Limiting a Lessor's Free Gas Usage When the Lease Does Not Provide a Numeric Limitation. Nicholas J. Parrish

Transcription

1 Limiting a Lessor's Free Gas Usage When the Lease Does Not Provide a Numeric Limitation Introduction Terminology. Nicholas J. Parrish McClure and Watkins, P.C. Pittsburgh, Pennsylvania Restrictions Within the Free Gas Clause The Cases. [1]ÑEstablishing the Principle. [2]ÑRefining the Principle. [3]ÑReiterating the Principle. [4]ÑInvigorating the Principle Conclusion Introduction. Synopsis Many oil and gas leases, particularly older oil and gas leases, permit the use of free gas by the lessor or other parties without placing any numeric limitations on the amount used. As the production declines, the proportional burden on the lessee caused by free gas usage increases. At the same time, the free gas user desires to continue using as much free gas as he or she wants because the oil and gas lease does not expressly state a limitation. This situation is complicated when the free gas user is also the lessor, because free gas is often considered to be partial consideration, along with royalties, for the oil and gas lease. There is case law which gives the lessee the right, in certain circumstances, to place reasonable limitations on the free gas usage. These limitations can only be imposed if the lessee can prove that the free gas user is wasting free gas, therefore abusing the privileges afforded to him or her in the oil and gas lease. The providing of free gas has been a prevalent practice in the Appalachian Basin, (1) and disputes over the amount of free gas to which a user is entitled seem to be unique to the Appalachian Basin. Of the reported cases, only one occurred outside of the Appalachian Basin. Modern oil and gas leases contain a numeric limitation on the amount of free gas which can be used, eliminating the potential for dispute. This chapter covers only those oil and gas leases or other contracts which do not contain any limitations or restrictions, numeric or otherwise. Also discussed will be oil and gas leases or other contracts which restrict free gas use to domestic consumption, require the use of economical appliances, or have other non-numeric limitations Terminology. The term "free gas" will be used because of the prevalence of this term in the literature; arguably, the term

2 "reserve gas" may be more accurate. This is dependent upon whether case law in a jurisdiction views the providing of free gas as an exception from the grant by the lessor, or as a covenant to deliver gas which is owned by the lessee. (2) The term "free gas user" will be used instead of lessor to denote the party who is using the free gas. While often the free gas user is the original lessor (or that lessor's assignee), this is not always the case, such as when the surface estate and the oil and gas estate have been severed. The term "lessee" will be used to denote the free gas provider unless the free gas obligation does not arise from an oil and gas lease. Two of the cases which will be discussed arise from contracts providing for the use of free gas. The term "overburn" will be used to signify that amount of gas consumed by the free gas user which exceeds what is reasonable or what the user is entitled to consume Restrictions Within the Free Gas Clause. When a dispute arises over the amount of free gas being used, the language of the oil and gas lease must first be examined. Even if the oil and gas lease does not contain a numeric limitation, other restrictions may exist: (1) the oil and gas lease may limit free gas to structures located on the leased premises; (2) there may be a limitation on the number of structures or the oil and gas lease may specifically identify the structures which are permitted to use free gas; (3) the oil and gas lease may limit free gas to domestic purposes; (4) the oil and gas lease may limit which appliances may use the free gas and whether gas can be used outdoors; (5) the oil and gas lease may require that the appliances which use the free gas be in good condition; and (6) the oil and gas lease may contain a specific prohibition against waste. In addition to the oil and gas lease, limitations may be contained in an application for free gas service. While producers often do not require a free gas application, it is not unusual for utilities who are lessees to require an application The Cases. [1]ÑEstablishing the Principle. A paucity of language in the free gas clause of the oil and gas lease does not necessarily defeat an effort to limit the amount of free gas which may be taken if gas is being wasted. The following cases establish the principle that even absent restrictions or limitations in the oil and gas lease, a free gas user is only entitled to take a reasonable amount of gas. A free gas user is not permitted to waste the property of the lessee. The parties' intentions at the time the oil and gas lease was executed must be determined when attempting to impose a limitation on free gas usage. (3) Although the parties may not have intended that the dwelling using the free gas employ state-of-the-art

