California v. Southland Royalty Company – Oral Argument – December 07, 1977

Media for California v. Southland Royalty Company

Audio Transcription for Opinion Announcement – May 31, 1978 in California v. Southland Royalty Company
Audio Transcription for Oral Reargument – April 17, 1978 in California v. Southland Royalty Company

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Warren E. Burger:

We will hear arguments next in 76-1114 in the consolidated cases, California v. Southland Royalty Company.

Mr. Barnett.

Stephen R. Barnett:

Mr. Chief Justice, and may it please the Court.

This cases involve oil and gas leases and the extent of the authority of the Federal Energy Regulatory Commission, formerly the Federal Power Commission under section 7D of the Natural Gas Act.

Section 7D as set out on the Appendix to our brief provides, and I would like to read it in full since I think it is crucial to this case:“No natural gas company shall abandon oil 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 the finding by the Commission that the available supply of natural gas is depleted to the extent that the continuance of service is unwarranted or that the present and future public convenience or necessity permits such abandonment.

”In these cases, a gas producer had leased gas producing property under a 50-year lease and had sold gas from that property in interstate commerce, pursuant to a certificate of public convenience and necessity issued by the commission without limit of time.

The question presented in the case is whether, when the 50-year term of the lease expires, the process of supplying gas from that property to interstate commerce may be terminated and the gas produced from those reserves sold in intrastate commerce instead without a requirement that either the lessee or the lessor obtain abandonment authorization from the Commission pursuant to section 7D of the Act.

The facts may be briefly stated.

In 1925, Gulf Oil Corporation obtained an Oil and Gas lease from the owners of the Waddell Ranch in Crane County in West Texas, part of the Permian Basin.

The lease gave Gulf the exclusive right to explore for oil and gas on the Waddell Ranch and to produce and market all the oil and gas it might find there for the fixed term of 50 years.

The lease provided that the owners of the Waddell Ranch, the lessors would receive a royalty from Gulf based on the quantity of natural gas produced and the number of producing wells.

A year later in 1926, the owners of the Waddell Ranch conveyed one half of their mineral fee interest to Southland Royalty Company, one of respondents here.

Other shares in the mineral interest under the Waddell Ranch were subsequently conveyed to a number of other owners.

At present, the record discloses that Southland owns 47 percent, trustees under the will of Warren right own 26 percent, the Exxon Corporation owns 14 percent and there are more than one hundred other owners.

I will refer at times to all those owners collectively as Southland.

In 1951, Gulf entered into a contract with El Paso Natural Gas Company and Interstate Pipeline, whereby Gulf agreed to sell to El Paso surplus residue gas.

That is a portion of the casing head gas which comes from oil wells as distinguished from gas well gas.

Gulf agreed to sell to El Paso’s surplus residue gas from the Waddell lease and from other sources.

In 1954, after this Court’s decision in the Phillips case, Gulf applied to the Federal Power Commission, as it then was, for a Certificate of Public Convenience and Necessity, under section 7E of the Natural Gas Act, authorizing it to make the sale to El Paso and this certificate was granted by the Commission in 1956.

Either the application for the certificate nor the certificate itself provided for any limit of time on the sales or service being authorized.

In 1972, Gulf entered into a second similar contract with El Paso for the sale of gas coming from the Waddell lease and other sources.Gulf again applied for a certificate to the Federal Power Commission and again got it in 1973.

On July 14, 1975, the 50-year term of the Waddell lease came to an end and the lease expired and title to the mineral estate in the Waddell Ranch thus, reverted to the reversionary mineral interest owners – Southland, et all.

Meanwhile, there is also, in this case the Goldsmith lease.

Also in 1925, Gulf entered into a similar 50-year fixed term oil and gas lease with Goldsmith and others on the Goldsmith Ranch in Ector County, Texas, also West Texas.

The owners of the Goldsmith Ranch subsequently conveyed their mineral interest to others including the same Southland Royalty Company, and including Texaco Inc. which now owns one-fourth of the interest.

Gulf sold gas from the Goldsmith lease to Phillips Petroleum Company which processed that gas and sold it to El Paso for resale in interstate commerce, pursuant to certificates that the Commission granted to El Paso.

In 1975, of course, the Goldsmith lease also expired and title to the mineral estate reverted to the reversionary mineral interest owners.

For the purposes of this case, the parties had agreed that the Waddell lease and the Goldsmith lease, the Waddell Ranch and the Goldsmith Ranch, and all the legal ramifications of each have no legal differences.

And thus, I will adapt the practice followed by Southland in its brief and refer at least sometimes to both leases and terms of the Waddell lease.

Audio Transcription for Oral Reargument – April 17, 1978 in California v. Southland Royalty Company

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Stephen R. Barnett:

I will always refer to the lessee as Gulf, although in fact there are some other minor lessees, and I will sometimes refer to the owners of the reversionary mineral interests simply as Southland.

Now, the proceedings before the Commission…

John Paul Stevens:

Mr. Barnett, right at that point when you are clarifying the parties, is it Gulf or the Southland and Waddell people that within your view of Section 7B is the natural gas company within the meaning of the statute?

Stephen R. Barnett:

I plan to get to that, Mr. Justice Stevens, but in short I think they both are but I will expound on that a little more fully in a moment, if you like.

The proceedings before the Commission were as follows: Shortly before the end of the Waddell lease period in 1975, Southland entered into a contract with Intratex Gas Company and Intrastate gas pipeline in Texas, whereby Southland agreed to sell to Intratex on the unregulated intrastate market gas from the Waddell lease after the lease expired.

Needless to say, the intrastate price – and that is what this case is all about of course – the intrastate price is significantly higher than the interstate price regulated by the Commission, at which the gas was being sold to El Paso.

In January 1975, having heard that Southland was soliciting proposals for intrastate sales of its gas, El Paso petitioned the Commission for a declaratory judgment, as to whether when the Waddell lease expired, Southland and the other reversionary mineral interest owners would be entitled to terminate the deliveries of Waddell Ranch Gas to El Paso and sell the gas instead on the intrastate market without getting the Commission’s approval under Section 7B.

Texaco as one-fourth owner of the reversionary estate in the Goldsmith Ranch filed a similar petition for a declaratory judgment before the commission.

Since the cases were so similar, the Commission consolidated the two proceedings since there were no issues or fact, no evidentiary hearings were sought or held various parties intervened before the Commission.

The Commission issued its decision in July 1975.

It held that the various mineral interest reversioners may not sell gas from the reserves underlying the Waddell and Goldsmith Ranches in intrastate commerce without first obtaining abandonment authorization from the Commission.

Because the Commission held that gas had been dedicated to interstate commerce by the certificate of sales that the lessees had made to El Paso.

The Commission reasoned that under the decisions of this Court, the dedication involved is not the dedication of an individual party or producer but the dedication of gas and that once the service of supplying gas in interstate commerce from specific acreage has commenced, quoting this Court’s decisions in CATCO and Sunray “There can be no withdrawal of that supply from continued interstate movement without Commission approval.”

The Commission said, “This does not mean that we are modifying the law of Texas as to the leasehold rights; we are however recognizing rights and duties that have been created by the Congress under the Natural Gas Act.”

The Commission therefore held – and this relates to your question, Mr. Justice Stevens – that the reversionary mineral interest owners and also Gulf were required to obtain abandonment authority under Section 7 before ceasing the interstate sales.

I do not mean to say that answers your question;I propose to try to do so in a minute.

It was not at any agency theory then, it was just the idea that if the lessee had dedicated it, it was automatically dedicated when the lease reverted.

Stephen R. Barnett:

That is correct.

The Commission’s theory was that it is a dedication of gas, not a dedication of any particular person.

As it has otherwise been put, it is an in rem rather than in personam concept, the gas is dedicated.

I will return to some of the ramifications of that.

On petition for rehearing the Commission essentially adhered, the Commission did adhere to its findings and conclusions, although adding some supplementary reasoning that I think I need not recite.

Southland and the other reversionary interest owners appealed to the Fifth Circuit Court of Appeals, which reversed the Commission’s orders.

The court viewed the issue of interstate dedication as controlled by local Texas law, noting that, “under applicable Texas law, Gulf’s rights were those of a tenant for a term of years.

