Appendix — Gulf Oil Corp. v. Federal Energy Regulatory Commission

upreme Court, U. S.

FILED

IN THE

Supreme Court of the United States

OCTOBER TERM, 1977

—FR- 596 °

GULF OIL CORPORATION,

7 Petitioner,

FEDERAL ENERGY REGULATORY COMMISSION.

APPENDICES TO

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

WARREN M. SPARKS

SPARKS AND SPARKS

Suite 301

Mid-Continent Building

Tulsa, Oklahoma 74103

B. JAMES MCGRAW

Gulf Oil Corporation

P.O. Box 3725

Houston, Texas 77001

Of Counsel: CARROLL L. GILLIAM

GROVE, JASKIEWICZ, KEITH R. McCCREA

GILLIAM & COBERT CRAIG W. HULVEY

1730 M Street, N.W. 1730 M Street, N.W.

Washington, D.C. 20036 Washington, D.C. 200386

Attorneys for Petitioner

October 25, 1977 Gulf Oi] Corporation

WILSON - EPES PRINTING Co.. INC. - RE 7-6002 - WASHINGTON. D. C. 20001

APPENDIX

APPENDIX

APPENDIX

APPENDIX

APPENDIX

APPENDIX

TABLE OF CONTENTS

Opinion of the United States Court

of Appeals for the Third Circuit,

Gulf Oil Corporation v. Federal

Power Commission, No. 76-2596,

III Wii: TUIIIII “< ccavesscsienisaihocisiiesenshends

Order on Rehearing of the United

States Court of Appeals for the

Third Circuit, Gulf Oil Corporation

Vv. Federal Power Commission, No.

76-2596, September 26, 1977 _.........

Judgment of the United States Court

of Appeals for the Third Circuit,

Gulf Oil Corporation v. Federal

Power Commission, No. 76-2596,

I i

Opinion No. 780 of the Federal

Power Commission, Docket No. CI

64-26, October 15, 1976 2.000.

Erratum Notice, December 9, 1976.

Opinion No. 780-A of the Federal

Power Commission, Docket No. CI

64-26, December 9, 1976...

STATUTES:

Natural Gas Act, Sections 4; 7(b),

(c), (e); 16 and 19(b) 00 ad

Federal Arbitration Act, Sections 1,

EET Ra rrr een nee Re

Administrative Procedure Act, Sec-

TE TTS Po ES, Ea TT

Page

la

59a

95a

Note: Volume Nos. I, II, and III of the Joint Appendix pre-

pared for the lower court have been filed with the

Clerk of the Supreme Court in conjunction with these

Appendices to the Petition for Writ of Certiorari.

la

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 76-2596

GULF OIL CORPORATION,

Petitioner,

Vv.

FEDERAL POWER COMMISSION,

Respondent

PHILADELPHIA GAS WORKS, TEXAS EASTERN TRANSMIS-

MISSION CORPORATION, MILTON CLARK, FREDERICK

W. ROSE, AND ST. REGIS APARTMENT, LTD., on behalf

of themselves and all others similarly situated (PGW’s

customers), WASHINGTON URBAN LEAGUE, PUBLIC

SERVICE ELECTRIC AND GAS COMPANY, CONNECTICUT

PUBLIC UTILITIES CONTROL AUTHORITY, MASSACHUSETTS

DEPARTMENT OF PUBLIC UTILITIES, RHODE ISLAND DI-

VISION OF PUBLIC UTILITIES AND CARRIERS, RHODE

ISLAND ATTORNEY GENERAL AND RHODE ISLAND Cus-

TOMERS’ COUNCIL (New England), PUBLIC SERVICE

COMMISSION OF THE STATE OF NEW YORK, THE BROOK-

LYN UNION GAS COMPANY, PHILADELPHIA ELECTRIC

COMPANY,

Intervenors

2a | 3a

No. 77-1050 ON PETITIONS FOR REVIEW OF OPINIONS AND

ORDERS OF THE FEDERAL POWER CMMISSION

CONNECTICUT PUBLIC UTILITIES CONTROL AUTHORITY,

MASSACHUSETTS DEPARTMENT OF PUBLIC UTILITIES, Argued June 7, 1977

RHODE ISLAND DIVISION OF PUBLIC UTILITIES AND

CARRIERS, RHODE ISLAND ATTORNEY GENERAL, AND

RHODE ISLAND CONSUMERS’ COUNCIL,

Petitioners

Vv.

FEDERAL POWER COMMISSION,

Respondent

PHILADELPHIA GAS WoRKS, GULF OIL CORPORATION, BAY

STATE GAS COMPANY, BOSTON GAS COMPANY, BRISTOL

AND WARREN GAS COMPANY, CAPE Cop GAS COMPANY,

COMMONWEALTH GAS COMPANY, THE CONNECTICUT

GAs COMPANY, CONNECTICUT NATURAL GAS CORPORA-

TION, FALL RIVER GAS COMPANY, THE HARTFORD ELEC-

TRIC LIGHT COMPANY, TOWN OF MIDDLEBOROUGH,

MUNICIPAL GAS AND ELECTRIC DEPARTMENT, NEW

BEDFORD GAS AND EDISON LIGHT COMPANY, NORTH

ATTLEBORO GAS COMPANY, CITY OF NORWICH, DE-

PARTMENT OF PUBLIC UTILITIES, PEQUOT GAS COMPANY,

PROVIDENCE GAS COMPANY, SOUTH CouUNTYy Gas Com-

PANY, THE SOUTHERN CONNECTICUT GAS COMPANY,

TIVERTON GAS COMPANY, PUBLIC SERVICE ELECTRIC

AND GAS COMPANY, MILTON CLARK, FREDERICK W.

ROSE AND ST. REGIS APARTMENTS, LTD. (PGW’s cus-

tomers), ALGONQUIN GAS TRANSMISSION COMPANY,

PHILADELPHIA ELECTRIC COMPANY,

Intervenors

Before SEITZ, Chief Judge, ALDISERT and ROSENN,

Circuit Judges

Of Counsel:

Grove, Jaskiewicz,

Gilliam and Cobert

1730 M St., N.W.

Drexel D. Journey, General Counsel

Robert W. Perdue, Deputy General Counsel

Allan Abbot Tuttle, Solicitor

Scott M. DuBoff, Attorney

Edgar K. Parks, Attorney

Federal Power Commission

Washington, D.C. 20426

Attorneys for Federal Power Commission

Warren M. Sparks, Esquire

Sparks and Sparks

Suite 301

Mid-Continent Building

Tulsa, Oklahoma 74103

B. James McGraw, Esquire

Gulf Oil Corporation

P.O. Box 3725

Houston, Texas 77001

Carroll L. Gilliam, Esquire

Keith R. McCrea, Esquire

Craig W. Hulvey, Esquire

1730 M Street, N.W.

Washington, D.C. 20036 Washington, D.C. 20036

Attorneys for Gulf Oil Corporation

R. Daniel Prentiss

Special Assistant Attorney General

56 Pine Street

Providence, Rhode Island 02903

Dennis J. Roberts, II, Esquire

Ten Dorrance Street

Providence, Rhode Island 02903

4a

Andrew L. Niven, Legal Analyst

Southern New England Regulatory Project

100 Orange Street

Providence, Rhode Island 02903

Attorneys for Connecticut Public Utilities

Control Authority, et al.

Jack D. Head, Esquire

P.O. Box 2521

Houston, Texas 77001

James W. McCartney, Esquire

Judy M. Johnson, Attorney

Vinson & Elkins

2100 First City National Bank Bldg.

Houston, Texas 77002

Attorneys for Texas Eastern

Transmission Corporation

A. Grant Sprecher, Esquire

Stephen Schachman, Esquire

Barry J. Hart, Esquire

Obermayer, Rebmann, Maxwell & Hippel

Packard Building

Philadelphia, Pa. 19102

Attorneys for Philadelphia Gas Works

Thomas E. Wiener, Esquire

Goodis, Greenfield, Henry & Edelstein

1234 Market Street, 20th Floor

Philadelphia, Pa. 19107

Attorneys for Customers of Philadelphia

Gas Works

Peter H. Schiff, General Counsel

The Public Service Commission of the

State of New York

Empire State Plaza

Albany, New York

Richard A. Solomon, Esquire

Sheila S. Hollis, Attorney

Wilner & Scheiner

2021 L Street, N.W.

Washington, D.C. 20036

Attorneys for The Public Service

Commission of the State of New York

ce ew ememeee -

5a

Barbara M. Gunther, Attorney

Michael W. Hall, Esquire

Cullen and Dykman

177 Montague Street

Brooklyn, New York 11201

Attorneys for The Brooklyn Union Gas

Co.

Morton L. Simons, Esquire

Simons & Simons

1629 K Street, N.W.

Washington, D.C. 20006

Victor H. Kramer, Esquire

David C. Vladeck, Esquire

Institute for Public Interest Representation

600 New Jersey Avenue, N.W.

Washington, D.C. 20001

Attorneys for Washington Urban League

OPINION OF THE COURT

(Filed Sep. 7, 1977)

ROSENN, Circuit Judge

These petitions raise numerous questions concerning

an order by the Federal Power Commission (““FPC”) re-

quiring Gulf Oil Corporation (“Gulf’’) to deliver to the

pipelines of the Texas Eastern Transmission Company

(“Texas Eastern”) large quantities of natural gas. Gulf

urges that the FPC order be set aside, several New Eng-

lang states (“New England’”)* ask that the order be

modified, and a group of intervenors’? argue that the

1The petitioners in No. 77-1050 are the Connecticut Public

Utilities Control Authority, the Massachusetts Department of Public

Utilities, the Attorney General of Rhode Island, the Rhode Island

Division of Public Utilities and Carriers, and the Rhode Island

Consumers’ Council. Gulf Oil Corporation is an intervenor in No.

77-1050.

2 The intervenors in No. 76-2596 are the Washington Urban

League, the Texas Eastern Transmission Co., Brooklyn Union

Gas Co., Public Service Electric and Gas Co., the Public Service

Commission of New York, Philadelphia Gas Works, Customers of

Philadelphia Gas Works, and the several New England entities who

are petitioners in No. 77-1060.

6a

Commission’s order should be enforced in full. Finding

no merit in either Gulf’s or New England’s petition, we

affirm the Commission’s order without modification.

I. Background

This dispute grows out of a certificate of public con-

venience and necessity issued to Gulf by the FPC in

1964. That certificate followed a 1963 “Precedent Agree-

ment” between Gulf and Texas Eastern wherein they

agreed to enter into a “Gas Purchase Contract” upon the

receipt by each of an appropriate certificate from the

FPC.

Upon issuance of the certificates, Gulf commenced per-

formance in accordance with the terms of the contract

and the certificate. Within a few years, however, Gulf

discovered that it had vastly overestimated the reserves

of its West Delta Block 27 Field located in Plaquemines

Parish, Louisiana, the field from which Gulf had ex-

pected to draw most of the natural gas for the Texas

Eastern contract. In 1971, citing the mistake in its re-

serve estimate, Gulf applied to the Commission for a

certificate amendment increasing the price at which it

supplied gas to Texas Eastern. In Opinion Nos. 692 and

692-A, issued in 1974, the FPC denied Gulf’s applica-

tion for an amendment and Gulf did not seek judicial

review of the Commission’s decision.

Since 1973, Gulf’s deliveries to Texas Eastern have

fallen short of Texas Eastern’s demands and since 1974,

short of the contract specified quantities. On November

7, 1975, the FPC issued the show cause order which

initiated this proceeding. After a hearing, the Admin-

istrative Law Judge concluded that Gulf was obligated

to deliver greater quantities of gas than it had been and

he ordered certain performance and refunds on the part

of Gulf. The Commission, in Opinion No. 780, agreed

7a

with the conclusions of the Administrative Law Judge.

Gulf and a number of other parties petitioned for re-

hearing but in Opinion No. 780-A the Commission held

to its prior decision. This appeal followed.

On review, we are empowered to “affirm, modify, or

set aside [the Commission’s] order in whole or in part,”

Section 19(a) of the Natural Gas Act of 1938, 15 U.S.C.

§ 717r (1970). The scope of our review is defined by the

Administrative Procedure Act, 5 U.S.C. § 706 (1970).*

3’ Section 706 provides:

Scope of review

To the extent necessary to decision and when presented, the

reviewing court shall decide all relevant questions of law, in-

terpret constitutional and statutory provisions, and determine

the meaning or applicability of the terms of an agency action.

The reviewing court shall—

(1) compel agency action unlawfully withheld or un-

reasonably delayed; and

(2) hold unlawful and set aside agency action, findings,

and conclusions found to be—

(A) arbitrary, capricious, an abuse of discretion,

or otherwise not in accordance with law;

(B) contrary to constitutional right, power, privi-

lege, or immunity;

(C) in excess of statutory jurisdiction, authority,

or limitations, or short of statutory right;

(D) without observance of procedure required by

law ;

(E) unsupported by substantial evidence in a case

subject to sections 556 and 557 of this title or other-

wise reviewed on the record of an agency hearing pro-

vided by statute; or

(F) unwarranted by the facts to the extent that

the facts are subject to trial de novo by the reviewing

court.

In making the foregoing determinations, the court shall review

the whole record or those parts of it cited by a party, and due

account shall be taken of the rule of prejudicial error.

8a

II. Gulf's Delivery Obligations

The firts question before us concerns the quantity of

gas which Gulf is obligated to deliver. The Commission

found that under the certificate of public convenience and

necessity, Gulf is obligated to deliver 625,000 MCF | thou-

sand cubic feet) of gas per day to Texas Eastern except

when Texas Eastern demands less. Gulf maintains that

its obligation, if any, is limited to 500,000 MCF per day.

Although our concern is with the meaning of the cer-

tificate, see Sunray Mid-Contract Oil Co. v. FPC, 364

U.S. 137, 152-54 (1960), it is to the Gulf-Texas Eastern

contract that we must turn. The reason is that the cer-

tificate alone has little substance. At its core is the in-

corporation by reference of Gulf’s application; the ap-

plication in turn refers to the terms of the precedent

agreement and the gas purchase contract. The scope of

the certificate, therefore, is in large part defined by the

terms of the contract.*

Several provisions of the contract are relevant to this

issue. The first is Article II, ©1l(a), which provides

that after a start-up period ending on November 1, 1968,

the “Daily Contract Quantity” will be established at 500.-

000 MCF per day. The second relevant provision is Ar-

ticle I (‘Scope of Agreement’), § 4:

Seller [Gulf] warrants and agrees that there will

be provided under the terms of this Agreement a

quantity of gas sufficient to enable Seller to have

available for delivery hereunder on any day or days

a volume not less than one-hundred twenty-five per

cent (125%) of the Daily Contract Quantity... .

Article II (“Quantity of Gas”) contains two addi-

tional provisions of importance. Under paragraph 1(b),

‘Pertinent parts of the contract are reprinted as an appendix

to this opinion. Individual paragraphs are quoted throughout the

body of the opinion.

_—

9a

Texas Eastern agreed to purchase or pay for if available

and not taken

a quantity of gas equal to eighty per cent (80%)

of the sum of [the] Daily Contract Quantity . . .,

multiplied by the number of days in [the] year....

Paragraph lic) gives Texas Eastern the right

to purchase from Seller hereunder at any time, and

from time to time, quantities of gas greater than

the Daily Contract Quantity ...; provided that Sel-

ler shall not be obligated to deliver in any day a

quantity of gas in excess of one hundred twenty-five

per cent (125%) of [the] Daily Contract Quantity.

Another relevant provision, Article XII states:

This Agreement shall . . . remain in full force

and effect for a term of twenty-six (26) years from

the date of initial deliveries of gas hereunder, or to

the date on which four billion four hundred thirty-

seven million six hundred seventy-five thousand (4,-

437,675,000) MCF of gas... has been delivered to

Buyer [,] whichever shall first occur.

Gulf insists that if these provisions of the contract are

read together, it becomes clear that some sort of “swing”

in deliveries is contemplated. In Gulf’s view, Texas East-

ern is entitled to receive and Gulf is obligated to pro-

vide no more than the Daily Contract Quantity (““DCQ”’)

—500,000 MCF—except on those “infrequent days when

customers create a peak demand on [Texas Eastern’s]

system.” On days when Texas Eastern experiences a

light demand, on the other hand, Texas Eastern need

take no more than 80 percent of the DCQ. Thus, accord-

ing to Gulf, the provisions of §1(b) and §1(c) of Ar-

ticle II are, in a sense, reciprocal—the contract contem-

plates that “swings” one way or another over the course

of the contract will ultimately balance out so that the

10a

delivery of the 4,437,675,000 MCF * (or 4.4 TCF) will be

completed on or about the 26th anniversary of the Agree-

ment. The conclusion which Gulf draws is that the con-

tract does not entitle Texas Eastern to receive the full

125 percent of the DCQ—625,000 MCF—day after day

on a regular basis.

The FPC responds to Gulf’s argument by first noting

that since 1973 Texas Eastern has consistently demanded

delivery of 625,000 MCF every day. The Commission’s

view is that Gulf’s obligation to deliver 125 percent of

the DCQ is contingent on nothing but Texas Eastern’s de-

mand; once the demand is made, the obligation becomes

operative.

In our own analysis of the contract, we find one im-

portant factor supporting Gulf’s interpretation: the use

of the term “Daily Contract Quantity.” These three

words standing alone imply that 500,000 MCF is the

normal daily quantity of gas which Gulf must deliver

and Texas Eastern is required to buy. Arrayed against

this single factor, however, are other factors which mili-

tate against Gulf’s theory. First is the unequivocal and

unconditional warranty contained in Article I, “Scope of

Agreement”: “Seller warrants ... to have available for

delivery ... on any day or days a volume not less than

one hundred twenty-five percent ... of the Daily Contract

Quantity.” (Emphasis supplied.) Moreover, if the 80

percent DCQ provision and the 125 percent DCQ pro-

vision were intended to be reciprocal, as Gulf contends,

the mention of one without the other in the Scope of

Agreement would be most unlikely.

*The figure of 4,437,675,000 MCF represents the product of

multiplying the number of days in a year (365 or 366) by 26 years

and then multiplying this figure by the DCQ of 500,000 MCF with

——w adjustments for the lower DCQ’s during the start-up

period.

lla

We believe that Article II, “Quantity of Gas,” lends

further support to the Commission’s interpretation. No-

where in that Article is Gulf’s daily obligation limited to

the DCQ. On the contrary, the article speaks only of

Texas Eastern’s right to purchase “at any time, and from

time to time” as much as 125 percent of the DCQ.

