# Appendix — California v. Tenneco Oil Co. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385011_1395%3A02 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1984 - **Citation:** 468 U.S. 1219 ## Text PTE D 88-1321 FEB 9 1984 No, ___ ALEXANDER \. STEVAS. | IN THE Supreme Court of the United States OCTOBER TERM, 1983 THE PEOPLE OF THE STATE OF CALIFORNIA AND THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA, Petitioners, Vv. TENNECO OIL CoMPANY, et al., Respondents. APPENDIX Petition For A Writ Of Certiorari To The United States Court Of Appeals For The Fifth Circuit JANICE E. KERR J. CALVIN SIMPSON HARVEY Y. Morris PuBLic UTILITIES COMMISSION OF THE STATE OF CALIFORNIA 5066 State Building 350 McAllister Avenue San Francisco, California 94102 (415) 557-2403 Counsel for Petitioners PRESS OF BYRON 8, ADAMS PRINTING, INC,, WASHINGTON, D.C, (202) 347-8203 12. INDEX TO APPENDIX . Opinion of the Court of Appeals, E/ Paso Natural Gas Co. v. Sun Oil Co., F.2d 1011 (July 5, BEUED be vervencadseclvcsuct cencuueeneuecreel la-19a Order of Federal Energy Regulatory Commission Affirming Initial Decision an ~~ Further Hearing, El Paso Natural Gas Co., 12 FERC 4 61,297 (September 25, 1980) ............4. 2la-3la ALJ’s Initial Decision on Jurisdictional Status of Lease Sale A ments, El Paso Natural Gas Co., 6 FERC 4 63,037 (February 20, 1979) ........ 33a-120a Opinion of the United States District Court for the estern District of Texas, E/ Paso Natural Gas Co. v. Sun Oil Co., 426 F. Supp. 963 (January 27, SNE in'c gnbwe obs ok LU neeecaee aa eee 121la-136a Order of Court of yo Tenneco Oil Co. v. FERC, 580 F.2d 722 & ptember 6, 1978) . 137a-l4la Order of the Court of Appeals, Tenneco Oil Co. v. FERC (October 25, 1978) ........cceeeees 143a-144a Judgment of the Court of Appeals, Tenneco Oil Co. v. FERC, No. 80-2404 (July 5, 1983) ........... 145a Judgment of the Court of Appeals, Tenneco Oil Co. v. FERC, No. 77-2613 (July 5, 1988) ........... 147a Judgment of the Court of Appeals, E/ Paso Natural Gas Co. v. Sun Oil Company, No. 77-1762 (July 5, GEE « ci.cccsvoehysueeed Mich aeskanennenneiies 149a . Order of the Court of Appeals Denying Petition for Rehearing and Suggestion for Rehearing En Banc (Deemed B, TH voce cccaceindesucuaews 15la-152a . Order of Federal Energy poguaory Commission Denying Applications for Rehearing, Z/ Paso Natu- ral Co., 18 FERC 4 61,239 ( mber 18, SOOO) s ccwecevescobecesstdpeepaucavedan .. 158a-154a Natural Gas Act, §§ 1(b), 2(6), 4(a), 7(c) ........ 155a 1. OPINION OF THE COURT OF APPEALS, EL PASO NATURAL GAS CO. v. SUN OIL CO., 708 F.2d 1011 (JULY £, 1983) St la UNITED STATES COURT OF APPEALS, FIFTH CIRCUIT.* July 5, 1983 Nos. 77-1762, 77-2613 and 80-2404 EL Paso NATURAL GAs CoMPANY, et al., Plaintiffs-Appellants, v. SuN OIL ComMPANY, et al., Defendants-Appellees. TENNECO OIL Co., et al., Petitioners, Vv. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. TENNECO OIL COMPANY, et al., Petitioners, Vv. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. Petitions were filed seeking review of orders of the Federal Energy Regulatory Commission which determined that it had jurisdiction over certain lease-sale agreements transferring rights to certain gas-bearing lands in the San Juan Basin of New Mexico and Colorado. After consolidation with a decision of the United States District Court for the Western District of Texas, Dorwin W. Suttle, J., which found that such agree- ments were not within regulatory jurisdiction of the Commis- sion, the Court of Appeals, Roney, Circuit Judge, held that where reserves underlying the leaseholds were not sub- stantially developed at the time the lease sales were executed *Former Fifth Circuit case, Section 9(3) of Public Law 96-452, October 14, 1980. 2a because of lack of imminent ability to produce in commercial quanities, series of lease-sale agreements transferring rights to certain gas-bearing lands in the San Juan Basin of New Mexico were not sales of natural gas in interstate commerce within meaning of Natural Gas Act and were therefore beyond regulatory jurisdiction of Federal Energy Regulatory Com- mission. Appeal from district court’s decision affirmed; one petition for review dismissed and the other reversed. Danie: Joseph, Jack W. Hanks, Daniel Watkiss, Washing- ton, D.C., Donald C. Shepler, Salt Lake City, Utah, David K. Watkiss, Jack D. Bachman, Salt Lake City, Utah, for North- west Pipeline Corp. Rufus G. Thayer, Jr., Janice E. Kerr, J. Calvin Simpson, San Francisco, Cal., for People of State of Cal. and Public Utilities Com’n of State of California. Howard V. Golub, Shirley A. Woo, Malcolm H. Furbush, San Francisco, Cal., for Pacific Gas & Elec. Co. Charles F. Hawkins, Dallas, Tex., for Southern Union Co. J. Alan Galbraith, Washington, D.C., Arthur R. Formanek, E] Paso, Tex., for E] Paso Natural Gas Co. Steven A. Taube, Atty., George H. Williams, Jr., Jerome Nelson, Sol., Washington, D.C., for amicus curiae F.E.R.C. Leo J. Hoffman, Herf M. Weinert, Julius L. Lybrand, Dal- las, Tex., for Sun Oil Co. George B. Mickum, III, Steven H. Brose, Washington, D.C., Edward J. Kremer, Jr., Dallas, Tex., for Atlantic Rich- field Co. Craig W. Hulvey, Washington, D.C., Robert D. Haworth, Houston, Tex., for Mobil Oil Corp. Gordon Gooch, Charles M. Darling, IV, Washington, D.C., for Tenneco, Continental, American Petrofina, Crown Cen- tral, Delta Drilling, M/MS Morris Mizel. 3a Vernon M. Turner, Houston, Tex., for Tenneco. Michael J. Henke, Washington, D.C., Dee H. Richardson, Midland, Tex., for Union Oil Co. of Cal. Thomas Burton, Jr., Houston, Tex., for Continental Oil Co. W.B. Browder, Jr., Midland, Tex., for W. Watson LaForce, et al. Donald F. Burke, Baltimore, Md., for Crown Central Pet- roleum. Terry R. Barrett, Stanley L. Cunningham, Oklahoma City, Okl., for F.H.N., Ltd. Robert D. Haworth, Houston, Tex., for Mobil Oil Corp. Craig W. Hulvey, Washington, D.C., for Getty Oil Co. Sherman S. Poland, Bernard A. Foster, III, Ross, Marsh & Foster, Washington, D.C., for William G. Webb, et al. J.O. Terrell Couch, Hutcheson & Grundy, Randel R. Young, Houston, Tex., for Robert Beamon, et al. Steven R. Hunsicker, Gordon Gooch, Charles M. Darling, IV, Baker & Botts, Washington, D.C., Strasburger & Price, Leo J. Hoffman, Dallas, Tex., for Tenneco Oil Co., et al. Larry Pain, John L. Williford, Bartlesville, Okl., for Phillips Petroleum Co. John S. Fick, Los Angeles, Cal., for Southern Cal. Gas Co. William M. Lange, Colorado Springs, Colo., for Colo. In- terstate Gas Co. Robert H. Landt, Denver, Colo., for Amoco Production Co. J. Alan Galbraith, Washington, D.C., for E] Paso Natural Gas Co. Donald K. Dankner, Washington, D.C., for CP National Corp. Robert L. Simpson, Spokane, Wash., for Wash. Water Pow- er Co. da G. Thomas Dohn, Yakima, Wash., for City of Ellensburg. Justin R. Wolf, Washington, D.C., Bruce R. DeBolt, Associ- ate Counsel, Portland, Or., for Northwest Natural Gas Co. Thomas F. Brosnan, Washington, D.C., for Washington Natural Gas Co. John H. Socolofsky, Asst. Atty. Gen., Salem, Or., for Public Utility Com’r of Oregon. Kenneth O. Eikenberry, Atty. Gen., Donald D. Trotter, Asst. Atty. Gen., Olympia, Wash., for Washington Utilities and 1 nsportation Com’n. John Ketcham, Washington, D.C., for Cascade Natural Gas Corp. P. Michael Koenig, William M. Lange, Colorado Springs, Colo., for Colo. Interstate Gas Co. Lester D. Sitter, Denver, Colo., for Rocky Mountain Natu- ral Gas Co., Inc. Gary G. Sackett, Associate Gen. Counsel, Salt Lake City, Utah, for Mountain Fuel Supply Co. Steven R. Shanahan, Sr., Asst. Atty. Gen., Cheyenne, Wyo., for Public Service Com’n of Wyoming. Zev E. Kaplan, Deputy Atty. Gen., Carson City, Nev., for Public Service Com’n of Nev. J. Richard Tiano, Washington, D.C., for Intermountain Gas Co. Wm. W. Bedwell, Washington, D.C., for Southwest Gas Corporation. Michael S. Gilmore, Deputy Atty. Gen., Boise, Idaho, for Idaho Pub. Utilities Comm. Appeal from the United States District Court for the West- ern District of Texas. 5a Petitions for Review of Orders of the Federal Energy Regu- latory Commission. Before Brown, Roney and TJoFLaT, Circuit Judges. Roney, Circuit Judge: The basic question presented by these consolidated appeals is whether a series of lease-sale agreements transferring rights to certain gas-bearing lands in the San Juan Basin of New Mexico are sales of natural gas in interstate commerce within the meaning of section 1(b) of the Natural Gas Act, 15 U.S.C.A. § 717(b). Holding the agreements are not sales as defined by the Act, and are therefore beyond regulatory jurisdiction, we affirm the district court judgment to that effect and reverse the decision of the Federal Energy Regula- tory Commission to the contrary. Before considering a case of this kind, it is necessary to remind ourselves that the Commission’s power to regulate the economics of natural gas transactions has been limited by Congress. Although it presumably has the power to regulate every nook and cranny of the natural gas business, Congress chose not to do so. FPC v. Panhandle Eastern Pipe Line Co., 337 U.S. 498, 502, 69S.Ct. 1251, 1254, 93 L.Ed. 1499 (1949). In this situation, it is important that the courts restrict the regu- latory agencies to precisely that authority delivered to them by Congress, and to stop where Congress intended to stop no matter how tempting it might be to hearken to persuasive arguments that more regulation is appropriate. Agencies have a tendency to perceive a need for regulation. Congress is the determinative body in the matter, however, and this case has been considered and decided on that precise premise. If Con- gress had intended to regulate the transactions here involved, it easily could have done so with simple legislative language. We make no judgment whether it should have done so. We only decide, based upon the leading Supreme Court decision and the prior precedent of this Court, that it did not. Before reviewing the facts and getting on with the decision, it might be helpful to describe the parties to this litigation while 6a footnoting the names of all litigants, to state briefly the source of these appeals and the lengthy history of the litigation, and in a simplified way to suggest the issues that have been presented for decision. THE PARTIES On one side of this litigation are two pipeline companies, ' which acquired leasehold rights in gas-bearing lands, and the Federal Energy Regulation Commission. On the other side are numerous oil and gas concerns and a few individuals who transferred the leasehold rights in question.* A number of state commissions and interested private entities have been granted permission to intervene or file amicus briefs.’ ' E] Paso Natural Gas Company and Northwest Pipeline Corpora- tion. “Sun Oil Company, Atlantic Richfield Company, Mobil Oil Corporation, Tenneco Oil Company, Continental Oil Company, American Petrofina Company of Texas, Union Oil Company of Cali- fornia, Crown Central Petroleum Corporation, Delta Drilling Com- pany, Amoco Production Company, Phillips Petroleum Company, F.H.N., Ltd., Getty Oil Company, W. Watson Laforce, Jr., Morris and Flora Mizel, William G. Webb, et al., Robert Beamon, in- dividually and as trustee, Thomas L. Hail, Trustee, and Pattie Ann Beamon Lundell. * Washington Utilities and Transportation Commission, The Peo- ple of the State of California, The Public Utilities Commission of the State of California, The Public Utility Commissioner of Oregon, City of Ellensburg, Washington, The Public Service Commission of Neva- da, The Public Service Commission of Wyoming, Idaho Public Utili- ties Commission, Pacific Gas and Electric Company, Southern Cali- fornia Gas Company, Southern Union Company, C.P. National Corporation, Colorado Interstate Gas Company, Cascade Natural Gas Corporation, Northwest Natural Gas Company, Rocky Moun- tain Natural Gas Company, Intermountain Gas Company, South- west Gas Corporation, Mountain Fuel Supply Company, Washington Natural Gas Company, and Washington Water Power Company. 7a HISTORY OF THE LITIGATION During the 1950s, Tenneco Oil, Sun Oil, Continental Oil, Atlantic Richfield, Phillips Petroleum, and several other oil companies entered into gas lease-sale agreements with E] Paso Natural Gas Company and Pacific Northwest Pipeline Com- pany, both gas pipeline companies. In return for their working interests in certain leases in the San Juan Basin of New Mexico and Colorado, the oil companies were to receive so-called overriding royalties or production payments. The rates estab- lished for these royalties were subject to redetermination at the expiration of the initial term. If at the expiration of the term the parties could not agree on a new rate, the rate was to be fixed by arbitration. In 1973, Sun Oil and E] Paso failed to agree on a new override rate, and the dispute was submitted to arbitration. The arbitration board awarded Sun Oil an override based on the well head price of intrastate gas which exceeded the regulated interstate rate. Other oil companies then sought redetermina- tion of their rates, and E] Paso thereafter brought four actions in the United States District Court for the District of Columbia seeking a declaratory judgment that the royalty recipients were selling gas in interstate commerce within the meaning of section 1(b) of the Natural Gas Act, 15 U.S.C.A. § 717(b). Ifin interstate commerce, the lease-sale agreements came within the jurisdiction of the Natural Gas Act, and the royalty reci- pients could not receive more than the interstate rates estab- lished by the Federal Power Commission (now the Federal Energy Regulatory Commission). The suits were consolidated and transferred to the Western District of Texas. 