Pure Oil Company v. Federal Power Commission

• Citation: 299 F.2d 370
• Decision Date: 26 February 1962
• Docket Number: No. 13392.,13392.
• Parties: The PURE OIL COMPANY, Petitioner, v. FEDERAL POWER COMMISSION, Respondent.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

299 F.2d 370 (1962)

The PURE OIL COMPANY, Petitioner, v. FEDERAL POWER COMMISSION, Respondent.

No. 13392.

United States Court of Appeals Seventh Circuit.

February 26, 1962.

John C. Snodgrass, Palatine, Ill., Ben A. Harper, and Vinson, Elkins, Weems & Searls, Houston, Tex., of counsel.

Howard E. Wahrenbrock, Sol., Federal Power Commission, Washington, D. C., Ralph S. Spritzer, Gen. Counsel, Luke R. Lamb, Asst. Gen. Counsel, Milton J. Grossman, Atty., Federal Power Commission, Washington, D. C., for respondent.

C. Frank Reifsnyder, George D. Horning, Jr., Washington, D. C., Allen R. Grambling, El Paso, Tex., for intervenor, El Paso Natural Gas Co., Hogan & Hartson, Washington, D. C., and Hardie, Grambling, Sims & Galatzan, El Paso, Tex., of counsel.

Harry P. Letton, Jr., John Ormasa, Los Angeles, Cal., for intervenor Southern Cal. Gas Co.

Milford Springer, Robert M. Olson, Jr., Los Angeles, Cal., for intervenor Southern Counties Gas Co. of Cal.

Malcolm H. Furbush, Richard H. Peterson, F. T. Searls, San Francisco, Cal., for intervenor-respondent, Pacific Gas and Electric Co.

William M. Bennett, Chief Counsel, Public Utilities Commission, State of California, J. Calvin Simpson, Senior Counsel, John T. Murphy, Counsel, San Francisco, Cal., for the People of Cal. and Public Utilities Commission of Cal.

Before DUFFY, CASTLE and SWYGERT, Circuit Judges.

CASTLE, Circuit Judge.

Petitioner, The Pure Oil Company, petitions to set aside an order of the Federal Power Commission, respondent, which refused to allow Pure to file and charge a rate of 16 cents per Mcf for natural gas theretofore being supplied to El Paso Natural Gas Company under three separate contracts at 10.6 and 11 cents per Mcf. The Commission refused to permit the filings on the ground that they were not authorized by the contracts between Pure and El Paso. Pure contends that the Commission erred in its construction of the contracts, resolved the issues by reference to standards other than governing canons of contract construction, and that the order is without substantial evidentiary support.

Pure is an independent producer of natural gas subject to jurisdiction of the Commission.¹ Pure has three contracts with El Paso for the sale of natural gas from the area in western Texas and southeastern New Mexico known as the Permian Basin. One contract, executed in 1954, concerns wells in the Jack Herbert Field, Upton County, Texas; another contract, made in 1952, relates to wells in the Clara Couch area, Crockett County, Texas; and the third contract, executed in 1954, relates to wells in the Jalmat Field, Lea County, New Mexico. Pursuant to regulations promulgated by the Commission under the Natural Gas Act,² copies of these contracts were filed and became rate schedules. Each of the contracts is for a twenty-year term, and each contains what is known as a two-party favored-nation clause providing, in effect, that if at any time the buyer, El Paso, should purchase from another seller any gas within a specified geographic area at a price "higher" than that being paid Pure under the contract, El Paso, should immediately begin paying the same higher price to Pure. Each contract defines the term "higher price" as used in the favored-nation clause. The language of the Herbert and Jalmat contracts is identical:

"* * * In determining whether the price payable under such other contract or agreement is "higher" than the price payable for gas under this agreement, due consideration shall be given to the provisions of this agreement as compared with such other contract or agreement as to quantity and quality of gas, delivery pressures, gathering and compressing arrangements, provisions regarding measurement of gas including deviation from Boyle\'s Law, taxes payable on or with respect to such gas, and all other pertinent factors."

The comparable provision of the Couch contract is:

"* * * In determining whether the price payable for such gas is "higher" than the price payable for gas under this agreement, due consideration shall be given to the provisions as to quality of gas, delivery pressures, gathering and compressing obligations, provisions regarding measurement of gas, including deviation from Boyle\'s Law, taxes payable on or with respect to such gas, and all other pertinent factors except quantity."

In 1958, El Paso entered into a contract with West Texas Gathering Company, and commenced purchases of gas thereunder, on a "cost-of-service" formula which Pure alleges represents a wellhead price of 16 cents per Mcf.

The increase of rates sought by Pure in its filings is predicated on the ground that the West Texas purchases by El Paso served to trigger the favored-nation clauses of the Pure-El Paso contracts and entitle Pure to a 16 cents per Mcf rate on each of those contracts. El Paso formally protested the filings on the basis that the West Texas sale was not comparable to the Pure sales and that, accordingly, the favored-nation clauses had not been triggered.

The Commission suspended the effectiveness of the increased rates and convened a hearing to determine whether the favored-nation clauses had been triggered. The Commission, in an opinion (25 FPC 383), affirmed the Examiner's decision that the clauses had not been triggered, denied the proposed increase, and ordered Pure to make refunds to El Paso.

Pure's filing of notices of increased rates precipitated the threshold question of whether the increases were contractually authorized. Determination of that question in the affirmative was a prerequisite to the Commission's...