CALIFORNIA ET AL. v. SOUTHLAND ROYALTY CO. ET AL.
No. 76-1114
Supreme Court of the United States
May 31, 1978
436 U.S. 519
*Together with No. 76-1133, El Paso Natural Gas Co. v. Southland Royalty Co. et al.; and No. 76-1587, Federal Energy Regulatory Commission v. Southland Royalty Co. et al., also on certiorari to the same court.
Randolph W. Deutsch reargued the cause for petitioners in No. 76-1114. With him on the briefs were Janice E. Kerr and J. Calvin Simpson. Deputy Solicitor General Barnett reargued the cause for petitioner in No. 76-1587. On the briefs were Solicitor General McCree, Richard A. Allen, Robert W. Perdue, and Philip R. Telleen. C. Frank Reifsnyder, Arthur R. Formanek, and Richard S. Morris filed briefs for petitioner in No. 76-1133.
J. Evans Attwell reargued the cause for respondents in all cases. With him on the brief were Martin N. Erck, Sherman S. Poland, Bernard A. Foster III, and Roger L. Brandt. William Pannill and F. H. Pannill filed a brief for respondent Crane County Development Co.
John L. Hill, Attorney General, reargued the cause for the State of Texas as amicus curiae urging affirmance in all cases. With him on the brief were David M. Kendall, First Assistant Attorney General, Steve Van, Assistant Attorney General, and Frank C. Cooksey.†
†Frederick Moring and James A. Wilderotter filed a brief for the Associated Gas Distributors as amicus curiae urging reversal in all cases.
Briefs of amici curiae urging affirmance were filed by James R. Patton, Jr., Harry E. Barsh, Jr., Edwin W. Edwards, Governor, and William J. Guste, Jr., Attorney General, for the State of Louisiana; and by Toney
Peter H. Schiff and Richard A. Solomon filed a brief for the Public Service Commission of the State of New York as amicus curiae.
MR. JUSTICE WHITE delivered the opinion of the Court.
In 1925 the owners of certain acreage in Texas executed a lease which gave to Gulf Oil Corp., as lessee, the exclusive right to produce and market oil and gas from that land for the next 50 years.1 Gulf was entitled to drill wells, string telephone and telegraph wires, and build storage facilities and pipelines on the land. Gulf would also have “such other privileges as are reasonably requisite for the conduct of said operations.” App. 135. In exchange, the owners were to receive a royalty based on the quantity of natural gas produced and the number of producing wells, as well as other royalties and payments. The following year, the owners of the property sold one-half of their mineral fee interest to respondent Southland Royalty Co. and the rest to other respondents.
In 1951 Gulf contracted to sell casinghead gas from the leased property to the El Paso Natural Gas Co., an interstate pipeline. After this Court‘s decision in Phillips Petroleum Co. v. Wisconsin, 347 U. S. 672 (1954), Gulf applied for a certificate of public convenience and necessity from the Federal Power Commission authorizing the sale in interstate commerce of 30,000 Mcf per day. By order dated May 28, 1956, the Commission granted a certificate of unlimited duration, and this certificate was among those construed as “permanent” by
The original 50-year lease obtained by Gulf expired on July 14, 1975, and, under local law, the lessee‘s interest in the remaining oil and gas reserves terminated and reverted to respondents. See Gulf Oil Corp. v. Southland Royalty Co., 496 S. W. 2d 547 (Tex. 1973). Just prior to expiration of the lease, respondents arranged to sell the remaining casinghead gas to an intrastate purchaser, at the higher prices available in the intrastate market.
El Paso, in order to preserve one of its sources of supply, then filed a petition with the Commission seeking a determination that the remaining gas reserves could not be diverted to the intrastate market without abandonment authorization pursuant to
On respondents’ petition for review, the Court of Appeals for the Fifth Circuit reversed. Southland Royalty Co. v. FPC, 543 F. 2d 1134 (1976). The court held that Gulf, as a tenant for a term of years, could not legally dedicate that portion of the gas which Southland and other respondents might own upon expiration of the lease. Because of the importance of the question presented to the authority of the Federal Power Commission, now the Federal Energy Regulatory Commission, we granted the petition for certiorari. 433 U. S. 907. We reverse.
