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SOUTHERN NATURAL GAS COMPANY v. JOSEPH F. FRITZ

AUGUST 05, 1987

SOUTHERN NATURAL GAS COMPANY
v.
JOSEPH F. FRITZ, G. B." BOOTS "SMITH CORPORATION, CHALLENGER DEEPWELL SERVICES, INC., H. LANIER B. FOOTE, AND EXXON CORPORATION



BEFORE ROY NOBLE LEE, SULLIVAN and GRIFFIN

ROY NOBLE LEE, PRESIDING JUSTICE, FOR THE COURT:

The Circuit Court of Marion County, Mississippi, sitting without a jury, entered judgment in the amount of one million thirty-two thousand four hundred sixty-seven dollars and sixty cents ($1,032,467.60) in favor of Joseph F. Fritz, et al., against Southern Natural Gas Company [Southern] for breach of contract involving the sale of natural gas. Fritz also sought punitive damages, alleging an intentional, willful and bad faith breach, constituting an intentional and tortious breach of contract. The lower court granted summary judgment in favor of Southern Natural Gas Company as to punitive damages. From the money judgment, Southern has appealed, and Fritz, et al., have cross-appealed from the judgment denying the punitive damages claim and from the amount of the money judgment.

Appellant assigns the following errors in the trial below:

 I. THE LOWER COURT ERRED IN GRANTING SUMMARY JUDGMENT ON THE RULE 270.207 ISSUE.

 II. THE LOWER COURT ERRED IN REFUSING TO STAY THE CASE PENDING REVIEW OF THE RULE 270.207 ISSUE BY THE FEDERAL ENERGY REGULATORY COMMISSION [FERC] PURSUANT TO THE FERC'S PRIMARY JURISDICTION

 III. EVEN IF FRITZ IS ENTITLED TO COLLECT THE DEREGULATED PRICE, HE CANNOT COLLECT IT RETROACTIVELY.

 IV. ATTORNEY'S FEES ARE NOT RECOVERABLE WHERE PUNITIVE DAMAGES ARE DISALLOWED

 V. THE LOWER COURT ERRED IN ALLOWING INTEREST CHARGES IN EXCESS OF THE CONTRACT AMOUNT.

 Facts

 On October 26, 1951, Southern entered into a contract with Humble Oil & Refining Company (now Exxon) for the purchase of gas produced from the Sandy Hook Field in Marion and Pearl River Counties, Mississippi, and Washington Parrish, Louisiana. The contract was amended a number of times by Exxon and Southern, the last being February 5, 1982. The contract amendment involved here was executed October 5, 1979.

 Prior to 1978, all gas sold in interstate commerce was subject to federal ceiling price regulation and was referred to as regulated gas. The passage of the Natural Gas Policy Act of 1978 resulted in the lifting of price restrictions on certain categories of natural gas, which was referred to as deregulated gas, while other categories remained regulated. One of the categories which became deregulated as the result of NGPA was" deep, high-cost "gas produced from a depth of below 15,000 feet. That category applies to the well in the present case.

 In early 1978, Exxon had discovered gas in the" Mississippi Canyon "area of off-shore Louisiana and Southern submitted a proposal to purchase the gas from Exxon During the late summer or fall of 1978, Exxon and Southern reached an agreement in principal to upgrade and modernize various contracts and for Exxon to sell its Mississippi Canyon gas to Southern. The amendments upgrading those contracts were executed by Exxon and Southern October 5, 1979. After the amendment occurred, FERC gave notice that it was considering adopting a regulation governing sales of regulated and deregulated gas. The regulation is 18 C F.R. 270.207. The purpose of the regulation was to prevent a producer, who was selling both regulated and deregulated gas to a given purchaser, from evading the price ceilings on regulated gas by hiding part of the price he was receiving for regulated gas in the price he was charging the purchaser for deregulated gas.

