California v. Southland Royalty Company – Oral Reargument – April 17, 1978

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

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

Warren E. Burger:

Hear arguments next in California against Southland Royalty, and the related cases.

Mr. Barnett, you may proceed whenever you are ready.

Stephen R. Barnett:

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

As the Court will recall, we are dealing here with an oil and gas lease, Actually two of them but I think they can be reduced to one for purposes of the argument.

A lease running for a term of 50 years to the Mineral estate underlying the Waddell Ranch in West Texas, where the lessee, Gulf was selling the gas from the reserves under the Waddell Ranch in interstate commerce pursuant to Certificate of Public Convenience and Necessity granted by the Commission.

The question presented is whether when the 50 year lease expires, Section 7(b) of the Natural Gas Act, requires the lessors, Southland Royalty and others, that is the holders of the reversionary interest in the mineral estate to obtain Abandonment Authority from the Commission before they may stop that service of interstate, may stop that service of supplying gas to interstate commerce and divert that flow of gas instead to the intrastate market.

Now, first I would like to explain why we take the position that what is dedicated to interstate commerce here and hence cannot be abandoned without the Commission’s approval under Section 7(b), is the service of supplying gas to the interstate market from these reserves underlying the Waddell Ranch, the reserves from which the gas was continuing to flow to the interstate market, at the moment that the lease expired.

Now, respondents brief throughout their brief and my colleague Mr. Attwell spoke throughout his argument last time, as though what was involved here was two distinct bodies of gas, two physically distinct bodies of gas, Gulf’s gas and Southland’s gas, as they put it.

Thus in respondent’s brief at page 13 it is stated, the Commission held that Southland Royalty’s gas was dedicated to interstate service because Gulf had made an interstate sale of Gulf’s leasehold gas.

Whether Gulf thus dedicated Southland Royalty’s gas, is the issue before this Court; that is the respondent’s view of it.

In pursuit of this theory, the respondents analogized the case to the situation of vertical or horizontal limitations on interstate sales.

The case where, where a producer limits vertically to a certain distance below the ground, the gas that is being sold interstate or where a producer limited horizontally, say to 500 acres of a thousand acre track, or respondents analogized the case to that of a split stream where certain producers owning shares in a producing property, make interstate sales of their gas while other producers make intrastate sales of their shares.

And respondents say that this case is in their terms, simply the case of a severance in time rather than a severance in space.

Quote, from their brief at page 12, “the severance between a fixed term lease hold interest and a mineral fee interest is a severance in time rather than a horizontal or a vertical severance in space”.

And to respondents, they are both the same and this case should be analogized to the others, as Mr. Attwell said last time, it is just as if Gulf owned Black Acre and Southland owned White Acre, the parcels are that separate and so the Court of Appeals held here, applying Texas Law.

Well, there are several reasons why we think this analogy is no good, why we think a severance in time, that is the severance created here between the leasehold and the reversionary estate is quite different for purposes of the Natural Gas Act from the spatial severances to which respondents would analogize it.

First of all, the argument ignores the certificates that were granted to Gulf here.

The certificates granted to Gulf here were not limited in time.

Now in this case, we know that it is clearly as we ever could because the very certificates that were granted to Gulf for this particular, for the reserves under the Waddell Ranch, were before this Court, in the Sun Oil case and were expressly held there not to be limited in time.

That is the first thing we find wrong with the argument.

But more important, the attempt to analogize the severance, the so called severance in time here, with these limitations of space is quite inconsistent with the language and purposes of the Natural Gas Act.

There is first of all a physical difference.

In the case of the vertical or horizontal limitation on the interstate sale, the stream never flows in interstate commerce.

In the first place, there is simply a limitation on the amount of gas that flows in interstate commerce in the first place.

There is no stream flowing in interstate commerce that would be shut off and diverted to intrastate commerce as would happen here, if respondents prevail.

That is the heart of this case, respondents here claim that by virtue of their state is there is a certain kind of property owner under Texas Law, they may cut off a stream of gas from given reserves, that is flowing to interstate commerce at the end of this lease and diverted physically to the intrastate market instead without having to get the Commissions Abandonment Authority under Section 7 (b).

Now, the distinction here is crucial with respect to the purpose of Section B and indeed of the entire Act.

That purpose as this Court emphasized in Sunray among other cases is to protect the continuity of service to the interstate market.

The stability of natural gas prices and supply.

Well, in the case of the vertical or horizontal limitation on the sale, the interstate market never comes to rely on that sale because the gas is never flowing to the interstate market in the first place.

Stephen R. Barnett:

The interstate consumers cannot become dependent on the part of the gas reserve, on the part of the gas who would now be reserved for intrastate use because that part never entered interstate commerce in the first place.

Here in contrast, the stream of gas from the reserves underlying the Waddell Ranch has supplied El Paso’s interstate costumers since 1951.

El Paso and its costumers have come to rely on that supply and indeed the amount of gas involved in this case represents more than 1% of El Paso’s total annual foreign supply of gas.

That is in the record of Appendix page 375.

Further, if El Paso loses this case, and if the Commission loses this case, the amount of gas that El Paso would now have to return to Southland and the other reversionary owners under the Protective Agreement, now amounts to 37 million MCF, that is—

Warren E. Burger:

Is that in the record Mr. Barnett?

Stephen R. Barnett:

No, that is not in the record; that is figured as of March 1st, 1978, supplied by the Commission.

Warren E. Burger:

And what difference would it make if it was ten times average—

Stephen R. Barnett:

Well the point is—

Warren E. Burger:

To the legal issues involved in this case?

Stephen R. Barnett:

Well, the point is that that gas would have to come out of the interstate market.

It would have to come out of supplies that El Paso would otherwise to be able to provide to the interstate market and that illustrates the purpose of the Natural Gas Act which is involved in this case, which is to assure supply to the interstate market.

Further, so as I was saying, the basic purpose of the Act it seems to us, distinguishes sharply between the flow that has began and would not be cut off by what respondents call a severance in time and a horizontal or vertical limitation or a split stream limitation where the gas never flows to the interstate market in the first place and thus there is no reliance on it and no continuity to protect.

Further, we submit that the very language of Section 7(b), the very word abandonment, distinguishes between a severance in time and a spatial severance.

A Statutory requirement that a service may not be abandoned is precisely a command that a severance in time is not permitted, that is what abandonment means.

Now if the Statute also had a provision that prohibited any spatial segmentation, that prohibited any percentage segmentation of a gas reserve, then it might be appropriate to argue the severances in space, can be analogized to severances in time.

But there is no such provision; the very purpose and meaning of abandonment is that you cannot stop something that has been started, that a severance in time is to be distinguished from a severance in space.

Now, this is supported also by this Court’s decisions, for example, the Lo-Vaca case, California versus Lo-Vaca Gathering 379 US 366, cited in El Paso’s brief, holds that we submit that once gas flows in interstate commerce, it is subjected to the Commission’s Jurisdiction.

That even without a sale for resale in interstate commerce, Federal Jurisdiction follows the flow as the Court there said.

That too distinguishes the so called spatial severance which would cut off a flow that has began from the cases, I am sorry, the so called Temporal Severance that would cut off a flow that has begun, from the spatial cases, where the flow never starts in the first place.

Now, we submit here that what has been dedicated on the facts of this case by Gulf’s sale in interstate commerce is a service in interstate commerce and service is a key concept under Section 7 as this Court held in Sunray of course, a service of supplying gas from the particular reserves underlying the Waddell Ranch.

And that that service, that stream of gas running from these particular reserves has been dedicated by Gulf’s sale and may not be abandoned without the Commission’s approval.

Now, Southland has in fact taken a rather similar position with which we agree.

In Southland’s brief before the Commission, which appears in the record at page A 476, Southland said this.

