FEDERAL ENERGY REGULATORY COMMISSION, PETITIONER V. TENNECO OIL
COMPANY, ET AL

   No. 83-1618

   In the Supreme Court of the United States

   October Term, 1983

   The Solicitor General, on behalf of the Federal Energy Regulatory
Commission, petitions for a writ of certiorari to review the judgment
of the United States Court of Appeals for the Fifth Circuit in this
case.

   Petition for a Writ of Certiorari to the United States Court of
Appeals For the Fifth Circuit

                       PARTIES TO THE PROCEEDING

   Public Agencies:

   Federal

   Federal Energy Regulatory Commission

   State

   People of the State of California

   Public Utilities Commission of the State of California

   Idaho Public Utilities Commission

   Public Service Commission of Nevada

   Public Utility Commissioner of Oregon

   Washington Utilities & Transportation Commission

   Public Service Commission of Wyoming

   City

   City of Ellensburg, Washington

   Interstate Natural Gas Pipeline Companies:

   El Paso Natural Gas Company

   Northwest Pipeline Corporation

   Distribution Companies:

   Cascade Natural Gas Corporation

   Colorado Interstate Gas Company

   CP National Corp.

   Intermountain Gas Company

   Mountain Fuel Supply Company

   Northwest Natural Gas Company

   Pacific Gas and Electric Company

   Rocky Mountain Natural Gas Company

   San Diego Gas & Electric Company

   Southern California Edison Company

   Southern California Gas Company

   Southern Union Company

   Southwest Gas Corporation

   Washington Natural Gas Company

   Washington Water & Power Company

   Producers:

   El Paso's

   System Party

   GLA 47

   Tenneco Oil Company

   Conoco, Inc.

   GLA 51

   Mapco, Inc.

   Hopi Oil Company

   GLA 52

   Tenneco Oil Company

   Conoco, Inc.

   Union Oil Company of California

   New York Life Insurance Company

   GLA 60

   Tenneco Oil Company

   Conoco, Inc.

   Charles Colwill

   Anne Home Emerson, Trustee

   Ina Belle Hightower

   Anna Lou Home

   Jean E. Keyser

   Cassandra Keyser

   Teresa Home

   Barron Kidd

   W.H. and Alberta A. Sloan

   Helen Ulmer van Atta

   GLA 61

   Sun Oil Company (Delaware)

   GLA 62

   FHN, Ltd.

   GLA 63

   Atlantic Richfield Company

   GLA 66

   W. Watson LaForce, Jr.

   Henry P. Isham, Jr. Estate

   Robert T. Isham

   Josephine C. Jacobson

   J. Roberts Jones

   Nancy LaForce Keyes

   Frederic P. G. Lattner, Trustee

   U/T Martha M. Lattner, Settlor

   Suzanne LaForce Baber

   James C. Bard

   Douglas N. Bard

   Ralph A. Bard, Jr.

   Roy E. Bard, Jr.

   G. R. Brainard, Jr. Trust

   Continental Illinois National Bank and

   Trust Company of Chicago, Trustee

   Trust No. 23935

   Continental Illinois National Bank and

   Trust Company of Chicago, Trustee

   Trust No. 23949

   Eleanor Isham Dunne

   Charles W. Farnham, Jr.

   Robert B. Farnham

   Walter B. Farnham

   Elizabeth B. Farrington

   Minnie A. Fitting

   R. U. Fitting, Jr. Estate

   Robert D. Fitting

   Nancy H. Gerson

   John R. Grimes

   Jay C. Halls and Ruth N. Halls, Trustees

   Ruth N. Halls

   Cortland T. Hill

   Elsie F. Hill

   Louis W. Hill, Jr.

   Albert L. Hopkins, Jr.

   George S. Isham

   R. S. MacDonald, A. MacDonald and

   Northern Trust Co., Trustees

   U/W of N. S. MacDonald, Deceased

   Mary F. Love

   William J. McDermott, Trustee

   Nora R. Ranney

   Catherine H. Ruml

   Edward L. Ryerson, Jr.

   Sabine Royalty Corporation

   Shaw, Isham & Company

   John I. Shaw, et al., Trustees

   Elizabeth B. Simpson Trust

   James Simpson, Jr. Trust

   William E. Simpson Trust

   Sydney Stein, Jr.

   Northern Trust Co., Trustee U/W of

   John Stuart

   Robert Douglas Stuart Estate

   William P. Sutter

   Michael Simpson Trust

   Patricia Simpson Trust

   Kay B. Towle

   Katharine I. White

   Kay B. Gundlach

   F. F. Webster Revocable Trust

   Federick W. Webster

   Mary S. Zick

   David Waller Dangler

   Ralph U. Fitting, III, Executor of

   Estate of R. U. Fitting, Jr., Deceased

   J. Robert Jones, Executor of Estate of

   R. U. Fitting, Jr., Deceased

   GLA 72, 86, 101, 127

   Mapco, Inc.

   Hopi Oil Company

   GLA 76

   Union Oil Company of California

   First National Bank of Ft. Worth,

   Trustee for Eula May Johnston

   James J. Johnston

   Alvin C. Johnson, Trustee

   V. A. Johnson Family Trust

   Jones Company

   Wm. C. McMahan Estate

   Homer R. Stasney & Sons Company

   Rogers-Gibbard Trust

   Robert Beamon

   Thomas L. Hale

   Pattie Anne Beamon Lundell

   Orville Curtis Rogers, Trustee

   Veva Jane Gibbard, Trustee

   GLA 77

   Robert Beamon

   Robert Beamon, Trustee

   Pattie Ann Beamon Lundell

   Thomas L. Hale, Trustee

   First National Bank of Ft. Worth,

   Trustee for Eula May Johnston

   Rogers-Gibbard Trust

   James J. Johnston

   Alvin C. Johnson, Trustee

   V. A. Johnston

   A. V. Jones Company

   W. C. McMahan

   Homer R. Stasney

   GLA 78

   American Petrofina Company

   Tenneco Oil Company

   Conoco, Inc.