The fundamental purpose of the Natural Gas Act is to assure an adequate and reliable supply of gas at reasonable prices. Sunray Mid-Continent Oil Co. v. FPC, 364 U. S. 137, 147, 151-154 (1960); Atlantic Refining Co. v. Public Serv. Comm‘n of New York, 360 U. S. 378, 388 (1959). To this end, not only must those who would serve the interstate market obtain a certificate of public convenience and necessity but also, under
“No natural-gas company shall abandon all or any portion of its facilities subject to the jurisdiction of the Commission, or any service rendered by means of such facilities, without the permission and approval of the Commission first had and obtained, after due hearing, and a finding by the Commission that the available supply of natural gas is depleted to the extent that the con-
tinuance of service is unwarranted, or that the present or future public convenience or necessity permit such abandonment.” 15 U. S. C. § 717f (b) (1976 ed.) .
The Commission may therefore control both the terms on which a service is provided to the interstate market and the conditions on which it will cease:
“An initial application of an independent producer, to make movements of natural gas in interstate commerce, leads to a certificate of public convenience and necessity under which the Commission controls the basis on which gas may be initially dedicated to interstate use. Moreover, once so dedicated there can be no withdrawal of that supply from continued interstate movement without Commission approval.” Sunray Mid-Continent Oil Co., supra, at 156.
The Act was “so framed as to afford consumers a complete, permanent and effective bond of protection from excessive rates and charges.” Atlantic Refining Co. v. Public Serv. Comm‘n of New York, supra, at 388.
The jurisdiction of the Commission extends to the transportation of natural gas in interstate commerce or the sale in interstate commerce for resale to consumers.
“We said in Connecticut Co. v. Federal Power Comm‘n, 324 U. S. 515, 529, ‘Federal jurisdiction was to follow the flow of electric energy, an engineering and scientific, rather than a legalistic or governmental, test.’ And that is the test we have followed under both the Federal Power Act and the Natural Gas Act, except as Congress itself
has substituted a so-called legal standard for the technological one. Id., at 530-531.” Id., at 369.
The Court reasoned that in the circumstances of that case,4 “[t]he fact that a substantial part of the gas will be resold [in interstate commerce] . . . invokes federal jurisdiction at the outset over the entire transaction.” Ibid.
In this litigation the Commission held that once gas began to flow in interstate commerce from a field subject to a certificate of unlimited duration, that flow could not be terminated unless the Commission authorized an abandonment of service. The initiation of interstate service pursuant to the certificate dedicated all fields subject to that certificate. The expiration of a lease on the field of gas did not affect the obligation to continue the flow of gas, a service obligation imposed by the Act.
We think that the Commission‘s interpretation of the abandonment provision of the Natural Gas Act is a permissible one. In Sunray Mid-Continent Oil Co. v. FPC, the Court recognized that the obligation to serve the interstate market imposed by a certificate of unlimited duration could not be terminated by private contractual arrangements. In that case, a producing company which had contracted with a pipeline to supply gas for 20 years sought a certificate from the Commission limited to that period. The Commission insisted on a permanent certificate; and this Court upheld its authority to do so, holding that even after the contract had expired, the producer would remain under an obligation to supply gas to
Similar principles control this litigation. This issuance of a certificate of unlimited duration covering the gas at issue here created a federal obligation to serve the interstate market until abandonment authorization had been obtained. The Commission reasonably concluded that under the statute the obligation to continue service attached to the gas, not as a matter of contract but as a matter of law, and bound all those with dominion and power of sale over the gas, including the lessors to whom it reverted. Just as in Sunray, the service obligation imposed by the Commission survived the expiration of the private agreement which gave rise to the Commission‘s jurisdiction.