I am reading from A 476, preliminarily, mineral interest owners that Southland and the other reversioners, agree with El Paso’s statement, that once dedicated to interstate commerce, gas reserves may not be removed from interstate commerce without abandonment authorization.

Gas reserves may not be removed from interstate commerce without abandonment authorization.

That of course is what would happen here.

This gas at the end of the, at termination of the lease is flowing from the particular reserves under the Waddell Ranch.

Our position is that that flow may not be terminated until the reserves are exhausted without the Commission’s approval.

Southland appeared there to have taken the same position.

Stephen R. Barnett:

We would cite other support for this notion that Section 7 applies to the flow until the reserves are exhausted.

In the Hunt case, in the 5th Circuit, 306 Fed 2nd 334, which the Commission relied on and which we quoted in our brief, the Court says that the obligation to continue serving is like the ancient covenant running with the land, I am sorry, like the ancient covenant running with the land, the duty to continue to deliver and sell flows with the gas from the moment of the first delivery down to the exhaustion of the reserve or until the Commission on appropriate terms permits the session of service under Section 7(b).

I might here and since this case talked about a covenant running with the land, say a word in response to the argument that our colleagues from Texas have made, they ague that this notion of a covenant running with the land would create also as the problems of clouds on title in Texas because one would never know whether some previous lessee of particular acreage had made an interstate sale and then seized it and thus if one discovers a completely new reserve on that land, one might subsequently find that gas from that reserve had been dedicated.

Well, as we pointed out in our reply brief, which our colleague from Texas apparently did not refer to last time, that is not an accurate representation of the position the Commission is taking here.

The Commission’s position here is that this gas is dedicated until the reserve is exhausted, that in the words of the Hunt case, the duty to continue to deliver and sell flows with the gas from the moment of the first delivery down to the exhaustion of the reserve.

That is the covenant that the Court was talking about in the Hunt case and that is the covenant that we are talking about here,As further support for this notion of dedication of a particular reserve or a particular field, I would call the Court’s attention to the United Gas pipeline case 385 US 83—

Byron R. White:

What do you suggest, you suggest, just a matter law that the Federal Law that says to a lessee and and to his lessor that if you are going to get in the interstate market, you are in until we let you out?

Stephen R. Barnett:

Once the lessee has made sales in interstate commerce pursuant to a Commission Certificate which has no limit on time; that service is dedicated until the reserves run out,

Byron R. White:

Now, and, so when the lease expires, you do not, you do not dispute the fact that the lease expires?

Stephen R. Barnett:

Oh no, not at all.

Byron R. White:

And when the lease expires, the lessor is still stuck in the interstate market because that was the rule on the first place, is that it?

Stephen R. Barnett:

That is right because the lessee acting within the authority granted by the lease began a service, instituted a service which the lessee had full authority to do under the lease, which service has come under the Commission’s Jurisdiction and is dedicate the interstate commerce so long at least does the gas flows from the particular reserves.

As Southland had self said before the Commission, the reserves have been dedicated.

That is our position.

Byron R. White:

So, if the lease, if there was a clause in the lease that you cannot sell this gas in the interstate market, would the Commission let it be, with a certificate issued for the interstate market or not?

Stephen R. Barnett:

If the Commission knew about that clause the—

Byron R. White:

Well then certainly, it must be the leasers have filed I think.

Stephen R. Barnett:

The leases in fact as I understand that are not filed and not brought to the attention of the—

Byron R. White:

I know but do not they; when they apply for the certificate; they must make some representations about—

Stephen R. Barnett:

It is my understanding that the leases as a matter of course, are not brought to the attention of the Commission but let us assume that they are, I assume that the Commission knows that the lessee has no authority under the lease to make an interstate sale, the Commission would not grant a certificate.

Byron R. White:

So you are saying legally, it is as though it was a joint, a joint application for a certificate from the lessor and the lessee?

Stephen R. Barnett:

Well, that is the legal conclusion but it is not based on any agency that the lessee has from the lessor, it is based on the facts of what the lessee did within the authority granted by the lease.

The lessee was authorized to make interstate sales, in fact, may have had a duty to, when indeed so, and under the interstate and under the Natural Gas Act, with its purpose of assuring continuity to the interstate market, that flow, those sales from those reserves may not be abandoned without abandonment authorization.

That is, that is our position.

Mr. Justice White, the United Gas pipeline case, Mr. Justice White which I was just referring to was an opinion written by you as I recall, where the Court rejected the notion that the word service under Section 7(b) could include only the sale of natural gas, not the taking and transportation of gas from any particular field rather the Court said, at page 89, it could not be more clear that United here abandoned this service, the taking of Johnson’s bio-fueled gas and its transportation in interstate commerce and we would support that for, we would cite that for the proposition, that what has begun is a service of supplying gas from a particular field, the particular reserve and that is what may not be cut off without the Commission’s authorization.

Now, respondents argue that there is something being done here that is inconsistent with basic principles of Property Law.

That one cannot encumber a property interest that one does not own as they put it, and hence that Gulf cannot encumber Southland’s gas, still pursuing their notion that there are two separate packages of gas here rather than a continuing flow from the same reserve.

Warren E. Burger:

Well, there are two separate owners are they not?

Stephen R. Barnett:

There are two separate owners—

Warren E. Burger:

Well the general owner and the owner and one lessee.

Stephen R. Barnett:

That is true Mr. Chief Justice, we do not question that.

Warren E. Burger:

Your case turns on the power of the lessee through the Act, to permit the owner in perpetuity.

Stephen R. Barnett:

And until this particular reserve runs out in any event, yes, or until the Commission grants Abandonment Authority of course.

Byron R. White:

Is that, is that duty you speak of, to sell in the interstate market, is that a Texas Law Proposition?

Stephen R. Barnett:

Ah, there is authority in Texas Law, the Colt case cited in our briefs, for the notion that a lessee has a duty to sell and at the time of this, at the time these sales were made, the interstate market was virtually the only place that this gas could be so, now the respondents in their brief have argued that that was not true of Texas as a whole at this time.

We submit it was true of the Permian Basin where this gas comes from.

Byron R. White:

But in any event, you insist that the lessee had the authority to sell in the interstate market.

Stephen R. Barnett:

Oh, it does not seem, I do not think the respondents even dispute that Mr. Justice White.

Well, in response to respondent’s argument about how one cannot supposedly encumber a property interest that one does not own, we do not see any such radical innovation here.

We point in our brief to the Interstate Commerce Act cases which support the proposition that once a lessee operates a railroad property, there can be no abandonment, either by the lessee, unless the Commission grants authority either to the lessee or the lessor.

But more basically, we would look at the basic purpose of Public Utility Regulation.

The purpose of Public Utility Regulation is based on the public’s interest in the service or the property being regulated.

The purpose is to regulate for the public benefit, a business or a property that has become affected with the public interest.

And in the Natural Gas Act, Section 1(a), Congress expressly finds that the business of transporting and selling natural gas for ultimate distribution to the public is affected with a public interest.

Now that is the business that the lessee here has started under the authority of the lease.

The theory of Public Interest Regulation has never been based on any notion of estoppel or consent and thus respondents here, do not complain and cannot complain about the fact that when they granted their lease in 1925, they had no way of knowing that the, that the Natural Gas Act would come along, Natural Gas Act would come along later or that the Phillips decision would come along later.

They realized that they are subjected, that the sales Gulf made at least were subjected to the Commission of Jurisdiction even though they never consented to that when they made the sale.

And thus, since the Purpose of Public Utility Regulation is based on the public’s interest in what is being regulated and not on any notion of estoppel or waiver or consent by the owner, it should not matter that it is the lessor rather than the lessee who by virtue of Property Law has come into control of the property being regulated.