   Union Oil Company of California

   GLA 106

   Morris and Flora Mizel

   GLA 122

   Producing Royalties, Inc.

   Harold S. Long

   Dixie M. McLane Trust

   Mrs. Judy St. John Taylor

   John S. White

   GLA 125

   American Petrofina Company

   Anderson Construction Company, Inc.

   Benson-Montin-Greer Drilling Corp.

   Tom Bolack

   Oliver Benson

   Albert R. Greer

   Mary Eddy Jones

   Edna Fern Benson

   Walter Benson

   Charlene K. Greer

   Mary E. Jones and The First National

   Bank & Trust Company of

   Oklahoma City, Trustees

   U/W of F. Jones

   Late Oil Company

   A. C. Montin, Jr.

   William V. Montin

   Oklahoma and Northwestern Company

   GLA 129

   Delta Drilling Company

   Trustees of the DeGolyer Foundation

   Mrs. Nell V. Golyer

   3-M Oil Company

   GLA 139

   Producing Royalties, Inc.

   James A. and Hazel H. Borland

   R. Lewis Chandler Trust

   Mary C. Fannin

   Charles E. Graham, Jr.

   Lewis Chandler

   Mrs. Carrie B. Graham

   Newell R. Hays

   Dixie M. McLane Grandchildren's Trust

   Critchell Parsons

   Judy St. John Taylor

   GLA 152, 160, 231

   J. Glenn Turner

   Sue Reeder Turner Trust

   William G. Webb

   GLA 153

   Gretchen A. Gartner

   Helen L. Harvey

   GLA 157

   Mapco, Inc.

   Barbara Ann Bruss

   O. J. Lilly

   Barbara Irene McConnell

   GLA 172

   Crown Central Petroleum Corporation

   GLA 195

   William G. Webb

   J. Glenn Turner

   GLA 196

   J. Glenn Turner

   Sue Reeder Turner Trust

   William G. Webb

   Benson-Montin-Greer Drilling Corp.

   Barbara Ann Bruss

   Charles Albert Greer

   La Plata Gathering System, Inc.

   O. J. Lilly

   Huerfanito Gas Co., et al.

   Barbara Irene McConnell

   Mary R. Boecking and

   H. E. Boecking, Jr., Trustees U/T of

   Mary M. Strachley

   Jacqulyn M. Williams

   GLA 197

   Huerfanito Drilling Company, Inc.

   GLA 198, 248

   J. Glenn Turner

   Sue Reeder Turner Trust

   William G. Webb

   Frank A Schultz

   GLA 249

   Benson-Montin-Greer Drilling Corp.

   Barbara Ann Bruss

   Charles Albert Greer

   La Plata Gathering System, Inc.

   O. J. Lilly

   Barbara Irene McConnell

   Mary R. Boecking and H. E.

   Boecking, Jr., Trustees

   U/T of Mary M. Strachley

   J. Glenn Turner

   Sue Reeder Turner Trust

   Jacqulyn M. Williams

   GLA 348

   Union Oil Company of California

   Jones Company

   W. C. McMahan

   H. R. Stasney & Sons Company

   Alvin C. Jonnson, Trustee

   GLA 349

   Union Oil Company of California

   A. V. Jones Co.

   W. C. McMahan

   Homer R. Stasney

   Robert Beamon and Robert Beamon,

   Trustee

   GLA 350, 351

   Robert Beamon

   Robert Beamon, Trustee

   Thomas L. Hale, Trustee

   Pattie Anne Beamon Lundell

   Northwest's

   System Party

   PLA 2

   Atlantic Richfield Company

   PLA 3

   Getty Oil Company

   PLA 4

   Grace M. Brown

   Catherine B. McElvain, Inc.

   and as Executrix of

   Estate of T. H. McElvain, Deceased

   T. H. McElvain Oil and Gas Properties

   James E. McElvain, Executor of Estate

   of Carl R. McElvain

   J. Wm. McElvain

   Estate of F. B. Miller

   Mabelle McElvain Miller

   Mrs. Ruth M. Vaughn

   PLA 5

   Phillips Petroleum Company

   PLA 6

   Amoco Production Company

   J. Ralph Ellis, Jr.

   Jones Felvey, II

   First National Bank in Dallas for the

   Acct. of J. Ralph Ellis, Jr.

   McCulloch Oil Corporation

   Mountain States Natural Gas Corp.

   John D. Mugg, Jr.

   Jack B. Ryan

   Texas Oil & Gas Corp.

   U.V. Industries

   PLA's 7, 9, 10, 11

   Amoco Production Company

   PLA 8

   J. Ralph Ellis, Jr.

   Jones Felvey, II

   First National Bank in Dallas for the

   Acct. of J. Ralph Ellis, Jr.

   H. M. Meredith, Trustee, and First

   National Bank in Dallas for the

   Acct. of J. Ralph Ellis, Jr.

   Mountain States Natural Gas Corp.

   John D. Mugg, Jr.

   Amoco Production Company

   Jack B. Ryan

   Texas Oil & Gas Corp.

   PLA 13

   Mobil Oil Corporation

   PLA 14

   Champlin Petroleum Co.

            TABLE OF CONTENTS
   Opinions below
   Jurisdiction
   Statute involved
   Statement:
      A. Regulatory background
      B. Factual background
      C. The rulings of the district court and the Commission
      D. The opinion of the court of appeals
   Reasons for granting the petition
   Conclusion

                            OPINIONS BELOW

   The opinion of the court of appeals (Pet. App. 1a-19a) /1/ is
reported at 708 F.2d 1011.  The orders of the Federal Energy
Regulatory Commission (Pet. App. 21a-31a, 153a-154a) are reported at
12 F.E.R.C. Paragraph 61,297 and 13 F.E.R.C. Paragraph 61,239,
respectively.  The decision of the administrative law judge (Pet. App.
33a-120a) is reported at 6 F.E.R.C. Paragraph 63,037.  The opinion of
the district court (Pet. App. 121a-136a) is reported at 426 F. Supp.
963.

