PUBLISH
UNITED STATES COURT OF APPEALS Filed 10/16/96 TENTH CIRCUIT

HARVEY E. YATES COMPANY, a New Mexico corporation; NEW MEXICO OIL & GAS ASSOCIATION, Plaintiffs-Appellees,

v. RAY POWELL, Commissioner of Public Lands for the State of New Mexico, Defendant-Appellant. No. 95-2214

Appeal from the United States District Court for the District of New Mexico (D.C. No. CIV 90-715M) Jan Unna, Special Assistant Attorney General, SantaFe, New Mexico (Kelly Brooks, Special Assistant Attorney General, with her on the brief), for Defendant-Appellant. Andrew J. Cloutier of Hinkle, Cox, Eaton, Coffield & Hensley, Roswell, New Mexico (Harold L. Hensley, Jr., with him on the brief), for PlaintiffsAppellees.
Before SEYMOUR , Chief Judge, TACHAand EBEL , Circuit Judges.

EBEL , Circuit Judge.- 2 -

Appellees Harvey E. Yates, Co. ("HEYCO") and the Ne w Mexico Oil and Gas Association ("NMOGA") filed this declaratory judgment action in state district court in Chaves County, New Mexico a gainst the New Mexico Commissioner for Public Lands. Appellees sought a judgment declaring invalid a revised New Mexico State Land Office regu lation governing the calculation and payment of royalties under state oi l and gas leases ("Rule 1.059"). The Commissioner removed the action to fe deral district court pursuant to 28 U.S.C. §§ 1441, 1446 (1994) and asse rted various counterclaims against Appellee HEYCO. The Commissi oner's counterclaims sought royalty payments or correspond ing damages from HEYCO arising out of HEYCO's acceptance of cash pay ments in settlement of certain take-or-pay disputes. The federal distr ict court granted summary judgment to HEYCO on the Commissioner's counterclai ms, holding that no royalty was due on the settlement proceeds received by HEYCO. In a separate ruling, the district court also granted su mmary judgment to Appellees on their claim for declaratory relief and apparently held Rule 1.059 invalid in its entirety. The Commissioner no w appeals both summary judgment rulings. We exercise jurisdiction pursuan t to 28 U.S.C. § 1291 and affirm in part, reverse in part, and remand forfurther proceedings.- 3 - I. BACKGROUND The New Mexico Commissioner of Public Lands is the executive officer of the New Mexico State Land Office ("SLO") , which holds over thirteen million acres of state land in trust for v arious specified beneficiaries, including schools and institutions o f higher learning. See N.M. Stat. Ann. §§ 19-1-1, 19-1-2, 19-1-17 (Michie 1994). Revenues to support these beneficiaries are obtained in primary part from oil and gas producers, who lease oil and gas interests in the S LO lands and pay a royalty to the state pursuant to statutory leases. Although the Commissioner is authorized by statute to execute an d issue oil and gas leases on SLO lands, N.M. Stat. Ann. § 19-10-1 (Mic hie 1994), the state legislature sets the terms and conditions of the oi l and gas leases, and directs the Commissioner to use the form leases as set forth in the New Mexico Public Land Code. See N.M. Stat. Ann. § 19-10-4 (Michie 1994) (directing commissioner to use legislative form lea ses); see also N.M. Stat. Ann. §§ 19-10-4.1 to -4.3 (Michie 1994) (containing actual form leases). Appellee NMOGA is an unincorporated trade associati on made up of various individuals and entities involved in oil an d gas exploration, development and production in New Mexico. Many mem bers of NMOGA are lessees under state oil and gas leases. Appell ee HEYCO is a natural gas- 4 -

producer which holds a number of statutory leases o n lands owned in trust by the SLO.

A. The Royalty Dispute In the late 1970s and early 1980s, HEYCO entered in to long-term gas supply contracts with various pipeline companies pu rsuant to which HEYCO agreed to supply the pipeline companies, at s tipulated prices, with natural gas produced from certain state gas leases. In 1989, HEYCO had thirty-three such gas supply contracts with the El Paso Natural Gas Company and two with the Transwestern Pipeline Comp any. These contracts each contained "take-or-pay" clauses whic h obligated the pipeline purchasers either to take a certain minimum amount of gas each year or, failing to do so, to pay HEYCO the difference in va lue between the minimum contract amount and the amount actually tak en. At the time these gas supply contracts were entered into, federal regulatory price ceilings on natural gas sold in th e interstate market had resulted in decreased production and availability o f natural gas. See generallyPrenalta Corp. v. Colorado Interstate Gas Co. , 944 F.2d 677, 679- 80 (10th Cir. 1991) (discussing effects of federal regulation on interstate gas market). Pipeline companies therefore were wil ling to enter into long-1 For more detailed explanation of the take-or-pay crisis wh ich

followed the federal government's deregulation of the inte rstate natural gas market, see Richard J. Pierce, Jr., State Regulation of Nat ural Gas in a Federally Deregulated Market: The Tragedy of the Commons Re visited , 73 Cornell L. Rev. 15, 18-20 (1987). - 5 - term contracts with substantial take-or-pay obligat ions in order to ensure a steady supply of natural gas for their customers. Id. HEYCO's gas supply contracts with Transwestern and El Paso were repres entative of this type of long-term take-or-pay contract. Following deregulation of natural gas pricing in th e mid-1980s, the supply of natural gas increased and the market pric e dropped sharply. Pipeline companies, however, continued to be obligated under their existing take-or-pay contracts to purchase large qu antities of natural gas at an above-market contract price. 1 In response to these economic forces, pipeline companies generally began reducing their g as "takes" without making any corresponding take-or-pay payments to pr oducers. See Prenalta , 944 F.2d at 680. In HEYCO's case, for example, E l Paso and Transwestern not only reduced their gas "takes," bu t also unilaterally lowered to market level the purchase price of any g as actually taken. Based on these price and take deficiencies, HEYCO m ade a claim against Transwestern for breach of its gas supply c ontracts. HEYCO subsequently entered into settlement negotiations w ith Transwestern,2A "buy down" is a settlement payment made to the producer whi ch

accompanies renegotiation of other terms in the supply cont ract, such as "a reduced price term, an extension of the delivery terms, a red uction in the minimum or total quantity to be purchased, or some combinati on of these elements." Howard R. Williams & Charles J. Meyers, 8 Manual of Oil and Gas Terms 121 (1995) (quotation omitted).

