United Gas Pipe Line Company v. Combs Federal Energy Regulatory Commission v. Combs

• Decision Date: 18 June 1979
• Docket Number: 78-249,Nos. 78-17,s. 78-17
• Parties: UNITED GAS PIPE LINE COMPANY, Petitioner, v. Billy J. McCOMBS et al. FEDERAL ENERGY REGULATORY COMMISSION, Petitioner, v. Billy J. McCOMBS et al
• Court: U.S. Supreme Court

442 U.S. 529

99 S.Ct. 2461

61 L.Ed.2d 54

UNITED GAS PIPE LINE COMPANY, Petitioner,

v Billy J. McCOMBS et al.

FEDERAL ENERGY REGULATORY COMMISSION, Petitioner,

v. Billy J. McCOMBS et al.

Nos. 78-17, 78-249.

Argued Feb. 22, 1979.

Decided June 18, 1979.

Syllabus

In 1954, the Federal Power Commission, now the Federal Energy Regulatory Commission, issued a certificate of public convenience and necessity authorizing the sale to petitioner United Gas Pipe Line Co. (United) of natural gas produced from a leased tract of land. After the lease had been assigned several times and a replacement certificate issued, the lessee-producer notified United in 1966 that the existing wells were depleted and that no other gas was available at that time. Despite a warning from the Commission, the lessee never sought the Commission's authorization, pursuant to § 7(b) of the Natural Gas Act (Act), for abandoning the service in interstate commerce. The lease was subsequently assigned to a group headed by respondent McCombs, which group discovered new gas reserves underlying the tract and contracted to sell the gas to respondent E. I. du Pont de Nemours & Co. for uses in intrastate commerce. Upon learning of the renewed production, United asserted its contractual right to purchase the newly discovered gas and filed a complaint with the Commission. The Commission upheld the Administrative Law Judge's determination that the McCombs group could not divert the gas from the interstate market, because the gas had been dedicated to interstate commerce and the agency had never authorized an abandonment of service. In addition, the Commission refused to grant its approval retroactively since the supply of gas was not in fact depleted. Accordingly, the Commission ordered delivery to United of all gas derived from the tract. The Court of Appeals set aside the Commission's order, holding that "strict compliance" with § 7(b)'s approval requirement was unnecessary in this case, the abandonment having been accomplished "as a matter of law, when all of the parties recognized that the then known natural gas reserves were depleted in 1966 followed by failure to provide any service . . . for a period of five years."

Held:

1. Section 7(b) requires producers to continue supplying in interstate commerce all gas produced from a dedicated leasehold until they obtain permission for abandonment from the Commission. Pp. 535-539.

(a) Congress could not have been more explicit in establishing Commission approval as a prerequisite for lawful abandonment of service within its jurisdiction. The statutory language simply does not admit of any exception to the procedure set forth in § 7(b), as this Court's previous decisions have recognized. Pp. 535-538.

(b) The Commission's control over the continuation of service is a fundamental component of the regulatory scheme, and to deprive the Commission of this authority, even in limited circumstances, would conflict with basic policies underlying the Act. Requiring Commission approval of abandonment, "after due hearing," permits all interested parties to be heard and therefore facilitates full presentation of the facts necessary to determine whether § 7(b)'s criteria have been met. Moreover, the obligation to obtain Commission approval promotes certainty and reliability in the regulatory scheme. Pp. 538-539.

2. It need not be determined whether § 7(b) allows the Commission to approve an abandonment retroactively and disregard evidence of subsequent production, since the Commission did not abuse its discretion in declining to do so here. Given the potential for retroactive approvals to disrupt the regulatory scheme, it was within the Commission's discretion to reject allegations of good faith in failing to seek Commission approval as a sufficient justification, by itself, for determining whether the evidence available in 1966 warranted granting an abandonment. Pp. 539-541.

3. Respondents' contention that the current production of gas is not subject to § 7(b)'s requirements is without merit. The Commission properly found that the certificates of public convenience and necessity cover all reservoirs located on the tract. And initiation of interstate service pursuant to the certificates dedicated all fields subject to the certificates. California v. Southland Royalty Co., 436 U.S. 519, 525, 98 S.Ct. 1955, 1958, 56 L.Ed.2d 505. Once so dedicated, there can be no withdrawal of that supply from the interstate market absent Commission approval. Sunray Mid-Continent Oil Co. v. FPC, 364 U.S. 137, 156, 80 S.Ct. 1392, 1403, 4 L.Ed.2d 1623. Pp. 541-543.