                             JURISDICTION

   The Judgment of the court of appeals (Pet. App. 145a-149a) was
entered on July 5, 1983.  Petitions for rehearing were denied on
December 2, 1983 (Pet. App. 151a-152a).  Justice White extended the
time for filing a petition for a writ of certiorari to and including
April 2, 1984.  The jurisdiction of this Court is invoked under 28
U.S.C. 1254(1) and 15 U.S.C. 717r(b).

                           STATUTE INVOLVED

   Section 1(b) of the Natural Gas Act, 15 U.S.C. 717(b), provides:

         The provisions of this act shall apply to the transportation
      of natural gas in interstate commerce, to the sale in interstate
      commerce of natural gas for resale for ultimate public
      consumption for domestic, commercial, industrial, or any other
      use, and to natural-gas companies engaged in such transportation
      or sale, but shall not apply to any other transportation or sale
      of natural gas or to the local distribution of natural gas or to
      the facilities used for such distribution or to the production
      or gathering of natural gas.

                          QUESTION PRESENTED

   Whether the sale by a natural gas producer to an interstate
pipeline of a leasehold intereest in proven gas reserves for use by
the pipeline in supplying its interstate customers, which sale is in
all significant respects the economic equivalent of a conventional
wellhead sale, is a "sale in interstate commerce of natural gas for
resale" within the jurisdiction of the Federal Energy Regulatory
Commission under Section 1(b) of the Natural Gas Act, 15 U.S.C.
717(b).

                               STATEMENT

                       A. Regulatory Background

   This Court is familiar with the history of the Natural Gas Act, 15
U.S.C. 717 et seq.  Prior to the enactment of that Act, the Court had
held, in a series of cases, that the Commerce Clause barred the states
from regulating sales of natural gas for resale in interstate
commerce.  As a result of these rulings, wholesale gas transactions in
interstate commerce were left entirely unregulated.  The overriding
purpose of Congress in the Natural Gas Act was to close this
regulatory gap.  In Section 1(b) of the Act, 15 U.S.C. 717(b), the
Commission /2/ is given jurisdiction over natural gas companies
engaged in the transportation or sale of natural gas for resale in
interstate commerce, but not over the "production or gathering" of
natural gas.  Natural gas companies subject to Commission jurisdiction
under the Act are required to obtain from the Commission certificates
of public convenience and necessity before they may engage in such
sales (15 U.S.C. 717f(c)) and the rates they charge for such sales
must be just and reasonable (15 U.S.C. 717c).

   In Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672 (1954), this
Court held that conventional wellhead sales of natural gas by an
independent producer to an interstate pipeline for resale in
interstate commerce did not fall within the "production or gathering"
exemption but were subject to Commission jurisdiction under the
Natural Gas Act.  Thereafter, in United Gas Improvement Co. v.
Continental Oil Co., 381 U.S. 392 (1965) (commonly referred to as the
"Rayne Field" case), the Court held that sales of gas leases from a
"proven and substantially developed" field, which accomplish the
transfer of large volumes of natural gas to an interstate pipeline
company for resale in the interstate market, are likewise within the
Commission's jurisdiction under the Act.  /3/

                         B. Factual Background

   1. In 1948, six years before Phillips and 17 years prior to Rayne
Field, El Paso Natural Gas Company (El Paso), an interstate pipeline,
entered into a contract with Delhi Oil Corporation (Delhi) to purchase
gas produced by Delhi at Barker Dome in northwestern New Mexico, near
the San Juan Basin.  The history of the Barker Dome transaction is
detailed in the decision of the administrative law judge (Pet. App.
44a-51a).  For present purposes, it is sufficient to note that, before
the contract became effective, Delhi became concerned that a
conventional wellhead sale, such as that proposed in its contract with
El Paso, might be subject to regulation by the Commission.
Accordingly, Delhi, acting upon advice of counsel, insisted that the
transaction be recast in lease-sale form (Pet. App. 49a-50a).  /4/
This new arrangement placed Delhi and El Paso in about the same
economic position each would have enjoyed under a conventional
wellhead sales contract.

   Thereafter, Delhi and other producres acquired control over vast
amounts of proven gas reserves in the San Juan Basin (Pet. App.
56a-57a).  /5/ Again, following advice of counsel, Delhi insisted on
selling its reserves to El Paso under a lease-sale agreement (id. at
60a).  In an agreement designated GLA-47, /6/ Delhi transferred in
place to El Paso an estimated 1.063 trillion cubic feet of gas (R.
9692).  /7/ The parties anticipated that 179 billion cubic feet would
be extracted from the properties during the first four years (ibid.).
Shortly after the closing of GLA-47 in March of 1952, El Paso began
taking into its interstate system large volumes of natural gas from
the San Juan field (Pet. App. 60a;  R. 5241-5246).

   Subsequently, other San Juan Basin producers transferred their
reserves to El Paso under similar lease-sale agreements.  In all, El
Paso entered into some 36 lease-sale agreements in the San Juan Basin
(35 of which are in issue here), acquiring gas underlying more than a
quarter of a million acres (Pet. App. 61a).

   2. In 1952, Pacific Northwest Pipeline Corporation (PNW), the
predecessor of respondent Northwest Pipeline, sought Commission
authorization to construct an interstate pipeline system from the San
Juan Basin to the Pacific Northwest.  In attempting to secure reserve
dedications to support its application before the Commission, PNW
offered the various Basin producers the option of either a
conventional wellhead sale of natural gas or a sale of reserves in
place (Pet. App. 74a-75a).

