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KENTUCKY WEST VIRGINIA GAS CO. v. PENNSYLVANIA PUC

April 27, 1989

KENTUCKY WEST VIRGINIA GAS COMPANY, and EQUITABLE GAS COMPANY, Plaintiffs
v.
PENNSYLVANIA PUBLIC UTILITY COMMISSION, Defendant



The opinion of the court was delivered by: CALDWELL

 WILLIAM W. CALDWELL, UNITED STATES DISTRICT JUDGE

 Introduction and Background.

 Before the court is the motion of defendant, Pennsylvania Public Utility Commission (PUC), to dismiss this action pursuant to Fed. R. Civ. P. 12(b)(6). Defendant contends that the action is barred by the doctrine of claim preclusion, formerly known as res judicata. *fn1" Plaintiffs are challenging on federal constitutional and statutory grounds a 1988 PUC rate making order in a so-called section 1307(f) proceeding under state utility law. The order refused Equitable the recovery of some $ 10.2 million in alleged variable commodity costs incurred during a thirteen month period from July of 1983 through July of 1984. This case is related to other lawsuits plaintiffs had previously brought before this court and the Third Circuit Court of Appeals making a similar challenge to other PUC section 1307(f) orders. See Kentucky West Virginia Gas Co. v. Pennsylvania Public Utility Comm'n, 620 F. Supp. 1458 (M.D. Pa. 1985) (dismissing complaint concerning a 1985 PUC section 1307(f) order on abstention grounds), rev'd, 791 F.2d 1111 (3d Cir. 1986), (reversing and remanding for a decision on the merits), on remand, 650 F. Supp. 659 (M.D. Pa. 1986), aff'd, 837 F.2d 600 (3d Cir.) (Kentucky West I), cert. denied, 488 U.S. 941, 109 S. Ct. 365, 102 L. Ed. 2d 355 (1988). See also Kentucky West Virginia Gas Co. v. Pennsylvania Public Utility Comm'n, 862 F.2d 69 (3d Cir. 1988), (Kentucky West II) (involving a challenge to a 1986 PUC section 1307(f) order), rev'g, No. 86-1380 (M.D. Pa. July 13, 1987). Factual details of the regulatory scheme and of prior proceedings can be found in Kentucky West I and Kentucky West II. We reiterate here only those facts pertinent to the claim preclusion defense.

 Plaintiff, Kentucky West Virginia Gas Co. (Kentucky West), a wholly owned subsidiary of Equitable Resources, Inc., is an interstate pipeline company engaged in the sale of natural gas in interstate commerce. Plaintiff, Equitable Gas Company (Equitable), a division of Equitable Resources, Inc., is a Pennsylvania retailer of natural gas subject to the authority of the PUC. In a 1985 section 1307(f) proceeding dealing with Equitable's revenues and expenditures from July of 1983 through December of 1984, the PUC, by order dated August 31, 1985, disallowed recovery by Equitable of $ 14.3 million in purchased gas costs for gas bought from Kentucky West, one of Equitable's interstate pipeline suppliers. The PUC reasoned that Equitable could have purchased the gas more cheaply from other suppliers. In the parlance of the state statute, the PUC had decided that Equitable had not followed a "least cost fuel procurement policy." See 66 Pa.C.S. ┬ž 1318.

 Thereafter, plaintiffs filed a complaint in this court on October 11, 1985, challenging the PUC's action on the basis, in part, of the commerce clause, the supremacy clause, and the first, fifth and fourteenth amendments. The thrust of the argument at that time before this court in relation to the supremacy clause claim was that the PUC could not investigate the prudence of Equitable's purchases because to do so would invade the exclusive jurisdiction of the Federal Energy Regulatory Commission (FERC) to set the rates at which Kentucky West would sell its gas at wholesale. No argument was made before this court that the $ 14.3 million in purchased gas costs represented any minimum bill liability imposed on Equitable by its contract with Kentucky West. "Minimum bill contracts" are intended "to guarantee a long term supply of gas." Kentucky West I, 837 F.2d at 609 n. 7. Under the contract in effect at the time of the 1985 PUC determination, the clause required Equitable "to pay for a specified percentage (66 and 2/3%) of its total contractual entitlement, regardless of actual consumption." Id. This minimum commodity bill had been approved by the FERC along with the rest of the provisions of Equitable's contract with Kentucky West.

