Court Opinion

ID: 9846625
Source: CourtListenerOpinion
Date Created: 2023-09-24 03:44:27.118181+00
Date Added: 2024-06-11T09:19:40.684402
License: Public Domain

Fatzer, C. J.,
concurring and dissenting:
The crux of this controversy is the amount of royalty Kansas landowners have the right to be paid pursuant to the leases before the court. The landowners claim that such royalty payments should be based on the arbitrated prices of 16.75 and 15.00 cents per Mcf fixed pursuant to the “A” and “B” contracts, respectively. Mobil claims the basis for royalty must be the rates finally approved by order of the Federal Power Commission.
During the period of this controversy, late 1958 through June 10, 1963, the contract prices in effect under the “A” and “B” contracts between the lessee and pipeline purchaser (Northern) were 16.75 and 15.00 cents per Mcf respectively. During this five-year period, Mobil and its predecessor, Republic, actually received the current contract prices of 16.75 and 15.00 cents for the gas they delivered to Northern, subject to refund should the FPC later decide these contract prices did not provide “just and reasonable” rates. During this same five-year period, Mobil paid royalties to the plaintiffs on the basis of 8.75 and 7.15 cents per Mcf, the contract prices for *470the preceding five-year period (1953-1958). In late 1963 and early 1964, the appellee landowners commenced these actions to recover additional royalties which Mobil had failed to pay in accordance with its obligation under the lease contracts.
In March, 1964, Mobil filed a company-wide natural gas rate settlement proposal with the FPC involving some 200 contracts, two of which were the instant “A” and “B” contracts. The FPC approved this settlement proposal by an order which became final on July 26, 1964. The rates fixed by the order for the period of this controversy are as follows:

Period “A” Contract “B” Contract

Dec. 20/58-Mar. 31/60 16.75$! Mcf 15.00$! Mcf
Apr. 1/60-Dec. 31/61 11.00$! Mcf 11.00$! Mcf
Jan. 1/62-Nov. 30/62 16.75$! Mcf 15.00$! Mcf
Dec. 1/62-June. 30/63 11.00$! Mcf 11.00$! Mcf
It is these rates which Mobil now claims must be the measure of its royalty obligation due the appellee royalty owners.
The district court made findings of fact and entered judgment in favor of the plaintiff landowners. The majority reverses that judgment with respect to the amount of royalties due under the ’’proceeds” leases.
I concur in the first four paragraphs of the syllabus and corresponding portions of the majority opinion. Royalties due lessor-landowners are controlled by the terms of the gas leases. As lessee, Mobil’s obligation to pay royalties to Kansas royalty owners is a question of state law — not federal law. Moreover, FPC’s jurisdiction does not extend to the royalty owners or to the royalties payable under a gas lease. Consequently, full compliance with the royalty clause is not prevented by any federal regulation or order. Federal courts have clearly recognized that the basis for royalty in a gas lease may be an amount greater than the FPC ceiling rate. Mobil Oil Corporation v. Federal Power Commission, 463 F. 2d 256 (D. C. Cir. 1971), cert. den. 406 U. S. 976, 32 L. ed. 2d 676, 92 S. Ct. 2413.
I also concur in the majority’s ruling on the issue of prejudgment interest and its disposition of Mobil’s counterclaim.
In addition, I am in full accord with the court’s ruling as to the amount of royalties the lessor-landowners are entitled to under the “market value” leases. Where the majority and I part company is in their determination that the royalties due Kansas royalty owners under the “proceeds” leases, including the so-called *471“Waechter” leases, are fixed by the FPC ceiling rate. I must dissent from that portion of the majority opinion.
I. JURISDICTION: STATE-FEDERAL
The first issue is one of jurisdiction with respect to the determination and payment of royalties under both “market value” and “proceeds” leases. On October 24, 1966, the controversy between Mobil and the plaintiff landowners pending in Kansas district courts over amounts paid and to be paid by Mobil to plaintiffs in their status as lessors or royalty owners, was referred to the FPC upon the complaint of Mobil. (Mobil Oil Corporation v. Carl F. Matzen, et al., Docket No. RI 67-114.) These proceedings were consolidated with Pan American Petroleum Corporation v. Leland C. Waechter, et al., Docket No. RI 67-400. Amoco Production Company is successor in interest to Pan American and was the party defendant in Waechter v. Amoco Production Co., 217 Kan. 489, 537 P. 2d 228, adhered to after rehearing, 219 Kan. 41, 546 P. 2d 1320.