   In 1953, PNW and Phillips Petroleum Company (Phillips) executed a
conditional lease-sale agreement for the transfer of gas in place
(PLA-5), covering about 200,000 acres in the Basin and an estimated
three trillion cubic feet of gas (Pet. App. 75a).  The Phillips-PNW
contract was contingent on PNW's receipt of a Commission certificate
to construct its proposed pipeline and on PNW's obtaining satisfactory
financing commitments from a reputable financial institution (id. at
77a).

   Thereafter, other San Juan Basin producers entered into similar
conditional agreements with PNW (Pet. App. 77a-82a).  In 1954, the
Commission granted PNW a certificate authorizing it to construct its
pipeline system into the Pacific Northwest.  /8/ The Commission
subsequently approved PNW's financing plan, thereby permitting PNW to
close its conditional gas agreements.  On September 1, 1956,
construction of the PNW pipeline was completed and natural gas began
to flow from the San Juan Basin to consumers in the Pacific Northwest
(id. at 82a).

   3. In most respects, the terms of the above described lease-sale
agreements were similar.  The agreements called for the pipelines to
compensate the interest owner of the acreage by paying a special
"overriding royalty." /9/ The royalty was to be calculated as a
specified sum per Mcf of gas produced from the acreage and was subject
to periodic escalation.  At the end of a fixed term, the royalty was
subject to redetermination (either by agreement of the parties or
through arbitration) based upon the market value of the gas.  The
lease agreements conveyed rights only to gas, not oil, and imposed
strict drilling obligations upon the pipelines designed to ensure that
the leases would be fully and promptly developed.  In addition, many
of the agreements included conventional favored nations clauses /10/
and take-or-pay clauses.  /11/

   4. The instant controversy arose in 1973, when El Paso and Sun Oil
Company (Sun) were unable to agree on a mutually acceptable royalty
rate for one of the lease contracts.  In the absence of agreement, the
contract provided for determination of the royalty rate by a board of
arbitrators, which was to base its decision on the current value of
the gas at the wellhead (Pet. App. 40a).

   At Sun's request, the dispute was submitted to the board, which
agreed with Sun that the royalty should be based on the going wellhead
price for natural gas in the higher priced intrastate market rather
than the lower regulated rate for interstate sales of gas of the same
vintage (Pet. App. 40a).  Soon thereafter, other San Juan Basin
producers demanded redetermination of the rates applicable to their
overriding royalties, under either rate redetermination or favored
nations clauses in their lease-sale agreements (id. at 40a-41a).

       C.  The Rulings of the District Court and the Commission

   El Paso subsequently brought suit in the United States District
Court for the Western District of Texas, arguing that the lease sales
were subject to Commission jurisdiction under the Natural Gas Act and,
therefore, that the arbitration award could not exceed the applicable
Commission price ceiling.  El Paso also filed a complaint with the
Commission, seeking a determination that the lease-sale agreements
were subject to the Commission's jurisdiction.  Northwest intervened
in both the district court and Commission proceedings and sought a
declaration of jurisdiction with respect to its lease sales.

   The district court and the Commission reached conflicting
conclusions.  The court held that the lease sales were not subject to
Commission jurisdiction (Pet. App. 121a-136a).  The Commission, on the
other hand, held that it had jurisdiction over the transactions under
this Court's decision in Rayne Field (Pet. App. 21a-31a, adopting the
decision of the administrative law judge, Pet. App. 33a-120a).  The
Commission based its ruling on what it perceived to be the economic
and commercial realities of the lease-sale transactions, finding that
here, as in Rayne Field, the lease sales were the economic equivalent
of conventional wellhead sales because they accomplished the transfer
of large volumes of proven natural gas reserves from producers to
pipelines for resale in interstate commerce.  In the Commission's
view, these economic and commercial realities compelled the conclusion
that the transactions were subject to regulation under the Natural Gas
Act.

                D. The Opinion of the Court of Appeals

   The court of appeals reversed the Commission and affirmed the
district court (Pet. App. 1a-19a).  The court noted that, although the
issue was "of substantial significance," it was "difficult to decide"
because "(n)either the statute nor the cases give definitive
direction" (id. at 11a).  The court concluded, however, that the
Commission had misconstrued Rayne Field by elevating "economic
equivalency * * * from a component in the Rayne Field test to the
determinative factor on the issue" (id. at 12a-13a).  In the court's
view, the Commission erred in not focusing sufficiently on the
requirement that the reserves be "substantially developed" at the time
of the lease sales to assure "'imminent ability to produce in
commercial quantities'" (id. at 15a, quoting Continental Oil Co. v.
FPC, 370 F.2d 57, 64 (5th Cir. 1966), cert. denied, 388 U.S. 910
(1967)).  The court explained (Pet. App. 15a):

      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 application of all
      components of the Rayne Field test, including the proven and
      substantial development factor * * *.  We perceive the Rayne
      Field test to reflect the Supreme Court's concern with the
      apparent congressional intent not to regulate production.  A
      purely economic test would seem to encroach on that concern.

   The court of appeals acknowledged that "the reserves in the Basin
may well have been 'proven' at least within reasonable estimates"
(Pet. App. 15a).  It concluded, however, that, "because the acreage
was not substantially developed, the agreements in issue were not
sales of gas under the Natural Gas Act" (Pet. App. 17a).  The court
acknowledged that an important factor on which it relied in reaching
its decision was "the limited extent to which the Basin had been
drilled at the time the (lease agreements) were executed" (id. at
15a).

