Opposition — Louisiana Land & Exploration Co. v. Federal Energy Regulatory Commission

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No. 78-687

SE a

Iu the Supremv Court of the United States

OCTOBER TERM, 1978

LOUISIANA LAND AND EXPLORATION

COMPANY, PETITIONER

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE FIFTH CIRCUIT

BRIEF FOR THE FEDERAL ENERGY

REGULATORY COMMISSION IN OPPOSITION

WADE H. MCCREE, JR.

Solicitor General

Department of Justice

Washington, D.C. 20530

ROBERT R. NORDHAUS

General Counsel

HOWARD E. SHAPIRO

Solicitor

MCNEILL WATKINS, II

Attorney

Federal Energy Regulatory Commission

Washington, D.C. 20426

Page

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JUrisdiction ............2.....n--csonerencsee--nsnennsensoee = 2

Question presented ...........-.------:------sseseseeeereteeeees 2

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CITATIONS

Cases:

California v. Southland Royalty Co., 436

Oe canes ecetecdetanneesnoenccmesirsnss 7

FPC v. Pan American Petroleum Corp.,

BE DU aspikccecees arcmtscdennseasenncenenns 3, 6

FPC v. Transcontinental Gas Pipe Line

Corp., 423 U.S. 326 ........2-.-.------0:s+s020+-- 9

Mohil Oil Corp. v. FPC, 463 F.2d 256,

cert. denied, Ris. OE, siaseivererncnsicens 8

Pan American Petroleum Corp. v. FPC,

839 F.2d 694, rev’d, 381 U.S. 762 ........ 3

Phillips Petroleum Co. v. Wisconsin, 347

ie EY. ee nena een nen 10

United Gas Improvement Co. v. Conti-

nental Oil Co. (Rayne Field), 381 U.S.

a acstdaskescscnbcobeanininicaasesesnienes 3

Statutes: Page m

Natural Gas Act, 15 U.S.C. 717 et seq.: in the _—— — uf = ial States

TOBER TERM,

Section 1(b), 15 U.S.C. 717(b) ........ 2, 3,6

Section 19(b), 15 U.S.C. 717r(b) .... 5

Natural Gas Policy Act of 1978, Pub. No. 78-687

L. No. 95-621, 92 Stat. 3350 et seq.:

Section 2(20), 92 Stat. 3355 ............

Section 2(22), 92 Stat. 3355 -..........

LOUISIANA LAND AND EXPLORATION

COMPANY, PETITIONER

Vv.

FEDERAL ENERGY REGULATORY COMMISSION, ET AL.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE FIFTH CIRCUIT

BRIEF FOR THE FEDERAL ENERGY

REGULATORY COMMISSION IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App.

la-9a) is reported at 574 F.2d 204. The opinion deny-

ing rehearing (Pet. App. 10a) is reported at 579

F.2d 971. The initial opinion and order (No. 772)

of the Federal Power Commission (Pet. App. 18a-

27a) and its opinion and order (No. 772-A) denying

rehearing (Pet. App. 28a-39a) are not yet reported.

rr. T

(1)

JURISDICTION

The judgment of the court of appeals (Pet. App.

1la-12a) was entered on May 30, 1978, and its order

denying rehearing (Pet. App. 10a) was entered on

September 11, 1978. The petition for a writ of cer-

tiorari was filed on October 24, 1978. This Court’s

jurisdiction is invoked under 28 U.S.C. 1254(1) and

Section 19(b) of the Natural Gas Act, 15 U.S.C.

717r(b).

QUESTION PRESENTED

Whether the Federal Power Commission erred in

determining that petitioner had made a sale of nat-

ural gas in interstate commerce within the juris-

diction of the Commission under Section 1(b) of

the Natural Gas Act, 15 U.S.C. 717(b).