28 U.S.C.A. § 1406. El Paso sought refer- ence of the case to the Commission, and the district court carried the request with the case. At the same time, E] Paso filed a complaint with the Commission seeking a determination as to the status of the leases under the Act. After a protracted trial, the district court held the lease-sale agreements were not sales of gas within the meaning of the Act and dismissed the case for want of jurisdiction, implicitly denying E] Paso’s mo- 8a tion for reference to the Commission. E/ Paso Natural Gas Co. v. Sun Oil Co., 426 F.Supp. 963 (W.D.Tex.1977). El Paso appealed, moving this Court to refer the matter to the Com- mission. The Commission thereafter issued an order instituting a show cause proceeding directed to the jurisdictional issue. E/ Paso Natural Gas Co., 58 F.P.C. 2181 (1977). Tenneco Oil, Atlantic Richfield, Sun Oil, and others sought review of the order in this Court. We denied their motions to stay the Com- mission’s show cause proceeding but withheld decision of the appeal from the district court pending receipt of the Commis- sion’s opinion. Tenneco Oil Co. v. FERC, 580 F.2d 722 (Sth Cir. 1978). A record was fully developed before an administrative law judge. Affirming and adopting the decision of the administra- tive law judge, the Commission ruled that the lease-sale agree- ments were within its jurisdiction. E/ Paso Natural Gas Co., 12 F.E.R.C. © 61,297 (1980). Petitions for review of the Com- mission’s decision were thereafter filed with this Court. Thus the district court and the Commission, albeit on differ- ent records, reached opposite conclusions. Both decisions came before us for review. We heard extended oral argument in October 1981, permitted supplemental briefing to the end of that year and continued to receive helpful memoranda through April 1982. THE ISSUES The basic question that confronts the Court on these appeals is whether the natural gas lease-sale agreements are sales of gas within the meaning of the Natural Gas Act, 15 U.S.C.A. § 717-717w. Underlying this ultimate issue are subissues which seem to be no longer critical in light of our decision: (1) since the district court on oe the Commission's decision, did it have a res judi effect that bound the Com- mission? (2) having litigated and lost in the district court, were E] Paso and Northwest collaterally estopped from claiming 9a before the Commission that the transactions are jurisdictional? (3) was the Commission bound to treat the transactions as nonjurisdictional because of its prior rulings in connection with such transfers involving some of the same parties and the same basic facts? and (4) should the district court have referred the jurisdictional issue to the Commission under the doctrine of primary jurisdiction? Other subissues argued but not decided are: (a) whether the Commission prejudged the issues, (b) whether the petitions for review in No. 77-2613 concerning the Commission’s decision to conduct a show-cause proceeding on the jurisdictional issue should be dismissed for seeking review of nonfinal interlocutory orders, and (c) whether the Commis- sion’s resolution of the jurisdictional question should be given only advisory effect in the court of appeals. FACTS The San Juan Basin is located mainly in northwestern New Mexico, with a part extending northward into Colorado. Underlying the Basin are bowl-shaped sandstone formations permeated by large volumes of natural gas. There are three gas productive formations in the Basin: Pictured Cliffs, Mesa Verde, and Dakota. All three are characterized by low to moderate permeability and low porosity. As the district court correctly found, actual drilling is the only method of definitely locating recoverable gas saturations. Unable to obtain all the gas reserves it desired through conventional wellhead sales, E] Paso in 1951 entered into negotiations with Delhi Oil Corporation, a lease holder in the Basin. Delhi and E] Paso entered into the first of the lease-sale transéctions in issue in this case, GLA (Gas Lease Agreement) 47, in March 1952. In exchange for Delhi’s gas reserve acreage, E] Paso agreed to pay Delhi a fixed price per Mcf produced, subject to escalation over a specified period of time and there- after subject to redetermination at the fair market value of the gas. The parties agreed to submit to arbitration any price they could not settle upon. 10a E] Paso’s program of acquiring gas reserves in the San Juan Basin, through transactions similar to GLA-47, proceeded rapidly. In all, over a six-year period, E] Paso entered into 36 such lease-sale contracts with the owners of gas leaseholds in the Basin, thereby acquiring the gas underlying more than a quarter of a million acres. Thirty-five of these GLAs are in issue here. Prior to the lease-sale transactions, natural gas from some of the acreage had been sold to E] Paso under conventional wellhead sales contracts. All the GLAs followed the same general pattern: in ex- change for the producer’s agreement to transfer the leasehold, E] Paso agreed to make overriding royalty payments for the gas when produced. In 1952, Pacific Northwest Pipeline Corporation, a prospec- tive interstate natural gas pipeline company, filed an applica- tion with the Commission for a certificate of convenience and necessity to build a pipeline to supply gas to the Pacific North- west market. Since Pacific Northwest had no gas supplies, it sought commitments from independent producers who owned substantial reserves in the San Juan Basin. Pacific Northwest obtained commitments for San Juan Basin gas from several producers based on a lease-sale format (called “PLAs” for Pacific Lease Agreement) closely similar in most important respects to the GLAs in the E] Paso transactions. The basic scheme called for Pacific Northwest to compensate the interest owner of the acreage by paying an overriding royalty, calculated as a specified sum for each Mef of gas produced from the acreage, subject to periodic escalation. The price was also subject to later redetermination under a speci- fied formula tied to the market, i.e., the unregulated value of the gas. The PLAs conveyed rights only to gas, not oil. Northwest Pipeline Corporation is the successor in interest, through E] Paso, of Pacific Northwest. lla JURISDICTIONAL ISSUE Whether the gas lease-sale agreements are sales of gas within the meaning of the Natural Gas Act, 15 U.S.C.A. § 717- 717w, and thus subject to the jurisdiction of the Federal Ener- gy Regulatory Commission, is of substantial significance. If they are sales under the Act, the royalty recipients must seek certification from FERC and cannot receive payments exceed- ing the regulated interstate rate. If they are not sales, the recipients are entitled to the rate provided in the contracts. The issue is difficult to decide. Neither the statute nor the cases give definitive direction. Congress intended to regulate only interstate sales of natural gas, leaving intrastate sales and the production of gas regulated exclusively by the states, if regulated at all. See Interstate Natural Gas Co. v. FPC, 331 U.S. 682, 690, 67 S.Ct. 1482, 1487, 91 L.Ed. 1742 (1947). An easy line to draw in legislative halls, in the real world there is much confusion between sales and production, made ever in- creasingly so by legal craftsmanship that sometimes makes production look like sales, or sales look like production, depending upon the interest of the client. The main cases addressing the question focus on the geology and development of the acreage and the terms of the contracts involved. The fountainhead decision setting forth the factors to apply in determining whether a transaction is jurisdictional is United Gas Improvement Co. v. Continental Oil Co. (“Rayne Field”), 381 U.S. 392, 85 S.Ct. 1517, 14 L.Ed.2d 466 (1965). The significant case in this Circuit is Continental Oil Co. v. FPC (“Ship Shoal”), 370 F.2d 57 (Sth Cir. 1966). While ordinary wellhead sales of natural gas for resale in interstate commerce come within the jurisdiction of the Natu- ral Gas Act, see Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672, 677, 681-82, 74 S.Ct. 794, 796, 798-99, 98 L.Ed. 1035 (1954), lease transfers and the royalties collected thereunder are generally within “production or gathering” exemption of the Act, 15 U.S.C.A. § 717(b), and thus not jurisdictional. See Mobil Oil Corp. v. FPC, 463 F.2d 256 (D.C.Cir.1971), cert. 12a denied, 406 U.S. 976, 92 S.Ct. 2409, 32 L.Ed.2d 676 (1972). Difficulties arise, however, where, as in the instant case, the transactions are hybrid, manifesting characteristics of both arrangements. In the leading case of United Gas Improvement Co. v. Con- tinental Oil Co., commonly known as “Rayne Field,” the United States Supreme Court directed a case-by-case analysis of hybrid lease-sale arrangements, the fundamental inquiry being whether “the sales of these leases in. . . a proven and substantially developed field. . . accomplished the transfer of large amounts of natural gas to an interstate pipeline company for resale in other states.” 381 U.S. at 401, 85 S.Ct. at 1522. The Fifth Circuit expounded on the Rayne Field test in Con- tinental Oil Co. v. F.P.C. (“Ship Shoal”), stating the test as follows: (1) Isthe economic effect of the transfer similar to that of a conventional sale? (2) Is the subject of the transaction “proven and sub- stantially developed” reserves? (3) Is the transfer of the reserves for purpose of in- terstate transmission and resale? 370 F.2d at 62. Ship Shoal further articulated the standard for applying the second factor, whether reserves are “proven and substantially developed” within the meaning of Rayne Field, focusing on (1) definability of gas volume based upon proof of reserves and (2) imminent ability to produce in commercial quantities. Jd. at 63-64. While both the administrative law judge’s decision and that of the Commission invoke Rayne F ie/d, it is clear from acareful reading of the administrative law judge’s opinion and the Com- mission’s affirmance that neither correctly applied it under the law of this Circuit. In determining whether a transfer is juris- dictional under the Act, Ship Shoal teaches that all three of the above factors must be present. The administrative law judge and the Commission, however, elevated the first prong— economic equivalency—from 4 component in the Rayne Field 13a test to the determinative factor on the issue. Thus, the admin- istrative law judge stated: Under the Rayne Field case’s “economic equivalent” doctrine, a lease-sale agreement would clearly be subject to regulation as a jurisdictional sale of gas at the wellhead if it is held to be economically equivalent in substance to the conventional wellhead sale which the Court held to be jurisdictional in Phillips. x « ~ * * * The legal principles fashioned in the Rayne Field line of cases, when applied to the facts of this proceeding, lead inescapably to the conclusion that all of the lease-sale agreements at issue are jurisdictional. The crucial test that emerges from the cases is whether a particular transaction accomplished the transfer of large volumes of natural gas reserves to an interstate pipeline for resale in — commerce. If it did, the transaction is jurisdic- tional. x * * * * &* What is significant is the essential message of Rayne Field—that the transfer of large amounts of natural gas reserves to an interstate pipeline for resale in interstate commerce is a jurisdictional transaction, no matter how the lawyers decide to structure the transfer. Rayne’s specification that “proven and substantially developed re- serves” must be present is not a quantitative test, a license for future courts and Commissions to engage in massive well counting in order to ascertain whether some formulaic criterion has been satisfied. Rather, Rayne is concerned witn commercial realities. It asks whether what was sold was gas or merely the right to explore for and develop it in the uncertain event it is found. « a x * * * Here, too, the significant economic fact that will not go away no matter how much the respondents try to wish it away is that the GLA and PLA contracts at issue, each and — of them, transferred large volumes of natural gas from a producer of natural gas to an interstate natural gas pipeline for transmission and sale for resale in other states. That fact requires the finding that each of the contracts was, as a matter of law, economically equivalent l4a to a wellhead sale of natural gas for resale in interstate commerce. El Paso Natural Gas Co., 6 F.E.R.C. © 63,037, at 65,212; 65,217-19 (1979). In affirming, the Commission held: We find the magnitude of the overriding royalties and the fact that they apply to each Mcf of gas sold, irrespective of the quanitities of gas the contracting parties might origi- nally have thought were involved, lends, in our pudgment, strong support to the proposition that these lease sales were virtually identical in “economic effect” to con- ventional sales. El Paso Natural Gas Co., 12 F.E.R.C. © 61,297, at 61,683 (1980). By focusing on “commercial realities” and the parties’ assumption while negotiating that gas existed in the ground, the administrative law judge and the Commission misread and misapplied Rayne Field and Ship Shoal, almost ignoring the requirement for a finding of jurisdiction under the Natural Gas Act that the acreage involved must be proven and substantial- ly developed. See Ship Shoal, 370 F.2d at 62. Neither the Supreme Court nor our precedents have signaled a retreat from this requirement or indicated it is swallowed up by the first prong of Ship Shoal’s test. Thus, in holding the lease-sales jurisdictional in Rayne Field, the Supreme Court emphasized that the land included “proven and substantially developed” gas reserves. 381 U.S. at 401, 85 S.Ct. at 1522. Carried to its logical conclusion, the Commission's economic equivalency/commercial realities approach could render any sale of lease rights to an interstate pipeline company jurisdic- tional merely because the transaction ultimately results in successful production and disposition of gas in interstate com- merce, Certainly, E] Paso entered into the agreements in question in this litigation with the hope and expectation of obtaining gas for sale in interstate commerce. It had the same goal as a purchaser in the ordinary wellhead sale. But this statement is equally true of the lessee in a traditional transfer of a lease to gas-bearing lands. Unless all the Rajjne Field l5a factors, including proven and substantial development, are satisfied, such a transaction is not jurisdictional. See Mobil Oil Corp. v. FPC, 463 F.2d at 261-62; see also FPC v. Panhandle Eastern Pipeline Co., 337 U.S. 498, 69 S.Ct. 1251, 93 L.Ed. 1499 (1949). The Supreme Court emphasized the difference in degree of development in explaining why it held the transac- tion jurisdictional in Rayne Field, but nonjurisdictional in Panhandle. Rayne Field, 381 U.S. at 403, 85 S.Ct. at 1523. While the Commission's down-playing of the development issue may well foreshadow the next stage in the evolution of the law, for the time being our precedents demand full applica- tion of all components of the Rayne Field test, including the proven and substantial development factor, as explained in Ship Shoal. We perceive the Rayne Field test to reflect the Supreme Court’s concern with the apparent congressional in- tent not to regulate production. A purely economic test would seem to encroach on that concern. Focusing on the “proven and substantially developed” com- ponent of Rayne Field and Ship Shoal, the record reveals the reserves in the Basin may well have been “proven” at least within reasonable estimates. See generally Ship Shoal, 370 F.2d at 64-65. The district judge was correct, however, in deciding the lease-sale agreements did not involve substantial- ly developed reserves, and the Commission erred in determin- ing the same transfers did. Specifically, we hold the reserves underlying the leaseholds were not substantially developed at the time the lease sales were executed because of the lack of “imminent ability to produce in commercial quantities.” Ship Shoal, 370 F.2d at 64. An important factor in our decision is the limited extent to which the Basin had been drilled at the time the GLAs and PLAs were executed. Although different tracts varied as to development, taking the Basin as a whole, the acreage was far less drilled than the land covered by the agreements found jurisdictional in Rayne Field. Unlike in that case, massive efforts were required to make the fields in the Basin commer- cially productive. For example, GLA No. 47 covered approxi- l6a mately 102,400 acres. At the time of the signing of the agree- ment, there were fifteen wells in the Mesa Verde formation and nine in the Pictured Cliffs formation included under the GLA. State law, however, permitted far more extensive drill- ing: one Mesa Verde well for each 320 acres and one Pictured Cliffs well for each 160 acres. Substantial drilling took place after the agreement was reached. By December 1976, 736 wells were in the ground. An even more dramatic example of the lack of substantial development when the agreements were reached is provided by PLA-5. At the time of the agreement, there were no wells on the 188,000 acres. By December 1977, however, 365 wells were productive. Although a few GLAs and PLAs reflect substantial development, neither the Com- mission nor the parties have sought to approach the issue here on an individual agreement basis. In comparison, the acreage in Rayne Field featured far more development prior to execution of the agreements. In Rayne Field, nineteen wells were in the ground with only seven more to be drilled. 