Its interest was a limited one which terminated completely when title reverted to Southland at the expiration of the 50-year term”.

Thus, “under well-established concepts of property law, Gulf could not legally deal in, or dedicate that portion of the gas which Southland might own upon termination of Gulf’s estate.

The Court reiterated that under Texas law, Gulf’s 50-year lease interest did not authorize it to impose any limitation on the reversionary estate, and that under Texas property law, Gulf could not bind the reversionary estate by its actions.

The Court thus concluded that by virtue of local law, the reversioners were free to cease the service to El Paso and its interstate customers and to sell the gas from these reserves in intrastate commerce after expiration of the lease.

Petitions for certiorari were filed in this Court by the Commission and also by El Paso in the State of California, the Court granted the petitions and consolidated the cases.

Well, in the first place, we submit that the case is controlled by the plain language of Section 7B.

Audio Transcription for Oral Reargument – April 17, 1978 in California v. Southland Royalty Company

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Stephen R. Barnett:

That language provides, “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 first obtaining abandonment authorization from the Commission.”

Warren E. Burger:

I suppose the key words are “subject to the jurisdiction of the Commission,” is that not so?

Stephen R. Barnett:

Well, I do not think so, Mr. Chief Justice,I would say the key word is service.

It is clear here that what El Paso was doing was subject to the jurisdiction of the Commission.

That was a service indeed and I do not take it to be denied by our opponents that El Paso was performing as service subject to the jurisdiction of the Commission, within the language of Section 7B.

They do, I assume, raise the question…

John Paul Stevens:

But you did not suggest that El Paso was the natural gas company referred to —

Stephen R. Barnett:

Did I say El Paso?

John Paul Stevens:

You did.

Stephen R. Barnett:

I should have said Gulf.

I am sorry, thank you.

I do not take it, I think it could not be denied, and it is not denied that Gulf was performing a service subject to the jurisdiction of the Commission by the sales it was making to El Paso under the lease.

Given that service, and the Court has emphasized in the Sunray case, the importance of the service concept under Section 7B.

The Court there said that it is a service, not just a sale that the Commission authorizes when it grants a certificate under Section 7E.

In the language, quoted in our brief at page 11, “It is evident that all that matters for which a certificate is required must be justified in terms of a service to which they relate.”

John Paul Stevens:

Mr. Burnett, just because you focused on the statutory language which interests me, the word service is qualified by, rendered by means of such facilities, and that such facilities in turn refer back to its facilities.

If you talk about Gulf, the service would have to be, “Service rendered through facilities of Gulf,” would they not?

By just reading the plain language of the statute.

Stephen R. Barnett:

“No natural gas company shall abandon all or any portion of its facilities subject to the jurisdiction of the Commission or any…”

Well, I think Gulf’s facilities clearly worked.

Gulf had processing plants, it had pipeline connections with El Paso and with these gas wells.

John Paul Stevens:

Is it your position Gulf was obligated to continue providing that?

Stephen R. Barnett:

Yes, well let me know, this brings me now to your question, Mr. Justice Stevens.

I have just argued that it would seem clear here and I would think not denied, that Gulf was performing a service subject to the jurisdiction of the Commission.

However, it might be argued and our opponents apparently do argue that you also have to have a natural gas company on the premises.

That 7B says, “No natural gas company shall abandon” and Southland at least argues that it is not a natural gas company for the purposes of this case and, thus, I come to the question you raised earlier and I think there are several answers.

One is that Gulf is a natural gas company, clearly for the purposes of this case.

The Commission in its certificate granted to Gulf for the sales specifically held that the applicant is a natural gas company.

Moreover, I take the–

John Paul Stevens:

Let us stop right there for just a moment.

Audio Transcription for Oral Reargument – April 17, 1978 in California v. Southland Royalty Company

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John Paul Stevens:

What does that mean?Does that mean Gulf must continue to provide the gas?

Stephen R. Barnett:

Well, the Commission held in its order here that neither Gulf nor Southland may abandon the service without Commission authority.

To that extent, that means Gulf must continue to provide the gas, yes.

John Paul Stevens:

But Gulf does not have the lease.

The Gulf’s lease has expired.

Stephen R. Barnett:

That is true.

Gulf and Southland might have a course of action between each other, but for purposes of the regulatory purposes of the Natural Gas Act, Gulf having been performing this service subject to the jurisdiction of the Act was held not to be able to abandon it.

John Paul Stevens:

What if Gulf is simply, it was not a question of reversion of the list but Gulf had some oil fields and they simply ran out?

Would it still be obligated to continue furnishing that service?

Stephen R. Barnett:

Well, it might be obligated to go to the Commission and seek abandonment and I assume the Commission would grant it if the oil wells ran out.

But in any event, that is a different case, because here you have a continually flowing stream which did not run out, which is being stopped and diverted to intrastate commerce and the Commission held, this is at page 608 of the Appendix, with respect to holding that Gulf must seek abandonment as well as the reversioners.

In our opinion, this is not a mere technical requirement, but would allow us to pacify on the merits of the lessee’s abandonments upon the termination of the 50-year leases, as well as the proposed abandonment of the reversioners.

But I do not take the position, Mr. Justice Stevens,that that is the only answer to the question.

Well, we do submit that Gulf is a natural gas company for the purpose of having to go to the Commission before abandoning this particular service, we also submit that Southland is a natural gas company for this purpose.

Now Southland says, “We are not a natural gas company because we were not engaged in selling gas subject to the Commission’s jurisdiction, we were just receiving royalties.”

Thurgood Marshall:

Southland did not process either.

Stephen R. Barnett:

Southland did not process either, that is true.

Thurgood Marshall:

Process, is it not pretty odd on the gas company that does not process?

Stephen R. Barnett:

Excuse me, Mr. Justice?

Thurgood Marshall:

Is it not difficult to have a gas company if the company does not process?

Stephen R. Barnett:

Well, I would not assert that they are a gas company here because they did not process.

I would assert they are a natural gas company here because they are the party who now controls a service in natural gas which is subject to the Commission’s jurisdiction and which Section 7B says, “May not be abandoned without the Commission’s approval.”

It would be an anomalous and wholly self-destructive interpretation of Section 7B, I submit, to read it to say that even though you have a service, which Section 7B says, “May not be abandoned without the Commission’s approval,” still the party who controls that service happens not to be a natural gas company and therefore, there is no way that the Commission can effectuate the result that Section 7B commands.

Byron R. White:

Would not a convict Commission could have required the consent of Southland at the time that it issued the original certificate, could it not?

Stephen R. Barnett:

At the time it issued the certificate, Gulf could have required the consent of Southland —

Byron R. White:

Yes, if it said, we see you have just got a 50-year lease and we think we may want service furnished beyond that, if they can require this application by Southland to a company that of Gulf –.

Stephen R. Barnett:

The certificate provided for no limit of time, the application provided for no limit of time.

By the same token Southland could have written in to its contract with Gulf, its lease with Gulf that if you go apply for a certificate, you make clear that you are only applying a 50-year certificate.

Byron R. White:

Well, can the Commission not, in its proceedings on the application, ask the necessary questions and develop the necessary information to find out how long the lease is of the natural gas company and if there are reversionary interests, required that the owners’ reversionary interest join in the application?

Stephen R. Barnett:

Well, it perhaps could do that in the future.

Audio Transcription for Oral Reargument – April 17, 1978 in California v. Southland Royalty Company

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Stephen R. Barnett:

In this case, the application was for an unlimited certificate, the Commission may well have assumed on the basis of cases like Sunray that the certificate is unlimited when it says, it is unlimited and that just as a contract of 20 years was held in Sunray, not to limit the term of the dedication, so, the lease here does not.

John Paul Stevens:

Mr. Barnett, it often happens that gas companies get in a fight over who really owns the land, who really has a valid lease.

Suppose Gulf went to the Commission and got the certificate that litigation started as to who really had a valid lease and it is determined in court that Gulf had no lease at all.

I suppose you would say that Gulf would have to ask to terminate the service but you would not say that the Commission would deny termination, would you?

Stephen R. Barnett:

No.

I would think on those facts the Commission would grant the termination and substitute whoever the Court had found to be the actual lessee.

