CALIFORNIA v. SOUTHLAND ROYALTY CO.

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Argument of Stephen R. Barnett

Chief Justice Warren E. Burger: We will hear arguments next in 76-1114 in the consolidated cases, California v. Southland Royalty Company.

Mr. Barnett.

Mr. 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.

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…

Justice 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?

Mr. 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.

Unknown Speaker: 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.

Mr. 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.

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.”

Chief Justice Warren E. Burger: I suppose the key words are “subject to the jurisdiction of the Commission,” is that not so?

Mr. 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…

Justice John Paul Stevens: But you did not suggest that El Paso was the natural gas company referred to ---

Mr. Stephen R. Barnett: Did I say El Paso?

Justice John Paul Stevens: You did.

Mr. 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.”

Justice 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.

Mr. 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.

Justice John Paul Stevens: Is it your position Gulf was obligated to continue providing that?

Mr. 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--

Justice John Paul Stevens: Let us stop right there for just a moment.

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

Mr. 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.

Justice John Paul Stevens: But Gulf does not have the lease.

The Gulf’s lease has expired.

Mr. 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.

Justice 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?

Mr. 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.”

Justice Thurgood Marshall: Southland did not process either.

Mr. Stephen R. Barnett: Southland did not process either, that is true.

Justice Thurgood Marshall: Process, is it not pretty odd on the gas company that does not process?

Mr. Stephen R. Barnett: Excuse me, Mr. Justice?

Justice Thurgood Marshall: Is it not difficult to have a gas company if the company does not process?

Mr. 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.

Justice Mr. Justice 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?

Mr. Stephen R. Barnett: At the time it issued the certificate, Gulf could have required the consent of Southland --

Justice Mr. Justice 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 --.

Mr. 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.

Justice Mr. Justice 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?

Mr. Stephen R. Barnett: Well, it perhaps could do that in the future.

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.

Justice 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?

Mr. 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.

Justice 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.

Mr. 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--

Unknown Speaker: If they were in good faith like a lot of people do they just get the title question --

Mr. 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.

Justice 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.

Mr. Stephen R. Barnett: Where there has once been a dedication of a stream of gas, and authorized dedication anyway of a stream of gas….

Justice Mr. Justice 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.

Mr. 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 –

Justice Mr. Justice White : So, the service could be discontinued?

Mr. 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.

Justice Mr. Justice White : So, you must say then that Southland here implicitly authorized the dedication?

Mr. Stephen R. Barnett: Yes, I would say, implicitly by virtue of what its authorized lessee did.

Justice Mr. Justice White : Now is that the theory the Commission used?

Mr. 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.

Justice Mr. Justice White : Well it certainly did not use the theory that Southland is a gas company, did it?

Mr. 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 --

Chief Justice Warren E. Burger: What are you reading from there?

Mr. 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 --

Justice 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.

Mr. Stephen R. Barnett: No natural gas company shall abandon all or any of its facilities.

Justice 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.

Mr. Stephen R. Barnett: But it is the service, the lessee here—

Justice John Paul Stevens: Services rendered by means of such facility.

Mr. Stephen R. Barnett: Well, such facilities could mean facilities subject to the Commission of the jurisdiction, that is, Gulf’s facilities here.

Justice John Paul Stevens: No, it would seem that such facilities are its facilities in the preceding line.

Mr. 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—

Justice 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.

Mr. 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.

Justice 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.

Mr. Stephen R. Barnett: Well, it is not the central argument by any means.

Justice John Paul Stevens: Well, it is a totally meritless argument, is it not?

Mr. 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.

Justice 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.

Mr. 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.

Justice 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?

Mr. 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.

Justice 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?

Mr. 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.

Chief Justice Warren E. Burger: Very well, Mr. Barnett.

Mr. Deutsch.

Argument of Randolph W. Deutsch

Mr. 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 --

Justice William H. Rehnquist: What do you mean when you say you are to plead it on policy grounds?

Mr. 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.

Justice William H. Rehnquist: That you will have some relation I take it, to the statute or administrative law in question?

Mr. 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.

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 --

Justice John Paul Stevens: Mr. Deutsch, what will happen to that gas if you lose?

Mr. 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-

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

Mr. Randolph W. Deutsch: No Sir, not at all.

Justice John Paul Stevens: So, what is your argument?

Mr. 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.

