Source: http://supreme.nolo.com/us/442/529/case.html
Timestamp: 2019-04-26 06:59:12+00:00

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"as a matter of law, when all of the parties recognized that the then known natural gas reserves were depleted in 1966 followed by failure to provide any service . . . for a period of five years."
commerce all gas produced from a dedicated leasehold until they obtain permission for abandonment from the Commission. Pp. 442 U. S. 535-539.
(a) Congress could not have been more explicit in establishing Commission approval as a prerequisite for lawful abandonment of service within its jurisdiction. The statutory language simply does not admit of any exception to the procedure set forth in § 7(b), as this Court's previous decisions have recognized. Pp. 442 U. S. 535-538.
(b) The Commission's control over the continuation of service is a fundamental component of the regulatory scheme, and to deprive the Commission of this authority, even in limited circumstances, would conflict with basic policies underlying the Act. Requiring Commission approval of abandonment, "after due hearing," permits all interested parties to be heard, and therefore facilitates full presentation of the facts necessary to determine whether § 7(b)'s criteria have been met. Moreover, the obligation to obtain Commission approval promotes certainty and reliability in the regulatory scheme. Pp. 442 U. S. 538-539.
2. It need not be determined whether § 7(b) allows the Commission to approve an abandonment retroactively and disregard evidence of subsequent production, since the Commission did not abuse its discretion in declining to do so here. Given the potential for retroactive approvals to disrupt the regulatory scheme, it was within the Commission's discretion to reject allegations of good faith in failing to seek Commission approval as a sufficient justification, by itself, for determining whether the evidence available in 1966 warranted granting an abandonment. Pp. 442 U. S. 539-541.
3. Respondents' contention that the current production of gas is not subject to § 7(b)'s requirements is without merit. The Commission properly found that the certificates of public convenience and necessity cover all reservoirs located on the tract. And initiation of interstate service pursuant to the certificates dedicated all fields subject to the certificates. California v. Southland Royalty Co., 436 U. S. 519, 436 U. S. 525. Once so dedicated, there can be no withdrawal of that supply from the interstate market absent Commission approval. Sunray Mid-Continent Oil Co. v. FPC, 364 U. S. 137, 364 U. S. 156. Pp. 442 U. S. 541-543.
MARSHALL, J., delivered the opinion of the Court, in which all other Members joined, except STEWART, J., who took no part in the consideration or decision of the cases.
Under § 7(c) of the Natural Gas Act, producers who sell natural gas to pipelines for resale in interstate commerce must obtain a certificate of public convenience and necessity from the Federal Energy Regulatory Commission. [Footnote 1] Section 7(b) of the Act obligates these producers to continue supplying gas in the interstate market until the Commission authorizes an "abandonment." [Footnote 2] The principal issue presented by this case is whether a producer may, consistent with § 7(b), ever terminate this service obligation without obtaining the agency's express approval.
known as the Butler B tract. In 1948, the owner of this land, B. C. Butler, Sr., executed an oil and gas lease with W. R. Quin as the lessee. Quin's widow contracted in 1953 to sell petitioner United Gas Pipe Line Co. (United), for a 10-year period, all "merchantable natural gas . . . now or hereafter" produced from the Butler B tract. App. 7A. Because United was an interstate pipeline company, Ms. Quin applied to the Commission for a certificate of public convenience and necessity authorizing this sale. The certificate issued by the Commission contained neither a time limitation nor any designation of the depths from which the gas would be produced.
"if, at some future date, you have further gas to deliver to us at the above delivery point, which will be subject to the terms of the above-captioned contract."
During 1971 and 1972, Haring divided the Butler B leasehold horizontally and vertically, and he assigned to a group headed by respondent McCombs a working interest in the eastern 113 acres of the tract between the depths of 6,500 and 8,653 feet. A few months later, the group acquired a similar interest in the entire Butler B tract from depths of 8,700 to 9,700 feet. Drilling to these deeper horizons, the McCombs group discovered new gas reserves. [Footnote 5] In 1972, they contracted to sell this gas to respondent E. I. du Pont de Nemours & Co. for industrial uses in intrastate commerce. Upon learning of the renewed production, however, United asserted its rights under the 1953 contract, as extended in 1961, to purchase all gas produced from the property. When the McCombs group rejected this claim, United filed a complaint with the Commission.
