Grigsby v. Department of Energy (585 F.2d 1069, 1978)

INGRAHAM, Judge.

The Federal Energy Administration (FEA) instituted this action against Jack W. Grigsby, an independent oil operator, following FEA audits on two of Grigsby’s properties. The ensuing Notice of Probable Violation (NOPV) accused Grigsby of charging prices for crude oil produced from these two properties in excess of the limits set by the Emergency Petroleum Allocation Act of 1975 (Act) and its implementing regulations. The NOPV ripened into a remedial order. Grigsby sued in United States District Court for the Western District of Louisiana for review of the FEA action and for injunction. The district court upheld the FEA remedial order, dismissed Grigsby’s complaint and ordered him to comply with the FEA remedial order. The alleged violations present us with two issues of first impression under the Act. We affirm the district court on both issues.

Since the initiation of this suit by the FEA, the agency as it was constituted has been abolished. As of October 1,1977, pursuant to the Department of Energy Organization Act, 42 U.S.C. §§ 7101, et seq. (Supp. III 1977), and Executive Order 12009, 42 Fed.Reg. 46267 (1977), the FEA and its functions were transferred to the Department of Energy (DOE), of which James R. Schlesinger is Secretary. Pursuant to Rule 43(c), Federal Rules of Appellate Procedure, the DOE and James G. Schlesinger are hereby substituted as appellees for the FEA and Administrator O’Leary.

The two properties upon which Grigsby purportedly violated the Act are both located in the State of Louisiana — one in the North Jennings Field, Acadia Parish, and the other in the West Pontchartrain East Block 41 Field, St. Charles Parish. Because the question of whether Grigsby overcharged his customers in each of the two fields is based upon a different legal issue, we will discuss each field separately.

THE NORTH JENNINGS PROPERTY

Grigsby operated the Heywood RA SU B located in the North Jennings Field. The unit was created on January 22, 1969, by Order No. 464-F-l of the Commissioner of Conservation of the State of Louisiana. The Commissioner’s order pooled five separately owned tracts and leases within the unit area and designated Lucky Strike Well No. 1 as the unit well. In accordance with state law, the unit order provided that the production from the unit would be allocated among the leases comprising it.

After a period of substantial production, the Lucky Strike Well began to produce excessive salt water, so Grigsby applied to the Louisiana Department of Conservation for permission to drill a substitute well for the same unit. By Order No. 464-F-2, dated July 26, 1974, the Commissioner authorized Grigsby to drill a new well in the unit to be called the Robert Leger Well No. 1. Completed on a different tract of the unit, the new well began production on October 14, 1974. In the same month, Grigsby terminated crude oil production from the Lucky Strike Well and closed it. From October 14, 1974' until the present, production of crude oil from the Heywood Sand has been obtained by production from the Robert Leger Well.

On June 24, 1976, the Commissioner of Conservation determined that the Robert Leger Well was completed in a stratigraphi-eally higher reservoir, not in communication with the reservoir from which the Lucky Strike Well produced oil. For this reason, the Commissioner issued Order No. 464-K, which redefined the Heywood Sand as being comprised of two separate reservoirs, the Heywood Sand, Reservoir A, and the Upper Heywood “A” Sand, Reservoir A. The order dissolved the Heywood RA SU B, creating in its stead the Upper Heywood “A” RA SU B. Grigsby remained the operator of the Upper Heywood Sand, and the tracts covered by the five mineral leases continued to be pooled. This case arose when Grigsby treating all production from the Robert Leger Well as “new oil” under FEA regulations, charged upper tier prices for the oil produced from the well.

On November 29, 1976, the FEA issued a remedial order to Grigsby for violations of Cost of Living Council Phase IV Petroleum Price Regulations, 6 C.F.R. § 150.353 (1974) and FEA Petroleum Price Regulations, 10 C.F.R. § 212.73 (1977). The FEA had determined that Grigsby had overcharged Cities Service Oil Company and Cities Service Pipeline Company by billing them at “new oil” prices instead of “old oil” prices beginning on October 14, 1974, and continuing until the date of the remedial order. Grigs-by was ordered to reduce prices charged for crude oil produced from the North Jennings properties immediately, so that prices conformed to the FEA’s interpretation of 10 C.F.R. §§ 212.73 and 212.74 (1977), and to refund past overcharges with interest to Cities Service.

On December 11, 1976 Grigsby filed an appeal of the remedial order with the FEA’s Office of Exceptions and Appeals. The remedial order was essentially upheld, although the amount of some overcharges was reduced.

