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AMOCO Production Co. v. Federal Energy Regulatory Commission

June 20, 1985


Petition for Review of an Order of the Federal Energy Regulatory Commission.

Author: Cudahy

Before WOOD, CUDAHY and FLAUM, Circuit Judges.

CUDAHY, Circuit Judge.

This is a petition for review of several orders of the Federal Energy Regulatory Commission (the "Commission") involving the validity of a rate filing made by Amoco Production Company ("Amoco") for sale of natural gas to Phillips Petroleum Company ("Phillips"). Essentially the rate determination involved an interpretation of a 1945 contract between Amoco and Phillips on the question whether that contract permitted Amoco to collect tax reimbursement monies from Phillips as a separate addition to a base rate which already took specific account of, and included, the relevant tax payments. Amoco particularly objects that the method of computation approved by the Commission denies Amoco 100% pass-through of tax-based payments which Phillips received in turn on resale of the natural gas to Michigan-Wisconsin Pipe Line Company ("Michigan").

In 1945, Amoco entered into a contract to sell natural gas to Phillips. Phillips, in turn, after treating and processing the gas, was to resell it to Michigan under a separate contract. The base price for sale from Amoco to Phillips was to be determined by a formula in Article VII of the contract under which the key variable was the price received on resale from Phillips to Michigan.*fn1 Under Article VIII, Amoco was also entitled to collect from Phillips 75% of any of Amoco's additional severance, production and excise taxes. Article VIII noted that Phillips, in turn, under its contract with Michigan could recover 75% of such taxes from Michigan.*fn2 In 1965 the agreement between Phillips and Michigan was amended to provide for reimbursement of 100% of additional taxes by Michigan to Phillips. Since Article VIII of the Amoco-Phillips contract referred specifically to the Phillips-Michigan contract, Amoco argues that its proportion of recovery should now be 100% rather than 75% as well.

After the decision in Phillips Petroleum Company v. Wisconsin, 347 U.S. 672, 98 L. Ed. 1035, 74 S. Ct. 794 (1954), which held that the Commission had jurisdiction over wellhead sales of natural gas, both Amoco and Phillips filed their gas sales contracts with the Commission and conformed the rates charged to agency regulation. The effect of regulation was to limit the rates Amoco and Phillips could collect to the contract rate or any ceiling rate prescribed by the Commission, whichever was less. See Federal power Commission v. Sierra Pacific Power Co., 350 U.S. 348, 100 L. Ed. 388, 76 S. Ct. 368 (1956); United Gas Pipe Line v. Mobile Gas Service Corp., 350 U.S. 332, 100 L. Ed. 373, 76 S. Ct. 373 (1956).

In 1971 and 1972, Amoco filed rate changes with the Commission at the appropriate area ceiling prices then in effect.*fn3 Phillips protested both filings and the Commission consolidated the two matters for evidentiary hearing. The relevant issue in those proceedings was the amount to be used as the applicable Phillips resale price (to Michigan). This number was in turn the numerator in the contractual formula for determining the price Phillips was to pay Amoco. Based on contract language referring to "the price received [by Phillips]," the Administrative Law Judge (the "ALJ") held that the numerator in the formula was, as Phillips had argued, the price actually received by Phillips from Michigan - a regulatory ceiling price, not, as Amoco had argued, a higher contract price. In his Findings and Conclusions the ALJ, using the contractual formula, found that Amoco was entitled to charge Phillips certain amounts calculated "under Section 3 of Article VII of the Amoco-Phillips gas sale contract exclusive of tax reimbursement." ALJ Initial Decision, Nos. RI 71-691, RI 73-70 (April 1, 1974) (emphasis supplied).

The Commission affirmed and adopted the ALJ's decision but modified it to hold that only during the period covered by one rate filing (January, 1971 - June, 1972) was the proper numerator in the formula in fact the appropriate area ceiling rate. The Commission said, however, that after July 1, 1972, the proper numerator was the contract rate from Michigan since it was lower than the increased area ceiling. The Commission stated:

From January 12, 1971, until July 1, 1972, Phillips collected the area ceiling rate prescribed in Opinion No. 586 for the resale of the subject gas. On July 1, 1972, Phillips commenced the collection of its contract rate of 16.22 cents per Mcf, plus applicable tax reimbursement, without refund obligation.

Order Affirming and Adopting Initial Decision with Modification, 52 F.P.C. 889, 891 (1974).

In 1976, Amoco filed a new rate using as the Phillips' resale price in the contract formula the applicable rates set forth in a Commission national rate-making order, Opinion No. 749, Just and Reasonable Rates, 54 F.P.C. 3090 (1975) ("Opinion No. 749"). In addition to this base rate, Amoco's notice included a separate component for tax reimbursement. The claim for the component for tax reimbursement was made pursuant to Article VIII of the AMoco-Phillips contract, which, as noted, provided that 75% of applicable tax increases would be collected by Phillips from Michigan and passed on to Amoco, which paid the taxes. Amoco treated the 75% as having been amended to 100% as the result of the 1965 amendment to Phillips' contract with Michigan.

Phillips objected to the tax reimbursement component, pointing out that under Opinion No. 749 it was permitted to collect only the ceiling rate set by the Commission. This was a primarily cost-based rate which included tax adjustment. Phillips argued that, since it collected no separate monies from Michigan earmarked for tax reimbursement, no additional monies were due to Amoco. Subsequently, Amoco filed a complaint asking that the Commission direct Phillips to pay the separate tax reimbursement and Phillips reiterated its defense characterizing the tax reimbursement component as a nullity.

In Opinion No. 209, and Order Interpreting Contracts, Dismissing Complaint and Terminating Proceeding, 26 F.E.R.C. P61, 257 (1984), the Commission dismissed Amoco's complaint, holding that since Amoco was compensated for tax reimbursement as part of the rate paid by Phillips under the formula (based on the amounts paid in turn by Michigan to Phillips), a separate tax component increment would be a double recovery. The Commission said that such an increment was not authorized by the underlying contract and was null and void. Both Amoco and Phillips filed applications for rehearing - Amoco challenging the decision and Phillips seeking refund of rate overpayments ...

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