"the abandonment of the service in the instant case was accomplished, as a matter of law, when all of the parties recognized that the then known natural gas reserves were depleted in 1966, followed by failure to provide any service under the certificates for a period of five years, during which time there was no evidence of other estimated gas reserves recoverable from the subject leaseholds."
Id. at 1382 In sum, the Court of Appeals considered the facts so clear that the abandonment issue was no longer "within the expertise of the Commission." Id. at 1381. The dissenting judge found this conclusion "directly contrary to the plain terms of § 7(b)," which mandate approval by the Commission as the sole means of effectuating a valid abandonment. Id. at 1382.
We granted certiorari, 439 U.S. 892 (1978), and now reverse.
"No natural gas company shall abandon all or any portion of its facilities subject to the jurisdiction of the Commission, or any service rendered by means of such facilities, without the permission and approval of the Commission first had and obtained, after due hearing, and a finding by the Commission that the available supply of natural gas is depleted to the extent that the continuance of service is unwarranted, or that the present or future public convenience or necessity permit such abandonment."
"[I]f the companies, failing to find new sources of gas supply, desired to abandon service because of a depletion of supply, they would have to make proof thereof before the Commission, under § 7(b). The Commission thus, even though there may be physical problems beyond its control, [keeps] legal control over the continuation of service by the applicants."
Id. at 364 U. S. 158 n. 25. In short, Sunray makes clear that producers must secure Commission approval to abandon service even when there is little or no doubt that gas supplies are exhausted.
"[o]nce the gas commenced to flow into interstate commerce from the facilities used by the lessees, § 7(b) require[s] that the Commission's permission be obtained prior to the discontinuance of 'any service rendered by means of such facilities.'"
Id. at 436 U. S. 527 (emphasis added).
Thus, we have consistently recognized that the Commission's "legal control over the continuation of service," Sunray, supra at 364 U. S. 158 n. 25, is a fundamental component of the regulatory scheme. To deprive the Commission of this authority, even in limited circumstances, would conflict with basic policies underlying the Act.
of the leasehold had been insufficient to justify finding "the available supply of natural gas . . . depleted to the extent that the continuance of service [was] unwarranted. . . ." § 7(b). And the Commission might have concluded that production from deeper reserves or other measures to restore service were feasible. Permitting natural gas companies to bypass abandonment proceedings simply because known reserves appear depleted would obviously foreclose these factual inquiries. Consequently, the abandonment determination would rest, as a practical matter, in the producer's control, a result clearly at odds with Congress' purpose to regulate the supply and price of natural gas. See California v. Southland Royalty Co., supra at 436 U. S. 526-527, 436 U. S. 529-530; Sunray Mid-Continent Oil Co. v. FPC, supra, at 364 U. S. 142-147.
authority to set aside the Commission's order on this ground. Although respondents urged the agency to authorize an abandonment of service from Butler B, the Administrative Law Judge and the Commission rejected this suggestion in light of the clear evidence that the leasehold was still capable of production. Respondents, however, contend that, because Haring acted in good faith in failing to seek agency approval, the Commission was obligated to treat their answer to United's complaint as if it were an abandonment application filed in 1966. Thus, according to respondents, the Court of Appeals was entitled to conclude that the Commission should have ignored the evidence of subsequent production and authorized an abandonment based on the evidence available in 1966.
Applying these principles, the Commission determined that all reserves underlying Butler B were dedicated to interstate commerce pursuant to the certificates it had issued in 1954 and 1963, see supra at 442 U. S. 534, and n. 6, and therefore were subject to the requirements of § 7(b). There being ample factual and legal justification for the Commission's conclusions, see Sun Oil Co. v. FPC, 364 U. S. 170 (1960), we hold that § 7(b) requires respondents to continue supplying in interstate commerce all gas produced from the leasehold until they properly obtain permission for abandonment.