John Paul Stevens:

I know but that person– suppose that person who owns it, he has no interest in continuing the service.

Once they sell in intrastate commerce, has not any interest in doing what Gulf had been doing and it is the owner of the lease.

Stephen R. Barnett:

Well, if you were suggesting that Gulf’s application to the Commission on your facts was wholly unauthorized,Gulf was a sort of squatter on the land and had no authority–

If they were in good faith like a lot of people do they just get the title question —

Stephen R. Barnett:

Well, I think in that case, the Commission might find that the original dedication was not authorized by the land owner and in that case might set aside the original dedication.

John Paul Stevens:

Well, you had said a moment ago that the theory the Commission was not an agency, but now in your answer to Justice Whites, question, it sounds like you saying it was agency.

Stephen R. Barnett:

Where there has once been a dedication of a stream of gas, and authorized dedication anyway of a stream of gas….

Byron R. White:

There is anybody — you can not say Gulf in my example is authorized by anybody, the land owner has determined that Gulf does not hold the lease but some other company holds the lease and is the owner and has the right to dedicate the task.

Stephen R. Barnett:

That is why I said an authorized dedication and in that case, there would not have been an authorized dedication in the first place and that the –

Byron R. White:

So, the service could be discontinued?

Stephen R. Barnett:

Well, you might well have to go to the Commission to do so but I should think that on those facts the Commission would find that since there had been no authorized sale or service in the first place, the application was fraudulent in a sense.

Byron R. White:

So, you must say then that Southland here implicitly authorized the dedication?

Stephen R. Barnett:

Yes, I would say, implicitly by virtue of what its authorized lessee did.

Byron R. White:

Now is that the theory the Commission used?

Stephen R. Barnett:

Well, in the sense, yes I think the Commission’s theory is that this gas was dedicated to interstate commerce by the sales and service which Gulf performed pursuant to the Commission certificate.

Everything Gulf did was not only normal but proper and required of it under its lease.

Byron R. White:

Well it certainly did not use the theory that Southland is a gas company, did it?

Stephen R. Barnett:

Well, the Commission did not specifically address the question of who is a natural gas company and why, it held that Southland and Gulf both are for the purposes of having to come to the Commission to get abandonment authority and I would submit as I already have that Gulf clearly is.

I think Southland also is by virtue of controlling the service.

In the United Gas Pipeline case a few years ago, this Court was faced with the question.

In that case, a producer did not want to buy any more gas from a particular field and the Court held that his refusal to keep purchasing was an abandonment, ordered him to keep purchasing and the objection was made where does this Court get the authority to order a purchase.

And the Court answered, where it is necessary to regulate the purchase of gas in some respects to carry out its expressly granted authority over transportation in sale, the Commission must have the power to do so.

Undoubtedly, the continued purchase of gas has been ordered but only as an incident to regulating transportation in sales.

Similarly here —

Audio Transcription for Oral Reargument – April 17, 1978 in California v. Southland Royalty Company

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Warren E. Burger:

What are you reading from there?

Stephen R. Barnett:

United Gas Pipeline Co. v. FCC 385 US 90, cited in El Paso’s brief at page 29.

Similarly here, in order to effectuate its jurisdiction over the service that does exist, the Commission, if necessary, would have to be able to assert personal jurisdiction over Southland to hold the abandonment proceeding.

But as I have said, Gulf also is a natural gas company.

As yet a third point on this, it should be noted how carefully Southland qualifies its statement in its brief at page 16, that it “has not at anytime been a natural gas company with respect to its Waddell Ranch gas.”

Well now some of the reversioners here clearly are natural gas companies with respect to other gas.

Texaco is and concedes so in the record at appendix page 218.

Exxon, which owns 14 percent of the Waddell interest is and concedes so in the record of page 443.

Although it is not in the record, it is implied by Southland’s statement which I just read and I am informed that Southland is also a natural gas company, that is, does sell gas in interstate commerce pursuant to Commission certificates with respect to other gas.

That would make more than 50 percent of the more than 60 percent of the owners of the Waddell Ranch who are natural gas companies.

Now if the argument is that the natural gas company requirement under Section 7B is a separate requirement from the requirement of having a service subject to the Commission’s jurisdiction, then there is no reason why the natural gas company has to be one with respect to this gas.

On that basis, too, you have —

John Paul Stevens:

Mr. Burnett, the statutory language is that the particular facilities must be subject to the jurisdiction.

Is it your view that the lessor’s interest is a facility subject to the jurisdiction of the Commission?

Well, the fact that the lessor operates a natural gas plant up in Maine or some place would not have anything to do with the case, would it?

The fact that they are technically a natural gas company is not dispositive.

It must be operating facilities subject to the jurisdiction of the Commission and the service involved must be performed pursuant to those facilities.

Stephen R. Barnett:

No natural gas company shall abandon all or any of its facilities.

John Paul Stevens:

Of its facilities.

Now, you say Exxon is a lessee, but that does not – or is one of the lessors – that does not make any difference unless the leasehold interest is a facility within the meaning of the statute.

Stephen R. Barnett:

But it is the service, the lessee here—

John Paul Stevens:

Services rendered by means of such facility.

Stephen R. Barnett:

Well, such facilities could mean facilities subject to the Commission of the jurisdiction, that is, Gulf’s facilities here.

John Paul Stevens:

No, it would seem that such facilities are its facilities in the preceding line.

Stephen R. Barnett:

Well, I do not think it has to be read that way.I think Gulf’s facilities here were rendering the service and the natural gas company could be one separately.

But I think the strongest—

John Paul Stevens:

Let me just cut through.

You think it makes any difference for this case whether the lessor is some individual who never had anything to do with gas other than owning the lease interest, or it’s Exxon Corporations.

Stephen R. Barnett:

I do not think it makes any difference.

I think the shortest and easiest answer is that once you come into control of jurisdictional service and you are the only party who has the power to abandon or continue that service, you are by virtue of that control a natural gas company within the meaning of the Act.

Audio Transcription for Oral Reargument – April 17, 1978 in California v. Southland Royalty Company

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John Paul Stevens:

So you really do not make any point out of the careful language in the Southland brief that they may have been a natural gas company for some other purpose.

That is your role.

Stephen R. Barnett:

Well, it is not the central argument by any means.

John Paul Stevens:

Well, it is a totally meritless argument, is it not?

Stephen R. Barnett:

I would not say that.

I think it has some weight especially with respect to the claim of the reversioners that they are just land owners, they have nothing to do with the natural gas business and why should they be subjected to any duties under the Natural Gas Act.

John Paul Stevens:

Well, Mr. Barnett, I am interested as to whether, if you can put your finger on where you think the Commission indicated that Southland should be held to have dedicated the gas.

Stephen R. Barnett:

I do not say that is the Commission indicated that Southland should be held to have dedicated the gas.

The Commission found that the gas was dedicated by what Gulf did within the terms of its lease.

John Paul Stevens:

And you do not say then that Gulf had any of it?

Do you say that the Commission said that Gulf had the authority on behalf of Southland to dedicate all of the gas?

Stephen R. Barnett:

Well, Gulf had that authority by virtue of its lease from Southland.

That lease authorized it to take all the gas it could out of the land. Pursuant to that lease, it applied for and got a certificate without limit of time.

John Paul Stevens:

But I thought your argument really was and I thought the Commission’s argument was, it was a matter of service and even if Gulf was breaching its contract, breaching its lease with Southland in asking for an unlimited certificate, you would maybe making the same argument?

Stephen R. Barnett:

Well that would be a different case, there is nothing here to indicate that Gulf has in any way breached its lease with Southland.

I see that my time is up for the present.

Warren E. Burger:

Very well, Mr. Barnett.

Mr. Deutsch.

Randolph W. Deutsch:

Mr. Chief Justice, may it please the Court.

California is here today as a consumer state of Interstate Natural Gas Service.

The facts of this case directly affect California, however, we believe that the decision of the Court below so undermines one of the fundamental protections for the gas consumers of the United States, that we are basically here to plead the cause of those consumers on policy grounds.

Factually, California receives —

William H. Rehnquist:

What do you mean when you say you are to plead it on policy grounds?

