Opinion ID: 391883
Heading Depth: 1
Heading Rank: 4

Heading: The Southland Exclusion of the NGPA

Text: 34 NGPA § 2(18)(A)(ii) provides that the term committed or dedicated to interstate commerce means natural gas which, if sold, would be required to be sold in interstate commerce (within the meaning of the Natural Gas Act) under the terms of any contract, any certificate under the Natural Gas Act, or any provision of such Act. Since the deep gas remained dedicated under the NGA, it is within the NGPA definition of committed or dedicated, unless it qualifies for exclusion from the NGPA definition. Section 2(18)(B)(iii), also known as the Southland exclusion, provides that the term committed or dedicated to interstate commerce does not apply with respect to 35 natural gas which, but for this clause, would be committed or dedicated to interstate commerce under subparagraph (A)(ii) by reason of the action of any person (including any successor in interest thereof, other than by means of any reversion of a leasehold interest), if on May 31, 1978 36 (I) neither that person, nor any affiliate thereof, had any right to explore for, develop, produce, or sell such natural gas; and 37 (II) such natural gas was not being sold in interstate commerce (within the meaning of the Natural Gas Act) for resale (other than (certain specified sales not relevant here)). 38 The keying date for application of the Southland exclusion May 31, 1978 is the date the Supreme Court handed down its Southland decision; the successor in interest and flowing gas rationales of the Court are also reflected in the Southland exclusion. Note, The Meaning of the Southland Exclusion at 444. The exclusion thus limits the application of the Southland decision without reversing it on its facts. See H.R.Rep.No. 1752, 95th Cong., 2d Sess. 71 (1978), U.S.Code Cong. & Admin.News 1978, p. 8800. 39 The district court applied the Southland exclusion and found that the deep gas met the tests necessary to qualify for that exclusion from the NGPA definition of committed or dedicated. 470 F.Supp. at 548-50. The voluntary surrender of the original leases occurred in 1973. On the assumption that the voluntary surrender constituted a reversion, the Southland exclusion's requirement that a reversion occur prior to May 31, 1978, was met. On May 31, 1978, the subsequent grantee (Allied Chemical) of the reversioners (the Wylie Heirs) held the right to produce, explore, develop, and sell the deep gas. Therefore, as required by the Southland exclusion, neither the dedicator, the dedicator's affiliates, nor the successors in interest of the dedicator prior to the reversion, had those rights on May 31, 1978. 7 Finally, since the deep gas was being sold in intrastate commerce, the deep gas was not flowing in interstate commerce on May 31, 1978, as further required by the Southland exclusion. 8 Columbia, however, contests some crucial express assumptions made by the district court in arriving at its conclusion. 40 Columbia first challenges the assumption that the voluntary surrender of the original leases constituted a reversion within the meaning of the Southland exclusion. The NGPA does not define the term reversion. However, Representative Dingell, in a statement in the Congressional Record, explained that a reversion is 41 any process by which a natural gas leasehold interest or part thereof terminates and the lessee loses the right to explore for, develop, produce, or sell natural gas from the acreage formerly covered by such lease or part thereof. Such processes include termination by voluntary release, by judicial cancellation decree, or under the provisions of a lease which require termination if production is not established or if production is not maintained in paying quantities. 42 124 Cong.Rec. H13116 (daily ed. Oct. 14, 1978) (emphasis added). In reliance on Representative Dingell's statement, the district court correctly held that the voluntary surrender in settlement of litigation constituted a reversion. In addition to Representative Dingell's statement, the Conference Committee Report to the NGPA states that the term successor in interest in the Southland exclusion does not include any interest owner who acquires his right pursuant to the reversion or any other termination of a natural gas leasehold interest. H.R.Rep.No. 1752, supra, at 71, U.S.Code Cong. & Admin.News 1978, p. 8988 (emphasis added). A statutory provision must be read in light of the central purpose of the statute, as derived from its legislative history and the circumstances surrounding its enactment. Johansen v. United States, 343 U.S. 427, 431, 72 S.Ct. 849, 852, 96 L.Ed. 1051 (1952); Note, Legislative History of the Natural Gas Policy Act: Title I, 59 Texas L.Rev. 101 (1980). This Court is compelled to conclude, in light of the foregoing legislative history and the exclusion's remedial purpose in limiting the Southland decision, that the term reversion should be broadly construed to encompass various forms of relinquishing a leasehold interest, including voluntary surrender. See Note, The Meaning of the Southland Exclusion at 453-54. We affirm the district court's holding in this regard. 