Another important consideration also militates against

Gulf’s contention that the contract established a “swing”

in Gulf’s gas delivery obligations rather than an ab-

solute obligation to deliver 125 percent of the DCQ upon

demand. Such a construction of the contract is unrea-

sonable since it would render the parties’ rights and ob-

ligations uncertain and indefinite. A contract should be

construed, if possible, so as to sustain it rather than

convert it into something vague and unenforceable and

we will not strain the language of a vital provision of

this contract to create an ambiguity where none exists.

See H. K. Porter Company v. Wire Rope Corp. of Amer-

ica, Inc., 367 F.2d 653 (8th Cir. 1966); Ness v. National

Indemnity Company of Nebraska, 247 F.Supp. 944 (D.C.

Alaska 1965).

We recognize that the question is close. We are par-

ticularly disturbed by the failure of the FPC and the

intervenors to explain satisfactorily the use of the words

“Daily Contract Quantity.” Nevertheless, when we weigh

that term against the other factors, particularly the war-

ranty of 125 percent of the DCQ, we are persuaded that

the Commission’s interpretation is more harmonious with

the contractual language than is the interpretation urged

by Gulf. We therefore accept the Commission’s interpre-

tation and we will affirm the Commission’s holding that

Gulf is obligated to deliver 625,000 MCF every day un-

less Texas Eastern demands less until the contract ex-

pires.°

* Gulf’s reference in its 1971 petition to amend the certificate

to “‘maximum required deliveries of 625 million cublic feet per day”

12a

III. Arbitration

On November 20, 1975, two weeks after the Commis-

sion issued the show cause order, Gulf by letter to Texas

Eastern invoked the arbitration clause of the agreement:

Any dispute arising between Seller and Buyer out

of this Agreement shall be determined by a board

of three arbitrators to be selected for each such

controversy so arising . . . . Such board shall de-

termine the matters submitted to it pursuant to the

provisions of this Agreement. The action of a ma-

jority of the members of such board shall govern

and their decision in writing shall be final and bind-

ing on the parties hereto.

Gulf requested arbitration on the issue whether Gulf’s

delivery obligations were wholly or partially excused by

(1) commercial impracticality, (2) mutual mistake, or

(3) force majeure.’ In the proceeding before the FPC,

Gulf requested that the Commission reserve its rulings

on these issues until it had received the decision of the

arbitration board. Gulf now seeks review of the Com-

mission’s refusal to defer to the arbitrators.

Gulf’s argument is that its certificate obligation is co-

extensive with its contractual obligation, that the extent

of its contractual obligation is to be determined by ar-

bitration, and, therefore, that the Commission cannot pos-

sibly decide whether Gulf is complying with its certificate

casts considerable doubt on its present contention that the parties

to the contract did not contemplate daily deliveries in that amount.

We recognize, however, that neither the doctrine of res judicata nor

that of collateral estoppel binds Gulf to the position which it form-

erly took. See generally 1B Moore's Federal Practice © 0.441 at 3771

et seq. (1974 ed.).

*On January 13, 1976, Texas Eastern filed suit against Gulf in

the United States District Court for the Southern District of Texas.

Houston Division, to enjoin the arbitration. A motion for a pre-

liminary injunction is now pending in that action.

i ian cnt lr be altsaDe a oh tins ian

13a

until the arbitration board decides whether Gulf’s per-

formance is adequate under the contract. Gulf contends

that the Federal Arbitration Act, 9 U.S.C. §$1-14

(1970) ,* evidences a strong Congressional policy favor-

ing arbitration of contract disputes, J.S.@H Construction

Co. Vv. Richmond County Hospital Authority, 473 F.2d

212 (5th Cir. 1973), and that regulatory agencies are

not exempt from this policy. William E. Arnold Co. V.

Carpenters Dist. Council, 417 U.S. 12, 16-17 (1974).

In granting a certificate based on the contract, Gulf

maintains, the Commission effectively gave its approval

to the contract’s arbitration clause. In Gulf’s view, the

Commission should not now be permitted to deny the

validity of arbitration as the means for resolving contract

disputes. We disagree with Gulf’s analysis.

By its terms, the arbitration clause of the contract

applies only to disputes “arising between Seller and

Buyer out of this Agreement,”’ whereas the instant case

is a dispute betwen Gulf and the FPC arising out of

the certificate. We discern no inconsistency in the Com-

mission’s approval of arbitration as a means of resolving

disputes between Gulf and Texas Eastern and the Com-

mission’s refusal to defer to arbitration for the resolu-

tion of disputes between Gulf and the FPC.

Gulf’s argument, in essence, is that since the scope

of Gulf’s certificate obligation is defined by the contract

and the contract calls for questions of interpretation to

be decided by arbitration, it follows that Gulf’s obliga-

tion under the certificate is to be decided by arbitration.

Although we accept the premises of this argument, our

reading of the arbitration clause and the responsibilities

*9 U.S.C. § 2 provides that a “provision in any ... contract evi-

dencing a transaction involving commerce to settle by arbitration

a controversy thereafter arising out of such contract ... or the

refusal to perform the whole or any part thereof, ... shall be

valid, irrevocable and enforceable.”

l4a

of the Commission under the Natural Gas Act do not

allow us to agree with the conclusion.

The FPC is charged with the public responsibility to

enforce the certificate, and in the performance of its duty,

the Commission necessarily must resort to the terms of

the contract. But this does not mean that the Com-

mission becomes in any sense a party to the contract

bound by the mutual obligations between the parties

themselves. The reciprocal promises between Gulf and

Texas me ae to resolve their disputes by arbitration

are inapplicable to the Commission’s duty to enforce the

certificate of public convenience.

We are not persuaded by the cases which Gulf cites

as authority for the contrary conclusion.* Each of these

cases involves the division of responsibility between a

court and arbitrator where the parties had previously

agreed to arbitrate the very dispute before the court. In

contrast, the issue in the instant case is the interpreta-

tion of Gulf’s public service obligation under its certificate,

the interpretation of which can only be within the FPC’s

exclusive jurisdiction and which is not subject to arbitra-

tion. None of the cases cited by Gulf concerns the ques-

tion whether a regulatory agency seeking to enforce a

certificate issued by it must defer to arbitration merely

because the certificate party has agreed in a sales contract

with a customer to arbitrate disputes between them.

Moreover, none involves a governmental agency which has

an independent interest as a regulatory body in the en-

forcement of the terms of its certificate of public con-

venience.

® E.g., William E. Arnold Co. v. Carpenters District Council, 417

U.S. 12 (1974); United Steelworkers of America v. Warrior and

Gulf Navigation Co., 363 U.S. 574 (1960); United Steelworkers of

America v. American Manufacturing Co., 363 U.S. 564 (1960);

J.S.&H. Const. Co. v. Richmond County Hospital Authority, 473 F.2d

212 (5th Cir. 1973).

hug bis i. ee Te a ee

ERC a ST eM ee ee

15a

The futility of the procedure which Gulf proposes also

concerns us. Although Gulf claims the right to arbi-

trate the issues of contract interpretation, it does not

contend that the results would in any sense be binding

on the Commission. Gulf urges only that the Commission

should not have uecided this case without the benefit of the

arbitrators’ previous resolution of the same issues. We

fail to see the purpose to be served, however, in a lengthy

delay of FPC action in this urgent matter pending arbi-

tration when the FPC, even under Culf’s view, would

ultimately be free to ignore completely the arbitration re-

sults. Deferral to arbitration under these circumstances

would unnecessarily expend precious time, effort, and

money.

For these reasons, we will affirm the refusal of the

FPC to defer to arbitration.

IV. Commercial Impracticability

Gulf contends that the contract is limited to the gas

which it is commercially practicable to deliver. As part

of this argument, Gulf insists that the contract as a whole

evidences the intention of the parties to deal only with gas

found in the southern Louisiana area in which Delta Block

27 is located. Gulf also maintains that even if its de

livery obligations are unconditional on the face of the

contract, the Commission’s order that Gulf perform the

contractual deliveries is erroneous under two principles

of law: *° (1) even facially unconditional obligations are

10 We reject Gulf’s contention that the Commiss:on’s enforce-

ment of its certificate of public convenience is subject to the dis-

cretion of the court by analogy to the equitable principles dealing

with specific performance. Each order to comply with a certificate

is, in a sense, an order of specific performance, but that alone does

not make it subject to the equitable discretion of the court. We may

set aside the Commission’s order only if it constitutes an abuse of

discretion or otherwise fails to meet the standards of the Adminis-

trative Procedure Act, 5 U.S.C. §706(2). The analogy to specific

performance is of no help in making that determination.

l6a

subject to economic limitations; and (2) “[{w]here per-

formance has been rendered impracticable, even though

not impossible, and such impracticability was the result

of unforeseen events, as here, a party will be excused from

performance.”

The first question to be resolved is whether the con-

tract itself limits the sources of gas to the southern

Louisiana area. Gulf points to the specific reference in

the preamble of the contract to southern Louisiana and

to the provision in Article III that delivery will take

place in Plaquemines Parish, Louisiana, close to Delta

Block 27. Gulf’s interpretation of the contract, however,

is inconsistent with the single most important provision

of the contract—the provision by which Gulf “warrants”

the delivery of the contract quantities of gas without re-

gard to service. The importance of this provision is under-

scored by the history of the contract. Thus, although Gulf

could have dedicated to the contract the specific gas pro-

ducing lease of West Delta Block 27, Gulf purposefully

chose not to do so. As Gulf emphasized in its applica-

tion for the certificate of public convenience,

[T]he agreement with Texas Eastern does not

commit or dedicate to the contract any specific gas

producing leases or fields, and no specific commit-

ment or dedication is intended.

Gulf itself reiterated its understanding of the contract in

its 1971 application for an amendment to the certification:

The Gas Purchase Contract is what is known as a

warranty contract which does not involve the dedica-

tion of specific leases to the performance of the

agreement but warrants delivery of a stated volume

at a specified rate per day.

Furthermore, the FPC’s finding and order accompany-

ing the issuance of the certificate require that we not

interpret the contract as limited to gas from West Delta

—— a |

17a

Block 27. The Commission, although recognizing that

Gulf expected to draw most of the gas from Delta Block

27, noted that “Gulf further indicated that it had addi-

tional gas available to fulfill the overall contractual re-

quirement.” By accepting the certificate which was based

on this finding, Gulf became bound by the Commission’s

interpretation. Cf. Sunray Mid-Continent Oil Co. v. FPC,

supra, 364 U.S. at 156; Atlantic Refining Co. PSC of

New York, 360 U.S. 378, 389 (1959).

Against this overwhelming evidence that Gulf intended

to warrant the deliveries of contract quantities without

regard to source and that the certificate is predicated

on that warranty, Gulf relies only upon the reference in

the preamble to southern Louisiana and the delivery point

provision of Article III. In our view, these references

are a slender reed on which to rest and neither they nor

other aspects of the contract support Gulf’s position.

First, a recital in a preamble, although part of the con-

tract, must give way in case of conflict with the operative

provisions of a contract. Fidelity Bank v. Lutheran Mu-

tual Life Ins. Co., 465 F.2d 211, 214 (10th Cir. 1972) ;

Kogod v. Stanley Co. of America, 186 F.2d 763, 765 (D.C.

cir. 1950). Thus, although we perceive no conflict be-

tween the recital of gas reserves in southern Louisiana

and the warranty of deliveries regardless of source, a

conflict, if any, must be resolved in favor of the warranty.

Secondly, the provision for delivery at a point near the

area from which Gulf concededly anticipated it would

draw most of the gas is hardly very remarkable and

proves very little. Even without the warranty provision,

we would not interpret language which purports to do no

more than establish a delivery point as actually creat-

ing an implied condition on the seller’s entire obligation

to perform. In the context of this warranty contract, of

course, such an interpretation is impossible. We con-

clude, therefore, that the contract on its fact obligates

18a

Gulf to deliver the specified contract quantities of gas

regardless of where the gas is drawn.

The next question is whether Gulf’s delivery obliga-

tion, although unconditional on the face of the contract,

is subject to economic limitations. Gulf cites Dillon v.

United States, 156 F.Supp. 719, 722 (Ct. Cl. 1975), hold-

ing that contract to deliver hay at Ft. Reno, Oklahoma,

which the parties contemplated would be grown in nearby

Vinita, Oklahoma, did not obligate the seller to purchase

hay in Nebraska and ship it to Oklahoma at his expense,

and Mitchell Canaries, Inc. v. United States, 77 F.Supp.

498, 502 (Ct. Cl. 1948), reaching a similar result with

respect to blackberries not available where contemplated

due to a crop failure.

Reliance on these cases is misplaced for three reasons:

First, and most important, neither case involves a war-

ranty contract. Second, in both cases the sellers were

relieved of their delivery obligation only upon a showing

of extreme hardship, whereas Gulf has shown no par-

ticular hardship at all in the instant case, as we discuss

below. Third, in both Dillon and Mitchell Canaries, the

extreme economic hardship to the sellers resulted from

forces of nature clearly beyond the sellers’ control, not an

error on the part of the sellers in estimating their sup-

plies. We, therefore, do not believe that Gulf’s obliga-

tion can be excused by analogy to either Dillon or Mitchell

Canaries.

Finally, we turn to Gulf’s argument that its perform-

ance is excused by the doctrine of commercial impractical-

ity. In support of this contention, Gulf cites a number of

cases which hold that if, due to unforeseen circumstances,

the cost of performance of a contract becomes so ex-

cessive and unreasonable as to make performance imprac-

ticable, performance may be excused. See, e.g., Mineral

Park Land Co. v. Howard, 172 Cal. 289, 156 P. 458

19a

(1916) ; Cosden Oil & Gas Co. v. Moss, 1313 Okla. 49, 267

P. 855 (1928); Corozza v. Williams, 190 Md. 143, 57

A.2d 782 (Ct. App. 1948). Relying on these authorities,

Gulf asserts that “[N]o one entertained the thought that

Gulf would be required to deliver gas from far off places

at unknown but obviously ‘exhorbitant’ costs.’”” We do not

dispute Gulf’s statement of the legal doctrine, only its

application to this case.

We believe, first of all, that a warranty by its very

nature precludes relief on a theory of commercial imprac-

ticability resulting from the unavailability of gas.

In essence a warranty is an assurance by one party

to an agreement of the existence of a fact upon which

the other party may rely; it is intended precisely to

relieve the promisee of any duty to ascertain the

facts for himself. Thus, a warranty amounts to a

promise to indemnify the promisee for any loss if

the fact warranted proves untrue.

Paccon, Inc. v. United States, 399 F.2d 162, 166-67 (Ct.

Cl. 1968), quoting Dale Constr. Co. v. United States, 168

Ct. Cl. 692, 699 (1964). Accord, Metropolitan Coal Co. v.

Howard, 155 F.2d 780, 784 (2d Cir. 1946) (L. Hand,

J.); The Fred Smartley, Jr., 108 F.2d 603, 606-07 (4th

Cir. 1940). Gulf’s warranty “that there will be provided

. a quantity of gas sufficient to enable Seller to have

available for delivery [the contract quantities of gas]”

whether it is a warranty of fact or of performance, is sub-

ject to the same rule: By warranting, rather than merely

promising, the availability of sufficient quantities of gas,

Gulf assumed for itself the entire risk that future condi-

tions would raise the cost of gas. As the Restatement

says,

Since it is possible for a party to contract to assume

the risk of every chance occurrence, a fair interpre-

20a

tation of a contract may indicate an intention to be

bound to perform or to pay damages for nonperform-

ance whatever contingencies occur.

Restatement of Contracts, § 288, comment b at 427

(1932). Gulf’s warranty indicates just such an intention

to be bound. The defense of impracticability is inconsis-

tent with an express warranty. Chemetron Corp. V.

McLouth Steel Corp., 381 F.Supp. 245, 257 (N.D. II.

1974), aff'd 522 F.2d 469 (7th Cir. 1975); cf. United

States v. Hathaway, 242 F.2d 897, 899-901 (9th Cir.

1957), and Gulf may not avoid its obligations because one

of the risks which it assumed has now become real.

We also believe that even in the absence of an ex-

press and unconditional warranty, the doctrine of com-

mercial impracticability would not apply to this case.

The crucial question in applying that doctrine to any

given situation is whether the cost of performance has

in fact become so excessive and unreasonable that the

failure to excuse performance would result in grave in-

justice:

We do not mean to intimate that the defendants

could excuse themselves by showing the existence

of conditions which would make the performance of

their obligation more expensive than they had antici-

pated, or which would entail a loss upon them.

Mineral Park Land Co, supra, 172 Cal. at ——, 156

P. at 460. The party seeking to excuse his performance

must not only show that he can perform only at a loss

but also that the loss will be especially severe and un-

reasonable. See American Trading & Production Corp.

v. Shell Int’l Marine Ltd., 453 F.2d 939, 942 (1972);

Uniform Commercial Code § 2-615, Comment 4. Gulf has

made no such showing.

While repeatedly asserting that the cost of delivering.

the contract quantities of gas would be “exorbitant,”

2la

Gulf’s briefs are curiously devoid of citation to sup-

porting evidence in the record. Nor have we been able

to discover any such evidence ourselves. What we do

find in the record is an uncontradicted Price-Waterhouse

Report commissioned by Gulf for Gulf’s confidential use

which projects a net profit to Gulf of $190,000,000 on

the Texas Eastern Contract even if Gulf is required to

fulfill its warranty obligations. At the very least, the evi-

dence in the record suggests that although Gulf may

realize smaller profits than originally anticipated, it will

probably suffer no loss, and certainly not a severe and

devastating loss. The commercial impracticability doc-

trine is thus completely inapplicable to the instant case.

We find no error in the FPC’s decision on this issue.”

V. Mistake

Gulf contends that it is entitled to partial relief from

its delivery obligations on the basis of the mistake it

made in estimating the gas reserves of Delta Block 27.

Gulf evidently relies on the well known doctrine that a

mutual mistake as to a material fact will relieve a party

to a contract of his obligation to perform.” We agree

with the Commission that Gulf is entitled to no relief on

this ground.