381 U.S. at 396 n.3, 85 S.Ct. at 1520 n.3. This significant drilling enabled the purchaser-lessee to receive gas for interstate distribution shortly after execution. /d. at 397, 85 S.Ct. at 1520. The evidence in the present litigation reveals that the few wells in the ground when the agreements were executed could not have come close to depleting the acreage. For example, even after adding numerous wells in the land covered by GLA- 47, the purchaser-lessee sought and received permission to double the number of wells previously allowed under state law in the Mesa Verde formation. According to the purchaser- lessee, the party favoring Commission jurisdiction and arguing the reserves were substantially developed, the additional wells were necessary to deplete the formation. While the number of wells existing at execution of the agree- ment is not the sine qua non of substantial development, the Commission has considered this factor, and the cases point up its significance. E.g., Rayne Field, 381 U.S. at 396 & n.3, 403 & 17a n.8, 85 S.Ct. at 1520 & n.3, 1523 & n.8; Texas Gas Transmis- sion Corp., Docket No. CP77-612, “Findings and Order After Statutory Hearing Issuing Certificate of Public Convenience and Necessity and Granting Petition to Intervene,” at 3 (May 10, 1978). Since substantial development turns on whether the acreage is capable of imminent production of natural gas in commercial quantities, Ship Shoal, 370 F.2d at 64, it stands to reason that the actual number of wells in comparison to the number needed to complete production from the land is a relevant factor. As the Supreme Court stated in explaining the relevance of the substantial development criteria, “the more that must be done before the gas begins its interstate journey, the less the transaction resembles the conventional wellhead sale of natural gas in interstate commerce.” Rayne Field, 381 U.S. at 403, 85 S.Ct. at 1523. The pipeline companies’ ability to tie in a few wells shortly after consummation of the transaction does not demonstrate an “imminent ability to produce in com- mercial quantities,” Ship Shoal, 370 F.2d at 64 (emphasis added), or substantial development. We therefore conclude that because the acreage was not substantially developed, the agreements in issue were not sales of gas under the Natural Gas Act. The pipeline companies urge and the Commission ruled that even if the lease-sales were not covered by the Act at the outset, they “ripened” into jurisdictional transactions when the price paid under the contracts was redetermined through the much later 1973 arbitration. Relying on Weymouth v. Colorado Interstate Gas Co., 367 F.2d 84 (5th Cir. 1966), the Commission held the price redetermination proceedings con- stituted a reassertion of “control over the price of gas sold at a time when the gas was undeniably from a proven and sub- stantially developed field.” E/ Paso Natural Gas Co., 12 F.E.R.C. § 61,297, at 61,684 (1980). We reject the Commission's approach because it is implicit in the controlling authorities that jurisdiction must be evaluated at the time lease-sale agreements are executed. In Rayne Field, the Supreme Court found the gas reserves proven and 18a substantially developed at the time the lease-sales were signed. See 381 U.S. at 396, 85 S.Ct. at 1520. Similarly, the Fifth Circuit in Ship Shoal treated the pipeline company’s readiness to connect to the field upon execution as a “strong indication that the field was ‘substantially developed’ at the time of transfer.” 370 F.2d at 65 (emphasis added). Weymouth, relied on by the Commission, is inapposite. In that case, the parties entered into a new lease which super- seded various individual leases and incorporated many sub- stantial changes. The Fifth Circuit referred the case to the Commission for a jurisdictional determination, noting the ap- plicability of the Natural Gas Act to agreements reached or significantly altered after the date of its enactment. 367 F.2d at 102. In the instant case, however, redetermination of rates followed precisely according to the terms of the lease-sale agreements which remained unchanged. The mere redetermination of rates pursuant to the original contracts does not render the arrangements sales and is not factually analogous to the exercise of a retained right to withhold con- sent to sublease or assign, deemed jurisdictional in Louisiana Land and Exploration Co. v. FERC, 574 F.2d 204 (Sth Cir.), cert. denied, 439 U.S. 1127, 99 S.Ct. 1043, 59 L.Ed.2d 88 (1979). Thus, in the absence of authority commanding a contra- ry rule, we hold the agreements must be evaluated for jurisdic- tion under the Natural Gas Act as of the date of execution. PRIMARY JURISDICTION, RES JUDICATA, COLLATERAL ESTOPPEL The issue concerning FERC’s statutory jurisdiction was pending simultaneously before both the agency and the district court. Throughout this litigation both the purchaser-lessees and the Commission have consistently maintained that under the doctrine of primary jurisdiction, the agency’s expert and specialized knowledge should have been utilized from the out- set and that the district court erred in failing to refer the case to the Commission for initial determination. 19a Whether the district court should have referred this action to the Commission under the doctrine of primary jurisdiction is, at this juncture, without consequence. Our decision in this case has been preceded by and we have considered both tribun- als’ decisions so that the spirit of the flexible doctrine, if not the letter, has been satisfied. Cf. J.M. Huber Corp. v. Denman, 367 F.2d 104, 111 (5th Cir.1966) (primary jurisdiction is a flexible doctrine). Beyond holding that we did not, as has been argued, refer the jurisdiction issue to the Commission in Ten- neco Oil Co. v. FERC, 580 F.2d 722 (5th Cir. 1978), this ques- tion requires no further analysis. Similarly, we need not decide the res judicata or collateral estoppel effect, if any, of the district court opinion vis-a-vis the decision of the Commission. Our holding that the district court decision is not clearly erroneous as to the lease-sale agree- ments before it and that the Commission’s ruling is not sup- ported by substantial evidence obviates the need for a detailed discussion of these issues. Those parties claiming the Commis- sion;s actions were precluded by the doctrine, especially Wil- liam G. Webb, et al., prevail under our approach even without their rationale. See William G. Webb, 49 F.P.C. 17(1973). NO. 77-1762: AFFIRMED. NO. 77-2613: DISMISSED. NO. 80-2404: REVERSED. 2. ORDER OF FEDERAL ENERGY REGULATORY COMMISSION AFFIRMING INITIAL DECISION AND INITIATING FURTHER © HEARING, EL PASO NATURAL GAS CO., 12 FERC { 61,297 (SEPTEMBER 25, 1980) 2la 12 FERC £ 61,297 El Paso Natural Gas Company, Docket No. CP74-314; Northwest Pipeline Corporation, Docket No. CP76-327; Sun Oil Company, et al., Docket No. C177-526 Order Affirming Initial Decision and Initiating Further Hearing (Issued September 25, 1980) [Initial decision issued February 20, 1979 appears at 6 FERC £ 63,037.) Syllabus Commission affirms without modification that a series of lease-sale agreements constituted sales of natural gas for re- sale in interstate commerce under the Natural Gas Act. {1] PIPELINE-RATEMAKING & REGULATION Jurisdiction Commission finds that overriding royalty owners initially received approximately the same net amount under lease-sale contracts as would have been received under conventional wellhead sales after costs of production were considered. The magnitude of the overriding royalties and the fact that they apply to each Mef of gas sold, irrespective of the quantities of gas the contracting parties might originally have thought were involved, strongly supports this finding and leads the Commis- sion to conclude that the lease-sales are jurisdictional. (2) PIPELINE-RATEMAKING & REGULATION Jurisdiction Commission finds that persons acquiring leases of land later sold to pipelines were not real estate speculators. Instead these lease-sales accomplished the transfer of natural gas to an interstate pipeline company for resale in other states. The sellers bought leases from the original landowners and sold the gas contained in those leases to the pipelines. The original 22a landowners received a standard royalty for the rights which they sold and controlled no aspects of the ultimate sale of the gas to pipelines. The Commission also finds the inclusion of take-or-pay provisions and the section of noncommercial acreage provision in the lease-sale contract between pipelines and those acquiring the leases leads to the conclusion that gas, not land, was being sold. [3] PIPELINE-RATEMAKING & REGULATION Jurisdiction Commission reaffirms Weymouth decision in finding that the lease-sales in question are subject to Commission jurisdic- tion. Assuming arguendo that the lease-sales were not initially jurisdictional, they became so at the time the price paid for the gas pursuant to the contracts was redetermined through arbitration and thereby established at levels equal to or ap- proaching prevailing wellhead prices. Upon redetermination of price, the sellers reasserted their control over the price of gas sold at a time when the gas was undeniably from a proven and substantially developed field. [4] PIPELINE-RATEMAKING & REGULATION Jurisdiction Commission rejects argument that Commission is barred by the doctrines of res judicata and collateral estoppel from hold- ing lease-sale transactions to be jurisdictional. Webb-Turner did not directly decide that lease-sales were non-jurisdictional. That ruling was based on less than a complete record and reached under different circumstances. In light of the increas- ing burden on consumers of non-regulation of these lease-sale transactions, the FPC was compelled to throughly examine these lease-sales to determine whether they were jurisdiction- al. After redetermination of prices, changes in fundamental facts further necessitated a review of the jurisdictional issue. The Commission has also been ordered by the Fifth Circuit to decide whether the subject lease-sale contracts are sales of 23a natural gas for resale in interstate commerce as defined by the Natural Gas Act. [5] PIPELINE-RATEMAKING & REGULATION Refunds & Restitution Commission remands for determination of the remedial measures to be taken, including: (1) whether and if so to what extent payments made by pipelines to overriding royalty own- ers were excessive and therefore unlawful; (2) what amounts, if any, should be required to be refunded by royalty owners to pipelines and flowed through by them to their jurisdictional customers; and (3) what level of royalties should be approved for the future. Paul R. Connolly, J. Alan Galbraith and Arthur R. For- manek for El] Paso Natural Gas Company David K. Watkiss, Jack W. Hanks and Joseph T. Casey for Northwest Pipeline Corporation Gordon Gooch and Charles M. Darling, IV for Tenneco Oil Company, Continental Oil Company, American Petrofina Company of Texas, Crown Central Petroleum Corpora- tion, Delta Drilling Company and Mr. & Mrs. Morris Mizel Michael J. Henke and MaryJane Reynolds for Union Oil Company of California Craig W. Hulvey for Mobil Oil Corporation and Getty Oil Company George Mickum, Steven H. Brose and Edward Leahy for Atlantic Richfield Company Leo J. Hoffman for Sun Oil Company (Delaware) John L. Williford and Larry Pain for Phillips Petroleum Company R. H. Landt for Amoco Production Company Seg Ral Barrett and Stanley L. Cunningham for F.H.N., Ltd. oe B. Browder, Jr. for W. Watson LaForce, Jr., et al. 24a J. O. Terrell Couch for Robert Beamon, et ai. Sherman S. Poland and Bernard A. Foster, III for Wil- liam G. Webb, et al. John S. Fick and Thomas D. Clarke for Southern Califor- nia Gas Company Shirley A. Woo, Malcom Furbush and Peter Hanson for Pacific Gas and Electric Company Edwyn R. Sherwood, Henry E. Brown and Joel L. Greene for Colorado Interstate Gas Company Bruce R. Debolt and John H. Socolofsky for the Oregon Public Utility Commissioner Radovan Z. Pinto for the People of the State of California and the California Public Utilities Commission Richard E. Kelly for the Staff of the Federal Energy Regulatory Commission Before Commissioners: Charles B. Curtis, Chairman; Georgiana Sheldon, Matthew Holden, Jr. and George R. Hall. {Order Text] On February 20, 1979, the presiding administrative law judge issued an initial decision in the above-captioned proceed- ing. The judge found that a series of lease-sale agreements, which are the subject matter of this proceeding, constituted sales of natural gas for resale in interstate commerce under the Natural Gas Act. We agree with the judge’s determination and find nothing in the exceptions thereto warranting modification of his decision. [1] We do, however, want to stress several factors leading to the conclusion that the lease-sales at issue are in fact jurisdic- tional. The law judge found that the overriding royalty owners initially received approximately the same net amount under the lease-sale contracts as they would have received under conventional wellhead sales after costs of production were considered. The presiding judge also noted that when the overriding royalty payments were tredetermined as provided 25a for in the lease-sale contracts, they were established at the fair-market value of wellhead sales in the case of the contracts of El] Paso Natural Gas Company, and at 75% of wellhead value in the case of the contracts now held by Northwest Pipeline Company. The overriding royalties were to be paid on each Mef of gas produced. These payments are sharply different from payments normally made in a royalty situation. In an ordinary royalty contract, the royalty owner is paid a royalty based ona percentage of the value of production. Here, however, the royalty owners are receiving royalties based on the fair- market value at wellhead for each Mef produced. These pay- ments are virtually equivalent to the payments that would have been received in a conventional wellhead sale except that in an ordinary wellhead sale the producers would be expected to absorb the costs of production. In this case, of course, the royalty owners are responsible for none of the production costs. The pipelines are instead responsible for production costs and such costs are passed on to their customers (and to the ultimate consumer) in addition to the overriding royalties paid to the lessors. We find that the magnitude of the overrid- ing royalties and the fact that they apply to each Mef of gas sold, irrespective of the quantities of gas the contracting par- ties might originally have thought were involved, lends, in our judgment, strong support to the proposition that these lease sales were virtually identical in “economic effect” to con- ventional sales. [2] The law judge also found that persons who acquired the leases and sold them to the pipelines were not real estate speculators. The sellers bought leases from the landowners and then sold the gas contained in those leases to the pipelines. The landowners, who were the original sellers of the leases, received a standard royalty for the rights which they sold. They negotiated that royalty with the persons who sold the ' United Gas Improvement Co. v. Continental Oil Co. (“Rayne Field”), 381 U.S. 392, 396 (1965). 