43 The district court also held the Southland exclusion encompasses partial reversions of a leasehold. 9 Again, the NGPA does not define reversion, but does refer to a reversion of a leasehold interest  rather than simply a leasehold, which implies that the exclusion may encompass reversions of part of a leasehold estate. The Conference Committee Report to the NGPA, which states that the term successor in interest does not include any interest owner who acquires his right pursuant to the reversion or any other termination of a natural gas leasehold interest, H.R.Rep.No. 1752, supra, at 71, U.S.Code Cong. & Admin.News 1978, p. 8988 (emphasis added), similarly implies a partial reversion. Most persuasive, however, is Representative Dingell's statement that the term reversion, was intended to include any process by which a natural gas leasehold interest or part thereof terminates and the lessee loses the right to explore for, develop, produce, or sell natural gas from the acreage formerly covered by the lease or part thereof. 124 Cong.Rec. at H13116 (emphasis added). Therefore, this court, in light of the foregoing legislative history and the remedial purpose of the Southland exclusion, affirms the district court's holding that the term reversion in the Southland exclusion can encompass partial leasehold reversions. See Note, The Meaning of the Southland Exclusion at 453-54 (statutory purpose frustrated if protection of reversioners from application of successor in interest doctrine is limited to cases in which entire leasehold reverts). 44 Columbia also argued that the two different levels of gas reserves could not be separated from each other, and since the gas above 10,600 feet was flowing in interstate commerce on May 31, 1978, the requirement of the exclusion in this regard was not met. The district court rejected this argument because a partial release of gas rights is authorized, and it is the released gas which must be flowing on May 31, 1978, to defeat exclusion. 470 F.Supp. at 550 (emphasis in original). This Court finds this reasoning accurate and precise as a matter of statutory interpretation. Since the statute authorizes partial reversions, then it does not matter that the partial reversion of the leasehold is defined according to depth rather than specified surface acreage. 10 See Note, The Meaning of the Southland Exclusion at 453-54. Since the statute provides that the gas covered by the reversion must not be flowing in interstate commerce on May 31, 1978, the deep gas properly qualifies for the Southland exclusion even though the shallow gas was flowing in interstate commerce on that date. 11 45 In summary then, this Court holds that the district court correctly held that the deep gas qualified for the Southland exclusion. The next step in the analysis is to determine what consequences flow from having so qualified. 46 Columbia argued that even if the deep gas does qualify for the Southland exclusion, under the Southland decision it is entitled to receive a payback of all gas wrongfully diverted up until December 1, 1978, because that date is when the protection of the exclusion becomes effective. Columbia pointed to NGPA § 601(a)(1)(A), 15 U.S.C.A. § 3431(a)(1)(A), which provides: 47 For purposes of section 1(b) of the Natural Gas Act, effective on (December 1, 1978), the provisions of the Natural Gas Act and the jurisdiction of the Commission under such Act shall not apply to natural gas which was not committed or dedicated to interstate commerce as of November 8, 1978, solely by reason of any first sale of such natural gas. 48 The district court rejected this argument on two grounds. The reasoning of the district court in this regard, however, is in error, and we accordingly reverse the district court's conclusion on the first ground and vacate it on the second. 49 The first ground that the district court acted upon concerned the point in time at which the Southland exclusion is effective. The district court held that gas meeting the necessary qualifications of the Southland exclusion on May 31, 1978, is considered not committed or dedicated as of that date, and hence is not committed or dedicated prior to the enactment of the NGPA. It then concluded that there is no Commission jurisdiction under NGA § 1(b) over such gas, and hence, no wrongful diversion without NGA § 7 abandonment authority. 