                   REASONS FOR GRANTING THE PETITION

   This case presents an important question concerning the scope of
the Commission's jurisdiction under the Natural Gas Act.  Although the
court of appeals purported to apply settled precedent in deciding this
jurisdictional issue, the effect of the court's ruling is to broaden
the scope of the "production or gathering" exemption of Section 1(b)
of the Act, 15 U.S.C. 717(b), beyond the intent of Congress as
construed in the decisions of this Court.  The decision below is at
odds with the teachings of this Court in Phillips and Rayne Field, and
is inconsistent with a number of other court of appeals decisions.  If
allowed to stand, the decision below would preclude the Commission
from effectively regulating the rates charged for gas produced from
fields that are major sources of gas supply for the two major
interstate pipelines that serve the western United States.  /12/ It
would also have a significant financial impact on the pipelines and
their customers.  In these circumstances, review by this Court is
warranted.

   1. Prior to Phillips, the governing rule was that lease transfers
were not subject to the Commission's jurisdiction under Section 1(b)
of the Natural Gas Act.  See FPC v. Panhandle Eastern Pipe Line Co.,
337 U.S. 498 (1949).  Expressing the view that "leases are an
essential part of production" (id. at 505), the Court in Panhandle
concluded that "the transfer of undeveloped gas leases is an activity
related to the production and gathering of natural gas and beyond the
coverage of the Act" (id. at 515).

   In Phillips, however, the Court rejected such a formalistic reading
of the "production or gathering" exemption.  The Court stated that
"'(e)xemptions to the primary grant of jurisdiction in the section
(1(b)) are to be strictly construed'" (347 U.S. at 679 (footnote
omitted), quoting Interstate Natural Gas Co. v. FPC, 331 U.S. 682,
690-691 (1947)).  /13/ As the Court viewed the legislative history of
the Natural Gas Act, Congress intended "to give the Commission
jurisdiction over the rates of all wholesales of natural gas in
interstate commerce, whether by a pipeline company or not and whether
occurring before, during, or after transmission by an interstate
pipeline company" (347 U.S. at 682 (footnote omitted)).  The Court
noted that, because the rates charged by independent producers for
these sales "may have a direct and substantial effect on the price
paid by the ultimate consumers," its decision was consistent with the
primary purpose of the Natural Gas Act, which was to protect consumers
"against exploitation at the hands of natural-gas companies" (id. at
685).

   The Court's reading of the congressional purpose in Phillips led it
to change its analytical approach in determining the question of
Commission jurisdiction over lease-sale agreements.  This new approach
was enunciated in Rayne Field.  There, the parties had initially
structured the transaction as a conventional wellhead sale, which
clearly would have been considered jurisdictional under Phillips.
However, after a decision in another case /14/ indicated that the
proposed rates would not be approved by the Commission, the parties
recast the transaction in lease-sale form in the expectation that the
transaction would be considered outside the Commission's jurisdiction
under Panhandle.  The Commission rejected this effort to escape its
jurisdiction.  In its view, to make the result turn on whether the
transaction "was cast as a sale of leases instead of a sale of natural
gas 'would exalt form over substance, would give greater weight to the
technicalities of contract draftsmanship than to the achievement of
the purposes of the Natural Gas Act, and would impair (its) ability to
control the price received for gas sold to the pipelines in interstate
commerce to the detriment of the ultimate consumer'" (Rayne Field, 381
U.S. at 398, quoting Texas Eastern Transmission Corp., 29 F.P.C. 249,
256 (1963)).  The Fifth Circuit, however, relying on Panhandle,
concluded that the leases "relate to the production or gathering of
natural gas and are thus outside Commission jurisdiction" (Marr v.
FPC, 336 F.2d 320, 325 (1964)).

   This Court reversed, concluding that the lease sales could be
considered "sales" of natural gas in interstate commerce for purposes
of the Natural Gas Act.  The Court explained (381 U.S. at 401
(citation omitted)):

      The sales of leases here involved were, in most respects,
      equivalent to conventional sales of natural gas which
      unquestionably would be subject to Commission jurisdiction under
      Phillips * * *.  Indeed, the context of this case shows that
      when the first plan was aborted by the Catco case, the parties
      did not alter their objectives, but merely the method of
      attaining them.  * * * There are differences, to be sure,
      between the original sale agreements and the lease-sale plan.  *
      * * But it is perfectly clear that the sales of these leases in
      Rayne Field, 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.  That is
      the significant and determinative economic fact.  To ignore it
      would substantially undercut Phillips, and because of it the
      Commission * * * acted properly in treating these sales of
      leasehold interests as sales of natural gas within the meaning
      of the Natural Gas Act.

   The Court emphatically rejected the contention that the lease sales
were outside Commission jurisdiction because of the "production or
gathering" exemption.  Instead, it concluded that "even though a sale
of natural gas in interstate commerce occurs before production or
gathering is ended, it is nonetheless subject to regulation" (381 U.S.
at 402).  The Court noted that if the "production or gathering"
exemption were construed as turning "purely on a matter of the timing
of the title transfer," that would mean that any sale of gas in place
would fall within the exemption (ibid.).  In the Court's view, "(a)
cceptance of any such narrow interpretation would make Phillips a
shadow" (ibid.).

   The decision below erroneously limits Rayne Field to its specific
facts while disregarding the central teaching of that case and
Phillips -- that all wholesales of gas in interstate commerce, whether
case in the form of conventional sales contracts or lease
transactions, are jurisdictional.  Thus, contrary to the view of the
court of appeals (Pet. App. 14a-15a), in determining whether a
transaction is subject to regulation under the Natural Gas Act, the
controlling factor is not the form, but the economic and commercial
substance of the transaction.  To be sure, as this Court pointed out
in Rayne Field, "substantiality of development is a relevant
consideration, for 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" (381
U.S. at 403).  However, it is one thing to say, as this Court did in
Rayne Field, that substantiality of development is a relevant
consideration;  it is quite another to conclude, as did the court of
appeals in this case, that substantiality of development is the sine
qua non of Commission jurisdiction over lease-sale agreements.
Indeed, if substantiality of development were an essential predicate
to jurisdiction, it would have been wholly unnecessary for the Court
in Rayne Field to have stressed that "even though a sale of natural
gas in interstate commerce occurs before production or gathering is
ended, it is nonetheless subject to regulation" (381 U.S. at 402), and
that "the 'production or gathering' exemption relates to the physical
activities, processes and facilities of production or gathering, but
not to sales of the kind affirmatively subjected to Commission
jurisdiction" (ibid.).