26a leases to the pipelines. The original landowners had no control over the ultimate destination of any gas which might be dis- covered, and no knowledge whether the gas, if discovered, will be sold interstate or intrastate. Nor did the landowners control the quantity to be sold, the price to be paid, or the identity of the purchaser. The middlemen sellers controlled all these in- cidents of sale. They sold the gas to the interstate pipelines, specified how much was to be sold per year, negotiated the price, and dealt with the purchasing pipelines. The sellers of these lease-sale agreements were not landowners selling rights to drill. They were sellers of the natural gas contained in acreage which they had leased from landowners. [2] We also wish to stress certain contractual provisions which lead us to the conclusion that it was gas, proved re- serves, which was being sold. The take-or-pay provisions, and the return of non-commercial acreage provisions, are signifi- cant in our determination that what was being sold was gas. (2) The take-or-pay provisions are commonly found in con- ventional sales contracts and support our conclusion that these transactions contemplated the sale of proved reserves. More- over, the return of non-commercial acreage provisions show that all that was being sold was proved reserves as measured by the results of actual drilling. The only difference between these lease sales and producer sales, which may include clauses giving the buyer an option not to attach reserves from wells deemed non-commercial,’ is the fact that the buyers incurred the risks and costs associated with drilling. Yet this difference is one which, in our view, supports, and certainly does not detract, from our conclusion that these agreements are the functional equivalent of sales from successful wells by produc- ers. We conclude that the evidence amply demonstrates that * See Mitchell Energy Corporation, Docket No. C178-704, Order Denying Petition For Declaratory Order, Directing Applicant to File For Abandonment Authorization and Granting Intervention (Octo- ber 23, 1979, 9 FERC € __). 27a these lease sales “accomplished the transfer of large amounts of natural gas to an interstate pipeline company for resale in other States.” [3] In support of the proposition that the lease-sales in ques- tion are subject to the Commission’s jurisdiction, the staff cites several cases including United States v. Southwestern Cable Co., 392 U.S. 157 (1968), Mobil Oil Corp. v. F.P.C., 463 F.2d 256 (D.C. Cir. 1971) and Fanny Fern Weymouth v. Colorado Interstate Gen. Co., 367 F.2d 84 (Sth Cir. 1966). We are not persuaded that either the Southwestern Cable or Mobil case is directly relevant to the jurisdictional issue presented in this case. However, we do believe that support for the assertion of Commission jurisdiction is provided by Weymouth. In that case the court stated: Unlike Huber which involves a lease from the Landowner to the Lessee-Producer who in turn sells the gas to North- ern, the Pipeline Purchaser, this transaction from its in- ception was a one-step affair. It is between the Landowner-Lessor and the Pipeline as Lessee and Pur- chaser. Considering that the Natural Gas Act applies from the date of its enactment, at least to all transactions which come into being or are significantly altered thereafter— whether the parties are aware of the existence of the legislation or whether it is being actively enforced—there is at least a possibility that, taking into account the nature and extent of the reserves of this huge gas field, at some stage or time and to some extent, this transaction ripened into a “sale” of a kind comparable to that found to exist in Rayne Field. (367 F.2d at 102). [3] Assuming arguendo that the lease-sales here were not initially jurisdictional, we think that they became jurisdiction- al at the time the price paid for gas pursuant to these contracts was redetermined through arbitration and thereby established at levels equal to or approaching prevailing wellhead prices. *381 U.S. at 401. a 28a Upon the redetermination of price, the sellers reasserted' their control over the price of gas sold at a time when the gas was undeniably from a proven and substantially developed field. {4} In their exceptions to the initial decision, the royalty owners argue that this Conimission is barred by the doctrines of res judicata and collateral estoppel from holding these transactions to be jurisdictional.’ The FPC previously rejected those contentions and we continue to do so. We cannot be bound by the conclusion drawn by the FPC in the Webb- Turner proceeding. This Commission has a continuing obliga- tion to regulate sales which Congress has declared to be within ‘The sellers in negotiating the initial contracts had control over all incidents of sale which a conventional seller-producer, as opposed toa landowner-royalty owner, would have. These inclucled the ability to contract of the quantity to be sold, the price to be paid, the identity of the purchaser and whether it shall be sold in interstate or foreign commerce. In initially contracting for a price for gas, the sellers reserved the right to redetermine the price after the initial contract period. They exercised this right which resulted in an arbitrated finding of prices for the gas in excess of applicable F PC ceiling prices. In stating that the arbitrators found that the contracts provided for prices higher than the FPC ceiling prices, we in no way imply that that result is consistent with applicable law or with the intent of the parties at the time the agreements were negotiated. ‘Respondents also claim that this case is similar to Teras Gas Transmission Corporation, Docket No. CP77-612, Findings and Order After Statutory Hearing Issuing Certificate of Public Con- venience and Necessity and Granting Petition to Intervene (May 10, 1978, 3 FERC © ___), in which we found that a sale of gas reserves in place did not constitute a jurisdictional sale. Texas Gas is inapposite. The sale in Texas Gas involved reserves where the magnitude of reserves was unknown. And more importantly, the purchase price was not tied to the level of any future production or to the magnitude of reserves ultimately discovered. In this case, the purchase price was tied directly to the level of future production. *Webb-Turner, Opinion No. 642, 49 FPC 17 (1973). 29a the Commission's jurisdiction. The Commission cannot waive that jurisdiction.’ The producers, in this case, have no right to continued non-regulation.* And the producers can show no harm from relying on the FPC’s decision in the Webb-Turner proceeding. (4) Moreover, the Webb-Turner proceeding arose in a differ- ent context. It involved primarily issues of wheher to grant the Webb-Turner parties permission to abandon sales to El Paso, whether to grant E] Paso a certificate to operate the facilities involved in those sales, and what costs related to the gas in question were properly includable in E] Paso’s cost-of-service. In Webb-Turner, the FPC did not directly decide that the lease-sale transactions were non-jurisdictional. Rather it found that it would not impose a Rayne-type remedy in that case. Although in so doing the FPC, in essence, indicated that it considered the lease-sales not to be jurisdictional, in view of more recent events there can be no dispute that the FPC’s rather oblique ruling was based on less than a complete record and was reached under substantially different circumstances. In light of the increasing burden of consumers of non- regulation of these lease-sale transactions, the FPC was com- pelled to thoroughly examine these lease-sales to determine whether they are in fact jurisdictional. Prior to the price redetermination, payments were of less regulatory interest to the Commission. After redetermination, when regulatory in- terest in these leases was greater, changes in fundamental facts necessitated a thorough review of the jurisdictional issue. Additionally, this Commission has been directed by the Fifth Circuit to decide whether the subject lease-sale contracts are sales of natural gas for resale in interstate commerce as defined * Brooklyn Union Gas Co. v. F.E.R.C., 627 F.2d 462 (D.C. Cir. 1980), at 7. * Nantahala Power and Light Co. v. F.P.C., 384 F.2d 200 (4th Cir. 1967); Connecticut Light and Power Co. v. F.P.C., 557 F.2d 349 (2nd Cir. 1977). 30a by the Natural Gas Act.” For these reasons, the res judicata and collateral estoppel arguments cannot stand. The royalty owners have requested oral argument. They point to the magnitude of the briefs, the lengthy record, and the factual and legal complexity of the issues as reason for oral argument. The case has been well briefed and we feel that oral argument is unnecessary for a thorough review and resolution of the case. Therefore, oral argument will be denied. [5] Having found that the subject lease-sale agreements are sales of natural gas as defined by the Natural Gas Act, the remains to be decided what remedies should be adopted for past and future periods. Numerous questions remain as to what remedies are available and what action or combination of actions should be taken to insure that consumers are afforded the “complete, permanent and effective bond of protection from excessive rates and charges”"’ contemplated by the Natu- ral Gas Act. These issues were previously discussed by the FPC in its order issued in these dockets on June 3, 1977 58 FPC. However, the FPC later phased the proceeding and deferred the remedy issues until the jurisdictional issue had been decided. This case shall be remanded for hearing and decision of the remaining issues including those set forth in the order of June 3, 1977. The basic issues to be addressed on remand are (1) whether and if so to what extent were the payments made by E] Paso, Northwest and PNW to the overriding royalty owners excessive and therefore unlawful, (2) what if any amounts should be required to be refunded by the royalty owners to El] Paso and Northwest and flowed through by them to their jurisdictional customers, and (3) what level of royalties should be approved for the future? *Tenneco Oil Co. v. F.E.R.C., 580 F.2d 722, 724 (5th Cir. 1978). ” Atlantic Refining Co. v. P.S.C. of New York (“CATCO") 360 U.S. 378, 388 (1959). 3la THE COMMISSION ORDERS: (A) The initial decision of the administrative law judge is affirmed and adopted. (B) The motion for oral argument is denied. (C) A hearing shall be held to determine proper remedies for past and future periods in accordance with the terms of this order. (D) A presiding administrative law judge to be designated by the chief administrative law judge shall preside at the hearing in this proceeding, with authority to establish and change all procedural dates, and to rule on all motions as provided in the rules of practice and procedure. 3. ALJ’S INITIAL DECISION ON JURISDICTIONAL STATUS OF LEASE SALE AGREEMENTS, EL PASO NATURAL GAS CO., 6 FERC { 63,037 (February 20, 1979) 33a 6 FERC © 63,037 El Paso Natural Gas Company, Docket No. CP74-314; Northwest Pipeline Corporation, Docket No. CP76-327; Sun > Oil Company, et al., Docket No. CI77-526 Presiding Administrative Law Judge's Initial Decision on Jurisdictional Status of Lease-Sale Agreements (Issued February 20, 1979) {[Note: Order affirming Initial Decision and initiating fur- ther hearing was issued September 25, 1980, and appears at 12 FERC * 61,297.) Appearances Paul R. Connolly, J. Alan Galbraith and Arthur R. For- manek for E] Paso Natural Gas Company David K. Watkiss, Jack W. Hanks and Joseph T. Casey for Northwest Pipeline Corporation Gordon Gooch and Charles M. Darling, [V for Tenneco Oil Company, Continental Oil Company, American Petrofina Company of Texas, Crown Central Petroleum Corpora- tion, Delta Drilling Company, and Mr. & Mrs. Morris Mizel Michael J. Henke and Mary Jane Reynolds for Union Oil Company of California Craig W. Hulvey for Mobil Oil Corporation and Getty Oil Company George Mickum, Steven H. Brose and Edward Leahy for Atlantic Richfield Company Leo J. Hoffman for Sun Oil Company (Delaware) John L. Williford and Larry Pain for Phillips Petroleum Company R.H. Landt for Amoco Production Company 34a Terry R. Barrett and Stanley L. Cunningham for F.H.N.., Ltd. William B. Browder, Jr. for W. Watson LaForce, Jr., et al, J. O. Terrell Couch for Robert Beamon, et al. Sherman S. Poland and Bernard A. Foster, III for William G. Webb, et al. John S. Fick and Thomas D. Clarke for Southern Califor- nia Gas Company Shirley A. Woo, Malcolm Furbush, and Peter Hanson for Pacific Gas and Electric Company Edwyn R. Sherwood, Henry E. Brown, and Joel L. Greene for Colorado Interstate Gas Company Bruce R. Debolt and John H. Socolofsky for the Oregon Public Utility Commissioner Radovan Z. Pinto for the People of the State of California and the California Public Utilities Commission Richard E. Kelly for the Staff of the Federal Power Com- mission and the Staff of the Federal Energy Regulatory Commission. BENKIN, Presiding Administrative Law Judge: These three cases have been consolidated for investigation under Section 5 of the Natural Gas Act. The focus of the inquiry is a series of “lease-sale agreements” contracts which transferred ownership of the natural gas re- serves underlying a vast amount of acreage in the San Juan Basin. Most of the San Juan Basin lies in northwestern New Mex- ico, but a part of it extends northward into Colorado. It is high, semiarid country. The land appears to be unpromising; one 35a witness described it as “a lot of scenery [and] goat pasture.” There was a time when so little was thought of the prospects for the San Juan Basin that most of the land was given to the Indians. Today, we know better: the bowl-shaped sandstone formations that underlie the Basin are permeated by enormous volumes of natural gas. Nearby in the “Four Corners” area are some of the Nation’s most abundant deposits of coal.