50 The district court then addressed what it termed as technical violations occurring prior to May 31, 1978, and found, on the basis of the legislative history, that there is no payback requirement for prior Southland -type violations either. Representative Dingell in his explanatory statement remarked: 51 While the Southland provisions of this legislation prospectively immunize producers from enforcement actions brought under the Natural Gas Act based upon an extension of the principles of the Southland case, additional flexibility was needed respecting enforcement of past violations of requirements of the Natural Gas Act, for example in cases where the producer who had commenced deliveries of gas to interstate commerce diverted that gas to intrastate commerce. A Federal enforcement policy directed towards recovering a payback of natural gas volumes in conjectural circumstances (especially where it is clear the producer acted in good faith and without knowledge or notice that his gas might be regarded as dedicated due to the action of an earlier lessee under an expired lease) could frustrate the objectives of this bill. Producers faced with possible payback exposure would not be free to reinvest in new drilling activities the revenues derived from sales of historically intrastate gas. If this traditional financing mechanism is eliminated or seriously impaired, the supply objectives of this bill cannot hope to be achieved. Sudden supply disruptions in the intrastate market which could result from such an enforcement policy would also be inconsistent with the objectives of the legislation. With respect to past violations of the Natural Gas Act, it is appropriate that enforcement be accomplished through development of judicious enforcement policies by the Federal Energy Regulatory Commission in consideration of the objectives of the Natural Gas Policy Act. 52 124 Cong.Rec. H13115-H13116 (daily ed. Oct. 14, 1978). The district court concluded that the Wylie Heirs, Toce, and the Allied Chemical Group could not have anticipated that the courts would one day regard the gas located below 10,600 feet subsea as dedicated to interstate commerce as a result of the actions of earlier lessees under terminated leases. Concluding that the ordering of even a limited payback of gas would contravene the spirit and intent of the NGPA, the district court held that these defendants were entitled to judgment in their favor on the first count of Columbia's complaint. Because the district court in reliance on Representative Dingell's statement held that no payback liability would be imposed on the good faith defendants, the court retreated from its earlier conclusion concerning when the Southland exclusion became effective. It stated that it did not need to decide whether exemption from payback liability operates from December 1, 1978, or from May 31, 1978, or any other date, in light of Representative Dingell's explanatory statement. 53 With regard to the district court's initial view that the Southland exclusion is effective on May 31, 1978, this Court has previously stated that gas qualifying for the Southland exclusion is removed from NGA jurisdiction on December 1, 1978, by NGPA § 601(a)(1)(a). Columbia Gas Development Corp. v. FERC, 651 F.2d 1146, 1157 n.14 (5th Cir. 1981); Falcon Petroleum v. FERC, 642 F.2d 780, 784-85 (5th Cir. 1981). The district court's interpretation suffers from the assumption that section 2(18)(B)(iii) is an exclusion from NGA dedication, with the only question being one of effective date. The exclusion, however, is an exclusion from the NGPA's definition of committed or dedicated for purposes of applying the operative NGPA provisions, one of which, in addition to wellhead pricing and price deregulation, is selective repeal of NGA jurisdiction (and thus dedication requirements) by NGPA § 601(a)(1). 12 Note, The Meaning of the Southland Exclusion at 456. The May 31, 1978, keying date is merely a condition to qualifying for the definitional exclusion. Id. The gas interest of a reversioner or subsequent grantee of a reversioner that qualifies under the Southland exclusion remains dedicated under the NGA until removed from NGA jurisdiction on December 1, 1978, because the exclusion deems that gas to be not committed or dedicated on November 8, 1978, for purposes of applying NGPA § 601 (a)(1)(a). See Falcon, 642 F.2d at 784-85. The reversioner or his subsequent grantee would, however, remain in violation of the NGA for any unauthorized Southland -type diversions or abandonments of gas prior to December 1, 1978. Note, The Meaning of the Southland Exlcusion at 456. Therefore, since FERC still has NGA jurisdiction until December 1, 1978, over gas that qualifies for exclusion from the NGPA definition of committed or dedicated, it still possesses enforcement authority for violations of the NGA with respect to that gas that occurred prior to December 1, 1978. 