   To the extent that the court of appeals may have relied on this
Court's decision in Panhandle to support the result below (see Pet.
App. 15a), that reliance is completely misplaced.  The Court in Rayne
Field distinguished Panhandle on the ground that it "did not involve a
sale of natural gas for resale in interstate commerce, but a transfer
* * * for sale of the gas in intrastate commerce" (381 U.S. at 403-404
(emphasis in original)).  Although the Court noted that Panhandle was
also distinguishable because it involved the transfer of undeveloped
leaseholds (381 U.S. at 403), the Court expressly disapproved certain
broad language in Panhandle, including the statement that "'leases are
an essential part of production'" (381 U.S. at 404 (quoting Panhandle,
337 U.S. at 505)).  The Court emphasized that such flat statements
"should not be taken to cover more than the particular kind of leases
that were before the Court;  it should not be considered as embracing
each and every transfer that can be put in lease form" (381 U.S. at
404).

   The court below also erroneously relied (Pet. App. 15a) on Mobil
Oil Corp. v. FPC, 463 F.2d 256 (D.C. Cir. 1971), cert. denied, 406
U.S. 976 (1972), which held that the typical lease agreement, granting
the right to explore for gas on the lessor's property, is not subject
to Commission jurisdiction.  The court in Mobil, unlike the court of
appeals in this case, recognized that Phillips and Rayne Field "were
written with full awareness of the significance, in commercial and
regulatory terms, of the sales of gas by independent producers to
interstate pipeline companies" (463 F.2d at 261-262).  Indeed, the
court in Mobil pointed out that Rayne Field was grounded on the
realization that "these lease transfers were the equivalent 'in
economic effect to the concept of conventional sales' and such
conclusion was required so as not to open gaps in Federal regulation"
(463 F.2d at 262).  The court emphasized that the jurisdictional
foundation under the Natural Gas Act -- "sales in interstate commerce"
-- was admitted in Phillips and (exist(ed) through economic equivalent
in Rayne Field" (463 F.2d at 262).  In contrast, "an ordinary lease by
a landowner to a producer * * * is neither a 'customary' sale in
interstate commerce nor its equivalent in economic effect" (ibid.).
Unlike a lease-sale agreement involving proven reserves, as in this
case and Rayne Field, a typical gas lease transfers "only the right to
explore, develop, and market if exploration is successful;  no royalty
is paid if no gas is discovered" (463 F.2d at 262).  Moreover, the
landowner's royalty is generally payable on 12 1/2% of production,
not, as here (and in Rayne Field), on the entire net interest
assigned, which amounts to between 70% and 80% of production.  Thus,
far from supporting the decision below, the Mobil case merely serves
to underscore the error of the court of appeals in rejecting the
Commission's focus on commercial realities.  /15/

   2. The decision of the court of appeals cannot be reconciled with
its own decision in Continental Oil Co. v. FPC, 370 F.2d 57 (5th Cir.
1966), cert. denied, 388 U.S. 910 (1967) (Ship Shoal), and is at odds
with the decision of the Tenth Circuit in Cities Service Gas Co. v.
FPC, 424 F.2d 411 (1969).

   In Ship Shoal, the court (per Judge Wisdom) acknowledged that the
leaseholds were "a 'long way' from being fully developed" (370 F.2d at
66).  In fact, at the time of the lease-sale agreement, there was only
one gas well, which was shut-in and had no production history, and it
was calculated that at least 34 to 40 additional completions would be
necessary (ibid.).  The court nevertheless held the lease sale to be
jurisdictional, concluding that the gas field had "reached the stage
of proof and development necessary to satisfy the Rayne criteria" (370
F.2d at 64).  In reaching this result, the court pointed to (1) the
pipeline's willingness to invest more than $97 million to connect its
facilities with the underlying reserves;  (2) the pipeline's reliance
on those reserves to support its application to the Commission for
authorization to construct the necessary facilities;  (3) the
Commission's approval of the pipeline's application;  and (4) the
pipeline's estimate that once production began it could extract a
substantial percentage of the reserves during the first four years
(370 F.2d at 65-66).

   It is clear that the decision in Ship Shoal did not turn on the
sort of mechanical well-counting approach engaged in by the court of
appeals in this case.  Rather, the court concluded (370 F.2d at 67):

         The crucial fact here, as in Rayne, is that the assignment of
      the leases accomplished the transfer of large amounts of
      substantially proven off-shore natural gas reserves to an
      interstate pipeline company for eventual resale in interstate
      commerce.  The transaction was a sale of a definable volume of
      gas, the price of which was geared to the actual volume found,
      and payment for which was directly related to its production --
      even if there has also been a transfer of an interest in real
      property.  If such sales were not subject to Commission
      regulation, an "attractive gap" in the regulatory system would
      be created, and the producing states would be unable to close
      it.

   Similarly, in Cities Service, the Tenth Circuit observed that the
continuing validity of Panhandle was "clouded" by Rayne Field, which
the court construed as holding that the Commission "ha(s) jurisdiction
over the sale of proven reserves to a pipeline" (424 F.2d at 416).
See also Louisiana Land & Exploration Co. v. FERC, 574 F.2d 204, 207
(5th Cir. 1978), cert. denied, 439 U.S. 1127 (1979) ("economic
realities * * * determine whether a jurisdictional sale has
occurred").