Respondents seek to distinguish Sunray on the ground that the producer in that case owned all of the gas covered by the certificate, but the central theme of that opinion is that the Act is concerned with the continuation of “service” rather than with particular sales of gas or contract rights. The Court traced the language of the statute to show that “all the matters for which a certificate is required—the construction of facilities or their extension, as well as the making of jurisdictional sales—must be justified in terms of a ‘service’ to which they relate.” Id., at 150. The Court specifically noted that ”
Respondents contend that the gas at issue here was never impressed with an obligation to serve the interstate market because it was never “dedicated” to an interstate sale. The core of their argument is that “no man can dedicate what he does not own.” Brief for Respondent Southland Royalty Co. et al. 8. This maxim has an appealing resonance, but only because it takes unfair advantage of an ambiguity in the term “dedicate.” For most lawyers, as well as laymen, to “dedicate” is to “give, present, or surrender to public use.” Webster‘s Third New International Dictionary 589 (1961). But gas which is “dedicated” pursuant to the Natural Gas Act is not surrendered to the public; it is simply placed within the jurisdiction of the Commission, so that it may be sold to the public at the “just and reasonable” rates specified by
Respondents also appear to argue that they should not be viewed as “natural gas companies” with respect to the Waddell Ranch gas because they have not voluntarily committed any act that would place them within the Commission‘s jurisdiction. As we have seen, this argument is somewhat beside the point, for the obligation to serve the interstate market had already attached to the gas, and respondents became obligated to continue that service when they assumed control of the gas. In the Commission‘s language, “the dedication involved is not the dedication of an individual party or producer, but the dedication of gas.” 54 F. P. C., at 149, 10 P. U. R. 4th, at 348.
In any event, we perceive no unfairness in holding respondents, as lessors, responsible for continuation of the service until abandonment is obtained. Respondents were “mineral lease owners who entered into a lease that permitted the lease holders to make interstate sales.” 54 F. P. C., at 920. They did not object when Gulf sought a certificate from the Commission. Indeed, as the Commission pointed out, Gulf may even have been under a duty to seek interstate purchasers for the gas. Id., at 919. Gas leases are typically construed to include a duty diligently to develop and market, see, e. g., 5 H. Williams & C. Meyers, Oil and Gas Law § 853 (1977), and at the time the certificate was sought the interstate market was the major outlet for gas, see Atlantic Refining Co. v. Public Serv. Comm‘n of New York, 360 U. S., at 394. Having authorized Gulf to make interstate
In Sunray, the Court discussed the “practical consequences” for the consumer if the term of the sales contract limited the term of the certificate. 364 U. S., at 143, 142-147. The Court reasoned:
“If petitioner‘s contentions . . . were . . . sustained, the
way would be clear for every independent producer of natural gas to seek certification only for the limited period of its initial contract with the transmission company, and thus automatically be free at a future date, untrammelled by Commission regulation, to reassess whether it desired to continue serving the interstate market.” Id., at 142.
A “local economy which had grown dependent on natural gas as a fuel” might experience disruption or significantly higher prices. Id., at 143. These observations are equally pertinent to private arrangements by way of leases. If the expiration of a lease to mineral rights terminated all obligation to provide interstate service, producers would be free to structure their leasing arrangements to frustrate the aims and goals of the Natural Gas Act.
Respondents suggest that the Commission could require a voluntary assumption of the service obligation by the lessor as a condition to certificates issued in the future. It is obvious that this solution does nothing to protect those communities presently depending on the flow of gas pursuant to a certificate of unlimited duration already issued. Moreover, the Court questioned in Sunray whether the conditioning power could be used to achieve indirectly what the Act did not authorize the Commission to do directly. Id., at 152. In light of this tension, the Court concluded that “the Commission‘s power to protect the public interest under § 7 (e) need not be restricted to these indirect and dubious methods.” Ibid.
We conclude that the Commission acted within its statutory powers in requiring that respondents obtain permission to abandon interstate service. “A regulatory statute such as the Natural Gas Act would be hamstrung if it were tied down to technical concepts of local law.” United Gas Improvement Co. v. Continental Oil Co., 381 U. S. 392, 400 (1965). By tying the concept of dedication to local property law, respondents would cripple the authority of the Commission at a time when the need for decisive action is greatest. Guided by
The decision of the Court of Appeals is reversed, and the cases are remanded for further proceedings consistent with this opinion.
So ordered.
MR. JUSTICE STEWART and MR. JUSTICE POWELL took no part in the consideration or decision of these cases.