3A nonrecoupable payment is "[t]hat portion of theamount paid under a settlement agreement of a take-or-pay controversy which may not be recouped by later taking gas in excess of the contractually required take-or-pay quantities." Howard R. Williams & Charles J. Meyers, 8 Manual of Oil and Gas Terms704 (1995). - 6 - during which Transwestern sought amendments to the price and quantity terms of the gas supply contracts in exchange for a"buy down" payment. 2 Specifically, Transwestern hoped to lower its take obligations and to amend the contract to add a "market-sensitive" clause that would set the price of gas according to prevailing market rates. In Janua ry 1989, HEYCO agreed to accept a $275,000 nonrecoupable 3 buy down payment in exchange for certain price and take reduction amendments to the supply contracts. ("Letter Agreement," Appellant App. at 135-41.) Fo r the remaining period of the contracts, Transwestern paid HEYCO the gener ally prevailing market price for its natural gas, which was substantially lower than the prior contract rate. The State of New Mexico has not rec eived a royalty payment from HEYCO on the Transwestern settlement proceeds, although HEYCO has paid the state all royalty on gas produced and sold at the lower spot market price since the Transwestern settlement.4A "buy out" is a settlement payment made by a gas purchaser to the

producer in order to extinguish its liabilities under a take -or-pay clause and to discharge the purchaser from further performance under t he supply contract. See 8 Howard R. Williams & Charles J. Meyers, Manual of Oil and Gas Terms 122 (1995). - 7 - In February 1989, HEYCO also negotiated a settlemen t agreement with El Paso. ("Settlement Agreement and Release," Appellant App. at 143-46.) Pursuant to this agreement, HEYCO accepte d a $312,181 nonrecoupable "buy out" payment 4from El Paso. In exchange, HEYCO agreed to terminate the El Paso gas supply contract s and to discharge El Paso from any further obligations thereunder. HEYC O has not paid the State of New Mexico any royalty on the buy out proc eeds received from El
Paso. Before the district court, the Commissioner asserte d a counterclaim against HEYCO arising out of HEYCO's failure to payroyalties on the El Paso and Transwestern settlement proceeds. The Com missioner's counterclaim sought royalty payments under five sep arate legal theories: (1) breach of the duty to market and breach of the duty of good faith and fair dealing; (2) constructive sale of gas; (3) bre ach of the duty to pay royalties; (4) unjust enrichment; and (5) third-party beneficiary. The district court held that no royalty was due under t he express terms of the5Rule 1.059(B)(13) provides in relevant part as follows: (continued...) - 8 - New Mexico statutory lease and granted summary judg ment to HEYCO on the Commissioner's counterclaim.

B. The Rule 1.059 Controversy On June 1, 1988, the Commissioner circulated a prop osed amendment, entitled "Calculating and Remitting Oil and Gas Roy alties," to Rule 1.059 of the SLO regulations. The amendment to Rule 1.05 9 was the Commissioner's attempt to standardize the practice of calculating royalties under state oil and gas leases (Rule 1.059(A), Appe llant App. at 352), and to combat what the Commissioner perceived to be wid espread underreporting of royalties by lessees. After the notice and comment period, the amendment to Rule 1.059 was adopted and became effective on January 1, 1990. For purposes of this appeal, the most important provision added by the amendment is a detailed definition of "proceeds" upon which lessees must now base their royalty payments to the state. See Rule 1.059(B)(13). The "proceeds" definition requires l essees to pay royalties to the state based on "the total consideration accruin g to the lessee," and provides an extensive, yet nonexhaustive, list of e xamples. Id. 55 (...continued)

"[P]roceeds" means the total consideration accruing to the lessee. It includes but is not limited to: reimbursement for dehydration, compression, measurement, or field gathering to the extent that the lessee is obligated to perform them at no cost to t he lessor; reimbursements, payments, or credits for advanced p repaid reserve payments subject to recoupment through reduced pric es in later sales; advanced exploration or development costs that are subject to recoupment through reduced prices in later sales; a ny other consideration given to the lessee, or any action ta ken or not taken in exchange for reduced prices; take-or-pay payments ; and tax reimbursements. . . . (emphasis added.) The parties seem to agree that t he new "proceeds" definition, if enforceable, would require the payme nt of royalties on all take-or-pay settlements. However, because amended Rule 1.059 did not become effective until January 1, 1990 (approximate ly one year after HEYCO's settlement agreements with El Paso and Tran swestern), the Commissioner's counterclaim does not rely on the ne w "proceeds" definition in seeking royalty payments from HEYCO. - 9 - In addition to the "proceeds" definition, amended Rule 1.059 imposes upon state lessees complicated accounting requireme nts with respect to oil and gas that is either sold, processed or transport ed under contracts which are not "arm's-length" agreements as defined by the Rule. According to the Commissioner, the purpose of the "arm's-length" pro visions is to value oil and gas for royalty purposes at a true market value rather than an artificially low non-arm's-length price. Amended Rule 1.059 also requires lessees to obtain SLO approval of accounting proced ures contained in nonarm's-length contracts for the sale of processed ga s. Under subsection (F)- 10 -

of the Rule, the Commissioner may disapprove of a l essee's proposed methodology for calculating deductible processing c osts and impose a different methodology which more reasonably reflect s the actual costs of processing. See Rule 1.059(F)(2)(c). Appellees argue that by promulgating Rule 1.059, th e Commissioner unilaterally has imposed substantial new obligation s upon state oil and gas lessees. Appellees contend that Rule 1.059 thus co nstitutes an unconstitutional impairment of contracts and a deni al of due process under both the federal and state constitutions. Appellee s also argue that the Commissioner exceeded his authority under state law and usurped the legislative power in promulgating the Rule. The di strict court, in granting summary judgment to Appellees, agreed that the Comm issioner acted without authority in promulgating Rule 1.059. The court also agreed with Appellees' argument that the Commissioner's action was a usurpation of legislative power. The court did not address Appel lees' other state or federal constitutional claims.

II. DISCUSSION We review the grant of a motion for summary judgmen t de novo , under the same standard applied by the district cou rt pursuant to Fed. R.- 11 -

Civ. P. 56(c). Universal Money Ctrs., Inc. v. AT&T , 22 F.3d 1527, 1529 (10th Cir.), cert. denied , 115 S. Ct. 655 (1994). Summary judgment is appropriate “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, i f any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Fed. R. Civ. P. 56 (c). If there is no genuine issue of material fact in dispute, we must determine whether the substantive law was correctly applied by the distri ct court. Applied Genetics Int'l v. First Affiliated Sec., Inc. , 912 F.2d 1238, 1241 (10th Cir. 1990).

A. HEYCO's Obligation to Pay Royalties on the Settleme nt Proceeds We first address whether HEYCO breached its duty to pay royalties by failing to pay the state its royalty share of th e settlement proceeds received from El Paso and Transwestern. Our inquiry begins with the gas royalty clause of the New Mexico statutory lease, w hich reads in part as follows: Subject to the free use without royalty, as hereinb efore provided, at the option of the lessor at any time and from time to time, the lessee shall pay the lessor as royalty one-eighth part of the gas produced and saved from the leased premises, including casing-he ad gas. Unless said option is exercised by lessor, the lessee shal l pay the lessor as royalty one-eighth of the cash value of the gas, in cluding casing-head6Because the question whether state lessees must p ay royalties on lump

sum take-or-pay settlements is resnovain New Mexico and would control the outcome of this case, the Commissioner asks us to c ertify the question to the Supreme Court of New Mexico. While the importance and novelty of this question both mitigate in favor of certification, we decline the Commissioner's invitation to certify for two reasons. First, the Commissioner's request is not well taken considering that the present suit was originally filed in state court by the plaintiffs and removed to federal court by the Commissioner. Cf. Croteau v. Olin Corp. , 884 F.2d 45, 46 (1st Cir. 1989) ("[O]ne who choos es to litigate his state action in the federal forum . . . must ordinarily accept the federal court's reasonable interpretation of extant state law rather than seeking extensions via the certification process."). Second, in the proceedings before the district court, the Commissioner did not seek to certify the question, and only now (after receiving an adverse ruling) has asked us to do so. SeeMassengale v. Oklahoma Bd. of Examiners in Optometry, 30 F.3d 1325, 1331 (10th Cir. 1994) (citing Armij o v. Ex Cam, Inc. , 843 F.2d 406, 407 (10th Cir. 1988)) ("We generally will not certify questions to a state supreme court when the requesting party seeks certification only after having received an adverse decision fromthe district court."). We therefore deny the Commissioner's Motion to CertifyQuestions to the Supreme Court of New Mexico. - 12 - gas, produced and saved from the leased premises an d marketed or utilized, such value to be equal to the net proceed s derived from the sale of such gas in the field . . . . N.M. Stat. Ann. § 19-10-4.1 (Michie 1994). 6 Although the terms of the New Mexico oil and gas le ase are prescribed by statute, the lease itself is a contra ct between the State as lessor on the one hand and HEYCO as lessee on the o ther. We therefore apply general New Mexico contract principles in asc ertaining the effect of the particular provisions of the lease. See Leonard v. Barnes , 404 P.2d 292, 302 (N.M. 1965) (noting that an oil and gas lease “ is merely a contract- 13 -

