Texasgulf, Inc. v. United Gas Pipe Line Co. (610 F. Supp. 1329, 1985)

MEMORANDUM ON LIABILITY

GESELL, District Judge.

This diversity suit for breach of contract arises out of the failure of United Gas Pipe Line Company (United) to deliver to Texas-gulf, Inc. (Texasgulf) the amount of natural gas specified under a long-term continuing supply contract. Texasgulf required the gas to operate its sulphur mine in Louisiana. Texasgulf claims substantial damages. The case is before the Court on an Amended and Supplemental Complaint after a bench trial. Proof was limited by the Court to the issue of liability and focused on the reasons underlying United’s admitted failure to supply gas as required by the contract.

I. Proceedings to Date

This case has a prolonged history. The original complaint was filed November 10, 1971, and the Amended and Supplemental Complaint, upon which this action has proceeded to trial, was filed March 23, 1982. There have been a number of administrative and judicial actions relating to this controversy which require brief reference to put the dispute as it eventually came before the Court in proper context.

The original complaint was dismissed by the Court (Jones, J.) on January 21, 1972, on the ground that the subject matter of the controversy lay within the exclusive jurisdiction of the Federal Power Commission (FPC) and that Texasgulf had failed to exhaust its administrative remedies. This order was vacated and the action remanded on April 19, 1972. Monsanto Company v. Federal Power Commission, 463 F.2d 799 (D.C.Cir.1972). Judge Jones, retaining jurisdiction, then took cognizance of the agency’s primary jurisdiction, where related proceedings were in progress, and stayed this case awaiting agency action.

Thereafter various hearings involving curtailment of delivery by United and certain other pipelines due to supply shortages that had developed continued before the FPC, and later before the Federal Energy Regulatory Commission (FERC). Both Texasgulf and United actively participated. In April 1975, this Court vacated the stay, the case having been reassigned following Judge Jones’ death. Discovery was then conducted concurrent with agency proceedings until late 1978. On February 12, 1979, the Court again stayed further court proceedings and referred three specific issues to the FERC for determination under its primary jurisdiction.

Subsequently, Texasgulf made several attempts to have the Court lift the stay and proceed to trial, but these were denied.

Finally, on September 14,1982, a detailed decision was issued by the FERC Administrative Law Judge (ALJ) bringing certain basic issues in the administrative proceedings into focus for Commission decision. 20 FERC H 63,070. In anticipation of trial, the Court on October 27, 1983, made further rulings in an effort to narrow issues and resolve remaining pretrial problems. But after further consideration in the light of Mississippi Power & Light Co. v. United Gas Pipe Line Co., 532 F.2d 412 (5th Cir.1976), cert. denied, 429 U.S. 1094, 97 S.Ct. 1109, 51 L.Ed.2d 541 (1977), the Court reluctantly determined that trial should await definitive action by the Commission on appeals from the ALJ’s decision, an appeal both United and Texasgulf were seeking to expedite.

Two years went by after the ALJ’s decision, and the Commission did not make the expected decisions or take any action on the specific issues referred to it by the Court in February, 1979. With no indication when the Commission might act and in response to further urging by Texasgulf that trial should proceed, the Court over United’s objection finally set aside the stay and proceeded to trial.

By Orders of October 26, 1984, and December 7, 1984, the Court established an expedited trial schedule, and trial began on February 25, 1985.

The record includes an agreed series of 854 stipulated facts and approximately 850 exhibits consisting of documents, pertinent judicial and administrative decisions, and excerpts from prior testimony taken under adversary conditions. Thirteen witnesses testified at trial. The parties have submitted extensive proposed findings of fact documented to the record, as well as pretrial and post-trial briefs. Now after argument, the Court makes its findings of fact and reaches conclusions of law on the issue of liability as set forth below.

II. The Gas Sales Agreement and United’s Failure to Deliver

Texasgulf has mined sulphur for approximately 50 years at locations in different states. Its principal offices are in New York. It is also a small producer of natural gas at one or two gas fields.

United is a “natural gas company within the meaning of the Natural Gas Act of 1938,” United Gas Pipe Line Co., 3 FPC 863 (1942), operating at times relevant to this suit as a Delaware corporation with its principal offices in Louisiana. It is the second largest natural gas pipeline in the United States with a 10,250-mile pipeline system extending from the Texas coast through Louisiana, Mississippi and Alabama into the Florida panhandle. United functioned in 1967 as a wholly owned subsidiary of United Gas Corporation, which, in turn, was controlled by Pennzoil Company. As of April 1, 1968, Pennzoil merged with United Gas Corporation, thus becoming United’s direct parent.

In 1967 Texasgulf undertook to extract sulphur from deposits that existed at its Bully Camp dome in the coastal marshes about 40 miles southwest of New Orleans, Louisiana. Texasgulf had used the so-called frasch process for extracting sulphur at its sulphur mines since 1919. This process depended on a continuous, uninterrupted, 365-day-a-year energy source to melt the sulphur with superheated water in underground deposits and to keep the sulphur in molten form after it was extracted from the ground. Extensive facilities were required. These were constructed away from the site and eventually came to rest on barges and pilings in the muck above the dome.

Texasgulf considered natural gas the only practical energy source at this location. It sought a single large supplier, negotiating for natural gas first with Texaco and then with United in 1967. United prevailed as the lower bidder, obtaining the contract for Texasgulf’s full requirements. United built two pipeline extensions on its system, one to Texasgulf’s mine, and the other to the intercoastal storage base, both at United’s expense, thus becoming, in effect, the only available gas supplier on which Texasgulf could thereafter rely to operate the mine.

United drafted the Gas Sales Agreement between the companies, undertaking to supply up to 10,100 Mcf of natural gas per day to the mine over a continuous period of 20 years. United was fully aware of Texasgulf’s need for continuous 24-hour-a-day supply and repeatedly represented during the negotiations that it already had “a supply of gas available” and was “willing to sell and deliver” Texas-gulf’s full requirements. Texasgulf made no independent investigation of United’s gas reserves, relying entirely on United’s representations and size. Texasgulf did not bargain for or receive any commitment from United requiring that the gas originate in Louisiana or from interstate sources. CS 56.