The disparity between the regulated price of natural gas in the interstate market and the unregulated price in the Texas market gives this case its importance.1 The legal issue depends on the meaning of
“Does the lessee under a 50-year fixed-term mineral lease, by making certificated sales of leasehold natural gas in interstate commerce, thereby dedicate to interstate commerce the gas which remains in the ground at the end of the 50th year?” Southland Royalty Co. v. FPC, 543 F. 2d 1134, 1136 (1976).
In my opinion, the Fifth Circuit correctly answered that question in the negative and ruled that the lessors did not have to seek the Commission‘s abandonment approval under
Through two separate leases executed in 1925, Gulf Oil Corp. obtained the right to explore, produce, and market oil and gas from specified acreage in Texas.3 The leases were for a fixed term of 50 years, and the reversionary interests in the minerals were shared by a number of fee owners (respondents), of which Southland Royalty Co. is the largest.4 As lessors of the property, respondents received a royalty based on the quantity of natural gas produced and the number of producing wells.5 Gulf‘s interest in the leased gas terminated, as a matter of Texas law, in 1975, and the mineral rights reverted to respondents. See Gulf Oil Corp. v. Southland Royalty Co., 496 S. W. 2d 547 (Tex. 1973).
In 1951, well before its leasehold interest expired, Gulf
The Commission held that Southland and the other mineral interest owners may not divert leasehold gas into the local market without prior Commission approval. The Commission noted that its decision was not supported by direct
On respondents’ petition for review, the Court of Appeals reversed. The court held that Gulf, as a tenant for a term of years, could not legally dedicate that portion of the gas which Southland and the other reversioners might own upon expiration of the lease. It rejected the Commission‘s argument that since Gulf had an unquantified right during the 50-year term, it had a legal right to withdraw all of the leased gas, and therefore was empowered to dedicate the entire supply to the interstate market. The court reasoned that Gulf‘s interest in the gas was contingent upon its removal within 50 years and that its right to dedicate the gas to interstate commerce was subject to the same contingency.11 The Commission‘s alternative argument that the acceptance of royalty payments constituted ratification of the dedication to interstate commerce was rejected on the ground that the holders of the reversionary interest had no right to control Gulf‘s sale of the gas during the lease term.
In this Court, petitioners12 argue that a lessee‘s acceptance
I
Although Sunray Oil is of immediate concern, that decision must be considered in the context of the jurisdictional development of the Natural Gas Act that began in 1954 with Phillips Petroleum Co. v. Wisconsin, 347 U. S. 672. In Phillips, the Court held that sales of natural gas by an independent producer to an interstate pipeline were subject to the jurisdiction of the Federal Power Commission. The Court rejected the independent producer‘s claim that the Act was concerned only with regulating interstate pipelines and, instead, held that the FPC‘s jurisdiction was based on the broader concept of interstate “sales” of natural gas. One obvious result of Phillips was the sudden expansion of the Commission‘s jurisdictional responsibilities. Permian Basin Area Rate Cases, 390 U. S. 747, 756-757.13 Less obviously, but perhaps more importantly,
In Sunray Oil, the Court held that a natural gas company had made a dedication of gas to interstate commerce of unlimited duration even though its sales contract with the interstate pipeline was for a fixed term of 20 years. The company had applied to the Commission for a limited certificate of convenience and necessity authorizing interstate
The Court explained that the company‘s statutory obligation was not limited to the contractual commitment it had voluntarily assumed. “[T]he service in which the producer engages [the sale of natural gas] is distinct from the contract which regulates his relationship with the transmission company in performing the service.” 364 U. S., at 153. The duty to continue that service is an obligation imposed by the Act, not by contract. Id., at 155.15
And later in the opinion the Court added:
“An initial application of an independent producer, to make movements of natural gas in interstate commerce, leads to a certificate of public convenience and necessity under which the Commission controls the basis on which ‘gas may be initially dedicated to interstate use. Moreover, once so dedicated there can be no withdrawal of that supply from continued interstate movement without Commission approval. The gas operator, although to this extent a captive subject to the jurisdiction of the Commission, is not without remedy to protect himself.’ [Atlantic Refining Co. v. Public Serv. Comm‘n of New York,] 360 U. S., at 389.” Id., at 156.