   3. Under the approach mandated by this Court in Rayne Field, the
dispositive question is whether what was sold was gas or merely the
right to explore for gas.  In our view, the lease-sale agreements in
this case clearly involved sales of natural gas in interstate commerce
subject to the Commission's jurisdiction under the Natural Gas Act.

   Here, as in Ship Shoal, the San Juan Basin reserves were relied on
by El Paso to support a major expansion of its interstate pipeline
facilities and by PNW to construct its entire interstate pipeline
system.  The Commission similarly relied on the reserves in
certificating both construction requests.  In its order granting El
Paso's application for a certificate authorizing the expansion of its
facilities shortly after the closing on GLA-47, the Commission removed
a 34 Bcf annual ceiling on San Juan Basin volumes transported through
the pipeline's system.  El Paso Natural Gas Co., 11 F.P.C. 1071, 1074
(1952).  The Commission's action was wholly in accord with Delhi's own
estimate that El Paso could produce 179 Bcf of gas, or 16.8% of the
estimated recoverable reserves from GLA-47, in the first four years of
production (R. 9692).  By contrast, only 10% of the reserves involved
in the transaction held jurisdictional in Ship Shoal were estimated as
recoverable in the first four years (370 F.2d at 66).  Finally, as
soon as the pipelines' facilities were connected, substantial volumes
of natural gas began to flow from these reserves into interstate
commerce.

   By rejecting the Commission's economic equivalency test in favor of
its own mechanical well-counting approach, the court below has
effectively rejected the teachings of Phillips and Rayne Field and has
returned to the discredited approach of Panhandle.  As a consequence
of its erroneous approach, the court has reopened the regulatory gap
that existed prior to enactment of the Natural Gas Act.

   4. Unless overturned, the decision below would have a substantial
adverse impact -- both immediate and prospective -- on the pipelines
and on gas consumers in the western states, particularly California.

   In 1974, following the Sun arbitration award (see page 8, supra).
El Paso and Northwest entered into settlements with the producers in
which the pipelines (while expressly reserving the right to litigate
the jurisdictional issue) agreed to pay an overriding royalty based on
the Commission's "new" gas ceiling rate even though most of the
lease-sale gas was "old", lower-priced gas.  As of June 1, 1983, for
example, the ceiling rate for "new" gas under Section 102 of the
Natural Gas Policy Act of 1978 (NGPA), 15 U.S.C. 3312, was $3.421 per
MMBtu, whereas the maximum lawful price for "old" gas under Section
104 of the NGPA, 15 U.S.C. 3314, ranged from 46.7 cents to 83.6 cents
per MMBtu.  See 48 Fed. Reg. 18795 (1983) (to be codified at 18 C.F.R.
271.101).  Between 1974 and 1983, the overriding royalties paid by El
Paso and Northwest to the producers were passed through by the
pipelines to their customers and to the ultimate consumers under the
cost-of-service approach.  If the decision below is overturned and the
Commission is held to have jurisdiction, the customers would be
entitled to substantial refunds.  Although refund estimates vary, the
general consensus among the pipelines, their customers, interested
state commissioners and the Commission staff is that such refunds
would exceed $1 billion.

   The future impact of teh decision below is even more substantial.
In Public Service Commission v. Mid-Louisiana Gas Co., No. 81-1889
(June 28, 1983), this Court held that "first sales" of pipeline
produced gas are subject to the price ceilings established in Title I
of the NGPA.  If the lease transactions are deemed to be
nonjurisdictional, then under Mid-Louisiana the pipelines' sales of
their production would be considered first sales within the meaning of
the NGPA and the pipelines could charge their customers only the
applicable NGPA rate rather than the cost-of-service rate (which takes
into account the overriding royalty).  The pipelines would still be
required, however, to continue their royalty payments to the producers
based on the NGPA's "new" gas ceiling rate, which is substantially
higher than the applicable NGPA rate (see page 20, supra).  As a
result, the pipelines would suffer a loss of more than $2.00 per MMBtu
for much of the gas they produce.  /16/ Of course, the pipelines could
seek special rate relief from the Commission pursuant to Section
104(b)(2) of the NGPA, 15 U.S.C. 3314(b)(2), but that would simply
shift liability back to the consumers.  In this regard, the future
financial impact of the decision below would likely outweigh the past
impact, because the lease-sale acreage remains a major source of
supply for the two pipelines, containing estimated reserves of three
trillion cubic feet of gas.  If, on the otehr hand, the lease-sale
transactions are held to be jurisdictional, then the pipelines would
pay the producers an overriding royalty equal to the lower NGPA rate
less the cost of production;  the pipelines' customers, in turn, would
pay the applicable NGPA price for the gas.  In short, review by this
Court is essential to ensure the effective protection of consumers
from excessive charges.  /17/

                              CONCLUSION

   The petition for a writ of certiorari should be granted.

   Respectfully submitted.

   REX E. LEE

      Solicitor General

   LOUIS F. CLAIBORNE

      Deputy Solicitor General

   ELLIOTT SCHULDER

      Assistant to the Solicitor General

   WILLIAM H. SATTERFIELD

      General Counsel

   JEROME M. FEIT

      Solicitor

   JOEL M. COCKRELL

      Attorney Federal Energy Regulatory Commission

   APRIL 1984

   /1/ "Pet. App." refers to the appendix to the petition in No.
83-1321.

   /2/ Both the Federal Energy Regulatory Commission and its
predecessor agency, the Federal Power Commission, are referred to
herein as the "Commission".

   /3/ These cases and others are discussed in greater detail at pages
11-19, infra.

   /4/ The lease-sale agreement in Rayne Field, like that at Barker
Dome, was adopted as a substitute for a conventional wellhead sales
contract.  See page 12, infra.  In his initial decision, the
administrative law judge observed that "(t)he Barker Dome dealings * *
* probably represented a more blatant attempt to evade Federal
regulation than the scheme which occurred in the Rayne Field case"
(Pet. App. 105a).

