Jupiter Corporation v. Federal Energy Regulatory Commission, and Tennessee Gas Pipeline Company, Intervening

Citation: 943 F.2d 704Docket: 89-3498

Court: Court of Appeals for the Seventh Circuit; September 25, 1991; Federal Appellate Court

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Jupiter Corporation purchased natural gas from Louisiana producers to sell to Tennessee Gas Pipeline Company, which then sold it to wholesale customers. In 1958, Louisiana enacted a severance tax for gas producers, prompting them to seek permission from the Federal Power Commission (FPC) to increase rates to Jupiter to cover this tax. Jupiter subsequently raised its rates to Tennessee Pipeline accordingly, despite the tax never being levied on the producers. For nearly seven years, Jupiter collected this tax in its rates, amounting to $2-3 million, which it treated as income.

In 1966, while applying for a permanent certificate of public convenience and necessity, the FPC discovered that Jupiter had been charging rates that included the unlevied severance tax. Following this revelation, Jupiter proposed a settlement in which it would receive the permanent certificate conditional upon placing two-thirds of the severance tax revenue received from 1958-1965 into escrow, along with 7% interest for the duration it held the funds. The FPC approved this settlement in June 1966, stating that it would reduce Tennessee Pipeline's transportation rate, resolve the severance tax issue without litigation, and benefit consumers by establishing lower transportation rates while ensuring Jupiter's financial stability.

A permanent certificate of public convenience and necessity was issued to Jupiter, allowing it to sell gas to Tennessee Pipeline, contingent upon establishing an escrow account with an initial deposit of $252,298 and subsequent monthly payments of $27,000 for 50 months. The escrow account, which accumulated interest, remained active for nearly 23 years, fully funded by 1970. By January 1989, the account balance exceeded $9 million. Jupiter and Tennessee Pipeline proposed a distribution plan to the FERC, indicating that disputed funds were held in escrow. They outlined a settlement where the escrow agent would pay Jupiter Industries, Inc. the total amount, with Jupiter to pay Tennessee $1,901,398 to satisfy its obligation. Tennessee Pipeline agreed to waive claims on the escrow funds, passing refunds to customers, contingent on a final order from the Commission detailing the payment amounts and refund liabilities. The settlement agreement did not disclose the escrow account's total of $9,104,290.31 or that Jupiter would retain $7,202,892.31 if accepted. Jupiter requested expedited processing of the settlement to resolve the matter. Two months later, Jupiter provided further details emphasizing its aim to recover excess funds in line with the 1966 Order.

Jupiter appealed to the FERC, seeking equitable treatment similar to other entities that charged customers the Louisiana severance tax, which was never enforced. The FERC denied Jupiter's request for a distribution of the escrow fund, ruling that Jupiter had no claim to the escrowed funds, instead directing that all funds be paid to Tennessee Pipeline for distribution to its customers. Jupiter was permitted to retain amounts for annual fees paid to the escrow agent. Following this decision, Jupiter filed a petition for rehearing, which the FERC granted for further consideration but ultimately denied.

Jupiter's petition for review was initiated under the Natural Gas Act. The reviewing court emphasized that its examination of FERC's orders is limited and affords deference to the agency as an expert body in natural gas supply contracts. The court confirmed that FERC's decisions must be reasoned and based on substantial evidence. Despite this deferential approach, the court concluded that its own decision would align with the FERC's ruling.

Jupiter argued it should retain the majority of the $9 million in escrow, claiming unfairness in distributing the funds entirely to consumers. However, it was noted that had Jupiter not agreed to escrow the funds and instead retained the refunds, it would have only paid interest at the regulatory rate. The court highlighted that Jupiter voluntarily settled in 1966, agreeing to escrow funds and allowing the FERC to allocate those funds to eligible parties. The funds were designated for either the gas producers if the tax was valid or the customers of Tennessee Pipeline if the tax was invalid. A Supreme Court decision established that Louisiana could not impose a severance tax on offshore gas wells, making Tennessee Pipeline and its customers the rightful beneficiaries of the escrow account.

Jupiter has no legal claim to the escrowed funds resulting from its settlement, despite other sellers having more favorable outcomes. It incorrectly perceives the escrow account as its own due to prolonged involvement. Jupiter's assertion that it should not refund more interest than it would have if it had retained the funds is unfounded, as its refund obligations were satisfied when the escrow account was fully funded. The funds in escrow, which included a percentage of the severance tax collected, belonged to others, not Jupiter. The growth of the account to $9 million does not affect Jupiter's liability, which was fixed upon funding the escrow. The Federal Energy Regulatory Commission (FERC) correctly interpreted the settlement terms, determining that all accumulated interest earned during the holding period is included in the distribution. Consequently, FERC's decision to deny Jupiter's settlement proposal is upheld.