Let me try a hypothetical case which may illustrate this.

Suppose an owner of a large track land leases it for 25 or 50 years to a developer, this is undeveloped real estate, the land is leased to a developer and the lessee proceeds to build residential housing, say garden apartments on the land, now at the time of the lease, the land is not zoned at all, it is undeveloped and un-zoned.

But as a result of the lessee’s construction of the residential housing, the local government authorities steps in and zones the land residential.

Suppose even further that the lessee appears at the zoning hearing and then supports the residential zoning, now at the expiration of that lease, 25 or 50 years later, when the lessor comes into the reversion, if the lessor wants to build a factory on that land, the lessor may find that he cannot do so because the land is zoned residential.

And that zoning has resulted from actions taken by the lessee under the lease.

And we submit that–

John Paul Stevens:

Or could not he tear the houses down if he wanted to?

Stephen R. Barnett:

He could tear the houses down if he wanted to but he would still have to get the zoning changed I suppose.

John Paul Stevens:

Why would it be the zoning change to tear the housing down?

Stephen R. Barnett:

No, no, he was still have to get the zoning change to build his factory I assume even if he could tear the house—

John Paul Stevens:

But at least he has the power to discontinue the usage of the property for the purposes have been used for during the lease.

Stephen R. Barnett:

Yes, but he does not, assuming that what he wants to do is build a factory on a portion of the property that would not require tearing the houses down, in any event, the point is this property is now zoned residential, he would have to get that zoning change somehow, and that is in respondents terms, or the respondents might say, the lessee has somehow encumbered the reversion of real state.

Stephen R. Barnett:

We see nothing strange in it, all that has happened is that the lessee has done something under the lease and within the authority granted by the lease, which is brought on in these regulatory consequences—

John Paul Stevens:

For example, as supposed that your zoning laws probably would provide for notice to the landlord of what is going to happen to the zoning rules and he would have a chance to appear and oppose.

Was there any similar notice here that the landlord about the, I mean to the landlord of this lease about, what future burden there might be on his property if the gas were sold interstate commerce.

Stephen R. Barnett:

Well, there certainly was an opportunity on behalf of the land owners of the lessors in this case to intervene in the Commission proceeding and indeed, the record here states that there was no protest, no intervention in the proceeding which Gulf—

John Paul Stevens:

Well how, how do they even know about it?

How do they even know about the proceeding?

The zoning case that you give us is a similar example; they are entitled as some matter of right to notice something.

Stephen R. Barnett:

I cannot assert on the records that the lessors here knew of the proceeding, however, they—

John Paul Stevens:

All Commission procedure whereby they would normally and the normal routine be given notice either way—

Stephen R. Barnett:

I do not know whether there is not Mr. Justice Stevens.

I can say that when the 2nd certificate was granted to Gulf here in 19, in 1962, I think it was, at that time, by that time, the lessor certainly must have known that sales were being made in the interstate market, they were receiving royalties and the record reflected there was no protest or intervention in that proceeding either.

So I, it seems to me fair to assume that this is not a problem of them, not having a notice and they have not asserted that they did not have notice of the commission proceeding.

John Paul Stevens:

I am just wondering how far you pressed your hypothetical example, so, in one case; it is clearly entitled to it, the other they may or may not have gotten it, any on what the record might show.

Stephen R. Barnett:

But the, as I say, they do not appear to contend here and they did not have notice of the Commission proceeding.

And so we would submit that that is simply a similar situation, it is a case cited in El Paso’s brief, at page 9 note 5, a New York case which supports a similar kind of consequence under the Zoning Laws.

I would like to say a few things finally about the consequences of this decision, we submit that if this decision below is not reversed, it would substantially impair the Commission’s Regulatory Authority over natural gas, would undercut the Commission’s ability to assure an adequate and reliable supply of natural gas to the nation and ability which this Courts since the Phillips case has driven to uphold.

William H. Rehnquist:

And the Commission, required that the lessor joined with the lessee in making an application to the Commission?

Stephen R. Barnett:

For the future, I suppose the Commission could do that, that would not handle a lot of the cases that have already come up, the Commission might find that if they did that, it would have less gas dedicated or I suppose the Commission —

William H. Rehnquist:

That is the natural consequences of the Phillips decision that is—

Stephen R. Barnett:

I suppose the Commission could do that for the future.

It should be noted in the first place that there is a lot of gas involved in this case.

Our respondents have, be little, the amount of gas involved here saying in their brief at page 14 and this case involves a miniscule fraction of the United States market at natural gas production.

They do not cite miniscule fraction there, they did cite in their brief and our position to the petition for certiorari, at page 11 note 7, and that fraction is .08, that is 8/10th of 1% of all the gas production in the nation is involved in this case, that is onshore and offshore 8/10th of 1%, we would submit that that is not a miniscule amount—

William H. Rehnquist:

.08 Of —

Stephen R. Barnett:

.08 is the fraction.

William H. Rehnquist:

Is that .08 over a hundred or simply .08 decimal?

Stephen R. Barnett:

It is .08, almost one—

William H. Rehnquist:

Almost 1%?

Stephen R. Barnett:

I am sorry, it is almost, it must be almost 1/10th of 1%.

I will check that on the rebuttal Mr. Justice Rehnquist, I am sorry.

Stephen R. Barnett:

As I have said before, that is more than 1% of El Paso’s total annual requirements.

The significance of this case is further illustrated by the interest of the States of Texas, New Mexico and Louisiana and that to them, it is not a minor case.

Further the, the effect of the case would not be limited to fixed term leases.

It would in fact very possibly extend to the kind of lease that is quite common and that was involved in the Pennzoil case in the Fifth Circuit.

That was simply a typical life of the reserves lease, cited in our brief at pages 30 to 33.

A life of the reserve’s lease providing for royalties to be based on the market value of the gas, the lessor insisted that this meant the intrastate market value.

The Court, the State Court upheld that and the lessees apply to the Commission for an exception from the Commission’s sealing price, arguing that they would have to pay that higher rate and they argue that if they could not pay that higher rate, the lease would be terminated for failure to pay the royalties.

The Commission responded that if the lease is terminated, well the lessors will still have to carry on the service, citing the Commission’s decision in the Southland case.

The Fifth Circuit however, in reversing the Commission in Pennzoil, said that is not the case, the Commission was operating on a wrong legal premise in Southland in assuming that that gas was trapped in the interstate market as the Fifth Circuit put it.

Thus it is quite possible that under such leases, that under such leases if the lessor terminates for failure to pay the higher rates, the lessor is then in control and under Texas Property Law as a respondents assert here, there is a separate state which is not subject to the interstate dedication.

I would like to reserve the rest of my time please.

Warren E. Burger:

Mr. Deutsch.

Randolph W. Deutsch:

Mr. Chief Justice and May it please the Court.

We believe that when it is presented in a decision in the Court below, is an attack on one of the fundamental principles of the Natural Gas Act and that it raises a central issue of whether the Federal Energy Regulatory Commission, possesses a jurisdiction under the Natural Gas Act to protect the public, the public’s continuity of interstate service, at reasonable rate.

Now my colleague has already referenced the Congressional intents stated in Section 1(a) of the Act that the business of transporting and selling natural gas for ultimate distribution to the public is affected with the public interest, we believe that Section 7, and specifically Section 7(b) of the Natural Gas Act embodies the heart of that public protection.

The essential meaning of the Abandonment Requirement of Section 7(b) is to protect the public from a loss of gas in interstate service upon which it has come to rely.

California agrees with the statement of the Tenth Circuit Court of Appeals in the original Sunray case at 239 Federal 2nd 101 which states, no single factor in the Commission’s duty to protect that public can be more important to the public than the continuity of service furnished.