The Gas Sales Agreement, as executed October 27, 1967, specified certain contingencies limiting United’s otherwise firm commitment to deliver.

Article VIII, Force Majeure, contained a detailed exculpatory clause applicable to both parties, which included along with a listing of specific contingencies not applicable here “restraints of governments,” and encompassed “any other causes, whether of the kind enumerated or otherwise, not within the control of the party claiming suspension and which by the exercise of due diligence such party is unable to prevent or overcome.”

Article IX, Impairment of Deliveries, provided that in the event United was unable to supply all its customers’ needs, Texasgulf as an industrial customer would receive a lower priority than other customers of United who served domestic gas needs.

Article XVI, Duly Constituted Authorities, stated:

This agreement is especially made subject to all present or future valid rules, regulations or orders of any commission or regulatory body having jurisdiction.

This clause brings into play the applicability of United’s federal tariffs to the contract, a matter to be considered shortly.

United began delivering natural gas to Texasgulf’s Bully Camp mine pursuant to the Gas Sales Agreement in May 1968 and subsequently met Texasgulf’s requirements under the contract until November 1970, when United began reducing deliveries pursuant to tariffs on file. From November 1970 through November 1971, Texasgulf limited its takes of gas to that allocated by United. From December 1971 to November 1972, Texasgulf deliberately violated its allotment and took from the pipeline the amount of gas it believed necessary to continue operating its mine. On November 22, 1972 the FPC ordered Texas-gulf to obey United’s curtailment and to pay back its overtakes by reducing subsequent takes below its entitlement. In response to this order, Texasgulf shut down the Bully Camp mine until June 1973, when it partially reopened the mine using reduced deliveries from United supplemented by gas from other suppliers. Texasgulf again closed the mine in July 1978, at which point all deliveries of gas to the mine stopped.

III. United’s Liability Is Not Excused by Its Tariff and Its Tariff Defense Must Fail If It Did Not Exercise Due Care

In view of the respective contentions of the parties, the Court will first consider the meaning and effect of United’s tariffs to determine whether they provide a basis on which United’s liability, if any, may be determined.

United claims that it is not liable to Texasgulf as a matter of federal law. It urges that its operations as an interstate gas pipeline have been completely preempted by the Natural Gas Act of 1938, 15 U.S.C. § 717, and that its tariffs as filed with its regulatory agency are incorporated into the Gas Sales Agreement by the Duly Constituted Authorities clause, and exonerate it completely from liability. It concedes only that it may be held at fault for failing to deliver if there was a shortage of gas caused by its own reckless or willful misconduct. United vigorously denies such conduct.

Texasgulf disputes each of these contentions. It urges that United’s shortage was caused by its own mismanagement and improper conduct, making it liable as a matter of state contract law. It sharply contests United’s claim of tariff protection, arguing that as a direct customer United’s tariffs were inapplicable to it.

For reasons set forth below, the Court concludes that United’s tariff on file when the Gas Sales Agreement was signed is applicable to Texasgulf and decisive as to United’s liability. The Court further concludes as a matter of federal law that the tariff does not exonerate United from liability if its shortage of gas was caused by its own negligence.

A. The Extent of Federal Jurisdiction Over United’s System

Initially a brief description of United’s system and the relation of its parts to the federal regulatory scheme is appropriate. United had essentially three distinctive segments of its system at the time of the Texasgulf contract: Texas intrastate, Louisiana “locked-in,” and interstate.

Texas intrastate operated as a self-contained unit, buying and selling gas entirely within that state. The gas did not cross state lines. Texas state regulatory authorities had exclusive jurisdiction. Gas producers often prefer such a purely intrastate operation because it helps them get a higher price than if the gas they sell moves interstate and thereby becomes subject to FPC price control.

The interstate phase of United’s system extended from Louisiana and Alabama into the Florida panhandle. The FPC exercised jurisdiction over various aspects of both the sales and the interstate transportation of gas in this operation. Sales by producers to United were subject to FPC price regulation. United’s sales to resale customers, such as local gas utilities, were also price-regulated by the FPC, although sales to direct industrial customers were not.

Texasgulf’s sulphur mine was attached to United’s third segment, which was known by United as District 5. This system was “locked-in”: it operated at lower pressure than the interstate part of United’s system to which it was connected, so that gas could come into District 5 from outside but could not leave it. District 5, which was confined to south Louisiana, changed in character over the years, emerging eventually as a legally complex hybrid intrastate/interstate system. While District 5 received a grandfather certificate from the FPC in the early 1940s along with the rest of United’s system, by the mid-1940s it was operated exclusively with gas purchased in Louisiana. In- 1954, United agreed with its customers and the FPC to remove those sales from FPC jurisdiction because no interstate gas was being used for them. The Louisiana Public Service Commission thereafter regulated price to resale customers on District 5.

However, beginning in 1965, United regularly sent gas into District 5 from another section of its Louisiana pipelines, known as District 6. District 6 was interconnected with United’s interstate system. Thus interstate gas began flowing into District 5 as of 1965. Under the law, 15 U.S.C. § 717f(c), United was required to obtain a certificate of public convenience and necessity from the FPC for this expansion of its interstate gas transportation. However, it did not seek such a certificate until October 1970. In 1972, the FPC ruled that the intermingling of interstate gas into District 5 starting in 1965 made District 5 subject to the Commission’s jurisdiction as of 1965. The Commission also issued a certificate of public convenience and necessity for District 5 effective as of 1972. The effect of these rulings was to transform District 5 into part of United’s interstate system for purposes of federal regulation over United’s sales and deliveries to customers on District 5. However, District 5 retained its intrastate character as to sales by producers to United from fields located in District 5 because that gas was sold only within Louisiana and never left the state due to District 5’s locked-in status. Thus producers with fields located in District 5 were still free to sell to United and avoid federal price control.

B. The Applicability of United’s Tariff

Against this background the Court turns to consider the effect of United’s tariff on its liability to Texasgulf. The tariff’s terms represent the only extent to which United can claim its liability is subject to federal preemption because otherwise there is no provision of the Natural Gas Act as such dealing with a pipeline’s liability under its contracts with its customers.