* So the Basin, despite its unprepossessing appearance and its isolation from major population centers, is rich. More than two decades ago, the independent producers who owned the working interests in oil and gas leases covering large tracts of land in the San Juan Basin entered into a series of contracts by which they transferred their leasehold rights to the gas reserves underlying the acreage. The transferees were two corporations. One was E] Paso Natural Gas Company (E] Paso), a jurisdictional interstate natural gas pipeline. The other, Pacific Northwest Pipeline Corporation (PNW), was soon to become a jurisdictional natural gas pipeline. Under the so-called lease-sale agreements, the interest owners reserved the right to receive certain payments — termed “overriding royalties” — determined by multiplying a specified unit sum by the volume of gas (in Mcf) that the pipelines extracted from the acreage.’ In time, wach royalty would escalate until it would be set at a figure approximating the fair market value of the gas produced. The question for decision in this proceeding, aspects of which have previously been litigated before a Federal District Court, is whether the lease-sale agreements constituted sales of natu- ral gas for resale in interstate commerce. If, as a matter of law, 'Tr. 337. * See Chemehuevi Tribe of Indians v. F .P.C., 420 U.S. 395, 397 n.3 (1975). *In some of the agreements, the overriding royalty payments defrayed the pipeline’s obligation to make a “production payment” for gas extracted. 36a they were, it follows that the agreements have been subject to the regulatory jurisdiction of the Commission under the Natu- ral Gas Act.‘ The principal consequence of a determination that the lease-sale agreements were jurisdictional sales of natural gas would be a holding that the provisions of the agreements which purported to obligate the pipeline-buyers to pay the producer-interest owners amounts (whether or not denomin- ated royalties) exceeding the FPC/FERC-established ceiling prices for gas of the vintages involved were, to that extent, illegal. From such a holding it might also follow that a large portion of the huge sums paid for gas produced under the agreements may have to be refunded and may eventually find its way back into the pockets of ratepayers in California andthe Pacific Northwest from whom the funds were exacted in the first place.’ ‘See § l(b) of the Act, 15’ ».C. 717(b). At the time this proceed- ing was begun, the “Commission” in question was the Federal Power Commission. The Federa! Power Commission was abolished and was replaced by the Federal Energy Regulatory Commission, which assumed mosi of the FPC’s jurisdiction, under the Department of Energy Organization Act, 42 U.S.C. 7101-7352. The DOE Organiza- tion Act took effect on October 1, 1977. This proceeding is continued before the new Federal Energy Reguliory Commission pursuant to $§ 402(a) and 705(b) of the DOE Orgar.zation Act, 42 U.S.C. 7172(a), and 7295(b). *The parties have not had the opportunity to submit briefs or arguments on the effect of a holding that the agreements are jurisdic- tional upon the pricing of the gas vader the Natural Gas Policy Act of 1978. Hence, that question will not be dealt with in this decision. Another question that will not be considered in this decision is the matter of criminal liability under Section 21 of the Natural Gas Act, 15 U.S.C. 717t, in the event the Commission determines that the lease-sale agreements constituted unlawful (because uncertificated) jurisdictional sales at above-ceiling prices. Early in the proceeding, Commission Staff Counsel expressly disclaimed any intention on the Staff's part to consider this case for reference to the Department of Justice. Tr. 69. 37a In order to dispose of the issues, the Commission must necessarily undertake a substantial exercise in historical detective work. In addition, despite the existence of several definitive judicial pronouncements on the subject, from the Supreme Court and elsewhere, the Commission must apply some still-nascent legal principles. This investigation proceeding was instituted by an order of the Federal Power Commission issued on June 3, 1977, 58 FPC 2181, exactly three years after El Paso had filed a complaint asking the Commission to undertake the investigation." Part of the three-year delay was occasioned by the Commission’s deci- sion, announced on April 8, 1976, 55 FPC 1677, to defer action upon the complaint pending disposition of litigation then going forward in the United States District Court in Midland, Texas, involving issues identical to those raised by El Paso’s com- plaint to the Commission.’ The District Court suit came to an end on January 27, 1977." According to the Commission, the primary question to be determined in this investigation proceeding is whether the “lease-sale” agreements between the pipelines and various owners of working interests in acreage in the San Juan Basin constitute jurisdictional sales of natural gas for resale within “El Paso Natural Gas Co., Docket No. CP74-314, et al., Order Instituting Show Cause Proceeding, Ordering Filing of Evidence and Ordering Hearing, issued June 3, 1977 (hereinafter cited as Order Instituting Proceeding). * See El Paso Natural Gas Co., Docket No. CP74-314, et al, Order Deferring Action on Request to Show Cause, Denying Motions and Permitting Intervention, issued April 8, 1976. There is, so far as the record shows, no explanation for the almost two-year delay between the filing of the complaint and issuance of the April 8, 1976 order. *See n. 19, infra. 38a the meaning of Section 1(b) of the Natural Gas Act as it was construed in Rayne Field*and the progeny of that case. After El Paso filed its complaint, Northwest Pipeline Corporation (Northwest) filed a petition for leave to intervene in the proceeding. Northwest, like El] Paso a jurisdictional interstate natural gas pipeline, is the successor in interest to the lease-sale agreements that were executed by PNW in the 1950's and that eventually came into Northwest's hands by virtue of a court-ordered divestiture."’ In its April 8, 1976 order, the Commission directed that Northwest's intervention petition would be treated as a § 5 complaint and would be given its own docket number. Thereafter, in the June 3, 1977 order instituting this proceeding, the Commission joined as respon- dents in the proceeding the interest owners who were parties to the E] Paso lease-sale agreements (sometimes called GLAs) and the interest owners who were parties to the lease-sale agreements (denominated PLAs) that had made their way into the hands of Northwest. '' * United Gas Improvement Co. v. Continental Oil Co., 381 U.S. 392 (1965). In 1957, after PNW entered into various lease-sale agreements, El Paso acquired all of the outstanding stock of PNW. Two years later, PNW was merged into E] Paso, and all of PNW’s assets, including its interests under the lease-sale agreements, became part of the Northwest Division of E] Paso. After a decade of antitrust litigation, necessitating five separate opinions by the Supreme Court of the United States, E] Paso was forceti to divest itself of the PNW. assets. (California-Pacific Utilities Co. v. United States, 410 U.S. 962 (1973), aff'g United States v. El Paso Natural Gas Co., 358 F. Supp. 820 (D. Col. 1972); Utah Public Service Comm'n. v. El Paso Natural Gas Co., 395 U.S. 464 (1969); Cascade Natural Gas Corp. v. El Paso Natural Gas Co., 386 U.S. 129 (1967); United States v. El Paso Natural Gas Co., 376 U.S. 651 (1964); California v. F.P.C., 369 U.S. 482 (1962). “GLA” means “Gas Lease Agreement” and is the designation given by El Paso to the lease-sale agreements made with E] Paso. E] Paso designated each of the lease-sale agreements it acquired fron 39a 3 The Commission also noted that some four years earlier it had issued an opinion which dealt with the question whether certain of the lease-sale agreements were jurisdictional sales of natural gas. In that case, William G. Webb, et al. (Opinion No. 642),"* the Commission had authorized certain of the interest owners—known as the Webb-Turner parties—to abandon con- ventional sales to the interstate market in order to con- summate their contracts to make lease-sales of their acreage to E] Paso. Both the Commission Staff and the State of California had argued that the lease-sales themselves were jurisdictional under the Rayne Field doctrine. The Commission had distin- guished Rayne Field and rejected that argument." The June 3, 1977 order initiating the instant proceeding expressly made the interest owners who were parties to the Webb, et al., Opinion No. 642 case parties to this case. The Commission said that it wanted to review the holding in Opinion No. 642 in light of today’s changed circumstances, holding that the doctrine of res judicata did not preclude relitigation of the jurisdictional issue decided in that Opinion." PNW asa“PLA,” which stands for “Pacific Lease Agreement.” The PLAs are now owned by Northwest, of course, and Northwest has continued to use the E] Paso terminology to designate the contracts. "49 FPC 17 (1973). “Id. at 25-26. “In its Order Instituting Proceeding, the Commission said that the Webb decision “did not consider at that time whether the continu- ing production payment itself was a sale.” 59 FPC 1209 at 1214-1215. As the Commission acknowledged in its July 29, 1977 order on rehearing, however, that statement was incorrect. Nevertheless, the Commission on rehearing adhered to its determination to recon- sider the jurisdictional holding in Webd in light of “the changed circumstances of today” and to its conclusion that “The doctrine of res judicata does not apply where changed circumstances appear.” E/ Paso Natural Gas Co., Docket No. CP74-314, et al., Order on Rehearing, Ruling on Motions for Deferral of Proceedings, Granting Motion to Designate Additional Parties, Granting Late Interven- tions and Granting Motion to Delete Respondent, issued July 29, 1977, 59 FPC 1214-1215 (hereinafter cited as Order on Rehearing). 40a The event which precipitated the entire controversy Was a dispute between E] Paso and Sun Oil Company, the owner of the “overriding royalty” interest under GLA 61. That agree- ment provided for redetermination of the rate of the per-Mcf overriding royalty payable to the interest owner at specified intervals; after 15 years, the royalty was to be a rate fixed by mutual agreement of the parties (but not less than ten cents per Mcf). In the absence of agreement between the parties, the contract provided for determination of the royalty rate by a board of arbitrators who “shall base their decision on the then value of such gas at the well head.”"* In 1973, after the 20-year price-redetermination point arrived, E] Paso and Sun were unable to agree on a mutually-acceptable royalty rate. At Sun’s insistence, the dispute was submitted to a board of arbitrators. The board agreed with Sun’s contention that, under GLA 61. it was entitled to the full market value of the gas at the wellhead. and that the operative standard for establishing market value was the going wellhead price for natural gas in the intrastate market. The board's decision, issued in 1973, rejected the contention that the market value of the GLA 61 gas should be equal to the lower F PC-established rate for interstate sales of gas of the same vintage. The board set the royalty rate for E! Paso’s payments to Sun at 40 cents per Mcf."" Upon learning of the Sun award, other GLA and PLA in- terest owners demanded redetermination of the rates applica- ble to their per-Mcf overriding royalties, under either rate redetermination or favored nations clauses in their lease-sale Exh. 22, p. 9. The respondents assert that the arbitrators’ award of 40 cents per Mcf was substantially less than the prevailing intrastate price in the vicinity; 55-60 cents per Mcf. See Respondents’ Initial Brief, p. 25. It is nonetheless conceded that the F PC-regulated interstate price for flowing gas of similar vintage was 24 cents per Mef. See Complainants’ Proposed Findings of Fact (hereinafter “CPFF”) No. 193, p. 61; Responses of Designated Respondents to Complainants Proposed Findings of Fact (hereinafter “RCPFF”), No. 193. p. 101. dla agreements." E] Paso’s response to these demands was to file four separate lawsuits in U.S. District Court against some interest owners under the GLAs. The actions, which were eventually consolidated and transferred for trial to the District Court for the Western District of Texas, sought declaratory judgments that the lease-sale transactions were in reality jurisdictional natural gas sales which had to be the subjects of FPC-issued certificates of public convenience and necessity before any overriding royalties could lawfully be collected. In addition, El Paso sought to enjoin any interest owner from following Sun's lead and seeking an arbitration award. OnJune 3, 1974, having filed its complaint with the Commission, E] Paso moved in the District Court for a stay of proceedings and for reference of the suit to the Commission. The Court with- held decision on the motion (and, in fact, simply never ruled on it). The District Court did, however, issue an order on August 1, 1974, permitting Northwest to intervene in the litigation. It did so because after the suits were instituted, Northwest suc- ceeded to El Paso’s interest in one of the lease-sale agreements on which E] Paso had sued." The typical favored nations clause provided that the interest owner would receive the highest overriding royalty rate paid by the pipeline-producer for gas produced under any lease-sale agreement covering acreage located within 200 miles of the interest owner's acreage. * See n. 10, supra. The lease-sale agreement was PLA 13 with Mobil Oil Corporation as the interest owner. Northwest acquired El Paso’s rights under PLA 13 on February 1, 1974. After having made the acquisition, Northwest not only intervened in El Paso’s suit in order to assert its interests under PLA 13, but also sought to join as parties to the suit the interest owners who were parties to the remaining PLAs which were not involved in E) Paso’s action, so that it could obtain an adjudication of its rights and liabilities under the PLAs. The District Court, however, refused to permit joinder of the remaining independent producers. 