Sugar Bowl Gas Corp. v. Louisiana Public Service Commission

• Decision Date: 30 January 1978
• Docket Number: No. 60144,60144
• Citation: 354 So.2d 1014
• Parties: SUGAR BOWL GAS CORPORATION v. LOUISIANA PUBLIC SERVICE COMMISSION.
• Court: Louisiana Supreme Court

Page 1014

354 So.2d 1014

SUGAR BOWL GAS CORPORATION v. LOUISIANA PUBLIC SERVICE COMMISSION.

No. 60144.

Supreme Court of Louisiana.

Jan. 30, 1978.

Gene W. Lafitte, John M. Wilson, George J. Domas, Liskow & Lewis, New Orleans, for plaintiff-appellee.

Marshall B. Brinkley, Gen. Counsel, Louisiana Public Service Com'n, Baton Rouge, for defendant-appellant.

DENNIS, Justice.

This appeal is yet another repercussion of the national gas shortage. The issue presented is whether the Louisiana Public Service Commission (Commission) properly reduced rates within its jurisdiction charged to several municipalities by a gas pipeline company for the purpose of removing prejudicial effects caused by the company's sale of gas to industries at prices below cost under long term contracts, which are not within the statutory jurisdiction of the Commission.

Respondent Sugar Bowl Gas Corporation (Sugar Bowl) distributes natural gas in south Louisiana. For many years it has purchased gas from producers for resale to industries, municipalities and residents. In the 1960's Sugar Bowl entered long term contracts with several of its industrial customers whereby it agreed to supply large volumes of gas at fixed prices. Prior to 1972 Sugar Bowl also sold gas to several municipalities and publicly owned distributing systems under contract. ¹ However, in 1971-2, the Public Service Commission abrogated the cities' contracts with Sugar Bowl and ordered it to supply gas to them at a rate consisting of its average cost of gas purchased each month plus an additional charge for cost of service and return on investment.

Sugar Bowl is one of three intrastate natural gas common carrier pipelines whose rates and services are partially regulated by the Commission. The vast majority of the gas distributed by these pipelines is sold directly to industrial customers under contract, and this part of the pipelines' activities is statutorily exempt from regulation by the Commission. La.R.S. 45:301-303. ² Because the unregulated rates charged industries by the pipelines remained anchored by long term contracts while the rates fixed by the Commission rose sharply with the average cost of gas in response to the energy shortage, some of the municipally owned distributing systems complained to the Commission of discrimination and inequitable treatment.

On September 15, 1976, the Commission ordered Sugar Bowl to show cause why it should not be required to reduce rates charged the municipalities of Donaldsonville, Plaquemine and White Castle ³ (cities) to a level equivalent to the average rate charged in sales to its industrial customers. Hearings were conducted in which witnesses testified for the company, the cities, and other consumers. Sugar Bowl furnished, upon the Commission's request, information regarding the prices and quantities of gas purchased and sold by it during various periods.

After completion of the hearings, the Commission, acting under La.R.S. 45:303, by order dated February 16, 1977, found that Sugar Bowl's long term contracts with industries resulted in prejudicial effects on rates charged the cities. To remove the prejudicial effects it ordered a reduction in rates by requiring the company to charge each of the cities, for a volume of gas equal to the amount consumed by that city during the year preceding April, 1972, on the basis of Sugar Bowl's average cost of gas under pre-April 1972 purchase contracts. ⁴ For any additional gas taken by the cities in excess of pre-1972 usage Sugar Bowl was ordered to charge them on the basis of the average cost of gas purchased under supply contracts entered subsequent to April, 1972. The total charge, however, could not exceed the overall average price for gas paid by Sugar Bowl for the gas purchased during this billing period. ⁵ In simple terms, the order has the effect of dedicating to the cities, up to the volumes they used prior to April, 1972, Sugar Bowl's "old gas" which will be acquired at lower costs under the older supply contracts.

On Sugar Bowl's appeal, the district court issued a preliminary injunction suspending the Commission's order pending a hearing on the permanent injunction and the merits of the appeal. In its written reasons, the district court found that implementation of the order would cause Sugar Bowl irreparable injury. Although the district court did not single out any error of law or unreasonable factual determination by the Commission, it stated that the rising cost of gas did not create a presumption that industrial sales were prejudicial to the rates charged the cities. The Commission appealed. For the reasons hereinafter stated we affirm.