United’s service to Texasgulf’s Bully Camp mine became subject to federal regulatory jurisdiction in 1965 by virtue of United’s introduction of gas from interstate sources into District 5. Thus, as a matter of law and by the express terms of the Duly Constituted Authorities Article of the Gas Sales Agreement, United’s tariff on file with the FPC became applicable. Indeed, in 1975, the Commission held United’s tariff applicable to customers such as Texasgulf as of 1965, United Gas Pipe Line Co., 54 FPC 796, 799 (1975); CS 677, 678. Since Texasgulf was a party to that proceeding and did not appeal, it is estopped from contesting the applicability of United’s tariffs on file in 1965 to its Gas Sales Agreement.

In 1952, United filed a tariff governing the terms of its service, which was approved by the Commission in 1954 with some modifications. This tariff has been in effect since that date. Subsequent curtailment amendments to that tariff have been filed pursuant to Commission direction but these amendments have not received final approval. United was bound to follow these voluntary tariff amendments upon filing but the legality of the tariffs remains “an open question.” Hercules Inc. v. FPC, 552 F.2d 74, 87 (3d Cir.1977). Commission proceedings are still underway. Only the 1954 tariff which was in effect when United failed to deliver has been approved, and it must be applied to determine United’s basic liability to Texasgulf.

C. The Meaning of the Tariff

Two sections of the 1954 tariff— Section 11 Force Majeure and Section 12 Impairment of Deliveries — have a direct bearing on United’s obligation to deliver gas to Texasgulf. Texasgulf is bound by their terms. A force majeure under the tariff is any cause for failure to deliver gas not within United’s control, i.e., “which by the exercise of due diligence” United “is unable to prevent or overcome.” Section 11 provides that United is not obligated to supply gas to a customer such as Texas-gulf during the existence of a “force majeure” situation if it notifies Texasgulf that a force majeure has occurred. Section 12.1 provides that “[i]n the event a shortage of gas renders seller [United] unable to supply the full gas requirements of all of its consumers, then Seller [United], may, without liability to Buyer [Texasgulf] prorate its gas supply” as further outlined in that section. This “without liability to Buyer” phrase is omitted from the otherwise parallel provision of Article IX of the Gas Sales Agreement.

When the Commission approved this tariff in 1954 it did not interpret these provisions, nor did it present any basis for removing United from contractual liability in the event of a breach of its obligation to deliver gas.

In an effort to avoid responsibility for failure to deliver gas due to its own fault, United points to the language of section 12.1 allowing it, “in the event [of] shortage,” to prorate supplies “without liability.” Although United recognizes that this language cannot be read literally to immunize it from liability no matter the cause of the shortage, it urges that the language be interpreted broadly to exonerate it for any shortage that United did not intentionally or recklessly cause, and thus shield United from any liability unless Texasgulf can show such gross wrongdoing.

United appears to contend that the due diligence standard of section 11 applies only when United declares it so applicable by announcing that it is experiencing a force majeure shortage. This would mean that whenever United was short of gas, it could legally ignore its firm contract commitments simply by declaring a need to prorate under section 12.1, even when the shortage resulted from its lack of due diligence.

This position stands the tariff on its head and leads to a result confounding common sense. The Commission could not have meant to approve a tariff that first under section 11 placed a due diligence standard on United to meet its contractual obligations in the face of extraordinary force majeure events such as war, riots, storms, epidemics and earthquakes, and second under section 12.1 allowed United to escape liability for shortages entirely by prorating even where proration resulted from a shortage that was caused by its own lack of due diligence.

The Court must reject this effort to read sections 11 and 12 in isolation from each other to create two contradictory fault standards. The tariff must be read as a whole. When so read, it is the Court’s view that the tariff creates a single exculpatory standard. That standard is one of due diligence, as stated in section 11. Under the tariff, United is excused from liability for failing to deliver gas pursuant to contract only when a gas shortage occurs that it could not by due diligence have prevented or overcome. A lack of due care constitutes a lack of due diligence.

When the tariff states in section 12.1 that in the event of a shortage United may prorate “without liability” in accord with the priorities established by the tariff, it is not establishing a separate fault standard. This language provides exculpation only from liability for the proration itself pursuant to a tariff approved by the Commission — for example, from a buyer’s complaint that it should have been placed in a higher proration priority than other buyers. Because the priority categories are to be approved by the Commission after hearings in which all buyers may participate, to allow a buyer later to claim damages for being placed in a particular category would completely undercut the validity of any Commission-approved curtailment orders. But a prerequisite for this exculpation according to the tarriff is the existence of a gas shortage not caused by United’s lack of due diligence. This interpretation brings section 12 into harmony with section 11 and preserves the federal interest in continuity of supply and orderly curtailments pursuant to Commission orders. This interpretation also is consistent with the observation of the U.S. Court of Appeals early in the proceedings in this case, where it noted Monsanto Co. v. FPC, 463 F.2d 799, 808 (D.C.Cir.1972).

[T]he industrial user may be able to say: Given the pickle created by the pipeline company, what the FPC did was lawful and proper as to actual subsequent rationing of the limited supply of gas, but the pipeline company is liable in damages because of the way it put us all in the pickle.

Because a due diligence standard is created by United’s federal tariff, it is a federal standard which becomes applicable on a uniform basis to all of United’s delivery contracts, irrespective of vagaries in state law. Due diligence is a simple negligence standard of due care: it is a standard which by the tariff’s terms places the burden of proof upon United to establish its own due care before it can be relieved of responsibility for gas shortage on its system.

Unlike the more lenient standard proposed by United, this standard also is consistent with public policy. “The fundamental purpose of the Natural Gas Act is to assure an adequate and reliable supply of gas at reasonable prices.” California v. Southland Royalty Co., 436 U.S. 519, 523, 98 S.Ct. 1955, 1957, 56 L.Ed.2d 505 (1978) (emphasis added). Subjecting pipelines to potentially ruinous contract liability when they were completely free from fault would not be appropriate. On the other hand, if United was relieved of liability for all but its reckless or willfully bad acts, its management would have far less incentive over the long run to provide reliable service to its customers. Thus a negligence standard strikes the appropriate balance.