* Together with No. 78-249, Federal Energy Regulatory Commission v. McCombs et al., also on certiorari to the same court.
52 Stat. 825, as amended, 15 U.S.C. § 717f(c). See Phillips Petroleum Co. v. Wisconsin, 347 U. S. 672 (1954). Pursuant to the Department of Energy Organization Act, 91 Stat. 565, the regulatory functions at issue here were transferred from the Federal Power Commission to the Federal Energy Regulatory Commission, effective October 1, 1977.
Although Haring advised United that he would apply to the Commission for a successor producer certificate, no application was ever filed. App. to Pet. for Cert. in No. 717, pp. A-6 to A-7.
The Secretary of the Commission wrote Bay Rock in January, 1971, that it would be necessary to file an application for permission to abandon service and a notice of cancellation of rate schedule. Id. at A-100 to A-101. This letter also directed the lessee to submit either a copy of any agreement with United canceling the gas purchase contract or a statement from United "indicating its position with respect to the proposed abandonment." Ibid. The Secretary had written a similar letter to Pagenkopf in August, 1968, but he, too, failed to respond. Id. at A-97 to A-98.
In addition to the Butler B interests, the McCombs group also owned an interest in an adjoining tract of land. In order to operate both tracts as a single entity, the group "unitized," or combined, their interests in Butler B with those in the corresponding depths of the adjacent tract. As a result, a fraction of the production from each of four successful wells located on the total unitized acreage is attributable to the Butler B leasehold for purposes of the gas purchase contract and the Commission's certificates. Id. at A-8 to A-10. See generally 6 H. Williams & C. Meyers, Oil & Gas Law 2-3 (1977 ed.).
In determining the scope of Pagenkopf's certificate, the Commission analyzed separately the depths covered and the duration of the obligation to sell gas in interstate commerce. The Commission based its conclusion that the certificates encompassed all reservoirs on the absence of any reference to particular depths in either the applications for certification, which incorporated the contract with United, or in the certificates issued Pagenkopf and Ms. Quin. App. to Pet. for Cert. in No. 78-17, pp. A-29 to A35. Referring to the same documents, the Commission interpreted Pagenkopf's certificate to encompass all gas produced from wells drilled before the contract's expiration date, even if the gas is extracted after February 7, 1981. Ibid. However, the Commission refused to consider whether the certificate also covered gas produced from wells drilled after the contract's expiration date. Id. at A-33, and n. 28; see Sun Oil Co. v. FPC, 364 U. S. 170 (1960). Since the parties have not challenged here these findings on duration, we express no view on the Commission's ruling concerning production beyond 1981.
The Commission did not address the validity of United's gas purchase contract. McCombs has raised that issue in a separate suit, which is being held in abeyance pending completion of this litigation. McCombs v. United Cas Pipe Line Co., No. SA-73-CA-210 (WD Tex., filed Aug. 2, 1973).
The Court of Appeals rendered this decision on rehearing after withdrawing an earlier opinion by a different panel. See 542 F.2d 1144 (1976).
Although Congress has recently revised the federal scheme for regulating natural gas, see the Natural Gas Policy Act of 1978, 92 Stat. 3351, that legislation does not affect the outcome of this case. With certain exceptions not relevant here, gas reserves dedicated to interstate commerce before November 8, 1978, remain subject to § 7(b) of the Natural Gas Act. See §§ 2(18), 104, 106(a), and 601(a) of the Natural Gas Policy Act, 92 Stat. 3354, 3362, 3365, 3409, 15 U.S.C. §§ 3301(18), 3314, 3316(a), 3431(a) (1976 ed., Supp. III); S.Conf.Rep. No. 95-1126, pp. 71-72, 82, 84 85, 123-124 (1978); H.R.Conf.Rep. No. 95-1752, pp. 71-72, 82, 84-85, 123-124 (1978).