Randolph W. Deutsch:

I am sorry sir, what I mean is that we certainly agree with the statements said, the solicitors made as us to the law of the case.

What I wanted to bring to the Court’s attention was the various situations in the Interstate gas market today.

William H. Rehnquist:

That you will have some relation I take it, to the statute or administrative law in question?

Randolph W. Deutsch:

Yes, Justice Rehnquist.

Factually, the State of California receives approximately 90 percent of its gas from the interstate market.

Our major supplier of that gas is El Paso Natural Gas Company.

On the facts of this case, if the decision of the lower court is upheld, some 35 million cubic feet a day of gas will be lost to the El Paso system without the abandonment authorization.

Audio Transcription for Oral Reargument – April 17, 1978 in California v. Southland Royalty Company

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Randolph W. Deutsch:

This is sufficient to heat approximately 120,000 homes.

California would receive approximately 75 percent of that gas under normal circumstances, but we believe that the theory —

John Paul Stevens:

Mr. Deutsch, what will happen to that gas if you lose?

Randolph W. Deutsch:

It is my understanding that that gas has already been contracted in intrastate Commerce within the State of Texas and I have no idea what the use of that gas would be-

John Paul Stevens:

Do you think we should have an interest in being sure it goes to California instead of the Texas?

Randolph W. Deutsch:

No Sir, not at all.

John Paul Stevens:

So, what is your argument?

Randolph W. Deutsch:

My argument is that first of all, this gas goes to all the States on the El Paso system but more importantly, the theory of the case could be applied not only to these two fixed term leases but to all types of leases including life of production leases.

Therefore, that the facts or the theory of the case could be applied to cause a loss of a great deal more gas from the interstate system and this is in opposite to one of the basic protections of the consumer in the United States unto the Natural Gas Act, which is to have an assurance of inadequate and reliable supply of gas in interstate service.

In deciding this case, California believes that the Court should consider the purpose for which the Natural Gas Act was enacted and the impact, the decision of this Court will have on the consumers of the United States.

In deciding that, we would like to bring to your attention two factors in the gas market today that will have an effect on this case and have an effect on the Commission’s ability to ensure continuing, reliable and adequate supply of gas in the interstate market, that is shortages in natural gas in the interstate market and the disparity of price in the interstate, between the interstate and intrastate market.

California, receiving over 90 percent of its gas from the interstate market, has found that there has been a significant decline in gas, some nine percent a year dedicated to that market and subsequently declining supplies to California.

This is true for the United States and this shown by the Amici Briefs of New York and the Associated Gas Producers.

The effect of the shortages were dramatically shown in the winter’s freeze of 1976, where natural gas could not get to the Northern tier states.

It has an immediate effect on the health, well-being and economic viability of the gas consumers.

Now, a major reason for these shortages is a disparity in price between the interstate and intrastate market.

The intrastate market of course is unregulated and the price has been as high as over two dollars, a thousand cubic feet.

The selling price in the interstate market is $1.44.

California is not here to disparage the fundamental economic motivation of someone to sell their gas at the highest price possible.

What we are bringing to the Court’s attention is that the chronic shortages in the interstate market combined with the disparity of price and added to this motivation to sell gas at the highest price possible, puts untenable pressures on the Commission to uphold this fundamental protection which is to ensure a continuing, adequate and reliable supply of gas in the interstate service.

William H. Rehnquist:

Untenable pressures on the public utilities commission of California or the federal, what used to be the Federal Power?

Randolph W. Deutsch:

The Federal Power Commission, Justice Rehnquist.

In the 1950’s, it was in the interest of producers to sell their gas in the interstate market.

In 1977, it is in their interest to sell their gas in the intrastate market,and we believe that the decision of the Court below applied to leases gives producers just the vehicle that they need to carry out their economic interestto determine, to be able to take gas from interstate commerce, either now or some time during the life of production and move that to intrastate commerce without worrying about the public interest and without having the Commission being able to determine the public convenience and necessity of whether this gas can be removed from interstate commerce and we think this violates —

Thurgood Marshall:

Well, I thought I understood the government to say that they were trying to do just what you are talking about, that the Energy Commission was trying to do just what you say they are not doing.

Randolph W. Deutsch:

I am sorry Justice Marshall.

Thurgood Marshall:

Are you saying that the Energy Commission is having pressure put on them to stop them from doing what you want them to do?Is that what you are saying?

Randolph W. Deutsch:

Well, what I am saying is that the Commission has a duty to ensure an adequate supply of gas in the interstate market.

I am saying that the chronic shortages which make it a seller’s market combined with this case allow producers, give producers an opportunity to move their gas from the interstate market to the intrastate market or in the future to make leases that give them that opportunity and this is a pressure put on the Commission and the Commission has a duty to ensure that there is an adequate supply in the interstate market and not to allow this abandonment unless the gas well has been depleted or that it is —

Thurgood Marshall:

Well, are you criticizing what the Commission did in this case or not?

Audio Transcription for Oral Reargument – April 17, 1978 in California v. Southland Royalty Company

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Randolph W. Deutsch:

No.

Thurgood Marshall:

Well, what is your argument about this?

Randolph W. Deutsch:

My argument is that the decision of the court below can be applied to all forms of leases and that theory concerning leases, which allows leases to be drawn up which would avoid Section 7B abandonment provisions–

Thurgood Marshall:

All I am trying to say is, I am trying to find out what legal arguments you have other than policy.

Randolph W. Deutsch:

Well, my legal argument is, as the solicitor stated that gas cannot be removed, Section 7B says that, “The gas cannot be removed from interstate commerce once it is has been dedicated,” without a Section 7B, abandonment authorization.

The gas in this case was dedicated to interstate commerce, an unlimited certificate was given.

Gulf had the right to dedicate all that gas, in fact, if the production circumstances had been different, Gulf could have sold all of that gas before the termination of the 50 years and the reversionary mineral interest owners had only a future expectation.

Until that vested at the end of the 50 years, they did not what gas would be left.

All of that gas was in fact dedicated in interstate market and could have been produced and sold in the interstate market and under the clear language of Section 7B, that gas once dedicated for whatever reason, no matter how justified the reason, cannot be removed from interstate commerce in the first instance, until the Commission, within its jurisdiction has determined that abandonment can be made.

Thurgood Marshall:

All kinds of interpretation on this one section.

Randolph W. Deutsch:

Yes, it does, I believe so.

I would like to turn to two points raised by the respondents in this case.

The first is that the leases could not be made that would terminate prematurely natural gas service in interstate commerce, because it would be against the economic interest of the producer to do so because of the initial cost of production.

I would like to make several comments on that.

First of all, we have the possibility of lease situations that affect adversely the consumer even though they do not necessarily affect the producer.

And we see this in cases now in the Court below more than the Fifth Circuit concerning the area of royalty gas, where the issue is whether the royalty payment to a lessor should be based on the intrastate or interstate price of gas.

The secondary issue there is whether the gas, the lessor can terminate the lease, thereby causing the gas to revert back to the lessor, if the lessor does not receive the value that he thinks he should.

Under the theory of this case, that would avoid the abandonment provision.

Another factual situation concerns a lessor’s ability to retain a royalty interest with the right to convert that into a working interest, a situation that arose in the Tenth Circuit in the Phillips Petroleum case.

In that case, the lessor did convert the gas into a working interest and attempted to sell it as new gas in interstate commerce without seeking abandonment authorization.

Now the Tenth Circuit held that that gas was dedicated but I think there is no guarantee that other Courts of Appeal would also hold that specially if in this case, the Fifth Circuit is upheld.

There are other situations involving termination for lack of production.

A producer with a marginal well could find it in his best interest to simply abandon that well, allowing the gas lease to terminate and he could move on to more productive areas, but that avoids Section 7B abandonment.

Perhaps the Commission would find that that it is in the public interest to produce that marginal gas that that producer is still getting a fair rate of return.One overall comment in this area and one I would like to emphasize to the Court, it is a seller’s market.

There is a tremendous chronic shortage of natural gas.

Whether the producers like it or not, whether the Commission likes it or not, it is the theory of this case that leases can avoid Section 7B abandonment authorization is upheld, I think we will find a great many leases that include provisions that allow for termination if certain circumstances occur during the production in the life of the lease and neither the Commission nor producers will be able to do anything about it because those are the type of leases they are faced with.