In recent cases the Commission has rejected tariffs seeking the same broad exculpation urged here by United. See Tennessee Gas Pipeline Co., 57 FPC 1593, 1604 (1977); Lehigh Portland Cement Co. v. Florida Gas Transmission Co., 8 FERC ¶ 63,049 at 65,532 (1979), 13 FERC ¶ 61,041 at 61,084-85 (1980). Moreover, as a general rule blanket exculpatory clauses in contracts are disfavored. Bisso v. Inland Waterways Corp., 349 U.S. 85, 91, 75 S.Ct. 629, 632, 99 L.Ed. 911 (1955); U.S. Industries, Inc. v. Blake Construction Co., 671 F.2d 539, 544 (D.C.Cir.1982). Such clauses in tariffs receive favor only where the regulatory body in the exercise of its primary jurisdiction expressly approves the exculpation for stated reasons consistent with its regulatory scheme. See Southwestern Sugar & Molasses Co., Inc. v. River Terminals Corp., 360 U.S. 411, 420-21, 79 S.Ct. 1210, 1216, 3 L.Ed.2d 1334 (1959); Dixilyn Drilling Corp. v. Crescent Towing & Salvage Co., 372 U.S. 697, 698, 83 S.Ct. 967, 968, 10 L.Ed.2d 78 (1963) (per curiam); cf. First Pennsylvania Bank v. Eastern Airlines, 731 F.2d 1113, 1122 (3d Cir.1984). United has obtained no such exculpation from the Commission.

D. Federal Regulation Does Not Preempt Damage Actions

It is therefore clear that the tariff does apply as a matter of federal law and it supplants exculpatory standards of state law. FPC v. Louisiana Power & Light Co., 406 U.S. 621, 646, 92 S.Ct. 1827, 1841, 32 L.Ed.2d 369 (1972). However, this does not mean, as United urges, that federal control of contract terms by tariff preempts all state law, depriving United’s customers of the right to sue for damages when gas is not delivered as contracted. Pennzoil Co. v. FERC, 645 F.2d 360, 385 (5th Cir.1981), cert. denied, 454 U.S. 1142, 102 S.Ct. 1000, 71 L.Ed.2d 293 (1982). Federal regulation of companies like United is far from pervasive. The Commission had no control over the rates United charged Texasgulf, the prices charged United by intrastate gas producers, abandonment of service by such intrastate producers, United’s acquisition of gas supplies, or United’s decisions to take on new customers.

Nothing in the Natural Gas Act expressly authorizes the Commission to immunize companies like United from common-law damage actions, cf. Nader v. Allegheny Airlines, 426 U.S. 290, 301, 96 S.Ct. 1978, 1985, 48 L.Ed.2d 643 (1976), nor has the Commission asserted such exculpatory authority here. While the Commission “has plenary authority to limit or to proscribe contractual arrangements that contravene the relevant public interests,” Permian Basin Area Rate Cases, 390 U.S. 747, 784, 88 S.Ct. 1344, 1369, 20 L.Ed.2d 312 (1968), the Commission has never found that state-law damage actions for breach of contract contravene the Act’s stated purpose that gas be transported on a “just and reasonable” basis, 15 U.S.C. § 717c(a). The Act also provides that pipelines may not “subject any person to any undue prejudice or disadvantage.” 15 U.S.C. § 717c(b). The Court finds that total preemption of Texas-gulf’s breach of contract cause of action is inconsistent with the purpose of the Natural Gas Act “to protect consumers against exploitation at the hands of natural gas companies,” FPC v. Hope Natural Gas Co., 320 U.S. 591, 610, 64 S.Ct. 281, 291, 88 L.Ed. 333 (1944), and to assure continuity of supply. However, federal jurisdiction does mean that the exculpatory standards of United’s federal tariff apply and that damages, if any, also must be measured by a uniform federal standard.

IV. The Nature of United’s Obligation To Exercise Due Care

Since United as a certificated interstate carrier was obligated by its own tariff and by the Natural Gas Act to exercise due care in providing continuity of service, the nature of this duty must be examined before considering United’s conduct.

United’s management was required “to assure an adequate and reliable supply of gas at reasonable prices,” California v. Southland Royalty Co., 436 U.S. 519, 523, 98 S.Ct. 1955, 1958, 56 L.Ed.2d 505 (1978). This was its primary and persistent obligation at all times, before it contracted with Texasgulf and thereafter. It was an ever-present responsibility to be carried out in an affirmative manner with foresight and practical plans fitting the special conditions and circumstances of United’s system. United’s duty of due care depended on the evolving circumstances of its business as it knew them or reasonably should have known them to be.

Natural gas is not available on call. Many uncertainties affect its availability for pipeline transportation. The existence of natural gas underground must be determined. Even proven sources of supply require about five years to develop on-shore, and seven or more years off-shore. United bought its gas from gas producers whose incentive to develop new supply depended on price and adequate assurance that gas, once developed and committed for sale, would be taken and not left underground. As previously noted, gas used intrastate was unregulated as to price by the Commission, but when sold interstate the producer price was controlled. Thus, availability of gas depended on a complex interplay of economic factors always operating in a competitive environment. Only a pipeline that looked well ahead, was adequately informed and pursued a definite, planned course of action could expect to achieve reliability of supply.

By the 1960s, the Commission had made it abundantly clear to all pipelines under its jurisdiction that while a pipeline entering a 20-year firm contract for continuous delivery need not have sufficient gas in reserve to fulfill the entire commitment at the outset, it was the duty of management to look well ahead and maintain a reasonable balance between its reserves and delivery obligations. All pipeline managers knew that the more a pipeline’s ability to deliver appeared limited short term, the heavier its responsibility to act decisively to obtain assured sources of supply or to reduce future delivery obligations to maintain a reasonable balance for the future between its contractual commitments to obtain gas and its obligations to deliver gas.

United’s management had special supply problems which affected its ability to assure continuity of service.