The Commission's opinion in the instant case included factual findings which we summarize as follows: In the 1960's there was a surplus of natural gas and the long term industrial contracts were consummated by Sugar Bowl on the assumption that adequate supplies would be available through the term of the contract at profitable rates. However, Sugar Bowl's average cost of gas is now approximately six times greater than the price it receives in some of its non-jurisdictional sales. The average cost of gas of all three intrastate gas pipelines regulated by the Commission has increased markedly, but from April, 1972 to September, 1976 Sugar Bowl's average cost increased approximately one-third more than the other pipelines. ⁶ Sugar Bowl presently purchases annually about 40 million MCF of gas under pre-April 1972 contracts at a weighted average price of 93.2 cents per MCF. Annually it buys approximately 46.8 million MCF of gas under newer supply contracts at a weighted average of $1.515 per MCF. Annual deliveries to the cities total only about 4.1 million MCF, a volume approximately equal to 1/10th of the gas purchased by Sugar Bowl from the pre-1972 contracted reserves. An audit conducted in 1975 revealed that all of Sugar Bowl's jurisdictional gas sales accounted for about 5 1/2% Of the volumes sold but produced approximately 8 3/4% Of the revenues. Contracted reserves of gas available to Sugar Bowl through 1981, the expiration date of some of the industrial contracts, amount to 339 billion cubic feet. However, the company has contract commitments to deliver 399 billion cubic feet during this period. Approximately 60.8% Of the contracted reserves is considered controlled by corporations affiliated with Sugar Bowl, which is a wholly owned subsidiary of Allied Chemical Corporation.

From these factual determinations the Commission reached conclusions, which we paraphrase as follows: Sugar Bowl purchased gas after 1972 at substantially higher prices than the other intrastate pipelines. The company's long-term contracts with industries which now require delivery of gas from inadequate reserves for prices substantially less than acquisition costs results in prejudice to the rates charged the cities. The jurisdictional customers should not bear the full impact of the acquisition prices for new gas purchased primarily to fulfill industrial contract commitments when prior contracted reserves were adequate to meet jurisdictional requirements.

The first question before us is whether the Commission correctly apprehended the ambit of authority granted to it by La.R.S. 45:303. The pertinent part of the statute provides that the Commission, upon finding that "any particular direct industrial sale" is "prejudicial" to regulated rates, may order such adjustment of the rates "as may be necessary to remove the prejudicial effect of such direct industrial sale." ⁷ By this enactment the legislature, in our opinion, intended to grant the Commission the authority to revise a regulated rate to offset the effects of an undue preference or undue discrimination by a pipeline company in a direct industrial sale. The term "prejudicial" implies injury received due to inequality or partiality. The preceding paragraph of the statute authorizes the Commission to make adjustments in the purchase price of gas considered for rate-making purposes if the acquisition was not "pursuant to arm's-length contract." ⁸ Thus, both paragraphs seem intended to empower the Commission to make adjustments to protect ratepayers from the effects of unjust preferences and discrimination. The redactors' cross reference ⁹ and the similarities of purpose suggest that the legislature modeled these provisions of La.R.S. 45:303 on Sections 4 and 5 of the Federal Natural Gas Act of 1938, which prohibits "any undue preference or advantage" and "any undue prejudice or disadvantage" in rates ¹⁰ and which authorizes the Federal Power Commission to correct any "unduly discriminatory, or preferential" rate. ¹¹ A cursory survey of treatise writers indicates that prevention of discrimination has been a vital regulatory function since the advent of federal and state statutes dealing with "natural monopolies," and that the Louisiana statute is couched in typical language. 1 Priest, Principles of Public Utility Regulation, 285 et seq. (1969), (hereinafter referred to as Priest); Bonbright, Principles of Public Utility Rates, 369 (1961) (hereinafter referred to as Bonbright). Accordingly, we conclude that the Commission correctly decided that it has the authority to adjust regulated rates to compensate for any prejudice caused to such rates by a difference between them and particular direct industrial sale rates which is unduly discriminatory or preferential. ¹²

Nevertheless, it appears that the Commission has improperly exercised its authority in this case. The record before us reflects that the Commission did not consider all of the factors necessary to a sound determination that undue discrimination exists between the rates in question. Assuming undue rate discrimination to be a fact, it also does not appear that the Commission proceeded reasonably and prudently in making its adjustment to remove undue discrimination from the rates.

There appears to be unanimity for the proposition that,...