Tenneco Exploration, Ltd., Petitioner, v. Federal Energy Regulatory Commission, Respondent, 649 F.2d 376 (5th Cir. 1981)

This case involves the review of two unreported orders of the Federal Energy Regulatory Commission (FERC). Tenneco Exploration, Ltd. applied for certificates of public convenience and necessity to sell certain Outer Continental Shelf gas at the section 109(a) (2) ceiling price under the Natural Gas Policy Act of 1978 (NGPA), 15 U.S.C.A. § 3319(a) (2). The Commission authorized Tenneco Exploration's sales at no more than the section 104 ceiling price of the NGPA. The issue in this case is whether the Commission properly concluded that section 104 rather than section 109 applied to the sales of gas involved here. This Court concludes that it did not, and accordingly sets aside in part and remands the orders of the Commission.

On June 1, 1977, Tenneco Exploration applied for two optional procedure certificates under 18 C.F.R. § 2.75 for certain natural gas to be produced from the Outer Continental Shelf. On November 9, 1978, when the NGPA became law, Tenneco Exploration's certificate applications were still pending before FERC. On February 16, 1979, Tenneco Exploration filed a motion to withdraw the optional procedure certificate applications so that it could seek certification of the gas sales at NGPA ceiling prices. The Commission granted this motion.

On October 31, 1979, Tenneco Exploration applied for the certificates at issue here. On December 3, 1979, FERC issued the requested certificates, conditioned to permit collection of no more than the applicable maximum lawful price prescribed in NGPA § 104. On December 18, 1979, Tenneco Exploration filed a notice of acceptance of the certificates and at the same time requested rehearing of the order with regard to the pricing condition. Tenneco Exploration's position there, as it is here on appeal, was that the applicable maximum lawful NGPA price was the section 109(a) (2) ceiling price rather than the section 104 ceiling price. On January 18, 1980, the Commission granted rehearing of the order, and on March 19, 1980, denied rehearing. FERC maintained, as it does here on appeal, that the proposed sales are covered by section 104 and not by section 109 of the NGPA.

II. Determination of the Applicable NGPA Pricing Category

Section 104 applies to "natural gas committed or dedicated to interstate commerce on November 8, 1978, and for which a just and reasonable rate under the Natural Gas Act was in effect on such date." Section 109(a) (2) applies to "natural gas committed or dedicated to interstate commerce on November 8, 1978, and for which a just and reasonable rate under the Natural Gas Act was not in effect on such date." Sections 104 and 109(a) (2) both require initially that on November 8, 1978, the gas be "committed or dedicated to interstate commerce," as that term is defined in section 2(18), 15 U.S.C.A. § 3301(18). Each section secondarily requires the exact converse of the other: a just and reasonable rate under the Natural Gas Act of 1938 (NGA), 15 U.S.C.A. § 717-717w, either was or was not in effect on November 8, 1978, for the gas.

There is no dispute in this case that the gas at issue was "committed or dedicated to interstate commerce" on November 8th within the meaning of the NGPA. Section 2(18) (A) (i) defines "committed or dedicated to interstate commerce" to include natural gas that is from the Outer Continental Shelf, as is the case here. Additionally, section 2(18) (A) (ii) includes within the definition any "natural gas which, if sold, would be required to be sold in interstate commerce (within the meaning of the Natural Gas Act) under the terms of any contract." Before November 8, 1978, Tenneco Exploration had executed contracts to sell the gas in interstate commerce. For both these reasons, the gas at issue was "committed or dedicated to interstate commerce" on November 8th, which satisfies the initial test for pricing under sections 104 and 109. Resolution of this dispute with FERC turns instead on whether the second requirement of section 104, or its opposite in section 109, is met in this case.