By order issued June 23, 1967, the FPC stated the question at issue as follows:
“The common question presented is whether royalty payments made to the lessors named in these proceedings are subject to this Commission’s jurisdiction under the Natural Gas Act.”
By a vote of three to two, the FPC determined it had jurisdiction under the Natural Gas Act over the oil and gas leases now before this court and the amounts of royalty payments thereunder. The purport of the decision was that royalty payments under both “market value” and “proceeds” leases could not be based on an amount in excess of the FPC ceiling rate.
The Commission was reversed in Mobil Oil Corporation v. Federal Power Commission, supra. Mobil held the FPC has no jurisdiction over a royalty owner, over oil and gas leases executed by him, or over a dispute between a royalty owner and his producer as to the amount of royalties payable under such leases.
Anyone questioning the foregoing has but to refer to Exxon Corp., FPC Declaratory Order-Royalty, Docket No. RI 76-29 (May 18, 1976), wherein the FPC said:
"The Commission’s jurisdiction over royalty payments by producers to lessors was rejected by the Court in Mobil Oil Corporation v. F. P. C., 463 F. 2d 256 (D. C. Cir. 1972), cert, den’d, 406 U. S. 976 (1976). The Court held that although the Commission had jurisdiction over rates charged by a producer, it had no jurisdiction over the rate [or price] utilized in computing the royalty payment.” (emphasis supplied) (p. 2)
*472Thus, in the specific area under consideration, federal jurisdiction in which the FPC is authorized to act is limited to fixing “just and reasonable” rates charged by a producer for the protection of the consumer. The FPC has no jurisdiction over the price utilized in computing royalty payments.
The Constitution of the United States established a federal system of dual sovereignty. For purposes here concerned, federal jurisdiction consists of that conferred by the Constitution and valid Congressional enactments. Governmental powers not delegated to the United States by the Constitution are reserved by the Tenth Amendment to the states — or to the people. An essential feature of our dual system is that in some areas federal jurisdiction is exclusive. In others, state jurisdiction is exclusive, and in still others, federal and state jurisdiction is concurrent. (16 Am. Jur. 2d, Constitutional Law, § 198-209, pp. 433-448.)
In its broadest context, the power to regulate (and therefore to protect) commerce is an express grant of Constitutional authority to the federal government. When the federal sovereignty in this area has been implemented, state acts which are in conflict must give way. But the Constitutional provision is not a universal grant, available under any and all conditions. It is an express and specific allocation of legislative power, and it is Congress that regulates commerce among the states and with foreign nations.
The United States Supreme Court has determined that Congress, by the enactment of the Natural Gas Act, did not intend the federal government to occupy the entire field of regulatory jurisdiction to the exclusion of the states. (Power Comm'n v. Panhandle Co., 337 U. S. 498, 502-515, 93 L. Ed. 1499, 1503-1510, 69 S. Ct. 1251. Power Commn v. Hope Gas Co., 320 U. S. 591, 609-613, 88 L. Ed. 333, 348-350, 64 S. Ct. 281.) In Power Comm'n v. Panhandle Co., supra, it was said:
“. . . [T]he Natural Gas Act was designed to supplement state power and to produce a harmonious and comprehensive regulation of the industry. Neither state nor federal regulatory body was to encroach upon the jurisdiction of the other. Congress enacted this Act after full consideration of the problems of production and distribution. It considered the state interests as well as the national interest. It had both producers and consumers in mind. Legislative adjustments were made to reconcile the conflicting views.” (emphasis supplied) (Id. at 513)
In F. P. C. v. Transcontinental Gas Corp., 365 U. S. 1, 5 L. Ed. 2d 377, 81 S. Ct. 435 (January 23, 1961), the Court said:
“. . . Congress, in enacting the Natural Gas Act, did not give the *473Commission comprehensive powers over every incident of gas production, transportation, and sale. Rather, Congress was ‘meticulous’ only to invest the Commission with authority over certain aspects of this field, leaving the residue for state regulation. Panhandle Eastern Pipe Line Co. v. Public Service Comm’n, 332 U. S. 507.” (emphasis supplied) (Id. at 8)
and further:
“. . . When Congress enacted the Natural Gas Act, it was motivated by a desire ‘to protect consumers against exploitation at the hands of natural gas companies.’ Sunray Mid-Continent Oil Co. v. Federal Power Comm’n, 364 U. S. 137, 147. To that end, Congress ‘meant to create a comprehensive and effective regulatory scheme.’ Panhandle Eastern Pipe Line Co. v. Public Service Comm’n, 332 U. S. 507, 520. See, Public Utilities Comm’n v. United Fuel Gas Co., 317 U. S. 456, 467. It is true, of course, that Congress did not desire comprehensive federal regulation; much authority was reserved for the States.” (Id. at 19)
We have here the clearest possible example of a gas field over which there is concurrent state and federal jurisdiction. In the area of jurisdiction to determine royalty payments, either the state or federal government regulatory power must prevail — only one sovereign has jurisdiction.
