Texas Gas Transmission Corporation v. Shell Oil Company

PETITIONER:Texas Gas Transmission Corporation
RESPONDENT:Shell Oil Company
LOCATION:District Court for the District Court of Columbia

DECIDED BY: Warren Court (1958-1962)
LOWER COURT: United States Court of Appeals for the Third Circuit

CITATION: 363 US 263 (1960)
ARGUED: Apr 20, 1960 / Apr 21, 1960
DECIDED: Jun 13, 1960

Facts of the case


  • Oral Argument – April 21, 1960
  • Audio Transcription for Oral Argument – April 21, 1960 in Texas Gas Transmission Corporation v. Shell Oil Company

    Audio Transcription for Oral Argument – April 20, 1960 in Texas Gas Transmission Corporation v. Shell Oil Company

    Earl Warren:

    Number 167, Texas Gas Transmission Corporation, et al., Petitioners, versus Shell Oil Company and number 170, Federal Power Commission, Petitioner, versus Shell Oil Company.

    Mr. Gatchell, you may now proceed.

    Willard W. Gatchell:

    Mr. Chief Justice, and Associate Justices, may it please the Court.

    We ask for the privilege of opening the argument in this case because to us, it presents more than merely a dispute between two private litigants.

    It concerns a matter of regulatory control which we regard as rather vital.

    In these cases, the Court is asked to decide whether or not a favored-nation escalation clause in a contract of Shell Oil Company and The Texas Gas Transmission Company was triggered, that is made effective by a higher rate paid by Texas Gas under another contract with another producer, Atlantic Refining Company.

    The answer to this question is required in order to determine the effective rates to be charged by Shell under the Natural Gas Act as of June 7, 1954.

    The date used by the Federal Power Commission to start the regulatory controls under that act as applied to independent producers of natural gas.

    The Court well remembers that the Phillips Petroleum Company case was decided on June 7, 1954, holding independent producers to be subject to the Natural Gas Act.

    As Shell entered into its contract in 1951 with Louisiana Natural Gas Company, a subsidiary of Texas Gas and then the subsidiary was later merged into Texas Gas and we will refer to this 1951 contract as the Shell contract because it is the first one that needs attention.

    The favored-nation escalation clause in this Shell contract provide that if anytime the buyer enters into a contract providing for the purchase of gas produced by a field within 50 miles of the Shell field and the price payable by the buyer is higher than the price under the 1951 Shell contract, the buyer has to pay Shell the same higher price.

    The 1951 Shell contract calls for a price of 8.997 a thousand cubic feet for all gas purchased after January 1, 1952 through December 1956, thus, higher price is called for under the escalation clause.

    On June 7, 1954, Texas Gas was the buyer and this 8.97 — 997-cent rate would, if it — the rate fixed in the contract applied, the either rate which would be the initial rate used by the Commission and by the companies as the start of their service under the Natural Gas Act.

    Now, the contract which is said that triggered the Shell contract was entered into in 1943 by Atlantic Refining Company as a seller and the United States Government as the — as the buyer, and then the United States Government has transferred and finally, Texas Gas gets it as buyer and — and Texas Gas was the buyer under both contracts on June 7, 1954.

    The gas was sold under this Atlantic contract originally at 2.2 cents per Mcf and the contract was to continue for the producing life of the field but not longer than 25 years.

    There’s a slight error in the Court of Appeals’ decision where it refers to a 20-year contract whereas it actually is a 25.

    The seller agreed to sell and the buyer agreed to buy under this Atlantic contract specified daily quantities of gas, and that’s important.

    Under the Atlantic contract, no price was fixed after the first five years, started off and said that during the first five years of the 2.2 cents and then after that, the buyer and the seller were to reach an agreement as to the price for the second five year period.

    And after — in doing that, they would consider the prevailing market price for gas sold in that area, Southeast and Southwestern Louisiana.

    And then the price for each succeeding five-year period would be similarly determined or agreed upon by the parties.

    What happened if they failed to agree?

    Willard W. Gatchell:

    There was a provision for arbitration and that’s the most important because to us, the arbitration agreement means that this 1943 contract continues for 25 years and that the mere incident of a price adjustment or a price determination could be by the parties if they were able to do so or under arbitration, so that to us, it was not a new contract entered into in 1953 when the third five-year period started.

    Now, there was an agreement for the second five-year period.

    They had a letter agreement and then it went up, and for a few months from September, they had a six months period where they did agree.