The critical language in both sections 104 and 109 is "(gas) for which (an NGA rate) was (or was not) in effect." Tenneco Exploration's theory in support of its claim to section 109(a) (2) pricing hinges on the argument that section 104's second test requires that the gas be dedicated to interstate commerce within the meaning of the NGA. To be subject to an NGA rate, gas had to first come under the Commission's NGA jurisdiction; dedication to interstate commerce within the meaning of the NGA was the means by which such jurisdiction attached. Dedication of acreage under the Natural Gas Act requires not just a contract to sell the gas into interstate commerce, but actual sales in interstate commerce; this is unlike the NGPA's broader term "committed or dedicated." Falcon Petroleum v. FERC, 642 F.2d 780, 784 (5th Cir. 1981); Conoco, Inc. v. FERC, 622 F.2d 796, 797 (5th Cir. 1980). Tenneco Exploration did not commence deliveries of the gas at issue until after November 8, 1978. Therefore, the gas was not dedicated under the NGA on November 8th. Since it was not dedicated under the NGA on that date, Tenneco Exploration argues, the gas was not subject to an NGA ceiling price.¹ 

FERC's argument to the contrary is that the language "in effect" in section 104 means only that there were natural gas rate orders in existence on that date that would apply to the gas if it had been sold in interstate commerce. While an agency interpretation of its own statute is generally given deference, Udall v. Tallman, 380 U.S. 1, 16, 85 S. Ct. 792, 801, 13 L. Ed. 2d 616 (1963), such deference evaporates when the agency's interpretation is clearly wrong or unreasonable, Coca-Cola Co. v. Atchison, T. & S. F. Ry., 608 F.2d 213, 222 (5th Cir. 1979). This Court concludes that FERC's interpretation is clearly wrong.

To begin, FERC focuses inordinate attention on the phrase "in effect" and not enough on the equally important phrase "gas for which." FERC's selective emphasis on the language of sections 104 and 109 places the focus of analysis on whether the Commission had promulgated wellhead price regulation orders. The language of sections 104 and 109, however, is more specific in its chosen focus. By referring to "gas for which" an NGA rate was "in effect," the NGPA expresses the intent that the gas at issue actually have been subject to an NGA rate. By moving from Commission rate orders generally to the specific gas involved, the analysis must accordingly shift from whether the Commission could regulate such gas if sold in interstate commerce, to whether the Commission did in fact have such jurisdiction with respect to the gas at issue.

A necessary predicate for NGA rate regulation to attach to producer sales of natural gas was that the sale must be a sale in interstate commerce for resale. NGA § 1(b), 15 U.S.C.A. § 717(b).²  Normally, the producer must have had a certificate of public convenience and necessity before undertaking such a jurisdictional sale. NGA § 7(c) (1), id. § 717f(c) (1). Initiating sales in interstate commerce for resale without such a certificate, however, nonetheless subjected that gas to the Commission's rate regulation jurisdiction under the NGA. See Cox v. FERC, 581 F.2d 449, 450-51 (5th Cir. 1978). Nor did obtaining a certificate alone constitute dedication; physical deliveries of gas into interstate commerce, which is the initiation of the regulated service, must still have occurred. Conoco, 622 F.2d at 797.

In short, dedication by commencing interstate deliveries was the legal means by which gas was placed within the Commission's NGA rate jurisdiction. See California v. Southland Royalty Co., 436 U.S. 519, 527, 98 S. Ct. 1955, 1959, 56 L. Ed. 2d 505 (1978). The gas at issue here was not sold in interstate commerce for resale until after November 8, 1978. Consequently, it was not dedicated to interstate commerce within the meaning of the NGA on November 8th, and was therefore not subject to an NGA ceiling price on that date. That places the gas under section 109(a) (2) pricing (unless it qualifies for an incentive price category) rather than under section 104 pricing.³ 

FERC additionally argues that the NGPA definition of "committed or dedicated to interstate commerce" is applicable as if it were in effect on November 8, 1978; since this gas was "committed or dedicated" within the meaning of the NGPA, FERC argues, it was therefore subject to an NGA rate because such a rate would have applied had Tenneco Exploration sold its gas on November 8, 1978. FERC relies for its argument on language from Conoco, which states that Congress intended for the definition of "committed or dedicated to interstate commerce" under the NGPA to be applicable as if it were in force prior to the effective date of the NGPA. Conoco, 622 F.2d at 798.