Clearly, Congress could have given the FPC jurisdiction to use the ceiling rate to determine royalty payments due Kansas landowners; just as clearly, Mobil teaches it has not done so. Congress was “meticulous” only to invest the FPC with authority over certain aspects of the interstate transportation and sale of natural gas, leaving the residue of the power to be exercised by die states. Indeed, the Commission s jurisdiction is limited only to that conferred by the Act — to fix “just and reasonable” rates with respect to gas moving in interstate commerce for resale to “protect consumers against exploitation at the hands of natural gas companies.” No express or implied power was conferred upon the Commission with respect to lessor-landowners or their royalty interest in the natural gas produced from their land. The Act is silent concerning the use of the FPC ceiling rate to determine the lessee’s royalty payments to the lessors.
The jurisdiction conferred by the Natural Gas Act was for the limited purpose of protecting the consuming public. A “just and reasonable” rate is fixed by the FPC for that purpose. Where that purpose has been exercised, the FPC’s jurisdiction under the Act is exhausted. It is at an end, and may not be expanded by the courts. The rate fixed under FPC’s limited jurisdiction for the purpose of protecting the consumer may not be used for another purpose — to measure the payment of royalty. Mobil decided the *474FPC’s jurisdiction under the Natural Gas Act does not extend to a royalty owner, a lease contract between the landowner and producer, or the payment of royalty thereunder, and further, that the FPC ceiling rate fixes no limit on the measure of royalty to be paid under a lease. See, Placid Oil Company v. Federal Power Commission, 483 F. 2d 880 (5th Cir. 1973); Mobil Oil Corp. v. FPC, 417 U. S. 283, 41 L. Ed. 2d 72, 94 S. Ct. 2328 (1974). The rate fixed for a purpose within the FPC’s jurisdiction may not be used for a different purpose wholly outside that agency’s jurisdiction. The FPC rate may not be used by this court as the measure of royalty under these leases.
II. THE ROYALTY INTEREST
It has been deemed to be in the public interest that the consumer be able to purchase natural gas at artificially low prices. Toward this end, producers have been allowed to receive only a “just and reasonable” rate of return for the gas delivered. These rates which the producer (Mobil) may charge the pipeline carrier (Northern) are fixed by the FPC as a matter of utility rate setting. The rate is fixed to allow the producer its reasonable costs of production plus a reasonable return on its investment. The rate is derived from cost data rather than prevailing field prices. See, e. g., Permian Basin Area Rate Cases, 390 U. S. 747, 20 L. Ed. 2d 312, 88 S. Ct 1344; Shell Oil Company v. F. P. C., 520 F. 2d 1061 (5th Cir. 1975); Placid Oil Company v. Federal Power Commission, supra; In re Hugoton-Anadarko Area Rate Case, 466 F. 2d 974 ( 9th Cir. 1972).
The discussion of the Court in Shell Oil Company v. F. P. C., supra, sheds some light on the rate fixing process:
“ . . . [T]he Commission adhered to cost as the basis for the new national rate. The FPC utilized the methodology developed by it in Area Rate Proceeding (Permian Basin), 34 FPC 159 (1965), aff’d, Permian Basin Area Rate Cases, 390 U.S. 747, 88 S. Ct. 1344, 20 L. Ed. 2d 312 (1968), as modified in the second Southern Louisiana proceeding, Area Rate Proceeding (Southern Louisiana), 46 FPC 86 (1971), aff’d, Placid Oil Co. v. Federal Power Commission, 483 F. 2d 880 (5th Cir. 1973), aff’d sub nom., Mobil Oil Corp. v. FPC, 417 U. S. 283, 94 S. Ct. 2328, 41 L. Ed 2d 72 (1974) [So. La. II]. Basically the rate was determined by projecting the average cost of finding and producing new gas,’-i. e., gas discovered after January 1, 1973, over the estimated life of the producing wells and adding a 15 percent annual rate of return. Historical items of cost were predicted for the future to attempt to insure that the producer would recover its actual expenses at the time work is done. Relating these estimated costs to the commonly accepted unit of gas sold to the consumer results in a maximum allowable rate for natural gas in cents per Mcf, i. e., thousand cubic feet.” (520 F. 2d at 1066)
*475Factors of production cost and return on investment considered by the FPC in arriving at the “just and reasonable” rate producers may charge include the following: (1) successful well costs, (2) dry hole costs, (3) lease acquisition costs, (4) costs of other production facilities, (5) other exploration costs, (6) exploration overhead, (7) area gathering costs, (8) production operating expense, (9) production tax, (10) recompletion and deeper drilling cost, (11) royalty expense, (12) regulatory expense, (13) net liquid credit (subtracted from costs), (14) return on production investment, (15) return on working capital. See, Shell Oil Company v. F. P. C., supra; Placid Oil Company v. Federal Power Commission, supra.
