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Parties Involved:
Federal Energy Regulatory Commission
Respondent
Jack J. Grynberg
Petitioner
Rocky Mountain Natural Gas Company
Intervenor

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 10, 1995 Decided December 12, 1995

No. 94-1699

JACK J. GRYNBERG, INDIVIDUALLY AND AS GENERAL PARTNER 

FOR THE GREATER GREEN RIVER BASIN DRILLING PROGRAM: 72-73,

PETITIONER 

v.

FEDERAL ENERGY REGULATORY COMMISSION,

RESPONDENT 

ROCKY MOUNTAIN NATURAL GAS COMPANY,

INTERVENOR 

Consolidated with

95-1134

-

On Petitions for Review of Orders of the

Federal Energy Regulatory Commission

-

Nancy J. Skancke argued the cause and filed the briefs for petitioner Jack J. Grynberg.

John T. Miller, Jr. argued the cause and filed the briefsfor petitioner and intervenor RockyMountain

Natural Gas Company.

Jill L. Hall, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent.

With her on the brief was Jerome M. Feit, Solicitor, Federal Energy Regulatory Commission.

Before: SILBERMAN, HENDERSON, and RANDOLPH, Circuit Judges.

Opinion for the court filed by Circuit Judge RANDOLPH.

RANDOLPH, Circuit Judge: In 1975, Jack J. Grynberg entered into a contract to sell natural

gasto Rocky Mountain Natural Gas Company in intrastate commerce. RockyMountain now argues

that the contract was illegal because Grynberg had previously dedicated the gas to interstate

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commerce under a 1968 agreement between Grynberg and Mountain Fuel, an interstate pipeline. If

the gas was dedicated to interstate commerce, the maximum lawful price of the gas would be lower

than the contract price paid by Rocky Mountain. The Federal Energy Regulatory Commission

decided that the gas had been dedicated to interstate commerce under the 1968 agreement.

Both Grynberg and Rocky Mountain have filed petitions for review. Grynberg contests the

Commission's finding that the gas was dedicated to interstate commerce. Rocky Mountain contests

the Commission's refusal to order Grynberg to refund certain overpayments. We grant Grynberg's

petition for review because the Commission'sinterpretation of the 1968 agreement is not reasonable.

We therefore vacate the Commission's orders and remand the case, without addressing Grynberg's

other arguments and without considering Rocky Mountain's petition.

I

In 1968, Grynberg entered into a contract with Mountain Fuel to sell gas from certain fields

in Colorado. Grynberg applied to the Commission for a certificate of public convenience and

necessity to sell the gas in interstate commerce. The Commission granted the certificate on March

24, 1969. Grynberg completed well No. 1-25 and sold the gas from that well to Mountain Fuel until

November 1978.

In 1973, Grynberg drilled two new wells in the fields listed in the 1968 contract. Grynberg

offered the gas from these wellsNos. 1-24 and 1-36to Mountain Fuel, but Mountain Fuel

declined the offer. In 1975, Grynberg entered into a contract with Rocky Mountain to sell the gas

fromthese two wellsin intrastate commerce. Grynberg eventually drilled four additional wellsNos.

2-25 (spudded in April 1988), 2-36 (June 1988), 4-25 (July 1990), and 5-25 (October 1990)and

sold the gasfromthese wellsto Rocky Mountain under the 1975 agreement. The central issue in this

case is whether the gas from these six wells was dedicated to interstate commerce by the 1968

agreement with Mountain Fuel.

Until 1978, the Federal Energy Regulatory Commission had authority to regulate only gas

sold in interstate commerce. 15 U.S.C. § 717(b). In order to sell gas in interstate commerce, a seller

had to receive a certificate of convenience and necessity from the Commission. 15 U.S.C. § 717f(c).

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Once the gas was certifiedor dedicated to interstate commerceit had to be sold in interstate

commerce subject to the Commission's price regulations until the Commission permitted the service

to be abandoned. 15 U.S.C. § 717f(b).

The scope of the dedication to interstate commerce is determined by the language of the

certificate issued by the Commission. See Sunray Oil Co. v. FPC, 364 U.S. 137, 152-54 (1960). If

the certificate is inconclusive, the dedication is controlled by the certificate application, and, if

necessary, the contract underlying the application. Gulf Oil Corp. v. FPC, 563 F.2d 588, 594 (3d

Cir. 1977), cert. denied, 434 U.S. 1062 (1978). Here, the certificate does not provide any details

about the scope ofthe dedication. It refers back to the application which, in turn, quotes Articles II-1

and II-2 of the 1968 contract, a copy of which Grynberg attached. The Commission based its

decision on its interpretation of the contract. 62 F.E.R.C. ¶ 61,046 (1993).

The Commission's reading of the contract is entitled to judicial respect, see Transwestern

Pipeline Co. v. FERC, 988 F.2d 169, 173 (D.C. Cir. 1993), but here the Commission has gone

beyond a fair construction to reach a result it has not supported. The Commission viewed the 1968

agreement as having dedicated all of the gas underlying the fields described in the contract to

Mountain Fuel. This the Commission derived not from the body of the contract, but from the

introductory "Whereas" clause, which states: "WHEREAS, Seller owns or controls, and desires to

sell and Buyer desires to purchase Seller's share of gas underlying the lands and leaseholds (subject

lands) described in Appendix "A'...."