One last point concerning the issue raised about the cloud on real property in the State of Texas.

First, what we perceive here is a Congressional regulatory requirement placed on interstate gas service.

We do not see the cloud on real estate title.

That gas has reverted to the reversionary mineral interest owners, they have full title to it, they will receive the proceeds for the sale of that gas.

Audio Transcription for Oral Reargument – April 17, 1978 in California v. Southland Royalty Company

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Randolph W. Deutsch:

I see my time is up, Thank you.

Warren E. Burger:

Mr. Attwell.

J. Evans Attwell:

Mr. Chief Justice and may it please the Court.

My name is Ebenezer Attwell and I appear here on behalf of the respondents Southland Royalty Company et all.

I would like to start out by briefly summarizing our position and what we are asking this Court to hold.

Then I want to turn to the reasons why Southland’s gas was not involuntarily dedicated to interstate service because Gulf made an interstate sale of Gulf’s share of the Waddell Ranch Gas.

Finally, I want to conclude with a discussion of the practical consequences of this Court holding for Southland.

Our position is very simple but it is very fundamental.

It is that you cannot sell what you never owned nor you you dedicate what you never owned.

This is true as a matter of property law and it is also true under the Natural Gas Act.

Therefore, this case does not present a conflict between State property law on the one hand and the Natural Gas Act on the other, nor does it involve the withdrawal or diversion of dedicated gas from the interstate market.

We recognize that if our gas has been dedicated, then in the words of Justice Brennan in Sunray, there can be no withdrawal of that supply from continued interstate movement without Commission approval.

But none of Southland’s gas has ever flowed in interstate commerce except under compulsion of the Commission’s orders in this case and those orders expressly provide that such for sales by Southland are without prejudice to its rights in this case.

Therefore, the question before the Court is whether Southland’s share of the Waddell Ranch Gas was somehow dedicated to interstate service because Gulf made an interstate sale of its share of the Waddell Ranch Gas.

We recognize and agree that this dedication question is to be decided under the Natural Gas Act.

We say that because Gulf was never — and I emphasize the word ‘never’ — possessed of any rights in, or control over Southland’s interest in the Waddell Ranch Gas, it could not, it did not encumber that gas with an interstate service obligation.

Well do you think the Commission, as a matter of law or of fact, said that it did?

J. Evans Attwell:

It did say that in its opinion, yes sir.

As a matter of fact or of law that — everybody who takes a lease or anybody who gives a lease must understand under the Natural Gas Act that the lessee has the power under the National Gas Act to dedicate permanently.

Is that what the Commission said?

J. Evans Attwell:

I think that the Commission said that it was holding that Gulf had the power and did exercise the power to dedicate Southland’s gas.

Now the Commission equivocates as to where it got that power.

Byron R. White:

Well now, what has the Natural Gas Act said on its face, what I just indicated?

You would not be here, I take it.

J. Evans Attwell:

I think it Congress wanted to preempt the whole deal–

Byron R. White:

Not preempt it, the Gas Act just says, let us suppose it just said on his face that when a lessor is to give leases, lessees have the power to dedicate permanently all of the gas.

That is just like a provision…

J. Evans Attwell:

That is right, that is just like saying that a Natural Gas Act said that A could dedicate B’s gas.

Warren E. Burger:

Let me address that further at one o’clock.

You may continue Mr. Attwell.

Audio Transcription for Oral Reargument – April 17, 1978 in California v. Southland Royalty Company

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J. Evans Attwell:

Thank you, Mr. Chief Justice.

Mr. Justice White, I would like to take up if I may where we left off before the luncheon recess.

If I understood you correctly, you had asked what if Congress had said that A could dedicate B’s gas, that Gulf could dedicate Southland’s gas.

We think it is very clear from the Natural Gas Act that Congress did not say that.

Now, the Commission has made references to Section 7B of the Natural Gas Act, the Abandonment Section.

We think that is really kind of a big question in this case which is whether our gas is dedicated.

Byron R. White:

But in effect the Commission is construing the Natural Gas Act and to say that when a lessee dedicates, you can dedicate the entire thing.

J. Evans Attwell:

That is right, that is exactly the point I am trying to make.

I think you are looking at the wrong section.

7B applies to dedicated gas it does not apply to undedicated gas.

What section applies here, how do you determine what a lessee could dedicate?

Warren E. Burger:

You also said I think before lunch that he can dedicate only what he has.

J. Evans Attwell:

Absolutely, that is our position.

Warren E. Burger:

What about his potential beyond the 50 years?

J. Evans Attwell:

He did not have any potential, he had none whatsoever.

Warren E. Burger:

What if there were a potential, let us say an option of some kind.

That clearly would be part of the dedication, would it not?

J. Evans Attwell:

Any interest to property right he had, yes.

No question about that Mr. Chief Justice.

Byron R. White:

Well, he has a potential using it all on 50 years.

J. Evans Attwell:

No, the Texas Supreme Court in 1973, in its decision made it very clear that all that Gulf Oil Corporation got under its lease was gas that was found, produced within a specified 50-year term ending July 14, 1975.

When that day went bang, that was the end of any interest whatsoever.

Byron R. White:

Was it physically possible that by the end of 50 years there would not be any more in oil and gas in that lease?

J. Evans Attwell:

I do not think it is physically possible but I am sure there is no evidence in this record one way or another.

Byron R. White:

Well, in any event, if that were a remote possibility Gulf might have used it all up.

J. Evans Attwell:

Well, maybe I misunderstood your question.Obviously, that was physically possible.

Byron R. White:

Whatever it was free to take out within 50 years of that lease that it dedicated on.

J. Evans Attwell:

That is right, and that is all that it could dedicate under its lease.

Let me back to my question as to the proper section of the Natural Gas Act.

I think we need to look to, to see the extent of dedication, its Section 7E not Section 7B.

Audio Transcription for Oral Reargument – April 17, 1978 in California v. Southland Royalty Company

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Warren E. Burger:

7E?

J. Evans Attwell:

Yes Mr. Chief Justice.

That says a certificate shall be issued to any qualified applicant, therefore, authorizing the whole or any part of the operation, sales, service, construction, extension et cetera; if it is found that the applicant is able and willing properly to do the acts and performance perform the service.

Gulf was never able to perform the service of selling Southland Royalty’s gas.

Gulf never owned any interest in or had any right to control the disposition.

William H. Rehnquist:

Could Gulf, by producing more rapidly out of the leased properties have taken a larger amount of gas out of the property that it in fact did, or is the record silent on that point?

J. Evans Attwell:

I would say the record is silent on that point, Mr. Justice Rehnquist.

Warren E. Burger:

Well, on the same conversation earlier today about Gulf selling this in intrastate commerce.

J. Evans Attwell:

I do not think so, Mr. Chief Justice.

I think Southland Royalty has made a contract to sell its gas intrastate commerce, but not Gulf.

Gulf sold all of the gas it was entitled under the 50-year lease to El Paso.

Warren E. Burger:

Where does Southland get its title, interest or whatever to sell in intrastate commerce?

J. Evans Attwell:

Because we have a separate independent property interest,it has never been dedicated.

It is just like we had white acre over here black acre over here.

White acre was dedicated by Gulf, we owned black acre and we claim that we are entitled to sell our gas in intrastate commerce.

We are entitled to sell it to the purchaser of our choice.

William H. Rehnquist:

What you are saying is Congress has not authorized the FPC to regulate that sort of sale?

J. Evans Attwell:

That is correct, Justice Rehnquist, at least as of the present moment.

John Paul Stevens:

Mr. Attwell, while you are interrupted, assume for the moment that the Gulf was under an obligation to apply for an abandonment because they had a certificate and in effect their interest in the leasehold was going to run out.

They had an obligation to do so and they failed to do so.

What would be the consequences be?

J. Evans Attwell:

Well, it would have violated the rules and regulations of the Commission and of course the Natural Gas Act that gives the Commission, the remedial power, but the truth of the matter is —

John Paul Stevens:

Remedial power to do what?

J. Evans Attwell:

Remedial power to see the either punish Gulf or to make them forcing to file and the truth of the matter is this case Justice Stevens, that Gulf filed an application to abandon over two years ago, and it has is been sitting up with the Federal Power Commission and nothing has happened.