 Despite its contractual obligation, during the time period covered by the 1985 section 1307(f) rate filing, July of 1983 through December of 1984, Equitable had unilaterally stopped paying for gas it was not actually taking from Kentucky West, thereby suspending its minimum bill liability for this period. It was negotiating with Kentucky West for a settlement of those charges but no agreement was reached during the PUC consideration and eventual disposition by order of August 31, 1985, of Equitable's section 1307(f) rate filing. Nor had agreement been reached by the time the complaint had been filed in this court challenging the 1985 PUC order. Plaintiffs allege that a settlement was eventually reached and that the FERC approved it on November 13, 1985. *fn2" The settlement: (1) revised Equitable's minimum bill liability downward from 66 and 2/3% to 55% for July 1, 1983 through July 31, 1984; (2) established the 55% ratio for July 1, 1983 through February 29, 1984; and (3) required Equitable to pay carrying charges on minimum bill deficiencies from March 1, 1984 through July 31, 1984. The settlement also gave Equitable the right to future redelivery of gas from January 1, 1985 until December 31, 1988. In the meantime, this court had abstained from entertaining plaintiffs' challenge to the PUC action, was reversed, and eventually held a hearing on the merits on August 21, 22 and 28 of 1986. See 650 F. Supp. at 661.

 Subsequent section 1307(f) proceedings occurred in 1986 and 1987. No claim relating to the $ 14.3 million was made in 1986. In the 1987 proceeding, Equitable based its rate adjustment request, in part, on the fixed commodity charge of $ 2.5 million of minimum bill liability incurred during the eighteen months ending in December of 1984. By order, dated August 31, 1987, the PUC allowed recovery of this expense.

 On March 1, 1988, Equitable instituted another section 1307(f) proceeding in which it sought recovery of $ 10.2 million "for the minimum bill costs approved by the FERC represent[ing] the variable cost . . . portion of Kentucky West's minimum bill . . . which Equitable was obligated to pay under the FERC approved settlement agreement." (complaint, para. 26) (brackets added). On September 1, 1988, the PUC disallowed the claim, reasoning, in part, as follows:

 
Equitable seeks recovery of a hypothetical variable cost minimum bill payment that it never actually made to its pipeline supplier. *fn3" This claim is appropriately denied first, because it does not constitute a cost actually incurred and paid. Second, the 1987 Section 1307(f) case compensated Equitable for the minimum bill liability with Kentucky West. Equitable has not cited any new events or changed circumstances that have arisen since it claimed and recovered Kentucky West minimum bill costs from 1983-1984 in its 1987 gas cost recovery proceeding that warrants allowance of a new and different minimum bill amount. This is an effort to relitigate an issue already settled in the absence of new evidence or changed circumstances.

 (PUC brief in support of motion to dismiss, Attachment B at p. 12) (emphasis added) (footnote added).

 While appealing this determination to the Pennsylvania Commonwealth Court, Equitable also filed the instant lawsuit challenging the 1988 PUC order on the basis of: (1) the supremacy clause, *fn4" the filed rate doctrine, *fn5" the due process clause of the fourteenth amendment *fn6" and the taking clause. *fn7"

 Discussion.

 Defendant contends that claim preclusion bars the instant action because plaintiffs could have raised the same claim but did not do so: (1) in the proceedings in this court in August of 1986 following the Third Circuit's remand in Kentucky West I, or in its federal challenge to the 1986 PUC order dealt with in Kentucky West II, or ...


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