In Sunray the issue before the Court was whether a private contract between a producer and a pipeline company could supplant the Commission‘s authority to determine how long the producer‘s gas would be subject to interstate dedication. There was no question that the producer had dedicated the gas to the interstate market, and there was no question that the producer owned the gas that he had dedicated. In the case at hand, however, respondents have not themselves dedicated any gas to interstate commerce, and they strenuously urge that Gulf‘s power to dedicate their gas was limited by the character of Gulf‘s leasehold interest. The issue here, therefore, is one step removed from that in Sunray. Nevertheless petitioners claim that Sunray controls. Their “syllogism” is that since a private contract is not determinative of the scope of a dedication, a private lease should not be determinative of whether there has been a dedication. But the syllogism is a non sequitur.16 Moreover, Sunray cannot, consistently with the purposes and structure of the Natural Gas Act, be expanded in this fashion.
The Natural Gas Act, as this Court has repeatedly stated, does not represent an exercise of Congress’ full power under the Commerce Clause. See, e. g., FPC v. Panhandle Eastern Pipe Line Co., 337 U. S. 498, 502. Instead,
While Gulf, like the oil company in Sunray, is a “natural gas company” within this definition, it is clear that, at least prior to the lease termination, the respondents were not. They clearly did not transport gas, and their retention of a standard, fixed royalty interest did not constitute a “sale” of gas in interstate commerce.17 This latter point follows from the rule that the royalty provisions of an oil and gas lease are not subject to the Natural Gas Act. Mobil Oil Corp. v. FPC, 149 U. S. App. D. C. 310, 463 F. 2d 256 (1972), cert. denied sub nom. Mobil Oil Corp. v. Matzen, 406 U. S. 976. The reasoning of the Court of Appeals in that case is applicable here:
“When we come to an ordinary lease by the landowner to the producer there is neither a ‘customary’ sale in interstate commerce nor its equivalent in economic effect. Such a lease is a transaction that is itself customary and conventional, but one that precedes the ‘conventional’ sales in interstate commerce with which Congress was concerned, indeed even precedes the ‘production and gathering’ which § 1 (b) visualized as preceding the sale
in interstate commerce over which jurisdiction was being established.
“The FPC is limited by the provision establishing its jurisdiction, and we do not find in that provision, rooted as it is in a sale in interstate commerce, any basis for reaching out to cover the landowner‘s lease or its royalty payments.”18
The Commission does not challenge this rule; instead, it argues that “lessors who succeed to the interest of their natural gas company lessees would be natural gas companies within the meaning of the Act.” Brief for Petitioner in No. 76-1587, p. 29. But neither the Commission nor any court has held that a lessor succeeds to the interest of his lessee when a lease expires by its terms. The Commission has held that a purchaser or assignee charged with notice of the burdens imposed on the acquired estate by its former owner must seek abandonment approval under
That analysis does not apply in this case. The character of the fee owner‘s reversionary interest was defined when the leasehold estate was created. Respondents did not “step into” Gulf‘s leasehold interest; that interest expired. This is, of
Petitioners rejoin that strict concepts of property law or state definitions of ownership cannot control the scope of the federal Act. But this proposition, though valid, does not support petitioners’ position. As the Court has previously stated, “[a] regulatory statute such as the Natural Gas Act would be hamstrung if it were tied down to technical concepts of local law,” United Gas Improvement Co. v. Continental Oil Co., 381 U. S. 392, 400, and the Court must instead look to the economic reality of the transaction. But in this case respondents, as royalty owners, had “no control over any incident of such [gas] sale either as to the quantity to be sold, the price to be paid, the identity of the purchaser or whether it [should] be sold in interstate or intrastate commerce.” Mobil Oil Corp. v. FPC, supra, at 316, 463 F. 2d, at 262. There is no claim that the lease was terminated prematurely in order to withdraw the gas from the interstate market or to evade the Commission‘s ratemaking authority. And, in fact, this case does not even present the specter of evasion or bad faith since the lease was negotiated at arm‘s length and executed years before the statute was passed.
