Premier Resources, Ltd. v. Northern Natural Gas Co.

• Decision Date: 04 March 1980
• Docket Number: No. 78-2014,78-2014
• Parties: PREMIER RESOURCES, LTD., Plaintiff-Appellant, v. NORTHERN NATURAL GAS COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1171

616 F.2d 1171

PREMIER RESOURCES, LTD., Plaintiff-Appellant, v. NORTHERN NATURAL GAS COMPANY, Defendant-Appellee.

No. 78-2014.

United States Court of Appeals, Tenth Circuit.

Argued Jan. 21, 1980.

Decided March 4, 1980.

Charles L. Birke of Sandler & Rosen, Los Angeles, Cal., for plaintiff-appellant.

Thomas J. Kenan of George, Kenan, Robertson & Lindsey, Oklahoma City, Okl. (Patrick J. McCarthy, Northern Natural Gas Company, Omaha, Neb., and James W. McCall of George, Kenan, Robertson & Lindsey, Oklahoma City, Okl., with him, on brief), for defendant-appellee.

Before DOYLE, BREITENSTEIN and McKAY, Circuit Judges.

WILLIAM E. DOYLE, Circuit Judge.

This is a natural gas pricing case. Premier Resources, Ltd., the appellant herein, seeks reversal of a judgment rendered by the United States District Court for the Western District of Oklahoma, in favor of the defendant-appellee, Northern Natural Gas Company. Premier is a Colorado corporation engaged in oil and gas exploration and production, and has its principal place of business in Denver. It is what is known in the industry as a small producer of natural gas and is certified by the Federal Power Commission, or the Federal Energy Regulatory Commission, as it is now called. Northern, on the other hand, is a Delaware corporation which has its principal place of business in Omaha, Nebraska, and is essentially an interstate pipeline company.

Premier and Northern had entered into a series of three contracts on February 12, 1973, November 14, 1973, and September 18, 1974. Each of these provided for the sale by Premier to Northern of gas from wells in the Hugoton-Anadarko area, located in Kansas, Oklahoma and Texas. The matter in issue is the amount Premier was entitled to receive for its gas: whether the terms of the contract governed for the period following July 27, 1976, or whether FPC Order No. 742-A, which was adopted on the date just mentioned and which established higher ceiling prices for small-producer sales than had been allowable at the time of execution of the contracts, set the price level. This contract method of pricing was not disapproved by the Supreme Court, but was changed by the Commission afterwards.

The district court ruled in favor of Northern. It found that the pricing provisions of the contracts were "to some extent uncertain and indefinite," and received evidence to clear up the ambiguities. A particular clause which is in all three contracts, the meaning of which is in issue, reads as follows:

If FPC Order No. 428, as modified, is determined not to be effective with respect to the sale of gas hereunder, then the price charged for gas purchased and sold hereunder shall be such price as is permitted to be effective by the Federal Power Commission and Seller (Premier) agrees to refund amounts paid by Northern in excess of such price.

This provision was included in each of the three mentioned contracts to cover a possible contingency, that of a declaration by the Supreme Court of the United States rendering noneffective Order No. 428, a simplified pricing measure for small producers, which will be discussed presently.

HISTORY AND BACKGROUND

In 1971, the FPC issued its Order No. 428 (which was later modified by Order Nos. 428-A and 428-B). Number 428 exempted present and future sales of natural gas by FPC-certified "small producers" from direct rate regulation. The purpose of the promulgation of No. 428 was to encourage exploration by small producers and to encourage also their engaging in interstate natural gas production and their competing in the natural gas market. The order exempted small producers from the fixed area rate ceilings imposed by the FPC on large producers. ¹ It allowed, with certain limitations, small producers to charge prevailing market prices for their gas.

It was not the object of No. 428 to deregulate the small producers altogether. It sought, however, to limit the regulation by establishing a system of indirect regulation. This consisted of requiring pipeline companies to justify that the prices paid to the small producers were reasonable as a condition to their being able to pass on the differences to their own customers.