Royalty, it will be noted, is one of the producer’s expenses which is considered in arriving at the ultimate FPC rate. The amount paid by the producer to the royalty owner is an expense just as the wages paid to his drilling crews and the price he pays for the pipe he sinks in the ground. These other costs are controlled by market forces. Royalty should be treated no differently.
Area rates do not take into account cost variances of individual producers. Placid Oil Company v. Federal Power Commission, supra. If royalty costs or other costs incurred by a particular producer are higher than those contemplated by the FPC in establishing the rate, that producer may seek individualized relief. See, Mobil Oil Corp. v. FPC, supra.
The final company-wide rates established by the FPC in the instant action share a common basis with area rates and national rates — all are based on the producer’s costs. In its settlement negotiations with the FPC, Mobil presented company-wide cost of production information. The record indicates Mobil did not present specific cost information on its production under the instant “A” and “B” contracts (two of some 200 contracts involved' in the company-wide settlement). Had Mobil chosen to do so, it could have presented its royalty costs under the “A” and “B” contracts to the FPC on the basis claimed by the appellee royalty owners since these cases were pending when Mobil filed its settlement proposal. All the rates established for the five-year period involved in this controversy were determined by the producer’s company-wide cost of production. Even the two periods totaling some 24 months Mobil was allowed to retain the full contract price it had received were determined by an analysis of Republic’s (Mobil’s predecessor) and Mobil’s revenue and costs of production.
*476The FPC rate is totally unrelated to the value of the commodity gas. For the benefit of the consuming public, the rate is set to give the producer a reasonable return on its production costs and investment. It need only be high enough to avoid being confiscatory. FPC v. Texaco Inc., 417 U. S. 380, 41 L. Ed. 2d 141, 94 S. Ct. 2315. Neither the value of the gas nor the price it will command in the unregulated marketplace is taken into consideration in fixing the FPC rate. The gas is, in essence, being given away. The FPC controlled rate which the producer receives is not in payment for the commodity gas; it is to cover the producers costs and provide a certain return on the producers investment.
With respect to “proceeds” leases, the majority says the measure •of royalty is the FPC rate which the lessee-producer receives for the gas. To say that a landowners share of gas produced on his land is to be measured by the producers cost of production,; which is totally unrelated to the value of the gas and which is reflected by a rate fixed for the purpose of protecting the consuming public by an agency having no jurisdiction over the royalty owner, his lease, or the amount of his royalty payment, is, in my judgment, incongruous. This offends my sense of logic. It taxes credulity to the breaking point.
All royalty clauses, whatever the language, deal with the same interest of the landowner — royalty. “Royalty” is the landowner’s share in the oil and gas actually produced which is paid as compensation for the right to drill and produce. See, Magnusson v. Colorado Oil and Gas Corp., 183 Kan. 568, 331 P. 2d 577; Shelly Oil Co. v. Cities Service Oil Co., 160 Kan. 226, 160 P. 2d 246; Rutland Savings Bank v. Steele, 155 Kan. 667, 127 P. 2d 741. The landowner’s royalty interest is not a share of the producers cost of production. It is not a share of an amount totally unrelated to the value of the commodity gas. It is not a share of an amount fixed for the protection of the consuming public by an agency that has no jurisdiction over the landowner or his lease. The landowner’s royalty interest is a share in the value of the gas actually produced. Because the physical properties of gas do not permit its being stored, the royalty owner takes his share of the commodity in the form of dollars rather than a share of the gas itself. But, royalty is still tied to the gas produced. Gas — the commodity — is at the heart of the royalty obligation of all gas leases. Gas — the commodity — does have a value in the market. The FPC rate which is neither related to or based on the commodity gas or its value in *477the market simply cannot be, in logic or in law, the measure of the landowners royalty interest in the gas produced on his land.
Relying on Waechter v. Amoco Production Co., 217 Kan. 489, 537 P. 2d 228, adhered to after rehearing, 219 Kan. 41, 546 P. 2d 1320, the majority summarily decides the FPC rate is the measure of royalty under the “proceeds” leases now before this court. Waechter, in my opinion, was incorrectly decided. Relying on it here compounds the error.