between the parties and is to be tested by the same rules as any contract"). Unless its provisions are ambiguous, "the lease mus t be given the legal effect resulting from a construction of the languag e contained within the four corners of the instrument." Owens v. Superio r Oil Co. , 730 P.2d 458, 459 (N.M. 1986) (citing cases). A contract is ambi guous when its language "can be fairly and reasonably construed in differen t ways." Harper Oil Co. v. Yates Petroleum Corp. , 733 P.2d 1313, 1316 (N.M. 1987).

1. "Production is the key to royalty" Here, we find the royalty clause to be clear and un ambiguous: Under its plain terms, the lessee need only "pay the less or as royalty one-eighth of the cash value of the gas . . . produced and saved from the leased premises . . . ." N.M. Stat. Ann. § 19-10-4.1 (Michie 1994) (emphasis added). Thus, the lessee is not obligated to pay a royalty on the "cash value of the gas" in the abstract, but only on the cash value of gas whi ch is actually "produced and saved" from the leased property. See Diamond Shamrock Exploration Co. v. Hodel , 853 F.2d 1159, 1165-68 (5th Cir. 1988) (holding t hat under similar "production"-type royalty clause, “royaltie s are not due on `value’ or even `market value’ in the abstract, but only on the value of production saved, removed or sold from the leased property.”). This construction of- 14 -

the lease agreement not only is compelled by the pl ain language of the royalty clause, but also comports with the interpre tation adopted by the majority of courts which have addressed the "produc tion"-type royalty clause. See, e.g. , Mandell v. Hamman Oil & Ref. Co. , 822 S.W.2d 153, 165 (Tex. Ct. App. 1991) (citing Diamond Shamrock , 853 F.2d at 1167-68) ("Production is the key to royalty."); Killam Oil C o. v. Bruni , 806 S.W.2d 264, 267 (Tex. Ct. App. 1991) ("[T]he lease entitle d the [lessor] to royalty payments on gas actually produced."); State v. Penn zoil Co. , 752 P.2d 975, 981 (Wyo. 1988) ("By its clear terms, [the lease] m anifests the intention of the parties that royalty payments were to be made o nly in the event of production from the lease, that is, after physical extraction of the gas from the land and its sale or use."); Diamond Shamrock , 853 F.2d at 1165 ("[R]oyalties are not owed unless and until actual production. . . ."). In State v. Pennzoil Co. , the Wyoming Supreme Court was called upon to interpret a similar lease provision requiri ng the payment of royalties "on gas . . . produced from said land sav ed and sold or used off the premises . . . ." 752 P.2d at 976 (emphasis in original). At issue in that case was whether the State of Wyoming was entitled, as lessor, to a royalty on recoupable take-or-pay payments received by the lessees. Id. The State argued that the royalty clause was ambiguous and th us should be interpreted- 15 -

broadly to require royalties "on all proceeds relat ing to th[e] gas whether or not actual production and sale had occurred." Id. at 978-79. The court rejected this argument, holding that the express te rms of the lease required actual "production" of gas to trigger the lessees' duty to pay royalty: The word "production" has an established legal mean ing when used in a royalty or habendum clause of an oil and gas leas e. "Production" requires severance of the mineral from the ground. . . . [T]he lease demonstrates that the parties intended the general meaning of "production." . . . This language manifests the pr oposition that royalties are due only upon physical extraction of the gas from the ground and its removal. Id. at 979 (citations omitted). Similarly, in Diamond Shamrock Exploration Co. v. H odel , 853 F.2d 1159, 1163 (5th Cir. 1988), the Fifth Circuit const rued a federal off-shore lease calling for royalties of a certain percentage , “in amount or value of production saved, removed, or sold from the leased area." The court held that this language expressly conditioned the paymen t of royalties upon "production" of gas, id. at 1165, and that "[f]or purposes of royalty calculation and payment, production does not occur until the minerals are physically severed from the earth." Id. at 1168. Thus, the court concluded, because take-or-pay payments are not payments for p roduced gas, but rather are payments for the pipeline-purchaser's failure to take produced gas, such payments are not subject to the lessor's royalty in terest. Id. at 1167.7In Mandell , as in this case, the pipeline company paid cash to settle

claims that it not only had breached the take-or-pay clause o f the gas supply contract, but also that it had underpaid for gas previously p roduced. While the lessee in Mandell did not pay a royalty on the take-or-pay portion of the settlement, it did tender a royalty on that portion of the settlement which was attributable to the pipeline's underpayment for produc ed gas. 822 S.W.2d at 157. Here, however, HEYCO has not paid the state a ro yalty on anyportion of the settlements. - 16 - Other courts have applied the reasoning of Pennzoil and Diamond Shamrockto hold that, under a "production"-type royalty cl ause, no royalties are due on cash payments received in sett lement of the take-or-pay provision of a gas supply contract. In Mandell v. Hamman Oil & Ref. Co. , 822 S.W.2d 153, 164 (Tex. Ct. App. 1991), for examp le, the Texas Court of Appeals held that royalties were not due on the tak e-or-pay portion of a settlement because "[t]ake or pay is not a payment for production; it is a payment for nonproduction." 7Similarly, in Killam Oil Co. v. Bruni , 806 S.W.2d 264, 268 (Tex. Ct. App. 1991), the court hel d that a lessor was “not entitled to royalties on the settlement proceeds ar ising from the take-or-pay provision of the contract . . . because under a sta ndard lease, take-or-pay payments do not constitute any part of the price pa id for produced gas. . . .” Accord Lenape Resources Corp. v. Tennessee Gas Pipe line Co. , 925 S.W.2d 565, 569-70 (Tex. 1996); TransAmerican Natural Gas Corp. v. Finkelstein , No. 04-95-00365-CV, 1996 WL 460010, at *6-*8 (Tex. Ct. App. Aug. 14,- 17 -