11 We find it unnecessary to consider the Commission’s conten-

tion that performance of a Natural Gas Act certificate obligation can

be excused only upon a showing that performance would impair

the certificate holder’s overall financial integrity. Cf. Permian Basin

Area Rate Cases, 390 U.S. 747, 822 (1968); FPC v. Sierra Pacific

Power Co., 350 U.S. 348, 350 (1956).

12 See, e.g., Restatement of Contract, § 502 (1932):

[Where parties on entering into a transaction that affects

their contractual relations are both under a mistake regarding

a fact assumed by them as the basis on which they entered

into the transaction, it is voidable by either party if enforce-

ment of it would be materially more onerous to him than it

would have been had the fact been as the parties believed it

to be....

22a

We must stress once again that the contract here at

issue contains an express and unconditional warranty.

For reasons best known to Gulf itself, Gulf chose not to

base this contract on the actual reserves of Delta Block

27 by dedicating its gas leasehold for that field to this

contract.“ Instead, Gulf warranted the availability of the

contract quantities of gas in the expectation of obtaining

the bulk of it from Delta Block 27 despite the inherent

uncertainty of the quantities ultimately available in the

Block.** We believe that the existence of a warranty as

to the availability of gas completely forecloses equitable

relief based on a mistake as to the availability of gas.

The warranty in this case is analogous to a warranty

deed. As Professor Corbin says, “A seller of land or

goods who conveys by warranty deed, or who otherwise

expressly warrants title or quality or condition, does not

escape from his warrant by proving that he reasonably

believed that defects did not exist. Even though he was

not conscious that there was risk, he was at least aware

of the extent of his express warranty.” 3 Corbin on Con-

tracts $598 at 591-92 (1960) (footnote omitted). Ac-

cord, 6 S. Williston and G. Thompson, Williston on Con-

tracts $1984 at 5417 (rev. ed. 1938).*° Having war-

*8 According to Gulf’s witness, Dr. Walter Shellshear, Gulf pre-

ferred to enter into a warranty contract rather than into the usual

contract of dedication of a specific gas field because it “did not want

to reveal any of its confidential geological information... .”

14 Cf. Hatt v. Walker, 33 S.W. 2d 489, 499 (Tex. Civ. App. 1930),

holding that it is “a matter of fact of which courts will take judicial

notice that the existence of or the duration of the existence of

petroleum within the limits of a particular tract of land is un-

certain.”

*® See also Trans World Airlines, Inc. v. Skyline Air Parts. Inc..

193 A.2d 72 (D.C. Ct. App. 1963), holding that a party who makes

a binding contract to sell goods which he has already sold to another

is not excused from performance by virtue of his .nilateral. negli-

gent mistake.

[Footnote continued on page 23a]

23a

ranted the availability of 625,000 MCF of natural gas

per day, Gulf may not now assert a defense of mistake.”

We will affirm the Commission’s decision on this issue.

VI. Force Majeure

Gulf argues that it is excused from delivery of the

full 625,000 MCF per day under the terms of the force

majeure clause of the contract. In Gulf’s view, the

failure of the Department of Interior to hold more than

two general offshore Louisiana lease sales between 1962

and 1972 constituted an act of force majeure within the

meaning of the contract. Specifically, Gulf points to this

language in the force majeure clause:

(The term “force majeure”’] shall... include (a)

in those instances where either party hereto is re-

quired to obtain servitudes, rights of way grants,

permits or licenses to enable such party to fulfill

its obligations hereunder, the inability of such party

to acquire . . . at reasonable cost and after the

exercise of reasonable diligence, such servitudes,

rights of way grants, permits or licenses... .

15 [Continued]

The same result obtains under Article 2 of the Uniform Com-

mercial Code, which we assume is applicable to the Gulf-Texas

Eastern contract. Cf., e.g., Amoco Pipeline Co. v. Admiral Crude

Oil Corp., 490 F.2d 114 (10th Cir. 1974); Oskey Gasoline & Oil Co.

v. OKC Refining Inc., 364 F.Supp. 1137 (D. Minn. 1973). An

express warranty under U.C.C. § 2-313 may extend to the quantity

of goods to be sold. See, e.g., A.A. Baxter Corp. v. Colt Industries,

Inc., 88 Cal. Rpts. 842, 847, 10 Cal. 3d 144 (1970).

2¢ The Commission and various intervenors suggest a number of

other reasons why Gulf’s defense of mistake is without merit—that

the mistake was not mutual, that a mistaken prediction as to a

future fact known to be uncertain cannot relieve a party of his

contractual obligations, and that the mistake as to Delta Block 27

was not even material in view of Gulf’s partial reliance on other

gas reserves. We need not pass on any of these questions.

24a

Gulf contends that because an offshore gas lease is a

“servitude” under Louisiana law, State ex rel. Bush Vv.

United Gas Public Service Co., 185 La. 496, 169 So. 523

(1936); Arent v. Hunter, 171 La. 1059, 1383 So. 157

(1931), Gulf’s inability to acquire offshore leases falls

within this definition of force majeuer.

Alternatively, Gulf contends that even if the doctrine

of ejusdem generis indicates that “servitudes,” together

with “rights of way grants, permits or licenses,” is in-

tended to refer only to easements necessary for construc-

tion of production or transportation facilities, the failure

to sanction offshore leases comes within another part of

the contract definition of force majeure: “any other

causes, whether of the kind herein enumerated or other-

wise, not within the control of the party claiming sus-

pension.” (Emphasis supplied.) Gulf’s argument, how-

ever, requires that we completely ignore the determina-

tive proviso of the force majeure clause:

. . . provided, further, that in no event shall [the]

term [“force majeure’’] mean or include partial or

entire failure or depletion of gas reserves or sources

of supply of gas.

We must give effect to this specific provision rather

than to the more general language on which Gulf relies.

See, e.g., Capitol Bus Lines Co. v. Blue Bird Coach Lines,

Inc., 478 F.2d 556, 560 (3d Cir. 1973).

In an effort to avoid the clear exclusion from the

force majeure clause of “failure . .. of gas reserves

or sources of gas,” Gulf argues in its reply brief that

gas leases must first be acquired before they can “fail,”

and that it is the inability to acquire leases in the first

place, not the failure of the leases, which forms the basis

for Gulf’s force majeure argument. Gulf’s argument in

this respect, however, is somewhat disingenuous. In

every other part of its brief and at oral argument, Gulf

25a

made clear that its alleged inability to perform its

certificate obligation was attributable to Gulf’s over-

estimate of the amount of gas in West Delta Block 27.

It was the “partial or entire failure or depletion” of

the Block 27 “reserves or sources of supply of gas”

which led to do Gulf’s under-deliveries. In its force

majeure argument, on the other hand, Gulf discovers

that it was its inability to acquire offshore leases rather

than its mistaken estimate of the Block 27 reserves

which brought about the reduced deliveries. The fact is,

however, that Gulf’s greatly increased need for offshore

leases was brought about by the mistaken estimate of

the Block 27 reserves, a mistake which is specifically

excluded from the force majeure clause.

The clear inapplicability of the force majeure clause

to the underdeliveries here is made even plainer when

it is considered in the context of the entire contract.

As we have discussed above, Gulf chose to warrant its

delivery of the full contract quantity, rather than condi-

tioning that delivery on the availability of sufficient gas

reserves. The notion that the unavailability of gas could

serve to excuse performance is inconsistent with the

essence of a warranty contract and the force majeure

clause cannot serve to excuse Gulf’s breach of warranty.

We will, therefore, affirm the FPC’s determination that

Gulf’s performance of its certificate obligations was not

excused in whole or in part by force majeure within

the meaning of the contract.

VII. Res Judicata

Gulf next contends that the Commission’s decisions in

Opinions No. 780 and No. 780-A—the decisions which are

now under review—are tainted by the Commission’s

unwarranted reliance on its prior decisions in Opinions

No. 692 and No. 692-A. In Opinions Nos. 692 and 692-

A, in response to Gulf’s application for an amendment

26a

to its certificate, the Commission determined that Gulf’s

delivery obligations were unconditional and not excused

by commercial impracticability, mistake, or force majeure

consisting of the Interior Department’s failure to sanc-

tion offshore leases. Gulf took no appeal from the Com-

mission’s decision in Nos. 692 and 692-A.

Although Gulf characterizes the Commission’s alleged

recent reliance on Nos. 692 and 692-A as a misapplication

of the doctrine of res judicata, we believe that Gulf is in

fact referring to the doctrine of collateral estoppel. Res

judicata applies only where a second suit or proceeding

is brought on the same cause of action between the same

parties or those in privity with them. The original judg-

ment on the merits is conclusive not only as to matters

actually raised but also as to matters which could have

been raised and litigated. Murphy v. Landsburg, 490

F.2d 319, 322 (8d Cir. 1973). Collateral estoppel is

more limited in its effect; collateral estoppel forecloses

a party from relitigating the same question decided ad-

versely to him by a prior judgment on another cause of

action; the conclusive effect of the prior adjudication

constitutes an estoppel only with respect to the identical

issues actually litigated and necessary to support the

initial judgment. Donegal Steel Foundry Co. v. Accurate

Products Company, 516 F.2d 583 (3d Cir. 1975). Since

Nos. 692 and 692-A involved an application by Gulf for

a certificate amendment and the present proceedings

concern a show cause order issued by the Commission

to enforce Gulf’s certificate obligations, we believe that

collateral estoppel is the correct principle to be considered.

The first question presented by Gulf’s collateral estop-

pel argument is whether the Commission’s decision in

the case now under review was in fact made in reliance

on its prior decision in Nos. 692 and 692-A. New Eng-

land, one of the intervenors, denies any such reliance

27a

on the part of the Commission, but we disagree. In

Opinion No. 780, the Commission said this:

But we do not rest the present opinion and order

in this show cause proceeding solely on statements

in Opinions Nos. 692 and 692-A but on our re-

examination of the contract and the record in this

case.

(Emphasis supplied.) Opinion No. 780-A contains a

substantially identical statement. In view of this lan-

guage, we recognize that one basis for the Commission’s

conclusion was its prior determination. On the other

hand, the opinions of the Administrative Law Judge and

the Commission in the present proceeding, as well as the

voluminous record which was assembled, demonstrate that

the Commission did in fact both thoroughly reexamine

the entire record and fully reconsider each of Gulf’s argu-

ments with respect to commercial impracticability, mis-

take, and force majeure. Thus, the Commission’s de-

termination on these issues rests on what are essentially

alternative holdings, one based on giving collateral estop-

pel effect to Opinion No. 692 and 692-A and the other

on a complete reconsideration on the merits in the in-

stant case.

We have held in Parts IV, V and VI, supra, that

Gulf’s arguments on the issues of commercial imprac-

ticability, mistake, and force majeure are without merit.

Even if Gulf is correct in its contention that the Com-

mission’s determination on these issues placed improper

reliance on Opinion No. 692 and 692-A,*° the existence

1* Gulf’s argument rests heavily on Judge Maris’ decision in

Panhandle Eastern Pipe Lines v. FPC, 236 F.2d 289, 292 (3d Cir.

1956). and its contention that the Commissions’ determination in

Nos. 692 and 692-A as to Gulf’s contractual obligations was not

necessary to the result of that proceeding—i.e., the determination

that an amendment of Gulf's certificate was not justified by public

convenience or necessity. The Commission supports its use of

28a

of an independent and meritorious ground in support

of the Commission’s decision renders harmless any error

the Commission may have made in its application of the

doctrine of collateral estoppel.

VIII. Refunds

The Commission ordered Gulf to refund to Texas

Eastern for distribution to Texas Eastern’s customers a

sum equal to “the difference between Texas Eastern’s

requests for gas and Gulf’s deliveries [multiplied by]

the difference between the contract price and the other-

wise applicable area or national rates” and interest. The

refunds are to be paid both for Gulf’s past defaults as

well as for any occasion in the future in which Gulf again

defaults on its delivery obligation. Coupled with the

refund provision is a recoupment order as follows: *

collateral estoppel with citations to United States v. Utah Con-

struction Co., 384 U.S. 394, 419 (1966); FTC v. Texaco, Inc., 517

F.2d 137, 143-48 (D.C. Cir. 1975), petition for certiorari filed,

45 U.S.L.W. 3708 (April 15, 1977); and In Re Federal Water

& Gas Corp., 188 F.2d 100, 104-05 (3d Cir. 1951), cert. denied 314

U.S. 953 (1951). The question of res judicata and collateral

estoppel in the administrative agency context is discussed in 2 K.

Davis, Administrative Law Treatise §§ 18.02, 18.03 (1958).

18 The Commission explained its position once again in Opinion

No. 780-A:

New England argues . . . that allowing Gulf to recoup its

refund at the end of the contract period renders the entire

refund a nullity. As noted, Gulf wili lose the time value of

the refund amount until recoupment. Further, if the refund

represented compensation for ultimate failure to deliver gas

rather than delay in delivering gas, Gulf would be relieved

of its obligation to deliver the gas for which the refund repre-

sented compensation. Various of the customers have objected

strenuously to any procedure which will relieve Gulf of its

obligation, and we agree. If the refund provision were taken

as full compensation for the non-delivered gas, Texas Eastern

and its customers would have no claim on Gulf before Gulf had

delivered 4.4 TCF. They would then have to buy in the gen-

eral market at a time when, under this order, Gulf is permitted

to begin to recoup its refund while contining to be obliged to

deliver gas.

29a

In the Commission’s opinion fairness to the con-

sumer demands that where Gulf has defaulted on

its undertaking to supply gas at a given price, Gulf

should make payments in order to leave Texas East-

ern and the consumers in approximately the same

economic position they would have been if they re-

ceived the gas.

* + * *

Texas Eastern argues that provision for refunds

would prevent it from receiving the amount of the

undelivered gas. That is not our intention. The

refund is designed to compensate Texas Eastern

and its customers for Gulf’s failure to make full

deliveries in the past. The contract amount of 4.4

Tef remains in effect. However, it is correct that

delivery of 4.4 Tef at the contract price, and pay-

ment of refunds would mean that Gulf was not re-

ceiving the compensation to which it was entitled.

At the same time, Gulf’s default has caused present

damage which requires relief. Therefore, we shall

provide that when Gulf has delivered an amount

of gas equivalent to the contract amount less the

amounts of gas for which it has paid refunds, Gulf

shall be permitted to charge the contract price plus

the amount of the refunds previously paid to an

equivalent amount of gas.

A hypothetical example may clarify our decision.

Assume it was found that before Gulf resumed sat-

isfaction of its contract obligations it had defaulted

in the following amounts:

1/1/76 -6/21/76 90 Bef at 7¢ [26¢-19¢]/Mcf=$6.3 million

6/21/74-12/4/74 40 Bef at 23¢ [42¢-19¢]/Mcf=$9.2 million

12/5/74-7/26/76 150 Bef at 33¢ [52¢-19¢] /Mcf=$49.5 million

7/27/76-12/1/76 20 Bef at $1.23 [1.42-19¢]/Mcf=$24.6 million

Then Gulf would be required to refund immediately,

plus appropriate interest, $89.6 million. Then, when

30a

it had delivered all by 300 Bcf of the contract

amount, it would be permitted to recoup its re-

funds by adding a surcharge of 7¢/Mcf to the next

90 Bcf sold, 23¢/Mcf to the next 40 Bef, etc., until

the entire contract was fulfilled, and the entire re-

fund recouped.

Over the entire contract, Gulf would have re

ceived exactly the contract price for all 4.4 Tcf, but

it would, in effect, have been required to lose the

time value of its money required to compensate its

customers for their losses due to Gulf’s non-delivery

in accordance with the terms of the contract.

Gulf argues that the Commission lacks statutory au-

thority to order any refunds at all ** while New England

contends that the Commission erred in coupling to the

refund order the proceduréwfor recoupment. Without

attempting to catalogue all the situations in which the

Commission may appropriately order refunds, we hold

12TIn its brief, Gulf also argues that it was not given adequate

notice and an opportunity to be heard on the issue of refunds. At

oral argument, however, counsel for Gulf informed the court that

Gulf did not wish to press that argument. Under these circum-

stances, we think it appropriate to limit our discussion of this issue

to the following observations: First, the record demonstrates that

regardless of possible deficiencies of notice in the original show

cause order, subsequent events put Gulf on early notice that the

Commission would consider the issue of refunds. Second, the record

also reveals that Gulf prepared and presented its position on the

matter of refunds with considerable vigor in the FPC proceedings,

notwithstanding its alleged lack of notice. Third, all of the cases

cited by Gulf for the proposition that midstream notice or late

notice cannot be any better than no notice at all concern the ade-

quacy of notice in rule-making proceedings. See, e.g., Consolidated

Edison Co. v. FPC, 512 F.2d 1332 (D.C. Cir. 1975); Mobil Oil Corp.

v. FPC, 483 F.2d 1238 (D.C. Cir. 1973); Buckeye Power, Inc. v.

EPA, 481 F.2d 162 (6th Cir. 1973), cert. denied sub nom Big

Rivers Elec. Corp. v. EPA, 425 U.S. 934 (1976); Texaco Inc. v.

FPC, 412 F.2d 740 (3d Cir. 1969). Accordingly, we see no reason

to reverse or modify the Commission’s order on the ground of in-

adequate notice and opportunity to be heard.

3la

that the refund-recoupment order here under review falls

within the Commission’s statutory power.

A. FPC Power to Order Refunds

The starting point for our analysis is section 7(c) of

the Natural Gas Act, 15 U.S.C. § 717f(c):*

(c) No natural-gas company .. . shall engage

in the... sale of natural gas, subject to the ju-

risdiction of the Commission . . . unless there is

in force with respect to such natural-gas company

a certificate of public convenience and necessity is-

20 In its brief to this court and at oral argument, the FPC at-

tempted to justify its refund order also by reference to section

7(b) of the Act, 15 U.S.C. § 717f(b) :

(b) No natural-gas company shall abandon all or any portion

of its facilities subject to the jurisdiction of the Commission,

or any service rendered by means of such facilities, without the

permission and approval of the Commission ... .

The Commission argues in its brief that any reduction in the

quantity of gas delivered constitutes an abandonment of service

within the meaning of section 7(b) and requires prior Commission

approval. Panhandle Eastern Pipe Line Co. v. Michigan Consoli-

dated Gas Co., 177 F.2d 942, 945 (6th Cir. 1949). See also Reynolds

Metals Co. v. FPC, 543 F.2d 379, 384 (D.C. Cir. 1976); cf. United

Gas Pipe Line Co. v. FPC, 385 U.S. 83, 86-89 (1966). The Com-

mission argues that Gulf’s underdeliveries to Texas Eastern there-

fore constitute a violation of section 7(b), and that the refund

order is a proper exercise of Commission authority under that

section combined with section 16.