Justice William H. Rehnquist: Untenable pressures on the public utilities commission of California or the federal, what used to be the Federal Power?

Mr. 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 --

Justice 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.

Mr. Randolph W. Deutsch: I am sorry Justice Marshall.

Justice 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?

Mr. 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 —

Justice Thurgood Marshall: Well, are you criticizing what the Commission did in this case or not?

Mr. Randolph W. Deutsch: No.

Justice Thurgood Marshall: Well, what is your argument about this?

Mr. 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--

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

Mr. 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.

Justice Thurgood Marshall: All kinds of interpretation on this one section.

Mr. 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.

I see my time is up, Thank you.

Chief Justice Warren E. Burger: Mr. Attwell.

Argument of J. Evans Attwell

Mr. 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.

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

Mr. J. Evans Attwell: It did say that in its opinion, yes sir.

Unknown Speaker: 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?

Mr. 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.

Justice Mr. Justice 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.

Mr. J. Evans Attwell: I think it Congress wanted to preempt the whole deal--

Justice Mr. Justice 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…

Mr. J. Evans Attwell: That is right, that is just like saying that a Natural Gas Act said that A could dedicate B's gas.

Chief Justice Warren E. Burger: Let me address that further at one o’clock.

You may continue Mr. Attwell.

Mr. 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.

Justice Mr. Justice 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.

Mr. 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?

Chief Justice Warren E. Burger: You also said I think before lunch that he can dedicate only what he has.

Mr. J. Evans Attwell: Absolutely, that is our position.

Chief Justice Warren E. Burger: What about his potential beyond the 50 years?

Mr. J. Evans Attwell: He did not have any potential, he had none whatsoever.

Chief Justice 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?

Mr. J. Evans Attwell: Any interest to property right he had, yes.

No question about that Mr. Chief Justice.

Justice Mr. Justice White : Well, he has a potential using it all on 50 years.

Mr. 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.

Justice Mr. Justice 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?

Mr. 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.

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

Mr. J. Evans Attwell: Well, maybe I misunderstood your question.Obviously, that was physically possible.

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

Mr. 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.

Chief Justice Warren E. Burger: 7E?

Mr. 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.

Justice 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?

Mr. J. Evans Attwell: I would say the record is silent on that point, Mr. Justice Rehnquist.

Chief Justice Warren E. Burger: Well, on the same conversation earlier today about Gulf selling this in intrastate commerce.

Mr. 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.

Chief Justice Warren E. Burger: Where does Southland get its title, interest or whatever to sell in intrastate commerce?

Mr. 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.

Justice William H. Rehnquist: What you are saying is Congress has not authorized the FPC to regulate that sort of sale?

Mr. J. Evans Attwell: That is correct, Justice Rehnquist, at least as of the present moment.

Justice 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?

Mr. 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 --

Justice John Paul Stevens: Remedial power to do what?

Mr. 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.

Justice John Paul Stevens: Does the record show that?

Mr. 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.

Justice 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.

Mr. 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.

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?

Justice John Paul Stevens: Under the statute, even if you run out, you have got to file a petition to abandon, do you not?

Mr. 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.

Justice 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?

Mr. J. Evans Attwell: Yes sir, they did.

Justice John Paul Stevens: But they are not here now.

Mr. 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 --

Unknown Speaker: Do you mean even prospectively as well as otherwise.

Mr. J. Evans Attwell: I do not follow.

Unknown Speaker: Well suppose the same transaction happens tomorrow.

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

Mr. J. Evans Attwell: That is a good point.

Justice Mr. Justice 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.

Mr. 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.

Justice 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?

Mr. 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.

Justice Thurgood Marshall: And the lease did say the fifth?

Mr. 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.

Justice Thurgood Marshall: As those leases ran out, that dedication ran out.

Mr. J. Evans Attwell: As the gas run out, that is right.

Justice Thurgood Marshall: That is your position?

Chief Justice 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.

Mr. J. Evans Attwell: I could not have said it better myself.

That is exactly what we are saying.

Chief Justice 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.

Mr. 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.

Justice Mr. Justice 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?

Mr. 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…

Justice Mr. Justice White : But it did not overrule, it did not overrule any prior decisions for example.

Mr. 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.

Justice Mr. Justice White : Of course there is interesting language in the Sunray.

Mr. J. Evans Attwell: There is a lot of different language in Sunray, I read it a lot of times.

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

Mr. 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…

Justice Mr. Justice 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.”