In its order, the Commission brushed aside Article II of the contract, which is titled

"Agreement to sell and reservations." Article II-1 states: "Seller agrees to sell to Buyer all gas

owned or controlled by Seller, produced from or allocated to Seller's interest in subject gas

reserves...." Article I-6 defines subject gas reserves to "include only gas reserves ... open to

production in a completed well or wells connected to Buyer's pipeline" that "underlie the lands

surrounding such wells." Such gas reserves "shall not be calculated to underlie more lands around

any given well than ... the number of acres embraced within a valid spacing order." In Colorado, well

spacing is approximately 40 acres.

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TheCommissionexplained that these provisions only"describeGrynberg's contract obligation

to sell gas(i.e. gasfromcompleted wells hooked up to Mountain Fuel and not, for example, gasfrom

undeveloped reserves in place)." 62 F.E.R.C. ¶ 61,046. While we do not disagree with this reading,

we fail to see how it supports the Commission's interpretation that in light of the "Whereas" clause,

Grynberg was obligated to sell all of the gas underlying all of the subject lands to Mountain Fuel. In

its brief, the Commission attempted to bolster its interpretation by explaining Article II as a

take-or-pay provision. Take-or-pay provisions protect sellers from cash flow fluctuations by

requiring buyers to pay for a certain percentage of the production from a well whether or not the

buyer actually accepts delivery of the gas. Transcontinental Pipeline v. State Oil & Gas Bd., 474

U.S. 409, 412 (1986) (citing Pierce, Natural Gas Regulation, Deregulation, and Contracts, 68 VA.

L. REV. 63, 77-79 (1982)).

The Commission's interpretation of the contract and the reasons given for it do not survive

close attention. Ignoring the rest of the contract, the Commission offers little more than an assertion

to support its idea that the prefatory Whereas clause defines the scope of the dedication. According

to the Commission, Grynberg agreed to sell all of the gas underlying the subject lands to Mountain

Fuel. But if the Whereas clause defines the extent of the obligation to sell and dedicates all of the gas

to Mountain Fuel, what is the role of Article II-1? It appears to determine Grynberg's obligation to

sell: "Seller agrees to sell ... Seller's interest in subject gas reserves." The Commission's

interpretation renders this provision meaningless, yet it is standard contract law that a Whereas

clause, while sometimes useful as an aid to interpretation, "cannot create any right beyond those

arising fromthe operative terms ofthe document." Abraham Zion Corp. v. Lebow, 761 F.2d 93, 103

(2d Cir. 1985) (quoting Genovese Drug Stores v. Connecticut Packing Co., 732 F.2d 286, 291 (2d

Cir. 1984)).

The attempt to portray Article II as a take-or-pay clause is, moreover, plainly wrong. A

take-or-pay clause obligatesthe buyer to buy a certain percentage ofthe production of a well; Article

II obligates the seller to sell all of the gas from wells connected to the pipeline. Further, Article II

cannot be a take-or-pay clause because Article IV is a take-or-pay clause. Article IV-1(c) states:

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"Buyer's take obligation shall be limited to fifty percent of the amount Seller is able to produce on a

sustained basis, with the take or pay obligation being limited to a maximumof 1.825 billion cubic feet

of gas per year."

Because the Commission has not sufficiently supported its reading of the contract, we must

vacate its orders and remand the case for reconsideration. In doing so we do not pass on the

question, raised in oral argument, whether the contract might properly be interpreted to give

Mountain Fuel an option or right of first refusal in gas from completed wells on the subject lands.

That Grynberg offered the gas from wells 1-24 and 1-36 to Mountain Fuel might support this view.

Grynberg himself suggested this possibility in his brief, stating that if Mountain Fuel "exercised the

election to connect a new gas well" the sale would be governed by the 1968 agreement. However,

the Commission did not rely on any such reasoning and we, therefore, cannot sustain the agency's

orders on this basis. SEC v. Chenery Corp., 318 U.S. 80, 95 (1943).

II

Grynberg asked the Commission to grant retroactive abandonment of the six wells. The

Commission rejected his request, reasoning that the equities were against Grynberg because he had

unclean hands and because he had "illegally" diverted gas to the intrastate market and "illegally"

collected a price higher than the maximum lawful price.

The Commission will need to reconsider this decision if it finds, on remand, that the 1968

agreement dedicated the gas from the six wells to interstate commerce. Grynberg appears to have

acted on a good faith beliefthat the six wells were not dedicated to interstate commerce. As we have

seen, the contract is ambiguous; it is subject to more than one reasonable interpretation. Grynberg

assumed that the contract dedicated only the 40 acressurrounding wellsthat were actually connected

to Mountain Fuel's pipeline. Grynberg's position was clear in 1986 when Celeste GrynbergJack

Grynberg's wifeapplied to the Commission for complete abandonment of the 1968 contract. The

application stated that she and Mountain Fuel had mutually agreed to terminate the 1968 agreement.

The application described the agreement as covering only well 1-25 and sought abandonment of that

wellso that she could sell the gasto Rocky Mountain. The Commission granted the application and

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coded the action as an "abandonment" of service rather than an "amendment to delete acreage."

Vacated and remanded.

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