1996) (en banc); Roye Realty & Developing, Inc. v. Watson , No. 76,848, 1996 WL 515794, at *9 (Okla. Sept. 10, 1996); Indep endent Petroleum Ass’n of Am. v. Babbitt , 92 F.3d 1248, 1259-60 (D.C. Cir. 1996). From these cases, we believe that three guiding pri nciples emerge that are applicable to the issues here. First, roy alty payments are not due under a "production"-type lease unless and until ga s is physically extracted from the leased premises. Second, nonrecoupable pr oceeds received by a lessee in settlement of the take-or-pay provision o f a gas supply contract are specifically for non -production and thus are not royalty bearing. Thir d, any portion of a settlement payment that is a buy-d own of the contract price for gas that is actually produced and taken by the settling purchaser is subject to the lessor’s royalty interest at the tim e of such production, but only in an amount reflecting a fair apportionment o f the price adjustment payment over the purchases affected by such price a djustment. In adopting this three-part framework, we reject th e Commissioner's suggestion that the "production" language in the ro yalty clause lease should not be strictly construed. The Commissioner argues that the entire lease agreement should be evaluated in light of the parti es' intent in entering into the contract, which the Commissioner characterizes as a "cooperative venture" between lessor and lessee to develop the l and and split all- 18 -

economic benefits arising therefrom. The Commissio ner's "cooperative venture" theory is an extension of the so-called "H arrell rule." See Thomas A. Harrell, Developments in Nonregulatory Oil and G as Law , 30 Inst. on Oil & Gas L. & Tax'n 311 (1979). Under the Harrell rule, a gas lease is a symbiotic endeavor in which "the lessor contribut[e s] the land and the lessee contribut[es] the capital and expertise nece ssary to develop the minerals for the mutual benefit of both parties." Id. at 334. A corollary to the “cooperative venture” theory is the argument th at buy-down or buy-out settlement payments enable the lessee to sell the r eleased gas on the open market at a cheaper price, and, accordingly, that s ubsequent production and sale of such gas to a third party should be deemed to be at a price consisting of two figures: the spot price received from the t hird party and an allocated portion of the settlement payment. The Commissione r relies on two cases which have applied the Harrell rule to require the payment of royalties on take-or-pay settlement proceeds: Frey v. Amoco Prod . Co. , 943 F.2d 578 (5th Cir. 1991) ["Frey I "], withdrawn in part on reh'g and question certified , 951 F.2d 67 (5th Cir. 1992) (per curiam), certifi ed question answered , 603 So.2d 166 (La. 1992) ["Frey II "], reinstated in part on reh’g , 976 F.2d 242 (5th Cir. 1992) (per curiam); and Klei n v. Jones , 980 F.2d 521- 19 -

(8th Cir. 1992), aff’d after remand , 73 F.3d 779 (8th Cir. 1996), cert. denied , 64 U.S.L.W. 3808 (U.S. Oct. 7, 1996) (applying Ar kansas law). In Frey , a private lessee-producer received a $66.5 millio n take-orpay buy down payment from a pipeline company. $20. 9 million of this amount represented a nonrecoupable settlement payme nt; the remaining $45.6 million represented a payment for accrued tak e-or-pay deficiencies, but which the pipeline could later recoup in the fo rm of make-up gas. Frey
I , 943 F.2d at 580. The royalty clause in the relev ant lease agreement required the producer-lessee to pay a "royalty on g as sold by Lessee [at] one-fifth ( 1 / 5 ) of the amount realized at the well from such sale s." Id. (brackets in original.) Although the lessee eventu ally paid royalties on the recoupable portion of the settlement (as the corres ponding make-up gas was taken), no royalties were ever paid on the $20.9 mi llion in nonrecoupable settlement proceeds. The lessors filed suit in fed eral district court seeking payment of royalties on the nonrecoupable settlemen t proceeds. Applying Louisiana law, the district court ruled against the lessors. 708 F. Supp. 783, 787 (E.D. La. 1989), rev’d , 943 F.2d 578 (5th Cir. 1991). The Fifth Circuit reversed, holding that a royalty was due th e lessors under the express terms of the lease agreement, which tied ro yalties to "sales" of gas rather than the "production" of gas. See Frey I , 943 F.2d at 581. In so- 20 -

holding, the Fifth Circuit distinguished its earlie r Diamond Shamrock decision, where take-or-pay payments were held not subject to a royalty under a lease agreement requiring royalties to be p aid on the "amount or value of productionsaved, removed, or sold." Id . (emphasis in original). The Diamond Shamrockcase was distinguishable, the Fifth Circuit concluded, because unlike the "sale" of gas, which in Louisiana is accomplished at the time the gas purchase contract is executed, the "production" of gas requires actual severance of th e minerals from the ground. Id. ; see also id. at 588 (Jones, J., concurring) ("[W]e are not attempting to overrule the Diamond Shamrockcase, whose outcome depended upon a standard production-type royalty cl ause."). On rehearing, the Fifth Circuit withdrew that porti on of its opinion dealing with the royalty issue and certified the qu estion to the Louisiana Supreme Court. Frey v. Amoco Prod. Co. , 951 F.2d 67 (5th Cir. 1992) (per curiam). Responding to the certified question, the Louisiana Supreme Court agreed with the Fifth Circuit's distinction b etween the "production"- type royalty clause construed in Diamond Shamrockand a clause requiring royalties to be paid on the "sale" of gas. See Frey II , 603 So.2d at 179. According to the court, the "sale" of gas--as oppos ed to the "production" of gas--occurs under Louisiana law when the gas purcha se contract is- 21 -

executed. Id . (citing La. Civ. Code. Ann. arts. 1767, 1775, 245 0, 2471 (West 1987)). Thus, the settlement proceeds consti tuted a part of the amount realized by the lessee from the "sale" of ga s, and the lessors therefore were entitled to a royalty share under th e express terms of the lease agreement. Id. at 178. Although the Louisiana Supreme Court found that the settlement payments were part of the amount realized from the "sale" of gas, the court chose not to base its decision on this fact alone. Rather, the court also invoked Professor Harrell's "cooperative venture" t heory. Frey II , 603 So.2d at 173. In this regard, the court noted thatunder Louisiana law, an oil and gas lease is a "cooperative venture in whic h the lessor contributes the land and the lessee the capital and expertise n ecessary to develop the minerals for the mutual benefit of both parties." Id . (citing Henry v. Ballard & Cordell Corp. , 418 So. 2d 1334, 1338 (La. 1982)). Based on Professor Harrell's rule, the Frey II court gave the royalty clause an "expansive reading," id. , such that the receipt by the lessee of any econom ic benefit traceable to the mineral lease triggers the lessee's duty to pay royalties: The lease represents a bargained-for exchange, with the benefits flowing directly from the leased premises to the le ssee and the lessor, the latter via royalty. An economic benefit accrui ng from the leased land, generated solely by virtue of the lease, and which is not- 22 -

expressly negated, is to be shared between the less or and the lessee in the fractional division contemplated by the lease. Id. at 174 (citations omitted). Applying this reasoni ng, the court held that the take-or-pay settlement payments were subject to the lessor's royalty interest because the payments were traceable to the lessee's right to develop and explore the property--a right expressly granted by the lease agreement. Id. at 180. The Eighth Circuit's decision in Klein v. Jones , 980 F.2d 521 (8th Cir. 1992), aff’d after remand , 73 F.3d 779 (8th Cir.), cert. denied , 64 U.S.L.W. 3808 (U.S. Oct. 7, 1996) applied the Harrell rule t o a standard "production"-type lease arrangement. In Klein , the court reversed a district court's order that certain payments made to the les see-producer arising out of a take-or-pay dispute were not subject to the le ssor's royalty interest under Arkansas law. 980 F.2d at 533. In remanding the case, the Eighth Circuit opined that Arkansas, like Louisiana, would apply the "cooperative venture" approach in interpreting oil and gas lease s. Id. at 531 ("We also recognize . . . that a lease arrangement is in the nature of a cooperative venture . . . to develop the minerals for the mutua l benefit of both parties."). We believe Frey II and Kleinare distinguishable from the instant case. First, the Frey II and Kleincourts adopted the "cooperative venture"- 23 -