Waechter noted that “proceeds” and “market value” royalty clauses are not the same. It said that under a “proceeds” lease, the lessor chooses not to be tied to the uncertainty of the market, but instead chooses to take his royalty share from whatever the lessee can get for the gas — relying on the lessee’s economic self-interest to obtain the best price possible. Under this rationale, whatever amount the producer receives must be the measure of royalty. While I understand this distinction, I do not think it can be stretched to the point of completely breaking away from the commodity gas which is the basis for royalty. Under a “proceeds” lease, is it possible the lessor contemplates the price received and his royalty share will be determined by something other than tire commodity gas? Surely if the landowner’s royalty interest is in a share of the value of the gas produced, his royalty payment will be determined by, or at the very least be related to, the value of the commodity gas regardless of whether his lease calls for a royalty share of the market value of the gas or the proceeds of the sale of the gas.
“Proceeds” and “market value” are both measures of the lessee’s royalty obligation — an obligation which commands payment to the lessor for a portion of the gas produced. Both are related to the commodity gas and its value. This common aspect of the royalty obligation of all gas leases has not gone unnoticed. One commentator has observed that while a literal distinction can be made between “proceeds” and “market value” royalty provisions, in practice, courts seem to apply the same standard — market value at the wellhead — whether a lease predicates royalty on “proceeds,” “market value” or “market price.” See, Siefkin, Rights of Lessor and Lessee with Respect to Sale of Gas and as to Gas Royalty Provisions, Fourth Oil and Gas Inst. 181, 214 (Matthew Bender 1953), and cases cited therein. Professor Sneed, after recognizing that proceeds does afford a different standard than market price or market value, says the parties probably contemplate this standard *478will yield no different return from any other standard. Sneed, Value of Lessors Share of Production Where Gas Only Is Produced, 25 Tex. L. Rev. 641, 655 (1947).
Some of the leases themselves illustrate the common basis underlying both the “proceeds” and “market value” types. The modified Parker lease provides:
“. . . (is) of the gross proceeds at the prevailing market rate. . . .”
If “proceeds” means actual sales price, and “market rate” means the market value for the gas, this clause is obviously contradictory. It can have only one meaning: out of the “proceeds” the lessee realizes, the lessor shall be paid royalty for the gas produced on the basis of market value at the well.
When one recognizes the common element in all gas royalty clauses — a share of the value of the commodity gas produced— it becomes clear that the meaning of proceeds just stated above must apply to all the “proceeds” leases before the court. The FPC rate imposed on the producer is completely unrelated to the gas produced or its value. It is a utility rate based essentially on costs of production. In this case, the arbitrated contract price of the “A” and “B” contracts is the only evidence of the market value of the commodity gas. This contract price and not the FPC rate is tied to the gas produced and its value. This value must serve as the basis for the lessor’s royalty share under the proceeds leases. Out of the proceeds the lessee realizes from the sale of the gas produced, the lessor should be paid his royalty share on the basis of the market value at the well as evidenced by the arbitrated contract prices.
It is well established that the landowner’s royalty share of the gas produced is free of the costs of production. In 3 Williams & Meyers, Oil and Gas Law, § 643.2, p. 529 (1975), it is said:
“Inasmuch as gas royalty is ordinarily payable in money rather than in kind and is measured by value or proceeds at the wellhead, it is not customary, as in the case of the oil royalty payable in kind, to specify that the royalty is free of cost of production. Freedom from such costs of production is implicit in the provision for payment of a share of the proceeds or value at the wellhead.” (emphasis supplied)
In Johnson v. Jernigan, 475 P. 2d 396, 399 (Okla. 1970), the court stated:
“. . . ‘Gross proceeds’ has reference to the value of the gas on the lease property without deducting any of the expenses involved in developing and marketing the dry gas to this point of delivery.”
*479Given the proposition that royalty is free of the costs of production, using the FPC rate 'as the basis for determining royalty creates a paradox: royalty, which is not to be burdened with any costs of production, is determined by a rate based on costs of production. Surely, this cannot have been the result intended by the parties.
Justice Fromme would have the FPC rate serve as the basis for royalty under both “proceeds” and “market price” (he distinguishes between market price and market value) royalty clauses. He says that although the two types of royalty clauses are different, such difference does not prevent the amount received as “proceeds” from adding up in dollars to as much as that received as “market price.”