John Paul Stevens:

Does the record show that?

J. Evans Attwell:

I believe it does, yes, sir.

In fact, I believe it was filed pursuant to the very orders that are under review in this case.

John Paul Stevens:

But you are saying that the remedy, if they were under a duty, if they acted properly by following the request to abandon and if the Commission did not act on it, they would not have abandoned anyway without action.

They may be subject to some penalty is that is what you are saying.

J. Evans Attwell:

Well, I am saying that they are not subject to any penalty for the abandonment because all the gas, that Gulf had was sold and delivered to El Paso.

Audio Transcription for Oral Reargument – April 17, 1978 in California v. Southland Royalty Company

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J. Evans Attwell:

It completely performed a service.

It was just like —

Mr. Chief Justice Rehnquist asked the question, what would happen if you just ran out of gas?

If Gulf had just ran out, what would happen?

John Paul Stevens:

Under the statute, even if you run out, you have got to file a petition to abandon, do you not?

J. Evans Attwell:

That is correct, and they have filed one, and it has been pending there for two years.

but I will admit that is a pro forma because the statute says if your reserves are completed to the extent further service is unwarranted, and, presumably Gulf meets that standard.

But an application to abandon has been filed and it has been, so I do not think what the technical point is.

John Paul Stevens:

You see Gulf is not before us here now.

They are a party to the proceeding before the Commission but not, did they intervene before the Commission?

J. Evans Attwell:

Yes sir, they did.

John Paul Stevens:

But they are not here now.

J. Evans Attwell:

I think that the decision of the Texas Supreme Court that I referred o, a 1973 decision, which conclusively established the limitations on Gulf’s power under its lease, inclusively established that Gulf had absolutely no power under that lease to dedicate Southland’s gas.

Also in its full and complete answer to any suggestion that Southland has successor interest to Gulf and therefore bound by Gulf’s dedication of Gulf’s gas.

A successor of course is one who acquires his predecessors’ estate and takes that estate subject to any benefits or infirmities but in this case when Gulf’s lease expired, it ceased to exist.

There was nothing left; there was nothing to be transferred.

Southland did not require Gulf’s lease voluntarily or otherwise.

Southland had a continuing presently vested property interest.

I think that the Texas Supreme Court decision is also an answer as to whether or not there was some type of agency under which Gulf acted in this case.

I think it is clear from this record and from the law that Gulf had absolutely no agency whatsoever to act on behalf of Southland Royalty.

In the past, the Commission has consistently recognized that a producer cannot dedicate what it does not own.

In fact just 45 days ago, the new Commission reversed a decision of the old Commission and held that when producer A dedicated his interest in a gas reserve, it did not dedicate producer B’s, because producer A had no authority to dedicate producer B’s gas and it had no ownership right in it.

But in this case the Commission has, for the first time to our knowledge, ignored the fundamental principal and held that when Gulf made an interstate sale of its gas, it could and did dedicate our gas, even though Gulf never had any ownership or other interest of any kind.

In so holding we submit the Commission clearly exceeded its authority under the Natural Gas Act.

First, we believe it is clear our gas —

Do you mean even prospectively as well as otherwise.

J. Evans Attwell:

I do not follow.

Well suppose the same transaction happens tomorrow.

Every lessor then knows what the Commission’s rule is.

J. Evans Attwell:

That is a good point.

Audio Transcription for Oral Reargument – April 17, 1978 in California v. Southland Royalty Company

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Byron R. White:

So are you saying that, suppose the Commission had run through a rule-making proceeding and made this supplemental piece of legislation and put out a regulation that this is the way leases will be construed or applied, or this is what the Natural Gas Act means, or at least this is the regulation.

I supposed you would be arguing here from what you just said that would be contrary to the Natural Gas Act.

J. Evans Attwell:

Absolutely, and I want to make one thing clear, Mr. Justice White, and the record in this case shows, One, fixed term lease is the kind we are dealing with here, are unique animals; they went into disuse in the late 1920s and the reason they went in to disuse is because producers are just not going to undertake investing hundreds of thousand of millions of dollars in a well and not be entitled to produce all of the gas that comes out of the well.

When it disused in the modern day, or at least provides that the producer’s lease rights continue so long as production continues in paying quantities.

So, you are not faced with a specter of this happening or going to these things coming up from the past.

More or less like when you issued your Sunray decision, you were contemporaneously faced with the specter of the Sun Oil decision with those old certificates coming up and if you did not hold as you did in Sunray, then those older certificates would have terminated.

Thurgood Marshall:

What I do not understand is why the original agreement with Gulf, the original dedication did not say specifically that we had dedicated only the gas that we have control over.

Would that have been done?

J. Evans Attwell:

I think that Gulf’s application to the Federal Power Commission clearly shows that all it was dedicating was, as far as a Waddell Ranch Gas is concerned was its interest under its lease.

Now, Gulf’s application does not come out and say it is limited to 50 years, it just identifies the lease.

Thurgood Marshall:

And the lease did say the fifth?

J. Evans Attwell:

Yes, and it identifies a great number of leases.

I want you to understand that Gulf’s application, Gulf had a processing plant here and, under its certificate, it took gas from a great number of sources, including one of those was the Waddell Ranch.

Thurgood Marshall:

As those leases ran out, that dedication ran out.

J. Evans Attwell:

As the gas run out, that is right.

Thurgood Marshall:

That is your position?

Warren E. Burger:

In other words, you are saying this situation is analogous to a person who has a 50- or 30-year lease on a building or piece of land for traditional purposes, not gas and oil and he has no power to do anything with it except to sell that lease term.

J. Evans Attwell:

I could not have said it better myself.

That is exactly what we are saying.

Warren E. Burger:

But you would, you did concede that if there were an option for renewal or extension, that that would be part of the original estate.

J. Evans Attwell:

I did.

Whatever Gulf owned, it is our position that what Gulf owned at the time of dedication, that determined the scope and extent of dedication and all Gulf owned was the right to produce gas from the Waddell Ranch for a defined 50-year term.

Byron R. White:

Could I ask you, in asking this question, I am not assuming that the Commission was correct or that it is legally correct but I am asking you this.

Was it foreseeable, that the Commission was going to rule this way?

Is this the first time it ever ruled this way?

J. Evans Attwell:

Yes, I think there are some statements that we quote, Justice White, about what — from the Commission’s orders about what a difficult question…

Byron R. White:

But it did not overrule, it did not overrule any prior decisions for example.

J. Evans Attwell:

I think that this situation is so rare and unique that this is the first time it was confronted with such a situation.

Byron R. White:

Of course there is interesting language in the Sunray.

J. Evans Attwell:

There is a lot of different language in Sunray, I read it a lot of times.

Audio Transcription for Oral Reargument – April 17, 1978 in California v. Southland Royalty Company

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Byron R. White:

I suppose that even if the Commission were right, it might not have been, legally, it might not have been foreseeable.

J. Evans Attwell:

We are not basing our argument in this sense to some facts that are expectations of any kind.

We are not saying that because our expectations were one way in 1925 and different obviously now…

Byron R. White:

I suppose you would if we disagreed with you legally and said the Commission had the power to do this, I am sure you would say, “We think you are wrong but even if we have to live with your rule, Mr. Court, you should not apply it retroactively.”

J. Evans Attwell:

We would certainly say that, yes.

Warren E. Burger:

In other words you would say that we were engaging in a rule-making process, de facto rule making.

J. Evans Attwell:

Correct.

The Commissions relies on Justice Brennan’s Sunray opinion to support its flow theory we believe is equally misplaced in this case because the record clearly shows that Southland has never sold any of its gas voluntarily, at least in the interstate commerce.

The only physical flow that Gulf could indeed dedicate to interstate service was Gulf’s leasehold gas, a 50-year flow, and once Gulf commenced that flow the service had to continue.

Sunray made it very clear that it could not withdraw that supply and Gulf has delivered all the leasehold gas but now Gulf’s supply is gone; it flowed and it is gone, and they applied for abandonment.