First, it served a wide variety of demand. United had to arrange supply for approximately 180 industrial customers, 100 distribution customers and five interstate pipelines which were taking gas to serve their customers as far away as Washington, D.C.

Second, its system was complex. In 1967, United had 452 gas fields attached to its system and purchased gas from 3,200 wells under 1,152 gas purchase contracts. The daily demands on the system fluctuated widely depending on the weather and other factors, causing peak-day deliveries to be almost twice as high as the average-day delivery.

Third, because of competitive pressures and industry practice, United committed itself to deliver gas under various types of long-term firm contracts which allowed it little or no leeway to refuse gas. This was in contrast to some pipelines that had greater supply flexibility under various types of interruptible contracts or other arrangements.

Viewed in this context, United’s duty of due care becomes more apparent. As a regulated pipeline, United was required by federal law to meet a high standard of care to assure continuity of delivery. It was required to confront this phase of its business with constant attention, skill and cautious planning. This duty of due care is not a static or abstract concept. Applied to its continuing obligation to balance its gas supply against the delivery demands of the system, foresight and cautious planning demanded an ever-current knowledge of United’s constantly changing demand pattern and full appreciation of all factors affecting both its present and future supply prospects.

Thus United’s obligation of due care was not satisfied by declaring general policies which were not decisively communicated in-house and closely monitored to achieve compliance. A pipeline management falls below the requisite standard of care in this regard if it ignores its own discrete mix of gas reserve holdings and delivery responsibilities and takes comfort in decisions of others in the business who confront a different condition. In short, United was required to develop a concrete plan, be well informed at all times, and face realities decisively.

A prudent pipeline manager must also take into account that its regulators, here the FPC or FERC, may take actions that adversely affect some course of action the pipeline wishes to pursue or is pursuing. This can be either direct action, by ruling on the pipeline’s proposals to expand service or increase rates to resale customers, or indirect action that affects general industry conditions.

In determining whether United satisfied this exacting, continuing duty of due care, the Court is called on to consider the proof without benefit of hindsight. The Court turns first to a review of United’s supply-demand situation immediately before the Gas Sales Agreement was executed in 1967.

In this hard-fought, never-ending dispute, able counsel for the parties have advanced a multitude of alternative theories and contentions addressed to this issue. At the outset, certain of Texasgulf’s theories relating to operation of District 5 designed to establish United’s fault in the management of its gas supply must be rejected as too speculative and overly influenced by hindsight.

Texasgulf’s expert witness, Charles Collins, constructed an elaborate hypothetical of how United could have operated District 5 in a completely different fashion beginning in the late 1950s. His purpose was to demonstrate that United would have retained reserves it released in the early 1960s and would have been able to avoid using any interstate gas on District 5. Extensive pipeline construction in District 5 would have been required in the 1960s. Texasgulf contends that this hypothetical operation would have allowed United to avoid any shortage on District 5 until the middle or late 1970s and urges that a prudent manager would have proceeded along these lines long before it ever contracted with Texasgulf.

The Court rejects this hypothetical scenario out of hand. It involves a series of unrealistic assumptions and questionable calculations, and finds support only in hindsight. Throughout Texasgulf’s elaborate presentation, no credible evidence was presented to show that a reasonably prudent pipeline manager would have followed this course of action knowing what United knew or should have known at the time critical decisions would have to have been made.

As will become clear below, this does not mean that all aspects of United’s operation of District 5 are irrelevant to liability. Since it was operated in- many respects as a separate system, and because it retained unique intrastate/interstate aspects, there is considerable relevant evidence focused on United’s operation of District 5. But the Court’s examination of United’s responsibility will focus on how United actually ran District 5 as an integral part of its interstate system, not how District 5 could have been operated in a radically different way as a completely intrastate system.

Part of Texasgulf’s hypothetical District 5 system involved United foregoing the use of the so-ealled swing fields. These were certain fields in south Louisiana to which United had attached both intrastate and interstate pipeline connections, and which it used to meet peak-day requirements within District 5.

An additional reason for rejecting the Texasgulf District 5 scenario is that Texas-gulf incorrectly argues that United’s use of swing field gas in District 5 was illegal. Texasgulf is of course correct: once gas is dedicated to interstate use, it cannot be withdrawn from interstate use without filing an application for abandonment with the Commission. But United correctly points out that at the time of its use of swing field gas in District 5, it was not established by the decisions of the Commission or of the courts whether dedication of a field to interstate use meant that it could not be simultaneously used also to meet intrastate needs, and whether that simultaneous use caused the receiving system to become jurisdictional.

United reads the Commission orders certificating District 5 as a general exculpation of its conduct relating to the certification. This is much too broad an interpretation. While those orders found that United as a practical matter needed interstate gas in District 5 as of 1965, the propriety of United’s failure to seek Commission approval for that use of interstate gas until 1970 was not resolved. Indeed, the Commission strongly implied that United’s conduct was unlawful. See United Gas Pipe Line Co., Opinion No. 661, 50 FPC 181,185 (1973). Texasgulf is not estopped from seeking evidentiary inferences from United’s conduct in connection with its certification of District 5 as part of its general attack on United’s mismanagement of its reserves.

V. United Failed to Manage Supply and Demand On Its System With Due Care

The Court has concluded from all the evidence that in a number of significant respects, United failed to manage its system with due care and that these failings proximately caused the shortage that eventually led to United’s curtailment and caused United to breach the Gas Sales Agreement.

These failings will be best brought into focus by dividing the inquiry into the events occurring immediately before United entered the Gas Sales Agreement with Texasgulf, and those that occurred after-wards leading up to the breach beginning in 1970.

A. United Failed to Exercise Due Care in Entering the Agreement with Texasgulf

The Gas Sales Agreement between United and Texasgulf was executed on October 27, 1967. Deliveries to the Bully Camp mine began in May 1968. While the full extent of United’s eventual shortage in the early 1970s could not have been reasonably foreseen at that time, United should have foreseen the strong probability that shortage on its system would promptly develop affecting continuity of service to Texasgulf by 1970. By executing a firm delivery contract and by beginning deliveries several months later without ever advising Texasgulf that it might need an alternative fuel source, United violated its duty of due care.