approach largely because of unique state statutes w hich expanded the definition of "royalty" in mineral leases. In Loui siana, for instance, the Mineral Code states: "Royalty," as used in connection with mineral lease s, means any interest in production, or its value, from or attri butable to land subject to a mineral lease, that is deliverable or payable to the lessor or others entitled to share therein . . . . "Royal ty" also includes sums payable to the lessor that are classified by the le ase as constructive production. La. Rev. Stat. Ann. § 31:213(5) (West 1989). Simil arly, the Arkansas statutes provide that "[i]t shall be the duty of bo th the lessee . . . [and the purchaser] to protect the royalty of the lessor's i nterest by paying to the lessor or his assignees the same price, including p remiums, steaming charges, and bonuses of whatsoever name for royalty oil or gas that is paid the operator or lessee under the Lease for the work ing interest thereunder." Ark. Code. Ann. § 15-74-705 (Michie 1987). Both th e Frey II and Klein courts relied on these statutory provisions in conc luding that royalties were due on all economic benefits, including take-or-pay settlements, attributable to the leased land. See Frey II , 603 So.2d at 171-72 (noting the "expansive definition of royalty" provided in the L ouisiana mineral code); Klein , 980 F.2d at 529 (noting the Arkansas legislature' s attempt to "expand the scope of 'royalty' by special definitions and c oncepts"). In contrast, the8It should be noted that the challenged SLO Rule 1.059, like t he

Louisiana and Arkansas statutes, expands the types of lesse e income subject to royalty under the New Mexico statutory lease, thereby bro adening the state's royalty interest. See Rule 1.059(B)(13) (defining "proceeds" subject to royalty as "the total consideration accruing to the lesse e [which] includes but is not limited to . . . payments subject to recoupment thro ugh reduced prices in later sales; . . . any other consideration given to t he lessee, or any action taken or not taken in exchange for reduced prices; [an d] take-or-pay payments"). However, as noted, the Commissioner does not re ly on the amended Rule 1.059 because the Rule was promulgated subsequ ent to the El Paso and Transwestern settlements. - 24 - New Mexico statutes do not contain an expanded defi nition of royalty. 8 Rather, New Mexico’s only pertinent statute specifi cally connects the payment of royalties to the production of gas. N.M . Stat. Ann. § 19-10-4.1 (Michie 1994) (royalties are due on gas which is "p roduced and saved from the leased premises"). Thus, because Freyand Kleinwere decided against a different statutory backdrop, we do not find their reasoning persuasive here. See John S. Lowe, Defining the Royalty Obligation , 49 SMU L. Rev. 223, 257 (1996) ("[B]oth Freyand Kleinwere based in part upon unusual state statutes that may expand the royalty obligati on. . . . Most states . . . apparently have no such legislation. Thus, to the extent that Freyand Klein were based upon statutory language, they may stand alone."). Second, the fact that New Mexico has expressly cond itioned the payment of royalties upon "production" of gas disti nguishes this case from Frey , where the relevant royalty clause was triggered b y "sales" of gas.- 25 -

Both the Fifth Circuit in Frey I and the Louisiana Supreme Court in Frey II recognized this crucial distinction. See Frey I , 943 F.2d at 581 ("The Lease affords royalty on the amount realized from sales, not on production."); Frey II , 603 So.2d at 179 ("The Frey-Amoco Lease explicitl y predicates Amoco's obligation to pay royalty on the sale of ga s. . . . Had the parties desired to condition the payment of royalties on pr oduction of gas, the Lease could easily have so provided."). Third, the “cooperative venture” theory advocated b y Professor Harrell has not apparently received very much addit ional support, and several recent cases have eschewed that approach in favor of a literal reading of the lease terms. For example, in Indepe ndent Petroleum Ass’n of Am. v. Babbitt , 92 F.3d 1248, 1259-60 (D.C. Cir. 1996) [“IPAA ”], the court declined to require royalties to be paid upon payments to settle or adjust contract obligations unless such payments we re recoupable against production and were, in fact, recouped by the settl ing party through actual production taken by the settling party. The mere fact that the lesseeproducer ultimately produced gas freed up by the se ttlement and sold it on the spot market to other buyers did not provide a nexus between that production and the settlement payment such that roy alties were due on the settlement payment. (Of course, the lessee-produce r would owe royalties- 26 -

on the spot price actually obtained for any such re placement sales.) The
IPAAcourt explained: When gas is actually severed and sold to a substitu te purchaser, the settlement payment does not serve as payment fo r the gas. The link between the funds on which royalties are c laimed and the actual production of gas is missing. . . . The relevant question in both cases [take-or-pay payments and co ntract settlement payments], under Diamond Shamrock , is whether or not the funds making up the payment actually pay fo r any gas severed from the ground. When take-or-pay payments (or settlement payments) are recouped, those funds do p ay for severed gas. But when payments (of either variety) are nonrecoupable, the funds are never linked to any se vered gas. Therefore, no royalties accrue on those payments.
IPAA , 92 F.3d at 1259-60 (footnote omitted). The Texas Court of Appeals reached the same result in TransAmerican Natural Ga s Corp. v. Finkelstein , No. 04-95-00365-CV, 1996 WL 460010 (Tex. Ct. App. A ug. 14, 1996) (en banc overturning of prior panel decision reported at 1996 WL 148175 (Tex. Ct. App. Apr. 13, 1996)). There, the court rejecte d the argument that takeor-pay settlements should be allocated to subsequen t production sold on the spot market to third parties. The court stated, “w e reaffirm . . . that a royalty owner, absent specific lease language, is n ot entitled to take-or-pay settlement proceeds, whether or not gas is sold to third parties on the spot market.” Id. at *9; accordRoye Realty & Developing, Inc. v. Watson , No. 76,848, 1996 WL 515794, at *9 (Okla. Sept. 10, 1996 ); see also Lenape Resources Corp. v. Tennessee Gas Pipeline Co. , 925 S.W.2d 565, 569-709While New Mexico’s “Public Lands” law, N.M. Stat. Ann. tit. 19 (Michie

1994), does not expressly define “production,” its tax code does. For purposes of New Mexico oil and gas tax law, “product” means “oi l, natural gas or liquid hydrocarbon, individually or any combination thereo f, or carbon dioxide.” N.M. Stat. Ann. §§ 7-29-2(E), 7-32-2(E) (Michie 1995). A “production unit” is “a unit of property . . . from which products of common ownership are severed.” Id. §§ 7- (continued...) - 27 - (Tex. 1996) (holding that “the pay option under a t ake-or-pay contract is not a payment for the sale of gas”). Butsee Williamson v. Elf Aquitaine,
Inc. , 925 F. Supp. 1163, 1168-69 (N.D. Miss. 1996) (fol lowing the panel decision in TransAmerican Natural Gas Corp. v. Fin kelsteinwhich, as noted above, was subsequently reversed by the Texas Court of Appeals sitting en banc). Because the present case involves a standard "produ ction"-type lease and arises under New Mexico statutory law (which is devoid of provision similar to those in Arkansas and Louisiana expandin g the lessee's royalty obligation), we predict that New Mexico would not a dopt the "cooperative venture" approach. We therefore apply the plain te rms of the statutory lease and conclude that the state is not entitled t o a royalty unless the contested proceeds received by HEYCO were ultimatel y recouped by HEYCO in exchange for actual "production" of gas fr om the leased tracts-- i.e. , "physical extraction of the gas from the ground a nd its removal." Pennzoil , 752 P.2d at 979. 99(...continued)