STATEMENT

In 1955 and 1959, petitioner, the owner of lands in

what later beeame known as the Bastian Bay Field,

Louisiana, executed oil and gas leases with a prede-

cessor of Amoco Production Company (collectively

referred to as “Amoco”). The leases provided for the

payment of royalties to petitioner measured by a per-

centage (2714% or 30°) of the price at which the

lessee sold the gas to third parties. The leases alter-

natively provided that if the lessee used the gas itself

or sold it to an affiliate, the royalties would be the

same percentage of the “fair and reasonable value”

of the gas (Pet. App. 15a). The leases required

petitioner’s written consent prior to any assignment,

sublease, or other transfer of the leaseholds (Pet.

App. 2a, 15a).

Amoco’s drilling on its leaseholds confirmed the ex-

istence of substantial natural gas reserves (Pet. 4).

Instead of selling the gas under a conventional con-

tract, Amoco arranged to assign its leasehold interests

to Tennessee Gas Pipeline Company (‘‘Tennessee”’),

an interstate carrier, at a price equivalent to 21 cents

per Mef of the estimated leasehold reserves (Pet.

App. 15a-16a, 18a; see also Pan American Petroleum

Corp. v. FPC, 339 ¥..2a 694, 695 (10th Cir. 1964), re-

versed, 381 U.S. 762 (1965) ). The Amoco-Tennessee

transfer was Jater found by this Court to have been

a “sale” in. place of proven natural gas reserves with-

in the meaning of Section 1(b) of the Act and thus

subject to the Commission’s jurisdiction. FPC v.

Pan American Petroleum Corp., 381 U.S. 762 (1965).

The Court relied on its decision a week earlier in the

Rayne Field case, United Gas Improvement Co. v.

Continental Oil Co., 381 U.S. 392 (1965). In Rayne

Field, the Court held that if the economic effect of a

transfer is similar to that of a conventional sale, if

the subject of the transaction is proven and substan-

tially developed reserves, and if the transfer of the

reserves is for the purpose of interstate transmission

and resale, the transaction is a “sale” within the

meaning of Section 1(b) of the Act. 7d. at 401.

After Amoco and Tennessee had agreed on the

assignment of the leases to Tennessee, Tennessee ap-

proached petitioner and offered to purchase petition-

er’s royalty interest in the leases or, alternatively, to

amend the leases to provide that royalty payments be

calculated as a percentage of a fixed value for gas

removed from the leaseholds (22.5 cents per Mef

through January 1, 1962, and 25 cents per Mcf there-

after) instead of a percentage of a varying market

price (Pet. App. 2a, 33a). Petitioner accepted the

offer of fixed-rate royalties, and its acceptance was

embodied in a letter contract signed by petitioner,

Amoco, and Tennessee. Petitioner thereupon con-

sented to the Amoco-Tennessee assignment (Pet. App.

16a).

The Commission held that petitioner’s participation

in the lease assignment and renegotiation of royalties

constituted the “sale of natural gas in interstate com-

merce subject to the jurisdiction of the Commission”

(Pet. App. 18a). The Commission reasoned that the

effect of the transaction was that (ibid.) :

Amoco is selling part of the gas to Tennessee for

21 cents per Mcf while [petitioner] is receiving

25 cents for another part of the gas. In our

opinion * * * this is a sale and it should be

treated as such under the Gas Act.

Accordingly, the Commission determined that peti-

tioner should refund the amount by which its renegoti-

ated royalties exceeded the maximum rates that would

have been permissible under a conventional, regulated

gas sales contract (Pet. App. 19a-25a).

The court of appeals affirmed (Pet. App. la-9a).

The court applied this Court’s Rayne Field test and

held (Pet. App. 6a) that petitioner’s retained power

to withhold consent to the lease transfers,

coupled as it was with an alteration of the royal-

ty rate, had the effect of altering not only the

cost of extracting the gas but also the cost of

introducing the gas to commerce. Under these

circumstances, we conclude that in economic ef-

fect [petitioner] sold gas in interstate commerce

subject to FERC jurisdiction.

The court also found the Commission’s refund calcu-

lation to be supported by substantial evidence (Pet.

App. 9a).

In a petition for rehearing, petitioner for the first

time argued that if the Commission’s refund formula

was applied to the production history of the leaseholds

and to the royalty payments made in the years since

the administrative record was closed, no refunds

would now be due. Accordingly, petitioner asked the

court for leave to adduce additional evidence before

the Commission pursuant to Section 19(b) of the

Act, 15 U.S.C. 717r(b) (Pet. App. 45a-46a).

