Phillips Petroleum Co. v. F.E.R.C.

• Decision Date: 30 April 1990
• Docket Number: No. 88-1257,88-1257
• Citation: 902 F.2d 795
• Parties: PHILLIPS PETROLEUM COMPANY and Phillips 66 Natural Gas Company, Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Arco Oil and Gas Company, a division of Atlantic Richfield Company, Associated Gas Distributors, Mobil Oil Corporation, Mobil Exploration & Producing Southeast Inc., Mobil Producing Texas & New Mexico Inc., Mobil Exploration & Producing North America Inc., and Exxon Corporation, Intervenors.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 795

902 F.2d 795

PHILLIPS PETROLEUM COMPANY and Phillips 66 Natural Gas

Company, Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent,

Arco Oil and Gas Company, a division of Atlantic Richfield

Company, Associated Gas Distributors, Mobil Oil Corporation,

Mobil Exploration & Producing Southeast Inc., Mobil

Producing Texas & New Mexico Inc., Mobil Exploration &

Producing North America Inc., and Exxon Corporation, Intervenors.

No. 88-1257.

United States Court of Appeals, Tenth Circuit.

April 30, 1990.

Larry Pain (John L. Williford and Don L. Jemison, with him on the briefs), Bartlesville, Okl., for petitioners.

Jill L. Hall, Atty. (Catherine C. Cook, General Counsel, Jerome M. Feit, Sol., and John H. Conway, Atty., on the brief), F.E.R.C., Washington, D.C., for respondent.

Before McKAY and SETH, Circuit Judges, and CONWAY, District Judge ^*.

SETH, Circuit Judge.

The petitioners, natural gas producers, and intervenors ("the Producers") seek review pursuant to 15 U.S.C. Sec. 717r and 15 U.S.C. Sec. 3416 of two orders issued by the Federal Energy Regulatory Commission ("the Commission") on remand from the Fifth Circuit in Texas Eastern Transmission Corp. v. F.E.R.C., 769 F.2d 1053 (5th Cir.). The Fifth Circuit affirmed and remanded in part Orders 94 and 94-A, which allow first sellers of natural gas to recover production-related costs over and above the maximum lawful price under Section 110 of the Natural Gas Policy Act of 1978 ("NGPA"), 15 U.S.C. Sec. 3320(a)(1) (1983). Texas Eastern also upheld the Commission's decision that area rate clauses can constitute sufficient contractual authority to collect delivery, but not other production-related cost allowances. On remand the Commission issued Orders 473 and 473-A which, as relevant to this appeal, implemented required protest procedures and provided for the retroactive collection of fuel and power costs. The basic issue on appeal is whether the Commission's orders on remand are within its authority and the Texas Eastern mandate. We hold that there are no procedural or jurisdictional grounds for reversal of the Commission's orders and with two modifications, as explained below, affirm.

I.

This case arises out of a continuing controversy that stems from a series of orders first issued by the Commission in 1983 under Section 110(a)(2) of the NGPA of 1978, 15 U.S.C. Sec. 3320(a)(2) (1982). The facts and history of this case are discussed in Texas Eastern, 769 F.2d 1053 (5th Cir.), so we will not repeat that discussion here, except as relevant to dispose of the issues in this appeal.

Congress gave the Commission authority, by rule or order, to permit first sellers to recover their production-related cost allowances above the maximum lawful price. Section 110(a)(2) of the NGPA, 15 U.S.C. Sec. 3320(a) (1982). In 1983, the Commission adopted final regulations implementing Section 110 which established generic allowances for delivery and compression of natural gas by first sellers. Order 94-A, Final Rule and Order on Rehearing of Order 94, 48 Fed.Reg. 5152, FERC Stats. & Regs. p 30,419 (1983), reh'g denied, Order 94-C (codified at 18 C.F.R. Secs. 271.1100--271.1104 (1987)).

In adopting the Order 94 series, the Commission included a requirement that no production-related cost allowances could be charged or collected by the seller unless "expressly authorized." See 18 C.F.R. Sec. 271.1104(c)(4)(ii)(A). Under Section 271.1104(c)(4)(ii)(A) an area rate clause is considered to be evidence of an "express authorization" for a purchaser's agreement to compensate the seller for the cost of delivering the natural gas, but not other production-related cost allowances such as compression.

The Texas Eastern court affirmed the Order 94 series, with the modification that on remand the Commission institute a protest procedure to allow aggrieved parties to protest the "presumptions of Order 94-A." Texas Eastern, 769 F.2d at 1065. The court found the lack of protest procedures "troublesome ... [due to the] paramount importance of intent under individual contracts." Id. The protest procedures were to be "modeled" after Order 23-B. See Pennzoil v. F.E.R.C., 645 F.2d 360, 369-71 (5th Cir.) (Pennzoil I ); Pennzoil v. F.E.R.C., 789 F.2d 1128 (5th Cir.) (Pennzoil II ); Hunt Oil Co. v. F.E.R.C., 853 F.2d 1226 (5th Cir.).