The Natural Gas Act does not deal expressly with the Commission’s Jurisdiction over the gas which is a subject of an expired lease.

We think that this particular circumstance, makes it entirely proper when deciding the Commission’s Jurisdiction in this particular instance to look at the reason why the Act was passed and the impact on the consuming public.

My colleague has already mentioned the immediate impact as a loss of some 25 million cubic feet a day of gas from the interstate market.

This is gas that El Paso has partially relied on in building gas facilities; this is gas that the consumers partially relied on in putting gas appliances in his home.

We also agree with the statement that this decision of the court below can foster reliance upon forms of leasehold arrangements which under the protection of Local Law, will permit lessors to reenter into possession of gas reserves at their discretion, ignoring the public interest and divert supplies from the interstate service.

This is a very real threat today.

It is a real threat because of the difference and diversions of gas prices in the interstate and intrastate market, there is a –, obviously the interstate market is regulated and the intrastate market is not.

There is also a great shortage of gas in the interstate market and there is not necessary that, that shortage in the intrastate market.

It is in the interest of the producers to be able to lead the interstate market at their discretion, in order to make the best profit possible from this gas.

The question here is whether the Commission will be for close from exercising any authority over interstate service of gas supplies covered by the leases which terminate because of clauses in these leases.

Warren E. Burger:

You seem to emphasize the reliance of consumers on getting the equipment, how did the consumers know that this particular reserve was going to lapse to either, even 50 years level on beyond —

Randolph W. Deutsch:

They did not —

Warren E. Burger:

You do not really suggest that consumers go through a process of reflection and analyze how long a particular area is going to produce gas, do you?

Randolph W. Deutsch:

Mr. Chief Justice, I do not and I believe that is the purpose for the Act, if they have no way of judging the specific dedication of gas—

Warren E. Burger:

Then why do you, why did you do rely on that, you just made an argument that consumers bought appliances and perhaps I assume you met, household heating, because they were depending upon this supply.

I thought you made that argument.

Randolph W. Deutsch:

Well perhaps, I failed to say or I thought I have that impartial reliance, I was looking at it in terms of the overall picture that the consumers are relying on the continuous and reliable stream of gas in interstate service.

And I believe that was the, one of the main purposes, the Act was passed and one of the main duties of the Natural Gas Act.

The Federal Energy Regulatory Commission; because the consumer cannot himself determine, what each particular gas contract might say, it is up to the Federal Energy Regulatory Commission to protect the consumer, and the consumer’s reliance on a reliable and continuous stream of gas.

That is one of the most important elements—

Warren E. Burger:

What notice did the lessor have here, 50 years ago that this would be the consequence?

Randolph W. Deutsch:

The lessor did not have notice that this would be the consequence, but I would submit that the obligation to continue the certified service is not one imposed by the agreement between the lessor and the lessee is imposed by the Natural Gas Act and I would submit and I think this Court recognized in the Sunray decision, that the idea of service is something separate and apart, service of natural gas and to the public is something separate and apart than the agreement which initiates that service.

And I would further submit that this is part of the idea of public convenience and necessity that a particular agreement, in order to be certified initially has to be justified by the service to which it relates.

If there is no justification in terms of the public interest, then the Federal Energy Regulatory Commission should not certify that agreement in the first place, so, I would, and in answer to your question I would say that, I do not think it is necessary that the lessor had notice at the beginning of that 50 years, in fact, I do not believe the Natural Gas Act had been passed at that time.

Byron R. White:

I guess he has to employ the, lessor has to put up with the prices and I guess, that the interstate market sets or that commission sets for the interstate market and his royalties are figured on that I suppose?

Randolph W. Deutsch:

Yes Justice White, and I would add that, we must remember at the beginning of this lease term, Gulf, the lessee had the right to sell all of the gas under this reserve and I think he had a duty to get the best price for that reserve, not only for that gas, not only for himself but for the reversionary interest holders, which were receiving a royalty at that time.

William H. Rehnquist:

Well, what law would be the source of that duty, State or Federal?

Randolph W. Deutsch:

I think that would be State Law just, it would be State Law, but the point is, that at that time, it was in the reversionary mineral interest owner’s interest for that gas to be sold in interstate commerce.

Today, it is in his interest to have that gas sold in intrastate commerce, but the question is, under the Natural Gas Act, is it in the consumers’ interest and under the theory of Southland, the consumer’s interest which the Natural Gas Act requires a Federal Energy Regulatory Commission to look at, could not be looked at, at all.

The continuing stream of gas would simply be terminated, because the lease terminated.

I think the theory of the case is, is that now, the reversionary mineral interest owners, received not the royalty interest but the entire sales price from this gas, that is sold in interstate commerce at a rate set by the Federal Energy Regulatory Commission.

But I think that this Court from the Phillips Petroleum Company versus Wisconsin case through the CATCO and Sunray and Lo-Vaca cases, have always recognized that there was a Congressional intent to protect the consuming public’s continuity of natural gas service at reasonable prices and if determined or reached decisions on the Natural Gas Act with that in mind.

John Paul Stevens:

Do you think that Congress recognize the same practice as this Court recognized in Phillips?

Randolph W. Deutsch:

I think that this Court recognized the basic fundamental intent of Congress.

To protect the consumer in passing a Natural Gas Act and I think, I think that is a very important point, I think the Southland would probably tell you that without the Natural Gas Act, without regulation, there might be more gas in the interstate market.

And so — there might very well be, but the point is, Congressional intent was to protect the consuming public because as Justice Brennan said in the Sunray case that if the producers and pipelines were left completely free to determine when to enter and when to leave the market and what prices to charge without the Federal Power Commission looking after their interests, there could be economic chaos at the local level.

Mr. Chief Justice, my time is up, thank you very much—

Warren E. Burger:

Very well.

Mr. Attwell.

J. Evans Attwell:

Mr. Chief Justice, may it please the court.

For a great deal today about many reasons why this Court should hold that Southlands, Waddell Gas has been somehow dedicated to El Paso in interstate commerce.

Well, I have heard precious little about the Natural Gas Act and I agree with the Chief Justice that the basic decision be rendered by the Court is the power of a lessee through the Natural Gas Act to commit two interstate commerce, the gas from Southland royalty.

As I understand the Commission’s position in this case, it is that it concedes one, that Southland has never dedicated any of its Waddell Ranch Gas to El Paso, and two, that under Universal Common Law, Gulf could not have dedicated the Southland’s gas because Gulf and Southland owned two separate and independent interests.

J. Evans Attwell:

Instead, the Commission claims that the Waddell Ranch Gas was involuntarily dedicated when Gulf made an interstate sale of Gulf’s leasehold gas.

According to the Commission, this dedication occurred as a matter of law under the Natural Gas Act.

So we see the case is boiling down to the fundamental issue of as to whether Congress intended for the Natural Gas Act to abrogate established Common Law and empower Private Party such as Gulf Oil Corporation to dedicate gas it never owned , never had any interest in and never intended to dedicate.

We submit that there is nothing in the Natural Gas Act or its legislative history to suggest that Congress intended such a radical result.

To the contrary, the plain language of the Act shows that Gulf could not dedicate Southland’s gas.

In considering this question of Statutory Construction, the commission would have you focus on 7(b) of the Act, the Abandonment section.

That Section provides that if a Natural Gas Company undertakes dedicated service, it cannot abandon that service without Commission Authorization but the Commission is looking at the wrong Section.

The 7(b) merely begs the question because it applies to dedicated gas.

Here, the question is whether Southland’s gas has ever been dedicated, more particularly whether Southland’s gas was somehow dedicated when Gulf made an interstate sale of Gulf’s gas.

Byron R. White:

Was the lessee authorized to sell in the interstate market under the lease?

J. Evans Attwell:

Yes sir, Justice White.