42a On January 27, 1977, after a 26-day trial and four days of oral argument, the District Court issued its decision.'* The Court - held that the lease-sale transactions were not sales of natural gas for resale within the meaning of Section 1(b) of the Natural Gas Act and, consequently, were not subject to the regulatory jurisdiction of the Commission.” The District Court thereupon dismissed the suits for lack of subject-matter jurisdiction.” The judgment of the District Court was appealed to the United States Court of Appeals for the Fifth Circuit.~ The Fifth Circuit was also the venue of petitions filed by a number of respondents, seeking immediate judicial review of the Com- mission’s order of June 3, 1977 sending this case to hearing and its July 29, 1977 order denying rehearing of the June 3 order.” The Court of Appeals consolidated the various cases for argu- ment and, on September 6, 1978, issued an order deferring its ruling on all of the appeals pending the Commission's decision in this proceeding.*' “ El Paso Natural Gas Co. v. Sun Oil Co., 426 F. Supp. 963 (W.D. Tex. 1977). “Td. at 970. “1 Id. at 971. = El Paso Natural Gas Co. v. Sun Oil Co., No. 77-1762. *Tenneco Oil Co. v. F.E.R.C., No. 77-2613, et al., 580 F.2d 722 (5th Cir. 1978). “ Shortly after the District Court rendered its decision, Northwest entered into settlement agreements with the PLA interest owners. The agreements mirrored the terms of settlement agreements which E] Paso and the GLA interest owners had executed in October 1974. Both pipelines agreed, during the pendency of litigation about the jurisdicational status of the lease-sale contracts, to pay overriding royalties at a rate keyed to, but slightly less than, the regulated ceiling price for new San Juan Basin gas. The outcome of this proceeding (including judicial review of the Commission's action) is to control the rights of the interest owners to retain the funds. In an order issued February 16, 1977, 57 FPC 989, the Commission permit- ted El Paso to pass through to its customers the cost of the higher 43a Meanwhile, the administrative hearing went forward. At first, plans were made for trial of all issues, including the question of the remedy that would be appropriate if the lease- sale agreements were ultimately held to constitute jurisdic- tional wellhead sales of natural gas. In an order issued Febru- ary 13, 1978, 2 FERC © 61,124, however, the Commission directed that the proceeding should be phased, so that the question of the Commission's jurisdiction over the agreements would be litigated and decided first, with the remedial issue pretermitted until after the jurisdictional question was decided.” The hearings on the jurisdictional issue got underway on May 2, 1977. At an early stage of the proceedings. all parties concerned agreed to stipulate that issues once litigated in the District Court in Midland would not be retried, and that the evidentiary record in the District Court case would be received in evidence in this proceeding and would be the basis for the Commission's disposition of the jurisditional issues between the parties to this proceeding who were also parties to the Midland case. This stipulation saved a great deal of time and effort. Nevertheless, the hearing into the disputes which were not the subject of the Midland litigation consumed 19 days of hearing sessions beginning on May 2, 1978 and ending on June 6, 1978. All parties filed proposed findings of fact and re- sponses to proposed findings of fact on July 3, 1978 and July 25, 1978, respectively. Simultaneous initial briefs were filed on September 11, 1978, and reply briefs were filed on September 29, 1978. overriding royalty payments. As of the date this record closed, Northwest had heen authorized two rate increases, of $27 million and $34 million, to recover its expenditures for increased overriding royalties. = El Paso Natural Gas Co., Docket No. CP74-314, ef a/., Order Granting Motion for Phasing of Proceedings and Deferral of Proce- dures Concerning Remedy, issued February 13, 1978. ae doa The first of the lease-sale agreements in the San Juan Basin was GLA 32, entered into in 1950 between E] Paso and Delhi Oil Corporation (Delhi). Examination of the history of that transaction is basic to an understanding of why the parties to that agreement, and the balance of the lease-sale agreements, chose to do business in the hybrid lease-sale format rather than through conventional wellhead-sale contracts. E] Paso had been interested in the San Juan Basin as a source of gas supply for several years before GLA 32 was con- summated. To supply its first pipeline to California, E] Paso had relied almost exclusively on casinghead gas produced in the Permian Basin. This source of supply proved to be unsatisfactory. Casinghead gas, being a by-product of oil pro- duction, was produced only as oil was produced. The schedule for oil production was, to a large extent, a function of state prorationing orders and the market’s demand for petroleum products, chiefly motor vehicle gasoline. Oil production tended to be most plentiful at the beginning of each month, when producers sought to meet their “allowables” and during the warm weather months, when highway travel was heaviest. These peak periods of oil—and casinghead gas—production did not coincide with the times when demand for natural gas was high in E] Paso’s markets. In addition, there simply was not enough natural gas avail- able to E] Paso from its Permian Basin sources. In the mid- 1940’s, it became clear to the pipeline and the California utili- ties it served that the rapidly expanding California market’s demand would soon outstrip E] Paso’s existing dedicated re- serves. The Federal Power Commission, too, was putting pressure on E] Paso to secure dedication of new and substantial reserves of dry gas, free from the vagaries of oil production. As a result of these factors, E] Paso undertook a search for a large dry gas supply. The search eventually centered in the San Juan Basin, where gas had first been produced, though not in commercial quantities, as early as the 1920’s. The San Juan tee 45a Basin’s relative proximity to E] Paso’s California market made it particularly attractive to the pipeline. Delhi, an independent producer, owned substantial reserves of natural gas in the Barker Dome Field of the San Juan Basin. Like other independent producers operating in the Basin, Del- hi was unable to market its gas because no interstate pipeline had reached the Basin, and local demand could not absorb the existing potential supply. El Paso proposed to fill the need for an interstate pipeline connecting the Basin to major metropoli- tan areas. On August 25, 1947, it filed an application with the FPC, seeking a certificate of public convenience and necessity for construction and operation of a pipeline from the San Juan Basin to a point on the Arizona-California border near Nee- dles, California. Delhi and E] Paso executed a gas-purchase contract dated May 1, 1948. Under the contract, Delhi was to sell and E] Paso agreed to purchase up to 100,000 Mef of natural gas per day for a period of 25 years, and from year to year thereafter, at a base price of ten cents, with a specified escalation of the price of each two and one-half years for the first 15 years of the contract.” After the first 15 years, and at five-year intervals thereafter, the price would be set at the fair market value of the gas at the wellhead. It is a measure of the times that the parties set a 13-cent-per-Mef floor on the fair-market-value figure to be employed under this redetermination clause.” By its terms, the contract would not become operative until two events occurred. Both involved the Federal Power Com- mission. First, E] Paso would have to obtain favorable action from the FPC upon its application for certification of its pipe- line project, an application which it had filed nearly nine months earlier. Second, Delhi would have to obtain from the * Exh. 40 EP 2, pp. 15, 17, 25. For the first ten years of the contract, the price was to escalate one-half cent per year; the price was to escalate one cent per year during the remaining five years. 7 Id. at 25. 46a Commission a ruling that its performance under the contract * would not make the company a jurisdictional natural-gas company.* On May 19, 1948, E] Paso and Delhi entered into a second contract which called for both of them jointly to construct, own, and operate the pipeline from the Basin to California that was the subject of El Paso’s pending application to the FPC. Thereafter, on June 30, 1948, the San Juan Pipe Line Com- pany, anewly-formed corporation owned by El Paso and Delhi, filed an application with the Commission for a certificate authorizing it to construct, own, and operate a pipeline from the San Juan Basin to California. The plan, under which the parties would jointly own and operate the pipeline that would, in turn, enable them to market a supply of natural gas to be sold under a relatively con- ventional gas sale contract, came a cropper, however. The critical problem was Delhi’s inability to secure from the Com- mission a declaratory order, ruling that its performance under the contracts would not subject it to regulation by the Commis- sion under the Natural Gas Act. Three times it sought such a ruling, and three times the Commission refused to issue one.” * Id. at 3-5. The contract also required Delhi, inter alia, to commit its Barker Dome acreage to the substantial performance of its con- tractual obligations, to drill wells (within the limits of state spacing restrictions) sufficient to supply the contract volumes of gas, to gather and treat the gas (reserving to Delhi the right to remove hydrocarbons other than methane), and to deliver pipeline-quality gas to a central point on the proposed pipeline. In addition to the above-described pricing provisions, the contract had a favored na- tions clause. *” Dethi Oil Corp., 8 FPC 613 (1949); Delhi Oil Corp., 7 FPC 1025 (1948); Delhi Oil Corp., 7 FPC 958 (1948). The problem, in those pre-Phillips days, evidently inhered in Delhi's participation in the pipeline-ownership-and-operation project. In the two later applica- tions, Dethi proposed to restrict, though not completely terminate, its participation and interest in the San Juan Pipe Line Company. The Commission, nevertheless, apparently felt that an independent 47a As a result, El Paso and Delhi abrogated their contract to construct the pipeline and entered into a new and substantially modified gas-purchase contract. Under the new gas-purchase contract, dated February 4, 1949, E] Paso was entitled to call upon Delhi to supply up to 150,000 Mef of gas per day to meet its peak loads. The second contract, like the first, was con- ditioned upon an F PC determination that Delhi would be free of regulation under the Natural Gas Act.” This time the pipe- line to California was to be constructed, owned, and operated by El] Paso, without any participation or assistance from Delhi. These terms were evidently satisfactory to the Commission, for on March 10, 1949, it issued an order in which it determined that Delhi would not become a regulated natural gas company by virtue of its performance under the second gas-purchase contract." While all of this was going on, the larger question of the amenability of independent producers to regulation under the Natural Gas Act was being loudly debated in several forums. There is no doubt about the fact that Delhi, like many other independents, was concerned about the prospect of FPC regulation and was anxious to take whatever steps were feasi- ble to avoid the spectre of jurisdictional status. In June of 1947, the Supreme Court of the United States, noting that the Commission had not asserted jurisdiction over wellhead sales per se, had commented: “We express no opinion producer’s affiliation with, and co-ownership of, a jurisdictional pipe- line could render the producer jurisdictional. To Delhi, a holding that it was jurisdictional would bring down upon it two undesirable con- sequences: cost-of-service treatment of its gas sales and a regulated rate of return. Once Delhi divested itself of all interest in the pipeline company, however, the law as it then existed placed no impediment in the path of the Commission's issuance of a nenjurisdictional status determination. ” Exh. 40 EP 6, pp. 7-8, 22-23. " Dethi Oil Corp., 8 FPC 750 (1949). 48a as to the validity of the jurisdictional tests employed by the Commission in these cases.” Since the issue in the /nterstate case was the Commission’s jurisdiction over a sale by a pipe- line, not its jurisdiction over an independent producer’s sale, it was unusual and ominous for the Court to reach out tocomment on the jurisdictional status of wellhead sales by such produc- ers. Soon thereafter, the Commission issued Order No. 139," adding to its General Rules a new Section 2.54, which pur- ported to exempt wellhead sales by independent producers to interstate pipelines from FPC jurisdiction. Presumably, the Commission's issuance of the new Section 2.54 was designed to eliminate any doubt about the status of independent producers that may have been engendered by the Supreme Court’s comment in the /nterstate case. The matter would not die that readily, however: On October 28, 1948, the Commission launched an investigation to determine whether Phillips Petroleum Company, an independent producer, had become a jurisdictional natural-gas company by virtue of its wellhead sales of natural gas to an interstate pipeline.” In addition, on May 11, 1949, two months after Delhi received its favorable ruling from the Commission, Chairman Nelson Lee Smith of the FPC sent a letter to Arizona Senator Carl Hayden, in which Smith indicated that Delhi’s proposed well- head sale of natural gas to El Paso might subject Delhi to regulation by the Commission.” At this time, there was pend- ing in Congress a bill which would have amended the Natural Gas Act to grant independent producers specific legislative ® Tnterstate Natural Gas Co. v. F.P.C., 331 U.S. 682, 690 n.18 (1947). | 12 F.R. 5585 (1947). 