3 conservation techniques, courts are willing to conclude that the parties did not intend to permit waste of gas. A determination of the individual free gas user's reasonable needs must be undertaken to determine if free gas is being wasted. Graves v. Key City Gas Co., (4) the first reported case in this area of the law, was an equity action by the free gas user to restrain the defendant, a gas company, from terminating the free gas use. The free gas user was entitled to free gas as partial consideration for the selling of property to the gas company. (5) An oil and gas lease was not involved. The free gas user had for a period of 20 years used gas for all ordinary purposes including a gas log in the library of the residence on the property, outbuildings and two street lamps. The gas company believed that the free gas user's consumption was excessive, and threatened to terminate service. The gas company presented evidence that the free gas user's residence contained 32 rooms and consumption averaged 300 Mcf per year. The gas company also presented evidence that no other residential customer used over 64 Mcf per year. (6) Initially, the court found that the gas company's refusal to supply gas was a breach of the contract and an interference with the free gas user's enjoyment of his property. (7) The court was particularly aggrieved by the gas company's actions since the free gas user had no other supply of gas. In granting an injunction, the court stated that if the free gas had been used for 20 years with the gas company's knowledge and without complaint, the gas company had acquiesced and should not later be permitted to disregard its acquiescence. (8) On remand, the lower court found that the free gas user was entitled to 100 Mcf per year in addition to that which was required for the street lamps. (9) The case was once again appealed, and the appellate court began its analysis by determining whether the phrase "all gas for ordinary purposes" was intended as a limitation upon both the appliances and the quantity to be used, or only upon the appliances. The appellate court concluded that the parties must have contemplated additional or replacement appliances, and that the language therefore was not intended to limit the free gas user to the appliances then in use, but was intended to permit use of any appliance that might be adapted for the use of gas for ordinary domestic purposes. (10) The court opined that the parties did not contemplate that the free gas user would commit waste: It was surely not intended to limit plaintiff's consumption of gas to a certain number of cubic feet, nor to the amount consumed by any one or more other customers. If either was intended, it would have been so written in the contract.... It was certainly not contemplated, however, that he (the free gas user) had or would permit the gas supplied to his premises to be wasted. (11) Waste was determined by comparing the free gas user's consumption to the gas use of other parties similarly situated. Prior to the agreement granting free gas rights, the free gas user was paying for the gas which was being consumed and therefore had an incentive to economize, an incentive which no longer existed. In order to resolve the dispute, the court set a limit of 150 Mcf per year on the amount of free gas that could be taken. (12)