The court denied rehearing, but stated: “[t]he

Commission should, however, allow additional hearing

on whether refunds should be recalculated * * *”

(Pet. App. 10a).’

ARGUMENT

The decision below is correct, there is no conflict

among the circuits, and the issue presented by the

unique facts of this case is not of general or recurring

importance.

1. The Commission and the court of appeals cor-

rectly applied the principles established in Rayne

Field, supra, in determining that petitioner’s trans-

1 No application for such a hearing has yet been filed with

the Commission.

action with Tennessee was in effect a sale of natural

gas in interstate commerce and therefore within the

Commission’s jurisdiction under Section 1(b) of the

Natural Gas Act.

Petitioner’s claim (Pet. 10-18) that it entered into

an ordinary lease and royalty agreement with Ten-

nessee is incorrect. The suusiance of the various

transactions was as follows: Under the original

leases, Amoco, as lessee, had a right to produce and

sell gas from the leaseholds and was required to pay

royalties to petitioner of 27.5% or 30% of Amoco’s

selling price. Amoco wished to assign all its rights to

the gas to Tennessee at a price equivalent to 21 cents

per Mcf—an assignment this Court later held to

be a jurisdictional sale, FPC v. Pan American Petro-

leum Corp., supra. Amoco and Tennessee, however,

needed petitioner’s consent to the assignment. Peti-

tioner consented to the assignment after renegotiating

the royalty provisions to provide petitioner with

royalties calculated on the basis of a fixed value for

the gas. As the Commission held (Pet. App. 18a),

fixing the value of the gas for royalty purposes at

25 cents per Mecf (after January 1, 1962) amounted

to a sale of the gas attributable to petitioner’s royalty

interest—at a price, indeed, higher than the price at

which Amoco sold its interest in the gas to Tennes-

see? In short, the Commission and the court of ap-

2 The economic effect of the transactions is the same as if

Amoco and petitioner had divided the gas under the lease-

hvuids between them (27.5% and 30% to petitioner and 72.5%

and 70% to Amoco), Amoco had sold its portion to Tennes-

see for 21 cents per Mcf, and petitioner had sold its portion

to Tennessee for 25 cents per Mcf.

peals correctly determined that under this Court’s

opinion in Rayne Field, the economic effect of peti-

tioner’s transaction with Tennessee was 2 jurisdic-

tional sale of gas.°

Indeed, petitioner appears to recognize that the

Commission correctly applied Rayne Field, since it

argues that Rayne Field was wrongly decided and

that “this Court should consider reshaping its hold-

ing * * *” (Pet. 13 & n.18). There is no occasion,

however, to reconsider Rayne Field, which this Court

has cited with approval several times, most recently

in California v. Southland Royalty Co., 436 U.S. 519,

541 (1978).

3 Petitioner argues (Pet. 14-18) that the record does not

support the Commission’s conclusion that petitioner’s right

to withhold consent to the assignment of the lease to Tennes-

see was relevant to the terms of the final arrangement be-

tween petitioner and Tennessee. The record evidence cited by

the Commission belies petitioner’s apparent contention that it

did not negotiate with Tennessee and did no more than pas-

sively consent to Tennessee’s proposal (see Pet. App. 3la-

34a). But even if there had been no evidence concerning the

actual negotiations between petitioner and Tennessee, the

Commission would have been justified in concluding that peti-

tioner’s right to withhold consent to the assignment was a

significant factor leading to the renegotiation of the royal-

ties, and that if the original leases had not given petitioner

that right, Tennessee, as assignee, would have been content

with the original royalty provisions.

‘Moreover, the Natural Gas Policy Act of 1978, Pub. L.

No. 95-621, enacted November $, 1978, 92 Stat. 8350, codi-

fies the Rayne Field doctrine. That Act defines “sale” to

mean “any sale, exchange, or transfer for value” (Section

2(20)), and defines “deliver,” with respect to any first sale

of natural gas, to include “in the case of the sale of proven

reserves in place * * * the transfer of title to such reserves.”

