Opinion ID: 2407622
Heading Depth: 1
Heading Rank: 6

Heading: background and facts of this case

Text: Before getting into the particulars of this case, it should be stated that there are three types of contractual transactions here involved. They will be more particularly discussed below. We shall designate them in general terms, (1) assignment of reserves, (2) banking, and (3) brokerage. The contract between TUFCO and Lo-Vaca is here treated as an assignment of reserves, and it will also be discussed below. It also has some attributes of the other two. Banking of gas generally involves the assignment or transfer [loan] of gas which belongs to some entity to Lo-Vaca. In return, the lender has the right to call on Lo-Vaca for the return of the same amount of gas at a future date, and at approximately the same price. This gas, for an additional consideration, is treated by Lo-Vaca; and it flows through its pipelines to Lo-Vaca's customers and back to the lender or the place designated by it. Brokerage involves finding a producer with available gas, under circumstances which gives Lo-Vaca, usually under an oral agreement, the right to purchase the gas. The testimony here was that in most instances now before the Court, the price of this gas was such that Lo-Vaca could not afford it. Lo-Vaca thereupon, for a valuable consideration, assigned or sold its right to purchase the gas to a willing buyer or buyers (third parties), some of whom are intervenors in this case. Contracts are then executed directly between the third-party purchaser of the gas and the corporation having gas for sale. This gas, for a consideration, is also treated by Lo-Vaca and flows through its pipelines, with Lo-Vaca acting as transporter. We will examine these contracts more particularly shortly; but in general, they are the ones which the City of Austin et al requested the Commission to examine, and to suspend indefinitely the deliveries of gas thereunder. The Commission was of the view that in all three situations, as the matter reached it, a basic question was, who owned such gas. Who had title to it? This Court, on numerous occasions, has held that the Commission does not have the power or jurisdiction to determine questions of title. Austin, San Antonio, and the LCRA do not question this legal principle, and they did not, before the Commission, put in issue the title to the gas. Their position is that it does not matter whose gas it is, or who has title to the gas,the Commission has the power and duty under the Cox Act to suspend the deliveries of gas under the various contracts and to apportion gas among the various cities and industrial users, as the public interest may require, because the gas flows in the pipelines of Lo-Vaca. The Commission relies in part on the case of Railroad Commission v. United Gas Pipe Line Co., 358 S.W.2d 907 (Tex. Civ.App.1962, writ ref. n. r. e.), discussed above. There the Commission had been asked to hold up the new contract between San Antonio and Alamo Gas,which was assigned to Coastal States, because of the assertion that the contracts were not in the public interest, and that the Commission had the power and duty under the Cox Act to step in. The Commission's decision that it had no such jurisdiction was upheld by the Austin Court of Civil Appeals. The Cox Act did not authorize the Commission to void contracts. In 1962, Austin likewise decided to terminate its contract with its current gas supplier; and it entered into a long term gas supply contract with Coastal States. Coastal States, in turn, assigned the contract to Lo-Vaca. The date of the LCRA contract with Coastal States does not appear, but it is assumed to be in the early 1960's. Coastal States or Lo-Vaca delivered gas to Austin, San Antonio and the LCRA in a satisfactory manner for many years,until the energy shortage now with us. 1. The Assignment of Reserves. Meanwhile, Texaco and Gulf Oil Corporation brought in a substantial gas field in far West Texas,in Reeves and Ward Counties in the general vicinity of Pecos, Texas. In May of 1969, Texaco sold its production of gas in the field to Lo-Vaca for a period of 18 years. On January 1, 1970, Gulf likewise agreed to sell to Lo-Vaca the gas produced from its wells in the area for 20 years. These contracts are complicated and are contained on 58 printed pages; but we shall assume that for the present purposes, the above is the substance of them. On September 21, 1970, at a time when there was no emergency in the gas supply, Lo-Vaca entered into a contract with TUFCO. This contract, also, is long (50 printed pages) and complicated. Under the contract, TUFCO and Lo-Vaca agreed to build, and did build, and operate a major pipeline 395 miles in length from a point in Pecos County to a point in Ellis County just below Dallas. There it connected with a pipeline of Lo-Vaca which extended south to serve Lo-Vaca customers. Lo-Vaca, under the contract, also acquired the right to use two pipelines located in Central and East Texas owned by TUFCO. The cost of the pipeline built by TUFCO and Lo-Vaca exceeded $60,000,000. TUFCO agreed to pay 60% of the cost, and Lo-Vaca 40%; i. e., TUFCO paid or is paying many millions of dollars more than Lo-Vaca for the line; but the line is