United did not have enough gas reserves at the time of signing the Texasgulf contract to provide Texasgulf’s needs for the entire period of the contract. This in itself was not unusual. Long-term gas supply contracts are typically executed by gas pipelines knowing they are required to add new reserves to fulfill delivery obligations in later years of the contract. Given United’s position in 1967, however, a number of factors — including studies on its system, general industry conditions, and its own recent experience in reserve management — should have alerted United that it could not reasonably rely on business as usual to obtain reserve for short-term needs.

1. United’s Gas Supply Situation in the 1960s

In the early 1960s, United found itself in a difficult marketing situation, particularly in the New Orleans area. United had entered into contracts with producers in the late 1950s requiring it to take a fixed percentage of a field’s known reserves or pay a penalty. These take-or-pay contracts, favorable to producers, were common in the region at the time, and United had had to agree'to them to obtain long-term supply commitments, even though they also had fixed price-escalation provisions.

Two problems developed in the early 1960s. First, while the cost of gas to United went up under the escalation provisions, the market price of gas went down considerably. Thus United found itself paying well above market rates for its gas, which it then could not market profitably. This problem was mitigated somewhat because United could pass on some of its increased gas costs to its cost-plus customers, although not to its fixed-price customers, but United’s ability to compete for new sales was particularly hurt at this time. Second, the fields to which United was attached turned out to have much greater reserves than first thought, thus increasing United’s take requirement well beyond what it had anticipated. United incurred substantial take-or-pay penalties in the early 1960s but began to work off these deficiency payments in 1965 and by 1970 had reduced its take-or-pay balance to zero.

To deal with the resulting financially onerous oversupply condition in the early 1960s, United stopped acquiring major new reserves from 1960 until 1966, and sought to renegotiate contracts with its major producers.

The most significant of these renegotiations was with Humble, United’s biggest gas supplier. Under an agreement reached October 1, 1962, Humble agreed to lower its prices to United, and United agreed to try to take more gas. Humble was given the option to withdraw its reserves from United if United did not satisfactorily increase its takes. United later reached a similar agreement with Texaco, its second largest supplier.

However, United did not increase its takes to the levels sought by these producers. Humble, Texaco and others thus exercised options to withdraw reserves previously committed to United. In addition, other reserves were lost when United in 1965 advised intrastate producers in its East Bastían Bay field that it wanted to take their production interstate, thus subjecting it to the Commission’s jurisdiction.

Under these contract terminations, United lost reserves totaling 4,589 Bcf by the end of 1968. As the following table shows, most of this loss was incurred before deliveries began to Texasgulf.

1963 29 Bcf

1964 796 Bcf

1965 1,593 Bcf

1966 1,674 Bef

1967 363 Bcf

1968 134 Bcf

Of these reserves, 2,063 Bef were lost in United’s District 5 to competing pipelines, all before the Texasgulf contract. PX 8. This amounted to more than half of the reserves attached to District 5 at the end of 1962. These reserves represented 780,000 Mcf per day of deliverability, or 67 percent of United’s delivery capacity in District 5 before the releases occurred. PX 217. United started adding reserves to District 5 in 1966 but by the end of 1967 had obtained only 91 Bcf, PX 23, making up only 4 percent of the losses in District 5 up to then.

United officials were unable to point to any comprehensive studies made at the time these major reserves were released of the effect of their releases on United’s ability to commit in the future. Yet, as United knew, the volume of dedicated proven reserves attached to United’s interstate system declined throughout the 1960s leading up to the Texasgulf contract in late 1967. The following chart shows the annual net change in reserves on the interstate system, including District 5, during that time. All figures are in billion cubic feet.

Reserves Released Year and Withdrawals 1960 884 1961 841 1962 863 1963 1,692 1964 975 1965 1,086 1966 1,612 1967 1,552 Total 9,505 Additions Net Change 384 -500 47 -794 484 -379 131 -1,561 82 -893 31 -1,055 304 -1,308 617 -935 2,080 -7,425

United renewed efforts to buy new gas reserves in 1966, but additions in 1966 and 1967 were far outnumbered by the loss of reserves in those years due to producers exercising the options previously granted by United to remove reserves from its system. Indeed, United officials testified that they were not able to buy as much gas as they wanted to in those two years and subsequently. This serious difficulty should have further alerted United to the dangers of adding new major customers on firm long-term contracts in 1967.

In terms of total year-end reserves, United had 25.4 Tcf in reserves at the end of 1963, 19.4 Tcf at the end of 1966 just before entering the negotiations with Texasgulf, and about the same at the end of 1967, a 24 percent decline. By comparison, 10 other interstate pipelines that were buying gas in United’s supply area experienced a 13 percent increase in their reserves during the same time.

2. Studies of United’s Deteriorating Reserves

The deteriorating reserve situation was brought forcefully to United’s attention by a number of reports available to United before signing the Texasgulf agreement.

Although United officials could point to no specific studies made at the time its major reserves were released in the early 1960s that assessed the effect of releasing reserves on its ability to meet further deliveries, United had available annual reports it was required to submit to the FPC, as well as routine in-house studies designed for general operating purposes. United also occasionally engaged outside consultants for special studies.

Various indexes were regularly prepared to measure United’s ability to meet its market requirements. These declined along with its falling reserves. In particular, the deliverability life index, which the Commission relied on as a benchmark and which until 1964 it required to be maintained at 12 years, plummeted. From 1965 to 1966, United’s deliverability life fell from 16.0 years to 6.0 years. CS 569.

The decline reflected in part a change in the method for measuring deliverability life. Until the 1966 report (prepared in early 1967), deliverability life was estimated by the company’s gas proration department based on personal contacts by the department’s employees with producers in the field. These employees had practical experience but no formal training as geologists or petroleum engineers. The new methodology was a computer-based system prepared by United’s consultant, Ryder Scott Co. which used a quantified measure from certain fields known as the “back pressure curve.” This system, while more

precise, still relied on certain human assumptions, but one assumption of the old system — a producer in a given field will expand known reserves by further exploration within that field — was dropped because reserves in the Louisiana fields were becoming exhausted.