54 Accordingly, this Court holds that the Wylie Heirs, Toce, and the Allied Chemical Group have violated the Natural Gas Act for wrongful diversions prior to December 1, 1978. Sales of the deep gas into the intrastate market on or after December 1, 1978, are no longer in violation of the NGA pursuant to NGPA § 601(a)(1)(A). This brings us to the final issue of whether Columbia is entitled to a payback of the gas wrongfully diverted prior to December 1, 1978. 55 The question is whether, as a matter of discretion, enforcement of a payback obligation should be ordered, a decision reviewable under the abuse of discretion standard. Such an exercise of discretion is to be undertaken with Representative Dingell's caution in mind concerning FERC enforcement policy with respect to Southland -type diversions. Because the district court essentially concluded that all prior Southland -type violations are within Representative Dingell's caution, this Court vacates the district court's holding that Representative Dingell's statement exonerated the defendants from liability. 56 Representative Dingell expressed the view that FERC should pursue a judicious course in enforcing the statute: zealous enforcement with regard to past diversions, when the producer acted in good faith and without knowledge or notice that his gas might be regarded as dedicated due to the action of an earlier lessee under an expired lease, might frustrate the goals of the NGPA by impairing the ability of producers to finance new exploration and development from the revenue generated by intrastate gas sales. One situation most clearly within Representative Dingell's statement is when a producer walked away from a lease because production was no longer commercially feasible, but failed to apply for or receive an abandonment authorization for the gas that he had earlier dedicated. The landowner to whom the lease reverted may very well not have known that the gas was dedicated to interstate commerce, and almost certainly would not know that an abandonment authorization had not been granted. The landowner may not even have known of the necessity for an abandonment authorization. Certificates and abandonment authorizations are not typically recorded in title records. Note, The Meaning of the Southland Exclusion at 443 n.42. Years later, a prospective lessee who determines that it is now commercially feasible to attempt production would thus have no easy means by which to ascertain whether there was an earlier dedication and, if so, whether an abandonment authorization with respect to this acreage had been applied for or granted. The new lessee would sell the gas in the best market at the time most likely the intrastate market. 57 This hypothetical situation is clearly not the case here. The deep gas was diverted in 1974, and prior to that time Columbia indicated to the Allied Chemical Group and the Wylie Heirs that it considered the deep gas to be dedicated to Columbia. The Wylie Heirs participated in the creation of the reversion of the leasehold to them since the reversion was accomplished by voluntary surrender in settlement of litigation. Therefore, the Wylie Heirs knew that all reserves, including the deep gas, might be within the original dedication. The Allied Chemical Group was similarly aware that the deep gas might be within the original dedication since it was aware of the circumstances under which the reversion of the leasehold interest in the deep gas occurred. 13 58 Rather than determine whether or not the case at hand is also within Representative Dingell's enforcement caution, however, this Court will instead vacate the judgment of the district court and instruct it on remand to refer the question of enforcement for the diversions prior to December 1, 1978, to FERC under the doctrine of primary jurisdiction. 14 Exoneration from liability in whole or in part is properly a matter for FERC discretion and expertise. 15 That determination will be subject to the abuse of discretion standard, in light of Representative Dingell's caution to FERC about judicious enforcement and NGPA policy goal achievement. 16