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November 7, 1990


The opinion of the court was delivered by: Elfvin, District Judge.


This Court presently revisits the question whether a state regulatory agency which "disapproves" a contract between a public utility and a private person pursuant to its statutory authority but without affording notice of its accompanying proceedings to the person violates such person's Fourteenth Amendment due process rights.

Briefly and by way of background, the plaintiff, National Fuel Gas Distribution Corporation ("NFG"), is a New York corporate gas distributor with its principal place of business in this state. Defendants TGX and Paragon Resources, Inc. ("Paragon") are gas producers incorporated under Delaware law with their principal places of business outside New York.*fn1 See 28 U.S.C. § 1332. They are parties to a gas-purchasing agreement ("the Agreement") which contains an "escalation clause" whereby the price for gas purchased thereunder by NFG is to increase annually by an amount equivalent to the yearly escalated increase in NFG's weighted average cost of gas purchased from three specific interstate pipelines.*fn2

New York's Public Service Commission ("the PSC"), a state regulatory agency empowered to "disapprove" of gas purchase contracts involving unjust and unreasonable charges — see sections 4 and 110(4) of New York's Public Service Law ("NYPSL") —, issued an order in 1983 ("the Opinion") finding that, because of the escalator provisions, NFG's procurement contracts (including the Agreement) "require, expressly and implicitly, that NFG pay excessive prices for gas" and that therefore such contracts "are not consistent with the public interest." PSC Opinion No. 83-26, Case 28447, National Fuel Gas Distribution Corp. — Gas Rates (December 20, 1983) at p. 14.*fn3 Confronted with a question as to "what steps to take to `transform' the three-pipeline escalator [clause] into an acceptable one[,]" the PSC observed that "[a] proposal that we effectively rewrite the contracts to include a ceiling on gas cost recoveries may not comport with [NYPSL] § 110(4)" — bid. — and concluded:

  "We have found the current local production
  contracts to be unacceptable, and we conclude
  that the better course is simply to disapprove
  the contracts. NFG appears to believe that such
  disapproval would enable it to rescind the
  contracts, in which case it might negotiate more
  acceptable agreements. Regardless of what the
  company does, however, our disapproval of the
  contracts constitutes notice that we shall not
  allow it, in the future, to recover from its
  customers any charges for locally-produced gas
  that exceed just and reasonable charges for such
  gas." Id. at p. 15.

NFG challenged the Opinion by commencing a state proceeding under Article 78 of New York's Civil Practice Law and Rules. The New York State courts upheld the PSC's Opinion as having a rational basis and as being supported by substantial evidence in the record. See National Fuel Gas Distrib. Corp. v. Public Service Comm'n, 107 A.D.2d 357, 487 N.Y.S.2d 150, 151 (3rd Dept.), aff'd without opinion, 66 N.Y.2d 956, 498 N.Y.S.2d 798, 489 N.E.2d 767 (1985).

This suit was instituted to determine the rights and liabilities of the parties under the Agreement in light of the Opinion. NFG has alleged that the Agreement was thereby effectively voided or "cancelled" and that NFG was under no continuing liability to the defendants. See Amended and Supplemental Complaint, ¶ 29. The defendants have counterclaimed, inter alia, for a declaration that the PSC had lacked jurisdiction to issue an order respecting them, that their Fourteenth Amendment due process rights were violated in that they were never given notice of the PSC's proceedings with respect to the Agreement, that the Opinion did not by its terms purport to void or cancel the Agreement and that the Agreement remained and remains in full force and effect. See Answer and Counterclaim to Amended and Supplemental Complaint. The PSC was permitted to intervene (pursuant to Fed.R.Civ.P. rule 24) in 1986 because, in this Court's stated view at the time,

  "[a] decision that the gas purchase agreement is
  valid, that the PSC had no power to affect the
  gas purchase agreement or that the PSC's
  procedure had violated the defendants' rights
  would impede the PSC's interest in enforcing
  Opinion No. 83-26 and would likely affect the
  PSC's future ability to regulate." Memorandum and
  Order, dated November 7, 1986, at p. 3, 1986 WL

Upon NFG's motion for summary judgment and the defendants' cross-motion for partial summary judgment, it was declared by this Court that the Opinion voided the escalation provisions but that the remainder of the Agreement continued in force. Memorandum and Order, dated October 1, 1987, at p. 15, 1987 WL 17863. At the same time, the defendants' constitutional counterclaim was rejected. Id. at 14-15. The very brief discussion of the basis for the dismissal was, in its entirety, as follows:

