California v. Southland Royalty Co.

436 U.S. 519, 98 S. Ct. 1955, 56 L. Ed. 2d 505, 1978 U.S. LEXIS 30

Opinions

Mr. Justice White

delivered the opinion of the Court.

In 1925 the owners of certain acreage in Texas executed a lease which gave to Gulf Oil Corp., as lessee, the exclusive right to produce and market oil and gas from that land for the next 50 years.¹ Gulf was entitled to drill wells, string telephone and telegraph wires, and build storage facilities and pipelines on the land. Gulf would also have “such other privileges as are reasonably requisite for the conduct of said operations.” App. 135. In exchange, the owners were to receive a royalty based on the quantity of natural gas produced and the number of producing wells, as well as other royalties and payments. The following year, the owners of the property sold one-half of their mineral fee interest to respondent South-land Royalty Co. and the rest to other respondents.

In 1951 Gulf contracted to sell casinghead gas from the leased property to the El Paso Natural Gas Co., an interstate pipeline. After this Court’s decision in Phillips Petroleum Co. v. Wisconsin, 347 U. S. 672 (1954), Gulf applied for a certificate of public convenience and necessity from the Federal Power Commission authorizing the sale in interstate commerce of 30,000 Mcf per day. By order dated May 28, 1956, the Commission granted a certificate of unlimited duration, and this certificate was among those construed as “permanent” by this Court in Sun Oil Co. v. FPC, 364 U. S. 170, 175 (1960).² Gulf entered into a second contract to sell additional volumes of gas to El Paso in 1972, and obtained a certificate of unlimited duration for those volumes in 1973.

The original 50-year lease obtained by Gulf expired on July 14, 1975, and, under local law, the lessee’s interest in the remaining oil and gas reserves terminated and reverted to respondents. See Gulf Oil Corp. v. Southland Royalty Co., 496 S. W. 2d 547 (Tex. 1973). Just prior to expiration of the lease, respondents arranged to sell the remaining casinghead gas to an intrastate purchaser, at the higher prices available' in the intrastate market.

El Paso, in order to preserve one of its sources of supply, then filed a petition with the Commission seeking a determination that the remaining gas reserves could not be diverted to the intrastate market without abandonment authorization pursuant to § 7 (b) of the Natural Gas Act of 1938, 52 Stat. 824, as amended, 15 U. S. C. § 717f (b) (1976 ed.).³ The Commission agreed with this contention, relying on the “principle established by Section 7 (b) that 'service’ may not be abandoned without our permission and approval.” El Paso Natural Gas Co., 54 F. P. C. 145, 150, 10 P. U. R. 4th 344, 348 (1975). The Commission held that respondents could not, upon termination of the lease, sell gas in intrastate commerce without prior permission from the Commission under § 7 (b) of the Natural Gas Act and that Gulf was also obligated to seek abandonment permission. The Commission reaffirmed this view in an order denying rehearing, but added language insuring that any deliveries of gas to El Paso during the period that the Commission’s order was under review would not constitute a dedication of those reserves to the interstate market. El Paso Natural Gas Co., 54 F. P. C. 2821, 11 P. U. R. 4th 488 (1975).

On respondents’ petition for review, the Court of Appeals for the Fifth Circuit reversed. Southland Royalty Co. v. FPC, 543 F. 2d 1134 (1976). The court held that Gulf, as a tenant for a term of years, could not legally dedicate that portion of the gas which Southland and other respondents might own upon expiration of the lease. Because of the importance of the question presented to the authority of the Federal Power Commission, now the Federal Energy Regulatory Commission, we granted the petition for certiorari. 433 U. S. 907. We reverse.

The fundamental purpose of the Natural Gas Act is to assure an adequate and reliable supply of gas at reasonable prices. Sunray Mid-Continent Oil Co. v. FPC, 364 U. S. 137, 147, 151-154 (1960); Atlantic Refining Co. v. Public Serv. Comm’n of New York, 360 U. S. 378, 388 (1959). To this end, not only must those who would serve the interstate market obtain a certificate of public convenience and necessity but also, under § 7 (b) of the Act:

“No natural-gas company shall abandon all or any portion of its facilities subject to the jurisdiction of the Commission, or any service rendered by means of such facilities, without the permission and approval of the Commission first had and obtained, after due hearing, and a finding by the Commission that the available supply of natural gas is depleted to the extent that the continuance of service is unwarranted, or that the present or future public convenience or necessity permit such abandonment.” 15 U. S. C. § 717f (b) (1976 ed.).