4 In the Appalachian Basin, the first case dealing with limiting a free gas user's consumption was Hall v. Philadelphia Co. (13) This case was an equity action by the free gas user to enforce the free gas obligations upon the lessee. The oil and gas lease provided the lessor could take free gas for domestic purposes. Gas was used for heating and lighting a building and maintenance of an open gas light in the yard. (14) The court engaged in a lengthy analysis of defining "domestic," because that word was used in the oil and gas lease to limit the free gas consumption. The court concluded that a house has an exterior as well as an interior and items connected with it on the outside are clearly things of or pertaining to it. (15) Therefore, the court concluded that the free gas user was allowed to have an outside light, and further concluded that the oil and gas lease was silent as to what appliances were permitted use of the free gas. (16) However, the open light in the yard used 100 times as much gas as an enclosed light while giving no better illumination. The court found this to be an extravagant and wasteful consumption of gas and concluded that the free gas user could only burn gas in an economical manner. This finding required the free gas user to provide an enclosed burner in the light at the free gas user's expense. (17) The most interesting aspect of this case is a discussion by the court of what it terms the "principle of economy." The principle of economy is what is now commonly called a cost-benefit analysis. The following discussion was in response to criticism of how far the principle of economy would be applied. As to that, of course, we decide nothing, since it is not involved; but it is not inappropriate to say, in this connection, that the principle is not to be applied or enforced to an unreasonable extent. There may be much less room or cause for complaint on the ground of wastefulness in the use of a crude or improvised inside burner than in the maintenance of an open outside light, and the cost of approved stoves or open fires is relatively much greater than the provision of a small burner for light. (18) [2]ÑRefining the Principle. Expanding upon the principle of law established in Hall is Pittsburgh & West Virginia Gas Co. v. Richardson. (19) In this case, the lessee sought a temporary injunction preventing the free gas user from interfering with the installation of a meter on the free gas user's property to measure free gas consumption. The temporary injunction was granted but subsequently dissolved. (20) The oil and gas lease in this case permitted the free gas user to take free gas from any gas well drilled or utilized on the premises for domestic purposes for one house. Free gas was being used and the lessee was not attempting to terminate or limit the free gas user's consumption. (21) The lessee's sole objective was to install a meter to measure the gas consumption in accordance with a West Virginia Public Service Commission rule requiring that all gas furnished without charge be metered and reported to the Public Service Commission. (22) The temporary injunction enjoining the user from interfering with the meter installation was reinstated. In

5 reaching this conclusion, the court found it difficult to understand why the free gas user objected to having the quantity of his gas usage metered since it involved no expense or inconvenience to him. (23) This case introduced several concepts, and expands on previously existing concepts, which are important in this area of the law. The Richardson case clearly establishes the touchstone of this entire line of cases Ñ that a free gas user is not entitled to an unlimited amount of free gas even where there are no express restrictions or limitations in the oil and gas lease: The quantity of gas to which defendant is entitled under this free gas clause is not unlimited, but is only such amount as is customary and reasonable for his domestic use (citations omitted). It cannot be said that the plaintiff has any arbitrary right to determine such amount. Neither has the defendant the right to say that he may use the gas produced to any extent his wants, real or capricious, may demand. He is entitled under his contract only to so much gas free of charge as is ordinarily used, and as is reasonably necessary for such domestic purposes as natural gas is usually devoted to. This being true, it is entirely proper for the plaintiff to adopt such regulatory measures as may be practicable and appropriate for the purpose of determining that its product is not being wasted. (24) This is the first reported case where a court goes beyond prohibiting a free gas user from committing waste and enunciates a standard, albeit vague, by which to gauge the amount of consumption to which the free gas user is entitled. What is the status of gas which is used in excess of that which is customary and reasonable? According to the Richardson court, it is the property of the lessee which is being taken by the free gas user. Whatever production of gas remains after the free gas thereof by the defendant is the property of the plaintiff. If the defendant uses more gas than his reasonable wants require, if gas is wasted by him, either because of defective appliances, or because of excessive use thereof, to the extent that such quantity exceeds his reasonable ordinary requirements, he is taking the property of the plaintiff. (25) The Richardson court takes an even further activist stance by requiring the free gas user to use appliances which are not defective. (26) Although not articulated by the court, it is presumed that a reasonableness standard would be applied to determine if an appliance is so defective as to cause waste. One possible test to determine if an appliance is defective is to determine whether a reasonable consumer would continue using the appliance if he or she was paying for the gas consumption. If the answer is no, gas may be being wasted in violation of the oil and gas lease. The court also determined that the lessee cannot arbitrarily limit the amount of free gas used. (27) This conclusion is also found in several cases in other Appalachian Basin states which are discussed later in this section. The court does not prohibit the lessee from determining a limit on the amount of free gas, it only prohibits that determination from being arbitrary. In Warfield Natural Gas Co. v. Jude (28) the oil and gas lease permitted free gas for household use. The lessee required the free gas user to submit an application before free gas use commenced. (29) The application stated that gas shall be used in an economical manner with modern appliances and that the free gas user shall use all due care to prevent any waste of gas. The parties stipulated that free gas usage was subject to the terms of the application. The oil and gas lease also provided the lessee the right to disconnect