570 F.2d 1376, reversed.

Richard A. Allen, Dept. of Justice, Washington, D.C., for petitioner in No. 78-249.

Knox Bemis, Washington, D. C., for petitioner in No. 78-17.

Stanley L. Cunningham, Bartlesville, Okl., for respondents in both cases.

Mr. Justice MARSHALL delivered the opinion of the Court.

Under § 7(c) of the Natural Gas Act, producers who sell natural gas to pipelines for resale in interstate commerce must obtain a certificate of public convenience and necessity from the Federal Energy Regulatory Commission.¹ Section 7(b) of the Act obligates these producers to continue supplying gas in the interstate market until the Commission authorizes an "abandonment." ² The principal issue presented by this case is whether a producer may, consistent with § 7(b), ever terminate this service obligation without obtaining the agency's express approval.

I

The natural gas involved in this case is produced from a 163-acre tract of land located in Karnes County, Tex., and known as the Butler B tract. In 1948, the owner of this land, B. C. Butler, Sr., executed an oil and gas lease with W. R. Quin as the lessee. Quin's widow contracted in 1953 to sell petitioner United Gas Pipe Line Co. (United), for a 10-year period, all "merchantable natural gas . . . now or hereafter" produced from the Butler B tract. App. 7A. Because United was an interstate pipeline company, Ms. Quin applied to the Commission for a certificate of public convenience and necessity authorizing this sale. The certificate issued by the Commission contained neither a time limitation nor any designation of the depths from which the gas would be produced.

After United installed gathering facilities on the property and began receiving gas from a well 2,960 feet deep, the Butler B lease was assigned several times. H. A. Pagenkopf eventually obtained the leasehold, and in 1961, he agreed to extend the term of United's gas purchase contract through February 7, 1981. Upon Pagenkopf's application, the Commission issued a new certificate in 1963, authorizing continued service to United under the same terms as the earlier certificate. In March 1966, Pagenkopf assigned the Butler B lease to a group headed by L. H. Haring,³ and shortly thereafter, the only successful well on the property stopped producing. Haring's operator, Bay Rock Corp., notified United some months later that the existing wells were depleted and no other gas would be available at that time. United replied that it would remove its metering equipment for use elsewhere, but would reinstall the equipment "if, at some future date, you have further gas to deliver to us at the above delivery point, which will be subject to the terms of the above-captioned contract." App. 8A-9A. Despite the Commission's subsequent warning that § 7(b) required the filing of an abandonment application if no further sales were contemplated, Haring never sought the Commission's authorization for abandoning service to United.⁴

During 1971 and 1972, Haring divided the Butler B lease hold horizontally and vertically, and he assigned to a group headed by respondent McCombs a working interest in the eastern 113 acres of the tract between the depths of 6,500 and 8,653 feet. A few months later, the group acquired a similar interest in the entire Butler B tract from depths of 8,700 to 9,700 feet. Drilling to these deeper horizons, the McCombs group discovered new gas reserves.⁵ In 1972, they contracted to sell this gas to respondent E. I. du Pont de Nemours & Co. for industrial uses in intrastate commerce. Upon learning of the renewed production, however, United asserted its rights under the 1953 contract, as extended in 1961, to purchase all gas produced from the property. When the McCombs group rejected this claim, United filed a complaint with the Commission.

The Commission upheld the Administrative Law Judge's determination that the McCombs group could not sell the Butler B gas in intrastate commerce, at least through February 7, 1981. Opinion No. 740, App. to Pet. for Cert. in No. 78-17, pp. A-32 to A-33. In particular, the Commission found that the certificates issued to the group's predecessors covered all gas produced from the property, including the reserves discovered in 1971 and 1972.⁶ Because these predecessors had commenced deliveries pursuant to the certificates, the Commission ruled that all reserves embraced by the certificates were "dedicated" to interstate commerce and could not be diverted from that market without obtaining the agency's approval under § 7(b). Noting that it had not authorized abandonment during the 5-year interruption in service, the Commission refused to grant its approval retroactively where, as here, the supply of natural gas was not in fact depleted. Accordingly, the Commission declared the sales in intrastate commerce violative of the Act, and ordered delivery to United of all gas derived from the Butler B leasehold.⁷

A divided panel of the Court of Appeals for the Tenth Circuit set aside the Commission's order. 570 F.2d 1376 (1978).⁸ The court did not dispute the Commission's determination that all gas underlying the Butler B tract had been dedicated to interstate commerce. However, while acknowledging that § 7(b) expressly requires Commission approval before a producer may withdraw dedicated natural gas from the interstate market, the majority...