    On September of 1953, they did agree.

    And then they come up to this period which really affects what we’re talking about here.

    Under the Atlantic contract, there was a dispute as to just how much the third period should cover, what price should be determined.

    And it was not until February of 1954, and I mentioned that because you see that is after September 1st, 1953 when the third period started.

    Not until February 1954 that they decided that they would pay, that Texas Gas would pay and as far as Atlantic was concerned, it was satisfactory.

    They would pay 12.5 cents.

    Willard W. Gatchell:

    So that from September 1953 on, for the balance of the five-year term, the rate was 12.5 cents.

    Charles E. Whittaker:

    That’s the letter of February 17, 1954 fixing the price of September 1 preceding.

    Willard W. Gatchell:

    Yes, sir.

    And we call that the 1953 agreement although it was entered into in February.

    It’s the 1953 agreement because that’s in the third period.

    Now, when Shell, a month later, that is Monday after this February 17th later — letter, found that there had been an — an escalation under the Atlantic contract.

    Shell told the — the buyer, Texas Gas, in 19 — March 1954 that its price had gone up automatically with the increase in the price paid to Atlantic and therefore, under the Shell contract, instead of an 8.9 cent price, there was a 12-cent — 12.5-cent price which should be paid by Texas Gas.

    And then as I said, this Court decided in June of 1954 right after this, decided that the independent producer was subject to the Natural Gas Act and the Commission started to impose the controls called for by that act.

    One of the controls of course was the filing of rate schedules.

    Now, independent producers don’t have rate schedules and tariff, one where they agree to sell the whole, those who may apply such as an interstate pipeline may do but they have individual contracts.

    And we were — we thought we were faced with a prospect of having a great many thousand individual contracts filed.

    Well, we didn’t estimate that there’ll be 46,000 by April 1960 but that’s what has happened, and then some 10,000 — over 10,000 basic contracts that have been filed with us and with no increase in staff and the tremendous burden which we anticipated, the Commission did the best thing it could and tried to see that the filing requirements were met properly and rather than they require, all of these producers to place their individual contracts into a tariff form, they said, “File your contracts.”

    But by way of assisting in an understanding of what rate would be involved, they ask that they file also with the contract, but really not a rate schedule, they filed a billing statement.

    At the end of each month, the company that buys submits a statement to the producer and says, “We have taken so many cubic feet of gas and under our contract, the rate for that month is — 8 cents,” or whatever it might be.

    And those billing statements assist us and assist those who come before us in understanding what exactly is the agreement stated in these very confusing individual contracts that the producers have.

    They are long, they are complex.

    You will find two contracts involved here taking up some 14 printed pages with very intricate provisions as to temperatures and impurities and there is the pressure and place of taking and so on.

    And — and then also, on page 65 of the record, the Shell contract list, the — the rates which would obtain during certain periods, absent the escalation clause and then goes on and has the escalation clause set up very clearly.

    Now, we have printed for the convenience of the Court, the escalation clauses that are involved here.

    The first, the Shell is on page — starts on page four of our brief.

    And — and I think the — just a brief reading of that, hasty reading of that may assist if at any time after December 31, 1951, the buyer that is Texas Gas at this time, shall enter into a contract providing for the purchase by it of gas produced from the field or fields located and delivered to buyer within a radius of 50 miles, then buyers to notify seller of that fact in the price.

    If the price per thousand cubic feet is more under the other contract, then it was another Shell contract, then the shell contract price goes up.

    Now, what was it that triggered it?

    Well, Shell says that this contract under which Texas Gas on June 4, 19 — June 7, 1954 was buying gas from Atlantic Refining, another producer that that was a new contract.

    Charles E. Whittaker:


    Willard W. Gatchell:

    A new contract.

    That’s what Shell says and that’s what the Third Circuit said.

    And that — the escalation clause is printed on page — starting on page five.

    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 each second five-year period is to be agreed upon at the beginning of such period after a survey of prevailing prices for gas sold in similar quantities in the Southwestern part of Louisiana and so, during each succeeding part and then arbitration if they are unable to agree.

    Was Shell committed to the full 25-year period?

    Willard W. Gatchell:

    Well, the 25 year —

    (Voice Overlap) —

    Willard W. Gatchell:

    — contract is with Atlantic.

    And — and —

    I beg your pardon.

    Willard W. Gatchell:

    — we think —


    Willard W. Gatchell:

    — we think there is no question.

