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

DOCKET NO.: 167
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

Question

Media for Texas Gas Transmission Corporation v. Shell Oil Company

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.