Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-88-02391/USCOURTS-ca10-88-02391-0/pdf.json

Parties Involved:
Federal Energy Regulatory Commission
Respondent
Phillips 66 Natural Gas Company
Petitioner

Document Text:

r' 

PUBLISH 

FILED 

United Stat~ C.OOn of Appeals 

Tenth Ci::u!t 

MAY 22 1990 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT ROBERT L. HOECKER 

Clerk 

PHILLIPS 66 NATURAL GAS 

COMPANY, 

Petitioner, 

v. 

) 

) 

) 

) 

) 

) 

) 

FEDERAL ENERGY REGULATORY) 

COMMISSION, ) 

Respondent. 

) 

) 

88-2391 

On Petition for Review 

Of Orders Of The 

Federal Energy Regulatory Commission 

(Docket No. RI-88-30) 

Luke A. Mickum (John L. Williford and Larry Pain, with him on the 

briefs), Bartlesville, Oklahoma, for Petitioner. 

Timm L. Abendroth, Attorney (Catherine C. Cook, General Counsel, 

Jerome M. Feit, Solicitor, and Joanne Leveque, Attorney, on the 

brief), Federal Energy Regulatory Commission, Washington, D.C., 

for Respondent. 

Before McKAY and SETH, Circuit Judges, and CONWAY, District 

Judge*. 

SETH, Circuit Judge. 

*Honorable John E. Conway, United States District Judge for the 

District of New Mexico, sitting by designation. 

Appellate Case: 88-2391 Document: 010110560501 Date Filed: 05/22/1990 Page: 1
The action underlying this appeal began in October 1987 when 

Phillips 66 Natural Gas Company (Phillips) filed an amendment to 

its blanket affidavit pursuant to 18 C.F.R. § 154.94(k) and 30 

rate schedule changes with the Federal Energy Regulatory 

Commission (Commission). Phillips was seeking to establish its 

right to collect power and fuel allowances for costs incurred in 

the operation of certain compressors, pursuant to Commission Order 

473 and 18 C.F.R. § 271.1104(d)(l)(iv)(B), in the rates charged 

four interstate gas pipelines. [We note that Commission Order 

473, issued June 3, 1987, expressly adopted the term "power and 

fuel allowance" in referring to compression allowances for 

compressors predating the Natural Gas Policy Act of 1978 (NGPA), 

15 U.S.C. § 3301, et~- (1982).] In March 1988 the Director of 

the Office of Pipeline and Producer Regulation (Director) issued a 

letter order authorizing collection of the specified productionrelated costs under 17 of the rate schedule changes; with respect 

to the remaining 13 rate schedule changes, the Director's letter 

stated that there was not express contractual authority as 

required by 18 C.F.R. § 271.1104(c)(4)(ii)(A) to collect the 

desired power and fuel allowances as production-related expenses. 

The Director's letter order relied on the fact that during a 

telephone conversation with Mr. K. R. Lilley of Phillips, a 

Commission staff member was informed that, with respect to the 13 

rate schedules at issue, Phillips was relying on area rate clauses 

as the authorizing language to collect a compression allowance for 

the cost of fuel or power to drive the compressors. Noting that 

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Appellate Case: 88-2391 Document: 010110560501 Date Filed: 05/22/1990 Page: 2
§ 271.1104{c){4){ii){B) provides that an area rate clause is 

evidence only of the purchaser's willingness to compensate for 

delivery costs, and not for compression, the Director conditioned 

the effectiveness of the 13 rate schedule changes on Phillips 

filing a protest pursuant to§ 271.1104{h){4){ii) and being 

successful in the final ruling. 

The Director required Phillips to file protests or refund 

money already collected because in the interim between Phillips' 

October 1987 filing and the Director's March 1988 letter order, 

the Commission had issued Order 473-A. Order 473-A provided, 

inter alia, for protest procedures so that first sellers of 

natural gas with pre-NGPA compre~sors would have an opportunity to 

make a showing of sufficient contractual authority to collect 

compression allowances for the cost of power and fuel required to 

drive the compressors. 

The Director's March 1988 letter order further provided that 

"if Phillips is collecting NGPA compression allowances ... for 

recent compression facilities, based upon an interpretation that 

area rate clauses constitute the requisite contract authority, any 

protest filed pursuant to section 271.1104{h){4){ii) of the 

regulations should include those rate schedules also." The letter 

order finally provided that if Phillips is not successful in its 

protest, or if it does not file a protest, then any monies 

collected for compression charges, or power and fuel charges, 

based on area rate clauses should be refunded. 

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Appellate Case: 88-2391 Document: 010110560501 Date Filed: 05/22/1990 Page: 3
Phillips then filed an appeal to the Commission from the 

action taken by the Director in the letter order of March 24, 

1988. On May 20, 1988, the Commission issued an order denying the 

appeal from staff action, finding that the conditions imposed by 

the Director on Phillips' rate schedule change filings were in 

accordance with relevant regulations and were within the authority 

delegated to the Director under 18 C.F.R. § 375.307(b). This 

order further noted that Phillips' complaints were really directed 

to the regulations and not the Director's action because the 

Director was merely requiring compliance with the regulations. 

On June 20, 1988, Phillips filed for rehearing of the 

Commission's order of May 20, 1988, and the Commission issued an 

order denying rehearing on July 20, 1988. This order of the 

Commission reiterated that Phillips' contentions are directed at 

the regulations and not the actions of the Director. 