Attractive as this argument may be, we are not permitted to con-

sider it, for the Commission’s reliance on section 7(b) has come too

late. In Opinion No. 780-A, the Commission placed exclusive reliance

on section 7(c), even after section 7(b) was brought to its atten-

tion on the issue of refunds. Since “a reviewing court, in dealing

with a determination or judgment which an administrative agency

alone is authorized to make, must judge the propriety of such action

solely by the grounds invoked by the agency,” SEC v. Chenery Corp..,

332 U.S. 194, 196 (1947), we may review the refund order only by

reference to section 7(c), the sole ground invoked by the agency.

See also Burlington Truck Lines, Inc. v. United States, 371 U.S. 156,

168-69 (1962).

32a

sued by the Commission authorizing such acts or

operations ....

(Emphasis supplied.) The Commission found that Gulf

violated section 7(c), holding in essence that since Gulf’s

certificate authorized daily deliveries of 625,000 MCF on

demand by Texas Eastern and not deliveries in some less-

er amount, Gulf’s underdeliveries constituted a sale of

natural gas as to which there was no certificate in force.

Although there appears to be no precedent for an ap-

plication of section 7(c) to an underdelivery under a

certificate of public convenience, neither has Gulf cited

any authority against it, nor any sufficient reason, so far

as we can see, to read the section otherwise. Gulf does

not contest the Commission’s authority in an appropriate

case to order a producer to comply with the terms of its

certificate and the source of that authority must be

section 7(c) combined with sections 7(a) and 7(e).™

The next question is whether the Commission’s refund-

recoupment order is an appropriate remedy for the viola-

tion by Gulf of section 7(c) and of the terms of its

certificate. In order to affirm the order, we need find

21 Section 7(a), 15 U.S.C. § 717f(a), provides in pertinent part:

(a) Whenever the Commission .. . finds such action necessary

or desirable in the public interest, it may by order direct a

natural-gas company to... sell natural gas to any person...

legally authorized to engage in the local distribution of natural

or artificial gas to the public.

Section 7(e), 15 U.S.C. § 717f(e), provides in pertinent part:

(e) Except in the cases governed by the provisos contained

in subsection (c) [not relevant to this case], a certificate shall

be issued to any qualified applicant therefor, authorizing the

whole or any part of the operation, sale [or] service...

covered by the application, if it is found that the applicant is

able and willing properly to do the acts and to perform the

service proposed . . . and that the proposed service, sale or

operation . . ., to the extent authorized by the certificate, is or

will be required by the present or future public convenience and

33a

only that it is appropriate, not that it is the only ap-

propriate or most appropriate remedy which might have

been devised. “Once the existence of a rational basis

for the Commission’s action is ascertained the review-

ing power is estopped from further consideration of the

Commission’s action.” Southern California Edison Co.

v. FPC, 387 F.2d 619, 621 (3d Cir. 1967), cert. denied,

392 U.S. 909 (1968). See also Mesa Petroleum Co. Vv.

FPC, 441 F.2d 182, 189 (5th Cir. 1971).

The scope of the Commission’s remedial powers is de-

fined by section 16 of the Act, 15 U.S.C. § 7170:

Sec. 16. The Commission shall have power to per-

form any and all acts and to prescribe, issue, make,

amend, and rescind such orders, rules, and regula-

tions as it may find necessary or appropriate to

carry out the provisions of this chapter.

In the view of the Commission, Section 16 may be

analogized to the necessary and proper clause of the Con-

stitution: once a matter has been found to be a proper

subject o. Commission concern, section 16 empowers the

Commission to exercise wide discretion in selecting the

tools with which to safeguard the public interest in

matters relating to the transportation and sale of natural

ges. Gulf submits, however, that section 16 does no

more than implement “authority otherwise conferred

upon the Commission.” (Emphasis in Gulf’s brief.)

Finding nothing in section 7(c) (or elsewhere in the

Act) which authorizes the Commission to award refunds

in the case of an underdelivery, Gulf concludes that the

refund-recoupment order cannot be predicated upon sec-

tion 16.

The leading case in support of the Commission’s posi-

tion is Mesa Petroleum Corp. v. FPC, supra. Hugoton

Production Co., a gas producer, held a certificate of public

34a

convenience and necessity for the sale of gas to Panhandle

Eastern Pipe Line Co. Without receiving Commission

approval, Hugoton terminated its deliveries to Panhandle

and at a later date, Hugoton applied to the Commission

for permission to abandon those deliveries nunc pro tunc.

The Commission determined that no abandonment should

be permitted, and it ordered Hugoton to refund to Pan-

handle the difference between what it actually paid and

what it would have paid for the gas had there been no

abandonment. Mesa Petroleum Co., successor in interest

to Hugoton, petitioned the Fifth Circuit for review and

raised the following question:

Does the Natural Gas Act [the Act] empower the

Commission to make an award of “damages” to a

pipeline company or its customers for injuries alleg-

edly resulting from the producer’s termination of de-

liveries to the pipeline?

441 F.2d at 186.

The Fifth Circuit began its analysis by recognizing

that the Commission’s primary responsibility under the

Natural Gas Act is to the consumer. E.g., California Gas

Producers Ass’n Vv. FPC, 421 F.2d 422, 428 (9th Cir.

1970). The Mesa court then construed section 16 as a

grant of remedial power to the Commission which, in

keeping with the Commission’s duty to serve the public

interest, could not be limited to the express remedies pro-

vided by other sections of the Act. The Mesa court re-

lied on the expansive construction given section 309 of the

Federal Power Act, 16 U.S.C. § 825h (1970)—employing

identical language to section 16 of the Natural Gas Act—

in Niagara Mohawk Power Corp. v. FPC, 379 F.2d 1538,

158 1967):

While such “necessary and appropriate” provisions

do not have the same majesty and breadth in statutes

as in a constitution, there is no dearth of decisions

35a

making clear that they are not restricted to proce-

dural minutiae, that they authorize an agency to use

means of regulation not spelled out in detail, pro-

vided the agency’s action conforms with the pur-

poses and policies of Congress and does not contra-

vene any terms of the Act.

Quoted in Mesa, 441 F.2d at 187. Again quoting Niagara

Mohawk, 379 F.2d at 159, the Mesa court opined that

“the breadth of agency discretion is . . . at its zenith when

the action assailed relates primarily . . . to the fashioning

of policies, remedies, and sanctions . . . in order to arrive

at maximum effectuation of Congressional objectives.”

Mesa, 441 F.2d at 187-188. This view of the Commission’s

section 16 power together with the Commission’s enforce-

ment of a specific provision of section 7(b) provided suf-

ficient answer, in the view of the Fifth Circuit, to the

contention that the refund order was unlawful.”* 441

F.2d at 188-89.

Gulf suggests that Mesa must be distinguished from

the instant case. In Mesa, Gulf points out, the Commis-

sion had found a section 7(b) violation based on the gas

producer’s failure to secure Commission approval of its

cutback in service whereas the instant case involves only

a section 7(c) violation. Moreover, Gulf maintains, Mesa

was also based to some degree on the gas producer’s re-

fusal to follow FPC prescribed procedures generally. We

do not agree that these factors provide any meaningful

distinction.

First, although it is true that the Commission did not

address the question whether Gulf has violated section

22 The Mesa court also rejected the contention that a refund order

is a matter of equity within the exclusive jurisdiction of the courts

as well as the argument that the refunds constituted an unauthor-

ized “penalty.” The court also expressed its belief that “it is of no

consequence that there were other avenues which the Commission

could have chosen for enforcement, such as an injunction, or a

criminal proceeding.” 441 F.2d at 189.

36a

7(b),™ the circumstances of this case are not in reality

very different from those in Mesa; like Hugaton, Gulf has

terminated part of its certificated service without the ap-

proval of the Commission. That the termination in Mesa

was treated as a violation of section 7\b) and here as a

violation of the certificate and of section 7'2) does not

diminish the FPC’s remedial powers. Secondly, nothing

in Mesa supports Gulf’s theory that the decision was pred-

icated on the wrongfulness of the producer’s conduct

rather than the appropriateness of refunds to remedy any

violation of the Act which has resulted in consumer in-

jury. Thus, we perceive no meaningful distinction de-

tween this case and Mesa. Our inability to distinguish

Mesa does not mean, however, that we must necessarily

follow the Mesa decision. Authority from other circuits

teaches that section 16 has a more narrow scope than that

which the Mesa court gave it.

Gulf cites a number of cases which generally lend cre-

dence to its position that section 16 exists only to imple-

ment authority otherwise conferred upon the Commis-

sion.* The best statement of this position is found in

Mobil Oil Corp. v. FPC, 483 F.2d 1238, 1257 (D.C. Cir.

1973):

The substantive provisions of the Act contemplate

certain procedures as incident to the functions pro-

vided. The range of permissible procedures must

be derived from these sections, sections like sections

4 and 5 of the Natural Gas Act, and the functions

23 See note 20, supra.

24 Mobil Oil Corp. v. FPC, 483 F.2d 1238, 1257 (D.C. Cir. 1973):

New England Power Co. v. FPC, 467 F.2d 425, 426 D.C. Cir.

1972) aff'd, 415 U.S. 345 (1974); City of Chicago v. FPC, 458 F.2d

731 (D.C. Cir. 1971) cert. denied, 405 U.S. 1074 (1972): Murphy

Oil Corp. v. FPC, 431 F.2d 805, 810 (8th Cir. 1970). Gulf also

cites FPC v. Texaco, Inc., 417 U.S. 380 (1974), but the Supreme

Court held there only that section 16 “does not authorize the Com-

inission to set at naught an explicit provision of the Act.” Jd. at 394.

87a

they describe. Section 16, which uses a broad general-

ity of “necessary and appropriate” that is not rooted

in a function, cannot enlarge the choice of permissible

procedures beyond those that may fairly be implied

from the substantive sections and the functions there

defined.

While it is true, as the FPC argues, that Mobil Oil con-

cerned an attempt by the FPC to use section 16 to dis-

pense with procedures mandated by the Act, the quoted

language of Mobil Oil suggests that the District of Colum-

bia Circuit would not sanction the expansive reading of

section 16 which the Fifth Circuit approved in Mesa. But

cf. United States Steel Corp. v. FPC, 533 F.2d 1217, 1222-

23 (D.C. Cir. 1976). We think that the interpretations of

section 16 in Mesa and Mobil Oil are irreconcilable.

We find the approach taken by the Mesa court to be

the more persuasive of the two, at least for the purposes

of this case, although we need not go as far as the

Mesa court did. Our concern in this case is with a pro-

cedure which will ultimately result in a loss to Gulf of

nothing more than the time value of the money: If Gulf

fully complies in the future with its delivery obligations, it

will recoup every dollar that it has been ordered to refund.

The refund-recoupment order is an efficient, fair, and

reasonable exercise of discretion to compel compliance with

section 7(c) of the Natural Gas Act. It is neither analo-

gous to damages, reparations, nor penalties since Texas

Eastern’s customers ultimately will be required to repay

all the money obtained under the refund order. The order

is, in our view, nothing more than a temporary perform-

ance bond made necessary by Gulf’s failure to fulfill the

terms of its certificate. Viewed in this light, the Com-

mission’s refund-recoupment order can be sustained with-

out reading section 16 as broadly as Mesa does. To affirm

the Commission, we need only find that section 16, if it

does nothing else, at least gives the Commission power

38a

to take reasonable, temporary measures to assure com-

pliance with its orders.

We believe that a natural and commonsense reading of

section 16 allows the Commission this latitude. The statu-

tory authority of the Commission to “carry out the pro-

visions of [the Act],” set forth in section 16, and to per-

form “any and all acts, and to... issue... such orders

. . . a8 it may find necessary or appropriate” implies the

necessary power to achieve compliance in the public in-

terest with the Commission’s lawful orders.

We do not mean to imply that every refund-recoupment

order is entitled to a per se affirmation. Any such order

must have a “rational basis,” Southern California Edi-

son, supra, 387 F.2d at 621, and may be set aside if arbi-

trary, capricious or an abuse of discretion. 5 U.S.C.

$ 706(2)(A). We believe that the Commission’s refund-

recoupment order in the instant case, however, meets these

standards.

The FPC was confronted in this case with a massive de-

fault on the part of Gulf, a blatant breach of the war-

ranty on the basis of which Gulf was awarded its cer-

tificate. In Opinion Nos. 692 and 692-A, the Commission

had made clear to Gulf its determination that Gulf’s ob-

ligation was unconditional and that no change in circum-

stances resulting from Gulf’s mistaken reserves estimate

would excuse Gulf from delivery of the full 625,000 MCF

per day, yet Gulf had neither petitioned for review of that

decision nor taken steps to meet its delivery obligations.

In short, the Commission was justified in believing that

Gulf needed a reasonable, external prod to ensure its

compliance with the Commission’s order.*

25 The Commission had before it a copy of the agenda for a

meeting of Gulf’s law department shortly after the issuance of

Opinion No. 692. Three possible corporate actions were listed

for discussion:

39a

The refund-recoupment order also serves two other

important purposes. First, by requiring that Gulf pay a

refund on every occasion in the future that it underde-

livers, the order discourages non-compliance. Second, by

reducing the profits Gulf achieved by its past derelictions,

Gulf and other gas producers are put on notice that noth-

ing is to be gained by failing to timely comply with their

certificates of public convenience.

Given the circumstances of this case and the sound

purposes and public interest to be served by the refund-

recoupment order in protecting consumers with an ade-

quate supply of natural gas at just and reasonable rates,

Sunray Mid-Continent Oil Co. v. FPC, 364 U.S. 137

(1960), we hold that the refund-recoupment order has a

rational basis and is neither arbitrary nor capricious, nor

an abuse of the Commission’s discretion.

B. Recoupment

New England petitions us to set aside the Commis-

sions’ recoupment order while leaving intact the order

of refunds. We cannot do so, not because we believe

A. A decision not to commit additional gas to the performance

of the Texas Eastern Contract at the present contract

prices.

B. A decision to make no decision but await action by the

Commission, Texas Eastern, Texas Eastern’s customers, or

a representative of the public, to enforce the contract

and/or the certificate before the Commission or in the

courts.

C. A decision to make every effort to fulfill the contract by

delivery of all gas which can be reasonably delivered to

Texas Eastern.

In light of Gulf’s subsequent conduct, the Commission may rea-

sonably have inferred that Gulf chose Option B, knowing full well

that the Commission would view underdeliveries as a violation of

the certificate. This evidence of Gulf’s attitude affords additional

justification for the refund-recoupment order.

40a

that every refund order must be complemented by a pro-

vision for recoupment—we need not decide that question

in this case—but because of a fundamental flaw in New

England’s argument.

New England does not contend that the Commission

was obligated to order refunds, nor does any authority

with which we are familiar hold that the Commission is

ever required to supplement an order enforcing perform-

ance of certificate obligations with a provision for re-

funds. Since there is no obligation to order any refunds,

there can be no abuse of discretion in the Commission’s re-

fusal to order irrecoverable refunds—in effect, penalties—

assuming, without deciding, that the Commission would

be legally empowered to do so. We cannot fault the Com-

mission for ordering the recoupment of funds when it was

under no mandate to order their refund in the first place.

We will, therefore, affirm the provisions for recoupment

in the Commission’s order.

C. The Refund Formula

Gulf contends that even if the Commission is empowered

to order refunds, the formula by which these refunds are

calculated is erroneous. The Commission’s formula is

based on the difference between the contract rate and the

prevailing area or national rates set by the Commission

from time to time.™ Gulf belives that the refund formula

should instead be based on the difference between the con-

tract rates and the actual rates at which Texas Eastern

procured replacement gas. The Commission had this to

say on the refund formula:

26 For an explanation of these rates, see Shell Oil v. FPC, 529

F.2d 1061, rehearing denied, 525 F.2d 1261 (5th Cir. 1975), cert.

denied, 426 U.S. 941 (1976).

4la

In our opinion, the staff’s formula, based upon the

applicable area or national rate, should be followed

in the present situation where expeditious relief is

desirable. Conditioning relief on actual proof of the

myriad affects [sic] of Gulf’s non-delivery could lead

to endless proceedings. Staff’s suggested measure of

payment is an equitable estimate of damage to the

customers.

We find no abuse of discretion in the refund formula.

In addition to the Commission’s rationale, which we find

persuasive, we have considered two other factors. The

first is the nature of the refund-recoupment order of which

the formula is a part. That order is not intended as a

measure of damages but as a method of enforcing compli-

ance with the certificate; the refund is recoverable upon

satisfaction of the delivery obligations. Thus, the dis-

pute over the formula is comparable to a dispute over

the amount of a security bond. In the case of such a bond,

the amount fixed by the district court will not be dis-

turbed absent an abuse of discretion, see, e.g., Stockslager

v. Carroll Elec. Co-op Corp., 528 F.2d 949 (8th Cir.

1976) ; Lektro-Vend Corp. v. Vendo Co., 405 F.Supp. 527

(N.D. Ill. 1975) affd 544 F.2d 1050 (7th Cir. 1976),

rev'd on other grounds, 45 U.S.L.W. 4971 (June 29,

1977), and we believe the same standard should pertain

here. We cannot say that the Commission’s formula is so

unreasonable as to constitute such an abuse of discretion.

Second, Gulf’s assertion that the actual replacement

rates were lower than the FPC prescribed area or national

rates is not supported by any citation to the record. In the

absence of any evidence that the rates differed, we can-

not say that the Commission’s choice of area or national

rates constituted an abuse of discretion. Accordingly, we

will affirm the Commission’s refund Formula.

42a

D. Interest

We will also affirm the Commission’s order that the re-

funds include a component of interest, designed to com-

pensate the customers of Texas Eastern for the loss

of the time value of the additional money they paid for

natural gas dues to Gulf’s default. As we read the

Commission’s order, Gulf will recoup the interest com-

ponent of the refunds together with the portion repre-

senting the difference in rates. The interest is thus just

one part of the refund-recoupment scheme and the dispute

over interest is nothing more than another aspect of the

dispute concerning the amount of the bond to be required

of Gulf. As such, the Commission’s determination is re-

viewable only for abuse of discretion, and we find no

abuse in the interest aspect of the Commission’s refund

order. We also see no merit in Gulf’s contention that

under 28 U.S.C. § 1961 the interest can only run, if at

all, from October 15, 1976, the date on which Opinion No.