    "The defendants assert that the PSC improperly
  exercised its power under [NYPSL section] 110.4
  by having failed to provide them with notice of
  the hearing concerning the [Agreement] and with
  an opportunity to be heard and, thus, that their
  procedural due process rights had been violated.
  However, the PSC's decision concerning the
  three-pipeline escalator [provisions] arose
  during a rate making proceeding. Whether the
  three-pipeline escalator [clause] was in the
  public interest as well as the rate making
  procedure itself concerned rulemaking by the PSC
  and were not adjudicatory. See section 102 of New
  York's Administrative Procedure Act. In the context
  of rulemaking, the defendant had not been entitled
  to formal notice. See Bi-Metallic Co. v. Colorado,
  239 U.S. 441, 445 [36 S.Ct. 141, 142, 60 L.Ed. 372]
  (1915). No due process violation is found." Ibid.

No challenge was made by the defendants to the dismissal of their counterclaim, but NFG moved for clarification and/or reconsideration of the October 1, 1987 declaration and, upon reconsideration, this Court arrived at a "non-binding conclusion" that the disapproved escalation provision had been an essential element of the Agreement and that therefore such Agreement is unenforceable absent its pricing provision. It was "tentatively declared" that the Agreement is void. Tentative Memorandum, dated March 18, 1988, at p. 5, 1988 WL 27583. This Court's tentative views were subsequently solidified into a declaration that the Agreement had been voided by the Opinion and that the Agreement "is no longer of any force or effect." Memorandum and Order, dated December 10, 1988, at p. 8, 1988 WL 132557.

In a pair of subsequent rulings, it was determined that the Johnson Act, 28 U.S.C. § 1342, which forbids federal challenges to state regulatory orders affecting rates chargeable by a public utility, does not divest this Court of jurisdiction over either NFG's declaratory action or the defendants' constitutional counterclaim. Memorandum and Order, dated May 10, 1990, 1990 WL 66231, reconsideration denied, Memorandum and Order, dated July 2, 1990, 1990 WL 98433. In a footnote in the earlier of such rulings this Court invited re-argument of the due process claim, which claim had been summarily dispensed with in October 1987. It was said,

    "The defendants' due process claim has been
  rejected by this Court, it having been found that
  in the context of non-adjudicatory administrative
  proceedings formal notice is not required by the
  Constitution. Memorandum and Order, dated October
  1, 1987, at pp. 14-15 (citing Bi-Metallic Co. v.
  Colorado, 239 U.S. 441 [36 S.Ct. 141, 60 L.Ed. 372]
  (1915)). On re-examination such conclusion may have
  been based on a dubious assessment of antiquated
  case law. Bi-Metallic Co. v. Colorado, a
  `Lochner era' decision, was a suit to enjoin the
  Colorado state tax commission from enforcing its
  order increasing the valuation of all taxable
  property in the city of Denver on grounds that the
  city's real property owners had not received an
  opportunity to be heard prior to the order's
  issuance. The challenge was rejected by the United
  States Supreme Court because `[w]here a rule of
  conduct applies to more than a few people it is
  impracticable that every one should have a direct
  voice in its adoption.' Bi-Metallic Co. v.
  Colorado, supra, at 445 [36 S.Ct. at 142]. The
  order was deemed legislative rather than
  adjudicatory, and thus, `to put the question [was]
  to answer it. There must be a limit to individual
  argument in such matters if government is to go
  on.' Ibid. Here, by contrast, the PSC's order
  was limited to an evaluation of a small set of
  agreements between discrete and readily-identified
  parties. While offering no view respecting whether
  Bi-Metallic Co. v. Colorado has survived the marked
  evolution of due process jurisprudence in this
  century, this Court considers its facts plainly
  inapposite. The due process claim may be reargued *
  * * if the defendants are so inclined." Memorandum
  and Order of May 10th, supra, at p. 13 fn. 10.

The defendants have since taken up the invitation and moved for reconsideration of the October 1987 ruling insofar as it had dismissed their due process counterclaim. The defendants argue in support of their motion that they had not received notice of the PSC hearings which had preceded the issuance of the Opinion, that the Opinion "destroyed" their economic interests under the parties' disapproved gas purchase agreement and, therefore, that they were deprived of property without due process of law. See Defendants' Memorandum of Law, filed June 21, 1990. NFG counters that the defendants had no cognizable property interest in the disapproved agreement and, even if they had, that the defendants nevertheless had an opportunity to be heard, post-disapproval, which opportunity fully satisfied the requisites of due process under the circumstances. See NFG's Memorandum in Response to Defendants' Due Process Claim, filed July 16, 1990. The PSC, for its part as an intervening plaintiff, responds to the defendants' ...

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