owned 50-50 under the contract by TUFCO and Lo-Vaca. Generally, each was to have the right to use the actual physical capacity of the line in proportion to their ownership. In the same agreement, it is stated that Lo-Vaca does hereby sell, dedicate, commit and assign exclusively to TUFCO, [16] and TUFCO does hereby buy, all the gas deliverable under the [Gulf and Texaco] gas purchase contracts; and to insure the faithful performance hereof, Lo-Vaca does hereby dedicate, commit, and assign exclusively to TUFCO, all of Lo-Vaca's rights to receive and/or purchase gas underlying the lands and leases covered and described in the [Gulf and Texaco] gas purchase contracts. The transfers were evidenced by memoranda of assignments recorded in the various counties. Under the contract, TUFCO became obligated to pay Gulf and Texaco, over the life of those contracts, for the gas produced and delivered to TUFCO. It was also provided that Lo-Vaca could and would take TUFCO's gas under a banking arrangement for a period of time. Others having assignment of reserves include Clajon Inc., Dow Chemical, and El Paso Natural Gas Company. Substantial consideration was paid to Lo-Vaca by each purchaser for these assignments of reserves, amounts in the vicinity of 6 million to 7.3 million dollars. The contracts on their face divested Lo-Vaca of title to the gas and vested title in the purchasers. The validity and legality of those contracts is before the district court in Harris County in the Pennzoil suit mentioned above. 2. Banking of Gas. As previously described, banking describes a transaction whereby a person or corporation, such as several of the Petitioners in this case, delivers gas to Lo-Vaca at a designated price, coupled with Lo-Vaca's obligation, upon request, to redeliver equivalent amounts of gas at roughly the same price. Under the banking aspects of the transactions, the banking firms did not purchase gas from Lo-Vaca, and their gas was not dedicated to the Lo-Vaca system. They have purchase gas from third parties, with payments therefor going from them to the third parties. When the lenders are repaid in the banking transaction, the gas is delivered by Lo-Vaca, with a payment to Lo-Vaca for the transportation. Those transactions having the aspects of banking include those between Lo-Vaca and AMOCO, American Smelting & Refining Co., Dow, DuPont, Southwestern Refining Company and, as mentioned, TUFCO, which banked some of the gas it had purchased from Lo-Vaca. These banking contracts are also before the district court in the Pennzoil suit. The banking arrangement of AMOCO was made in 1968 and 1969, before the Lo-Vaca supply problem was evident. AMOCO has sold Lo-Vaca more than 5 times more gas than it has banked, and it has put into the bank with Lo-Vaca substantially more gas than it has withdrawn. The transactions, at the time of the Commission's hearing, resulted in a net inflow to Lo-Vaca of between 75 and 80 billion cubic feet of gas. It is AMOCO's position that Lo-Vaca is in the position of a bailee of fungible goods; and that under Public Service Electric & Gas Co. v. Federal Power Commission, 371 F.2d 1 (3rd Cir. 1967), title to the gas remains in AMOCO. Our understanding is that over-all, and as to all those entering into banking transactions with Lo-Vaca, there has been a net inflow of gas to Lo-Vaca. However, on some peak days, or cold days in the winter, there is a net outflow of gas from Lo-Vaca. 3. Brokerage of Gas. The term brokerage refers to the activities and compensation in arranging for the sale of gas between producers and buyers. The substance of this type of transaction here is that Lo-Vaca had the opportunity to purchase various blocks of gas. Instead of formally contracting to take the gas itself, Lo-Vaca sold, or brokered, the gas to others. Generally, the formal sales or assignments of gas went directly from the producer to the third party purchasers; and Lo-Vaca received substantial fees for such brokerage. Some of the contracts reveal that Lo-Vaca purchased this gas under a verbal agreement with the producer until such time as Lo-Vaca could arrange for third parties, some of whom are Petitioners here, to contract directly with the producer. Corporations now before us who have been purchasers under brokerage transactions include American Smelting, Southwestern Refining, and DuPont. They assert that they do not buy gas from Lo-Vaca. They say that they buy the gas in the field, pay for it themselves, and transport it to Lo-Vaca's lines; that the reserves, or the lands, producing the gas have never been owned by, or dedicated to, the Lo-Vaca system; and that as far as this record shows, Lo-Vaca had the opportunity to acquire the gas. It did not; and for a consideration (a brokerage fee), it assigned the right to acquire the gas to others. It is not here contended that the Commission had previously promulgated any rule or regulation prohibiting the contracts entered into. It has made no rule, or at least we are pointed to none; and the Legislature has enacted no statute prohibiting the sale or assignment of reserves, the sale of gas from one utility to another, or to an industrial user without the consent of the Commission, or the sale or assignment of a right to purchase.