780 was issued. Section 1961 applies by its terms only to

civil cases in the United States district courts. Accord-

ingly, we will affirm the inclusion of interest in the refund

order.”

IX. Intrastate Sales

The Commission ordered Gulf to file with it all con-

tracts for the intrastate sale of natural gas.

In view of Gulf’s failure in recent years to comply

with the delivery requirements of the certificate is-

sued to it, we believe it important for us to review

any future intrastate sales proposed by Gulf to as-

27 We also can discern no error in the rates of interest set by the

Commission—7 percent per annum for underdeliveries prior to

October 10, 1974, and 9 percent thereafter—in the absence of any

indication that they are too high other than Gulf’s unsupported

assertion that they are “plainly excessive.” Cf. American Public

Gas Assoc. v. FPC, 546 F.2d 98, 987-88 (D.C. Cir. 1976); City of

Cleveland v. FPC, 525 F.2d 845, 850-51 n. 38 (D.C. Cir. 1976).

43a

certain whether such gas should be sold by Gulf to

Texas Eastern under the subject certificate. Accord-

ingly, we shall require Gulf to file with the Commis-

sion all contracts for the sale of gas in intrastate

commerce made after the date of this order.

Gulf objects not to the request for information per se

but to the implication which Gulf discerns in the Commis-

sion’s opinions that the Commission might in the future

attempt to regulate intrastate sales which are beyond its

jurisdiction under section 1(b) of the Act, 15 U.S.C.

§ 717(b).

In Opinion No. 780-A, responding to this contention by

Gulf, the Commission stated that it is “now only asking

for information of intrastate sales.”’ As Gulf concedes

the collection of such data is not improper, Continental

Oil Co. v. FPC, 519 F.2d 31 (5th Cir 1976), cert. denied,

425 U.S. 941 (1976), and we will, therefore, affirm this

aspect of the Commission’s order. Only if and when the

Commission attempts actually to regulate Gulf’s intra-

state sales will the question of the Commission’s authority

to do so become ripe for decision.

X. Congressional Interference

Gulf contends that members and staff of the Com-

mission were subjected to improper interrogation and in-

terference regarding their decision of this case by the

Subcommittee on Oversight and Investigation and the

Subcommittee on Energy and Power of the House Com-

mittee on Interstate and Foreign Commerce. Citing Pills-

bury v. FPC, 354 F.2d 952 (5th Cir. 1966), and D.C.

Federation of Civic Associates v. Volpe, 459 F.2d 1231

(D.C. Cir. 1972), Gulf submits that the pervasive infec-

tion of the Commission’s decision resulting from the Con-

gressional interference can be cured only by our setting

aside the Commission’s order in its entirety. The FPC

44a

responds by denying both the existence of any improper

Congressional interference and the applicability of Pills-

bury and D.C. Federation. Having carefully considered

the transcripts of the subcommittee hearings and the

correspondence between the subcommittee and the Com-

mission, we conclude that the Commission order should

not be set aside on this basis.

We agree, of course, with the principles underlying

Pillsbury: The courts must not tolerate undue legisla-

tive interference with an administrative agency’s adjudi-

cative functions. We also are sensitive to the legislative

importance of Congressional committees on oversight and

investigation and recognize that their interest in the

objective and efficient operation of regulatory agencies

serves a legitimate and wholesome function with which

we should not lightly interfere. We do not believe, how-

ever, that the extent and nature of the Congressional in-

volvement in the FPC’s conduct of this case warrants

reversal of the Commission’s order. The record shows

that the subcommittees’ interest in this case, although

substantial, was directed at accelerating the disposition

and enforcement of the FPC’s compliance procedures. It

was avowedly directed not at the FPC’s decision on the

merits but at the Commission’s determination to conduct

a lengthy show cause hearing rather than to seek im-

mediate injunctive relief in the federal district court.**

28 When the interrogation by a member of the Subcommittee on

Oversight and Investigation invaded the decisional area of the

FPC’s function, FPC General Counsel Journey replied that it would

be inappropriate for him to comment. Chairman Dingell of the

subcommittee responded that it was not the intention of his com-

mittee to “intrude into matters under judicial consideration by the

Commission .. . I want your understanding to be very clear on

that point.” He reemphasized that the committee was not interested

in influencing the consideration, deliberation, or conclusions of the

Commission.

The Subcommittee on Energy and Power was concerned at its

oversight hearing with the Commission’s failure generally to seek

45a

Although the Committee expressed its concern because

of the delay of the Commission in enforcing its order and

the obligations of the certificate holders, including Gulf

specifically, the record, in contrast to Pillsbury, supra,

does not disclose a “searching examination as to how and

why [the FTC] reached [a] decision in a case still pend-

ing . . . and to criticize [the Commission] for reaching

the ‘wrong decision.’” Pillsbury v. FPC, 354 F.2d at

964. Nor does it reveal any effort to influence the Com-

mission in reaching any decision on the specific facts of

the case. Any intrusion by subcommittee members into

the Commission’s actual decisional process concerning the

merits of the show cause proceeding, see Pillsbury, 354

F.2d at 964, was only incidental to the purpose of ac-

celerating the FPC’s disposition of the case.

We are persuaded that these incidental intrusions by

two or three members * into the FFC’s decisional process

did not seriously influence the Commission. First, it is

not clear that the interrogation of a few members re-

flected the view of the majority of the subcommittee,

not to mention the full committee or the Congress. Sec-

ondly, the obvious fact that the Commission doggedly

refused to abandon the show cause proceeding despite

the considerable pressure upon it to go to court is per-

suasive that the Commission was fully capable of with-

enforcement of gas production contracts by court injunction rather

than administrative hearings. At the hearing: of this subcommittee,

Counsel Journey again pointed out the inappropriateness of dis-

cussing the merits of the FPC’s pending enforcement action against

Gulf and Texas Eastern. This subcommittee’s interrogation may

have been indelicate at points since counsel were asked repeatedly

not only why the Commission had opted to follow the time con-

suming show cause procedure rather than to seek an immediate

injunction against further underdeliveries by Gulf, but also for their

views on the interpretation of the Gulf-Texas Eastern contract.

FPC counsel, however, carefully refrained from discussing the

merits of the issues.

2° Each of the subcommittees consisted of sixteen members.

46a

standing incidental efforts, if any, by subcommittee mem-

bers to influence its decision on the merits of the case.

Thirdly, the Commission’s prior decision in Opinion Nos.

692 and 692-A on April 19, 1974, more than a year be-

fore the subcommittee hearings, refutes any contention

that the idential resolution of each issue in Nos. 780 and

780-A resulted from Congressional pressure upon the

Commission.

We also do not believe that the legislative intrusions,

if any, into the Commission’s decisional process in this

case come within the Pillsbury rule.” As we read Pills-

bury, the court’s concern was with factual prejudice—

the prejudgment by the FTC of factual questions then

pending before it.** A point of view—even bias induced

by legislative interference—as to questions of law, on the

other hand, does not necessarily render invalid an

agency’s decision, United States v. Morgan, 313 USS.

409, 421 (1941); 2 Davis, Administrative Law Treatise,

$ 12.01 (1958). Members of an agency charged by Con-

gress with adjudicatory functions “are assumed to be

men of conscience and intellectual discipline capable of

judging a particular controversy fairly on the basis of

its own circumstances.” United States v. Morgan, supra

313 U.S. at 421. Moreover, Judicial review is fully ca-

pable of correcting bias as to legal questions. See, e.g.,

Marquette Cement Mfg. Co. v. FTC, 147 F.3d 589, 594

(7th Cir. 1945), affirmed sub nom. FTC v. Cement In-

8° D.C. Federation of Civic Associations v. Volpe, 459 F.2d 1231,

1245-49 (D.C. Cir. 1972), is also not apposite. The basis on

which the order of the Secretary of Transportation was held in-

valid in that case was not the existence of Congressional pressure

upon him but his consideration in reaching his decision of factors

“that Congress could not have intended to make relevant.” Jd. at

1246.

31 See 254 F.2d at 958; Note, 42 N.Y.U.L.Rev. 127, 128-29 (1967).

Pillsbury is also noted in 52 Va. L.Rev. 946 (1966): 66 Colum.

L.Rev. 1351 (1966); and 50 Minn.L.Rev. 1136 (1966).

47a

stitute, 333 U.S. 683 (1948). The essential adjudicative

facts in the instant case are undisputed; all the issues

decided by the Commission were entirely legal in nature

concerning the interpretation of a contract and a cer-

tificate of public convenience. We have considered de

novo as we are obligated to do each of the legal issues

raised by Gulf; on each, we have independently reached

the same conclusion as the Commission. Even assuming

arguendo the Commission’s decision reflected legislative

interference, our decision does not.

Weighing these factors—the importance and need for

Congressional oversight of regulatory agencies, the Com-

mission’s evident strong backbone in resisting subcom-

mittee pressure, the Commission’s identical resolution of

each issue in its prior decision, the entirely legal nature

of the Commission’s decision, and our agreement with that

decision—against our commitment to the principle that

administrative agencies must be allowed to exercise their

adjudicative functions free of Congressional pressure, we

conclude that the legislative conduct in this case did not

affect the fairness of the Commission’s proceedings and

does not warrant our setting aside the Commission’s

order.

XI. Conclusion

For the reasons stated above, we find no merit in any

of the arguments advanced by either petitioner. Accord-

ingly, the order of the Federal Power Commission will

be affirmed.

48a

APPENDIX

THIS AGREEMENT, made and entered into as of the

—— day of , 1963, by and between

GULF OIL CORPORATION, a Pennsylvania corpora-

tion, hereinafter referred to as “Seller,” and TEXAS

EASTERN TRANSMISSION CORPORATION, a Dela-

ware corporation, hereinafter referred to as “Buyer,”

WHEREAS, Buyer owns and operates a natural gas

pipeline transmission system, together with facilities and

properties used in connection therewith; and

WHEREAS, Seller owns or controls oil, gas and min-

eral leaseholds and/or lands located in southern Louis-

iana, and offshore thereof, and has a supply of gas in

said areas available for delivery near Venice, Plaque-

mines Parish, Louisiana; and

WHEREAS, Buyer desires to purchase gas from Seller

for a portion of the requirements of its said system; and

WHEREAS, the parties hereto have agreed that, ex-

cept where the context otherwise indicates another or

different meaning or intent, the following terms are in-

tended and used herein and shall be construed to have

meanings as follows:

6. The term “Daily Contract Quantity” shall

mean the applicable quantity of gas set out in Para-

graph 1(a) of Article II hereof.

NOW THEREFORE, in consideration of the premises

and the mutual covenants and agreements herein con-

tained, the parties hereto do hereby covenant and agree

as follows:

49a

I. SCOPE OF AGREEMENT

1. Subject to all of the terms, conditions and limita-

tions hereinafter set forth, Seller agrees to sell and de-

liver or cause to be delivered to Buyer, and Buyer agrees

to purchase and receive from Seller, gas, in the quanti-

ties hereinafter provided.

4. From and after the date of initial delivery of gas

under this Agreement and throughout the remainder of

the stated term hereof, Seller warrants and agrees that

there will be provided under the terms and provisions of

this Agreement a quantity of gas sufficient to enable

Seller to have available for delivery hereunder on any

day or days a volume not less than one hundred twenty-

five per cent (125%) of the Daily Contract Quantity in

effect from time to time under the provisions of Sub-

paragraph 1(a) of Article II hereof.

II. QUANTITY OF GAS

1. (a) Subject to the provisions of this Agreement

the Daily Contract Quantity to be effective on and after

the date of initial delivery shall be as follows:

Daily Contract Quantity

Commencing MCF/D

Date of Initial Delivery 150,000

November 1, 1965 250,000

November 1, 1966 325,000

November 1, 1967 425,000

November 1, 1968 through remaining 500,000

term of contract

(b) During each year of the term of this Agreement,

Buyer agrees to take and pay for, or pay for if available

and not taken, a quantity of gas equal to eighty per cent

(80%) of the sum of each Daily Contract Quantity in

50a

effect during such year, multiplied by the number of

days in such year each such Daily Contract Quantity

is in effect.

(c) Buyer shall have the right to purchase from Seller

hereunder at any time, and from time to time, quan-

tities of gas greater than the Daily Contract Quantity

then in effect hereunder; provided that Seller shall not

be obligated to deliver in any day a quantity of gas in

excess of one hundred twenty-five per cent (125%) of

such Daily Contract Quantity. Buyer shall give Seller

maximum prior notice, as permitted by its pipeline op-

erating requirements, of changes in delivery rates of

gas to be delivered hereunder.

III. POINT OF DELIVERY

1. The point of delivery of the gas to be delivered

by Seller to Buyer hereunder shall be at the outlet of

Seller’s meter station to be located at a mutually agree-

able point in Section 25, Township 21 South, Range 30

East, Plaquemines Parish, Louisiana. 2

X. FORCE MAJEURE

In the event of either party hereto being rendered

unable, wholly or in part, by force majeure to carry out

its obligations under this Agreement, other than to make

payments due hereunder, it is agreed that on such party

giving notice . . . then the obligations of the party

giving such notice, as far as they are affected by such

force majeure, shall be suspended during the continuance

of any inability so caused . . . and such cause shall as

far as possible be remedied with all reasonable dispatch.

The term “force majeure” as employed herein shall mean

—{» —-

5la

acts of God, strikes, lockouts or other industrial dis-

turbances, acts of the public enemy, wars, blockades,

insurrections, riots, epidemics, landslides, lightning, earth-

quakes, fires, storms, floods, washouts, arrests and re-

straints of governments and people, civil disturbances,

explosions, breakage or accidents to machinery or lines

of pipe, the necessity for making repairs to or al-

terations of machinery or lines of pipe, freezing of wells

or lines of pipe, the failure of production facilities

for causes other than depletion of the source of gas

supply, and any other causes, whether of the kind here-

in enumerated or otherwise, not within the control of

the party claiming suspension; provided, however, that

said term shall not mean or include any cause which

by the exercise of due diligence the party claiming force

majeure is able to overcome; and provided, further, that

in no event shall said term mean or include partial or

entire failure or depletion of gas reserves or sources

of supply of gas. Such term shall likewise include (a)

in those instances where either party hereto is required

to obtain servitudes, rights of way grants, permits or

licenses to enable such party to fulfill its obligations

hereunder, the inability of such party to acquire, or the

delays on the part of such party in acquiring, at reason-

able cost and after the exercise of reasonable diligence,

such servitudes, rights of way

XI. TERM

This Agreement shall be effective from the date here-

of and shall continue and remain in full force and effect

for a term of twenty-six (26) years from the date of

initial deliveries of gas hereunder, or to the date on

which four billion four hundred thirty-seven million

six hundred seventy-five thousand (4,437,670,000) MCF

52a

of gas (exclusive of any excess gas purchased under the

provisions of Article XVIII hereof) has been delivered

to Buyer whichever shall first occur.

e -_ a *

XIV. REGULATORY BODIES

This Agreement is subject to all present and future

valid orders, rules, and regulations of any regulatory

body having jurisdiction.

XV. ARBITRATION

Any dispute arising between Seller and Buyer out of

this Agreement shall be determined by a board of three

arbitrators to be selected for each such controversy so

arising as follows: . . . . Such board shall determine

the matters submitted to it pursuant to the provisions

of this Agreement. The action of a majority of the

members of such board shall govern and their decision

in writing shall be final and binding on the parties

hereto. Each party shall pay the expenses of the arbi-

trator selected by or for it and all other costs of the

arbitration shall be equally divided between the parties

hereto.

* « e =

TO THE CLERK:

Please file the foregoing opinion.

Circuit Judge

53a

ALDISERT, Circuit Judge, Dissenting.

With the majority, I agree that the Commission prop-

erly construed Gulf’s daily delivery obligation under the

contract. My disagreement with the majority, however,

while tracking a narrow compass, requires a different

result. I believe that Gulf’s petition for review should

be granted to the extent that it argues that the Federal

Power Commission erred in refusing to defer its deci-

sion on the questions submitted to the arbitrator until

it received the decision of the board of arbitrators.’

My starting point is the strong federal policy favoring

enforcement of arbitration when the parties have mu-

tually agreed to so resolve contract interpretation dis-

putes. Thus, in cases arising under the Federal Arbi-

tration Act, 9 U.S.C. §$§ 1-14, it has been determined that

“any doubts as to the construction of the Act ought to

be resolved in line with its liberal policy of promoting

arbitration both to accord with the original intention

of the parties and to help ease the current congestion

of court calendars. Such policy has been consistently re-

iterated by the federal courts and we think it deserves

to be heartily endorsed.” Robert Lawrence Co. v. Devon-

shire Fabrics, Inc., 271 F.2d 402, 410 (2d Cir. 1959)

(citations omitted).

Coexistent with this congressionally-declared public pol-

icy is the root source of arbitration, the law of contracts,

1 As stated by tne Commission, there are before the arbitrators

three questions:

(1) whether Gulf’s obligation for delivery of gas to Texas

Eastern is limited to gas produced in the vicinity of the de-

livery points, (2) whether Gulf by reason of the mistakes as

to gas reserves in West Delta Block 27 is excused from de-

livering the DCQ as provided in the contract, and (3) whether

the failure of the Department of the Interior to hold regular

general offshore Louisiana lease sales constituted an act of

force majeure to relieve Gulf of its obligations.

Opinion No. 780 at 296A.

54a

which directs that once parties have covenanted that arbi-

tration shall be the method of resolving disputes, the

parties shguld be held to that arbitration agreement.

Gulf and Texas Eastern entered into a bargain relating

to the delivery of natural gas. That bargain was reduced

to a written contract containing a clear arbitration clause

providing that “[{a]ny dispute arising between Seller

and Buyer out of this Agreement shall be determined

by a board of three arbitrators... .” The Commission

has conceded that the certificate issued by the FPC “ac-

cepted the contract with its arbitration provision.” * Thus,

we not only have parties to the contract agreeing that

disputes over contract interpretation shall be first sub-

mitted to arbitration, but we have a situation where

the Commission has approved that method as a first

step to dispute resolution.

