Opinion ID: 411279
Heading Depth: 2
Heading Rank: 2

Heading: Effect of the Federal Regulation on Market Value

Text: 25 The district court held, and we affirm, that the Shamrock-Southwestern sales contract price on which Shamrock based royalty payments constitutes market value after December, 1978, because it was equivalent to the government regulated maximum price for gas from the well in question. The Flowers contend that federal law regulates only the sales between Shamrock and Southwestern, and not royalty payments, under their leases. The Flowers point out that Texas law provides that the gas must be valued as if free and available for sale within its regulated market. See Texas Oil & Gas Corporation v. Vela, 429 S.W.2d 866 (Tex.1968). The Flowers argue that the federal price regulation under the Natural Gas Policy Act of 1978, 15 U.S.C. Secs. 3301 et seq., limiting the price of gas sold in intrastate commerce, such as the gas sales here between Shamrock and Southwestern, to the contract price, does not take into account Vela 's prescription that market value royalties be based on sales of gas free from actual sales contracts and sales that are treated as if the gas were newly available for sale at the time of production. 26 We recently addressed the Flowers' concerns about the effect of federal price ceilings on lessee-distributor sales contracts to which the lessor is not a party in a decision determining market value of gas sold in interstate commerce. In Bowers v. Phillips Petroleum Co., 692 F.2d 1015, (5th Cir. 1982), we emphasized that although federal law does not regulate the amount of royalty payments, it regulates the price at which gas subsequently may be lawfully sold and thus implicitly affects market value. Bowers, 692 F.2d at 1016. In Bowers we discussed Texas decisions holding that market value is based on comparable sales of similar gas, but noted that these decisions held that comparability includes the legal characteristics of the gas--that is, whether it is sold in a regulated or unregulated market, or in one particular category of a regulated market. Bowers, 692 F.2d at 1017 (quoting Exxon Corporation v. Middleton, 613 S.W.2d 240, 246 (Tex.1981)). We held that market value for royalty purposes cannot exceed the maximum price at which the gas produced from the lessor's wells may be sold under its particular categorization in the Act. 27 Section 105 of the Natural Gas Policy Act, 15 U.S.C. Sec. 3315 (1978), provides that the maximum lawful price of sales of natural gas under any existing contract which was not committed to interstate commerce in November, 1978 shall be the lower of either the price under the terms of the existing contract to which the natural gas is subject or else the price established under 15 U.S.C. Sec. 3312 for new uncommitted natural gas (that is, the maximum federal ceilings authorized for current sales of gas not under contract). Since the intrastate gas from the Flowers' property is committed to an existing sales contract, as was the gas in Bowers, the lower contract price specified in section 105 is the maximum lawful price at which it may be sold, and therefore constitutes market value. Under the limitations imposed by the Texas Supreme Court in Middleton, supra, we cannot establish market value as a price based upon sales of intrastate gas under a different category of the Natural Gas Policy Act. 28 The district court thus correctly found as a matter of law that the market value of gas produced under the Flowers-Shamrock lease could not exceed its federally regulated maximum price, which in this case was the contract sales price. Since Shamrock paid royalties based on a price that was at least equal to proceeds from the contract sales, we affirm that part of the district court's judgment that denied the Flowers additional royalties for gas production after December, 1978.