Was it required too or would there have been some breach of lease or a breach of the duty under the lease if it just had not sold anything?

J. Evans Attwell:

Absolute, well he had a duty to market but he could have sold in the interstate market or the intrastate market.

But he was not breaching the lease by selling in the interstate market?

J. Evans Attwell:

No sir, he was not.

The record in this case does show though that there was a substantial intrastate market in the Permian Basin Area.

It shows that in fact Gulf Oil Corporation on these varied properties that are at issue here, sold all of its gas well, gas and some of its casing head gas in the intrastate market.

So there was an intrastate market connected into these very —

Byron R. White:

But were there any rules in the governing any, any official or unofficial rules governing the interstate market, the lessee was not authorized to live up to.

I suppose he would have to live up to the prices —

J. Evans Attwell:

I do not follow your precedent Justice White.

Byron R. White:

Well, he is authorized to sell them interstate market—

J. Evans Attwell:

Yes sir.

Byron R. White:

And sooner or later there came to be a regime of law that governed the interstate market including prices.

J. Evans Attwell:

Correct.

Byron R. White:

And I suppose the lessee was supposed to live up to them, I suppose?

He was not breaching his lease by doing that.

J. Evans Attwell:

Or making a sale or Gulf making a sale of Gulf’s gas in the interstate market, they were certainly not breaking their lease.

In fact, in this particular lease Mr. Justice White, the royalty was payable on $0.40 per MCF, for thousand feet regardless of what the sales price the Gulf got for his gas.

Byron R. White:

Were any of these leases a percentage or not?

J. Evans Attwell:

These leases were no, the royalty was based strictly on a fixed rate of $0.04 cents.

Byron R. White:

I see.

J. Evans Attwell:

In determining whether Gulf could dedicate Southland’s gas, we submit that the proper Section of the Act to be looked at is section 7(e).

That section says that a certificate shall be issued any qualified applicant who is able and willing properly to do Acts and perform the service.

The 7(e) makes it clear that in order for a producer to dedicate gas to interstate service, he must be able to perform the service.

Gulf was never able or at anytime to perform the service of selling Southland’s gas because Gulf never owned any interest in or had any right or control over the disposition of Southland’s gas.

As the court below noted, Gulf in the present case at all times lacked the legal ability to deliver any gas from Southland’s property after the expiration of a limited 50 year term.

As to Gulf’s willingness to dedicate Southland’s gas, I want to make sure that the Court realizes that Gulf’s assertion that it attempted no dedication of gas beyond the interest it owned, is undisputed on the record in this case.

Likewise, there has been no challenge to Gulf’s assertion, that it did not purport to dedicate the gas to El Paso which it would not own after the expiration of its lease.

According to the record, Gulf believed that any such dedication would have been ineffective as a matter of law to buying gas which it had no right to.

I make this point because in the original argument, it appeared there might be a misconception that the record showed that Gulf intended or attempted in its contract with El Paso and in its certificate application could dedicate more gas than it owned under its 50 year fixed term lease, such is not the case.The f

act that Gulf applied for and was issued a certificate of unlimited duration does not bear on whether Gulf was able or willing to dedicate Southland’s gas, that simply meant that Gulf was obligated to sell all the Waddell Ranch Gas it owned, it did mean that Southland either sought or was authorized to sell gas it did not own.

Gulf sought a certificate unlimited in time because its contract with El Paso covered not only its limited interest in Waddell Gas but also gas from a number of other sources, where the leases were not for a fixed term but for the life of the reserves.

As a result, Gulf has delivered and is today delivering very substantial quantities of gas from these other sources to El Paso under this very same contract, in fact, those volumes of gas are substantially in excess of the volumes of gas involved in this case.

Nor was Southland’s gas dedicated because the certificate issued to Gulf pursuant to Section 7(e) imposed a service obligation, separate and apart from the sales obligation imposed by its contract with El Paso.

Under 7(e), the service obligation imposed by producer certificate, extends to what the producer is able to do but does not extend to what he is not able to do.

Byron R. White:

Do you think the commission could make Gulf get permission to terminate?

Let us forget about Southland.

J. Evans Attwell:

The commission could get permission to terminate what?

Byron R. White:

Would the lessee be required to get permission to terminate at the end of the lease?

J. Evans Attwell:

The lessee in this case, Gulf Oil Corporation has been required to file an abandonment application, file such an application more than two years ago.

Byron R. White:

You do, do you think the commission was within its powers in doing that?

J. Evans Attwell:

Yes I do but it is in full compliance with Section 7(b) of the Act—

Byron R. White:

But do you say it would be just a pro forma, the commission would be obligated to give permission.

J. Evans Attwell:

Correct Justice White because El Paso, I mean because Gulf’s supply of available gas has depleted to the extent that continuance of service is unwarranted, those are the words of section 7(b) and that is our position.

In this case, Gulf’s service obligation was limited to the Waddell Ranch Gas it found and produced during the defined 50 year term of its lease because that was the only gas Gulf had any right to sell and deliver.

Thus Gulf service obligation in no way was binding on Southland.

Let me illustrate by saying that in most instances, gas reserves are owned by a number of different producers and if one owner of the gas reserve makes an interstate sale of his interest, his service obligation binds him to deliver all the gas he owns regardless of any limitation to this contract to the contrary.

But this service obligation is no way binding on any of the other owners, they are free to sell their interest in the gas to the purchaser of their choice.

We say that is exactly the situation here.

J. Evans Attwell:

Gulf made an interstate sale of its interest in the Waddell Ranch Gas, the service obligation it incurred under a certificate, obligated Gulf to deliver as it has done all over Waddell Ranch Gas it owned.

Gulf would have had this obligation even if it is contract with El Paso had expired before the termination of its fixed term lease but Gulf’s service obligation is no way binding on Southland’s entirely separate interest in the Waddell Ranch Gas because Gulf was never legally able to undertake any service from Southland’s gas.

I would like to now turn to several of the points that Mr. Barnett made during the course of his opening presentation.

First, I want to turn to is the question of reliance which he mentioned I believe also Mr. Deutsch mentioned.

We reject that claim entirely as the Court below noted, this claim of public reliance is supported and I quote, by neither fact nor authority, none of the commissions orders under review here or based upon any such alleged reliance and moreover, there is absolutely no evidence in the record to support a claim of public reliance.

William H. Rehnquist:

If certainly Congress did not need a claim of public reliance when it enacted the Federal Power Act of 1934, it could just legislate under its commerce power until owners of Oil Royalties and on Oil pipelines were previously not been subjected to regulations that hereafter they were subjected to regulation.

J. Evans Attwell:

There is no question there whether, there might be a question Justice Rehnquist in my mind if the congress could do that, that it encompasses that congress could tell ‘A’ he could dedicated ‘B’s gas but aside from the fact, putting that aside, congress could certainly in effect assert jurisdiction over producers and lessors.

William H. Rehnquist:

In the fact that it happened before would be no defense to that assertion.

J. Evans Attwell:

That is correct and then I think that really gets back to where we started from and that is what congress did in the Natural Gas Act and whether the plain words of the Act say when read in the common sense fashion.

Warren E. Burger:

Does your response embrace intrastate as well as interstate?

J. Evans Attwell:

You mean the fact that congress could assert this—

Warren E. Burger:

Your response to Mr. Justice Rehnquist Could they regulate intrastate production and shipment?

J. Evans Attwell:

Could they amend the existing Natural Gas Act?

Warren E. Burger:

Ya —

J. Evans Attwell:

I believe they could.

I know there are some that take the position to contrary but I believe that a showing could be made by Congress—

Warren E. Burger:

This is under the General Welfare Clause; not the Commerce Clause.

J. Evans Attwell:

I believe that also probably the effect that the intrastate market has on the interstate market would be a basis for Congress asserting jurisdiction on that basis.