4 Phillips Petroluem Co., 7 FPC 983 (1948). Between the date Section 2.54 was issued and the date the Phillips investigation be- gan, Commissioner Richard Sachse had resigned and had been re- placed by Commissioner Thomas C. Buchanan. ® Exh. 40 EP 1720. = 49a exemptions for their wellhead sales to interstate pipelines, in effect enacting as a statute Section 2.54 of the Commission's General Rules. After it became aware of Chairman Smith's letter to Senator Hayden, Delhi sought clarification of its status from the Commission.” The Commission replied that, inasmuch as De- lhi’s status turned on the answer to a question of law, /.e., the legal effect of Order No. 139, promulgating Section 2.54 of the Commission's Rules, “The Commission is unable, in the cir- cumstances, to express a conclusive opinion as to whether you will or will not be subject to regulation under the Natural Gas Act by virtue of proposed sale of natural gas to E] Paso.”" Chilling words indeed!—indicating that the Commission's con- fidence in the legal validity of § 2.54 was beginning to ebb. This development, coupled with other rapidly moving events on the jurisdictional front (e.g., the ongoing Phillips investigation), caused Delhi to seek the advice of counsel on other ways to carry out the objectives of its agreement with E] Paso without subjecting itself to the risk of regulation under the Natural Gas Act. Delhi’s counsel in Dallas sought the advice of Charles V. Shannon, a Washington lawyer specializing in FPC law and the Commission's one-time General Counsel. In a letter of Decem- ber 1, 1949, Shannon expressed the opinion that if Delhi, instead of g»ing through with its then-pending wellhead sale contract with El] Paso, were to transfer its Barker Dome re- serves through a sale of the underlying leases, the transaction would be non-jurisdictional and would not make Delhi subject to regulation by the Federal Power Commission.” In light of "Id. “ Exh. 40 EP 1721. “Exh. 40 EP 22. Shannon's opinion was based upon the then- recent decision of the Supreme Court in F.P.C. v. Panhandle East- ern Pipe Line Co., 337 U.S. 498 (1949), holding that the Natural Gas Act did not apply to the transfer of leases by an interstate pipeline to a production company. It should be noted that Shannon's opinion was Wa Shannon's opinion and the confusion surrounding the legal status of independent producers, the parties decided to re- negotiate and recast the second gas-purchase contract in the form of a lease-sale agreement. Under the lease-sale format, Delhi would sell its gas leases covering the Barker Dome acreage to E] Paso, and E] Paso would undertake the produc- tion of natural gas from the acreage. Delhi would receive compensation for the gas in an amount roughly equivalent to the per-Mcf price it would have received under the gas- purchase contract, minus E] Paso’s production costs. The most significant factor in the arrangement was this: the lease-sale format was developed specifically for the purpose of putting the independent producer and the pipeline in about the same economic positions they would have enjoyed under a conventional wellhead gas sale contract. From the standpoint of the parties to the first lease-sale agreement, the primary purpose—and perhaps the sole purpose—of using that format rather than a conventional wellhead gas sale contract)was to avoid the possibility that independent producers who sold their gas to interstate pipelines under such a contract would be held to be natural-gas companies subject to the Federal Power Commission's regulatory jurisdiction. E] Paso and Delhi abrogated the second gas-purchase con- tract on January 27, 1950. On the same day, they entered intc « lease-sale agreement, which E] Paso later designated GLA 32. The agreement provided that E] Paso would pay to Delhi an “overriding royalty” on all gas produced from the Barker Dome acreage. The amount of the payment was to be five cents per Mcf for the first five years, six cents per Mef for the next five years, and seven cents per Mcf for the ensuing five years; rendered five years before the Supreme Court held, in Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672 (1954), that wellhead sales by independent producers were jurisdictional and 16 years before the Rayne Field case, supra, held that the sale of a lease may be the legal equivalent of a jurisdictional sale of natural gas. 5la thereafter, the seven-cents-per-Mef price would remain in ef- fect until cumulative production taken from the acreage by El Paso reached 600 Bef, after which the “royalty” would be equal to the fair market value of the gas (but not less than 7¢ per Mcf).” Delhi reserved all rights to any oil production. The agreement called for E] Paso to make a substantial cash down payment, which could be increased or decreased in the future depending upon the parties’ recalculation of the ges reserves underlying the acreage. E] Paso was entitled to take a max- imum of 110,000 Mcf per day; under the take-or-pay clause, it was obligated to take a minimum of 60,000 Mef per day.“ The lease-sale agreement, like its predecessor contracts, was con- tingent upon FPC issuance of the certificate to construct a pipeline and transport San Juan Basin gas to California mar- kets. That contingency was satisfied on July 4, 1950, when the Commission issued the certificate to E] Paso.’ One vear later, in July 1951, El Paso began the transportation to California of natural gas produced from the Barker Dome Field.“ "Exh. 40 EP 29. “ Id. at 9-10. Under a “take-or-pay” clause, the putative lessee was obligated to pay for a specified minimum volume “f gas production from the acreage, regardless of whether that volume of gas was actually produced and taken into the pipeline. The effect of the clause, in the context of a lease-sale agreement, is to prevent the lessee from shutting in production from the acreage covered by the agreement, thereby limiting its financial obligation and depriving the lessor of revenue. "San Juan Pipe Line Co., 9 FPC 170 (1950). “ Congress eventually passed the bill exempting well-head sales by independent producers from Federa! regulation under the Natu- ral Gas Act. On April 15, 1950, President Truman vetoed the meas- ure. Shortly thereafter, on July 11, 1950, the Commission issued Order No. 154, 15 F.R. 4633 (1950), rescinding Section 2.54 of its inconsistent with the Natural Gad Act. 52a IV One of the most bitterly contested issues in this case con- cerns the extent to which the gas-producing potential of the San Juan Basin was fully known at the time E] Paso began its program of acquiring leases in the Basin. Although a great deal of time and attention has been devoted to the geology of the San Juan Basin and its prospects from a business and economic standpoint, the essential facts can be summarized in relatively brief compass. Large volumes of natural gas underlie the San Juan Basin, and geologists and petroleum engineers were generaly aware of this fact as early as 1950, when GLA 32 was signed. *' The gas occurs principally in three sandstone formations: 1. The Pic- tured Cliffs formation, the shallowest of the three; 2. The Mesaverde formation, the primary focus of developmental activities, consisting of two distinct pay sands, the Cliff House and the Point Lookout, separated by the non-gas-bearing Menafee formation; and 3. The Dakota formation, the deepest of the three." The three formations share certain similarities. All are of varying depths and thicknesses. Each of the forma- tions consists of blanket, gas-bearing sands which are deepest towards the center of the Basin and outcrop progressively at the Basin’s perimeter. All of the gas-bearing formations are characterized by relatively low porosity and permeability.” Because of the low porosity and permeability of the pay sands, it was well known that the gas of the San Juan Basin would be relatively expensive to extract, and that a producer would have to wait longer to recover his investment in a San Juan * See ¢.g., Exh. 40 EP 1920. * Exh. 38, III J.A. 552a-554a, 557a. “Exh. 38, III J.A. 554a; Exh. 40 EP 1905(AX2), p. 3; 40 EP 1905(F (1), pp. 3-4; 40 EP 1905(FX1), pp. 4-5. * Exhs. 38, III J.A. 553a-554a, 576a; 40 EP 1905(A\(2), p. 4; 40 EP 1920, p. 119. 58a Basin well than he would have to wait for payout from a well drilled elsewhere. Counterbalancing these factors was the blanket nature of the sands, a phenomenon which tended to assure that gas would be encountered at virtually any location.” In the early 1950's, DeGolyer & MacNaughton (D&M), a respected, well-known firm of oil and gas geologists, made numerous studies and evaluations of the natural gas reserves of the San Juan Basin. D&M concluded that reserves of natural gas were available in sufficient quantities to warrant commer- cial production activities.“ Using the volumetric method of estimating, D&M expressed great confidence that large volumes of natural gas were available for extraction from virtually all of the San Juan Basin acreage that the firm stu- died. For example, in a January 1, 1950 report presenting “an estimate of the proved recoverable reserves from the lower Paradox limestone formation in the Barker Creek Gas Field * * * and certain acreage under dedication to El Paso Natural Gas Company,”” D&M concluded that— This reservoir is estimated to contain 2 trillion 294 bil- lion 272 million cubic feet of gas in place within an area of 45,000 acres. ~ - * * « The indicated original reserve in place per acre for the entire field is 50 million 983 thousand cubic feet per acre. “ 7. - . “ - “ A witness for Northwest testified that, having drilled several hundred wells in the Basin, the pipeline had never had a dry hole. Tr. 765. “See, ¢.g., Exhs. 40 EP 1905(A\(1), (AX(2), (C2), (C9), (E2), (EX4), (F1), (F 2). * Exh. 40 EP 1905(A\(1), p. 1. 5da The remaining gas reserves of the field recoverable to a terminal pressure of 250 psig shut-in wellhead after deducting the cumulative production to January.1, 1950 is 2 trillion 88 billion 743 ion cubic feet. The gas reserve available for pipeline sale after makin allowances for miscellaneous field use, treating losses an fuel, recoverable to a terminal pressure of 250 psig shut-in wellhead is 1 trillion 531 billion cubic feet.” This language, it should be noted, pertains to only one set of leaseholds in the Basin. D&M was similarly sanguine about the abundance of proved reserves underlying other acreage that it studied. The respondents now claim that D&M’s use of the “volumetric” method of calculating reserves in place, rather than the more precise “pressure decline” method, resulted in gross overestimates on D&M’s part. They also quibble about D&M’s use of the term “proved reserves” in the firm's several reports; respondents claim there is a difference between that term as D&M used it and the “proved reserves” that must be present before a sale of a leasehold will be construed as a sale of gas in place under the teachings of Rayne Field and its prog- eny. Both of these contentions are rejected. In the first place, respondents’ criticisms are palpably the product of litigation- inspired 20/20 hindsight. So far as this record shows, all of the contemporaneous, knowledgeable, interested persons who re- viewed the D&M reports placed complete confidence in their accuracy for the purpose for which they were made; the FPC, for instance, certificated a major new pipeline system based upon the reserve estimates produced by D&M. In the second place, it is doubtful that either Rayne Field or any of the cases that have expounded upon the Rayne Field doctrine demand that proven reserves be defined with the hairsplitting nicety upon which the respondents seem to insist. All that Rayne Field requires is that the parties know and * Id. at 4-5. 00a believe there is at least a specified quantity of gas in place upon which they can rely for the purpose of transacting business. Thirdly, while the volumetric method is admittedly less accurate than the pressure decline method, the difference is not substantial when we are dealing with an area as great, and volumes as large, as those the San Juan Basin presented. Furthermore, the volumetric method of estimating reserves is today, and was then, a sound, generally-accepted technique for estimating gas reserves, especially in a field with little or no production history." This is not, moreover, a case of preferring a faulty methodology over an exact and precise one. As counsel for Atlantic Richfield, one of the respondents, pointed out during the Midland trial, “reserve estimating is at best an inexact science.” Finally, as noted above, the record shows that. con- temporaneously with the D&M studies and thereafter, all of the parties acted on the assumption that there were massive quantities of proved reserves underlying the San Juan Basin. The most persuasive point is that, notwithstanding the above- average costs of extracting the San Juan Basin’s gas reserves, ™ experienced and knowledgeable businessmen were willing to expend huge sums of money to obtain rights to the gas reserves of the Basin. “See Exh. 38, IV J.A. 121] §a-19a. “Id. at 1219a. To which the witness responded, “I think that's a good classification, yes, sir.” ™“ Several of the factors that caused the cost of extracting gas from the Basin to exceed the cost of comparable development activities elsewhere in the Southwest have been noted above, There was the low permeability and porosity of its gas-bearing sandstone forma- tions, coupled with the unusually low pressure of the gas reserves. In addition, the relative isolation of the Basin and the lack of a local gas-technology infrastructure, ¢.g.. skilled drillers and equipment suppliers, made the cost of development operations higher than would have been the case in, say, the Permian or Hugoton Basins, 56a Delhi and other independent producers (some of whom are now before the Commission in this case, taking the view that the Basin was a risky speculation), all successful and profit- oriented business concerns, acquired leases on much of the Basin’s acreage and were willing to agree to delay-rental obligations for failure to develop the leases. Delhi had in fact executed two contracts with El] Paso, under which it was obligated to make wellhead sales of the reserves underlying its acreage. Although the contracts were aborted, the problem was not a lack of confidence in the estimates of the Delhi reserves. Similarly, E] Paso risked the vast sums that went into the construction of the San Juan pipeline on the belief that its acquisitions in the Basin included enough reserves to sup- port that investment. The Commission, too, must have been convinced of the virtual certainty of the reserves; it certifi- cated the pipeline on that basis. And D&M, then as now one of the most prestigious engineering consulting firms in the na- tion, had staked its professional reputation on its evaluation. At that time, before the significance of the question for purposes of litigation became known, all of the knowledgeable persons in the field acted upon the assumption that large volumes of proved reserves could be produced from the San Juan Basin. It is too late now to suggest that the contrary was true. Vv As we have seen, use of the lease-sale format as the mechan- ism for transferring reserves began with GLA 32, which was executed early in 1950. GLA 32, however, is not involved in this proceeding, and is substantially different in content from the El Paso lease-sale contracts that were executed later. The basic terms and conditions that recur again and again in the lease-sale contracts involved in this proceeding first appeared in GLA 47, signed in January of 1952. It seems clear that the contents of GLA 47 set the pattern for the rest of the San Juan Basin GLA contracts. For this reason, it is worthwhile to look into the reasons why GLA 47 came into being. 