The Commission nevertheless concluded that because

this proceeding involves “a matter of importance to the

public,” it, and not the arbitrators, should first decide

the three issues submitted by Gulf to arbitration.’ In

2 Opinion No. 780 at 297A.

’ The Commission’s discussion on this subject follows:

Gulf argues that because the Commission certificated the

1964 contract between Gulf and Texas Eastern, including the

arbitration provision (Article XI), the question of the nature

and extent of Gulf’s obligations under the contract is properly

before the arbitration board and is not within the primary

jurisdiction of the Commission and therefore in a proper and

reasonable exercise of its jurisdiction the Commission should

reserve its ruling in the instant proceeding until such time as

it received the benefit of the arbitrators’ decision. In the

opinion of the Commission this is not an appropriate case in

which to defer decision.

There are before the arbitrators three questions: (1)

whether Gulf’s obligation for delivery of gas to Texas Eastern

is limited to gas produced in the vicinity of the delivery points,

(2) whether Gulf by reason of the mistakes as to gas reserves

in West Delta Block 27 is excused from delivering the DCQ

as provided in the contract, and (3) whether the failure of the

55a

American Safety Equipment Corp. v. J. P. Maguire &

Co., 391 F.2d 821, 825-29 (2d Cir. 1968), perhaps the

strongest support for the Commission’s position, the arbi-

tration agreement at issue was itself attacked as “an

instrument of illegality”. Jd. at 827. Determining that

such a claim under the antitrust laws was not merely a

private matter, the court concluded that the antitrust

claims raised were not appropriate for arbitration due

to “the pervasive public interest in the enforcement of

Department of the Interior to hold regular general offshore

Louisiana lease sales constituted an act of force majeure to

relieve Gulf of its obligations. These are largely technical mat-

ters relating to Gulf’s service under its certificate. Thus the

effect of designating a delivery point and defining what might

be its vicinity, the effect of a mistake as to gas reserves and the

effect of a moratorium on offshore leases on the ability of

Gulf to deliver gas are matters peculiarly within the subject

matter of this Commission’s authority. In Michigan Consoli-

dated Gas Co. v. Panhandle Eastern Pipeline Co., 226 F.2d 60

(CA6-1955), Certiorari denied, 350 U.S. 987 (1956), cited by

Gulf, the Court said that intricate problems of service and

problems of changing industrial conditions and growing needs

of natural gas do not lend themselves in the first instance to

hearing before a court and require the expertise of the Com-

mission. The court contrasts these matters with the usual

questions of law and fact which a court is authorized to handle

and which require no special expert knowledge. The questions

here belong in the first category and are properly considered

by the Commission prior to submission to an arbitration board

or a court. While our certificate accepted the contract with

its arbitration provision, this did not mean that questions

within the peculiar competence of the Commission must be first

put before the board but rather the contractual matters that a

court would handle.

Furthermore, this proceeding involves a matter of importance

to the public. Whether or not Gulf is living up to its contract

and to its certificate is a matter of deep concern to this Com-

mission in meeting its responsibilities under the Natural Gas

Act. To defer further action until a board of arbitration issues

an interpretation of the contract of the parties in a matter

concerning the sale and delivery of gas in interstate commerce

would at this juncture be unconscionable action on our part.

Opinion No. 780 at 295A-97A.

56a

the antitrust laws, and the nature of the claims that

arise in such cases.” Jd. at 827-28. At first glance, this

reasoning appears to support the Commission’s conclu-

sion in the present case, that because the delivery of

natural gas involves a matter of importance to the pub-

lic, it should not defer its action until the arbitrators

have acted.

But this argument ignores the unique procedures avail-

able in the case before us. Unlike the circumstances in

American Safety, here a federal agency which proposes

to circumvent the arbitration forum had the opportunity

to intervene before there was any performance under the

agreement. When it issued a certificate of public con-

venience to Gulf, the Commission had the authority to

approve or reject the contract between Gulf and Texas

Eastern in whole or in part. If the delivery of natural

gas is, in the Commission’s words, “a matter of im-

portance to the public”, and if “[w]hether or not Gulf

is living up to its contract and to its certificate is a mat-

ter of deep concern to the Commission in meeting its

responsibility under the Natural Gas Act,” then the Com-

mission had an obligation to reject that portion of the

contract calling for arbitration of disputes between the

parties to the contract at the time the contract was sub-

mitted to it for approval. Dictates of sound reason and

fair justice demand that it should have asserted that

position to the parties at the time the contract was sub-

mitted as the basis for the certificate.

Simply put, the Commission cannot have it both ways.

It cannot approve a contract as the basis of a certificate

in the public interest and later, after performance by

the parties, abrogate crucial portions of the approved

contract ostensibly in the same public interest. Although

cloaked with much authority, the Commission has no

power to rewrite a contract it has approved.

57a

The arbitration clause clearly called for “interpreta-

tion ofthe contract of the parties concerning the sale

and delivery of natural gas in interstate commerce.” If

such a clause is an anathema to the FPC, it should re-

ject any contract containing such a provision. It did not.

It approved the contract containing this clause. Having

approved the contract with the arbitration clause, the

FPC cannot later say that deferring to this procedure

would be “unconscionable”. Rather, the reverse would

seem to be true. To me it is unconscionable for any fed-

eral agency to renege on any contractual procedure it

has previously approved, and upon which it has issued a

certificate of public necessity.

Thus, just as our mightiest corporations and industries

—entities which greatly affect the public interest—are

bound by arbitration clauses in labor and commercial

matters, here the parties and the FPC are bound to

the arbitration clause under the dictates of both federal

policy and the contract language. The Commission’s ap-

parent position that it possesses specialized knowledge

gained from experience in the regulation of industry,

e.g., Texas Gas Corp. v. Shell Oil Co., 363 U.S. 263

(1960), Michigan Consolidated Gas Co. v. Panhandle

Eastern Pipeline Co., 226 F.2d 60 (6th Cir. 1955), cert.

denied, 350 U.S. 987 (1956), which knowledge entitles

its interpretation of contract provisions dealing with

natural gas to greater weight than that of a court or a

board of arbitrators,‘ is of no avail. It misses what I

consider to be the controlling issue at bar: it is not

whose interpretation of the contract provisions ultimately

prevails; rather, it is whether the parties and the Com-

mission should be bound by their agreement as to the

procedure for the initial resolution of interpretation con-

*Indeed, an inference can be drawn from the Commission’s

brief that the Commission believes it should have exclusive, vir-

tually non-reviewable authority in this respect.

58a

flicts. The Commission’s reliance on Sunray Mid-Conti-

nent Oil Co. v. F.P.C., 264 U.S. 187 (1960), and Sun-

Oil Co. v. F.P.C., 364 U.S. 170 (1960), is, in my view,

irrelevant because these cases deal with the interpreta-

tion, not the procedure for initial interpretation. Only

after the arbitrators’ decision is reached should the Com-

mission, and ultimately <he courts, be permitted to decide

any possible conflict between the legal precept that “[i]t

is the arbitrator’s construction which was bargained for,”

United Steelworkers of America Vv. Enterprise Wheel &

Car Corp., 363 U.S. 593, 399 (1960), and the FPC con-

tention that because the three matters submitted to arbi-

tration are matters requiring special expert knowledge,

the arbitrators’ interpretation will not be honored.

If the Commission wishes to commit its expert knowl-

edge to the interpretation of all contractual provisions

dealing with the distribution of natural gas, then, as a

matter of policy, it should refuse to approve contracts be-

tween producers and distributors that contain arbitration

provisions. But once it has given its approval, as it did

here, it cannot blithely turn its face against the overrid-

ing important federal policy favoring arbitration.

Accordingly, I dissent from the denial of the petition

to review the Commission’s order.

59a

APPENDIX B

No. 76-2596

GULF OIL CORPORATION,

- Petitioner

FEDERAL POWER COMMISSION,

Respondent

PHILADELPHIA GAS WORKS, TEXAS EASTERN TRANSMIS-

SION CORPORATION, MILTON CLARK, FREDERICK W.

ROsE, and ST. REGIS APARTMENT, LTD., on behalf of

themselves and all other similarly situated (PGW’s

Customers), WASHINGTON URBAN LEAGUE, PUBLIC

SERVICE ELECTRIC AND GAS COMPANY, CONNECTICUT

PUBLIC UTILITIES CONTROL AUTHORITY, MASSACHUSETTS

DEPARTMENT OF PUBLIC UTILITIES, RHODE ISLAND DI-

VISION OF PUBLIC UTILITIES, RHODE ISLAND DIVISION OF

PUBLIC UTILITIES AND CARRIERS, RHODE ISLAND ATTOR-

NEY GENERAL and RHODE ISLAND CONSUMERS’ COUNCIL

(New England), PUBLIC SERVICE COMMISSION OF THE

STATE OF NEW YORK,

Intervenors

No. 77-1050

CONNECTICUT PUBLIC UTILITIES CONTROL AUTHORITY,

MASSACHUSETTS DEPARTMENT OF PUBLIC UTILITIES,

RHODE ISLAND DIVISION OF PUBLIC UTILITIES AND CAR-

RIERS, RHODE ISLAND ATTORNEY GENERAL, AND RHODE

ISLAND CONSUMERS’ COUNCIL,

=. Petitioners

FEDERAL POWER COMMISSION,

Respondent

60a

PHILADELPHIA GAS WORKS, GULF OIL CORPORATION, BAY

STATE GAS COMPANY, BOSTON GAS COMPANY, BRISTOL

AND WARREN GAS COMPANY, CAPE CODE GAS COMPANY,

COMMONWEALTH GAS COMPANY, THE CONNECTICUT

GAS COMPANY, THE HARTFORD ELECTRIC LIGHT COM-

PANY, TOWN OF MIDDLEBOROUGH, MUNICIPAL GAS AND

ELECTRIC DEPARTMENT, NEW BEDFORD GAS AND EDISON

LIGHT COMPANY, NORTH ATTLEBORO GAS COMPANY,

CITY OF NORWICH, DEPARTMENT OF PUBLIC UTILITIES,

Pequot GAS COMPANY, PROVIDENCE GAS COMPANY,

SouTH COUNTY GAS COMPANY, THE SOUTHERN CON-

NECTICUT GAS COMPANY, TIVERTON GAS COMPANY, PUB-

LIC SERVICE ELECTRIC AND GAS COMPANY,

Intervenors

6la

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 76-2596"

GULF OIL CORPORATION,

Petitioner

Vv.

FEDERAL POWER COMMISSION,

Respondent

PHILADELPHIA GAS WORKS, ET AL.,

Intervenors

No. 77-1050

CONNECTICUT PUBLIC UTILITIES CONTROL AUTHORITY,

ET AL.

Petitioners

Vv.

FEDERAL POWER COMMISSION,

Respondent

GULF OIL CORPORATION, ET AL.,

Intervenors

SUR PETITION FOR REHEARING

Present: SEITZ, Chief Judge, ALDISERT and ROSENN, Cir-

cuit Judges

62a

The petition for panel rehearing filed by Gulf Oil

Corporation in the above-entitled cases having been sub-

mitted to the judges who participated in the decision of

this court, and no judge who concurred in the decision

having asked for rehearing, the petition for rehearing is

denied.

By THE COURT,

/s/ Max Rosenn

Circuit Judge

Dated: Sep. 26 1977

63a

APPENDIX C

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 76-2596

GULF OIL CORPORATION,

Petitioner

We

FEDERAL POWER COMMISSION,

Respondent.

PHILADELPHIA GAS WORKS, TEXAS EASTERN TRANSMIS-

MISSION CORPORATION, MILTON CLARK, FREDERICK

W. ROsE, AND ST. REGIS APARTMENT, LTD., on behalf

of themselves and all others similarly situated (PGW’s

customers), WASHINGTON URBAN LEAGUE, PUBLIC

SERVICE ELECTRIC AND GAS COMPANY, CONNECTICUT

PUBLIC UTILITIES CONTROL AUTHORITY, MASSACHUSETTS

DEPARTMENT OF PUBLIC UTILITIES, RHODE ISLAND Dt-

VISION OF PUBLIC UTILITIES AND CARRIERS, RHODE

ISLAND ATTORNEY GENERAL AND RHODE ISLAND Cus-

TOMERS’ COUNCIL (New England), PUBLIC SERVICE

COMMISSION OF THE STATE OF NEW YORK, THE BROOK-

LYN UNION GAS COMPANY, PHILADELPHIA ELECTRIC

COMPANY,

Intervenors

64a 65a

ON PETITION FOR REVIEW OF ORDERS OF

No. 77-1050 THE FEDERAL POWER COMMISSION

Present: SEITZ, Chief Judge, ALDISERT and ROSENN, Cir-

CONNECTICUT PUBLIC UTILITIES CONTROL AUTHORITY, cuit Judges. rupees

MASSACHUSETTS DEPARTMENT OF PUBLIC UTILITIES,

RHODE ISLAND DIVISION OF PUBLIC UTILITIES AND Thess conn cen ee te te been oe he tes Oe

CARRIERS, RHODE ISLAND ATTORNEY GENERAL, AND the Wederel Power Gamestest q

RHODE ISLAND CONSUMERS’ COUNCIL ssion and were argued by

’ i counsel on June 7, 1977.

Petitioners

y. On consideration whereof, it is now here ordered and

adjudged by this Court that the petitions for review from

FEDERAL POWER COMMISSION, the orders of said Federal Power Commission, filed

Respondent October 15, 1976, and December 9, 1976, are hereby

denied and the order of the said Commission is affirmed.

PHILADELPHIA GAS WORKS, GULF OIL CORPORATION, BAY Costs taxed against petitioners.

STATE GAS COMPANY, BOSTON GAS COMPANY, BRISTOL

AND WARREN GAS COMPANY, CAPE Cop GAS COMPANY, ATTEST:

COMMONWEALTH GAS COMPANY, THE CONNECTICUT

GAS COMPANY, CONNECTICUT NATURAL GAS CORPORA-

TION, FALL RIVER GAS COMPANY, THE HARTFORD ELEC-

TRIC LIGHT COMPANY, TOWN OF MIDDLEBOROUGH, /s/ Thomas F. Quinn

BEDFORD GAS AND EDISON LIGHT CoMPANY, NORTH Clerk

ATTLEBORO GAS COMPANY, CITY OF NoRWICH, DE- September 7, 1977

PARTMENT OF PUBLIC UTILITIES, PEQUOT GAS COMPANY,

PROVIDENCE GAS COMPANY, SOUTH COUNTY GAS CoM-

PANY, THE SOUTHERN CONNECTICUT GAS COMPANY,

TIVERTON GAS COMPANY, PUBLIC SERVICE ELECTRIC

AND GAS COMPANY, MILTON CLARK, FREDERICK W.

ROSE AND ST. REGIS APARTMENTS, LTD. (PGW’s cus-

tomers), ALGONQUIN GAS TRANSMISSION COMPANY,

PHILADELPHIA ELECTRIC COMPANY,

Intervenors

67a

APPENDIX D

UNITED STATES OF AMERICA

FEDERAL POWER COMMISSION

Docket No. C164-26

GULF OIL CORPORATION AND

TEXAS EASTERN TRANSMISSION CORPORATION

OPINION NO. 780

OPINION AND ORDER ON DELIVERIES OF GAS

UNDER CERTIFICATE AND WARRANTY CONTRACT

(Issued: October 15, 1976)

[Caption Omitted]

APPEARANCES

Warren M. Sparks, B. James McGraw, Carroll L. Gil-

liam and Keith R. McCrea for Gulf Oil Corporation

James W. McCartney and Jack Head for Texas Eastern

Transmission Corporation

Augustine A. Mazzei, Jr., and Carl J. Babin for Equit-

able Gas Company p

Norman A. Flaningam, Charles R. Brown, George L.

Weber and Henry P. Sullivan for Consolidated Gas

Supply Corporation, The East Ohio Gas Company and

The Peoples Natural Gas Company

Victor H. Kramer, Richard B. Wolf, Diane Cohn, Wil-

liam Jordan and Morton L. Simons for Washington

Urban League, Incorporated

Shelia Hollis, Peter H. Schiff and Richard A. Solomon

for Public Service Commission of New York

68a

Harry E. Barsch, Jr., James R. Patton, Jr., David B.

Robinson and James G. Beste for State of Louisiana

Paul W. Fox and John S. Schmid for Algonquin Customer

Group

Thomas E. Wiener for Philadelphia Gas Works

E. S. Kieby, J. R. Lacey and William R. Duff for Public

Service Electric and Gas Company

Sharon A. Province for the Staff of the Federal Power

Commission

CONTRACTS (Warranty), PRACTICE AND

PROCERUDE (Show Cause), GAS SUPPLY

(Offshore), ANTI-TRUST, CERTIFICATES

(Delivery Obligations), REFUNDS

(under-deliveries) FLOW THROUGH,

JURISDICTION (primary)

UNITED STATES OF AMERICA

FEDERAL POWER COMMISSION

Before Commissioners: Richard L. Dunham, Chairman;

Don S. Smith, John H. Holloman

III, and James G. Watt.

Docket No. C164-26

GULF OIL CORPORATION AND

TEXAS EASTERN TRANSMISSION CORPORATION

OPINION NO. 780

OPINION AND ORDER ON DELIVERIES

OF GAS UNDER CERTIFICATE AND

WARRANTY CONTRACT

(Issued October 15, 1976)

69a

DUNHAM, Chairman:

This proceeding concerns the failure of Gulf Oil Cor-

poration (Gulf) to deliver to Texas Eastern Transmis-

sion Corporation (Texas Eastern) the amounis of gas

required by its certificate of public convenience and

necessity which was predicated on a warranty contract.

It is before us after our order to show cause of Novem-

ber 7, 1975, directed to Gulf and Texas Eastern, a hear-

ing, an initial decision issued August 13, 1976, by Presid-

ing Adminjstrative Law Judge Raymond M. Zimmet, and

exceptions and briefs opposing exceptions.

On December 19, 1963, the Commission issued cer-

tificates to Gulf Oil to sell the gas and to Texas Eastern

to transport the gas’ based on a previous agreement,

which was formalized as a contract on January 6, 1964.”

Under the contract Gulf was to deliver 4,437,675,000 Mef

(about 4.4 Tef) of gas to Texas Eastern over a twenty-

six year term. After a four-year build-up period the

Daily Contract Quantity (DCQ) was to be 500 Mcf per

day through the remaining term of the contract. Texas

Eastern agreed that during each year it would take and

pay for 80 percent of the DCQ multiplied by the number

of days in the year.