I want to point out that Southland did not ratify Gulf’s interstate dedication of Gulf’s gas to the interstate market by accepting royalties in a opinion, exhaustive opinion more than six years ago by Judge Leventhal of the DC Circuit.

He pointed out that a royalty owner is not a Natural Gas Company subject to Commission Jurisdiction because he is a land owner who simply enters into a lease for the expiration development of his land, if that transact is clearly not a jurisdictional one and that likewise the royalty owner does not make a sale of their gas in the interstate commerce because he has no control over the sale, one way or the other.

The Commission also contends that Southland’s gas was somehow dedicated to interstate service in this case because of the continuing flow of Gulf’s gas could not be interrupted without 7(b) Abandonment Authorization.

First, let me say that the record is unequivocal and clear that Southland has never made a sale of its gas in the interstate commerce except under compulsion of the orders that are under review.

So we do not have a situation where Southland’s gas has been flowing in interstate commerce and because of the flow, the Commission can assert a jurisdiction.

The basic policy though and the Commission’s argument, if that the only physical flow that Gulf could indeed dedicate to interstate service was Gulf’s leasehold gas, a 50 year flow and as this Court made clear in Sunray, once Gulf’s gas commenced the flow, that supply could not be withdrawn from continued interstate movement without Commission permission.

Of course, Gulf did not withdraw that supply; instead Gulf has delivered all of its leasehold gas.

Therefore, Gulf supplied the only supply which ever has flowed in the interstate commerce is gone and in the words of Section 7(b), it has been depleted to the extent that continuance of service is unwarranted.

As to the basis for asserting jurisdiction because of what are essentially policy witnesses, I believe that Mr. Justice Rehnquist put his finger on the question about this proliferation of short term leases if Southland prevails in this case, when he said that clearly, the Commission has the power and can require all of the necessary information so to determine whether or not a proposed sale involved such a lease and if so to take appropriate action to protect the public interest.

Warren E. Burger:

Do you mean that will be consequence if Southland prevails or if it does not prevail?

J. Evans Attwell:

We say that the Southland prevails, there are not going to be any short term leases because they are not economically feasible, that many, many years ago back in the late 1920s, these leases became extinct because producers are just not going to spend hundreds of thousands of dollars or millions of dollars drilling wells.

They will not be able to produce any gas they find for two or three years or whatever the defined term is, but that even if, it should happen that there were short term leases, the Commission clearly has it within its power to requiring for regulations that a lessee shows the term of his lease and then the Commission can take such action as it had deems appropriate to protect the public interest.

J. Evans Attwell:

As the second policy—

John Paul Stevens:

Would you explain that a little bit more to me, what could they do?

Say a lessee came in with a ten year lease, what could the Commission do to be sure we will have longer sources of supply?

J. Evans Attwell:

Justice Stevens, the Commission would say, we are not going to certificate this sale unless you get the lessor to join.

The Commission could say that we are going to just refuse the sale altogether, we do not think it is in the public interest to have that or thirdly, it could condition the sale on an unlimited term certificate just as the Commission did in Sunray.

John Paul Stevens:

But is this not this certificate unlimited in duration?

J. Evans Attwell:

Yes.

John Paul Stevens:

In this case?

J. Evans Attwell:

This certificate yes, in this certificate, the service obligation that was imposed by this certificate as I spoke to a minute ago, Gulf’s service obligation is limited to Gulf’s ability to perform and Gulf’s ability to perform here was limited to its leasehold gas and under its lease, the only gas that Gulf was entitled to was the gas it actually produced during the specified 50 year term, so that the fact that Gulf got an unlimited term certificate really made no difference, it did not affect.

In other words Southland as far as we are concerned.

As a second policy reason, the commission speculates that dedicated reserves may somehow be released from interstate commerce because of the reasoning or the theory of the Fifth Circuit in this case.

They say that such theory may be applied where a lease or grants are produces the right to dedicate gas.

He dedicates the gas and then his lease is prematurely terminated before all of a dedicated gas has been produced.

They particularly refer to the typical life of reserve lease which provides and it will remain in effect, so long as reserves are found in paying quantities.

We do not believe that the reasoning of Fifth Circuit applies to such a situation and his opinion Judge Clark was very careful to emphasize that under its lease, Gulf at no time was possessed of rights in the Waddell Ranch Gas.

That could extend beyond a 50 year term of this lease.

Therefore, it is clear we believe that the decision below is based upon the fact that Gulf never, and I emphasize the word never, had any interest in or control over Southland’s gas.

In fact, that is the basis on which the Tenth Circuit subsequently distinguished this case when it affirmed orders of the Commission holding that gas of Phillips Petroleum Company was dedicated to interstate commerce.

The Commission, in fact in the Pennzoil case mentioned by the Commission Counsel is going even further and taken the position that the reasoning in this case actually supports the position, that when a life of reserve lease preventively terminates the interstate dedication of reserves prior to such termination continues in effect.

In any event, when this Court is faced with a case involving the premature termination of a typical life reserve’s lease, it may well conclude that because the producer under such a lease had the power to dedicate 100 percent of his gas reserves and did so dedicate them before his lease terminated.

Any such gas remains dedicated despite the lease termination.Such a holding would be entirely consistent with holding for Southland based on the facts of this case.

All that the Court need hold here and all that we believe that this Circuit held is that one who has never had any interest in or control over gas cannot dedicate that gas to interstate service.

Of course, if there is any question in the Court’s mind as to the extent of the decision below, it can and should limit it.

The issue presented by the facts of this case which is whether one who never had an interest in or control over gas can dedicate that gas to interstate service.

Byron R. White:

Suppose the Natural Gas Act said on its face that when any gas is dedicated by a lessee, that is a matter of law, the entire gas supply is dedicated to the interstate market, unless there is consent of the Commission so that the– suppose the Gas Act said that now and tomorrow a lease has entered into and a lessee dedicates gas, you think you could buy in the lessor in a matter like that or not?

J. Evans Attwell:

With that of course, of course it is our position that the Act that say that.

Byron R. White:

I understand that.

J. Evans Attwell:

But I believe as long as the—

Byron R. White:

I was responding to your general statement that the lessee could never have authority to dedicate gas, that it does not —

J. Evans Attwell:

I think that, that is probably right because under the Natural Gas Act as it now stands, the Commission cannot force someone to sell their own gas in interstate commerce.

Byron R. White:

The lessee comes in now and says that I want to dedicate, and the law on its face says that, this will be taken as so and so, and the lessor has authorized him to sell in interstate commerce.

J. Evans Attwell:

He said, the lessee says that the —

Byron R. White:

The lease says on its face that he can sell it anywhere he wants to.

J. Evans Attwell:

But you are saying that the Act is also amended to provide that when the lessee makes the sale.

Well, of course if the lease was entered into it at the time that he had noticed then it might be a different — they it can be by consent.

Byron R. White:

Let us assume the lessor had noticed of the law and what the law once he entered into the lease, and so is he bound.

J. Evans Attwell:

I would say but he would have to be given his implied consent in that instance.

But of course in this instance we have no notice, whatsoever.

Byron R. White:

The lessee then is giving a — the lessee is then dedicating gas in which he has no interest.

J. Evans Attwell:

Well, but the lessor is; by entering into the lease with knowledge of the law as it is giving his implied consent to the lessee, to sell his gas in interstate commerce, it is kind of an agency argument in other words, and we do not have that here, Justice White.

I believe that this morning or this afternoon, the Government said that they are not relying on any type of agency concept.

I do want to mention two other points that Mr. Barnett brought up.