Mr. J. Evans Attwell: We would certainly say that, yes.

Chief Justice Warren E. Burger: In other words you would say that we were engaging in a rule-making process, de facto rule making.

Mr. 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.

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.

Justice 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?

Mr. J. Evans Attwell: Justice Marshall, that is exactly what they did say.

Justice Thurgood Marshall: Well, I thought you said that they did not have any gas, that Gulf did not have any.

Mr. 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.

Chief Justice Warren E. Burger: Very well Mr. Attwell.

Mr. Attorney General.

Argument of John L. Hill

Mr. 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…

Justice Mr. Justice White : The Gas Act did so provide that, I suppose, did it not expressly?

Mr. John L. Hill: Well that is a possibly so and it would, whether or not that would be a proper…

Justice Mr. Justice White : The Commission says if it so provides right now.

Mr. 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…

Justice Mr. Justice 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.

Mr. 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…

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

Mr. John L. Hill: No, but they…

Justice Mr. Justice White : And without getting the Commission’s consent?

Mr. 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…

Justice Mr. Justice 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.

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

Justice Mr. Justice 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 --

Mr. 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.

Justice 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.

Mr. 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.

Justice Mr. Justice 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…

Mr. 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 --

Justice Mr. Justice 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.

Mr. 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.

Justice 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?

Mr. 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.

Justice Mr. Justice White : And the Commission was required to grant the abandonment.

Mr. John L. Hill: Yes, that would eliminate in other word this abandonment…

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

Mr. 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.

Justice Mr. Justice White : That would be wholly inconsistent with my suggestion.

Mr. 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.

Justice Mr. Justice White : Do you think the issue here is whether there has to be a filing for an abandonment?

Mr. 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.

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.

Chief Justice Warren E. Burger: Thank you gentlemen.

The case is submitted.

Print this transcript Transcript: 

Argument of Stephen R. Barnett

Chief Justice Warren E. Burger: Hear arguments next in California against Southland Royalty, and the related cases.

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

Mr. 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.

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—

Chief Justice Warren E. Burger: Is that in the record Mr. Barnett?

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

Chief Justice Warren E. Burger: And what difference would it make if it was ten times average—

Mr. Stephen R. Barnett: Well the point is—

Chief Justice Warren E. Burger: To the legal issues involved in this case?

Mr. 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.

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—

Justice 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?

Mr. 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,

Justice Byron R. White: Now, and, so when the lease expires, you do not, you do not dispute the fact that the lease expires?

Mr. Stephen R. Barnett: Oh no, not at all.

Justice 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?

Mr. 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.

Justice 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?

Mr. Stephen R. Barnett: If the Commission knew about that clause the—

Justice Byron R. White: Well then certainly, it must be the leasers have filed I think.

Mr. Stephen R. Barnett: The leases in fact as I understand that are not filed and not brought to the attention of the—

Justice Byron R. White: I know but do not they; when they apply for the certificate; they must make some representations about—

Mr. 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.

Justice 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?

Mr. 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.

Chief Justice Warren E. Burger: Well, there are two separate owners are they not?

Mr. Stephen R. Barnett: There are two separate owners—

Chief Justice Warren E. Burger: Well the general owner and the owner and one lessee.

Mr. Stephen R. Barnett: That is true Mr. Chief Justice, we do not question that.

Chief Justice Warren E. Burger: Your case turns on the power of the lessee through the Act, to permit the owner in perpetuity.

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

Justice Byron R. White: Is that, is that duty you speak of, to sell in the interstate market, is that a Texas Law Proposition?

Mr. 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.

Justice Byron R. White: But in any event, you insist that the lessee had the authority to sell in the interstate market.

Mr. 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--

Justice John Paul Stevens: Or could not he tear the houses down if he wanted to?

Mr. 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.

Justice John Paul Stevens: Why would it be the zoning change to tear the housing down?

Mr. 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—

Justice 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.

Mr. 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.

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—

Justice 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.

Mr. 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—

Justice 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.

Mr. Stephen R. Barnett: I cannot assert on the records that the lessors here knew of the proceeding, however, they—

Justice John Paul Stevens: All Commission procedure whereby they would normally and the normal routine be given notice either way—

Mr. 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.

Justice 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.

Mr. 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.

Justice William H. Rehnquist: And the Commission, required that the lessor joined with the lessee in making an application to the Commission?