Section 2(22).

2. Contrary to petitioner’s claim (Pet. 9-12), the

court of appeals’ holding is fully consistent with

Mobil Oil Corp. v. FPC, 463 F.2d 256 (D.C. Cir.

1971), cert. denied, 406 U.S. 976 (1972). In Mobil,

the court of appeals held that by executing a typical

oil and gas lease, a landowner does not make a “sale”

of natural gas subject to Commission jurisdiction. As

the court stated (463 F.2d at 262; footnote omitted),

the lessor of reserves normally has

no knowledge when the lease is executed of the

ultimate destination of any gas that might be

discovered, no knowledge whether the gas, if dis-

covered, will be sold either to an interstate pipe-

line or to any other customer that will move it

across state lines. While the lease by the land-

owner provides for a royalty in the event of the

discovery and sale of gas, typically he has no

control over any incident of such sale either as to

the quantity to be sold, the price to be paid, the

identity of the purchaser or whether it shall be

sold in interstate or intrastate commerce.

The transaction in this case is not the typical lease

transaction described in Mobil. Here, proven and

substantially developed reserves were the subject of

the transfer; the transfer itself was for the purpose

of interstate transmission and resale. Petitioner

stepped out of the role of the v, ,*eal royalty owner to

affect the incidents of the sale, most pa. ‘larly the

cost of the gas on which the royalty was based. 1:.>se

facts distinguish petitioner from the typical lessor

considered in Mobil, as the court of appeals here

recognized (Pet. App. 5a-6a).

3. Petitioner also contends (Pet. 18-20) that the

court of appeals erred in denying petitioner’s motion

for leave to adduce additional evidence before the

Commission. The proffered evidence relates to gas

production and royalty payments in the years since

the administrative record was closed; according to

petitioner, the new evidence, when the Commission’s

refund formula is applied to it, would eliminate any

refund obligation.

The new evidence proffered does not affect the

merits of the Commission’s holding, and the proffer

implicitly accepts the Commission’s methodology for

computing refunds. Because the evidence did not

controvert the Commission’s fundamental conclusions,

the court of appeals properly denied the motion. Cf.

FPC v. Transcontinental Gas Pipe Line Corp., 423

U.S. 326, 331 (1976). In any event, petitioner is now

free to present its new evidence to the Commission, by

virtue of the court of appeals’ direction on petition

for rehearing that “[t]he Commission should * * *

allow additional hearing on whether refunds should

be recalculated * * *” (Pet. App. 10a). Any decision

by the Commission on an application to recalculate

refunds will be subject to judicial review. Because

petitioner has available a complete remedy, there is

no reason for further review here.

4. Finally, the events giving rise to this proceeding

are unlikely to recur. The lease-sale transaction con-

summated by Amoco and Tennessee in this case is

similar to other lease-transfer arrangements devised

by producers following this Court’s decision in Phillips

Petroleum Co. v. Wisconsin, 347 U.S. 672 (1954), in

attempting to avoid rate regulation under the Natural

Gas Act. Following this Court’s holding in Rayne

Field, the impetus for improvising such transactions

evaporated; if the transaction in question ‘“‘accom-

plished the transfer of large amounts of natural gas

to an interstate pipeline company for resale in other

States,” then that “is the significant and determina-

tive economic fact.’’ 381 U.S. at 401.

Moreover, petitioner’s role as a royalty owner in

the Amoco-Tennessee transfer appears to be unique.

Eight of the nine royalty owners that were parties

to the Commission proceeding, for example, did not

negotiate separate royalty agreements with Tennessee

and were dismissed from the proceeding. (Pet. App.

16a, 34a). In no other case subsequent io the decision

in Mobil, supra, has the Commission been presented

with facts similar to those presented here. There is,

therefore, no reason to believe that the issues raised

in this case are of general importance or recurring

significance.

CONCLUSION

The petition for a writ of certiorari should be

denied.

Respectfully submitted.

WADE H. McCREE, JR.