Texaco, Inc. challenged this exemption in a suit filed in the United States Court of Appeals for the District of Columbia. That court ruled that No. 428 of the FPC exceeded the authority delegated to the FPC under the Natural Gas Act, 15 U.S.C. §§ 717 et seq. See Texaco, Inc. v. FPC, 154 U.S.App.D.C. 168, 474 F.2d 416 (D.C.Cir.1972). Review was obtained in the Supreme Court, and on June 10, 1974, the Supreme Court gave its ruling. See FPC v. Texaco, Inc., 417 U.S. 380, 94 S.Ct. 2315, 41 L.Ed.2d 141 (1974). It held that Order No. 428 of the FPC was invalid. The Court held that indirect regulation through the mechanism of controlling large producers costs would not merely recreate the situation which the Court in the case of Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672, 74 S.Ct. 794, 98 L.Ed. 1035 (1954), found to be inconsistent with the Natural Gas Act. The Court found that allowing the small producers initially to charge what the market will bear and relying on later regulation of pipeline rates to protect the consumer was contrary to Atlantic Refining Co. v. Public Service Comm'n, 360 U.S. 378, 79 S.Ct. 124, 613 L.Ed.2d 1312 (1959). In effect, the Supreme Court held that Order No. 428 failed to provide a mechanism for insuring that small-producer rates would be just and reasonable, and that a market standard such as was employed in Order No. 428 did not satisfy the Act. The Court said:

In this posture of the case, we think it clear that Order No. 428 cannot stand in its present form and that the cases should be remanded for further proceedings before the Commission. We have studied the order with care, and we cannot accept the construction of it that the Commission now presses upon us. At the very least, the order is so ambiguous that it falls short of that standard of clarity that administrative orders must exhibit.

417 U.S. at 395-396, 94 S.Ct. at 2325. Essentially, it was the failure to insure the application of the just and reasonable standard that was condemned.

The Court added that " * * * we should also stress that in our view the prevailing price in the marketplace cannot be the final measure of 'just and reasonable' rates mandated by the Act." 417 U.S. at 397, 94 S.Ct. at 2326. The Court stressed that market price and "just and reasonable", although related, are not synonymous. The Court's final conclusion was that the Commission lacked the authority to rely exclusively on market prices in fixing just and reasonable rates. The Court said, however, that it was not condemning indirect The Texaco decision was announced June 10, 1974. On August 28, 1975, following the remand of the Texaco case, the FPC issued its Opinion No. 742. ² This opinion established a new system of direct regulation of small producers. It set rate ceilings for small producers at 130% of the applicable area rate for comparable sales by large producers.

regulation of small producers by reviewing pipeline costs of purchased gas so long as the Commission saw to it that the rates paid by pipelines, and ultimately borne by the consumer, were just and reasonable. The Court recognized or conceded that insuring just and reasonable rates by means of indirect regulation might not be feasible.

Following this, the FPC issued its Opinion No. 770, on July 27, 1976, eliminating variable area rate ceilings in favor of new, uniform national rates for large-producer sales of natural gas in interstate commerce. National rates of $1.01 per Mcf for 1973-74 biennium gas and $1.42 for 1975-76 biennium gas were established. The rate of $1.01 per Mcf was modified downward to 93 cents per Mcf in a subsequent FPC Opinion No. 770-A. These two opinions were upheld in American Public Gas Ass'n v. FPC, 186 U.S.App.D.C. 23, 567 F.2d 1016 (D.C.Cir.1977), cert. denied, 425 U.S. 907, 98 S.Ct. 1456, 55 L.Ed.2d 499 (1978).

On July 28, 1976, the FPC issued its Opinion No. 742-A which reaffirmed that small producers were entitled to higher rates of return than large producers, and that small producers could charge up to 130% of the national rates which were prescribed in Opinion Nos. 770 and 770-A. After that, Premier demanded from Northern increased prices under the three contracts in suit. This demand was pursuant to the FPC Opinion No. 742-A.

We must be mindful that the February 1973 contract and the November 1973 contract came into existence prior to the Supreme Court's decision in FPC v. Texaco, Inc., supra, and the September 1974 contract was executed following the Supreme Court's decision in Texaco but prior to the FPC proceedings on remand which culminated in issuance of the FPC Opinion No. 742-A which raised substantially the rates allowable to small producers.

Article V, the price provision for each of the contracts, established an initial price of 46 cents per Mcf for gas delivered during the first year of the contract. During the second year, the price was increased to 46.5 cents per Mcf. This Article also contained a so-called redetermination clause which provided a method for increasing contract prices at five-year intervals. It required renegotiation to commence three months before the beginning of the third contract year. The price was redetermined for the succeeding five-year period. The redetermined price provided for was the highest price contained in any contract executed by Northern for the purchase of gas in the county in which the well is located. Similarly, the price was redetermined three months prior to the end of each subsequent five-year period. Article V also provided that the contract price would never be reduced in any price renegotiations.

Pursuant to the redetermination clauses of the contracts, amendments to each contract were executed in 1975 and 1976 which established new, higher rates...