At the same time that Ryder Scott was informing United of declining deliverability life estimates, other studies warned of potential shortages developing quickly on United’s system.

In January 1967, well before the Texas-gulf contract was signed, in a report commissioned by United’s parent, Stone & Webster Service Corp. advised United that “present reserves will be able to meet annual sales requirements through 1968 when local shortages will begin to appear, first in the Houston intrastate system.” It also advised that as to long-range marketing, “the most probable condition and the one on which United should predicate its long-range planning is that of a basic shortage.”

A 10-year operating forecast study was prepared by United in February 1967. It showed peak-day shortages would begin as soon as the winter of 1968-69, with increased shortages in later years. It showed average-day deliveries would be adequate for six years.

Every fall, United prepared five-year forecasts of peak-day supply and demand. These studies, which included many volatile assumptions, were used to develop annual capital spending budgets. The 1966 five-year study showed a need for new supplies in the New Orleans area in 1971-72. The 1967 study increased the estimates of needed new supplies as of 1971-72.

3. Industry Conditions

Besides the studies of United’s system pointing to imminent shortage, general conditions in the industry also put United on notice that the days of ready access to new gas reserves were dwindling.

A 1962 report by a distinguished geologist to the National Academy of Sciences stirred controversy in the oil and gas business by predicting a natural gas shortage developing in the 1970s.

In May 1966, John J. Carter, the natural gas manager for Humble Oil & Refining Co. (Exxon), then United’s largest supplier of natural gas, made a speech to the American Gas Association stating that “our remaining gas reserves are, for all practical purposes, committed____” This official went on to state that

In the past years, pipeline expansion would often be supplied by developing reserves that had been waiting for suitable market outlets. At the present time, with the possible exception of Louisiana offshore reserves, there is a rather complete commitment of proved reserves to existing and projected pipelines and to local markets. As stated earlier, this is certainly true with Humble with no exceptions. Such being the case, future expansions of our industry must come from reserves yet to be discovered____ The proving of these [new] prospects will be extremely costly and will require more time than has been usual in the past.

In addition, as United’s own expert acknowledged at trial, other responsible producers were warning the Commission in 1966 and 1967 that a shortage could develop if the Commission did not provide producers adequate incentives for exploration by raising wellhead prices. A vice president of Mobil Oil Co. in 1967 specifically predicted a shortage developing in 1970.

Throughout the 1960s, the gas industry’s ratio of reserves to production (R/P ratio), which is used as an index of annual working inventory, fell each year, both nationally and in the Gulf Coast region. Exploratory drilling also declined in the 1960s.

Although the Commission favored some reduction in reserves relative to production so that consumers would not bear the burden of paying for excessive inventories, and many in the industry did not immediately become concerned with this reserve situation, the fact remains that general industry information available to United in 1967 showed no basis for optimism regarding United’s ability to add sufficient new reserves in time to prevent shortage in the short range.

4. United Misreported Its Reserves

United’s course of conduct in its reports to the Commission indicates awareness of imminent shortage. In a variety of ways, both large and small, United reported to the Commission larger reserves than it actually had. While some of these filings were mistakes and simply illustrate lack of due care, others were deliberately calculated to place United in an unwarranted favorable light before the Commission. Taken together, these reports lead to a definite inference that United knew it was in supply trouble much earlier than it has admitted.

The Commission instituted the requirement for annual Form 15 reports in 1964, at the same time that it relaxed its rigid inventory requirement of a 12-year deliver-ability life in favor of a flexible standard keyed to each pipeline’s gas acquisition efforts. The Form 15 filings were specifically designed to give the Commission sufficient data to judge whether a pipeline’s efforts to acquire reserves warranted an individual exception to the 12-year rule. The Commission relied on the Form 15’s to determine whether a pipeline had enough reserves to obtain the Commission’s certificated approval to add new or enlarged service.

United’s Paradis field was released to the producer, Texaco, in 1963. United’s Lirette field was likewise released to the producer, Humble, in 1964. However, United’s Form 15 reports for 1963, 1964 and 1965 continued to report these fields as attached to United’s system. Both were major fields with reserves totaling 1,205 Bcf, and the inaccurate reporting had the effect of exaggerating United’s dedicated reserves by five percent in 1964 and six percent in 1965. United attributes these inaccurate reports to human error. Even if so, such a large error illustrated lack of true concern for the adequacy of its supply. The same United official who negotiated the release of these reserves signed the Form 15 reports.

More disturbing was United’s use of certain assumptions in its reporting that, while not violating the letter of the Commission’s reporting requirements, tended to inflate United’s reserve situation and thus undermined the usefulness of the reports. In particular, United scheduled reserves as committed for long terms when in fact the reserves were under option to be withdrawn by the producers almost immediately. United did not remove these reserves from its long-term commitments until after the producers withdrew them. Because large amounts of these reserves were lost from United’s system in 1966 and 1967, this reflects particularly poorly on United’s willingness to judge accurately whether it could meet the Texasgulf commitment based on its then current reports.

In its Form 15’s, United also lumped together intrastate and interstate reserves, thus producing statistics that assumed gas could cross state lines when it was legally barred from doing so. While United argues that this was informally permitted by the Commission staff, the written reporting rules did not countenance reporting intrastate reserves. In any event, United’s action further undermined the validity of United’s reports and suggested again its too ready willingness to deceive itself, a practice inconsistent with due care.

Contemporaneous documents show that in at least three incidents, United officials made conscious decisions to massage their statistics in order to make their reserves look better to the Commission. Although one of these incidents came after deliveries began to the Bully Camp mine, two occurred before that time.