29-2(B), 7-32-2(B). Finally, “severance” means “the taking from the soil of any product in any manner whatsoever.” Id. §§ 7-29-2(C), 7-32-2(C). Thus, under New Mexico tax law, “production” means the taking o f natural gas from the soil. See e.g. Fullerton v. Kaune , 382 P.2d 529, 532 (N.M. 1963) (tax case using the words “production” and “extraction” interchangeably). - 28 - 2. Are the El Paso and Transwestern settlement proce eds attributable to the "production" of gas? Our conclusion that royalty is tied to production d oes not, of course, end our inquiry. We must now determine whether the El Paso and Transwestern settlement proceeds, or any portions t hereof, were paid to HEYCO forproduced gas as opposed to simply buying out contr actual obligations. We can attribute the settlement payme nts to production only if, and to the extent, the settling purchaser recoups recoupable take-or-pay payments by taking future make-up gas or takes actu al production at a reduced price because of the settlement provisions. The district court granted summary judgment to HEYC O on the ground that the settlement proceeds received by HEY CO were not tied to actual "production" of gas. Our independent review of the record, however, leaves us less certain of this fact, at least as to certain portions of the settlement proceeds. We believe there exists a gen uine issue of material fact whether the El Paso and Transwestern settlemen t proceeds are attributable solely to take-or-pay deficiencies (i. e. , non-production), or10HEYCO contends that the Commissioner has waived any argumen t

pertaining to past price deficiencies. In support of this co ntention, HEYCO asserts that "[t]he Commissioner argued below that royalty was owed on the entire settlement and did not raise any distinct argument th at past prices were settled and royalty bearing." Appellees’ Br. at 40-41. We disagree. The Commissioner's counterclaim alleged specifically that HEYCO owed royalties on settlement payments because they were receive d in "consideration for oil and gas that was produced or will be produced in the future from state lands." Appellant’s App. at 34 (emphasis a dded). Moreover, in opposing HEYCO's motion for summary judgment, the Commissioner argued that a material question of fact remain ed as to "[w]hether any portion of the proceeds received by HEYCO forsettlement of its disputes with El Paso and Transwestern was for settlem ent of price disputes." Appellant App. at 228. We therefore do not believ e that the Commissioner's argument is waived. - 29 - whether they are attributable, at least in part, to a price adjustment for the actual production of gas from the SLO lands acquire d or to be acquired by El Paso or Transwestern. We therefore reverse the grant of summary judgment in favor of HEYCO on the royalty issue and remand to the district court for further proceedings on this question. Although not entirely clear, the record in this cas e suggests that HEYCO sought payment from the pipelines for: (1) t he difference in price between what the pipelines should have paid under t heir gas supply contracts with HEYCO and the lower spot market pric e they actually paid for gas produced prior to the settlement ("past pr ice deficiencies") 10 ; (2) the difference between what the pipelines would hav e been required to pay under the gas supply contracts and the estimated fu ture spot market price11 Because the El Paso settlement was a buy out arrangement

terminating the gas supply contracts altogether, the futur e price deficiencies are relevant only to the Transwestern buy down. - 30 - for the gas ("future price deficiencies") for futur e production subsequent to the settlement taken under the modified gas supply contracts; 11 and (3) the difference in value between the volumes of gas the pipelines were required to take under the take-or-pay provisions of the con tracts and the lesser quantities of gas actually taken by the pipelines b oth prior to (accrued takeor-pay deficiencies) and subsequent to (future take -or-pay obligations) the settlements. As we have noted, the duty to pay royalty under a l ease which conditions royalty payments on "production" is not triggered unless and until gas is physically extracted from the leased p remises. Diamond Shamrock , 853 F.2d at 1168; Pennzoil , 752 P.2d at 979. Thus, proceeds received by the lessee in settlement of the take-or -pay provision of a gas supply contract (for either accrued take-or-pay deficiencies or to abrogate future take-or-pay obligations) are not royalty bea ring because they are payments for non -production. Mandell , 822 S.W.2d at 164; Killam Oil , 806 S.W.2d at 268. Although it does not appear here th at any portion of the settlement payment for reduced volume of gas taken was, or will be, recoupable by future production, if there is such arecoupment tied to actual- 31 -

production, at that point any payments so recouped would be royaltybearing. IPAA , 92 F.3d at 1259-60. With regard to any portions of the settlement attri buted to a reduction in price, HEYCO does have a duty to pay the state a royalty on those portions of the settlements which are attributable to past price deficiencies because any such payment represents HEYCO's recovery of underpayments for gas already produced and sold from the leased S LO lands. Cf. IPAA , 92 F.3d at 1262 & n.7 (Rogers, J., dissenting) (noting that the parties there conceded that amounts paid to resolve disputes overthe price of past production are royalty bearing and considering thatpayments to obtain future price reductions are also royalty bearing). However, any component of the settlements that pertain to future price red uctions present a more difficult question. Because we hold that the New M exico statutory lease form does not require the payment of royalty unless and until gas is physically severed from the ground, a lessee would not be required to remit royalties up front on those amounts which are paid by a pipeline company to buy down the price of future production under the supply contract. At the same time, however, it would grant a windfall to th e lessee if the lessee were permitted to retain the entire lump sum cash " buy down" without ever paying a royalty to the state on the buy-down settl ement amount that is used- 32 -

as a partial up-front payment for later gas that is produced and taken at below-contract prices. As the Commissioner correct ly points out, "if the producer receives $1.00 m.c.f. today, before the ga s is taken, and then receives an additional $1.00 m.c.f. in three months when the gas is actually produced and taken, royalty should be paid on $2.00 m.c.f. To hold otherwise allows the producers to pocket $1.00 of t he price without justification." Br. of Comm'r at 19 n.3. Moreover , if royalties were not ever payable on that portion of a settlement attrib utable to future price reductions on actual production taken by the settli ng purchaser, a lessee would be encouraged to avoid its royalty obligation by accepting large nonrecoupable payments in exchange for reduced pric es on future production. With these competing considerations in mind, we hol d that the lessee's duty to pay royalty on that portion of a s ettlement which is attributable to future price reductions is not trig gered until that future production is actually taken by the settling purcha ser. Thus, when a lessee negotiates a buy down payment in exchange for a red uced future price term, the state has no right to a royalty up front on that portion of the settlement proceeds. However, as the Commissioner's hypotheti cal illustrates, when the future production under the purchase contract i s taken at the newly- 33 -

"bought-down" price, the state should receive a roy alty based on both: (1) the proceeds obtained by the lessee from the sale o f gas at the bought-down price; and (2) a commensurate portion of the settle ment proceeds that is attributable to price reductions applicable to futu re production under the renegotiated gas sales agreement as production occu rs. We believe this approach is faithful to the express terms of the Ne w Mexico statutory lease, which condition royalty payments on actual producti on. This approach also eliminates a lessee's incentive to circumvent the r oyalty clause by maximizing lump sum settlements while minimizing th e future price of gas. Because the record has not been fully developed on this question, we must remand this case to the district court in orde r to determine which portions of the settlement are attributable to nonr ecoupable take-or-pay payments (and thus are not royalty bearing), and wh ich portions are attributable to past and future price deficiencies (and thus are royalty bearing to the extent that the payment is linked to actual production taken by the settling purchaser at below- initial contrac t prices). The district court also must determine what percentage of the su ms attributable to future price deficiencies currently are subject to the state's royalty interest. The record is not clear on this point, but because the HEYCO/Transwestern settlement was reached in 1989, more than seven yea rs ago, it is possible12We have concluded that the Commissioner's alternative argu ments

of breach of the duty to market, constructive sale of gas, and unjust enrichment are unavailing in this case because the state’s r ights here are governed by the terms of its leases with HEYCO. We have recogn ized that the Commissioner may (depending on the facts) have a valid co ntractual right to royalties on at least some portion of these settleme nt proceeds and we see nothing in the Commissioner’s alternative claims that would enlarge upon his contractual royalty rights. We also note that the Co mmissioner does not raise the third party beneficiary claim on appeal, a nd thus that argument is waived. - 34 - that Transwestern has already taken all of the then -anticipated production upon which the future price reductions were based. If this is the case, the state would be entitled immediately to its royalty share on the entire amount of the settlement attributable to future price defi ciencies. However, if Transwestern has to date taken only a portion of th e anticipated production at the bought down price, then only a pro rata amou nt of the buy down proceeds currently would be subject to the state's royalty interest. As noted, the record before us does not adequately ans wer these difficult questions, and thus summary judgment at this point is premature. We acknowledge the complexity of the district court's task on remand, yet we expect the parties will present additional evidence as to the allocation of the settlement proceeds and will cooperate fully wi th the district court in conducting this difficult accounting process. 12- 35 -

