Opinion ID: 410950
Heading Depth: 2
Heading Rank: 1

Heading: Texas Jurisprudence

Text: 11 Texas law has sought to preserve the willing-buyer, willing-seller concept of market value by basing it on comparable sales of similar gas. The Texas Supreme Court holds that market value of gas is to be determined at the time the gas is produced rather than when the producer and distributor execute a long-term contract. It is sold for purposes of the royalty provision at the time of each delivery to the pipeline; the lessor is entitled to royalties based on the value of comparable, contemporaneous sales of gas and not merely the proceeds from the producer's sales contract. See Texas Oil & Gas Corporation v. Vela, 429 S.W.2d 866 (Tex.1968). 12 Similarly, in Exxon Corporation v. Middleton, 613 S.W.2d 240 (Tex.1981), the Texas Supreme Court considered the gas sold at the time of delivery, regardless of the fixed price to which it has been committed in a long-term contract, and found that gas should be valued as though it is free and available for sale. 613 S.W.2d at 246 (emphasis supplied). The lessor may calculate the current market value of gas production by using evidence of comparable sales, defined as those sales comparable in time, quality, quantity, and availability of marketing outlets. 613 S.W.2d at 246 (citing Vela ). 13 The Middleton decision defined comparability of sales, however, to reflect the regulation of market prices of natural gas. Comparability of quality means not only similar physical properties, but also includes the legal characteristics of the gas: whether it is sold in a regulated or unregulated market, or in one particular category of a regulated market. Id. (emphasis supplied). In defining comparable marketing outlets, the court pointed to both geographic location and legal markets, for [g]as from fields with outlets to interstate markets only, for instance, would not be comparable to gas from a field with outlets only to the intrastate market. Id. at 247. 14 Vela and Middleton involved only sales of unregulated gas sold in the intrastate market. However, Middleton's holding that the market value of intrastate gas could not be determined by the non-comparable sales of regulated interstate gas--and its reference to comparability as including not only the legal characteristic of whether the gas is sold in a regulated or an unregulated market, but also whether in one particular category of a regulated market--at least implicitly support equally the rationales: (a), that the sales of unregulated, intrastate gas cannot be comparables upon which to fix the market value of gas dedicated to the regulated interstate market (as specifically held by the Texas court a few months later in First National Bank in Weatherford v. Exxon Corporation, 622 S.W.2d 80, 81-82 (Tex.1981)), and also (b), pertinently here, that the sales of gas in one regulated category are not comparables to be utilized in fixing the market value of natural gas sold in another regulated category. 15 The Fifth Circuit has also recognized that the determination of market value must consider the price regulation of the market in which the gas may legally be sold. In Kingery v. Continental Oil Company, 626 F.2d 1261, 1264 (5th Cir. 1980), cert. denied sub nom. Brent v. Natural Gas Pipeline Co. of America, --- U.S. ----, 102 S.Ct. 1012, 71 L.Ed.2d 302 (1982), which was rendered after the Texas appeals court, but before the Texas Supreme Court decided Middleton, 3 this court held that because sellers and buyers of gas in interstate commerce cannot lawfully contract for prices above federal ceilings, sales on the unregulated intrastate market are not comparable in calculating the market value of gas committed by producer contract to interstate commerce. 626 F.2d at 1264-65. This court reaffirmed that the test for market value is: 16 [W]hat ... a willing seller and a willing buyer in a business which subjects them and the commodity to restriction and regulation, ... [would] agree to take and pay with a reasonable expectation that the FPC [now the FERC] would approve the price (and price changes) and other terms and then issue the necessary certificate of public convenience and necessity. 17 Kingery, 626 F.2d at 1264. 18 The plaintiffs Bowers point out that Kingery and Weatherford held only that sales of un regulated gas could not be regarded as comparables to determine the market value of regulated gas, and that Middleton held only that sales of regulated gas were not comparables for determination of the market value of unregulated gas; the decisions did not expressly hold that comparables of sales of regulated gas did not include all sales within the regulated market. Bowers further notes that these decisions did not disturb the basic holding of Vela that the market value for purposes of calculating royalties is not determined by the price fixed in the long-term contract between the producer and the distributor, but rather by the current market value of the gas produced, nor did any of these decisions disturb the Texas rule that the gas should be valued as though it is free and available for sale. Middleton, supra, 613 S.W.2d at 246. 19 Nevertheless, in its decision in Weatherford, citing the result in the Fifth Circuit's Kingery with approval, 622 S.W.2d at 80 n. 1, the Texas Supreme Court reiterated the Middleton enunciation of the determination of market value, 613 S.W.2d at 247, by using only comparables with the same legal characteristics of the natural gas in question, such as sales in one particular category of a regulated market ... with marketing outlets similar to the gas in question. Weatherford, supra, 622 S.W.2d at 81. This rationale, in our opinion, requires us, Erie -bound by Texas law, to reject Bowers' contention that the market value of regulated, interstate-dedicated natural gas shall be determined by treating the present gas production as though it was newly produced or otherwise available for higher price and thus free of the particular federal price-fixed category into which it falls because of the preexisting long-term contract. 20 Fuller reference to the federal regulatory scheme is now required, in order to explain our conclusion that the market value of natural gas produced under a long-term contract and dedicated to interstate use is fixed by the maximum allowable price for regulated gas of the same particular category, and that this is consonant with the pronouncements in Vela and Middleton that the market value is determined as though the gas were free of the contract and available for sale in the current market and not bound to the actual price paid under the long-term sales contract.