    But what the producer, Atlantic Refining was committed for the full 25-year period.

    Earl Warren:

    Irrespect — irrespective of what effect the escalation clause had on the price.

    Willard W. Gatchell:


    Yes, sir.

    The Third Circuit, however, said that is a continuing contract for the delivery of gas.

    But obviously, gas is to be paid for if it is delivered.

    And that there would not be a final contract as to the second and third and fourth, five-year period until there was an agreement upon the price.

    And therefore, under this Atlantic contract, the Third Circuit says, “There was an agreement only in February — in the February 17 letter,” 1954 extending back to September 1, 1953.

    There was only an agreement at that time upon the price.

    And therefore, that was the entering of a new contract.

    And in our opinion, they disregard the language in the Shell contract that the escalation was to occur when there was a new contract for the purchase of gas.

    We think that it’s most important that that be born in mind.

    Now —

    Charles E. Whittaker:

    Mr. Gatchell —

    Willard W. Gatchell:

    Yes, sir.

    Charles E. Whittaker:

    May I ask you please, sir?

    Were the provisions at that letter of February 17, 1954, in your judgement a contract for the purchase of gas?

    Willard W. Gatchell:

    Mr. Justice Whittaker, I think there’s no question on that.

    It — they are not a contract for the purchase of gas.

    They are merely carrying out a provision that was set out in this Atlantic contract of 1943, namely an agreement upon the price.

    Charles E. Whittaker:

    Then in the absence of that letter, suppose it had not been made, would there then have been an existing contract for the purchase of gas by Texas from Shell?

    Willard W. Gatchell:

    There would have been, not only for Shell — not — not for Atlantic, for Atlantic to deliver and Texas to buy.

    Charles E. Whittaker:


    Willard W. Gatchell:

    Now, there, had the parties not agreed, they would of course have to go to arbitration to determine the price.

    But the — the contract and the important thing for this pipeline companies is the supply.

    The supply would have been available during the whole 25-year period at the place of delivery called for.

    Charles E. Whittaker:

    I noticed here there is — doesn’t appear to be any provision saying that the price in existence and the — during the preceding five-year term shall continue until a new one is arranged.

    There just isn’t any price after the end of the five-year period, until one is made.

    Is that not right?

    Willard W. Gatchell:

    No, You Honor, Mr. Justice Whitaker, I think really, this letter of February 17th demonstrates what happens.

    They continue to pay the prior price.

    But on February 17, 1954, they agreed to go back to the beginning of the third period, September 01, 1953.

    Agreed to go back and just pay 12.5 cents from that September 1st on.

    An absence — absent that February 17’s letter, I would think that the parties would have continued to go under the prior rate.

    But always, there would be an obligation upon the pipeline purchaser that is Texas Gas, to make up any difference, ultimately, determined either by agreement among the parties or by arbitration between the price for the second or third or fourth year five-year period over what have be — previously been collected.

    I think that letter of February 17th is most significant in that aspect of it.

    Now, I — I will deal in my presentation with what we regard as the limited scope of judicial review under the facts which I had given so far.

    The — we think the Third Circuit, reading this as a strictly legal document, the contract which could be interpreted by the Court.

    But that was all that there was to it and that therefore, since the contract, the Third Circuit called for a new agreement every five years.

    That new agreement under the Atlantic contract became a new agreement under the Shell and automatically triggered the escalation.

    If it did trigger the escalation of the Shell contract, then on June 7, 1954, the rate was 12.5 cents as claimed by Shell and not 8.997 as found by the Federal Power Commission.

    Now, the — when the Commission examined the billing statement that was filed with this Shell contract, I noticed the discrepancy.

    It said, “Well, we will not receive nor reject.

    We’ll not accept nor reject the contract, but we will ask for an explanation.”

    And we — we set that letter to them in January of 1955.

    It was not until February of 1957 that the explanation was given and it was then given not because there was a continuing situation, but because they had applied in February of 1957.

    Two years later, they applied for an increase in the Shell rate to 16 and — and 34 cents.

    We have — we had suspended that and — and set it down for hearing, then it was placed into effect as it could be at the end of the suspension period.

    And we have not yet gotten around to a determination as to whether that is a just and reasonable rate, but it is being collected at 16 cents.

    But that means that from September 1, 1953 up to February 1957, there is a rate in dispute between these parties which amounts to some $10,497 every month on the average, going on all of this time, because Texas has paid the 8.997 rate right along.

