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UNITED GAS IMPROVEMENT CO. v. CONTINENTAL OIL CO. ET AL.

decided*fn*: June 1, 1965.

UNITED GAS IMPROVEMENT CO
v.
CONTINENTAL OIL CO. ET AL.



CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT.

Warren, Black, Douglas, Clark, Harlan, Brennan, Stewart, White, Goldberg

Author: Harlan

[ 381 U.S. Page 394]

 MR. JUSTICE HARLAN delivered the opinion of the Court.

In Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672, the Court held that Federal Power Commission jurisdiction under the Natural Gas Act, as amended, 52 Stat. 821, 15 U. S. C. ยง 717 et seq. (1964 ed.), extended to what are described colloquially and perhaps somewhat loosely as "wellhead" sales of natural gas by producers to interstate pipeline companies for resale in interstate commerce. The issue in the present cases is whether sales to an interstate

[ 381 U.S. Page 395]

     pipeline company of leases covering proven and substantially developed reserves of gas to be sold in interstate commerce are also subject to Commission jurisdiction. We hold that they are.

I.

In 1957, Texas Eastern, a natural gas company which owns and operates an interstate transmission system extending from Texas to the Philadelphia-Newark area, executed gas purchase contracts with Continental Oil Company, M. H. Marr, Sun Oil Company, and General Crude Oil Company, to purchase their natural gas production in Rayne Field, Louisiana, at an initial price of 23.9cent per Mcf.*fn1 The producers applied to the Commission for certificates of public convenience and necessity authorizing them to sell their gas to Texas Eastern. Texas Eastern applied for a certificate permitting it to build new pipeline facilities to connect its system to Rayne Field. After a hearing, and in spite of objections by several intervenors to the 23.9cent price, the examiner issued a decision recommending a grant of the requested certificates. However, before the Commission acted on the examiner's decision, the Court of Appeals for the Third Circuit handed down its decision in Public Serv. Comm'n of New York v. FPC, 257 F.2d 717*fn2 (the " Catco " case), reversing an order of the Commission granting unconditional certificates for sales of natural gas on the ground that the certificate applicants had the burden of showing that the proposed sale price of 22.4cent was justified by public convenience and necessity, and that the burden had not been sustained. Thereafter the producers in the present case requested the Commission to permit withdrawal of their applications for sales to Texas Eastern at

[ 381 U.S. Page 39623]

     .9cent (1.5cent higher than the Catco price) and canceled the sales contracts. The parties then agreed on a different method for achieving their objectives.

Under the new plan formulated by the parties, Texas Eastern, instead of making conventional wellhead purchases of natural gas, proposed to buy the producers' leasehold interests in the Rayne Field lands in which the natural gas was located. The provisions of the lease-sale agreements were such that they were very close in economic effect to conventional sales of natural gas. The gas reserves in Rayne Field were proven, and the field substantially developed.*fn3 Texas Eastern was still to build the connecting facilities to the field which had been called for under the original plan, and the same volumes of gas were to flow into its system. The lease-sales were to cover no minerals except natural gas and condensate, all other mineral rights being reserved to the lease-sellers, and by a management agreement Continental Oil, one of the sellers, was to continue to do the bulk of production work.*fn4 Payments on the purchase price could be accelerated if gas production exceeded a specified amount, and the leases were purchased through an intermediate corporation so that Texas Eastern's liability would be substantially limited if production from the field fell below expectations.*fn5

[ 381 U.S. Page 397]

     Completion of the transfers was conditioned upon issuance of the necessary certificates by the Commission.

The Commission granted Texas Eastern's request to reopen the proceedings in order to consider the lease-sale plan, and issued an unconditional certificate to Texas Eastern permitting it to build the pipeline facilities necessary to connect with Rayne Field. In issuing the certificate the Commission overruled objections made by the New York Public Service Commission that the prices paid for the leases were not justified, and noted that "Texas Eastern has not filed an application for a certificate ...


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