Grigsby then appealed the FEA action in the United States District Court. The court granted the FEA’s motion for summary judgment upholding the FEA orders. The court also entered partial summary judgment in favor of the FEA on its counterclaim, ordering Grigsby to comply with the FEA remedial order as modified by the appeal decision and order. Grigsby has duly perfected this appeal.

Because Grigsby is an operator of crude oil producing properties, he is subject to the Emergency Petroleum Allocation Act of 1975, 15 U.S.C. §§ 751-760h (1977), as well as the DOE regulations promulgated thereunder. These regulations spell out the two-tier crude oil pricing system, a pricing program which we have discussed and upheld on a number of occasions. See, e. g., Griffin v. United States, 537 F.2d 1130 (Em. App.1976); Cities Service Company v. FEA, 529 F.2d 1016 (Em.App.1975); Consumers Union v. Sawhill, 525 F.2d 1068 (Em.App. 1975).

The two-tier pricing system was established in August, 1973, pursuant to the Economic Stabilization Act of 1970, 12 U.S.C. § 1904 note (Supp.1977). The implementing regulations were first promulgated by the Cost of Living Council, see 6 C.F.R. §§ 150.353 and 150.354 (1975), later adopted by the FEA, and are now enforced by the DOE. They provide that “old oil” not be sold above the lower tier ceiling price, 10 C.F.R. § 212.73 (1977), and that “new oil” not be sold above the upper tier ceiling price, 10 C.F.R. § 212.74 (1977). Because the upper tier ceiling price is based upon the highest posted price on September 30, 1975, and the lower tier ceiling price is based upon the highest posted price on May 15, 1973, the upper-tier price works to the advantage of the seller of crude oil.

Crude oil is treated as “new oil” to the extent that it exceeds the 1972 level of production of the property from which it was produced. The threshold inquiry in determining the amount of new oil produced from a premises is therefore whether the premises is a property that produced oil in 1972. This question can be answered only through applying the definition of the term “property.” The regulations define “property” as “the right which arises from a lease or from a fee interest to produce domestic crude oil.” 10 C.F.R. § 212.72 (1976). Two interpretations of this definition by the FEA are relevant to the present suit.

Ruling 1975-15 was the first FEA attempt to clarify the definition of the term “property.” The ruling emphasized the “right to produce” language in the definition, then addressed the application of the definition to unitized properties. The ruling explained that “since the unit agreement signifies one right to produce crude oil arising from several leases . . . the unit defines the property.” 40 Fed.Reg. 40832 (1975).

The next FEA attempt to interpret the definition of “property” occurred in 1977 with Ruling 1977-1, 42 Fed.Reg. 3628 (1977). In this ruling, the FEA recognized that the term “property” connoted the “surface acreage” or “tract” to which a producer obtained production rights through an oil and gas lease. Id. at 3631. The ruling then focused upon the relationship of the oil and gas lease to property:

Inasmuch as the lease is the basic document of the oil and gas industry, there should have been no doubt but that CLC [Cost of Living Council] intended by its definition of property to signify the premises described by an oil and gas lease

Id. at 3632.

By purportedly applying these rulings, along with the definition of property, the FEA found that the production of the Robert Leger Well from the Upper Heywood Sand, Reservoir A, was from the same property as that of the Lucky Strike Well from the Heywood Sand Reservoir. The production from the Robert Leger Well was therefore “old oil” and subject to lower tier prices. It was upon this determination that the FEA concluded, and the trial court agreed, that Grigsby overcharged Cities Service by billing it at upper-tier prices.

On appeal, Grigsby does not dispute the validity of the regulation which defines the term “property,” nor does he challenge the two-tier price system. Grigsby instead contests the FEA rulings which have explicated the rudimentary definition of “property” that appears in the regulations.

Grisby argues that in 1974, when he had to decide whether the production from the Robert Leger Well was from the same or from a different property than that from the Lucky Strike Well, he had only the definition set out in the regulations to follow. He contends that he read the definition literally — that “property” was the “right which arises from a lease . . . .” 10 C.F.R. § 212.72 (1976) (emphasis added). Since the Robert Leger Well was drilled on a different lease, Grigsby assertedly believed that he was justified in treating production from the lease as being from different property.

Of the two rulings relied upon by the FEA and by the court below, Grigsby directs the brunt of his attack against Ruling 1975-15. He maintains that the ruling is inconsistent with the definition of property and with Ruling 1977-1 to the extent that Ruling 1975-15 held that a unit composed of several leases defines the property. Where unitization exists, according to Grigsby, Ruling 1975-15 expanded the definition of “right to produce,” 10 C.F.R. § 212.72 (1976), by extending the breadth of this right from the lease to the multi-lease unit. See 40 Fed.Reg. 40832 (1975).