B. Validity of Rule 1.059 The Commissioner next appeals the grant of summary judgment to Appellees on their challenge to Rule 1.059. Appell ees below asserted a number of challenges to the rule under both the fed eral and state constitutions. The district court agreed with Appe llees' claims that the Commissioner, in promulgating Rule 1.059, had excee ded the authority given him under the New Mexico Constitution and had usurped a legislative function. Because of its holding with respect to t hese two claims, the district court found it unnecessary to address the balance of Appellees' constitutional arguments. On appeal, the Commissio ner contends the district court erred in three respects: first, by failing to dismiss Appellees' challenge as unripe; second, by ruling against the Commissioner on the merits of Appellees' state constitutional claims, a nd third, by striking down Rule 1.059 in its entirety without considering whet her the invalid portions of the Rule could be severed and the remaining port ions upheld.

1. Ripeness We first address a threshold jurisdictional issue. The Commissioner asserts that Appellees' challenge to Rule 1.059 is not ripe because the amended Rule has not yet been applied by the Commis sioner in any- 36 -

situation directly affecting the Appellees. Whethe r a claim is ripe for judicial review is a question of law which we revie w de novo . New Mexicans for Bill Richardson v. Gonzales , 64 F.3d 1495, 1499 (10th Cir. 1995). The familiar two-part ripeness inquiry requ ires us to "evaluate both the fitness of the issue for judicial resolution an d the hardship to the parties of withholding judicial consideration." Id. (quoting Sierra Club v. Yeutter , 911 F.2d 1405, 1415 (10th Cir. 1990) (quoting Abbott Labs. v. Gardner , 387 U.S. 136, 149 (1967))) (internal quotation mark s omitted). In applying this test, we must "caution against a rigid or mech anical application of a flexible and often context-specific doctrine." Yeu tter , 911 F.2d at 1417. The "fitness for judicial resolution" prong require s the court to consider "both the legal nature of the question pre sented and the finality of the administrative action. . . ." Id. We believe both of these factors favor jurisdiction over Appellees' claims. Generally, wh ere disputed facts exist in the record and the issue presented for review is not purely a legal one, a court must exercise caution before concluding that the claim is ripe. Powder River Basin Resource Council v. Babbitt , 54 F.3d 1477, 1484 (10th Cir. 1995). However, Appellees' challenge to Rule 1.059 presents primarily a legal question--i.e. , whether the Commissioner's promulgation of Rule 1.059 was within the bounds of the authority grante d to him under New- 37 -

Mexico law. Resolution of this question would depe nd almost exclusively upon the interpretation of the relevant New Mexico statutes and constitutional provisions. Cf. id . ("[T]he question here was purely legal: Plaintiff asked the court . . . [whether a Wyoming statute] violated federal law. . . . This judgment would be based almost exc lusively on Wyoming's legal duties under federal law."). Moreover, it is apparent from the record that Rule 1.059 is a final action. Compare Lujan v. National Wildlife Federation , 497 U.S. 871, 890-91 (1990) (challenge to Interio r Department program not ripe for review under the Administrativ e Procedure Act because program did not constitute final agency act ion). Rule 1.059 became effective January 1, 1990, and, according to affidavits submitted to the district court, the Commissioner is currently applying the regulation to state oil and gas leases. We therefore conclude th at Appellees' challenge to Rule 1.059 is "fit for judicial resolution" under t he first prong of the Abbott Labs. ripeness test. Applying the second prong of Abbott Labs. , we believe that Appellees would suffer hardship if judicial consideration of the Rule 1.059 issue were withheld. "In evaluating potential hardship to the parties, a court should consider (1) whether the challenged rule has had a direct impact on the party challenging the rule, and (2) the possible ha rm to the parties of13The Commissioner argues that these affidavits were not prop erly

before the district court and thus may not be considered on ap peal. Specifically, the Commissioner contends that because the c hallenged affidavits were submitted only in connection with Appellee s' motion to file an amended complaint, the district court could not have cons idered them in connection with the subsequent motions for summary judgmen t. The filing of an affidavit for one particular purpose does not preclude its consideration by the district court for other purposes in the litigation. See 10A Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Pract ice & Procedure § 2722, at 55-56 (2d ed. 1983) ("An affidavit of a party that is on file in the case will be considered by the court regardless of the purpose for which it was prepared and filed. Thus, an affidavit submitte d to support another motion may be taken into account on a motion for summa ry judgment.") (citing McCullough Tool Co. v. Well Surveys, I nc. , 395 F.2d 230 (10th Cir.), cert. denied , 393 U.S. 925 (1968)). Thus, because the affidavits at issue here were on file with the district courtand were made part of the record on appeal, the district court and this Court may consider them in connection with the motions for summary judgment. - 38 - delaying judicial consideration." Powder River , 54 F.3d at 1484 (citing
Yeutter , 911 F.2d at 1415). The district court found that"the enforcement of the revised rule results in considerable financi al consequences to plaintiffs in terms of new royalty payments." Appe llant App. at 413. The district court's finding is supported by the record , which contains a host of uncontroverted affidavits from employees of various oil and gas producers who are members of NMOGA. These affidavits show th at industry compliance with Rule 1.059 will be, and in some cas es already is, very time-consuming and expensive. 13 Any delay in attaining a judicial- 39 -

resolution of this issue will likely cause addition al harm to Appellees, and thus we hold that the issue is ripe for review.

2. The Commissioner's Authority to Promulgate Rule 1 .059

. The office of the Commissioner of Public Lands is e stablished, and its powers circumscribed, by state law. In this re gard, N.M. Stat. Ann. § 19-1-1 (Michie 1994) provides that: A state land office is hereby created, the executiv e officer of which shall be the commissioner of public lands . . . who shall have jurisdiction over all lands owned in this chapter b y the state, except as may be otherwise specifically provided by law , and shall have the management, care, custody, control and disposition thereof in accordance with the provisions of this chapterand the law or laws under which such lands have been or may be acquired

. (emphasis added.) Similarly, the state constitutio n provides that: All lands belonging to the territory of New Mexico, and all lands granted, transferred or confirmed to the state by c ongress, and all lands hereafter acquired, are declared to be public lands of the state to be held or disposed of as may be provided by law

. . . . The commissioner of public lands shall select, locate, classify and have the direction, control, care and disposition o f all public lands, under the provisions of the acts of congress relati ng thereto and such regulations as may be provided by law