On remand, the Commission issued Orders 473 and 473-A, the subject of this review, as its final rules modifying the Section 110 regulations as required by the court in Texas Eastern. Order 473, F.E.R.C. Stats. & Regs., p 30,747 (June 3, 1987); Order 473-A, F.E.R.C. Stats. & Regs., p 30,788 (December 29, 1987). Order 473 delineated protest procedures which extended to all NGPA categories of gas, except Sections 105 and 106(b), whether or not subject to Natural Gas Act ("NGA") jurisdiction. Order 473, at 13-15 (R. 160-61). Moreover, interest on retroactive collections of power and fuel allowances was permitted only if specific contractual authority exists. Id. at 9 (R. 156). On rehearing, the Commission adopted the Producers' request to extend protest procedures to allow Producers to show that an area rate clause authorizes compression allowances, but denied the Producers' other requests. Order 473-A at 6-7 (R. 238-39).

II.

Our review is basically to determine whether the Commission followed the Fifth Circuit's mandate in Texas Eastern. Mobil Oil Corp. v. Department of Energy, 647 F.2d 142 (Temp.Emer.Ct.App.) (on second appeal following remand, the court would not reconsider issues decided by prior appeal in coordinate court). The Texas Eastern mandate is "to be interpreted reasonably and not in a manner to do injustice...." Id. at 145 (citing Wilkinson v. Massachusetts Bonding & Ins. Co., 16 F.2d 66, 67 (5th Cir.)). We will also review the Commission's decision to determine whether it was "arbitrary and capricious." 5 U.S.C. Sec. 706(2)(A); Walker Operating Corp. v. F.E.R.C., 874 F.2d 1320, 1337 (10th Cir.). In Walker we stated:

"The scope of review under the 'arbitrary and capricious' standard is narrow and a court is not to substitute its judgment for that of the agency. Nevertheless, the agency must examine the relevant data and articulate a satisfactory explanation for its action including a 'rational connection between the facts found and the choice made.' "

874 F.2d at 1337 (citing Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 168, 83 S.Ct. 239, 245, 9 L.Ed.2d 207).

The parties disagree as to what the Texas Eastern court actually decided and the intent of the mandate, particularly with respect to the "expressly authorized" definition in 18 C.F.R. Sec. 271.1104(c)(4)(ii)(B). The Producers first urge that the Commission failed to comply with the Texas Eastern mandate because it "misconstrued" that decision and we should hold that it "reversed" the expressly authorized definition insofar as it seeks to adopt a test other than the contracting parties' intent. Alternatively, they argue the expressly authorized definition is at most a "bursting bubble" type of rebuttable presumption consistent with Pennzoil II.

The Commission disputes the merits of the Producers' objections and also contends that they are barred on jurisdictional grounds because the Producers failed to raise it in their petition for rehearing. The provisions of the NGPA, 15 U.S.C. Sec. 3416(a)(4) (1982), prescribe the procedures to be followed by a person seeking judicial review of a Commission order. That section states: "No objection to such order of the Commission shall be considered by the court if such objection was not urged before the Commission in the application for rehearing unless there was reasonable ground for the failure to do so." 15 U.S.C. Sec. 3416(a)(4) (1982). The failure to follow the requirements of this statute is a jurisdictional error which will result in dismissal of that issue. See Colorado Interstate Gas Co. v. F.E.R.C., 791 F.2d 803, 810 (10th Cir.).

We hold that the NGPA does not bar the Producers' objections concerning the expressly authorized requirement from judicial review. In the petition for rehearing, Producers' first specification of error was that the Commission erred in "failing to find that with respect to contractual authority for production related cost allowances, the contracting parties' intent is controlling and must be respected." Petition for Rehearing at 3 (R. 207). Specifically, Producers argued:

"The Commission ... misconstrues the clear meaning of the [Texas Eastern ] Court.... Both the Commission's 'general rules ' were converted to 'presumptions' by the court, and the Commission was required to set up a procedure whereby either presumption could be challenged as not reflecting the parties' intent. Any other construction takes impermissible liberties with the court's plain meaning."

Id. at 10 (R. 214) (emphasis in original). This language is sufficient to put the Commission on notice of whether the Commission misconstrued the Texas Eastern mandate and if the expressly authorized definition is a rebuttable presumption consistent with Pennzoil II. For these reasons, we decline to find waiver.

The Commission also urges that the Producers' objection to the "expressly authorized" definition should be dismissed on the ground that it amounts to an impermissible collateral attack. See McCulloch Interstate Gas Corp. v. F.P.C., 536 F.2d 910 (10th Cir.) (a party may not collaterally attack the validity of a prior agency order in a subsequent proceeding).

To the extent that issues have been decided by the Texas Eastern court, review of those issues would be contrary to law of the case. See Central Soya Co. v. Hormel, 723 F.2d 1573 (Fed.Cir.) (an appeal of an order issued on remand from a coordinate court constitutes law of the case and shall be given great deference, absent exceptional circumstances); 1B J. Moore, J. Lucas, T. Currier, Moore's Federal Practice p 0.404 at 170 (2d ed. 1988).

Although this case concerns...