It was also prescribed that Texas Eastern “shall have

the right to purchase from [Gulf at any time, and

from time to time, quantities of gas greater than the

Daily Contract Quantity then in effect hereunder; pro-

vided that seller shall not be obligated to deliver in any

day a quantity of gas in excess of one hundred twenty-

five per cent (125%) of such Daily Contract Quantity”.

This amounts to 625 MMcf per day. The price of gas

depends upon the annual load factor and varies from a

minimum 19.0 cents per Mcf at 100 percent to 20.987

Texas Eastern Transmission Corp. et al., 30 FPC 1559 (1963).

* Gulf’s FPC Gas Rate Schedule No. 278.

70a

cents per Mcf at 80 percent annual load factor. The

contract provided for an escalation of 2.0 cents per Mcf

after ten years and an additional 1.0 cents per Mef

after twenty years. Deliveries to Texas Eastern com-

menced on November 1, 1964.

In making its application Gulf depended heavily on

the West Delta Block 27 Field in which it believe it con-

trolled 2,533 billion cubic feet of gas available for sale

to Texas Eastern. However, it became apparent that the

Block 27 reserves had been over-estimated and that only

1,006 billion cubic feet were available for sale to Texas

Eastern and no gas is available from Block 27 today

(Ex. SC-1). As related more fully below through sub-

sequent years Gulf has connected available uncommitted

supplies of gas in fulfillment of its delivery obligations

to Texas Eastern. Among these it contracted to purchase

reserves originally estimated at 731 Bef from SLAM.°

Despite Gulf’s acquisition of further reserves, it en-

tered into negotiations with Texas Eastern and amended

its contract on August 2, 1971, providing for an in-

creased price or the area price, whichever was higher,

for reserves connected in the Southern Louisiana and

Texas Gulf Coast areas after July J, i971, that the term

would be changed to the date on which 4,437,675 trillion

cubic feet would be delivered, that all connected leases

and purchase contracts would be dedicated to the perform-

ance of the amended contract, that Gulf agreed to dedicate

all gas reserves it discovers in the vicinity of Texas East-

ern’s pipeline system or its own to maintain the delivery

quantity of 625 MMcf daily, and that additional gas

would be made available to Texas Eastern.

Gulf filed an application to amend its certificate to

conform to the contract amendment, but this was denied

’ Signal Oil Gas Company, Louisiana — and Exploration Com-

pany, Amerada-Hess Corporation and Marathon Oil Company.

aes, Tla

by the Commission in Opinion No. 692 and 692-A (51

FPC 1340, 52 FPC 593). The Commission found that

Gulf’s contractual warranty was unconditional, as were

its certificate obligations. The Commission accepted

Gulf’s miscalculation of the reserves as a good faith

error, but said Texas Eastern and the Commission were

induced to accept Gulf’s estimate at a time when a

surplus of gas was available. The Commission found no

basis for relieving Gulf of its errors at the expense of

Texas Eastern’s ratepayers. The Commission also re-

jected the application in the absence of proof that Gulf

could not fulfill its certificate obligations through ex-

panded and intensified exploration and development ef-

forts. The Commission said that Gulf enjoyed the bene-

fits of the contract and must now bear its burdens.

Since January 1, 1971, Texas Eastern has consistently

demanded 625 MMcf per day except in circumstances

when it could not absorb this amount because of system

supply, storage inventories or repairs (Tr. SC 360-362),

and it developed that Gulf was unable to fulfill this

maximum contract quantity. In 1973, Gulf’s deliveries

averaged 509 MMcf per day; in 1974, 391 MMcef per

day; and the first nine months of 1975, 366 MMef per

day.* On November 7, 1975, the Commission issued the

show cause order initiating this proceeding saying that

Gulf’s failure to live up to its warranty obligations with

the concomitant reduction in service to Texas Eastern

customers should be examined. It also made Texas East-

ern a respondent and directed it to show cause why it

should not be required to pursue all administrative and

judicial remedies available to it with respect to Gulf’s

failure to meet its delivery obligations under the war-

ranty contract and the certificate issue to Gulf. On

November 20, 1975, purportedly under its contract, Gulf

*When force majeure is taken into account these figures become

553, 427 and 412 MMcf per day respectively (Ex. SC-3).

72a

initiated a proceeding for arbitration of a dispute as to

whether its obligation for delivery of gas under the

contract is limited to gas purchased in the vicinity of

the delivery points and other matters (Ex. SC-23).

In the Commission’s show-cause proceeding a hearing

was held in January and March of 1976; briefs were

exchanged; and the Judge issued his initial decision on

August 13, 1976. The Judge denied Gulf’s argument that

the Commission should not decide this case until an arbi-

tration board rules on the question of Gulf’s delivery ob-

ligations, that it is relieved of its delivery obligations if

the cost is too high, that the Commission should leave it

alone because it is trying in good faith to meet its cer-

tificate obligations and that it will be completely free of

its certificate obligations once the 26-year term of the

contract expires.

The Judge found that while the Commission had power

to order refunds, such a remedy would be time con-

suming and would not necessarily prod Gulf into timely

future compliance. He also rejected a recommendation

of the staff that Gulf divert gas to Texas Eastern from

intrastate purchasers that entered into contracts with

Gulf after its proposed certificate amendment was de-

nied in 1974, pointing out that these intrastate pur-

chasers are not parties. *

The Judge would give Gulf a short period—no later

than the first day of the first calendar month following

the Commission’s final decision—to bring itself into com-

pliance with its maximum as well as minimum daily

delivery obligations, and thereafter Gulf and Texas East-

ern would file monthly reports of gas demanded and

quantities supplies. In the event Gulf failed to comply

with its certificate obligations, the Commission, he said,

should proceed immediately against Gulf in the federal

District Court to compel specific performance.

73a

The Judge said that Texas Eastern had scarcely lifted

a finger to force Gulf to fulfill its delivery obligations

and that Texas Eastern’s inaction concerning Gulf smacks

of a conspiracy between the two of them to withhold

gas from the interstate market until the price has been

driven up in violation of federal antitrust laws. For

these reasons the Judge recommends that the Commis-

sion transmit relevant evidence to the United States De-

partment of Justice pursuant to Section 20(a) of the

Natural Gas Act, urging that an investigation be made

and that appropriate criminal action be taken.

Exceptions were filed by Gulf, Texas Eastern, Public

Service Electric and Gas Company (Public Service),

Consolidated Edison Company of New York, Inc., The

Public Service Commission of the State of New York

(New York), The Washington Urban League (WUL)

and the staff of this Commission. Briefs opposing ex-

ceptions were filed by Public Service, Texas Eastern,

WUL, Gulf, Philadelphia Gas Works, Customers of

Philadelphia Gas Works, and the Commission staff. The

Commonwealth of Massachusetts filed a motion for leave

to “4 a brief amicus curiae opposing exceptions and the

brief.

GULF’S PERFORMANCE AND NEED FOR

COURT ACTION

Gulf argues that there is no basis for the Judge’s

recommendation that the Commission file suit in the

Federal District Court against Gulf unless it commences

delivery of the maximum contract volume the month

after the Commission’s decision. In this connection Gulf

points to the record that it has made substantial and

successful efforts to increase its gas supply. Thus at

the first Federal offshore Louisiana sale after the record

closed in the prior proceeding Gulf on September 12,

1972, acquired 12 tracts at a total expenditure of $131,-

T4a

284,000. At this and subsequent sales it paid $576,-

315,000 for 55 tracts, spending $53,390,000 in the most

recent sale on February 18, 1976 (Ex. SC-7, SC-8).

In addition during the past five years it spent $197,-

988,000 to explore and develop connected and newly ac-

quired leases (Exs. SC-36, SC-37). Of this amount ex-

penditures of $167,647,000 were divided among gas leases

($28,857,000), oil and casinghead gas leases ($41,142,-

000), and combination leases ($97,648,000 (Ex. SC-36).

Since April 1, 1974° Gulf spent $270,726,000 on acquisi-

tion of leases and exploration and development (Ex.

SC-37).

Gulf submitted a study to show that it commenced

wildeat drilling soon after it acquired leases and develop-

mental drilling promptly after the platform was installed

(Ex. SC-9, SC-3). In the case of 13 leases where there

had been developmental drilling Gulf spent a total of

$331,543,700 and obtained 292 Bef of proved and 764

Bef of probable reserves (Ex. SC-33). However, in the

ease of 22 leases where only wildcat wells have been

drilled, 14 of the leases, so far, had only dry holes.

Gulf has also presented evidence to show that past

deliveries to Texas Eastern and estimated total of gas

reserves available amounts to 5,904 Bef (Exs. SC-12,

SC-19). This includes total deliveries as to September

30, 1975, in the amount of 1,831 Bef, proved reserves

of 1,216 Bef, probable reserves of 824 Bef and geological

reserves of 2,033 Bef, the last representing the basis on

which bids were made. Gulf points out that deliveries

have averaged 523 Mcf per day since the end of the

build-up period (Ex. SC-3) and that the record indicates

an average daily deliverability of 534 Bef for 1977 in-

creasing to 625 Bef in 1979 (Ex. SC-19), so that the full

contract volume of 4.4 Tcf will be delivered in 1987 be

* Opinion No. 692 was issued on April 19, 1974.

75a

fore the end of the contract term and that this does not

include Gulf’s interest in South Timbalier Block 35 which

it acquired in January 1976. With respect to the geologi-

cal reserves, it admitted, however, that it could not be

certain that the reserves and deliverability shown will be

the actual results of the eventual development and de-

livery of gas from these leases.

While Gulf has attempted to show some success from

its efforts in procuring gas reserves, Gulf has not always

procured a gas supply where it did not consider it eco-

nomical to do so. Thus Gulf declined to buy Mobil’s

share in Grand Isle Block 94 and 95 when it appeared

that it would lose some 20 million dollars over the life

of the project, thus eliminating 302.8 Bcf of reserves

amounting to 98 MMcf per day (Ex. SC-27, pp. 7, 10).

Gulf asserts that the Judge misunderstood its position

that it is not obligated to incur unreasonably high costs

to deliver a specific gas reserve. Gulf says that its

position is that the cost of delivering each reserve must

be considered to see if it is reasonable or exorbitant. In

any case, it says through its policy witness McDonnell,

regardless of any such legal limitation, it intended to

deliver the gas from its new offshore Louisiana Leases

to Texas Eastern by one means or another. (Tr. SC-

72-3), but qualifies its intention by saying there must be

some reasonable economic basis and it might have to

work out arrangements with other pipelines with Com-

mission approval by which some of the gas might have

to be shared with another pipeline (Tr. 174-5, 179, 262-

3, 308-9, 316-7). It concludes, however, that construc-

tion of its own lines and arrangements with other pipe-

lines will permit expeditious delivery of its new reserves

to Texas Eastern.

Furthermore, it argues that its good faith is not ne-

gated by its position that the contract terminates at the

76a

end of the 26-year term. It says its legal position is

borne out by the wording of the contract (Article XII

that the term is 26 years or delivery of the 4.4 Tef

“which ever shall first occur”, but it adds that the record

shows that it has not malingered and it would be willing

to amend the contract to provide that it shall continue

until the 4.4 Tef has been delivered.

Gulf predicts that it will be able to deliver over 500

MMcef per day beginning in 1977 and 625 MMcf per

day in 1978 and contends that a suit for specific per-

formance in a Federal District Court, as recommended by

the Judge, would not be in the public interest. It also

contends that a court would be unable to overcome the

time-consuming physical difficulties of placing offshore

leases in production, would not consider the costs of

Gulf’s uncommitted gas reserves, and could not order

others to sell gas to Gulf.

Texas Eastern agrees that Gulf cannot be forced to

deliver gas that it does not have. Texas Eastern quotes

the evidence of its witness Bufkin that there would be

a remedy or recovery from the present level of delivery

(Tr. SC-386-7). It emphasizes that results of Gulf’s

acquisition, exploration and development operations. Pub-

lic Service believes that the Judge’s 30-day deadline is

impossible, but the Commission should order Gulf to

follow procedures to bring its deliveries to Texas East-

ern up to the certificated levels as soon as reasonably

possible. New York recommends, and Consolidated Edi-

son agrees, that the Commission determine that Gulf

dedicate to Texas Eastern by contracts within 90 days

all of the recoverable reserves on the leases that presently

are attached or will be attached fulfill its warranty

obligations. The staff recommends that Gulf be required

to deliver to Texas Eastern all gas from uncommitted

reserves acquired after 1971 until reserves sufficient to

deliver the 625 Mcf daily quantity are attached.

77a

As discussed above, Gulf has made some efforts to

increase its reserves and we are hopeful that it will be

successful. However, as the record shows, Gulf entered

into a contract that was advantageous to it at the time in

disposing of ample gas supplies, but in no year has

it reached an average of 625 MMcf per day since the

highest deliveries occurred in 1972 amounting to only

605 MMcef per day. From that time the record indicates

that deliveries decreased down to 357 MMcf per day in

1975 (Ex. SC-19). We would be neglectful of our re-

sponsibilities if we did no more than monitor Gulf’s

future deliveries. Something is required to assure the

public that every possible step is being taken to effect

Gulf’s delivery of the quantities of gas for which the

certificate was issued. In these circumstances Gulf should

be given only a limited time to bring its deliveries up to

a maximum level of 625 Mef per day as required by the

contract and certificate. The Commission has the right

and the duty to use the full extent of its powers to

force required deliveries. Therefore, we shall require

that Gulf deliver to Texas Eastern at a rate of 625

MMcef per day beginning on December 1, 1976, except

to the extent that Texas Eastern, on notice to the Com-

mission, and for good cause shown, demands less. Should

Gulf fail to make the required gas deliveries, the Com-

mission will apply to a Federal court of appropriate

jurisdiction to enforce compliance with our order.

The record shows that Gulf has commenced approxi-

mately twenty five intrastate sales since the issuance of

Opinion No. 692.° In view of Gulf’s failure in recent

years to comply with the delivery requirements of the

certificate issued to it, we believe it important for us

to review any further intrastate sales proposed by Gulf

to ascertain whether such gas should be sold by Gulf

to Texas Eastern under the subject certificate. Accord-

* Exhibit 13.

78a

ingly, we shall require Gulf to file with the Commission

all contracts for the sale of gas in intrastate commerce

made after the date of this order. In the absence of

such a condition, it would not be possible to protect ade-

quately the viability of our certificate order against the

possibility of Gulf selling gas in intrastate commerce

which should go to Texas Eastern. In these circumstances

we have authority under Section 16 to remedy the situa-

tion. Niagara Mohawk Power Corp. Vv. F.P.C., 379 F.2d

153.

REFUNDS

Contrary to the Judge’s determination not to require

refunds WUL argues that the Commission should exer-

cise its authority to require refunds that will flow through

to the consumers injured by the prior certificate viola-

tions. WUL does not think that further hearings are

necessary; the Commission need only prescribe a formula.

New York suggests that after fulfillment of Gulf’s obliga-

tion to sell 4.4 Tcf, Gulf should be permitted to charge

the then applicable nationwide rate, provided that the

rate be reduced to reflect a repayment to Texas East-

ern and its customers of the damages arising from Gulf’s

failure to meet its daily volumetric obligations. The staff

contends that refunds are an appropriate remedy to in-

sure that Gulf will have sufficient economic incentive to

supply the maximum volumes to Texas Eastern’s cus-

tomers.

In the Commission’s opinion fairness to the consumers

demands that where Gulf has defaulted on its under-

taking to supply gas at a given price, Gulf should make

payments in order to leave Texas Eastern and the con-

sumers in approximately the same economic position they

would have been if they received the gas. Gulf contends

that to do so a further hearing is necessary. Here,

however, there is no necessary determination of specific

79a

amounts involved, but only the determination of a for-

mula. Gulf can subsequently compute the amount of pay-

ment, subject to the Commission’s approval.

The staff recommends that refunds be measured by the

difference between Texas Eastern’s request for gas and

Gulf’s deliveries times the difference between the con-

tract price and the otherwise applicable area of national

rate. WUL would measure refunds by the differences

between the certificate price and the cost of replacement

gas multiplied by the number of Mef necessary to re-

place the undelivered quantities. In our opinion the staff’s

formula, based upon the applicable area or national rate,

should be followed in the present situation where ex-

peditious relief is desirable. Conditioning relief on actual

proof of the myriad effects of Gulf’s non-delivery could

lead to endless proceedings. Staff’s suggested measure of

payment is an equitable estimate of damage to the cus-

tomers. This formula will also apply to future failures

to deliver demanded amounts of gas.

Texas Eastern argues that provision for refunds would

prevent it from receiving the amount of the undelivered

gas. That is not our intention. The refund is designed

to compensate Texas Eastern and its customers for Gulf’s

failure to make full deliveries in the past. The contract

amount of 4.4 Tcf remains in effect. However, it is

correct that delivery of 4.4 Tcf at the contract price,

and payment of refunds would mean that Gulf was not

receiving the compensation to which it was entitled. At

the same time, Gulf’s default has caused present damage

which requires relief. Therefore, we shall provide that

when Gulf has delivered an amount of gas equivalent

to the contract amount less the amounts of gas for which

it has paid refunds, Gulf shall be permitted to charge

the contract price plus the amount of the refunds pre-

viously paid on an equivalent amount of gas.

80a

A hypothetical example may clarify our decision. As-

sume it were found that before Gulf resumed satisfaction

of its contract obligations it had defaulted in the follow-

ing amounts:

1/1/76 -6/21/76 90 Bef at 7¢ [26¢-19¢] /Mcf=$6.3 million

6/21/74-12/4/74 40 Bef at 23¢ [42¢-19¢] /Mcf=$9.2 million

12/5/74-7/26/76 150 Bef at 33¢ [52¢-19¢]/Mcf=$49.5 million

7/27/76-12/1/76 20 Bef at $1.23 [1.42-19¢]/Mcf=$24.6 million

Then Gulf would be required to refund immediately, plus

appropriate interest, $89.6 million. Then, when it had

delivered all but 300 Bef of the contract amount, it would

be permitted to recoup its refunds by adding a surcharge

of 7¢ Mef to the next 90 Bef sold, 23¢/Mcf to the next

40 Bef, etc., until the entire contract was fulfilled, and

the entire refund recouped.

