation: 667 F.2d 664
• Court: U.S. Court of Appeals — Eighth Circuit
• Parties: PETROLITE CORPORATION, BARECO DIVISION, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, and Cities Service Gas Company, Intervenor. AMERICAN HARDBOARD ASSOCIATION and Superwood Corporation, Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent.

Page 664

667 F.2d 664

PETROLITE CORPORATION, BARECO DIVISION, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, and Cities Service Gas Company, Intervenor.

AMERICAN HARDBOARD ASSOCIATION and Superwood Corporation, Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent.

Nos. 81-1214, 81-1456.

United States Court of Appeals,

Eighth Circuit.

Submitted Oct. 14, 1981.

Decided Dec. 15, 1981.

C. Frank Reifsnyder, argued, Richard C. Green, Hogan & Hartson, Washington, D.C., for Petrolite Corp., Bareco Div.; C. Scott Letcher, Tulsa, Okl., of counsel.

Nicholas W. Fels, argued, Jane H. Chalmers, Covington & Burling, Washington, D.C., William C. Ives, Robert A. Creamer, Keck, Mahin & Cate, Chicago, Ill., for American Hardboard Ass'n and Superwood Corp.

Jerome Nelson, Acting Gen. Counsel, Jerome M. Feit, Deputy Sol., Barbara J. Weller, Asst. Sol., argued, Washington, D.C., for respondent Federal Energy Regulatory Commission.

Before STEPHENSON and McMILLIAN, Circuit Judges, and LARSON, ^* Senior District Judge.

LARSON, Senior District Judge.

Petitioners in this consolidated ¹ proceeding seek appeal from orders of the Federal Energy Regulatory Commission (FERC) concerning the application of the agricultural exemption from the incremental pricing surcharges of the Natural Gas Policy Act of 1978 (NGPA), Pub.L. 95-621, 92 Stat. 3350 (1978), 15 U.S.C. §§ 3301, et seq. (Supp. III 1979). Petitioners applied to the Commission for rehearing of FERC Order No. 114, 45 Fed.Reg. 82915 (1980) pursuant to Section 506 of the Act, 15 U.S.C. § 3416(a)(2), but in FERC Order No. 114-A, 46 Fed.Reg. 11812 (1981), the Commission denied rehearing of its findings that food-grade waxes are only exempt from incremental pricing when they are used for entire food containers and that hardboard is only exempt prospectively. We affirm.

I. Introduction

Congress enacted the NGPA as a means of phasing in the deregulation of the wellhead price of natural gas. Title II of the Act sets forth a scheme of "incremental pricing" to channel the immediate impact of deregulation to large industrial users of natural gas and to provide relief for residential, small commercial, and agricultural users. The Act imposes an "incremental pricing surcharge" on industrial users based on the acquisition costs paid by interstate natural gas pipelines. The Act specifies a number of uses of natural gas that are exempt from surcharges, including "agricultural use" in Section 206, 15 U.S.C. § 3346(b)(3):

Agricultural use defined.-For purposes of this subsection, the term "agricultural use", when used with respect to natural gas, means the use of natural gas to the extent such use is-

(A) for agricultural production, natural fiber production, natural fiber processing, food processing, food quality maintenance,

irrigation pumping, or crop drying; or

(B) as a process fuel or feedstock in the production of fertilizer, agricultural chemicals, animal feed, or food.

FERC has adopted detailed rules on the scope of this agricultural exemption, and these rules are the subject of this appeal.

Petitioners seek, in the first instance, expansion of the Commission's rules on the agricultural exemption, and, in the second instance, retroactive application of the exemption. Petitioner Petrolite Corporation owns and operates a plant in Oklahoma whose sole function is the production of food-grade microcrystalline and synthetic paraffin waxes that are used in food packaging. In Order No. 114 Petrolite won an exemption for production of food-grade waxes used as "entire food containers" (for example, the casings on certain cheeses), but the Commission denied exemption for waxes used as a "secondary input into the manufacture of food packaging" (primarily waxes used as coatings or glazings on containers made of paper and other materials). Petitioner American Hardboard Association (AHA) is a trade association representing the hardboard industry, and petitioner Superwood Corporation, a member of AHA, is a manufacturer of hardboard. AHA won an exemption for gas used in manufacturing hardboard in Order No. 114, but the exemption only applied prospectively, with the earliest date that manufacturers of hardboard could take advantage of it being January 1, 1981. AHA and Superwood sought retroactive relief for the one year period from the onset of incremental pricing on January 1, 1980, to January 1, 1981, but FERC denied petitioners' request.

