Southland Royalty Co. v. Federal Power Commission, s. 75-3373

• Decision Date: 13 December 1976
• Docket Number: 75-3682,75-2851,Nos. 75-3373,75-3819 and 75-4001,s. 75-3373
• Citation: 543 F.2d 1134
• Court: U.S. Court of Appeals — Fifth Circuit
• Parties: SOUTHLAND ROYALTY COMPANY et al., Texaco Inc., Exxon Corporation, and Mobil Oil Corporation, Petitioners, v. FEDERAL POWER COMMISSION, Respondent.

Page 1134

543 F.2d 1134

SOUTHLAND ROYALTY COMPANY et al., Texaco Inc., Exxon Corporation, and Mobil Oil Corporation, Petitioners, v. FEDERAL POWER COMMISSION, Respondent.

Nos. 75-3373, 75-2851, 75-3682, 75-3819 and 75-4001.

United States Court of Appeals Fifth Circuit.

Dec. 13, 1976.

J. Evans Attwell, Henry S. May, Jr., Houston, Tex., for petitioner in No. 75-3373.

J. Evans Attwell, P. M. Schenkkan, Travis C. Broesche, Houston, Tex., Ernest E. Smith, III, Austin, Tex., Platt W. Davis, III, Washington, D. C., for Southland Royalty Co.

Kirk W. Weinert, Roger L. Brandt, C. Fielding Early, Jr., Houston, Tex., for Texaco, Inc.

Sherman S. Poland, Bernard A. Foster, III, Martin N. Erck, Douglas E. Mock, Houston, Tex., for Exxon Corp.

Robert D. Haworth, Houston, Tex., for Mobil Oil.

C. Frank Reifsnyder, Washington, D. C., Richard S. Morris, Asst. Gen. Counsel, Harris S. Wood, Atty., El Paso, Tex., G. Scott Cuming, Gen. Counsel, Houston, Tex., for El Paso Natural Gas Co.

Randolph W. Deutsch, J. Calvin Simpson, Richard D. Gravelle, San Francisco, Cal., for People & Public Utilities Comm. of State of Cal.

Jeffrey A. Meith, Los Angeles, Cal., for Southern California Gas Co.

Malcolm H. Furbush, San Francisco, Cal., Harris S. Wood, El Paso, Tex., for Pacific Gas & Elec. Co.

John Davenport, Austin, Tex., for Texas Independent Producers, etc.

Thomas W. Derryberry, Asst. Atty. Gen., William O. Jordan, Santa Fe, N. M., for State of N. M.

William P. Pannill, F. H. Pannill, Houston, Tex., for Crane City Development Co.

J. Milton Richardson, Asst. Atty. Gen., Austin, Tex., amicus curiae for State of Tex.

James E. Williams, Lake Charles, La., amicus curiae, for Commissioner of Conservation of La., etc.

Paul E. DeGraffenreid, Atty., Commissioners of the Land Office, State of Okl., Oklahoma City, Okl., amicus curiae, for State of Okl. ex rel. Comm. of the Land Office.

Robert W. Perdue, Deputy Gen. Counsel, Steven A. Taube, Douglas L. Corbett, Attys., Drexel D. Journey, Gen. Counsel, Allan A. Tuttle, Sol., F.P.C., Washington, D. C., for respondent.

Martin N. Erck, Paul W. Wright, Houston, Tex., Sherman S. Poland, Bernard A. Foster, Jr., Ralph C. Oser, Washington, D. C., for petitioner in No. 75-3819.

Petitions for Review of Orders of the Federal Power Commission (Texas Cases).

Before CLARK, RONEY and TJOFLAT, Circuit Judges.

CLARK, Circuit Judge:

Unprecedented escalations in the price of energy have stunned public, industry and engineers of federal regulatory process alike. The gross imbalance between controlled prices at which interstate natural gas must be sold ¹ and the substantially higher values set by the free market for gas and other fuels has created a sunburst of unique regulatory issues. Today's case is one such ray. Southland Royalty Co., and others, ² (Southland) challenge opinions of the Federal Power Commission (FPC) which held that natural gas which Southland now owns in fee under a leasehold reversionary interest had been dedicated to interstate commerce by the lessee of the property. The challenge presents this significant property rights vs. regulatory powers issue: Does the lessee under a 50-year fixed-term mineral lease, by making certificated sales of leasehold natural gas in interstate commerce, thereby dedicate to interstate commerce the gas which remains in the ground at the end of the 50th year? The FPC answered affirmatively. We reverse.

