Opinion ID: 543116
Heading Depth: 4
Heading Rank: 1

Heading: Effect of Regulation on Market Value.

Text: 66 The central point of contention between the parties on this issue is whether regulation is considered when determining the market value of the gas pursuant to the royalty contract. We conclude that Shell has the better of the argument. 67 We agree with the royalty owners that federal price ceilings do not apply to royalty interests per se, as royalty contracts do not constitute sales within the meaning of the Natural Gas Act (NGA) or the NGPA. See FERC v. Pennzoil Producing Co., 439 U.S. 508, 519, 99 S.Ct. 765, 772, 58 L.Ed.2d 773 (1979); Mobil Oil Corp. v. FPC, 463 F.2d 256 (D.C.Cir.1971), cert. denied, 406 U.S. 976, 92 S.Ct. 2409, 32 L.Ed.2d 676 (1972) (Mobil I ). However, this does not imply that federal price ceilings are not relevant when determining the market value upon which royalties will be based. While the royalties themselves may exceed the price ceiling, whether price ceilings are relevant to the determination of market value is a matter of state law contract interpretation. See Placid Oil Co. v. FPC, 483 F.2d 880, 911 (5th Cir.1973), aff'd sub nom. Mobil Oil Corp. v. FPC, 417 U.S. 283, 94 S.Ct. 2328, 41 L.Ed.2d 72 (1974) (Mobil II ). 68 The supreme courts of Kansas and Montana have held that federal price ceilings should not be used when determining market value for royalty purposes. See Lightcap v. Mobil Oil Corp., 221 Kan. 448, 562 P.2d 1, 8, cert. denied, 434 U.S. 876, 98 S.Ct. 228, 54 L.Ed.2d 156 (1977); Montana Power Co. v. Kravik, 179 Mont. 87, 586 P.2d 298, 301-02 (1978). Texas's highest court, on the other hand, has determined that federal price controls do affect market value for purposes of royalty payment determination. See Exxon Corp. v. Middleton, 613 S.W.2d 240, 246 (Tex.1981). 69 Neither party presents, and we have not found, any especially persuasive Mississippi authority on the issue. 12 While we have directly ruled that federal price ceilings should be considered in determining market value for purposes of gas royalties, see Flowers v. Diamond Shamrock Corp., 693 F.2d 1146, 1154 (5th Cir.1982), and Bowers v. Phillips Petroleum Co., 692 F.2d 1015, 1019-20 (5th Cir.1982), these decisions were interpreting Texas law in the wake of Middleton. 70 However, the rule that regulatory restraints should be considered when determining market value had been established in this circuit prior to Middleton. Even though we did not make a specific statement about determining market value for purposes of assessing royalty payments, in Weymouth v. Colorado Interstate Gas Co., 367 F.2d 84, 90 (5th Cir.1966), we did find market value for the purposes of an interstate gas sales contract to be 71 what ... a willing seller and a willing buyer in a business which subjects them and the commodity to restriction and regulation, including a commitment for a long period of time, [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. [Footnote omitted.] 72 We reached this conclusion without reference to state substantive law. Hence, where we have little or no indication from the Mississippi Supreme Court as to whether price regulations are subsumed in the term market value in a gas royalty contract, we view Weymouth as persuasive authority that the regulatory price ceilings should be considered. 13 73 Perhaps the most relevant signal, though, of how to construe market value in the contract was our quotation in Piney Woods II of Middleton, 613 S.W.2d at 246-47, wherein the Texas court, analyzing comparable sales for the purpose of establishing market value under a royalty contract, stated, 74 'Quality also involves the legal characteristics of the gas; that is, whether it is sold on a regulated or unregulated market, or in one particular category of a regulated market.... To be comparable, the sales must be made from an area with marketing outlets similar to the gas in question. Gas from fields without access to interstate markets only, for instance, would not be comparable to gas from a field with outlets only to the intrastate market.' 75 Piney Woods II, 726 F.2d 239 n. 17. We may infer from this that in the instant case, when using comparable sales to compute market value, we properly do consider the effect of regulation on market value. 76 Therefore, as Mississippi law makes no definite statement as to how to resolve this issue, we conclude that federal price ceilings do limit market value under the contract. We reach this result both because our quotation of Middleton in Piney Woods II suggests it and because of our earlier decision in Weymouth. 14 Thus, as Shell received its contract price, which in November 1978 became the maximum lawful price available for wells regulated under section 105 of the NGPA (15 U.S.C. Sec. 3315), no further payments were due to royalty owners for those wells governed exclusively by section 105. 77