6 the supply upon notice. The free gas user lived in a three-room log house with a gas stove. Because of crude appliances and a lack of a pressure regulator, more gas escaped through the open flues than was burned. The lessee also introduced evidence that the pipeline from the well into the house was leaking because of rust. (31) The free gas user was awarded damages in the trial court for an illness he contracted after his gas was terminated for excessive usage. The lessee appealed and the court reversed the judgment and remanded the case. (32) The appellate court found that 150 to 200 Mcf per year was a reasonable usage but the free gas user was using 530 Mcf per year. (33) The court stated that the free gas user was not entitled to an unlimited amount of free gas, nor could he arbitrarily take whatever amount he wanted. Conversely, the court determined that the lessee could not arbitrarily or capriciously limit the amount permitted. The quantity was to be gauged by what was customarily consumed in similar localities under like conditions with reasonable appliances. (34) The Jude case was the first case to look beyond the free gas clause of the oil and gas lease, and to examine the free gas application to aid in defining the rights of the parties. Pennsylvania's first reported case in this area was Sanford v. Witherspoon. (35) In this case, the free gas user purchased a gas well on his property which was originally drilled by a utility. The free gas user used the supply from the well to heat and light a dwelling, a dairy building and a garage. The dairy building and the garage contained apartments. (36) The production began to decline and the free gas user hired the defendant as a contractor to operate the well. The agreement between the parties provided for a division of profits and operating costs. The agreement further permitted the free gas user to take free gas from the well for use in dwellings located on the premises. (37) A dispute arose between the parties and resulted in the well operator alleging that he was entitled to onehalf the value of gas consumed in heating the dairy building and garage and a like proportion of gas which he alleged was wasted by the free gas user. (38) The well operator attempted to prove wasteful consumption by showing that the free gas user used 65 percent more gas than he had used for a like period when he had to purchase his supply from a utility. The court did not find this evidence persuasive in the absence of evidence showing that the conditions for the two periods were the same. (39) The free gas user's case was also aided by expert testimony that the amount of gas consumed by the free gas user was not excessive for the character of the dwelling. (40) The court viewed the contract in light of the circumstances under which it was made and found that the well operator knew that there were three buildings on the premises. This was evidenced by the use of the plural of the word dwelling in their agreement. (41) The court held that while the free gas user was entitled to free gas for domestic purposes, he was not entitled

7 to have gas to heat and light portions of the dairy building and garage that were not used as a dwelling. Echoing the sentiment of previous cases, it was determined that the free gas user was not entitled to an unlimited amount of free gas, but only such amount as was customary or reasonable. (42) The Sanford court articulated the Richardson (43) and Jude (44) standard for determining the amount of the free gas entitlement: "(t)he quantity (of free gas) should be gauged by what is customarily consumed in similar localities under like conditions with reasonably efficient appliances." (45) In Sanford, Pennsylvania joined West Virginia and Kentucky in prohibiting the lessee from arbitrarily determining the amount of free gas the user is entitled to consume. Can a lessee set a limitation if he or she can prove it is not arbitrary? A literal reading of cases indicates that it is possible. Alternatively, this a vulnerable area for the free gas user to attack when a lessee attempts a limitation. [3]ÑReiterating the Principle. In Warfield Natural Gas Co. v. Small, (46) the free gas user's service had been terminated by the lessee. The oil and gas lease permitted free gas sufficient for domestic use on the premises. The free gas user was required to submit to the lessee an application for free gas use which permitted the lessee to terminate gas service for lack of reasonable economy in the use of gas. (47) Service was terminated by the lessee for two reasons: First, the lessee believed that the free gas user was not entitled to free gas because the free gas user only owned the surface. The court found in favor of the free gas user on this point because the free gas clause in an oil and gas lease is a covenant running with the surface of the land. (48) The second reason service was terminated was for excessive usage. The free gas user's average usage was 579 Mcf a year. The court found that 225 Mcf a year was a liberal amount for the free gas user's consumption. (49) By setting a limit of 225 Mcf per year, the court tailored an amount of free gas which was specific to this free gas user. Any amount used in excess of 225 Mcf per year was deemed to be unreasonable. The free gas user could be required to pay for the overburn, and to enforce this payment, the lessee had the right to terminate service. (50) The court looked with askance upon the lessee's claim of total forfeiture of the free gas right: It will be observed that the application for free gas made by Small and his wife did not contain a provision forfeiting the right to use free gas but only a provision giving the company the right to shut off the gas from the consumer. Had it contained a forfeiture provision, the validity thereof would be doubtful since appellee's free gas right arises under the original lease which contained no such provision.... (51) The Small court also required that notice of excess consumption must be provided to the free gas user before the lessee could make any attempts to terminate service. Notice was required so that the free gas user could be afforded an opportunity to decrease his or her consumption. (52)

