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Shell Oil Co. v. Federal Power Commission

decided: January 27, 1959.


Author: Mclaughlin

Before GOODRICH, McLAUGHLIN and STALEY, Circuit Judges.

McLAUGHLIN, Circuit Judge.

This case is another in that line wherein the issue has been the effective rate on June 7, 1954, for natural gas sold by a so-called independent producer. That date was when the Supreme Court announced its decision in Phillips Petroleum Co. v. State of Wisconsin, 1954, 347 U.S. 672, 74 S. Ct. 794, 98 L. Ed. 1035. The effect of that decision was to subject independent producers of natural gas to regulation by the Federal Power Commission. The Commission, in implementing the decision, called for filing of rate schedules setting forth "* * * rates * * * effective on June 7, 1954."

What that rate was for Shell Oil Company in its contract with Louisiana Natural Gas Company*fn1 depends upon the contract-established provisions rather than on the fortuity of rates which were being actually paid on that date. See Natural Gas Pipeline Company of America v. Federal Power Commission, 3 Cir., 1958, 253 F.2d 3, certiorari denied Dorchester Corp. v. Natural Gas Pipeline Co., 1958, 357 U.S. 927, 78 S. Ct. 1372, 2 L. Ed. 2d 1370. The contract had been entered on May 1, 1951 and for the period in question provided for the sale of gas at 8.997 cents per Mcf, unless "* * * at any time after December 31, 1951, Buyer [Louisiana] * * * [should] enter into a contract providing for the purchase by it of gas * * *" produced and delivered within a fifty mile radius of any delivery point specified. In that event the contract price was to escalate to the same price as that called for by the subsequent contract with the other producer.

Louisiana had already succeeded to rights as purchaser under a contract entered with Atlantic Refining Company, another producer, in 1943. Under that contract buyer agreed to buy specified daily quantities of gas; it was provided that the rights of the parties should continue for the producing life of the field involved but for not more than twenty-five years. In that contract the buyer agreed to pay 2.2 cents net per Mcf for gas received for the first five years. No fixed price was established for periods after that, but rather the contract provided:

"(b) At the end of the first five-year period, Buyer and Seller are to reach an agreement as to the price for gas sold and delivered under this contract during the second five-year period. The price to be paid during such second five-year period is to be agreed upon at the beginning of such period after a survey of prevailing prices for gas being sold in similar quantities in the southwestern part of Louisiana.

"(c) During succeeding five-year periods, price to be paid will be determined at the beginning of each period in the same manner as provided for in paragraph (b) above.

"(d) In the event that the parties are unable to agree upon the price to be paid for gas after the first five-year period, in accordance with the arrangements set forth in paragraphs (b) and (c) above, such determination shall be submitted to arbitration in accordance with Condition XII."*fn2

A price for the second five year period had been agreed to by negotiation between the buyer and seller, but this agreement expired on August 31, 1953. Louisiana and Atlantic undertook negotiations in September of that year for agreeing to a price for the third five year period.

The parties had difficulty in agreeing. The negotiations consumed five and a half months, finally culminating in an agreement dated February 17, 1954, whereby the price was established at 12.5 cents per Mcf, plus gathering tax. Shell thereafter accidentally learned of this and subsequently notified Louisiana that it felt entitled under its contract to an escalation of its price to the same 12.5 cents level.

There is no dispute that the fifty mile radius requirement of the Louisiana-Shell contract is satisfied. The argument concerning Shell's right to a higher price turns on whether the Louisiana-Atlantic agreement of February, 1954 was an "entering of a contract" which activated the price escalation clause of the Louisiana-Shell contract.

When Shell filed its rate schedule with the Federal Power Commission pursuant to the Commission's orders implementing the Phillips decision, the Commission neither accepted or rejected the submitted rate, pending further explanation by Shell of why it claimed 12.5 cents per Mcf. Shell presented that explanation in February, 1957 when it filed for an increase in rate to 16.75 cents per Mcf. The reasonableness of that rate is still awaiting hearing. The Commission at this point directed that a hearing be held to determine the effective rate on June 7, 1954 under the Shell contract which it simultaneously accepted for filing.

As a result of the hearing the examiner found the effective rate to be 12.5 cents. This finding was subsequently reversed on November 12, 1957, by the Commission whose decision is here on appeal by Shell.

The clause in the Louisiana-Shell contract which is central to this controversy is one of the type commonly referred to in the trade as a "most favored nation" clause. The usual objective of such a clause is to assure the seller a top price for its gas. Testimony at the hearing before the Commission's examiner was that Louisiana had desired a twenty year contract which was for a term longer than Shell had at that time ever contracted for, at least in that area. Because of difficulty in establishing a price for so long a period, the clause in question was agreed upon. It appears that at the time of contracting Shell knew Louisiana was purchasing gas from Atlantic but was not familiar with the specific terms of that contract. These facts tend strongly to demonstrate that the intention of the parties was for ...

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