In May 1988, Phillips had received an extension of time for 

filing the ordered protests on the 13 rate schedule changes not 

approved by the Director, and for all other unnamed contracts 

under which Phillips may have collected a compression allowance or 

power and fuel allowance based on an area rate clause. Following 

the Commission's July 20, 1988 denial of rehearing, Phillips filed 

the protests and this appeal. 

On appeal, Phillips makes several claims of error in 

challenging the Director's March 1988 letter order. Based on 

these alleged errors, Phillips asks this court to reverse both the 

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Appellate Case: 88-2391 Document: 010110560501 Date Filed: 05/22/1990 Page: 4
Commission's order denying Phillips' appeal from staff action and 

the order denying rehearing thereon. 

The dispositive argument made by Phillips in this appeal is 

the assertion that the Director and the Commission violated the 

mandate of Texas Eastern Transmission Corp. v. F.E.R.C., 769 F.2d 

1053 (5th Cir.), by ruling, in essence, that the area rate clauses 

were insufficient contractual authorization for collecting 

compression allowances, or power and fuel allowances. For the 

reasons that follow, we agree with Phillips. 

The Fifth Circuit recognized in Texas Eastern the "paramount 

importance of intent under individual contracts" in determining 

what production-related costs are recoverable by first sellers of 

natural gas. See Texas Eastern, 769 F.2d at 1065. Subsequently, 

that court further explained that "[a]fter enactment of the NGPA, 

... the Commission opted for a case specific approach of 

ascertaining the contracting parties' intent, rather than issuing 

a dispositive ruling that all area rate clauses did or did not 

authorize the collection of NGPA rates." Hunt Oil Co. v. 

F.E.R.C., 853 F.2d 1226, 1229 (5th Cir.). "[T]he focal point for 

the Commission's analysis in determining whether a particular area 

rate clause authorizes NGPA rates is the contracting parties' 

intent which is to be ascertained on a case-by-case basis." Id. 

The Hunt Oil court also stated that: 

"if the contracting parties assert that their 

mutual intent is to collect the NGPA rates, a 

rebuttable presumption is created in favor of 

the contracting parties' interpretation (Order 

23 presumption). The third-party protester 

then has the burden of coming forward with 

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substantial evidence of lack of contractual 

authority to overcome the presumption that the 

contracting parties' assertion regarding their 

mutual intent is accurate." 

Id. at 1230. 

Here, Phillips has asserted, in essence, that the contracting 

parties mutually intended for power and fuel allowances to be 

collected by Phillips pursuant to the area rate clauses contained 

in the various contracts. Notably, none of the pipelines, as 

parties to the contracts with Phillips, have asserted otherwise 

and none have filed protests objecting to Phillips collecting 

power and fuel allowance pursuant to the area rate clauses in the 

contracts. This silence reasonably may evince that the pipelines 

agree with Phillips' claim of contractual authorization and mutual 

intent. See generally Hunt Oil, at 1239. The facts of this case 

establish that the contracting parties mutually intended that 

Phillips collect the compression, or power and fuel allowances 

pursuant to the area rate clauses in question. See Hunt Oil, at 

1230. 

The error committed by the Director, and affirmed by the 

Commission in this case, arises from the attempt to give 

substantive effect to§ 271.1104(c)(4)(ii)(B). The Director 

relied on this provision in ruling that the area rate clauses were 

insufficient to establish contractual authorization to collect the 

desired compression allowances. The approach taken by the 

Director here is inconsistent with the principle that it is for 

the contracting parties, in the first instance, to decide who 

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should bear the various production-related costs. The Supreme 

Court has stated that "[t)he regulatory system created by the 

[Natural Gas] Act is premised on contractual agreements 

voluntarily devised by the regulated companies; it contemplates 

abrogation of these agreements only in circumstances of 

unequivocal public necessity." Permian Basin Area Rate Cases, 390 

U.S. 747, 822. 

This court recently has held that the "bursting bubble" 

theory of presumptions adopted in Texas Eastern, and existing 

under Commission Orders 473 and 473-A, have only a procedural 

effect or usage in a protest proceeding; in other words, the 

presumption that compression allowances are not recoverable 

pursuant to an area rate clause has no substantive effect outside 

of protest proceedings. See Phillips Petroleum Co. v. F.E.R.C., 

F.2d , No. 88-1257, slip op. (10th Cir. April 30, 1990). 

In that case, we stated that "[t)he nature of the Orders 473 and 

473-A presumptions compel the conclusion that as with Order 23-B, 

these presumptions are procedural, and were not intended to 

operate as an affirmative substantive rule." Id. at 12. A 

procedural use of these presumptions is consistent with Permian 

Basin and Pennzoil Co. v. F.E.R.C., 789 F.2d 1128 (5th Cir.), in 

that it assures that the decision of who will bear productionrelated costs will be left initially to the contracting parties. 

See id. 

Because the Director and Commission in the present case 

relied on the presumption of noncollectibility of compression 

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allowances under area rate clauses as a basis for requiring 

Phillips to file protests, it is clear that substantive effect was 

erroneously given to the presumption outside of a protest 

proceeding. See id. Accordingly, the result of the proceedings 

before the Commission is REVERSED and the cause is REMANDED to the 

Commission for such other proceedings as are necessary in light of 

this opinion. IT IS SO ORDERED. 

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