The Commission may therefore control both the terms on which a service is provided to the interstate market and the conditions on which it, will cease:

“An initial application of an independent producer, to make movements of natural gas in interstate commerce, leads to a certificate of public convenience and necessity under which the Commission controls the basis on which 'gas may be initially dedicated to interstate use. Moreover, once so dedicated there can be no withdrawal of that supply from continued interstate movement without Commission approval.’ ” Sunray Mid-Continent Oil Co., supra, at 156.

The Act was “so framed as to afford consumers a complete, permanent and effective bond of protection from excessive rates and charges.” Atlantic Refining Co. v. Public Serv. Comm’n of New York, supra, at 388.

The jurisdiction of the Commission extends to the transportation of natural gas in interstate commerce or the sale in interstate commerce for resale to consumers. § 1 (b), 15 U. S. C. § 717 (b) (1976 ed.). Gas which flows across state lines for resale is dedicated to interstate commerce regardless of the intentions of the producer. California v. Lo-Vaca Co., 379 U. S. 366 (1965). The Court there approved an approach to questions of the Commission’s jurisdiction based on the physical flow of the gas:

“We said in Connecticut Co. v. Federal Power Comm’n, 324 U. S. 515, 529, 'Federal jurisdiction was to follow the flow of electric energy, an engineering and scientific, rather than a legalistic or governmental, test.’ And that is the test we have followed under both the Federal Power Act and the Natural Gas Act, except as Congress itself has substituted a so-called legal standard for the technological one. Id., at 530-531.” Id., at 369.

The Court reasoned that in the circumstances of that case,⁴ “[t]he fact that a substantial part of the gas will be resold [in interstate commerce] . . . invokes federal jurisdiction at the outset over the entire transaction.” Ibid.

In this litigation the Commission held that once gas began to flow in interstate commerce from a field subject to a certificate of unlimited duration, that flow could not be terminated unless the Commission authorized an abandonment of service. The initiation of interstate service pursuant to the certificate dedicated all fields subject to that certificate. The expiration of a lease on the field of gas did not affect the obligation to continue the flow of gas, a service obligation imposed by the Act.

We think that the Commission’s interpretation of the abandonment provision of the Natural Gas Act is a permissible one. In Sunray Mid-Continent Oil Co. v. FPC, the Court recognized that the obligation to serve the interstate market imposed by a certificate of unlimited duration could not be terminated by private contractual arrangements. In that case, a producing company which had contracted with a pipeline to supply gas for 20 years sought a certificate from the Commission limited to that period. The Commission insisted on a permanent certificate; and this Court upheld its authority to do so, holding that even after the contract had expired, the producer would remain under an obligation to supply gas to the pipeline, unless permission to abandon service had been obtained. The obligation on the producer which survived after the contract term “will not be one imposed by contract but by the Act.” 364 U. S., at 155. The obligation to continue the service despite the provisions of the sales contract was held essential to effectuate the purposes of the Act; otherwise producers and pipelines would be free to make arrangements that would circumvent the ratemaking and supply goals of the statute. Id., at 142-147.

Similar principles control this litigation. This issuance of a certificate of unlimited duration covering the gas at issue here created a federal obligation to serve the interstate market until abandonment authorization had been obtained. The Commission reasonably concluded that under the statute the obligation to continue service attached to the gas, not as a matter of contract but as a matter of law, and bound all those with dominion and power of sale over the gas, including the lessors to whom it reverted. Just as in Sunray, the service obligation imposed by the Commission survived the expiration of the private agreement which gave rise to the Commission’s jurisdiction.

Respondents seek to distinguish Sunray on the ground that the producer in that case owned all of the gas covered by the certificate, but the central theme of that opinion is that the Act is concerned with the continuation of “service” rather than with particular sales of gas or contract rights. The Court traced the language of the statute to show that “all the matters for which a certificate is required — the construction of facilities or their extension, as well as the making of jurisdictional sales — must be justified in terms of a ‘service’ to which they relate.” Id., at 150. The Court specifically noted that “§ 7 (b) does not refer to the abandonment of the continuation of sales, but rather to the abandonment of ‘services.’ ” Id., at 150 n. 17. The Commission “ [had] long drawn a distinction between the underlying service to the public a natural gas company performs and the specific manifestation — the contractual relationship — which that service takes at a given moment.” Id., at 152. Just as the federal obligation to continue service was held paramount to private arrangements in Sunray, that obligation must be recognized here. Once the gas commenced to flow into interstate commerce from the facilities used by the lessees, § 7 (b) required that the Commission’s permission be obtained prior to the discontinuance of “any service rendered by means of such facilities.” Private contractual arrangements might shift control of the facilities and thereby determine who is obligated to provide that service, but the parties may not simply agree to terminate the service obligation without the Commission’s permission.

