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12/17/71 Mobil Oil Corporation, v. Federal Power Commission

December 17, 1971

MOBIL OIL CORPORATION, PETITIONER

v.

FEDERAL POWER COMMISSION, RESPONDENT, PANHANDLE EASTERN PIPE LINE COMPANY ET AL., INTERVENORS. J. M. HUBER

CORPORATION, PETITIONER

v.

FEDERAL POWER COMMISSION, RESPONDENT, PHILADELPHIA GAS WORKS DIVISION OF UGI CORPORATION, SHELL OIL COMPANY, INTERVENORS. WESTERN

NATURAL GAS COMPANY, PETITIONER

v.

FEDERAL POWER COMMISSION, RESPONDENT, PHILADELPHIA GAS WORKS DIVISION OF

PRODUCTION COMPANY, PETITIONER

v.

FEDERAL POWER COMMISSION, RESPONDENT, PHILADELPHIA GAS WORKS DIVISION OF

LAND AND ROYALTY OWNERS OF LOUISIANA, PETITIONER

v.

FEDERAL POWER COMMISSION, RESPONDENT. MOBIL OIL CORPORATION, PHILADELPHIA GAS WORKS DIVISION OF UGI

CORPORATION, INTERVENORS. CARL F. MATZEN ET AL., PETITIONERS

v.

FEDERAL POWER COMMISSION, MOBIL OIL CORPORATION ET AL., INTERVENORS. WILLIAM HARVEY DENMAN ET



UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT

UGI Corporation, Carl F. Matzen, et al., Intervenors. AMOCO

UGI Corporation, Carl F. Matzen, et al., Intervenors. The

al., Petitioners, v. FEDERAL POWER COMMISSION, RESPONDENT,

Cities Service Oil Company et al., Intervenors

Nos. 23463, 23491, 23511, 23633, 23654, 24051, 24180 1971.CDC.262

Certiorari Denied June 7, 1972, 406 U.S. 976. Rehearing Granted in Part in No. 23491 August 29, 1972.

APPELLATE PANEL:

Leventhal, Robinson and MacKinnon, Circuit Judges. MacKinnon, Circuit Judge (concurring).

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE LEVENTHAL

These are petitions for review of an order of the Federal Power Commission , accompanied by its opinion No. 562, 42 FPC 164, which determined and declared that the royalty provisions of oil and gas leases constitute sales of natural gas for resale in interstate commerce subject to the Natural Gas Act, and that the landowners are subject to regulation as natural gas companies whose sales are covered by the filings of their lessees, the producer-operators. We reverse.

Facts and Prior Proceedings

In J. M. Huber Corp. v. Denman, 367 F.2d 104 (5th Cir. 1966), the court agreed with landowners that the particular oil and gas leases they executed required the gas-producer lessees to make royalty payments based on the current "market price" of the gas and not, as lessees contended, on the actual price received by the producer for the gas.

The market price was not determined because the lessor's claim, for a royalty based on a market price of 23 cents per mcf for gas run since 1946, presented "a serious question whether a Court, state or federal, either initially or ultimately, may allow any amounts fixed by jury, court, or both as increased royalty payments without express prior approval of the Federal Power Commission if, as would these, the price thus fixed would exceed levels prescribed by the FPC." (367 F.2d at 110, 111.) The court took account of the public interest issues involved and directed a reference by the parties to the FPC under the doctrine of primary jurisdiction for that agency to make an initial determination of its jurisdiction over rates to be paid for gas royalty.

Thereafter the royalty owner-landholders in Huber petitioned the FPC for a declaratory order disclaiming jurisdiction over royalty payments. Several lessee-producers involved in similar litigation filed complaints seeking an FPC determination that such royalties are subject to FPC jurisdiction. The FPC consolidated the dockets for hearing and decision. After prehearing conferences and evidentiary hearings, the presiding examiner concluded that the royalty owners are "natural gas companies as defined in the Natural Gas Act" *fn1 and that a royalty owner seeking an increase in royalty payment must apply to the FPC beforehand. The Commission affirmed in part by a vote of 3-2. It declared that "the royalty provisions of oil and gas leases constitute sales of natural gas for resale in interstate commerce subject to all the provisions of the Natural Gas Act." *fn2 However, it held that the royalty owners need not make a separate filing to the FPC; the producers' filings were held to cover the royalty "sales" adequately for regulatory purposes. *fn3

Petitions to review have been filed both by Mobil Oil Corporation and other producers, and by royalty owners, and the cases have been consolidated. The royalty owners challenge the FPC's jurisdictional decision. The producers challenge the contemporaneous ruling, referred to in more detail hereafter, that the royalty owners are entitled to payment on the basis of their contract terms even when higher than the producer's effective rate, provided no breach of ceiling prices is wrought. We find error in the jurisdictional determination.

Ruling That The FPC Does Not Have Jurisdiction Over The Payment of Royalties Under A Typical Natural Gas Lease

In the FPC's order of June 23, 1967, setting a hearing on whether royalty payments to the lessors are subject to its jurisdiction, the Commission authorized receipt of evidence relating to general industry contracting practices with respect to gas leases so as to be more fully informed as to the general background of the problem and possible economic and legal consequences before making its determination.

Evidence was introduced on industry practice with respect to oil and gas lease agreements. The evidence is well summarized in the opinion of the Presiding Examiner. He focused on the development wherein the landowner has sometimes reserved a royalty of a percentage of the physical hydrocarbon recovered (for oil), has sometimes reserved a royalty of a percentage of the proceeds thereof, and has sometimes reserved a royalty of a percentage of the "market value" thereof at the well or in the field. This portion of the Examiner's opinion provides useful background information and is set forth in an Appendix to this opinion.

The Commission found one "basic fact" determinative of the jurisdictional issue: "the effective retention by the royalty holders of a percentage interest in the gas sold in interstate commerce." This led to the conclusion "that if he has contracted to retain an economic interest in interstate sales, he has joined the other interest owners in such sales and he has become a seller of natural gas and therefore a natural gas company." *fn4

For jurisdiction to attach under the Natural Gas Act, the royalty owners must be held engaged in a "sale in interstate commerce of natural gas for resale." Section 2(6) of the Act defines a "natural gas company" to mean "a person engaged in the transportation of natural gas in interstate commerce, or the sale in interstate commerce of such gas for resale." *fn5 Section 1(b) of the Act provides, 15 U.S.C. ยง 717(b):

"The provisions of this act shall apply to the transportation of natural gas in interstate commerce, to the sale in interstate commerce of natural gas for resale for ultimate public consumption for domestic, commercial, industrial, or any other use, and to natural-gas companies engaged in such transportation or sale, but shall not apply to any other transportation or sale of natural gas or to the local distribution of natural gas or to the facilities used for such distribution or to the production or gathering of natural gas."

Whether landowners or other royalty owners are engaged in the "sale" of natural gas in interstate commerce for resale within the meaning of 1(b) of the Act must be ...


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