 In January, 1980, Exxon spudded the Sandy Hook gas

 Unit 27 #1 (well) Exxon was unable to complete the well as a producer and entered into a farm-out agreement with Fritz Under its terms, Fritz would earn an assignment of leases from Exxon, if he completed the Sandy Hook well as a productive unit. However, during the drilling operation, the well casing caved and the well cost Fritz an additional five million dollars ($5,000,000), which placed him in dire financial straits. On January 24, 1983, after Fritz completed the well, Exxon executed an assignment to him which was made subject to the Exxon-Southern contract. The agreement stated that Fritz confirm, ratify, and adopt the terms and provisions of the Exxon-Southern contract and assume all rights and obligations of Exxon thereunder as they related to the interest of Fritz committed to the performance of the contract

 In 1979, Exxon and Southern added a favored nations clause *fn1 to the contract which had the effect of increasing the price payable for deregulated gas. The amendment was agreed to in consideration of the commitment of regulated gas by Exxon to Southern. That regulated gas was subsequently sold to Southern at the maximum lawful price.

 Southern takes the position that because of the interstate nature of the transaction involved here, the parties are preemptively regulated by the FERC; that 270.207 has been interpreted by the FERC to render illegal the payment of a contract price for natural gas under circumstances similar to the present case; and that penalties probably would be inflicted from a violation of 270.207. Therefore, Southern declined to pay the full contract price, pending a ruling by the FERC that such payment would not constitute illegal activity.

 Fritz, on the other hand, claims that under the facts of the case, there is no violation of 270.207; that refusal by Southern to pay the contract price amounted to a tortious breach of the contract; and that Fritz is entitled to actual damages, incidental and consequential, and punitive damages.

 Law

 The record in this case comprises twenty-three (23) volumes, and adds to the complexity of the case. However, the issues are relatively simple, except that the two threshold questions relating to the jurisdiction of the FERC are difficult for determination. Southern contends (1) that the lower court erred in granting summary judgment on the 270.207 issue and (2) that the lower court erred in refusing to stay the case pending review of the 270.207 issue by the

 FERC pursuant to the FERC's primary jurisdiction.

 The basis of the first two issues is FERC Regulation 270.207, which states:

 Section 270.207 - Sales of Volumes of Gas Which Include Deregulated High-cost Gas.

 No portion of the price paid for the first sale of deregulated, high-cost gas, as defined in Section 272.103, or gas for which an application that the gas qualifies as deregulated high-cost gas is pending, may represent consideration for the sale of natural gas which is not deregulated, high-cost gas.

 In considering circumvention of maximum lawful prices, the FERC stated its regulatory analysis of the final rule enacting 270.207.

 The Commission is concerned that situations may arise where prices paid for deregulated gas may be paid as consideration for the sale of gas subject to price regulation. . . [W]e do not intend to permit circumvention of applicable maximum lawful prices and would consider sales in which part of the price paid for deregulated high cost gas was paid as compensation for the sale of price regulated gas to be circumventing applicable maximum lawful prices.

 Order No. 78, 45 Fed. Reg. 28092 (April 28, 1980), FERC Stat. & Reg. 30,147.

 Southern and Fritz both rely upon Columbia Gas Transmission Corp., 22 FERC 63,093 (1983). In Columbia, there was a 1963 contract between Exxon and Columbia for the sale of natural gas produced from the Garden City Field. Subsequently, the parties amended the Garden City contract to include a favored nations clause as an alternate pricing mechanism for deregulated gas. Under the agreement, Exxon was entitled to receive the highest price paid by Columbia to any other producer in the Garden City Field. The favored nations clause operated to increase the price paid for deregulated gas above that which would have been paid without the amendment. As consideration for the amendment, Exxon agreed to commit to Columbia certain gas reserves in off-shore Louisiana, the majority of which was regulated gas. This tie-in between the commitment of regulated gas and a deregulated price increase was held to be the practice prescribed by 270.207. On

 January 16, 1984, the FERC decided the Columbia case and stated:

 [I]n the case where the price of deregulated gas is increased in exchange for new reserves of regulated gas at the ceiling price, the price of the regulated gas exceeds the maximum lawful price because, in consideration for the regulated gas, the producer ...


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