First, he read from a part of the brief we filed with the Commission as to once gas are being dedicated, it remains dedicated but he quit there because the next sentence says, but this legal conclusion begs the question of whether gas attributable to the interest of the mineral estate or mineral interest owners has been dedicated to interstate commerce, and then we went on to answer another question that was asked this morning and that is the effect of this Court’s decision in California versus Lo-Vaca.

We said that the reliance on that decision is totally misplaced because there has been no physical movement of any gas attributable to our mineral estate.

The question was asked of Mr. Barnett, could Southland have come in and blocked tin effect Gulf’s certificate application, of course Southland had no idea that it would ever be claimed that Gulf was attempting to dedicate Southland’s gas.

But in any event, in this case, the record shows that the Commission told the Fifth Circuit and I quote that Southland Royalty could not prevent Gulf’s total dedication of surplus residue gas to El Paso.

As to the Commission’s analogy to an ancient covenant running with the land, we find that unusual, that analogy does not benefit them under Common Law, a covenant is not binding on anyone who is not a successor to the covenanter and in this case the decision of the Texas Supreme Court in 1973, made it crystal clear that Southland had a separate independent State that was vested at all times and that Southland is in no way a successor to Gulf.

In conclusion, let me say that we think that this case is based on two basic principles still and that is one, that you cannot dedicate what you do not own and two, that Gulf Oil never owned any interest in Southland’s gas, never had any right in that gas, had never had any control over it and that therefore, Southland’s gas was not dedicated to intestate service when Gulf made an interstate service of Gulf’s gas, for these reasons, we ask that you affirm the decision below.

Thank you.

Warren E. Burger:

Well.

Mr. Attorney General.

John L. Hill:

Mr. Chief Justice may it please the Court.

The state of Texas for reasons that we have outlined in our Amicus brief, joined in the most of the basic arguments that has been presented by Southland, I would not want us to be in agreement here, not that it is material to the decision in this case, we would not want to be in agreement that Congress could authorize a lessee to contract the gas that he did not own, nor would we want to be in agreement concerning any Congressional Authority to control intrastate gas.

But since neither one of those matters are in our opinion essential to the issue here let me turn to Section 7(b) which is the heart of this case and state why the State of Texas cares about this case and what our interest is that we conceive it.

And sustaining the Circuit Court’s decision and overturning the Federal Power Commission Order in this case.

Section 7(b) as we have been over and over, speaks of no Natural Gas Company shall abandon all or any portion of its facilities subject to the jurisdiction of the Commission.

Now, we say first that the Congressional intent as well as the clear reading of Section 7(b) would require you to hold in this case that Southland Royalty is not a natural gas company with then the meaning of 7(b) that Gulf is the only natural gas company that would come within that definition or meaning.

Then when it says facilities, we ask that you hold that, facilities contemplated in this case are only the lease that Gulf took, its lease, that that is the facilities, the 50 year term lease or that that would be the facilities in any interpretation of 7(b) would be the lease taken by the lessee and that the service intended is the gas covered by that lease and not any other gas, not any reversionary interest of anyone else and then it is a misreading of the Federal Power Commission Act to say that the mere dedication of a lessee’s interest to interstate service.

In some way, not ever stated by Congress would then mean that as long as that gas were flowing it would also authorize the bringing in under that service or that facility, gas which the lessee did not even own in the first place or would extend the gas that was found after that particular lease were abandoned.

We say that is a total misreading and a stretching of the Federal Power Commission Authority and that the Congress intends that it should say so and then and only then would we be facing the issue that is being inquired about in some of the questions then we would certainly want to raise Constitutional objections to it.

John L. Hill:

But that is not here, that it is not intended and the reason that we are concerned with any rule that would emanate from this case, if brought at the Federal Power Commission Order and let me refer to it again, it said, the duty to continue to serve is like an ancient covenant running with the land.

Now that is a very, very —

Or a new covenant.

John L. Hill:

It says sir.

Or a new covenant.

John L. Hill:

Or a new covenant, a new ancient or middle aged, if to us, a very, very novel doctrine with no authority to support it and totally unprecedented in Universal Law.

And that has to bother us because we own 16 million acres of land in our state, the State of Texas does, we are far and away are the largest land owner.

And we have 4,000 expired leases that we have discovered this since 1944 covering over 2 million acres of land in our state.

Now, that is just for owners, that is just what could say in going over in the general land office for purposes of this case and when you are faced with the possibility of a rule about a covenant running with the land that could mean that the interstate dedication would extend beyond the lessee’s interest whether not there have been an abandonment.

You can see why our state would be very concerned and the havoc if that that could cause not only in; and because most of the abandonments have not been carried out, it would mean that our people are trying to do business with us would find it very, is this mean my time is expired?

Warren E. Burger:

No, not just the one—

John L. Hill:

It would mean certainly that people that are trying to deal with the State of Texas in taking these leases, if they had no way of knowing and they do not, you cannot find these contracts that are made and utilized for interstate service, they are not recorded in any Court House anywhere.

You cannot find them, you could come up here and dig around in the FPC file, if you wanted to be that diligent but we have not found their files to be all that up to date.

And it placed a tremendous burden, to try to run down all those gas contract and how are you going to know when some contract — well, you cannot, the lease is down there but you cannot go find every unexpired lease, we found leases where there nine unexpired.

We found land with a nine unexpired leases.

How are you going to know whether in some prior lease, 25 or 30 years ago, maybe someone had a dedication of some gas into an interstate market then the gas trickled out and the lease expired and someone went on to the next deal.

Do you mean that when we are going to deal with people now, to try to get new leases, to encourage them to go out and drill this deep wells and have this exploration that they have got to try to determine whether someone years ago might have had some lease that under which there were some sale of gas in an interstate market and by that be bound now to sell their gas regardless of the circumstances and the interstate market?

You can see the tremendous dampening influence, that would have on expiration at the time when we are all trying to encourage expiration and you can see the cloud that it would flip over a title than our ability as a land owner to do business and that is why the rule should be plain and simply as the Circuit Court has put it.

And that is if the lessee can sell only what he owns, that always been the law that should remain the law for the purpose of deciding this case before.

There is nothing else that Gulf had except 50 years to sell, that is the gas they had, that is the worth—

Nobody’s trying to sell the lessor’s gas, it is just a question whether he must stay in the interstate market.

John L. Hill:

Well, you see there would never be any authorization.

I understand but nobody—; Gulf is not trying, nobody is suggesting that Gulf has the right to sell the lessor’s gas.

John L. Hill:

Well, if you leave it in the interstate.

Well, I know but it will still be the lessor selling it.

John L. Hill:

Well, but not, if it is an involuntary sale.

Well I know but it will still be him selling it.

It would not be Gulf selling it.

John L. Hill:

Well, Gulf would be in effect forcing Southland to sell its gas whether they want it to or not in the interstate commerce.

The laws were construed as the commission says that it would be the law that is making the lessor stay in the intestate market, Gulf is out.

John L. Hill:

Well, by what law—

I understand your position on that but nevertheless that would be, Gulf would be out in the lessor or be it and the lessor would be making the sales—

John L. Hill:

— that the lessor did not have one thing in the world to do.

I understand your argument in that the effect—

John L. Hill:

It would just be an involuntary forcing of Southland to sell its gas in the interstate commerce.

And at those price.

John L. Hill:

Yes sir, and we are not worried, the price is not the issue here.

California talks about its consumers, it talks about how many homes it will heed in California and they talked about losing gas.

They have no gas to lose because this gas was never dedicated and to interstate service beyond the 50 year term.

Southland did not dedicate its gas, they are begging, they are bootstrapping themselves, they are just begging the question when they say that —

The issue in the case is it, in what market may be gas be sold —

John L. Hill:

Southland has the right to sell it to Texas and we are here to say that it is our gas now and that it would not dedicate it under the previous transaction that all gas did sale with its 50 years supply, that everyone knew that going in.