8 Casebolt v. Kentucky West Virginia Gas Co., is the final of three Kentucky cases dealing with this issue. The oil and gas lease permitted the free gas users to take gas for heat and light for one family in each of the six houses on the premises. The free gas users were required by the oil and gas lease to use modern and economical appliances. (54) The lessee brought suit attempting to terminate service to two additional houses taking the free gas and to recover the value of gas used by the two additional houses. The lessee also sought reimbursement for amounts used in the original six houses which it believed were excessive. The lessee submitted evidence that 15,507 Mcf were used by the free gas users between June, 1934 when meters were installed and July, In the lessee's opinion, 6,000 Mcf would have been a reasonable amount. (55) The lessee, a utility, sought reimbursement for the overburn at its residential rate and the right to disconnect the free gas users until the amount was paid. (56) In defense, the free gas users alleged that the lessee knew about all of the usages of free gas, including the two additional houses, and had consented. (57) The lower court found for the lessee and limited the six houses to 150 Mcf per house per year. The free gas users were given 60 days to pay for free gas used in excess of the reasonable amount at the prevailing retail rates paid by consumers. On appeal, the free gas users argued (according to the opinion, they argued mildly), that they were entitled to all the gas they might use. (58) The court admitted that the free gas clause in the oil and gas lease was silent as to the quantity which is to be free and the price to be charged for overburn. Nevertheless, the court agreed with the lower court that gas could not be used in excessive quantities and that the free gas users were obligated to pay for all gas used in excess of the reasonable amount. (59) The court found the amount of free gas set by the lower court, 150 Mcf, to be harsh. Evidence was introduced that other free gas consumers in that area had free gas clauses permitting between 125 to 200 Mcf per year. The court established a limit of 200 Mcf per year for each of the six houses. (60) The court did not permit the lessee any recovery for overburn because of old or uneconomical appliances because that point had not been proven. The recovery by the lessee for overburn as found by the lower court was disallowed because a substantial portion of it was attributable to leakage in the service line. A witness for the lessee testified that it was usual company procedure for the lessee to repair leaking service lines if the consumers did not repair them. (61) The final point on appeal was the price the lessee could charge for the overburn. Instead of the retail rate permitted by the lower court, the appellate court only allowed recovery by the lessee of the wholesale value of the gas. Even though the free gas users were consumers, the lessee was uncertain as to which rate to apply; the court believed the wholesale price to be more equitable. (62) There are arguments to be made for both the wholesale and the retail price being charged which, by their absence in the opinion, may not have been explored in the case. In order to replace the overburn which the free gas users were consuming, the lessee only needed to incur the wholesale price. However, the free gas users were consumers of a utility, and to supply them gas at a discount would be discriminatory against all