The standard for review of administrative action, being one which this court has repeatedly discussed, need not be elaborated upon here. The foundation of the standard is § 211(d)(1) of the Economic Stabilization Act of 1970, 12 U.S.C. § 1904 note (Supp. 1977), which by virtue of § 5(a)(1) of the Emergency Petroleum Allocation Act of 1973, 15 U.S.C. § 754(a)(1), governs our review of the FEA’s action. The Act provides that no regulation be set aside unless the “issuance of such regulation was in excess of the agency’s authority, was arbitrary or capricious, or was otherwise unlawful . . ..” Texaco, Inc. v. FEA, 531 F.2d 1071, 1076 (Em.App.1976); Pasco, Inc. v. FEA, 525 F.2d 1391, 1400-01 (Em.App. 1975). The arbitrary or capricious standard requires us to uphold the issuance of a regulation if upon consideration of relevant factors, there was no clear error of judgment and there is a rational basis for the conclusions approved by the administrative body. Texaco, Inc. v. FEA, supra, at 1076-77. See Bowman Transportation, Inc. v. Arkansas-Best Freight System, Inc., 419 U.S. 281, 285, 95 S.Ct. 438, 42 L.Ed.2d 447 (1974) . The burden of persuasion lies on the party contesting the validity of the regulation. Pasco, Inc. v. FEA, supra, at 1401; Condor Operating Co. v. Sawhill, 514 F.2d 351, 359 (Em.App.), cert. denied, 421 U.S. 976, 95 S.Ct. 1975, 44 L.Ed.2d 467 (1975) .

In the present case, no regulation is challenged. Instead, Grigsby contests an FEA ruling, which in effect is an interpretation by the FEA of its own regulation. The Supreme Court has articulated the following standard for review of an agency interpretation of its own regulation:

When the construction of an administra- . tive regulation rather than a statute is is issue, deference is even more clearly in order. “Since this involves an interpretation of an administrative regulation, a court must necessarily look to the administrative construction of the regulation if the meaning of the words used is in doubt. . . . [T]he ultimate criterion is the administrative interpretation, which becomes of controlling weight unless it is plainly erroneous or inconsistent with the regulation.”

Udall v. Tallman, 380 U.S. 1,16-17, 85 S.Ct. 792, 801, 13 L.Ed.2d 616 (1965). See, e. g., University of Southern California v. Cost of Living Council, 472 F.2d 1065, 1069 (Em. App.1972).

We now proceed to apply this standard to determine the validity of Ruling 1975-15. At the outset, we must concede that the regulation defining “property” which this ruling seeks to interpret, suffers from a severe case of unartful drafting. It is therefore necessary for us to try to divine the intent of the drafters of the regulation. The regulation defines property as “the right which arises from a lease or from a fee interest. . .”10 C.F.R. § 212.72 (1976). We do not believe that the reference to “a lease or a fee interest,” id. (emphasis added), in the singular necessarily indicates a desire on the part of the drafters to limit the definition of property to the right to produce arising from one lease or one fee interest. We believe that the drafters were seeking instead to delineate in specific language the type of oil interests which should be encompassed in the definition. This conclusion flows from the fact that the drafters excluded several oil interests such as the royalty interest and the executory interest, while including the fee interest, an interest which is not as common a producing interest as the oil lease, but which deserves to be given the same treatment as the lease.

We therefore believe that the FEA was not arbitrary or capricious, or clearly erroneous when it stated in Ruling 1975-15 that a unit of several leases could define the property. See 40 Fed.Reg. 40832 (1975). Unitization normally results in the alteration of producing patterns and often distorts actual production from any one lease comprising the unit. It would therefore be impractical, if not impossible, to focus on each lease in a unitized property.

To allow the unit to define the property, on the other hand, is consistent with both the language of the definition and the purposes of the Act. Though the entire unit signifies only one right to produce, each leaseholder still claims a portion of that right through his lease in the unit. Therefore, the requirement of the definition that property be a right to produce which arises from the lease is satisfied. Because the unit defines the property, it makes no difference if the producing well is moved from one lease to the next. Neither the right to produce from the unit nor one leaseholder’s portion of that right to produce changes.