    And Shell for some reason which escaped me didn’t press its claim, either with the company or before the Commission, didn’t press its claim during this interval.

    Willard W. Gatchell:

    Now, the reason these escalation clauses to us are a little more than merely just concerning two companies which are before the Court is this.

    Many — many of these contracts originally with the producers had to be for a long periods.

    It cost a lot of money to put in the pipe and compressor stations and other facilities to get gas from this producing fields up to the markets where they — where the gas can be sold most profitably.

    And the pipeline companies cannot afford to undertake those — that expensive investment nor will the financial houses underwrite them and issue these securities until there is a — an assurance of a supply for a reasonable period.

    Most of them as the Shell contract are for 20 years, but some of them as the Atlantic contract, are for 25 years.

    And — and the producers in wanting to protect themselves economically against the inflation that has gone on in — in the oil field of steadily rising prices have used these escalation clauses.

    Originally, they were fixed escalations.

    Every two years or five years or whatever the period might be would — the price would go up one cent, two cents, or three cents.

    And under a contract like that, you could look at it and say at the beginning exactly what would be paid and that the pipeline purchaser would be able to tell its customers exactly what they would have to pay because all of the rates could be determined.

    But they found that those fixed periodic escalations did not give enough return to the producers and so they resorted to these indefinite pricing agreements which we call escalation clauses, where price might go up by reason or the buyer under this particular contract paying more to another buyer or because he enters into a new contract to another producer or where he enters into a new contract with some other producer or because there’s a rise in the field prices or a commodity index or — or some other fixed — some other indefinite provision whereby at some time, in some manner, there would be an additional price paid.

    Now, the two kinds with which we are concerned right here are very, very simply stated.

    One, which we think the Court mistakenly attributed to the Atlantic contract is where a producer — where a pipeline company enters into a new contract for a new supply of gas and pays more than he is playing — paying to his old supplier.

    And we don’t think that was this situation at all.

    We think that this situation was where the pipeline company has an agreement that could go out and say, “If we pay anything more than — to anybody else, then we will pay you.”

    Now, we think that under the Texas agreement, Texas Gas Company agreement with Atlantic, they were not obligated.

    They were not obligated to pay Shell by reason to the fact that Shell had put into its contract this escalation clause which I — which I read to you on page five of our brief that only if there was a new contract.

    When it came before the Commission after the hearing had been held and that all of the testimony taken they had any — that anyone offered, the trial examiner, hearing examiner said, “Why, this obviously is a contract that Texas has now entered into calling for a 12-cent price and therefore, the Shell price automatically went up to 12.5 cents.

    And he allowed them 12.5 cents.

    The Federal Power Commission on the other hand said this is not a new contract and it said three things have — would control.

    First, the rate actually being paid on June 7, 1954 was 8.997 cents and therefore, that is the rate which we will recognize.

    Now, that ground as subject had only been dropped because of some cases which have come up since then.

    But the Commission also said, “The contract that Shell has with Texas Gas calls for a new agreement to be entered into for the purchase of gas from some other producer.

    And this obviously is not a new agreement with — between Atlantic and Texas Gas and therefore, the rate has not been escalated to 12.5 cents.

    Charles E. Whittaker:

    I have not been able to find that word “new” in here anywhere —

    Willard W. Gatchell:

    Oh —

    Charles E. Whittaker:

    Is it in there, in this contract?

    Willard W. Gatchell:

    Well, I have been reading it in because as I read and I’ve — I’m starting at the bottom of page three, Mr. Justice Whitaker, in paragraph — page four of our other Commission’s brief.

    Yes, sir.

    The bottom of page 4, the Commission’s brief, I’m reading paragraph 3.

    “If at any time after December 31, 1951, buyer of Texas Gas shall enter into a contract.”

    Willard W. Gatchell:

    Now, I can’t read that any other way if it’s a renewal of a contract.

    Well, that is a simple thing to state.

    And Shell has many contracts which it says — in which it says that if a rate is paid under an existing contract that is higher than this one, then this one will be escalated.

    But this doesn’t say that.

    It says “it shall enter into a contract” and I don’t see how you can enter into a contract unless it is a new contract.

    It seems to me that the — axiomatic that you either do or do not have a contract.

    And if you have to enter into one, they know how to use language and they have many, many contracts.

    The Shell Company has — has been doing this for a great many years and they — this is a matter of negotiation between the companies where the pipeline is trying to protect itself.