My conclusion that Congress did not intend to allow a lessee to dedicate a lessor‘s gas in this situation is supported not
II
Based on the preceding analysis, it is apparent that this Court‘s railroad abandonment cases do not support petitioners. They rely on Smith v. Hoboken R., Warehouse & S. S. Connecting Co., 328 U. S. 123, and Thompson v. Texas Mexican R. Co., 328 U. S. 134, two companion cases decided in 1946, in which the Court held that
The railroad cases did not involve any question concerning the scope of the dedication to interstate commerce, or any attempt to impose an obligation on a party which was not subject to the Commission‘s jurisdiction. The question was which of the two companies subject to the jurisdiction of the Commission should operate—not whether the operation should continue. Neither the lessor nor the lessee wanted to have the regulated operation cease; both recognized that the common carrier‘s obligation to provide service to the public existed independently of the lease and survived its termination. In short, in neither case was there any question but that the lessor was a “common carrier” under the Interstate Commerce Act and subject to the obligations imposed by the Act.
The importance of this distinction is highlighted by subsequent lower court cases interpreting the railroad abandonment provision of
III
Finally, petitioners argue that the Court of Appeals’ ruling should be reversed in order to prevent parties from diverting natural gas production from the interstate market at will. The answer to this contention is implicit in the discussion of Sunray and the Natural Gas Act, Part I, supra, but I will address it separately because this Court has long recognized that one of the central purposes of the Act is “to protect consumers against exploitation at the hands of natural gas companies.” FPC v. Hope Gas Co., 320 U. S. 591, 610. The Commission argues that unless abandonment authorization is required in this case, the natural gas companies will be able to manipulate and restructure their leases to avoid the Commission‘s ratemaking authority. There are three answers to this concern.
First, there are few short-term development leases in existence. The magnitude of the capital investment required for exploration and development of oil and gas production makes it extremely unattractive for any natural gas company to accept a short-term production lease. Indeed, the literature
Second, nothing in the Fifth Circuit‘s decision affects the Commission‘s power to require future applicants for certificates to describe the details of their supply arrangements and to withhold approval pending the receipt of appropriate evidence of consent to an unlimited dedication by all interested parties. See Sunray Mid-Continent Oil Co. v. FPC, 364 U. S. 137.24
Finally, the decision of the Fifth Circuit does not in any way allow natural gas companies to exercise an “unregulated choice” over whether to continue serving the interstate market. See FPC v. Moss, 424 U. S. 494, 506 (BURGER, C. J., concurring in judgment). The Commission‘s error in this case was its conclusion that the need to obtain abandonment authorization was “like an ancient covenant running with the land,” El Paso Natural Gas Co., 54 F. P. C. 145, 150, 10 P. U. R. 4th 344, 348 (1975), which enabled a lessee for a limited term to impose
Despite the Act‘s flexibility, I would not stretch it to reach this case. The lessors, as royalty owners, had no control over the interstate sales, and even with the lease running without interruption, the lessee‘s interest was limited to a 50-year term. There is no authority in the statute for imposing a permanent service obligation on the lessors in this situation. Accordingly I would affirm the decision of the Court of Appeals.
Notes
“The Commission orders
“(A) A certificate of public convenience and necessity be and is hereby issued, upon the terms and conditions of this order, authorizing the sale by Applicant of natural gas in interstate commerce for resale, together with the operation of any facilities, subject to the jurisdiction of the Commission, used for the sale of natural gas in interstate commerce, as hereinbefore described and as more fully described in the application and exhibits in this proceeding.
“(B) The certificate issued herein shall be deemed accepted and of full force and effect, unless refused in writing and under oath by Applicant within 30 days from issuance of this order.
“(C) The certificate is not transferable and shall be effective only so long as Applicant continues the acts or operations hereby authorized in accordance with the provisions of the Natural Gas Act, and the applicable rules, regulations and orders of the Commission.” App. 37. See Sun Oil Co. v. FPC, 364 U. S. 170, 171-172.
In 1972, Gulf entered into a second contract with El Paso covering gas produced from wells covered by the leases in question, and the Commission granted Gulf another certificate covering sales under that contract.
“[N]o carrier by railroad subject to this chapter shall abandon all or any portion of a line of railroad, or the operation thereof, unless and until there shall first have been obtained from the Commission a certificate that the present or future public convenience and necessity permit of such abandonment.”