I do not agree with his view that the FPC rate may serve as the basis for royalty. I do, however, agree that the amount of royalty may be the same in dollars under both “proceeds” and “market value” leases. As I have pointed out at length, the FPC rate is foreign to the basic nature of the royalty interest. The FPC rate is ill-suited to serve as the measure of royalty under “proceeds” leases. Market value can and must serve as the measure of royalty under both the “market value” and “proceeds” leases now before this court. Under the circumstances at hand, the one-eighth royalty payment under both types of leases simply amounts to the same in dollars.
The majority makes a distinction between “proceeds” and “market value” leases, but fails to recognize another distinction: proceeds in a regulated and an unregulated market. As noted in Texaco, Inc. v. Federal Power Commission, 474 F. 2d 416, 422 (D. C. Cir. 1972):
“. . . [an unregulated industry] is governed by the market while . . . [a regulated industry], by definition, is the subject of active governmental control.”
The market value of gas and the “just and reasonable” rates mandated by the Natural Gas Act are two separate and distinct things. FPC v. Texaco Inc., supra.
Proceeds in the form of an imposed, govemmentally controlled cost of production rate are certainly not equivalent to the proceeds from a sale of gas in an unregulated market. The former is a sum commanded by cost factors unrelated to the commodity gas or to its price or value. The latter is a sum commanded by the gas produced. Royalty based on the proceeds from a sale of gas in an unregulated market is necessarily tied to the value of the gas, because it is the gas that commands the price received by the producer. Royalty based on proceeds in the form of the FPC ceiling *480rate is at odds with the royalty interest — a share of the value of the gas produced.
III. THE LEASE CONTRACTS
It is fundamental that royalty due a lessor-landowner is controlled by the terms of the gas lease. Such leases are contracts. They are governed by the common law of this jurisdiction. I am not unmindful of the well-established rules for the interpretation and construction of contracts. The cardinal rule is to ascertain the intention of the parties at the time they entered into the contract and to give effect to that intention if it can be done consistent with legal principles. See, e. g., Mobile Acres, Inc. v. Kurata, 211 Kan. 833, 508 P. 2d 889; First National Bank of Lawrence v. Methodist Home for the Aged, 181 Kan. 100, 309 P. 2d 389. Courts first look to the language used by the parties to ascertain their intent. The language of an oil and gas lease contract will be given its ordinary and commonly understood meaning when no reáson appears for doing otherwise. Skelly Oil Co. v. Savage, 202 Kan. 239, 447 P. 2d 395, 38 ALR 3d 971; Collier v. Monger, 75 Kan. 550, 89 Pac. 1011. In my judgment, the fact that the FPC rate is totally unrelated to the commodity which serves as the basis for royalty provides ample reason for doing otherwise.
In the face of the paradox created by using a cost basis utility rate as the measure of royalty for the gas produced, this court is fully warranted in construing these lease contracts to ascertain what the parties intended. The foregoing portions of this dissent clearly show these “proceeds” lease contracts may be understood to reach a meaning other than that ascribed by the majority. Where the language of a lease may be understood to reach two or more possible meanings, resort to rules of construction is proper.
The circumstances and conditions existing when an agreement was made may sometimes aid the court in clarifying the real intentions of the parties. E. g., Amortibanc Investment Co. v. Jehan, 220 Kan. 33, 551 P. 2d 918; Skelly Oil Co. v. Savage, supra. The “proceeds” leases in question were executed during the period of January 11, 1938, to November 18, 1942. The Natural Gas Act was enacted on June 21, 1938, 15 U. S. G. § 717 et seq. It was not until June 7, 1954, in the decision of Phillips Petroleum Co. v. Wisconsin, 347 U. S. 672, 98 L. Ed. 1035, 74 S. Ct. 794, that the United States Supreme Court determined the Federal Power Commission was authorized under the Natural Gas Act to regulate the rates chargeable by the lessee now before this court.
*481It is obvious that when the parties executed the leases, they intended the “proceeds” would result from a sale in an unregulated market. In the free market, it is the gas that commands the amount received by the producer, rather than an artificial rate based upon production cost factors and determined as a matter of utility rate setting for the benefit of the ultimate consumer. It seems clearly contrary to the intention of the parties to say that the measure of royalty under the “proceeds” leases should be the FPC regulated utility rate received for the gas produced. Instead, it may be said the parties intended the lessors’ royalty share of production denominated as “proceeds from the sale of gas” would result from a sale in an unregulated market and be based on gas produced and related to the value of that gas.
Another aid in construing provisions of a contract susceptible to more than one meaning is the conduct of the parties thereto subsequent to its execution. When such terms have been construed and acted upon by the parties themselves, such construction will be adopted, even though the language used may more strongly suggest another construction. Desbien v. Penokee Farmers Union Cooperative Association, 220 Kan. 358, 552 P. 2d 917.