Over the entire contract, Gulf would have received

exactly the contract price for all 4.4 Tef, but it would,

in effect, have been required to lose the time value of

its money required to compensate its customers for their

losses due to Gulf’s non-delivery in accordance with the

terms of the contract.

REMEDIES AGAINST TEXAS EASTERN

WUL and the staff contend that the Commission might

order Texas Eastern to reduce its rates because of costs

imprudently incurred. They argue that Texas Eastern

has failed to protect its customers’ interests by failing

to enforce its contractual and certificate rights against

Gulf. The Judge rejected this remedy, finding that Texas

Eastern had no adequate notice that such relief would be

sought against it here. WUL and the staff contend that

the show cause order and the hearing itself gave Texas

Eastern adequate notice. The Commission agrees with

the Judge that it is inconsistent to grant relief for the

higher costs of substitute gas against both Gulf and

8la

Texas Eastern. This is particularly true because Gulf is

being required to make refund to Texas Eastern, and it is

only proper in this case, as in others, that the refund be

flowed through to Texas Eastern’s distribution customers.

See Texas Eastern Transmission Corp. v. F.P.C., 414 F.

2d 344 (CA5—1969), certiorari denied, 398 U.S. 928

(1970); Texas Eastern Transmission Corp. v. F.P.C.,

470 F.2d 757 (CA5—1972).

To this end we shall require that Texas Eastern file

a plan of flow through which will reflect not merely de-

liveries of its various customers, but the amount of

detriment suffered by those customers because of Gulf’s

failure to deliver the full contract amounts requested by

Texas Eastern. To achieve this result opportunity will

be afforded for the customers and interested state com-

missions to participate in the determination.

As noted above, the Judge has suggested that Texas

Eastern may engage in a conspiracy with Gulf to

raise interstate gas prices and recommends reference to

the Department of Justice under Section 20(a) of the

Natural Gas Act that provides in part that the Com-

mission may transmit such evidence as may be available

concerning apparent violations of the Federal antitrust

laws to the Attorney General, who in his discretion may

institute the necessary criminal proceedings. The Anti-

trust Division has already requested and received the

materials in this proceeding, and a formal reference to

the Attorney General would be superfluous.

LEGAL ISSUES DISCUSSED BY GULF

; 1. Gulf argues that the Judge erred in concluding that

it was in violation of its certificate obligations and should

not have relied on one article of the contract to de

termine that it failed to deliver the minimum daily con-

tract quantity of 500 MMcf per day or the maximum

82a

of 625 MMef per day. Rather the obligations are meas-

ured by every provision and clause of the contract.

Thus, it says, the Daily Contract Quantity among other

things, provides the basis for the calculation of the

contemplated sales volumes of 4.4 Tcf during the 26-

year term of the contract. However, Gulf does not indi-

cate otherwise how it thinks the Judge has misinterpreted

the contract except for its position that its obligation for

delivery is limited to gas produced in the vicinity of the

delivery point set out in Article III of the contract and

secondary delivery points established by amendments tak-

ing into consideration the price provided by the con-

tract, the volume of gas involved, and the cost of de-

livering such gas.

In the opinion of the Commission the certificate issued

December 19, 1963, approved a sale and service proposed

by Gulf. This sale and service was described in the

application including the proposed contract, but this does

not mean that all terms of the contract are approved

or prescribed by the certificate. Thus it is commonplace

that a certificate may be granted for a sale under a

contract expressing a limited term, but the certificate,

unless it specifies otherwise, is of indefinite duration.

See Sun oil Co. v. F.P.C., 364 U.S. 170 (1960).

Here the contract describes the kind of service to be

rendered. In Article II the DCQ is stated to be 500

MMef, but the buyer has the right to purchase 125 per-

cent of that DCQ or 625 MMcf. It is true that at the

500 MMcf per day rate the specified quantity of gas

(4,437,675,000 Mcf) will be delivered in 26 years, but

that does not mean that it cannot be delivered in less

than 26 years or that 625 MMcf per day cannot be de-

manded on most or all days. The contract in Article III

provides for a point of delivery, and other points of de-

livery have been added, but there is nothing in the con-

tract which confines the gas supply to that produced

83a

in the vicinity of the delivery points. It is clear there-

fore, as the Judge found, that Gulf has in terms vio-

lated its contract and the certificate.

2. Gulf argues that the Judge erred in construing

Opinions 692 and 692-A as making binding determina-

tions of Gulf’s obligations, and that the doctrines of res

judicata and collateral estoppel do not apply. We think

it entirely appropriate that the Judge cited Opinions

692 and 692-A on the nature of Gulf’s obligations. Opin-

ion 692 said that Gulf’s contractual warranty and its

certificate obligations are unconditional. This is persua-

sive. But we do not rest the present opinion and order

in this show cause proceeding solely on statements in

Opinion Nos. 692 and 692-A but on our reexamination

of the contract and the record in this case.

8. Gulf argues that because the Commission certifi-

cated the 1964 contract between Gulf and Texas Eastern,

including the arbitration provision (Article XI), the

question of the nature and extent of Gulf’s obligations

under the contract is properly before the arbitration

board and is not within the primary jurisdiction of the

Commission and therefore in a proper and reasonable

exercise of its jurisdiction the Commission should reserve

its ruling in the instant proceeding until; such time as

it receives the benefit of the arbitrators’ decision. In the

opinion of the Commission this is not an appropriate

case in which to defer decision.

There are before the arbitrators three questions: (1)

whether Gulf’s obligation for delivery of gas to Texas

Eastern is limited to gas produced in the vicinity of the

delivery points, (2) whether Gulf by reason of the mis-

takes as to gas reserves in West Delta Block 27 is ex-

cused from delivering the DCQ as provided in the con-

tract, and (3) whether the failure of the Department

of the Interior to hold regular general offshore Louisiana

84a

lease sales constituted an act of force majeure to relieve

Gulf of its obligations. These are largely technical mat-

ters relating to Gulf’s service under its certificate. Thus

the effect of designating a delivery point and defining

what might be its vicinity, the effect of a mistake as to

gas reserves and the effect of a moratorium on offshore

leases on the ability of Gulf to deliver gas are matters

peculiarly within the subject matter of this Commission’s

authority. In Michigan Consolidated Gas Co. v. Panhan-

dle Eastern Pipeline Co., 226 F.2d 60 (CA6-1955), Cer-

tiorari denied, 350 U.S. 987 (1956), cited by Gulf, the

Court said that intricate problems of service and prob-

lems of changing industrial conditions and growing needs

of natural gas do not lend themselves in the first instance

to hearing before a court and require the expertise of

the Commission. The court contrasts these matters with

the usual questions of law and fact which a court is

authorized to handle and which require no special ex-

pert knowledge. The questions here belong in the first

category and are properly considered by the Commission

prior to submission to an arbitration board or a court.

While our certificate accepted the contract with its arbi-

tration provision, this did not mean that questions with-

in the peculiar competence of the Commission must be

first put before the board but rather the contractual

matters that a court would handle.

Furthermore, this proceeding involves a matter of im-

portance to the public. Whether or not Gulf is living up

to its contract and to its certificate is a matter of deep

concern to this Commission in meeting its responsibilities

under the Natural Gas Act. To defer further action

until a board of arbitration issues an interpretation of

the contract of the parties in a matter concerning the

sale and delivery of gas in interstate commerce would

at this juncture would be unconscionable action on our

part.

85a

As to the substance of these contentions, by this order

and by Opinion 692 the Commission has, in effect, deter-

mined that the obligation to deliver gas is not limited

to the vicinity of the delivery points and Gulf is not

excused by reason of its mistakes with respect to Block

27, because the contract is unconditional and has no such

provisions. With respect to the failure of the Depart-

ment of the Interior to hold lease sales it is the Commis-

sion’s opinion that this is not an act of force majeure

relieving Gulf of its obligations. Article X provides that

force majeure shall include “in those instances where

either party hereto is required to obtain . . . permits or

licenses to enable such party to fulfill its obligation here-

under, the inability of such party to acquire . . . such

. + + permits or licenses”. In the first place the purchase

of a lease in the federal domain is not a license or a

permit. Further, the contract does not specify where

the gas must be produced; it need not necessarily come

from the federal domain offshore requiring the purchase

of a lease.

4. Gulf further argues that it is not obligated to de-

liver gas to Texas Eastern where the cost of delivery

would be unreasonable. There is nothing in the 1964

contract that would support this view, which is contrary

to the Commission’s determination in Opinion 692 that

the contractual warranty and the certificate obligations

are unconditional. Article X covers the usual categories

of force majeure, acts of God, strikes, earthquakes, riots

and insurrections and also the inability to obtain servi-

tudes, rights-of-way, materials, and permits or permis-

sion from any governmental agency, but does not list an

excessive cost of gas as excusing deliveries.

It is true, as Gulf points out, that Opinion 692 states

that the cost of delivering certain gas to Texas Eastern

would have been “exorbitant”. The Commission was not

indicating an escape clause in the certificate, but merely

86a

recounting Gulf’s efforts to procure gas and the diffi-

culties that were encountered in attempting to serve

Texas Eastern. For this reason Gulf’s attempt to define

a standard of what a prudent producer should do is not

relevant. Gulf entered into the contract at a time when

it was to its advantage to do so. It cannot now employ

or develop a new standard by which to excuse perform-

ance.

5. Gulf finally says that the Judge erred in concluding

that the Commission had power to order refunds and

that refunds would not be inappropriate. Gulf contends

that it has been paid the contract price and that it has

not collected amounts subject to temporary authorization

or conditions, nor has it engaged in sales without a cer-

tificate or made an unauthorized abandonment. However,

it has failed to deliver the amount of gas required by

its contract and certificate. Its customer, Texas Eastern,

would have had to procure that gas elsewhere. There-

fore, Gulf has incurred a refund liability for the detri-

ment caused Texas Eastern and the consumers. In Mesa

Petroleum Co. v. F.P.C., 441 F.2d 182 (CA5-1971) the

producer improperly abandoned a sale to Panhandle East-

ern Pipeline Company. The Court said that the Commis-

sion acted legally and correctly in ordering post-termina-

tion refunds for the difference between the contract

prices and the average cost to Panhandle for replace-

ment of gas unlawfully withheld. The Court noted that

Section 16 of the Natural Gas Act has been construed

broadly and gives the Commission power to perform any

and all acts that are necessary or appropriate to carry

out the provisions of the Natural Gas Act. Gulf, how-

ever, argues that Section 16 does not provide any inde-

pendent statutory authority. But here Gulf has violated

its certificate issued under Section 7(c) and (e), and

Section 16 provides authority to remedy the situation.

See also Niagara Mohawk Power Corp. v. F.P.C., 379

F.2d 153, 159 (CADC-1967).

87a

The issues in these proceedings have been thoroughly

briefed, so that the Commission finds no need for oral

argument.

NOTICE OF PROCEEDING AND HEARING

Gulf’s 50 percent interest in production from Eugene

Island Block 313 (SC Ex.-9, Sch. 1) is not now being

delivered to Texas Eastern apparently because of prob-

lems in transporting this gas onshore. There is an exist-

ing pipeline in the vicinity of Block 313 owned jointly

by Tennessee Gas Pipeline Company and Columbia Gas

Transmission Corporation. Gulf’s estimated share of 45

MMcef of gas (SC Ex.-29, Item 16) is urgently needed

for fulfillment of the warranty contract. Since no order

could be issued requiring transportation of such gas with-

out notice and a hearing, by this order we shall initiate

a separate proceeding (Docket No. CI77-30) to investi-

gate this matter. Pursuant to Section 5 of the Outer

Continental Shelf Act’ and Section 7 of the Natural Gas

Act *, we shall examine the issue of whether Tennessee

Gas and Columbia Gas should be required to transport

gas from offshore Eugene Island Block 313 for Gulf.

We shall also make Gulf a respondent and require it to

present evidence as to preci .2ly how much gas is avail-

able, the availability of transportation by other existing

lines, and the estimated cost of delivery to Texas East-

ern’s system if Gulf itself were to transport this gas.

Tennessee Gas and Columbia Gas should present any

relevant evidence including:

(a) flow diagrams showing the present maximum

capability and daily average flow for the CNT line, the

Blue Water System, and all major lines connected to the

Blue Water System. These flow diagrams should include

the following:

"43 U.S.C. § 1384(c).

* 15 U.S.C. § 717(e).

88a

(1) location of all input points giving the amount,

the supplier, or for whom transported.

(2) location of all delivery points.

(3) pipe lengths, diameters, wall thicknesses, and

MAOP,

(4) location of all compressor stations showing the

horsepower, compression ratios, type of units, and

horsepower currently utilized,

(5) pressures at all inputs and delivery points on the

CNT line, the Blue Water System, and all the

major lines connected to the Blue Water System,

(6) pressures at all compressor stations, separators,

dehydrators, and plants,

(7) designation of the “null-point” on the east-west

lateral.

(b) flow diagrams as requested in (a) after all facili-

ties which have been certificated are installed on the

CNT line, the Blue Water System, or on major lines

connected to the Blue Water System. Also, give the dates

when it is expected that each of the facilities will be

installed, and the dates when it is expected that the new

supplies proposed in the applications for the new facili-

ties will come on line.

(ec) for the gas which is currently being transported

for others in these systems the following information:

(1) the transportation charge in ¢/Mcf-mile for the

gases, and any other charges such as line loss,

fuel, plant shrinkage, etc.,

(2) designation of where the gas is delivered to shore

(Egan or Cocodrie), and .

(3) any charges made for the transportation of liquids

or liquifiables as defined by the company.

89a

The Commission further finds:

(1) Gulf has failed to carry out responsibilities under

its contract of January 6, 1964, and its certificate of

public convenience and necessity issued December 19,

1963, particularly with respect to its deliveries of gas

to Texas Eastern.

(2) Gulf should compute and pay a refund as pro-

vided below.

(3) Texas Eastern should be required to flow through

the refund made by Gulf to its customers as provided

below.

The Commission orders:

(A) Gulf shall deliver natural gas to Texas Eastern

at the delivery points specified in its contract of January

6, 1964, as amended, at a rate of 625 MMcf per day

beginning on December 15, 1976, except to the extent

that Texas Eastern, on notice to the Commission, and

for good cause shown, demands less. Should Gulf fail

to make the required gas deliveries, the Commission will

apply to a Federal court of appropriate jurisdiction to

enforce compliance with our order.

(B) On December 15, 1976, Gulf shall file a compu-

tation of refunds to Texas Eastern, and serve it on all

parties to this proceeding subject to the approval of the

Commission and in accordance with the following for-

mula. The refund shall be measurcd by the difference

between Texas Eastern’s requests for gas, but not more

than the contract maximum amount, and actual deliveries

from November 1, 1964, until December 1, 1976, times

the difference between the applicable area or national

rate and the applicable contract price. Damages would

be assessed for each month deliveries fell below the

amount demanded by Texas Eastern, if within the con-

90a

tract maximum, excepting volumes attributable to force

majeure. Gulf shall make the required refund to Texas

Eastern within 30 days of Commission approval of Gulf’s

computation of refund. The refunds shall carry 7% in-

terest to October 10, 1974, 9% thereafter.

(C) If in any month subsequent to the refund required

in Paragraph (B) above Gulf fails to deliver the amount

of gas required by the contract, it shall within 30 days

make further refund to Texas Eastern in accordance

with the above formula.

(D) When there remains to be delivered under Gulf’s

contract with Texas Eastern that amount of gas for

which refund has been made, Gulf may file a rate change

so that the price to Texas Eastern for appropriate vol-

umes shall be the contract price plus the amount of the

refund previously paid applicable to the same volumes.

(E) Within 120 days of the date of the final order in

this proceeding, Texas Eastern shall submit a plan for

the flow-through of the refunds herein ordered to be dis-

bursed indicating the amount payable to each jurisdic-

tional customer, the basis used to compute the amount

payable, and the periods involved. Before doing s0,

Texas Eastern shall survey its customers and affected

state regulatory commissions to determine an equitable

division of the refund amount based on the costs to each

customer of failing to receive the gas undelivered by

Gulf. Copies of the flow-through plan shall be served on

each of the parties to this proceeding, Texas Eastern’s

jurisdictional customers, and upon affected state regu-

latory commissions. Within 30 days of approval of Texas

Eastern’s plan, providing the refund has been received

from Gulf, Texas Eastern shall proceed with the distri-

bution of refunds to its jurisdictional customers. In case

of any subsequent monthly refunds as provided in Para-

graph (C) above, Texas Eastern shall prepare and file

9la

similar allocation plans with the Commission and serve

them on its customers and the state commissions within

30 days of receiving an additional refund.

(F) Within 10 days of the end of each month Gulf

shall report to the Commission the average amount of

gas per day that Texas Eastern has demanded during

the month and the average amount of gas per day that

Gulf has delivered during the month. Texas Eastern

shall file an explanation within the same period of its

reasons for failing to require maximum volume on any

day on which such failure occurs.

(G) Pursuant to Section 5 of the Outer Continental

Shelf Act and Sections 4, 5, 7, 14, 15, and 16 of the Natu-

ral Gas Act, a hearing shall be held to determine whether

Tennessee Gas and Columbia Gas, as common carriers in

the Federal Offshore Domain, should be required to trans-

port Gulf’s production from Eugene Island Block 313.

Gulf is made a party respondent to this proceeding.

(H) Notices of intervention or petitions to intervene

in this proceeding may be filed with the Commission on

or before October 25, 1976, in accordance with the Com-

mission’s Rules of Practice and Procedure (18 C.F.R.

1.8).

(I) On or before November 2, 1976, Gulf, Tennessee,

and Columbia Gas shall file their direct testimony and

evidence. All testimony and evidence shall be served

upon the Presiding Administrative Law Judge, the Com-

mission Staff, and all parties to this proceeding. Should

a proper application for the transportation of the sub-

ject gas be timely filed, this date and the hearing date

in ordering paragraph (K) below may be deferred by

future Commission order.

(J) A Presiding Administrative Law Judge to be des-

ignated by the Chief Administrative Law Judge for that

purpose (see Delegation of Authority, 18 C.F.R. 3.5(d)),

92a

shall preside at the hearing in this proceeding pursuant

to the Commission’s Rules of Practice and Procedure.

(K) The Presiding Administrative Law Judge shall

preside at a pre-hearing conference to be

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