Two different leases are involved in the present case. Gulf Oil Corp. (Gulf) entered into a 50-year fixed-term lease on July 14, 1925, with W. N. Waddell. This lease covered approximately 46,000 acres in Crane County, Texas. Southland is the successor in title to the Waddell reversionary interest. After Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672, 74 S.Ct. 794, 98 L.Ed. 1035 (1954), Gulf received a certificate of public convenience and necessity from the FPC which authorized the sale of surplus residue gas under its lease in interstate commerce to El Paso Natural Gas Co. (El Paso). ³ A separate certificate was issued after Gulf and El Paso entered into a second contract in 1972 for the sale of further volumes of surplus residue gas. At no time was Southland a party to these contracts or the certification; the only interest which Southland held was the right to receive a royalty on the gas sold. Shortly prior to the end of Gulf's 50-year term, Southland contracted with the operator of an intrastate natural gas pipeline, Intratex Gas Company, for the future disposal of the gas covered by Southland's reversionary interest.

A similar 50-year fixed-term lease was executed August 7, 1925, between Gulf as lessee and Goldsmith and others as lessors. This lease covered approximately 20,000 acres in Ector County, Texas. In 1929 Texaco, Inc., acquired a one-fourth interest in the Goldsmith reversion. Southland also has a fractional interest in the reversion in the Ector County properties, as do other parties. The lessee, Gulf, made the same sort of unqualified interstate dedication of the natural gas being produced from this lease.

El Paso petitioned the FPC for a declaratory order establishing that Southland could not sell its gas in the intrastate market without first seeking FPC approval through abandonment procedures. 15 U.S.C. § 717f(b). Texaco also sought clarification of its position with regard to the Ector County properties, and its petition was consolidated with that filed by El Paso.

The FPC held that the reversioners could not remove the gas from the interstate market without FPC approval to abandon. The principal basis for its conclusion was the unqualified dedication by the initial lessees of the properties committed all of the leasehold gas including that which might become the property of reversioners to the interstate market. Alternatively, the FPC asserted that the acceptance of royalties from interstate gas sales of the lessees constituted ratification by the reversioners.

The FPC reasoned that this provision of Section 7(b) of the Natural Gas 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 permits such abandonment. (15 U.S.C. § 717f(b) (Emphasis supplied by the Commission.))

and this language from the Supreme Court's opinion in Atlantic Refining Co. v. Public Service Commission (CATCO), 360 U.S. 378, 388-89, 79 S.Ct. 1246, 1253-54, 3 L.Ed.2d 1312 (1959):

The (Natural Gas) Act was so framed as to afford consumers a complete, permanent and effective bond of protection from excessive rates and charges. . . . Section 7(e) vests in the Commission control over the conditions under 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.

authorized the conclusion that once the lessee had made a dedication of gas from the leasehold, none of the gas under those lands could be removed from the interstate market unless the FPC authorized abandonment. That Gulf's ownership was always limited to the gas produced within a fixed 50-year term was held to be irrelevant.

Under applicable Texas law, Gulf's rights were those of a tenant for a term of years; its interest was a limited one which terminated completely when title reverted to Southland at the expiration of the 50-year term. It is black letter law that a person holding a present interest in real property which is limited in duration cannot create an estate which will extend beyond the term of his interest. 2 R. Powell, The Law of Real Property P 247(1) (Rohan Ed. 1967). See also, e. g., 1 H. Tiffany, The Law of Real Property § 153 (3d ed. 1939); 2 H. Williams & C. Meyers, Oil & Gas Law § 332 (1975). Since Gulf never was possessed of rights in the gas under the leasehold lands which could survive the termination of its 50-year lease, it never could create rights in a third person to that same gas. Waddell v. Empire Drilling Co., 358 S.W.2d 221 (Tex.Civ.App. Eastland 1962, writ ref'd n. r. e.). The estates in the single tract are as separate as though they subsisted in separate parcels of land. Though it is unquestioned that Gulf's dedication covered all of the surplus residue gas it produced during its lease term, there likewise can be no question that, under well established concepts of property law, Gulf could not legally deal in or dedicate that portion of the gas which Southland might own upon termination of Gulf's estate. Indeed, the FPC does not attack this construction of Texas law. Rather, it emphasizes that (1) the extent of Gulf's rights during its 50-year term was unquantified; (2) under its presently vested leasehold estate, Gulf had the right to withdraw all of the natural gas under the lease land if it could; and (3) the interest of the reversioners was both future and contingent. Under this state of affairs, FPC asserts that Gulf was empowered to dedicate all lease gas to the interstate market.

Though the FPC attempts to distinguish it, the conclusion reached in the case of El Paso Natural Gas Co. v. Perry R. Bass, 48 F.P.C. 1269 (1972), is a compelling argument for our decision here. Bass contracted with Shell Oil Company to develop the gas under his property, retaining, however, a royalty interest and an option to convert his royalty interest into a one-half working interest. Under the contract, Shell had no right to sell any gas attributable to Bass's working interest. Shell's operations were certificated by the FPC for sales in interstate commerce to El Paso Natural Gas Company. Bass elected to convert...