Mr. 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 --

Justice William H. Rehnquist: That is the natural consequences of the Phillips decision that is—

Mr. 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—

Justice William H. Rehnquist: .08 Of --

Mr. Stephen R. Barnett: .08 is the fraction.

Justice William H. Rehnquist: Is that .08 over a hundred or simply .08 decimal?

Mr. Stephen R. Barnett: It is .08, almost one—

Justice William H. Rehnquist: Almost 1%?

Mr. 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.

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.

Chief Justice Warren E. Burger: Mr. Deutsch.

Argument of Randolph W. Deutsch

Mr. 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.

Chief Justice 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 --

Mr. Randolph W. Deutsch: They did not --

Chief Justice 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?

Mr. 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—

Chief Justice 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.

Mr. 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—

Chief Justice Warren E. Burger: What notice did the lessor have here, 50 years ago that this would be the consequence?

Mr. 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.

Justice 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?

Mr. 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.

Justice William H. Rehnquist: Well, what law would be the source of that duty, State or Federal?

Mr. 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.

Justice John Paul Stevens: Do you think that Congress recognize the same practice as this Court recognized in Phillips?

Mr. 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—

Chief Justice Warren E. Burger: Very well.

Mr. Attwell.

Argument of J. Evans Attwell

Mr. 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.

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.

Justice Byron R. White: Was the lessee authorized to sell in the interstate market under the lease?

Mr. J. Evans Attwell: Yes sir, Justice White.

Unknown Speaker: 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?

Mr. J. Evans Attwell: Absolute, well he had a duty to market but he could have sold in the interstate market or the intrastate market.

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

Mr. 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 --

Justice 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 --

Mr. J. Evans Attwell: I do not follow your precedent Justice White.

Justice Byron R. White: Well, he is authorized to sell them interstate market—

Mr. J. Evans Attwell: Yes sir.

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

Mr. J. Evans Attwell: Correct.

Justice 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.

Mr. 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.

Justice Byron R. White: Were any of these leases a percentage or not?

Mr. J. Evans Attwell: These leases were no, the royalty was based strictly on a fixed rate of $0.04 cents.

Justice Byron R. White: I see.

Mr. 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.

Justice Byron R. White: Do you think the commission could make Gulf get permission to terminate?

Let us forget about Southland.

Mr. J. Evans Attwell: The commission could get permission to terminate what?

Justice Byron R. White: Would the lessee be required to get permission to terminate at the end of the lease?

Mr. 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.

Justice Byron R. White: You do, do you think the commission was within its powers in doing that?

Mr. J. Evans Attwell: Yes I do but it is in full compliance with Section 7(b) of the Act—

Justice Byron R. White: But do you say it would be just a pro forma, the commission would be obligated to give permission.

Mr. 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.

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.

Justice 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.

Mr. 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.

Justice William H. Rehnquist: In the fact that it happened before would be no defense to that assertion.

Mr. 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.

Chief Justice Warren E. Burger: Does your response embrace intrastate as well as interstate?

Mr. J. Evans Attwell: You mean the fact that congress could assert this—

Chief Justice Warren E. Burger: Your response to Mr. Justice Rehnquist Could they regulate intrastate production and shipment?

Mr. J. Evans Attwell: Could they amend the existing Natural Gas Act?

Chief Justice Warren E. Burger: Ya --

Mr. 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—

Chief Justice Warren E. Burger: This is under the General Welfare Clause; not the Commerce Clause.

Mr. 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.

Chief Justice Warren E. Burger: Do you mean that will be consequence if Southland prevails or if it does not prevail?

Mr. 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.

As the second policy—

Justice 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?

Mr. 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.

Justice John Paul Stevens: But is this not this certificate unlimited in duration?

Mr. J. Evans Attwell: Yes.

Justice John Paul Stevens: In this case?

Mr. 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.

Justice 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?

Mr. J. Evans Attwell: With that of course, of course it is our position that the Act that say that.

Justice Byron R. White: I understand that.

Mr. J. Evans Attwell: But I believe as long as the—

Justice Byron R. White: I was responding to your general statement that the lessee could never have authority to dedicate gas, that it does not --

Mr. 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.

Justice 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.

Mr. J. Evans Attwell: He said, the lessee says that the --

Justice Byron R. White: The lease says on its face that he can sell it anywhere he wants to.

Mr. 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.

Justice 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.

Mr. 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.