Respondents contend that the gas at issue here was never impressed with an obligation to serve the interstate market because it was never “dedicated” to an interstate sale. The core of their argument is that “no man can dedicate what he does not own.” Brief for Respondent Southland Royalty Co. et al. 8. This maxim has an appealing resonance, but only because it takes unfair advantage of an ambiguity in the term “dedicate.” For most lawyers, as well as laymen, to “dedicate” is to “give, present, or surrender to public use.” Webster’s Third New International Dictionary 589 (1961). But gas which is “dedicated” pursuant to the Natural Gas Act is not surrendered to the public; it is simply placed within the jurisdiction of the Commission, so that it may be sold to the public at the “just and reasonable” rates specified by § 4 (a) of the Act, 15 U. S. C. § 717c (a) (1976 ed.). Judicial review insures that those rates will not be confiscatory. See FPC v. Natural Gas Pipeline Co., 315 U. S. 575 (1942); FPC v. Hope Gas Co., 320 U. S. 591, 602-603 (1944). Thus, by “dedicating” gas to the interstate market, a producer does not effect a gift or even a sale of that gas, but only changes its regulatory status.⁵ Here, the lessee dedicated the gas by seeking and receiving a certificate of unlimited duration from the Commission. Respondents apparently had no objection, for they could have intervened in those proceedings but did not do so. El Paso Natural Gas Co., 54 F. P. C. 917, 919 n. 3 (1975).

Respondents also appear to argue that they should not be viewed as “natural gas companies” with respect to the Wad-dell Ranch gas because they have not voluntarily committed any act that would place them within the Commission’s jurisdiction. As we have seen, this argument is somewhat beside the point, for the obligation to serve the interstate market had already attached to the gas, and respondents became obligated to continue that service when they assumed control of the gas. In the Commission’s language, “the dedication involved is not the dedication of an individual party or producer, but the dedication of gas.” 54 F. P. C., at 149, 10 P. U. R. 4th, at 348.

In any event, we perceive no unfairness in holding respondents, as lessors, responsible for continuation of the service until abandonment is obtained. Respondents were “mineral lease owners who entered into a lease that permitted the lease holders to make interstate sales.” 54 F. P. C., at 920. They did not object when Gulf sought a certificate from the Commission. Indeed, as the Commission pointed out, Gulf may even have been under a duty to seek interstate purchasers for the gas. Id., at 919. Gas leases are typically construed to include a duty diligently to develop and market, see, e. g., 5 H. Williams & C. Meyers, Oil and Gas Law § 853 (1977), and at the time the certificate was sought the interstate market was the major outlet for gas, see Atlantic Refining Co. v. Public Serv. Comm’n of New York, 360 U. S., at 394. Having authorized Gulf to make interstate sales of gas, respondents could not have expected those sales to be free from the rules and restrictions that from time to time would cover the interstate market. Cf. Louisville & Nashville R. Co. v. Mottley, 219 U. S. 467, 482 (1911).⁶

In Sunray, the Court discussed the “practical consequences” for the consumer if the term of the sales contract limited the term of the certificate. 364 U. S., at 143, 142-147. The Court reasoned:

“If petitioner’s contentions . . . were . . . sustained, the way would be clear for every independent producer of natural gas to seek certification only for the limited period of its initial contract with the transmission company, and thus automatically be free at a future date, untrammelled by Commission regulation, to reassess whether it desired to continue serving the interstate market.” Id., at 142.

A “local economy which had grown dependent on natural gas as a fuel” might experience disruption or significantly higher prices. Id., at 143. These observations are equally pertinent to private arrangements by way of leases. If the expiration of a lease to mineral rights terminated all obligation to provide interstate service, producers would be free to structure their leasing arrangements to frustrate the aims and goals of the Natural Gas Act.

Respondents suggest that the Commission could require a voluntary assumption of the service obligation by the lessor as a condition to certificates issued in the future. It is obvious that this solution does nothing to protect those communities presently depending on the flow of gas pursuant to a certificate of unlimited duration already issued. Moreover, the Court questioned in Sunray whether the conditioning power could be used to achieve indirectly what the Act did not authorize the Commission to do directly. Id., at 152. In light of this tension, the Court concluded that “the Commission’s power to protect the public interest under § 7 (e) need not be restricted to these indirect and dubious methods.” Ibid.