The district court found the conduct of the parties reflected an intention that royalty be based on the value of the gas. That finding is supported by substantial evidence. From the time production on these leases started until June 30, 1953, the gathering system utilized for delivery of the gas to the pipeline purchaser was owned by the lessee-producer. Sales, therefore, were not at the wellhead, but off the leased premises. The price paid for the gas and the basis for royalty was the price established by contract between the lessee-producer and the pipeline purchaser. The contract price and measure for royalty were related to and determined by the value of the gas produced.
On June 30, 1953, the producer and pipeline entered into a contract transferring the gathering system to the pipeline. Sales were thereafter at the wellhead. On that same date, the contracts governing the sale of gas from producer to pipeline were amended. The contract price was increased substantially. Royalty payments under the amended contracts were again based on the contract price which was determined by the market value of the gas.
The foregoing conduct does not bear out the assertion the parties intended royalty payments be based on the producer’s cost of production — the FPC rate. In transferring its gathering system to *482the pipeline, the producer decreased its costs. Yet the contract prices renegotiated at the same time were increased. It is clear that producer costs were not material to the basis for royalty payments. The history of royalty payments under the leases clearly shows a practice of measuring royalty against the value of the gas without reference to costs. Royalty payments were the same under all the leases, whatever the language of the royalty clause.
Another rule of construction deserves consideration. In construing a contract, reasonable rather than unreasonable interpretations are favored by the law, and results which vitiate the purpose or reduce the terms of the contract to an absurdity should be avoided. Garvey Center, Inc. v. Food Specialties, Inc., 214 Kan. 224, 519 P. 2d 646.
It cannot be disputed the FPC rate in no way reflects the value of the commodity gas. Neither can it be disputed that the rate is paid for development and production costs and not for the gas itself. It is manifestly clear that to allow such a rate to serve as the basis for royalty totally divorces royalty from the commodity on which it is based. This is an absurdity.
An equally unreasonable result is illustrated by the three leases in the Flower case. These three leases were made subject to a unitization agreement. Accordingly, all acreage burdened by those three leases is in a single unit, and gas produced from the three leases is from a single well. One of the leases is “market value”; the other two, “proceeds.” Under the majority opinion, the same gas from the same well will be subjected to two different measures for determining the royalty payments due lessors.
To interpret these “proceeds” leases as calling for the FPC ceiling rate as the measure of proceeds is unreasonable for an even more basic reason. The federal courts have held the FPC has no jurisdiction over the lease contract between landowner and producer nor over the payment of royalty thereunder. These same courts have said that the FPC ceiling sets no limit on the measure of royalty under the leases. To say, as does the majority, that the FPC rate is the measure of royalty under these “proceeds” leases is to do by indirection what the federal courts did not do directly. The majority’s interpretation of these lease contracts is restrictive, unwarranted and unwise. It renders the judicial and administrative proceedings culminating in Mobil Oil Corporation v. Federal Power Commission, supra, an exercise in futility. Royalty payments, at the FPC ceiling rate which were held inapplicable in Mobil for lack of *483jurisdiction, have noio been reinstated by the majority of this court as the basis of “proceeds” royalty payments.
One final rule of construction should be noted. The construction of an oil and gas lease subject to more than one interpretation is in favor of the lessor and against the lessee. Gilmore v. Superior Oil Co., 192 Kan. 388, 388 P. 2d 602. The reason for this rule is simple. The lessor almost never has a part in the preparation of the lease; the lessee, who either prepared the lease or chose the form, has the opportunity to protect itself through the language employed in the lease. Construing these “proceeds” leases in favor of the lessors brings me back to where this dissent began. Royalty arises from the gas produced and its measure is related to the value of that gas. From the lessee’s proceeds, the lessor’s royalty share is to be paid on the basis of the market value at the well as evidenced by the arbitrated contract prices. “Proceeds from the sale of gas” must be construed to mean proceeds obtained or obtainable in the absence of cost-oriented regulation of the producer. “Proceeds from the sale of gas” must mean proceeds at the prevailing market value.