Grigsby argues that Ruling 1975-15 conflicts with Ruling 1977-1. According to Grigsby, Ruling 1977-1 counsels that the term “property” should always be equated with the term “lease.” We must also reject this argument. A close reading of the ruling reveals that “property” is “generally synonymous with the tract or premises as to which a right to produce exists pursuant to an oil and gas lease. . . . ” 42 Fed. Reg. 3628, 3632 (1976). We agree that in most instances, the lease defines the property. In those cases where leases are pooled, however, the two terms cannot be equated. Ruling 1977-1 recognizes this fact, by incorporating by reference the discussion of the treatment of unitized leases from Ruling 1975-15. Id. at 3634.

In sum, we hold that Ruling 1975-15 is a rational interpretation of the definition of “property” that appears in the DOE regulations, and that the ruling is not inconsistent with Ruling 1977-1, insofar as treatment of unitized properties is concerned. Therefore, the fact that the Robert Leger Well was drilled on a different lease from the Lucky Strike Well does not of itself signal that the Robert Leger Well was drilled on different property.

Grigsby argues in the alternative that the redefinition of the unit by the Commissioner of Conservation from the Heywood RA SU B to the Upper Heywood “A” RA SU B created a new right to produce, thereby rendering the production from the Robert Leger as production from a different property. According to Grigsby, the right to produce flows from the state conservation permits and forced pooling orders covering the two wells. The operator of the Robert Leger well has a right to produce only from the Upper Heywood “A” Sand, Reservoir A. Grigsby contends that this right, derived from the forced pooling order covering that reservoir, is a wholly different right to produce than the right derived from the order creating the Heywood Sand, Reservoir A. The fact that Grigsby is the operator in each instance and that the same leases are included in each unit is coincidental.

Ruling 1975-15 put producers on notice that the definition of the term “property” cannot be construed “to mean that production from separate reservoirs subject to the same working interest would simply by virtue of the fact that the several reservoirs have been developed and produced separately be regarded as production from separate properties.” 42 Fed.Reg. 3628, 3634 (1975). At the same time, however, the ruling recognized that in special instances, “it would have been impracticable or inequitable for producers not to have treated separately production from a separate reservoir or reservoirs.” Id. Neither the FEA statutes or the implementing regulations prescribe treatment for a multi-reservoir right to produce. We can therefore discern no reason which would compel the FEA to treat separate producing reservoirs as per se different rights to produce. The FEA has rationally resolved the problem of separate reservoirs, and we accordingly hold that its interpretation of the term “property” is not clearly erroneous.

The FEA did not apply the ruling in an arbitrary and capricious manner to the separate reservoirs involved in this case. Though there are instances in which two reservoirs such as the Heywood Sand, Reservoir A and the Upper Heywood “A” Sand, Reservoir A, should constitute separate properties, this is not such a case. Order 464-F-l, which created the original Heywood RA SU B Unit, did not limit the unit to a specific reservoir. For the purposes of the Emergency Petroleum Allocation Act, the order therefore created one right to produce which covered all the reservoirs existing beneath the surface of the unit.

Order 464-K, which redefined the Heywood Sand as being composed of two reservoirs, created a new unit for the upper sand and abolished the old unit which had been producing from the lower sand. Again, regardless of the state law effect of the order, for the purposes of the federal energy laws the order merely partitioned the Heywood Sand into two units, each with its own reservoir, abolished one of the units, and kept the other viable. We do not accept Grigs-by’s argument that the division of the Heywood Sand created two properties where only one previously existed. The Robert Leger Well produced from the same property as the Lucky Strike Well in spite of the fact that it produced from a different reservoir pursuant to a different state conservation permit order.

In conclusion, we hold that the trial court was correct in deciding that the Robert Leger Well was drilled on the same “property” as the Lucky Strike Well, and that therefore the oil produced from the Robert Leger should have been sold at lower-tier prices.

WEST PONTCHARTRAIN PROPERTY

Grigsby is also the operator of a crude oil producing property known as the WLPE 41 7600' SU in the West Pontchartrain East Block 41 Field (Pontchartrain Field). Like the North Jennings property, the dispute from this field arises out of the two-tier pricing system; unlike the North Jennings property, both parties agree that the oil produced in this field is “old oil.” The dispute instead concerns how that “old oil” is to be priced.

As we discussed earlier, DOE regulations set the ceiling price for “old oil” as of May 15, 1973. On this date, Grigsby’s Pontchartrain property was not named in any price bulletin. Grigsby was selling the production from this property to Shell Oil Company under a written contract executed on June 11,1971, but amended twice since that date. The current provision provided for a flat price of $3.75 per barrel, to fluctuate with any changes in the arithmetical average of the prices posted for 40° gravity crude oil by producers in four nearby fields. On May 15,1973, each of the firms operating the four fields had issued price bulletins providing for a posted price of $4 per barrel for 40.0° gravity crude oil, less 2