    In which these plaintiffs, that — what comes of your point that the special expertise of the Commission is necessary on them?

    Willard W. Gatchell:

    Well, I — Your Honor —

    Charles E. Whittaker:

    And it maybe be convenient to add, answer in the same time, why is it necessary to add words?

    Willard W. Gatchell:

    Well, I think — I think, Your Honor, the answer to both of those question is — is a very simple statement.

    If a company knows that by entering into a contract with another producer, the pipeline will have to pay more for a gas, which it is purchasing in this case from Shell.

    And if its facilities for taking gas, for transporting gas in interstate commerce, are pretty well filled up anyhow, it will not go into that field to get a new supply of gas, to get an additional supply of gas.

    And therefore, the pipeline company does retain some major of control over what happens.

    Now, when the contract provides that the pipeline company has to pay the producer more whenever it pays anybody else more for its gas, then it makes no difference whether there is a new contract or not.

    When the — the second contract calls for a higher price, then the first contract automatically is raised or escalated up.

    And the pipeline company knows that it is inevitable that it will have to pay more for gas because that has been the steady consistent history in the producing field all this time that the prices are going up.

    And therefore, the pipeline can — can count on having to pay more and you are taking away from the pipeline the control which it would have and some of them exercise it, have to stay out of a field where an escalation in it and the price of gas which it is already purchasing at one rate would increase it — its cost as producing cost so much that it cannot afford to do that.

    And they need this language in order to protect them, the companies that are buying, the pipeline companies that are buying.

    I — I think myself as when this Court had the Memphis case before it that this Court very definitely took the only view which would be reasonable.

    You remember that was whether — whether they had a service agreement, where they had a service agreement.

    The question was whether that came under the Mobile doctrine that there could not be a unilateral change just on the part of the pipeline that the customers — the pipeline had to agree.

    And — and this Court said that the service agreement differs from a contract.

    But it went on and — and on page 114 of 358 U.S., the Court says, “There remains the question whether United’s service agreements reserved to it the power to make rate changes in this manner.

    The Commission found that the agreements so intended, but on it’s view of the case that the Court of Appeals found it unnecessary to decide the question.

    We think it would be both unnecessary and dilatory for us to remand the case to the Court of Appeals for consideration of that issue, which involves matters peculiarly within the area of the Commission’s special competence and as to which we could hardly be aided by further examination of the record by the Court of Appeals.

    Now, that is putting to the Commission the responsibility for making the determination initially had the Third Circuit then of the opinion that the Commission did not make the requisite findings that it should have made and that its expertise had not been applied, then it should have remanded the case to the Commission for a further examination either on that record or on a — on an additional record.

    But the Third Circuit goes out and the examine this merely on the law of contracts and in its analysis, it reads this language that I read to you from the Shell escalation in paragraph 3, and reads that merely as saying that it was a contract where there’s a new weren’t old, that calls for a higher price.

    Then the Shell price automatically goes up and we don’t think the words “enter into a contract for the purchase of gas” can be so construed.

    Willard W. Gatchell:

    There’s — there’s another case which is — is really just as — as significant as that Memphis case and — and might refer to that and that’s the Western Pacific case in 352 U.S.

    Because in there, the — the — this Court very definitely held that the — it was for the Interstate Commerce Commission first, that they first pass on a construction of the tariff.

    In another case which is somewhat like that, the Far Eastern Conference case and we refer the both of these in our — our brief, this Court referred to the fact that in the development of administrative law, Chief Justice White, in the words of Mr. Justice Frankfurter, applied the accommodating complimentary roles of the Court in the — and the administrative agencies in the enforcement of law to a situation where on the face of the statute, concurrent jurisdiction was conferred both on the courts and on the — the Interstate Commerce Commission.

    And if the Court goes on and refer us to the pioneer workers that Chief Justice White had given in the Texas and Pacific Railroad Company and then says this, “Court and agency are not to be regarded as wholly independent and unrelated instrumentalities of justice, each acting in the performance of it’s proscribed statutory duty without regard to the appropriate function of the other in securing the plainly indicated objects of the statute.”

    What we’re suggesting to the Court is — is simple — simply this, that this Court has placed restraints upon judicial review of administrative actions which we think have not been followed in this present case and we think that they should be.

    We think that this case, by reason of the large number of escalation clauses which the Commission must consider that this case should have a uniform and consistent application with the other escalation clauses which are before the Court.

    Thank you.