FERC is taking this Court's language out of context, however. Producers argued in Conoco for the use of the NGA meaning of dedication when applying NGPA § 601(a) (1) (A). The latter removes gas on December 1, 1978, from NGA jurisdiction if on November 8, 1978, that gas was not "committed or dedicated to interstate commerce." Since the test for application of section 601(a) (1) (A) turns on facts antecedent to the enactment of the NGPA, producers argued that only the NGA meaning of dedication could apply to those antecedent facts. Application of the narrower NGA meaning of dedication would have broadened the NGPA's limitation on NGA jurisdiction. This Court held, however, that it was the NGPA's definition of "committed or dedicated," and not the NGA meaning of dedication, that was used in section 601(a) (1) (A). The NGPA definition is thus to be applied to the antecedent facts as if the NGPA's definition were in effect on the antecedent date.

Here, the Commission is attempting to utilize the NGPA definition of "committed or dedicated" for the purpose of applying the NGA. This is improper. The converse of the holding of Conoco is equally true for this case: The Commission cannot attempt to use the NGPA definition for application of the NGA. See H.R.Rep.No. 1752, 95th Cong., 2d Sess. 72 (1978), U.S.Code Cong. & Admin.News 1978, p. 8988 ("committed or dedicated to interstate commerce" is used solely for the purpose of the NGPA; definition does not create new obligations or expand NGA jurisdiction). Simply stated, the NGPA definition can only be used for applying the NGPA, while the meaning of dedication under the NGA can only be used for applying the NGA. To say that since the gas was "committed or dedicated" on November 8, 1978, an NGA rate would have applied to the gas if it had been sold on that date, is simply to restate the hypothetical application of the NGA utilized in NGPA § 2(18) (A) (ii): "committed or dedicated" gas is gas that, if sold, would be required to be sold in interstate commerce. The first test of sections 104 and 109, like section 601(a) (1) (A), requires the application of the NGPA definition of "committed or dedicated." The second test of sections 104 and 109 directs the application of the NGA alone. Such a direction requires that the NGA meaning of dedication must be used when applying the NGA.

FERC's interpretation is also inconsistent with the structure and purpose of the NGPA. This Court has already noted that the NGPA definition of "committed or dedicated to interstate commerce" is broader than the NGA meaning of dedication to interstate commerce. Falcon, 642 F.2d at 784. Simply entering into a contract to sell gas in interstate commerce is sufficient to commit the gas to interstate commerce within the meaning of the NGPA, but actual sales of gas into interstate commerce are required for the gas to be dedicated within the meaning of the NGA. Id. The difference in scope in these two concepts relates directly to NGPA pricing policy. Section 104 incorporated by reference and carried forward prior FPC rate regulation. Gas that was subject to prior FPC rate orders was gas dedicated under the NGA. Congress thus continued prior ceilings on gas that otherwise needed no additional incentive in order for sales to occur. Also needing no additional incentive was gas already legally committed to interstate commerce, though not yet dedicated within the meaning of the NGA, because of a contract to sell the gas in interstate commerce, or because of the statutory requirement that Outer Continental Shelf gas must be sold in the United States.⁴ 

Section 109(a) (2) was thus designed to prevent windfalls to producers with respect to gas legally committed to interstate commerce, but not yet dedicated to interstate commerce within the meaning of the NGA. To soften the impact of this pricing policy, Congress specified the section 109 ceiling price as a dollar amount equal to the highest ceiling price available under prior FPC national rate orders, now the highest section 104 price. FERC's position undermines this significance to the distinction between dedicated gas and gas that is legally committed but not dedicated.

This Court concludes that since the gas at issue was not subject to an NGA rate on November 8, 1978, section 104 is not the applicable maximum lawful NGPA price for this gas. Accordingly, the orders under review are set aside with regard to the pricing condition in the certificates. The orders are remanded to FERC in light of the foregoing.

SET ASIDE IN PART AND REMANDED.