   /5/ By 1950, the San Juan Basin was already known as one of the
major fields of gas in place in North America (R. 9936;  Pet. App.
52a-55a).  ("R." refers to the record in the court of appeals.)

   /6/ "GLA" refers to the producer lease-sale agreements with El
Paso.  "PLA" refers to the producer lease-sale agreements with the
predecessor of Northwest Pipeline Corporation (Northwest).

   /7/ The Commission relied on these reserves in authorizing El Paso
to expand its pipeline facilities at an estimated capital cost of
about $46 million.  El Paso Natural Gas Co., 11 F.P.C. 1071, 1074
(1952).

   /8/ Northwest Natural Gas Co., 13 F.P.C. 221 (1954).

   /9/ An ordinary royalty, commonly referred to as a base royalty, is
the landowner's share of the profits of production, free of the
expenses of production.  This royalty is frequently set at one-eighth
of production profits.  An overriding royalty is an interest in oil
and gas produced at the surface and is assessed above and beyond the
base royalty.  In general, overriding royalties do not exceed
one-eighth of production, and smaller fractions are common.  See H.
Williams & C. Meyers, Manual of Oil and Gas Terms Section 418, at 340
(1981).  In the instant case, by contrast, the pipelines were required
to pay a special overriding royalty on the entire net interest
assigned to them by the producers (i.e., the interest remaining after
deduction of the base and conventional overriding royalties).  The net
interest assigned in GLA-47 was approximately 70%;  in PLA-5 the net
interest assigned was about 80%.

   /10/ The typical favored nations clause provided that the interest
owner would receive the highest overriding royalty rate paid by the
pipeline producer for gas production under any lease-sale agreement
covering acreage located within 200 miles of the interest owner's
acreage (Pet. App. 73a).

   /11/ Under a take-or-pay clause, the lessee is obligated to pay for
a specified minimum volume of gas production from the acreage,
regardless whether that volume is actually produced and taken into the
pipeline (Pet. App. 51a n.40).

   /12/ El Paso serves markets in Texas, New Mexico, Arizona, Nevada
and California.  Northwest serves markets in Colorado, Wyoming, Idaho,
Oregon, Washington and Nevada.

   /13/ The Court noted, in this regard, that the relevant committee
reports "reveal that a construction of the 'production or gathering'
exemption which would substantially limit the affirmative grant of
jurisdiction to the Commission was not contemplated" (347 U.S. at 679
n.7).

   /14/ Public Service Commission v. FPC, 257 F.2d 717 (3d Cir. 1958),
aff'd sub nom. Atlantic Refining Co. v. Public Service Commission, 360
U.S. 378 (1959) (the "Catco" case).

   /15/ Furthermore, the court of appeals' holding that properties
must be substantially developed at the time the lease agreements are
signed overlooks the undisputed economic fact that producers generally
will not commit capital to develop their properties until a market for
the gas has been found and a long term gas purchase contract has been
executed (see Pet. App. 110a).  Thus, the court below plainly erred in
examining the substantiality of development at the time the contracts
were executed rather than at the time the gas properties were
transferred.  Since the jurisdictional inquiry under Rayne Field
focuses on what was sold or transferred to the pipeline (i.e., gas or
something other than gas), and because Commission jurisdiction under
the Natural Gas Act attaches only at the time of gas delivery and not
at the time of execution of the sales contract (see, e.g., Tenneco
Exploration, Ltd. v. FERC, 649 F.2d 376, 379-380 (5th Cir. 1981)), the
relevant date is clearly the transfer date.  In this regard, the
finding of the court below (Pet. App. 16a) that no wells had been
drilled on the PLA-5 acreage at the time of the agreements is
misleading;  at the time of transfer, there were 75 wells on the
acreage.

   /16/ Following the court of appeals' decision, El Paso determined
that the GLA wells are unprofitable and attempted to reassign the
wells to the producers under a provision in the GLA agreements.  On
February 15, 1984, a Texas court ruled that El Paso had no right to
reassign the leases.

   /17/ It should be noted that the financial impact of this case far
exceeds that in Ashland Oil Co. v. Good, No. 83-1234, Mobil Oil Corp.
v. Batchelder, No. 83-1248 and Cities Service Oil Co. v. Matzen, No.
83-1278, which are pending before this Court on petitions for
certiorari.  In those cases, several natural gas producers entered
into leases with landowners permitting them to explore for and produce
natural gas on the leasehold acreage in return for royalty payments
based on one-eighth of the "market value" of the gas.  The gas
produced from these fields was ultimately sold in interstate commerce
and the producers paid royalties based upon applicable federal
ceilings for "old" or "flowing" gas.  The Supreme Court of Kansas
held, however, that under the market value clause in the leases, the
royalties should have been based on the higher price ceilings
applicable to "new" gas.  According to the producers in Ashland, the
Kansas Supreme Court's decision would increase the royalties owed to
the landowners to approximately 60% of the revenues received by the
producers for sales of the gas.  In contrast, the decision below would
require the pipelines to pay royalties that are more than 400% greater
than the price the pipelines could collect under the NGPA.

   The Commission has filed an amicus brief in Ashland contending that
the Kansas court's decision interferes with the Commission's
implementation of the just and reasonable rate-making scheme of the
Natural Gas Act and thus is preempted by that Act.  Here, as in
Ashland, the impact of the lower court's decision collides with the
primary purpose of the Natural Gas Act, i.e., "(p)rotection of
consumers against exploitation at the hands of natural-gas companies"
(Phillips, 347 U.S. at 685).  Unlike Ashland, however, this case
involves activity that is directly subject to the Commission's
regulatory authority.