Opinion ID: 1174031
Heading Depth: 1
Heading Rank: 1

Heading: facts and settlement on remand

Text: The facts and problems that faced the parties and the Commission after remand were not the same as those that had been before this Court. The ground was shifting beneath their feet, partly because of the parties' own actions, but more importantly because of legal and economic realities over which neither had complete control. Wexpro exercised its equitable right (recognized in Wexpro I, 595 P.2d at 879) to terminate the joint exploration agreement. Thereafter, the parties sought new approaches to the development and exploration of the contested properties that would be feasible and legal. Without notice to the Commission, MFS and Wexpro filed applications with the Federal Energy Regulatory Commission (FERC) to approve transfer of all of its unexplored properties to Celsius Energy Co. (hereinafter Celsius), a newly organized subsidiary of MFS. If such jurisdiction were exercised by FERC, this could free the contested properties for exploration and development, but it could also result in the requirement that any resulting gas production be supplied to MFS's ratepayers at the much higher federally regulated market prices rather than at the current cost-of-service prices. [4] When MFS later attempted to transfer properties to Celsius without Commission or FERC approval, the Division of Public Utilities blocked the attempt by a proceeding in the Commission. MFS, Wexpro, and the Shareholders Association sued the Commission in the United States District Court for the District of Utah, seeking a declaration that Commission regulation of certain MFS properties violated the United States Constitution. [5] In the meantime, exploration and development activities on all of MFS's unexplored (wildcat) acreage, including some acreage on which MFS ratepayers had a proprietary interest under Wexpro I, remained at a standstill. MFS maintained that it was practically impossible to conduct a petroleum exploration and development program that was subject to limited rates of return and other regulation by the Commission. MFS shareholders would not approve corporate investments on that basis, outside venture capital was not available for that purpose, and neither co-venturers nor the skilled company employees necessary to conduct such operations would be available under those circumstances. MFS leases on some wildcat acreage were expiring and the time for commencing drilling on other leases (to avoid forfeiture) was growing shorter with each passing month. [6] In summary, following remand from this Court the controversy between MFS and the Division of Public Utilities continued in the Commission, in the FERC, and in the United States District Court. Uncertainties about the outcome made it difficult or impossible for MFS to explore and develop its wildcat acreage, which was being lost as leases expired with the passage of time. Litigation expenses, already totalling more than $4 million (including over $775,000 for the state of Utah), could cost additional millions if these multifaceted controversies continued. In these circumstances, which posed serious threats to customers and shareholders as well as to the immediate parties, a negotiated settlement could resolve not only the immediate questions involved in the remand from this Court but also other related issues that threatened further controversy and delay. For example, the oil properties acreage directly involved in the remand from this Court totalled about 60,000 acres, whereas the unexplored leaseholds ultimately affected by the settlement agreement totalled about 1.4 million acres. With the encouragement of the Commission, settlement negotiations began in March, 1981, in the midst of discovery proceedings in preparation for adversary hearings before the Commission. Negotiations were concluded the following October. Counsel for MFS and Wexpro represented the utility, and special counsel for the Division of Public Utilities represented the public agency and consumers. Staff counsel for the Public Service Commission of Wyoming (which later approved the agreement) also participated. The Commission later made this finding about these negotiations: It appears from the statement of counsel and testimony of witnesses that the parties to the Settlement vigorously pursued their positions; negotiations were extremely tough and at arms length. The Commission also noted that the parties used well-qualified and eminent experts in connection with decisions made and positions taken in negotiations. The settlement, which the Commission approved after the hearings described hereinafter (Part III), had the following provisions: 1. Gas wells. MFS will retain ownership of producing gas wells and appurtenant facilities that historically have been accounted for in the MFS rate-base account 101. The natural gas, natural gas liquids, and oil produced from these productive gas reservoirs will belong to MFS and will be regulated by the Commission. The leaseholds and operating rights on these wells will be transferred to Wexpro, which will operate the wells and facilities on a service contract basis. In the first five years, Wexpro will spend a minimum of $40 million on developmental drilling on these reservoirs, which are not currently perforated by enough wells to produce all available gas. If a development well is unsuccessful, all of its costs will be borne by Wexpro. If it is successful, its cost will be capitalized in a manner similar to a ratebase account. The cost will include an amount equal to the base rate of return (calculated from returns received by a group of regulated utilities  currently 16%), plus an additional risk premium of 8% for investment in commercial development wells, both amounts to be paid to Wexpro. Natural gas produced from these wells will belong to MFS and will be delivered at cost-of-service prices. The proceeds from natural gas liquids and oil produced from these wells will be shared, after deduction of their proportionate share of expenses, including the base rate of return and a risk premium of 5%. Ratepayers will receive 54% of these proceeds (by Wexpro's payment to an MFS account to reduce natural gas rates), and Wexpro, 46%. 2. Oil wells. The productive oil reservoirs are the properties that were the main focus of controversy in Wexpro I. Their original cost was entered in MFS account 105, and most of the costs of their exploration and development have been borne by ratepayers. In a settlement provision whose fairness and consistency with our mandate is hotly challenged in these petitions, the rights in the productive oil reservoirs were divided as follows. Wexpro will own and operate the properties and develop them at its own expense and risk. All natural gas produced will be sold to MFS at cost-of-service prices. The net profits from production of oil and natural gas liquids (from existing and future wells) will be calculated after allowing Wexpro to recover all expenses and the base rate of return and risk premium described earlier. The ratepayers will receive 54% of the net profits, and Wexpro, 46%. 3. Exploratory properties. Another settlement provision whose fairness and consistency with our mandate is contested on this appeal concerns the 1.4 million acres of exploratory properties. This wildcat acreage consists of unexplored formations underlying producing gas properties, productive oil reservoirs, and totally unexplored leases. Under the settlement, all leases are to be transferred to Wexpro or its assignee (Celsius), which will explore these properties at its sole risk and expense. The ratepayers will receive a 7% overriding royalty on all production (measured on gross revenue or production in kind). MFS also has the first right to purchase any natural gas at market price. The transfer of these leases will remove about $14 million from the MFS rate base, plus the annual cost of retaining this acreage, both of which will have immediate effect in reducing MFS rates. 4. After-acquired properties. On 128,000 acres of unexplored property independently acquired by Wexpro between 1977 and 1979, and acreage in a field in San Juan County, Utah, neither of which was ever held in an MFS utility account, the ratepayers will receive a 2 1/2% royalty and MFS has a first right to purchase natural gas at market price. (There is no provision for ratepayers with respect to other unexplored properties Wexpro acquired after January, 1977, or other acreage never capitalized in the MFS rate base.) 5. Cash payments. In the first year of the settlement, Wexpro will pay MFS $21 million to be applied to reduce rates charged its ratepayers, plus $250,000 per year for the succeeding twelve years for the same purpose. In essence, the foregoing settlement resolves the pending disputes, including uncertainties over the extent of the MFS ratepayers' interest in the oil properties explored at their risk, by releasing the ratepayers' proprietary interest to MFS or its affiliates in exchange for their assuring the ratepayers an overriding royalty or a net profits interest in the oil and gas produced from these and other properties, and in consideration of the other agreements on cash payments and price and supply of natural gas.