That in no way supports the Commission’s position that Gulf’s flow of Gulf gas somehow bound Southland, and we also recognize that under Sunray, the certificate issued to Gulf imposed a service obligation that was obviously separate and apart from the sale or obligation imposed by this contract, but Gulf’s service obligation applied only to Gulf’s share of the Waddell Ranch.

The capacity of a producer to dedicate natural gas reserves we say is limited to the producer’s ownership rights in such reserves and does not extend to gas which the producer never had any ownership or other interest in.

Let me illustrate that by saying that throughout the industry it is very commonplace for there to be a number of different interest owners in gas reserves.

In fact that is lot more common than the contract and it is has been well established that if one producer in that gas reserve makes a sale of his interest, it in no way band binds or covers the other producers, and we say that is exactly the same thing here.

Here is the Waddell Ranch, Gulf makes a sale of its interest, that is no way binding on us.

We say that is exactly analogous.

Nor is it significant, we submit, that Gulf was issued a certificate of unlimited duration in this gas.

That simply meant that Gulf was obligated to sell all of its Waddell Ranch gas.

It did not mean that Gulf was somehow authorized to sell gas it did know.

We would note that what is involved in this case is far different in what faced you in Sunray.

In that case, this Court required the producer to continue selling his only gas after the term of his contract because of its service obligation imposed by its certificate.

In Sunray, the producer clearly had the right and power to continue to sell his gas after the contract expired.

By contrast,in the present case Gulf never had any power or right to sell Waddell Ranch gas after its lease expired.

Therefore, Gulf’s service obligation could not have extended to Southland’s gas; Gulf was not able in fact to sale Southland’s gas.

In my remaining time I would like to turn to the practical consequences of holding for Southland in this case.

First, I think as far as this is narrow case is concerned the consequences or at the minimums.

There is this case and there are only three other fixed term lease cases and the relative volumes of gas compared to the over all minimums.

Second, holding for Southland in this case will not mean that gas dedicated on the typical life of reserves lease could escape from interstate service if such a lease is prematurely terminated.

All that the Court need hold, and we say should hold in this case, is that one who has never had any interest in or control over gas cannot dedicate that gas to interstate service.

The typical life of reserves lease is of unlimited duration and unlike Gulf in this case the producer has the power at the time of dedication to dedicate whatever gas it finds.

Audio Transcription for Oral Reargument – April 17, 1978 in California v. Southland Royalty Company

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J. Evans Attwell:

I do not think petitioners really take the firm position that the holding in this case would reach that result.

They say to theory of this case might be expanded to bind these ordinary lease situations where the producers has the power which unlike Gulf in this case to dedicate gas.

It does dedicate the gas and then the lease is prematurely terminated.

We do not believe that this Circuit’s decision goes that far.

We think it is clear that Fifth Circuit’s decision is based on the fact that Gulf had no interest in or control over our gas reserves.

In fact, that is the basis on which the Tenth Circuit distinguished it.

Mr. George on behalf of California referred you to a recent Tenth Circuit decision in which the Commission had held that gas was dedicated and Phillips Petroleum Company appealed to the Tenth Circuit and the Commission was affirmed and the Tenth Circuit said Southland is not applicable because in that case, the lessee Gulf Oil never at any time had any interest in or control over Southland’s gas.

Thurgood Marshall:

What about the lease?

Could Gulf not say I will dedicate all of the oil that I will get under my 50-year lease with the Waddell Ranch?

J. Evans Attwell:

Justice Marshall, that is exactly what they did say.

Thurgood Marshall:

Well, I thought you said that they did not have any gas, that Gulf did not have any.

J. Evans Attwell:

I am saying that after 50 years they had absolutely no interest in any gas produced in the Waddell Ranch.

If I misspoke myself, I apologize.

In any event, if there is any question obviously in this Court’s mind as to the extent of the opinion below, we can obviously limit to the issue presented in this case which is whether one who has no interest in or control over gas can dedicate that gas to interstate service.

Such a holding, we submit, would be entirely consistent with the contrary holding if this Court were of that opinion and in these other cases.

Third, it is our position that holding for Southland in this case is not going to in any way result in this parade of horrors that the briefs have given you, this proliferation of short term leases, terminable at will under which producers can limit their service obligation in some manner and there by switch back and forth between the interstate and Intrastate market.

The suggestion is really so devoid of economic reality as to be (Inaudible).

In response to earlier questions, I pointed out with producers who quit entering in to this leases many, many years ago for economic reasons and they are not going to do it again because they are spending hundreds of thousands and millions of dollars on these wells now and they are not going to subject themselves to a situation where their right to produce any gas could to cut off in five years or could be even worse cut off at the will of the lessor.

But even if future producers should try to do that and should approach the Commission with an application to make such a sale of gas, if the Commission determines that that quantity of gas that limited to a quantity in someway jeopardizes the public interest, we submit that it has and can and will protect the public interest just as it is done by refusing to issue certificates limited to the term of a producer’s contract, to issue the certificate or condition it on the producer obtaining a longer and more stable supply of gas.

On the other side of the coin, if this Court is going to hold against Southland, it is going to have to adopt in effect a new rule of law in our opinion, and that is that one who never owned or had any interest in or control over gas can dedicate that gas to interstate service.

As we previously discussed, the authority for such a holding will have to be found in the Natural Gas Act and we do not believe there is anything whatsoever in the Natural Gas Act to indicate that Congress in any way intended such a radical alteration of established ownership rights.

In conclusion, I would like to briefly summarize the two points that we think are controlling in this case.

First, a producer cannot dedicate gas which he has never owned.

This is true under property law and as I have discussed, it is true under the Natural Gas Act.

Second, Gulf never owned or had any interest in or control over Southland’s gas and therefore could not dedicate such gas.

From these two simple but indisputable points, we believe it is clear that Southland’s gas is not now and never has been dedicated to interstate commerce.

Consequently, Southland is under no obligation to obtain abandonment authorization under Section 7B of the Natural Gas Act — well suppose Southland can sell its gas to the purchaser of his choice.

For these reasons we respectfully urge that this Court affirm the decision below on the ground that under the Natural Gas Act, Gulf could not and did not dedicate Southland’s gas to interstate service.

Warren E. Burger:

Very well Mr. Attwell.

Mr. Attorney General.

Audio Transcription for Oral Reargument – April 17, 1978 in California v. Southland Royalty Company

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John L. Hill:

Mr. Chief Justice and may it please the Court.

I am grateful for the 10 minutes that has been allotted to me to express some concerns which we have for these broader legal implications that we think are inherent in this FPC order which the petitioners are seeking to uphold and if I may address first what I conceive this order to be so that I can demonstrate why our concerns are real both as to the effect of this order on the stability of our domestic drilling program which affects this entire nation, its effect on our State lands which we own and of course its effect on our consumers whose own gas supply is in jeopardy in many instances by this order.

Let me try to say why I believe this order conjures up kind of the potentiality of many, many adverse effects on established legal rights, what we thought were established legal rights prior to this FPC order.

The order states on its face, and I am quoting from 443 of the Appendix: “Thus, it makes no different whether a lease is transferred or terminated, the obligation of service imposed upon the dedicated gas continues.

The duty to continue to serve is like an ancient covenant running with the land.”

So in this order the FPC has held that as a matter of law, Gulf here created a federal covenant running with the land forever by making an interstate sale of Gulf 50-year gas commitment under this lease and so the order holds that although the land owner was not a party to the granting of that certificate, although it is suggested by Justice Rehnquist,the land owner could have been brought in as a condition to the granting of that certificate, a condition to Gulf that was not done.

And although the land owner clearly is not a natural gas company within the meaning of 7B, and although Southland here is clearly not the owner of any facilities being used in service within the meaning of 7B, and although the land owner here is clearly the owner of different gas, gas that was never subjective or never could have been subjected to the jurisdiction of the Commission — they use the word “to the Act” – you cannot subject to the jurisdiction of the Commission by an application gas you do not own.

Whether you say in that application, Justice Marshall, that I am just applying for a 50-years supply or whether you just attached your lease, you simply do not have the power to commit in that application any gas beyond that which you own and in spite of all that…

Byron R. White:

The Gas Act did so provide that, I suppose, did it not expressly?

John L. Hill:

Well that is a possibly so and it would, whether or not that would be a proper…

Byron R. White:

The Commission says if it so provides right now.