II. Standard of Review

In reviewing FERC's rules on the scope of the agricultural exemption, this Court must accord great weight to the Commission's judgment. We are mindful of the rule set forth by Congress in the Administrative Procedure Act (APA), Pub.L.No. 89-554, 80 Stat. 393 (1966), requiring that "(t)he reviewing court shall ... hold unlawful and set aside agency action ... in excess of statutory jurisdiction, authority, or limitations, or short of statutory right." 5 U.S.C. § 706 (1976). We are also aware, however, that Congress granted the Commission a significant measure of discretionary authority under the NGPA. Ohio Ass'n of Community Action Agencies v. Federal Energy Regulatory Comm'n, 654 F.2d 811, 822 (D.C.Cir.1981). We will discuss the role Congress provided for the Commission at greater length below, but, for now, suffice it to say that the complexity of the NGPA requires that the Commission have discretion to apply its expertise and, as a corollary, that the reviewing court grant deference to FERC. Ecee, Inc. v. Federal Energy Regulatory Comm'n, 645 F.2d 339, 360 (5th Cir. 1981). We must uphold the Commission so long as the rules it has promulgated are within the broad grant of congressional authority and are rational. See, e.g., United States v. Allegheny-Ludlum Steel Corp., 406 U.S. 742, 749, 92 S.Ct. 1941, 1946, 1947, 32 L.Ed.2d 453 (1972); Ohio Ass'n of Community Action Agencies v. Federal Energy Regulatory Comm'n, 654 F.2d at 825; Murphy Oil Corp. v. Hickel, 439 F.2d 417, 422 (8th Cir. 1971); cf. Independent Oil Compounders Ass'n v. Department of Energy, 650 F.2d 1230, 1234 (Em.App.1981) (agency interpretation of regulation entitled to deference if reasonable).

III. Food-Grade Waxes

The Commission's rule for the exemption of food-grade waxes meets this standard. Petrolite argues that, by adopting the primary/secondary input distinction, FERC has transformed the statutory exemption for gas used in "food quality maintenance," 15 U.S.C. § 3346(b)(3), into an exemption for gas used in the manufacture of an "entire food package." Petrolite maintains that the Commission's refusal to exempt waxes used in the coating of packages violates the Act because such waxes are clearly used in "food quality maintenance." Petrolite points out that the primary/secondary input test was developed by the Secretary of Agriculture in implementing Section 401 of the NGPA, 15 U.S.C. § 3391(f)(1). The Secretary's task under this section was to determine which agricultural uses should be considered "essential" in the event of a curtailment of natural gas supply, and Petrolite argues that this standard is too stringent for determining the scope of the agricultural exemption under Section 206, 15 U.S.C. § 3346(b)(3). Petrolite admits that it is necessary to draw the line at some point,-surely it would be going too far to exempt gas used in the manufacture of all steel because some of it will eventually be turned into metal food cans-but petitioner argues that the preferable approach would be to consider the intended use and function of a product at the manufacturing stage, rather than whether the product is a primary or secondary input into food packages.

In essence, Petrolite is arguing that its test would be more rational than the one adopted by the Commission. We are satisfied, however, that the primary/secondary test is at least minimally rational. Given the need for the Commission to draw the line somewhere in the production of food packages, the step where the actual food package is produced as opposed to materials used in packages is acceptable. It is irrelevant that Petrolite has come up with a test it believes to be marginally better when the question for the Court is simply whether the Commission's action is within the parameters of the statute and is rational. Further, the Court seriously doubts the desirability of Petrolite's alternative test. Determining the intended use of a packaging product at the manufacturing stage is apt to be difficult if not impossible in many cases and, in any event, is likely to entail high administrative costs. A large number of activities would be exempt under the Petrolite test, even those that are fairly remote from the production of products that serve a direct role in food quality maintenance. Considerations such as these lend credence to the judgment of FERC and reinforce our belief that deference to the expertise of the Commission is called for in its determination that only food-grade waxes used as entire containers should be included in the agricultural exemption to the NGPA.

IV. Hardboard

Before turning to the merits of the question of whether the Commission should have exempted hardboard retroactively, we must address FERC's argument that petitioners AHA and Superwood failed to pursue the appropriate administrative remedies and that their appeal to this Court constitutes an impermissible collateral attack on the Commission's regulations.

The gist of the Commission's position is that it specified the procedure for obtaining an exemption in FERC Order No. 49, 44 Fed.Reg. 57726 (1979), and that, because petitioners did not request a rehearing on the prospective-only issue in response to Order No. 49, judicial review cannot now be had under Section 506 of the NGPA, 15 U.S.C. § 3416. In Order No. 49 the Commission defined the exempt agricultural uses, although it did not recognize an exemption for hardboard at that time. Facilities that qualified for an exemption were required to file...