Opinion ID: 357159
Heading Depth: 1
Heading Rank: 2

Heading: Price Ceiling

Text: 6 Under applicable FERC regulations, a small producer is allowed to charge a higher price for its gas than the price ceiling set by the Commission for large producers. 18 C.F.R. § 157.40(c). The higher rates are in recognition of the generally higher risks, higher costs, and lower production of the small company. See generally FPC v. Texaco Inc., 417 U.S. 380, 94 S.Ct. 2315, 41 L.Ed.2d 141. In anticipation of potential abuse, however, the FERC provided that the higher rates would not be available to a small producer whose gas reserves were acquired by the purchase of developed reserves in place from a large producer. 18 C.F.R. § 157.40(c) (emphasis added). In the order before us the FERC held that the Tribe's election to take their royalty payments in kind rather than in cash was tantamount to a purchase of the gas from El Paso and Northwest within the meaning of § 157.40, thus disqualifying the Tribe from the small producer rates. With all due deference to the Commission's interpretation, we must disagree. 7 The provisions of the lease involved in this case are not disputed. The Tribe was to be paid a royalty of 1/6th of the value or amount of all gas produced on the leased property. Section 4 of the lease provided: The lessor expressly reserves: 8 (c) Royalty in kind The right to elect on 30 days' written notice to take lessor's royalty in kind. 9 We believe this express reservation of the unqualified right to take royalty in kind precludes a conclusion that the Tribe has in any way purchased this gas. We do not agree with the FERC's characterization of the election as an exchange of cash for gas. There is no exchange involved here at all, much less an exchange which could reasonably be deemed a purchase as that term is commonly understood. The Tribe was simply exercising its right to choose one means of payment over another. 10 Although we need not, and do not, base our decision on state law concepts of property interests created by oil and gas leases, we do find persuasive support from a number of cases discussing such interests. See Waggoner Estate v. Wichita County, 273 U.S. 113, 47 S.Ct. 271, 71 L.Ed. 566; Henley v. United States, 396 F.2d 956, 972-75, 184 Ct.Cl. 315. Thompson v. Thompson, 149 Tex. 632, 236 S.W.2d 779, 784-85. In Waggoner, a state tax case, the Supreme Court decided that a lessor's reserved right to receive a portion of the oil produced on the leased property as royalty was properly taxed as real property. The Court could find no basis in the lease provisions for concluding that the lessor had granted or conveyed away his entire interest in the oil. 273 U.S. at 118, 47 S.Ct. 271. The ownership of the royalty oil was deemed to have remained in the lessor who retained the power of disposition and the right to receive possession . . . . Id. The other cases cited above reach a similar conclusion that a royalty owner who reserves the right to receive payment in kind has not conveyed away his entire interest in the oil or gas. Having retained a percentage interest in the property, it would be illogical to hold that the same percentage was subsequently purchased by the royalty owner. 11 In its brief, the FERC argues that its ruling is supported by Mobil Oil Corp. v. FPC, 149 U.S.App.D.C. 310, 463 F.2d 256, cert. denied, 406 U.S. 976, 92 S.Ct. 2409, 32 L.Ed.2d 676. That case held that lessors, royalty owners were not engaged in sales of natural gas merely by accepting royalty payments pursuant to their leases. The FERC argues that this conclusion is correct because the entire ownership of the gas produced under the lease is in the lessee. 4 The conclusion in Mobil Oil that royalty owners are not sellers of natural gas was not based on any concept of ownership or title, however. See 464 F.2d at 259. The court found, rather, that a royalty owner was not a seller in any commonly understood sense of that term. Our decision that the Tribe is not a purchaser of its royalty gas is based on much the same reasoning. 12 In sum, we find the FERC's application of its regulation so as to disqualify the Tribe from small producer rates because it purchased its royalty gas from a large producer to be without legal foundation. We recognize the longstanding rule, cited by the FERC, that an agency's interpretation of its own regulation is entitled to great deference on appeal. See, e. g., United States v. Larionoff, 431 U.S. 864, 872, 97 S.Ct. 2150, 53 L.Ed.2d 48; Bowles v. Seminole Rock Co., 325 U.S. 410, 414, 65 S.Ct. 1215, 89 L.Ed. 1700. The rule is based on the agency's greater expertise in the area they regulate. See Perine v. William Norton & Co., 2 Cir., 509 F.2d 114, 120. When the administrative interpretation is not based on expertise in the particular field, however, but is based on general common law principles, great deference is not required. See Texas Gas Transmission Corp. v. Shell Oil Co., 363 U.S. 263, 270, 80 S.Ct. 1122, 4 L.Ed.2d 1208. In interpreting the word purchase, the FERC relied primarily on property concepts developed and enunciated by the common law. See Brief for Respondent at 16-17. Since the decision of the Commission was explicitly based upon the applicability of principles of (law) announced by courts, its validity must likewise be judged on that basis. SEC v. Chenery Corp., 318 U.S. 80, 87, 63 S.Ct. 454, 459, 87 L.Ed. 626. 13 The orders are affirmed in part and reversed in part. The case is remanded to the FERC for further proceedings not inconsistent with this opinion.