John L. Hill:

Well, I do not agree with that and I think it would also portend some other constitutional questions that are not before us but it suffices to say that it is not…

Byron R. White:

Well, no more so than what the Commission says and the Commission says in that, that when you dedicate under a lease, you have dedicated all the gas.

That is the way they construe the Act.

so, if you have constitutional issues, if the Act expressly said, they are constitutionally sound.

John L. Hill:

Well, I am not addressing constitutional issues, I was responding to you to say that I think an effort to do that, whether by the Commission or by the Congress would certainly open up that question.

But it is enough to say here that the gas from the acreage, their holding that the gas from this acreage must be forever sold into the interstate markets, that is the nubbin of our complaint, that even though it is a 50-year supply and a 50-year lease, that by this so-called covenant running with the land theory of the FPC and the order, that even after that lease expires, that gas has still to be sold into interstate commerce.

Now that legal resolve of that order bothers Texas because if gas is discovered in the future in our State, and we think a great deal will be discovered in the future I hope for the good of this country that it will be.

If that gas is discovered from a lease that has previously been under an expired lease, and I assure this Court and we set it out in our brief by checking with our land holdings that we know on the instance of state owned lands that there are many unexpired leases, some as many as eight and nine expired leases and I mean expired for legitimate purposes.

If under any of those expired leases it could be discovered later, if this FPC order here holds up, that there was some interstate gas sold back up the road even though it petered out and is no longer in the game that that would create a covenant running with that land so as to commit any new gas produced from that acreage into interstate commerce forever.

It takes little imagination to see what effect that has on the stability of titled searches a stability of drilling programs to know where you stand when you go in to make these deep tests which we are increasingly having to make to find gas in this country and as Justice White observed, this order here is broad enough to cover a situation where A obtains a certificate from the FPC and then gets in litigation with B who claims that he really owns the lease, even though A in good faith thought he owned it and B wins.

B, in spite of the fact he had nothing to do with the certification process, who was not involved top, side or bottom, could be held under this ancient covenant running with the land theory in this order to be subject to the FPC jurisdiction to interstate Commerce sale and to abandonment procedures for actions that he totally were un-authorized for him and in which he had no participation and presumably no knowledge.

Now then, when a producer in Texas is leasing today for new exploratory purposes under this order in the breadth of this order, that producer would have no assurance at all that if there had not been a previously lease applicable to that acreage, that would automatically subject his acreage to the FPC jurisdiction to interstate market…

Byron R. White:

Do you think the lessor and the lessee prior to the 50 years could just together terminate the lease, agree to terminate it?

John L. Hill:

No, but they…

Byron R. White:

And without getting the Commission’s consent?

John L. Hill:

What we have today under our, so long as gas is produced and that is the way most of our lessees agree, when there is no gas produced in the past or primary term, the lease lapses.

That is the typical thing that happens in the oil industry today and that happens six times, seven times, eight times.Sometimes they go through an abandonment procedure and sometimes they do not probably…

Byron R. White:

Suppose the gas had run out in the 40 years, technically, I suppose the Commission could require an abandonment proceeding and why would that not satisfy your concerns, Mr. Attorney General, if a lessee at the end of his lease had to file his petition for an abandonment but if the facts are as he alleged, the Commission would have to grant it.

John L. Hill:

In the first place, Mr. Justice White, the theory of the covenant running with the land…

Audio Transcription for Oral Reargument – April 17, 1978 in California v. Southland Royalty Company

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Byron R. White:

I am not talking about that.

I just wanted to know does that satisfy your concerns if the rule was he had to file but the Commission would have to grant —

John L. Hill:

It would not because that does not change this order that says that we are establishing a covenant running with the land.

John Paul Stevens:

But I thought Mr. Justice White’s question was not necessarily supporting the reasoning of the Commission but simply independent of the reasoning of the Commission.

John L. Hill:

I would answer it then that if that could supplant the language and we do not have covenant running with the land and the abandonment proceeding would have the legal effect of eliminating entirely the notion that the new lessee would not have a free hand to come in and produce, if he found gas and sell it wherever he wanted to, that would eliminate our concern but there are two problems to it.

First, this Court has got to deal with this covenant running with the land and I hope you will in this proceeding.

Byron R. White:

Mr. Hill, your colleague, Br. Barnett said that in that example that you reviewed, the one I gave him, he thought the Commission would have to grant the abandonment under the Commission’s rule, in the ANB case and the one you just reviewed.

He thought the Commission would have to grant the abandonment although they would…

John L. Hill:

Well, it is by no means certain that they would and he inferred from his answer to you that the theory of this decision was that the FPC was finding as a matter of law that they had implicit right, that Southland had implicitly authorized the dedication of their gas and so they would —

Byron R. White:

I understand that the Commission is not agreeing with my suggestion, would not be agreeing with my suggestion but I am wondering if it would satisfy your concern.

If the lessee had to file for abandonment at the end of his lease term but the Commission had to grant it, if unless there were some hanky-panky or some strange circumstances.

John L. Hill:

In the first place it does not satisfy because there are a number, a lot of our acreage in Texas today where we have reason to believe there was some fire interstate sale but it petered out, there is no more production and no abandonment was sought.

Now what do we do about that kind of a situation?

We would go back now, is this Court going to write some rule about the abandonments or I think what the Court should do, may it please the Court, is to hold now in this case is squarely and clearly that a producer’s interstate service obligation cannot be broader or longer than its property right to sell gas.

Harry A. Blackmun:

Did you interpret Mr. Justice White’s question to mean that until the lessee had filed an abandonment and it had been pro forma approved by the Commission, this lessor’s sales of gas would be subject to regulation by the FPC?

John L. Hill:

I understood him to ask me would it satisfy our concern about the problems associated with newly discovered gas, if there was some requirement that the lessee, once the lease has been extinguished by production was required as a matter of absolute requirement to go and obtain an abandonment under 7B.

Byron R. White:

And the Commission was required to grant the abandonment.

John L. Hill:

Yes, that would eliminate in other word this abandonment…

Byron R. White:

Because once they had consented to the abandonment, future gas is free I guess.

John L. Hill:

With one provision if you right out of any attempt to the FPC to right in to our law this ancient covenant running with the land theory because that is a broader concept than abandonment.

Byron R. White:

That would be wholly inconsistent with my suggestion.

John L. Hill:

So, if we do not have an ancient covenant running with the land coming out of this case and if the Court holds that no producer can obligate gas that he does not own and that abandonment procedures would be mandatory, then we would have something that we could work with but there are so many potentialities for harm when you are faced here with the order like this.

Stating that we are finding first that there is a covenant running with the land; we are finding second that a person can deal in gas beyond its lease term; we are finding third that if the lease is already expired and there is no longer any production, if there has not been an abandonment proceeding, that this and even though you do not know about it and have not picked it up in a title search and you go out and spend a vast amount of money and find new gas we can come back and put it into interstate commerce.

Those are the facts in this order.

Byron R. White:

Do you think the issue here is whether there has to be a filing for an abandonment?

John L. Hill:

No sir, I do not; I think the issue here is whether or not the gas was subject to the jurisdiction of the FPC in the first place, as Justice Burger pointed out, 7B applies only to that gas over which the Commission had jurisdiction.

It is my belief that the application when it is filed, given to the commission, only jurisdiction over the gas which the applicant owns, you cannot confer jurisdiction on someone over something you do not own or possess.

Gulf possessed a 50-year lease; that is all they possessed.

They had no ability to place within the jurisdiction of the FPC something that they did not have.

The reversionary interest to Southland which came in after the 50-year period was totally outside of the jurisdiction of the Court.

Audio Transcription for Oral Reargument – April 17, 1978 in California v. Southland Royalty Company

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John L. Hill:

So it is clearly not within the contemplation of Congress or that Act that gas which you do not own you can place within the jurisdiction of that Court.

It is not like Sunray written by Justice Brennan because in Sunray the only thing we were dealing with was a contract to purchase.

Here, we are dealing with a property interest, what was the extent of the property interest.

I think that issue has to be met squarely in this case.

Thank you very much.

Warren E. Burger:

Thank you gentlemen.

The case is submitted.