57a Once again, the fundamental stimulus was California's seem- ingly insatiable hunger for natura! gas. As the demands of the to maintain its position as California's primary gas supplier. On March 6, 1951, El Paso had filed an application with the Feder- al Power Commission, seeking a certificate authorizing the transportation of an additional 100,000 Mcf of gas per day from the San Juan Basin to the California border. By early 1951, Delhi had acquired huge reserves of natural gas in the Blanco-Largo and Kutz Canyon-Angel’s Peak Fields of the San Juan Basin. both of which were located to the Southeast of the Barker Dome Field. It was clear to E] Paso that, in order to Support its pending FPC application to in- crease its natural gas service, it would have to obtain dedica- tion of the vast Delhi reserves to the El Paso system. This was the case for two reasons. F irst, the Delhi reserves were uniquely large enough to provide the volumes needed to sup- port the application. Second, the unique strategic location of the Delhi reserves permitted them to be rapidly introduced into El Paso’s pipeline system, thereby providing the deliver- ability that E! Paso needed to demonstrate to the Commission. E] Paso at first attempted to purchase the gas from Delhi at the wellhead. It offered an initial base price of 7.33 cents per Mcf plus longevity escalations. Delhi rejected the offer on the ground that the price was too low. E! Paso then approached other independent producers in the area, seeking to make wellhead sales contracts. But those producers, aware of E] Paso’s urgent need for the dedication of new reserves and of Delhi's strong bargaining position, refused to consummate sales to E] Paso until the outcome of the negotiations with Delhi became known. Hence, E! Paso was forced to deal with Delhi first. Unable to obtain the gas reserves it needed through the medium of conventional wellhead sale contracts, El Paso sought to purchase Delhi's leases in a transaction similar in form to the Barker Dome sale that had taken place in 1950. 58a After months of hard bargaining, the parties executed the lease-sale agreement now known as GLA 47 on January 18, 1952.* GLA 47 covered leases owned by Delhi in the Blanco-Largo Field of the San Juan Basin. In the contract, Delhi agreed to assign its entire interest in the leaseholds to El Paso, reserving an “overriding royalty” on all gas produced and saved from the subject acreage. The quantum of the “overriding royalty” was fixed as follows: 5¥e¢ per Mcf for the first 3 1/3 years from date of closing. 6¥¢ per Mef for the next 3 1/3 years thereafter. 7¥e per Mcf for the next 3 1/3 years thereafter. Not less than 8¢ per Mef for 1 year thereafter. Not less than 9¢ per Mef for 1 year thereafter. Not less than 10¢ per Mcf thereafter.” The agreement also provided for redetermination of the price after the tenth year and after each ensuing five-year period. If the parties were unable to reach agreement as to the new price, the issue would be settled by arbitration, with the arbitrators fixing the price at the fair market value of the gas at the wellhead (but not less than the minimum figures set forth above). The agreement also contained a favored nations clause. In addition to its “overriding royalties” on gas production, Delhi also retained substantial rights in other minerals. Delhi reserved a 33 1/3% interest in all liquid hydrocarbons extracted from the acreage, and it had the option to require El Paso to pay the override in kind or in cash at the fair market value of the liquids. Delhi reserved the rights to any oil recovered from the leasehold. Delhi also retained the rights to all gas or other “The negotiations were conducted by two now-legendary figures in the industry, Clint Murchison, President of Delhi and Paul Kayser, President of E] Paso. * S Exh. 24, p. 5. 59a hydrocarbons taken from any formation deeper than the Mesaverde. The agreement also contained a take-or-pay clause, which required E] Paso to pay for a minimum volume of gas produc- tion from the leasehold, whether or not it took that quantity.” It imposed a number of specific drilling and developmental obligations upon E] Paso, such as the obligation to develop the acreage fully down through the Mesaverde and all shallower formations and to drill at least one well on each 320-acre spac- ing unit during the first five years after execution of the con- tract. E] Paso also undertook complete responsibility for oper- ation of the acreage, including the actual production of gas from it. In the contract, E] Paso agreed to pay Delhi for wells located on the acreage at the date of closing. The price was $80,000 for each completed commercial Mesaverde well and $20,000 for each completed commercial Pictured Cliffs well. E] Paso was given the right to reassign acreage to Delhi, and thereby to be relieved of responsibility to develop the acreage, if it appeared that a specific production unit would not produce gas in commercial quantities. In addition, E] Paso had the right to reconvey to Delhi any specific well that proved to be unpro- fitable to operate; Delhi then had the option to continue pro- duction from the well, selling the gas to E] Paso at the wellhead at the highest price prevailing in the field. Finally, the agree- ment provided that Delhi had the option to purchase, at El Paso’s cost, any oil well E] Paso might complete. The question whether the GLA 47 transaction would render the seller subject to FPC jurisdiction apparently remained * The clause (Article VII, Section 1) was somewhat ambiguous. It set the take-or-pay quantity at all gas produced from the acreage until total production exceeded 100,000 Mef per day. Thereafter, El Paso was obligated to take or pay for the greater of 25% of the open flow capacity of all the wells, on the basis of an 80% load factor, but not more than 150,000 Mcf per day, or 100,000 Mef of gas per day until the acreage was fully developed and 25% of open flow capacity up to 150,000 Mef per day thereafter. In any event, the minimum daily takes could be averaged out over a one-year period. 60a uppermost in the minds of Delhi’s principals, for they sought another legal opinion on that subject shortly before the agree- ment was executed. On January 7, 1952, eleven days prior to the signing of GLA 47, Delhi’s counsel, Charles V. Shannon, issued another opinion, in which he reiterated his view that consummation of this particular lease-sale agreement would not make the transaction jurisdictional under the Natural Gas Act.” GLA 47 was closed on March 1, 1952. On that date, Delhi assigned its leases and wells to El Paso and El Paso paid Delhi $1,020,941.34 for Mesaverde and Pictured Cliffs wells situated on the acreage covered by the agreement.” Shortly after the closing, during March 1952, E] Paso began to transport gas produced from the GLA-47 acreage through its interstate pipe- line system.” Three months later, on June 19, 1952, the Feder- al Power Commission granted E] Paso’s application for a cer- tificate authorizing the expansion of its facilities.” * It is significant that Shannon’s opinion was issued about a month after the parties had signed a memorandum agreement, dated De- cember 5, 1951, outlining the significant terms of the contemplated lease-sale agreement. They evidently believed that the deal could have been aborted if counsel subsequently advised that there had been a shift in the jurisdictional winds. * CPFF (Complainants’ Proposed Findings of Fact) No. 116, p. 43; See also Exh. 24 (Letter from Delhi Oil Corp. to E] Paso Natural Gas Co., dated February 29, 1952, re: Delhi-E] Paso Trade, pp. 1-4. It should be noted that the parties considered the wells to be sufficient- ly commercial to fall within the contract requirement that E] Paso must pay Delhi only for commercial wells. See Exh. 24, p. 10. *CPFF No. 118, p. 43. ® El Paso Natural Gas Co., 11 FPC 1071. The Commission also removed a 34 Bef annual ceiling on volumes transported through El Paso’s system. The ceiling had been imposed when the E] Paso pipeline from the San Juan Basin was originally certificated. 6la At present, the interest owners of GLA 47 (successors to Delhi’s rights) are Tenneco Oil Company and Continental Oil Company. Both of these companies have demanded increased overriding royalty payments from El Paso. Both Tenneco and Continental were parties to the U.S. District Court suit in Midland, Texas. VI It was as if the execution of GLA 47 had broken a logjam. After the March 1, 1952 closing of GLA 47, El Paso’s pro- gram of acquiring gas reserves in the San Juan Basin through purchases similar to the so-called “Delhi deal” proceeded rapidly. In all, the pipeline made 36 lease-sale contracts with the owners of gas leaseholds in the Basin, thereby acquiring the gas underlying more than a quarter of a million acres.” Although it took some six and one-half years to consummate all of the agreements, the large tracts were acquired early in the program. Almost two-thirds of the acreage (some 65.6% of it) was under contract by January 1953, a year after execution of the first GLA, and the contracts for more than 80% (82.5%) of the acreage had been signed by July 8, 1953, some 18 months after GLA 47 came into being. The essential details of the GLA acquisitions are provided in the following table: *! Only 35 of the GLA contracts are implicated in this case. The exception is GLA 153, which is shown on Exhibit 36 as having been executed on May 10, 1953. Francis I. Harvey is identifed as the interest owner. For reasons which are not presently apparent, the Commission did not designate the GLA 153 interest owners as re- spondents when it initiated this case. See Tr. 412. Prior Gas GLA Date Date Origaeal Present Purchase No. Signed Closed Owner Owner Contract“ 47 1/18/52 3/1/52 Delhi Oil Corp. Tenneco Oil Co. & Continental Oil No Co 51 2/29/52 41/52 J. Glenn Turner Mapeo Production Co. & Hopi Oil Yes Co 52 4/1952 5/1652 Three States Nat. Gas Co. Tenneco Conoco Yes 60 9/26/52 1/2253 San Juan Drilling Co., ¢f a/ Tenneco Conoco No 61 9/26/52 15538 Sunray Oil Co. Sun Oil Co. : No 62 10/10/52 318/53 Blackwood & Nichols Co. F.HLN., Ltd. No 63 123538 22038 Atlantic Refining Co. Atlantic Richfield Co. No 66 33153 42433 Lucerne Corp. W. Watson LaForce, ef al No 2 6/2/53 71553 J. Glenn Turner Mapeo Hopi Yes 76* 7/6/53 Vi Johnston Oil and Gas Co. Union Oil Co. of Cal. No =e" 7/653 1354 R. E. Beamon Robert Beamon, ef «/ No 73 Tes T2738 Three States & Albuquerque Ass‘. — Tenneco Conoco, Am. Petrofina, ef No Oil Co. al 86 12153 12158 J. Glenn Turner Mapco Hopi Yes 101 4254 4201 J. Glenn Turner Mapeo Hopi Yes 106 52554 TH Morris Mizel, ef wr Morris Mizel, ef wr. Yes 122 10/12/54 12/155 White, McMillan & McLane Producing Royalties, Inc., ef al. Yes 125" 11/1054 1130/56 Benson-Montin, ef «/ American Petrofina Co. Yes 127 121 12144 J. Glenn Turner Mapeo Hopi Yes 129 12245041056 Delta Drilling Co. Delta Drilling Co., et al Yes 139 3355 2138 White & McLane Producing Royalties, Inc. ef a/ Yes 152° 4156 4156 Webb & Turner Turner & Webb Yes 157" 61/55 655 Turner & Webb Turner & Webb Yes 160" 7/55 ri ts) Turner & Webb Turner & Webb Yes 172 4/2955" 92453" Beaver Lodge Oil Corp. Crown Central Petroleum Corp. Yes 195° 1956 Lw5G Turner & Webb Turner & Webb Yes 196 12.2855 1272855 Turner & Webb, ef «/ Turner & Webb, ef al. Yes 197 122855 122855 Huerfanito Drilling Co. Huerfanito Drilling Co. No ae Prior Gas GLA Date Date Original Present Purchase No. Sigued Closed Owner Owner Contract“ 193* 12/26/55 1228/55 Turner, Webb & Schultz, ef a/ Turner, Webb & Schultz, ef al. Yes 231° 12/1/55 155 Turner, Webb & Abraham Turner, Webb, ef al, Yes 243" 1/8/57 1657 Turner, Webb & Schultz Turner, Webb & Schultz Yes 249 1/57 1857 Turner & Webb Benson-Montin-Greer Drilling Yes Corp., et al, 343* 7/2938 41/58 Texas Nat'l Petroleum Co. Union Oil Co. of Cal. No 349°" 7/29/58 72938 Texas Nat'l Petroleum Co. Union Oil Co. of Cal. No 350* 4/5/58 45 5s R. E. Beamon Robert Beamon, ef al No 351** 8/5/58 995s kK. E. Beamon Robert Beamon, ef al. No *GLAs 76, 77, 348, and 350 related to the same acreage. **GLAs 349 and 351 related to the same acreage. “GLAs which were the subject of the case of William G. Webb, ef al. (Op. No. 642), 49 FPC 17 (1973). “Leases were transferred on September 24, 1953 pursuant to « ‘etter agreement dated July 30, 1953. Formal GLA contract was signed on April 29, 1955 “Exhibits 42 (Rev.) and 36 show closing date as 94958. CPFF No. 432 gives it as 7/29/58. “Yes” indicates that, prior to the lease-sale, El Paso purchased yas from the acreage under a wellhead sale. 64a As the table indicates, the number of separate tracts of land involved was somewhat less than the number of GLA con- tracts. Four of the agreements GLAs 76, 77, 348 and 350, related to the same acreage, with the latter two transactions transferring to El] Paso the deeper horizons of the tract. Similarly, both GLA 349 and GLA 351 related to the same acreage, with the first transferring five-sixths of the working interest and the second transferring the remainder. In the case of almost half the contracts—16 of them—we find that the interest owner who sold the leasehold consisted of J. Glenn Turner, Delhi’s General Counsel, one of Turner’s part- ners in the Dallas law firm of Turner, Atwood, White, McLane and Francis, or both. Whether these corporate lawyers were acting for themselves or as agents for others is a question upon which the record offers no enlightenment. Eight of the Webb- Turner GLAs, plus GLA 125, were the subject of the Federal Power Commission’s Opinion No. 642."' As the table above indicates, natural gas from the acreage involved had been sold to El Paso under conventional wellhead sale contracts before the Webb-Turner GLA contracts were signed. In order to transfer the leasehold interests, it was necessary for the seller, in each case, to obtain the Commis- sion’s approval; technically, the transmutation of [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385011_1395%3A02. Public record. Not legal advice.