El Paso knew what it was buying, 50 years.

Gulf did not sell something they did not own, they have had it now, their gas is; their rights have been exhausted under the only lease that existed and now—

Nobody is suggesting Gulf’s rights are going to go on is it?

Well General Hill, is that quite right?If the Commission is correct in holding that the, it was like a covenant running with the land and the landlord’s gas is permanently dedicated, why not, why would not the Commission have the power to deny Gulf’s petition for abandonment and keep Gulf in the picture?

Because it would still have resources supply?

John L. Hill:

Well because Gulf, you see, Gulf has filed an abandonment.

If the supply is still available why did they; they may deny the petition for abandonment, may they not?

John L. Hill:

Why do they not act on it that, is a very good question, it—

But is it perfectly clear that Gulf is out of the picture if the gas is still there?

John L. Hill:

Absolutely.

Warren E. Burger:

Your time is expired.

John L. Hill:

Gulf said only what it owned.

Warren E. Burger:

Thank you Mr. Attorney General.

Do you have anything further Mr. Barnett?

Stephen R. Barnett:

Just a few points Mr. Chief Justice.

First in response to Mr. Justice Rehnquist with the respect to that fumble, that fraction that I fumbled, it is .08 of 1% that is nearly 1/10th of 1%.

And as I said that was; that is more than 1% of El Paso’s firm annual requirement.

With respect to Mr. Attwell’s argument that the case is really based on Section 7(e) not 7(b) because Gulf was not able and willing to initiate the service, there are several answers to that.One is that it contradicts the certificates; the certificates granted to Gulf said precisely that Gulf is able and willing to perform the service and these certificates were limited, were unlimited at time, not limited to the 50 years of the lease.

William H. Rehnquist:

Then Mr. Barnett, do you agree that if the Commission is right, Gulf may remain in the picture permanently until the will expires.

Stephen R. Barnett:

Not permanently, we will not take to Gulf-

William H. Rehnquist:

-—the well is exhausted there?

Stephen R. Barnett:

No, we do not take the position that the Commission could make Gulf sell Southland’s gas permanently.

The Commission held that Gulf must seek abandonment.

William H. Rehnquist:

Yes, I know but they would have power to deny the petition for abandonment as long as there was still gas available in the well, would they not?

Stephen R. Barnett:

Well, so long as they also have power to deny Southland —

William H. Rehnquist:

Correct, but surely if they have the power over Southland, it would follow a fortiori would it not, that they could keep Gulf in the picture.

Stephen R. Barnett:

Yes, so long as Southland is there but we do not.

Why do you say that Mr. Barnett, cannot the lessor at least Illinois has to stay in the interstate market at least get rid of his lessee?

Stephen R. Barnett:

Well, I think that is true too that the Commission could—

Well, it cannot be both ways.

Stephen R. Barnett:

Well someone else could be a substituted for Gulf I suppose.

Substitute—

Warren E. Burger:

Someone like whom?

One of the lessors since I would hold, when the lessee’s expired, I understand that I have to stay in the interstate market but I do want to deal with Gulf anymore.

Stephen R. Barnett:

Well, in that case, that is what I have in mind by saying the lessor could bring in someone other than Gulf to—

What about itself, Southland?

Stephen R. Barnett:

I think Southland itself could—

If it were equipped.

Stephen R. Barnett:

Yes, I think Southland itself could be substituted for Gulf if necessary.

The point is that Southland ultimately is the natural gas company by virtue of having succeeded to this dedicated service in natural gas.

William H. Rehnquist:

But if Southland is a bunch of doctors sitting in Los Angeles, they are not going want to start building a pipeline themselves.

Stephen R. Barnett:

Well you do not have to build a pipeline to be a seller of Natural Gas Mr. Justice Rehnquist, there are many owners of producing interest who have no facilities in the sense of pipes or anything but which our natural gas companies under the Act because they are engaged in sales of natural gas.

Indeed we would say the reserve itself is the facility if you need a facility.

Warren E. Burger:

One the last day of the 50th year, Mr. Barnett, why is any petition for abandonment necessary?

What does Gulf have to abandon?

Stephen R. Barnett:

Gulf has a continuing service which is still performing and as the Commission said—

Warren E. Burger:

But when it performed anything under a lease after it has expired?

Stephen R. Barnett:

Well, all the Commission said was that we are requiring Gulf to seek abandonment so that we will have all the parties before us if we have to rearrange their legal arrangements, it is really a sort of—

Warren E. Burger:

Could they order Southland to make a new lease with Gulf?

Stephen R. Barnett:

They could order Southland to make a lease with somebody to continue selling.

Then you are, you have answered your– I am sure it is not intentional this when you have given contradictory answers to Justice White and to Justice Stevens.

Did you say that the Commission can rearrange the legal arrangements of the parties; that is a rather strange notion to emanate from the Statute is it not?

Stephen R. Barnett:

Well, to make clear that Southland is required to continue this service which Gulf has begun under the lease.

The Commission said we have, we need all the parties before us if we are going to, I think it said rearrange, resettle their legal arrangements but the point is that Southland contends that it does not have to sell this gas in the interstate commerce, the Commission would be telling it that it does, that is a rearrangement of the legal arrangement at least to Southland view as it was.

But do you take the position Mr. Barnett that by virtue of Gulf’s dedication, the commission acquired greater power over Southland that it has over gulf?

Stephen R. Barnett:

Well, in the sense that after the 50 years it now has power to require Gulf, to require Southland to sell the gas—

Does it also have power to require Gulf to stay in the picture, assuming you are right on Southland—?

Stephen R. Barnett:

To stay in the picture—

As lessee—

Stephen R. Barnett:

I do not, not if Southland wants another lessee, but if Gulf is being in the picture is necessary to effectuate —

It does not have the power to deny the Petition for Abandonment even though the source or supply remains available, that is your position.

Stephen R. Barnett:

No, it has the power to deny the petition for Gulf’s abandonment or to require Gulf the files that you petitioned as it did here—

—if its act on it, can it deny it, that is my question.

Does the Commission have the power to A, hold that Southland’s gas must remain available and B, we are going to deny Gulf’s petition for abandonment, does it have such power?

Stephen R. Barnett:

Yes.

Warren E. Burger:

What if Southland says we are not going to do anything at all, we are tired of this business, we are just going to let the gas stay where it is, we would not want to make a new lease with anybody?

Can the Commission say, here are three names, make a list with one of them?

Stephen R. Barnett:

Yes, in the United Gas Pipeline case, the Commission required the pipeline to keep purchasing in the Sunray case, it required the seller to keep selling, that would be the same thing here.

But you would not think you could or do you?

I do not know what your answer is now.

May the Commission keep deny Gulf’s Petition for Abandonment and make it stay in the picture over Southland’s objection.

Stephen R. Barnett:

Not if Southland has someone else it wants in the picture instead of Gulf.

But if Southland does not have someone else, if Southland’s objection is based on not wanting this gas to be sold to interstate commerce—

Well I suppose that there is one reason for requiring a lessee under an expiring lease to file is just at least to make sure that the lease is expiring and it is not just a trumped up arrangement.

Stephen R. Barnett:

Well, that may be one reason, yes.

Warren E. Burger:

Well, there would not be much difficultly about that, the Commission’s record show the lease—

Stephen R. Barnett:

The present record as I understand do not show the lease and this case was brought by Declaratory Judgment Action before the Commission.

I think ordinarily the Commission would not be aware that a particular lease is expired.

Warren E. Burger:

You mean because that is 50 years ago but they certainly must keep records these days do they not?

Stephen R. Barnett:

It is my understanding that they do not keep records of leases, I could be wrong but that is my understanding.

Warren E. Burger:

Thank you gentleman.

The case is submitted.