. N.M. Const. Art. XIII, §§ 1-2 (emphasis added). In terpreting these constitutional and statutory provisions, the New Me xico Supreme Court has declared that the Commissioner of Public Lands “is merely an agent of the- 40 -

state with such powers, and only such, as have been conferred upon him by the constitution and laws of the state, as limited by the [New Mexico] Enabling Act." Hickman v. Mylander , 362 P.2d 500, 502 (N.M. 1961); accordZinn v. Hampson , 301 P.2d 518, 519 (N.M. 1956). In contrast to the Commissioner's limited grant of authority, the state constitution vests the New Mexico legislature with broad powers to prescribe the terms and conditions of mineral lease s on the state's public lands. The New Mexico Constitution provides that: Leases and other contracts, reserving a royalty to the state, for the development and production of any and all minerals . . . may be made under such provisions relating to the necessity or requirement for or the mode and manner of appraisement, advertisement and competitive bidding, and containing such terms and provisions, as may be provided by act of the legislature

. . . . N.M. Const. Art. XXIV, § 1 (emphasis added). Thus, because the state legislature is the body constitutionally empowered to enact laws governing mineral leases on public lands, and because the Com missioner's delegated authority is circumscribed by "such regulations as may be provided by law," N.M. Const. Art. XIII, § 2, the Commissioner has no authority to promulgate rules or regulations inconsistent with l egislative enactments in this area. Accordingly, in order for Rule 1.059 to be within the Commissioner's power to promulgate, the Commissione r must show that Rule 1.059 is consistent with the terms of the stat utory leases.- 41 -

The district court's summary judgment order focused on only one aspect of Rule 1.059--the Rule's definition of "pro ceeds." In essence, this aspect of Rule 1.059 requires lessees to remit roya lties based on the "proceeds" obtained from the sale of gas removed fr om state lands, and defines "proceeds" as the total consideration accruing to the lessee. Itincludes but is not limited to: reimbursement for dehydration, compres sion, measurement, or field gathering to the extent that the lessee is obligated to perform them at no cost to the lessor; reimbursements, payments, or credits for advanced prepaid reserve p ayments subject to recoupment through reduced prices in later sales; a dvanced exploration or development costs that are subject t o recoupment through reduced prices in later sales; any other co nsideration given to the lessee, or any action taken or not taken in exc hange for reduced prices; take-or-pay payments; and tax reimbursement s. Rule 1.059(B)(13). This expansiveness of Rule 1.05 9's "proceeds" definition is its downfall. Whereas the statutory lease only requires the payment of royalties on "production," Rule 1.059 wo uld require state lessees to pay royalties even when gas is not physi cally extracted from the leased premises. Specifically, Rule 1.059's "proce eds" definition requires royalty payments based on "take-or-pay payments"--w hich we have now held do not bear royalties under the state leases. Moreover, as the district court pointed out, the "proceeds" definition "creat es new categories of payments not already in State Leases . . . [such as ] reimbursement for dehydration, compression and measurement of field g athering." (Aplt.14Appellees contend that the Commissioner failed to raise the

severability argument in the district court and thus cannotraise it now for the first time on appeal. We disagree. The Commissioner belo w argued that "even if [a portion of the Rule is held invalid], the severabi lity clause found in the Rule would enable the Court to hold [that] portion of th e Rule objectionable while declaring the remainder of the Rule to b e legally enacted and enforceable." (Aplt. App. at 400.) - 42 - App. at 413.) Because the definition of "proceeds" in Rule 1.059 attaches new and different obligations upon lessees under th e New Mexico statutory lease, we agree with the district court's conclusio n that the Commissioner exceeded his authority under state law and usurped a legislative function in promulgating that aspect of the Rule.

3. Severability of the "Proceeds" Definition Although the district court considered only the "pr oceeds" definition, the court apparently invalidated Rule 1.059 in its entirety. The Commissioner now argues that even if the "proceeds" definition is invalid-- which we hold it is--the district court erred in no t considering whether the remaining portions of the Rule could be preserved u nder the Rule's severability clause. This clause provides that "[i ]f any part or application of this rule is held invalid, the remainder or its application to other situations or persons shall not be affected." Rule 1.059(G). 14- 43 -

Severability of a state regulation is a question of state law. National Solid Wastes Management Ass’n v. Killian , 918 F.2d 671, 679 n.8 (7th Cir. 1990), aff’d , 505 U.S. 88 (1992); cf. Panhandle E. Pipeline Co. v. Oklahoma ex rel. Comm'rs of Land Office , 83 F.3d 1219, 1229 (10th Cir. 1996) (addressing a statute, not a regulation). Un der New Mexico law, the valid portion of a partially invalid statute can co ntinue in force if the following three criteria are satisfied: (1) the invalid part must be separable from the oth er portions without impairing the force and effect of the remaining parts; (2) the legislative purpose expressed in the valid portion can be given force and effect without the invalid part; and (3) when c onsidering the entire act, it cannot be said that the legislature would not have passed the remaining part if it had known that the objecti onable part was invalid. Giant Indus. Ariz., Inc. v. Taxation & Revenue Dep' t , 796 P.2d 1138, 1140 (N.M. Ct. App. 1990) (citing Bradbury & Stamm Const r. Co. v. Bureau of
Revenue , 372 P.2d 808 (N.M. 1962)). The existence of a se verability clause raises a presumption that the legislating bo dy would have enacted the remaining portions of a statute even without th e invalidated sections. Chapman v. Luna , 678 P.2d 687, 693 (N.M. 1984), aff’d after remand , 701 P.2d 367 (N.M.), cert. denied , 474 U.S. 947 (1985). Although these rules of construction are designed to test the severabili ty of a statute, we see no reason why a similar inquiry should not also govern the severability of a- 44 -

regulation. See Marez v. State Taxation & Revenue Dep't. , 893 P.2d 494, 497 (N.M. Ct. App. 1995) (noting the "commonplace t echnique of legislative drafting to provide for survival of non -affected provisions if portions of a statute or regulation are found to be invalid") (emphasis added). In light of Rule 1.059's severability provision, we hold that the district court's failure to consider the independen t validity of the other portions of Rule 1.059 was erroneous. Because seve rability is a legal question, Panhandle E. Pipeline Co. , 83 F.3d at 1229-31, a reviewing court may conduct a severability analysis on appeal witho ut resort to remand. However, the district court here never even conside red the predicate question whether the other provisions of the Rule w ere valid. Compare Leavitt v. Jane L. , 116 S. Ct. 2068, 2069 (1996) (per curiam) (consid ering severability of statute where district court had in validated one provision of the statute but held the remainder valid). Thus, i n the absence of a more developed record on this question, it would be impr udent in this case to conduct a severability analysis for the first time on appeal. Accordingly, we vacate that portion of the district court's orde r invalidating Rule 1.059 in its entirety and we remand with instructions to consider: (1) whether the remaining portions of Rule 1.059 are valid; and (2) if so, whether the- 45 -

invalid "proceeds" definition is severable from the lawful portions of the Rule under New Mexico law.

III. CONCLUSION The district court's grant of summary judgment in favor of Appellee HEYCO on the Commissioner's counterclaim for royalty payments is hereby
REVERSED and REMANDED to the district court for further proceedings consistent with this opinion. The declaratory judg ment in favor of Appellees NMOGA and HEYCO invalidating Rule 1.059 i s AFFIRMED IN
PART as to the "proceeds" definition but otherwise is VACATED and
REMANDED to the district court in order to determine the va lidity of the remaining features of Rule 1.059, and to determine whether any valid portions of the Rule are sustainable under the Rule 's severability clause.