We conclude that the Commission acted within its statutory powers in requiring that respondents obtain permission to abandon interstate service. “A regulatory statute such as the Natural Gas Act would be hamstrung if it were tied down to technical concepts of local law.” United Gas Improvement Co. v. Continental Oil Co., 381 U. S. 392, 400 (1965). By tying the concept of dedication to local property law, respondents would cripple the authority of the Commission at a time when the need for decisive action is greatest. Guided by Sunray, we believe that the structure and purposes of the Natural Gas Act require a broader view of the Commission’s authority.

The decision of the Court of Appeals is reversed, and the cases are remanded for further proceedings consistent with this opinion.

So ordered.

Mr. Justice Stewart and Mr. Justice Powell took no part in the consideration or decision of these cases.

1

The “Waddell” lease, executed on July 14, 1925, covered 45,771 acres in Crane County, Tex. In the same year Gulf executed an identical lease, the “Goldsmith” lease, with the owners of 19,840 acres in Ector County, Tex. The gas remaining at the expiration of both leases is at issue in this litigation, but because the parties are in agreement that there are no material differences in the language or history of these leases, we shall discuss only the Waddell lease.

2

The Commission’s order of May 28, 1956, had granted more than 100 certificates with identical language. This Court’s decision in Sun Oil, though prompted by a dispute over a specific certificate, interpreted the Commission’s order as it applied to the entire “batch of certificates.” 364 U. S., at 175.

3

Texaco, Inc., owner of a 25% interest in the reversion under the Goldsmith Lease, see n. 1, supra, also filed a petition with the Commission, seeking a declaration that upon expiration of the lease the fee owners would be free to sell the remaining gas to intrastate purchasers. Although Texaco’s interest was adverse to El Paso, Texaco’s petition raised the same issues as El Paso’s petition and was therefore consolidated with it. The State of California and its Public Utilities Commission intervened in the consolidated proceeding.

4

In California v. Lo-Vaca Co., an interstate pipeline had entered into a private contractual arrangement with a producer that all gas purchased pursuant to the agreement would be for internal use only. Despite this explicit reservation intended to remove this gas from the jurisdiction of the Commission, the Court held that the Commission had jurisdiction over the entire transaction because at least some part of the contract gas, physically commingled in the pipeline .with gas from other sources, would be sold to other interstate purchasers.

5

An analogy in state law may be found in the power of a tenant to seek a change in the zoning status of leased property. See, e. g., Newport Associates, Inc. v. Solow, 30 N. Y. 2d 263, 283 N. E. 2d 600 (1972), cert. denied, 410 U. S. 931 (1973); Richman v. Philadelphia Zoning Board of Adjustment, 391 Pa. 254, 258, 137 A. 2d 280, 283 (1958).

6

Moreover, the type of regulation which the Commission has here imposed is not without precedent. As we recognized in Sunray, § 7 (b) of the Natural Gas Act “follows a common pattern in federal utility regulation.” 364 U. S., at 141-142. Section 1 (18) of the Interstate Commerce Act, 49 U. S. C. § 1 (18), similarly provides that “no carrier by railroad subject to this chapter shall abandon all or any portion of a line of railroad, or the operation thereof, unless and until there shall first have been obtained from the commission a certificate that the present or future public convenience and necessity permit of such abandonment.” At a very early date the Interstate Commerce Commission interpreted this provision to require that a certificate of abandonment be obtained prior to the cessation of operations over leased tracks, even though the lease had expired by its own terms. Chicago & Alton R. Co. v. Toledo, Peoria & Western R. Co., 146 I. C. C. 171 (1928). In Lehigh Valley R. Co. Proposed Abandonment of Operation, 202 I. C. C. 659 (1935), the Commission held that even a lessor which had ceased to operate as a railroad prior to enactment of the Interstate Commerce Act would be required to seek permission to abandon a railroad line which had reverted to it upon expiration of a lease. Long before Gulf applied for its certificate, this Court approved these decisions. See Smith v. Hoboken R., Warehouse & S. S. Connecting Co., 328 U. S. 123, 130 (1946) (“[A] certificate is required under § 1 (18) whether the lessee or the lessor is abandoning operations”); Thompson v. Texas Mexican R. Co., 328 U. S. 134, 144-145 (1946) (“[T]he fact that the trackage contract was entered into in 1904 prior to the passage of the Act is immaterial; the provisions of the Act, including § 1 (18), are applicable to contracts made before as well as after its enactment”) . These precedents demonstrate that the specific type of obligation imposed here — an obligation to continue interstate service until abandonment has been obtained — is within the range of regulatory possibilities that must be anticipated by one profiting from interstate operations.