The Commission required that a pipeline report on Schedule 1 of its Form 15 the total reserves already committed to the pipeline. It allowed pipelines optionally also to file a Schedule 1-A estimating their future short-term contract additions if the companies had traditionally used such estimates to support their deliverability projections. CS 579. United never filled out a Schedule 1-A until its deliverability life based on committed reserves plummeted in the 1966 Form 15 due to the changes in the methodology developed by Ryder Scott. In its 1966 Form 15 report, prepared in early 1967 before the Texasgulf negotiations, United reported on Schedule 1-A that it would add nearly 5.9 trillion cubic feet of gas in the near future, a 30 percent addition to United’s then dedicated reserves. This unrealistically large estimate enabled United to increase the deliverability life reported on the 1966 Form 15 from six years to 12 years. United was advised by Ryder Scott in January 1968 that under Commission guidelines it should have claimed no more than 2.8 Tcf on the 1966 Schedule 1-A, instead of 5.9 Tcf. United nonetheless continued to use the inflated figure to support its pending certificate application to supply 200,000 Mcf a day of gas to Texas Gas Transmission Corp.

In the same January 1968 meeting between United’s top gas supply officials and the head of their Ryder Scott consulting team, United decided to continue reporting both intrastate and interstate reserves on the 1967 Form 15. The Ryder Scott official reported the decision in a memorandum to his boss. He explained:

UGPL has reported both intrastate and interstate gas supply in previous Form 15 Reports even though the FPC does not require a report on intrastate gas supply. If the intrastate gas supply were omitted from the 1967 Form 15, it would give the appearance of a cut in UGPL’s reserves of approximately 6 trillion cubic feet. This large apparent cut in reserves plus the fact the merger proceeding has not been completed could cause UGPL quite a bit of trouble in pending FPC proceedings.

PX 142 at 2. The merger pending was that between United and Pennzoil. The pending FPC proceeding was the sale to Texas Gas Transmission Corp.

Texasgulf makes other attacks on the misleading nature of United’s Form 15 reports. The Court finds most of these too trivial to be of any consequence on the liability issue. But one deserves mention. United reported each year in a summary table the new reserve additions for that year. This report consistently overstated, by a factor of sometimes 10-fold or more, the amount of new reserves added. The total overreporting for 1963 through 1966 was some 6.7 Tcf. United blames the problem on the Commission’s unrealistic reporting requirements, which forced it to make “guesstimates” of data it did not have. It notes that its actual reserve additions could be accurately determined in this period by comparing the total reserves reported in one Form 15 to the total reported in the next year’s Form 15. However, this does not explain why United persistently overestimated its new reserve additions year after year by such a wide margin. United seemed bent on deceiving itself.

The pattern that emerges is at best one of careless insensitivity to the purpose of the rules to meet the FPC’s mandate of assuring the reliability of gas supply by requiring public filings designed to show the adequacy of reserves.

In addition, a further inference that United knew it might not be able to meet its commitments to Texasgulf arises from the misleading nature of its contract with Texasgulf. United knew in 1967 that its injection of interstate gas into District 5 beginning in 1965 required it to obtain a certificate of public convenience and necessity from the Commission not only for its existing District 5 service, but a new certificate for the pipelines built to serve the Bully Camp mine. United had prepared a draft certificate application in 1967 but did not file it until the eve of its curtailments in late 1970. United’s contracts which involved new certificated service always alerted the buyer to the existence of federal jurisdiction, by the inclusion of a clause making service contingent on Commission approval of an appropriate certificate. CS 40, 49. However, the Gas Sales Agreement with Texasgulf contained no such clause. The significance of this omission lies in the fact that the Gas Sales Agreement contained no “without liability” language in its impairment of deliveries clause, while United’s tariff then on file with the FPC contained such language. United’s failure either to include the “without liability” language in the Gas Sales Agreement or alternatively to alert Texas-gulf specifically to the applicability of the tariff by reference to the need to certificate the service shows that United consciously hid from Texasgulf the escape hatch that it hoped would relieve it from liability if the expected shortage developed.

The significance of United’s knowledge in 1967 that it might not be able to fulfill its obligations to Texasgulf is two-fold. First, the duty of due care is measured in proportion to the risk reasonably known at the time the duty is undertaken. See Restatement (Second) of Torts §§ 289, 293 (1965); W. Keeton, Prosser and Keeton on the Law of Torts § 34 at 208-09 (5th ed. 1984). A supplier of gas like United, undertaking an obligation to provide gas where it knows the harm from shortage will be severe and where it also knows the likelihood of shortage is strong, is under a particularly high duty to prevent the foreseeable harm. Second, a supplier who knows before entering a contract that there is a significant danger of supervening events rendering performance impossible can be held to have assumed the risk of those events materializing, and the contractor’s subsequent excuses will be judged more strictly by the courts. See Transatlantic Financing Corp. v. United States, 363 F.2d 312, 318-19 (D.C.Cir.1966). With these principles in mind, the Court now turns to an examination of United’s conduct after entering into the Gas Sales Agreement with Texasgulf.

B. United Failed to Exercise Due Care After Entering into the Gas Sales Agreement

After United entered the Gas Sales Agreement with Texasgulf, it was not inevitable that a breach would occur in 1970. Prompt and decisive action could have cured United’s negligence in entering the contract. United failed to take such action and compounded its earlier negligence by adding new business, failing to acquire reserves, and unrealistically pinning all its hopes on a single offshore project.

1. United’s Management Failed to Coordinate Sales and Reserve Efforts

Sound management to achieve a proper balance between gas delivery obligations and reserves obviously requires close coordination between sales efforts and reserve acquisitions. Given the far-flung nature of United’s system, its many fields, its firm contracts for delivery, and constantly changing industry conditions, United had already reached a point by the middle of the 1960s where the “hunch” or “feel” of top executives for the situation could not be relied on and sophisticated controls were urgently needed.

United was specifically warned by Stone & Webster in the consultant’s January 1967 report that it needed to better coordinate its sales and reserve acquisition efforts. The study reported:

Generally, we found ... a high level of competence and individual effort at working levels, but a clear lack of top level coordination especially in the areas of long-range planning and customer relations. To a large extent this situation is the result of the inefficient delegation or neglect of top level responsibilities and the high centralization of operating authority. ... The rigidity and formality associated with the centralization of operating authority have resulted in indecisiveness and poor communication within the organization, have developed specialist managers with an inability to understand the problems and capabilities of other departments and have created a difficult environment for these managers in which to make long-range plans for the Company and for th