Justice Byron R. White: The lessee then is giving a -- the lessee is then dedicating gas in which he has no interest.

Mr. 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.

Chief Justice Warren E. Burger: Well.

Mr. Attorney General.

Argument of John L. Hill

Mr. 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.

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 --

Unknown Speaker: Or a new covenant.

Mr. John L. Hill: It says sir.

Unknown Speaker: Or a new covenant.

Mr. 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?

Chief Justice Warren E. Burger: No, not just the one—

Mr. 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—

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

Mr. John L. Hill: Well, you see there would never be any authorization.

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

Mr. John L. Hill: Well, if you leave it in the interstate.

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

Mr. John L. Hill: Well, but not, if it is an involuntary sale.

Unknown Speaker: Well I know but it will still be him selling it.

It would not be Gulf selling it.

Mr. 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.

Unknown Speaker: 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.

Mr. John L. Hill: Well, by what law—

Unknown Speaker: 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—

Mr. John L. Hill: -- that the lessor did not have one thing in the world to do.

Unknown Speaker: I understand your argument in that the effect—

Mr. John L. Hill: It would just be an involuntary forcing of Southland to sell its gas in the interstate commerce.

Unknown Speaker: And at those price.

Mr. 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 --

Unknown Speaker: The issue in the case is it, in what market may be gas be sold --

Mr. 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?

Unknown Speaker: 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?

Mr. John L. Hill: Well because Gulf, you see, Gulf has filed an abandonment.

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

Mr. John L. Hill: Why do they not act on it that, is a very good question, it—

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

Mr. John L. Hill: Absolutely.

Chief Justice Warren E. Burger: Your time is expired.

Mr. John L. Hill: Gulf said only what it owned.

Chief Justice Warren E. Burger: Thank you Mr. Attorney General.

Do you have anything further Mr. Barnett?

Rebuttal of Stephen R. Barnett

Mr. 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.

Justice 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.

Mr. Stephen R. Barnett: Not permanently, we will not take to Gulf-

Justice William H. Rehnquist: -—the well is exhausted there?

Mr. 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.

Justice 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?

Mr. Stephen R. Barnett: Well, so long as they also have power to deny Southland --

Justice 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.

Mr. Stephen R. Barnett: Yes, so long as Southland is there but we do not.

Unknown Speaker: 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?

Mr. Stephen R. Barnett: Well, I think that is true too that the Commission could—

Unknown Speaker: Well, it cannot be both ways.

Mr. Stephen R. Barnett: Well someone else could be a substituted for Gulf I suppose.

Unknown Speaker: Substitute—

Chief Justice Warren E. Burger: Someone like whom?

Unknown Speaker: 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.

Mr. 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—

Unknown Speaker: What about itself, Southland?

Mr. Stephen R. Barnett: I think Southland itself could—

Unknown Speaker: If it were equipped.

Mr. 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.

Justice 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.

Mr. 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.

Chief Justice 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?

Mr. Stephen R. Barnett: Gulf has a continuing service which is still performing and as the Commission said—

Chief Justice Warren E. Burger: But when it performed anything under a lease after it has expired?

Mr. 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—

Chief Justice Warren E. Burger: Could they order Southland to make a new lease with Gulf?

Mr. Stephen R. Barnett: They could order Southland to make a lease with somebody to continue selling.

Unknown Speaker: 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?

Mr. 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.

Unknown Speaker: 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?

Mr. 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—

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

Mr. Stephen R. Barnett: To stay in the picture—

Unknown Speaker: As lessee—

Mr. Stephen R. Barnett: I do not, not if Southland wants another lessee, but if Gulf is being in the picture is necessary to effectuate --

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

Mr. 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—

Unknown Speaker: —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?

Mr. Stephen R. Barnett: Yes.

Chief Justice 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?

Mr. 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.

Unknown Speaker: 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.

Mr. 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—

Unknown Speaker: 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.

Mr. Stephen R. Barnett: Well, that may be one reason, yes.

Chief Justice Warren E. Burger: Well, there would not be much difficultly about that, the Commission’s record show the lease—

Mr. 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.

Chief Justice Warren E. Burger: You mean because that is 50 years ago but they certainly must keep records these days do they not?

Mr. Stephen R. Barnett: It is my understanding that they do not keep records of leases, I could be wrong but that is my understanding.

Chief Justice Warren E. Burger: Thank you gentleman.

The case is submitted.