CONCLUSION

The “A” and “B” contracts cover all the gas produced from numerous gas wells under 644 leases on about 129,220 acres in Stevens and Morton Counties. The leases involved take a number of different forms and have several variations of royalty clauses. The ease at bar, to a large extent, will control the additional royalty due under these leases. The intention of the parties to the leases, as expressed through the words “market value,” “market price,” “proceeds from the sale of gas,” “gross proceeds at the prevailing market rate,” and “proceeds,” was that such values, prices, rates and proceeds were to be determined in the unregulated market for the commodity gas to be produced. The fortuitous selection of “market value” lease forms one day and “proceeds” lease forms the next by the so-called “lease hound” who first acquired the leases from the lessor-landowners should not be allowed to affect this intention. It was not the intention of any of the parties that, in using such words in any of the leases, royalty payments should be based upon the lessee’s cost of production. The reverse is true— royalty was to be paid free and clear of consideration of the lessee-producer’s costs.
Throughout the years, the lessee-producer has interpreted all of the various lease provisions as requiring the same per Mcf basis *484of payment of royalty; Mobil may not now contend that various lease provisions have a different legal effect as applied to the payment of royalties.
The intention of the parties to the “A” and “B” gas purchase contracts, which were amended 'and placed into effect prior to Phillips (June 7, 1954), were frustrated by the cosit-related FPC regulations of the lessee-producer. As indicated, both parties to these contracts complied with them during the five-year period in question. Thereafter, refunds were made by Mobil pursuant to orders of the FPC in the exercise of its jurisdiction under the Natural Gas Act and rate schedules were filed adjusting prices downward despite the contractual provisions of the “A” and “B” contracts for higher prices. In my opinion, the intentions of the parties to the “A” and “B” contracts have given way, as a matter of law, to the Natural Gas Act.
A different situation exists with respect to the intention of the parties as to lease contracts before this court and to royalty payments thereunder. Under Mobil the lessors and royalty payments are not subject to the Natural Gas Act or to regulations or orders of the FPC. Hence, common-law determination of such intentions may be made and the lease contracts construed on common law principles without reference to cost-related FPC regulations fixing the producer’s charges under the gas purchase contracts. Likewise, common law remedies are available to the lessor-landowners to recover the value of the commodity gas at the wellhead, irrespective of the type of royalty provision under consideration.
While, generally speaking, “market value” in the traditional sense is not the equivalent of “proceeds from the sale of gas,” when the district court has determined pursuant to state common law remedies that market value of the gas is the measure of royalty under all the leases, such amounts may be awarded. As indicated, “proceeds from the sale of gas” should be construed to mean proceeds at the prevailing market value. Under the circumstances, the differing language of the royalty clauses does not prevent the amount awarded for “market value” leases from being the same in dollars as that awarded as “proceeds”; payments under both royalty clauses simply amount to the same in dollars.
Based on the foregoing portions of this dissent, I conclude:
(1) Since neither the jurisdiction of the FPC under the Natural Gas Act nor the purpose of the Act extends to the determination of royalties under a gas lease contract, and since the FPC *485ceiling rate is determined as a matter of utility rate setting based on factors of production costs and return on investment totally unrelated to the gas itself or to its value and is fixed for the protection of the consuming public, and since the value of the gas is at the heart of the royalty interest which is free of the costs of production, I would hold that, as a matter of law, the FPC rate may not be used by this court as a measure of royalty in gas lease contracts between Kansas landowners and the lessee-producer.
(2) If a further reason need be stated for holding the FPC rate may not be the measure of royalty under “proceeds” leases, it may be found in their construction. It is obvious that when the leases were executed, the parties did not intend the FPC rate to be the measure of royalty. “Proceeds from the sale of gas” must be construed to mean proceeds obtained or obtainable in the absence of cost-oriented regulation of the producer — i. e., proceeds at the prevailing market value.
(3) Market value as evidenced by the arbitrated contract prices should be the measure of royalty under all the leases before this court. Such a holding is consistent v/ith the holding in Mobil, with the underlying basis of the royalty interest and with the intention of the parties.
(4) The judgment of the district court with respect to the measure of royalty under all the leases should be affirmed.
(5) The foregoing reasons, which mandate affirmance of the district court’s judgment with respect to both the “market value” and “proceeds” leases, are equally applicable to the leases in Waechter v. Amoco Production Co., supra, which the majority there characterized as “proceeds” leases. Those very leases were involved in the proceedings resulting in the decision of Mobil Oil Corporation v. Federal Power Commission, supra. Those leases, just as the ones now before this court, are subject to the teaching of Mobil. Yet, the majority’s opinion in Waechter did not cite, apply, discuss, distinguish or comment upon Mobil or its relationship to that case. For that reason, Waechter cannot be said to announce any applicable controlling principle of law with respect to questions of payments of royalty before this court. I did not participate in Waechter, but I agree with Justice Schroeder’s dissenting opinion there in which Justice Kaul joined. Waechter should be overruled, and this court’s mandate recalled and judgment entered for the plaintiffs in that case.