See Texaco, Inc., FERC, Docket Nos. G-8820 et al., Order Granting Petition for Reconsideration and Modifying Prior Order (Nov. 1, 1977).
Respondents contend that the Commission recently approved a retroactive § 7(b) abandonment in Arkansas Louisiana Gas Co., FPC Docket No. CP76-329 (Mar. 8, 1977). In that case, a certificated pipeline had agreed to sell excess gas, but its supply became depleted in 1971. Although the pipeline did not seek abandonment permission until 1977, the Commission approved the abandonment because the supply of excess gas was still depleted, and there was no likelihood of obtaining additional gas. The agency's decision therefore had no retroactive impact.
Relying on four lower court decisions that did not involve § 7(b), respondents argue that the Commission was required to approve abandonment retroactively here. None of these cases, however, supports respondents' contention that the Commission abused its discretion in this suit. In Ellwood City v. FERC, 583 F.2d 642 (CA3 1978), cert. denied, 440 U.S. 946 (1979), and Niagara Mohawk Power Corp. v. FPC, 126 U.S.App.D.C. 376, 379 F.2d 153 (1967), the Courts of Appeals found no abuse of discretion in the Commission's decision to give retroactive effect to certain rate schedules and licensing orders. Accordingly, neither decision addresses whether the Commission was required to exercise its discretion in this manner. Moreover, retrospective action was taken in Niagara Mohawk to prevent the utility from benefiting by its failure to comply with the law, a consideration that militates against granting retroactive approval in the instant action.
Plaquemines Oil Gas Co. v. FPC, 146 U.S.App.D.C. 287, 450 F.2d 1334 (1971), merely held that, once the Commission chooses "to regard as being done that which should have been done," id. at 290, 450 F.2d at 1337, it must apply this principle consistently within the same case. Finally, Highland Resources, Inc. v. FPC, 537 F.2d 1336 (CA5 1976), involved a producer that, relying on a published order of the Commission, failed to submit certain rate applications. After the agency changed its filing requirements, the producer promptly tendered the appropriate papers. The Commission nevertheless refused to give the application retroactive effect. The Court of Appeals set aside this aspect of the Commission's order, holding that a producer should not be penalized for its reliance on the agency's own pronouncements. There was no such reliance, however, in the present litigation. See n 4, supra.
Since the Commission and lower federal courts have held that § 7(b) prohibits abandonment of service without agency approval even where the producer has not obtained a certificate, see, e.g., Cumberland Natural Gas Co., 34 F.P.C. 132 (1965); Mesa Petroleum Co. v. FPC, 441 F.2d 182 (CA5 1971), respondents contend that § 7(b)'s reference to "service rendered" can never be measured by the certificate of public convenience and necessity. See n 2, supra. Respondents, however, misperceive the basis for these decisions. Because a company may not circumvent the regulatory scheme by failing to comply with the certification requirement, the Commission must, in such cases, rely on sources other than a certificate to ascertain the scope of a dedication in interstate commerce. These cases obviously do not preclude the agency from referring to certificates when they exist.
The agency's decisions have reflected a similar understanding of § 7(b). For example, in Cumberland Natural Gas Co., supra, where the producer had not yet obtained a certificate of convenience and necessity, the Commission held that "dedication of reserves for sale in interstate commerce occur[red] at least as soon as deliveries commenc[ed]" from any part of the 9,000-acre leasehold contractually committed to an interstate pipeline. 34 F.P.C. at 136. Accordingly, the agency required that all gas subsequently produced from the entire dedicated leasehold, even if discovered after the dedication, be sold in interstate commerce until the Commission approved an abandonment. Id. at 136-137. See also Pioneer Gathering System, Inc., 23 F.P.C. 260, 263 (1960); Murphy Oil Corp. v. FERC, 589 F.2d 944 (CA8 1978); Mitchell Energy Corp. v. FPC, 533 F.2d 258 (CA5 1976).

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