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

Heading: Effect of Federal Price Regulation

Text: 21 The district court found that Phillips had at all times during gas production paid Bowers royalties based on the maximum lawful ceiling prices that could be charged for the gas from that geographic area that had been committed to interstate commerce under a long-term contract. 4 Bowers contends that if the gas were not committed to the long-term contract between Phillips and Natural; that is, treated as though it is free and available for sale, Middleton, supra, 613 S.W.2d at 246, in the regulated market, the gas could command a higher price under federal law than the proceeds actually received from Phillips' sales to Natural under its long-term contract. For proof of comparable prices for free and available interstate gas, Bowers points to the maximum price ceilings imposed by the Natural Gas Policy Act on renewal, or rollover, contracts between a producer and an interstate distributor, which permit higher prices to be charged for the gas than do the ceilings for gas sales contracts that have not expired by their own terms. Phillips, of course, maintains that interstate rollover gas sales from renewal contracts constitute a separate category under the Act, and thus are not comparable to interstate gas sales from existing contracts (a different category), such as the Phillips sales contract that formed the basis of royalties paid by Phillips to Bowers. 22 The Natural Gas Policy Act authorizes the FERC to implement maximum price ceilings for different categories of gas produced in the United States. The Act sets forth gas categories based on the timing of drilling, location of wells, and markets for gas, with resultant variations in the maximum lawful price of first sales of the gas from that particular source. 5 The gas produced from Phillips' wells and sold to Natural is regulated by 15 U.S.C. Sec. 3314, which provides for maximum price ceilings for gas committed to interstate commerce on November 8, 1978. Section 3316, however, permits a different, higher, price ceiling for gas that was previously subject to an existing [interstate] contract which expired at the end of a fixed term ... whether or not there is an identity of parties or terms with those of the ... existing contract. Sec. 3301(12). In effect, the rollover provision requires that the gas retain its interstate status in subsequent sales, but permits it to be sold at a higher price than that of the prior interstate contract. See, e.g., 18 C.F.R. Sec. 271.101 (1981). 23 We cannot accept Bowers' contention that if the gas from its properties were free [of the contract] and available for sale, the market value of the gas from its properties would be the price of rollover gas or of new gas. In Middleton, the Texas Supreme Court has held that only sales of gas of comparable quality may be used to prove market value, taking into account its legal characteristics and whether it is sold in one particular category of the regulated market. Middleton, 613 S.W.2d at 246. The particular category of this gas is interstate gas under the maximum price ceilings of Sec. 3314, not the rollover provision of Sec. 3316, for there is no present lawful means by which the Phillips-Natural contract could expire by its own terms, as required by federal regulations, or could otherwise be renewed or replaced and be subject to a higher ceiling as rollover gas. 6 It would be as unlawful to market this gas as rollover gas, outside its particular category under the Act, as it would be to sell it as intrastate gas. 24 The requirement under Texas law that market value be calculated as though the gas were free and available for sale has content under this interpretation. The lessee must base the lessor's royalties on comparable sales of gas with the same legal characteristics and subject to the price restraints of the particular category of the Act, and not solely on the actual proceeds obtained under the sales contract it has with the distributor. If Phillips were receiving less than the maximum ceiling price from Natural, which is permitted under the Act, see 15 U.S.C. Sec. 3311(b)(9), 7 then Middleton's prescription that the gas should be considered free and available for sale would presumably permit Bowers to prove that comparable sales include existing interstate sales contracts that pay the maximum federal ceiling price.