9 other rate payers. In the Kepple case, (63) the Pennsylvania Public Utility Commission found that a free gas user's overburn was jurisdictional service subject to the rules and regulations of the Commission. In Ohio this principle of law has been established in the case of Ludolph v. Tuel and Thoenen, Inc., (64) where the court found that the free gas user was not entitled to free gas because he had not complied with the terms of the oil and gas lease which required him to take gas from a well, not from a distribution line. Although judgment was for the lessee on other grounds, the court quoted with approval the language of the Richardson (65) court wherein it stated that free gas was not unlimited, the free gas user was only permitted such amount as was reasonable and customary and that the lessee could not arbitrarily determine the amount of free gas. (66) [4]ÑInvigorating the Principle. Recently in Pennsylvania, Apollo Gas Company and its affiliate, Carnegie Natural Gas Company, initiated a policy intended to limit excessive free gas use. Apollo's conservation policy imposes a uniform limitation on free gas usage of 225 Mcf per year on all Apollo oil and gas leases which do not contain a numeric limitation. All gas used in excess of that amount is to be paid for by the free gas user at Apollo's tariff rate for residential service. The lessee notified all affected customers approximately one and one-half years prior to the time when Apollo would start charging consumers for overburn. The long lead-in time was designed to permit affected customers time to effectuate domestic conservation measures. (67) The conservation policy resulted in two actions being brought before the Pennsylvania Public Utility Commission ("Commission"). In Apollo Gas Co. v. Heilman, (68) a complaint was brought by Apollo, the lessee, requesting that the Commission find that the free gas users' consumption was excessive and unauthorized. The lessee also requested that the Commission declare that all gas used in excess of 225 Mcf per year be subject to the lessee's tariff rate for residential service. (69) The subject oil and gas lease permitted the free gas users to take gas free of cost for household use for one dwelling. When the conservation policy was initiated, the free gas users were using free gas in their dwelling, a metal barn, a separate milk house building and a separate summer kitchen building. The free gas users consumed 1,327 Mcf in a 13-month period while the average residential customer of the lessee used 115 Mcf per year. (70) The Commission's Initial Decision found that the wasteful use of energy was a matter affecting the public interest and the general well-being of the Commonwealth. (71) The Initial Decision also held that the lessee was attempting to invoke the Commission's power to vary, reform and revise the oil and gas lease and that the power to vary, reform and revise contracts did not become vested in the Commission until The oil and gas lease in the present case was entered into in 1900; accordingly, the Initial Decision concluded that the Commission did not have jurisdiction to hear the lessee's complaint and dismissed the case. (72) Exceptions were taken to the Initial Decision and the Commission entered an order remanding the case to an Administrative Law Judge. (73) In the same order, the Commission disagreed with the Initial Decision on the point of whether the Commission had jurisdiction to vary, reform or revise the oil and gas lease. The power to vary, reform and revise contracts (74) permits retroactive application of its provisions. (75)

10 Commissioner John Hanger, in a separate statement, succinctly characterized what he believes to be the equity of the parties' positions: If it can be demonstrated on remand that the landowner's actions have a sufficient negative impact on the public interest, the Commission could choose to modify the existing contract. Alternatively, maintaining the enforceability of existing contracts so that companies and individuals will be willing to sell goods and services to regulated utilities is an important consideration. (76) In Kepple v. Apollo Gas Co., (77) the second of the two Commission cases, the Commission addressed the merits of the lessee's claims. This action was brought by the free gas users against the lessee. The relief requested by the free gas users was specific performance of the free gas provision of the oil and gas lease without any charge for gas consumption. This case arose out of the same policy which the lessee was attempting to enforce in the Heilman case. (78) The oil and gas lease, from 1912, permitted free gas for one house, care to be taken not to waste. The free gas users' house was approximately 130 years old and was not insulated. Gas was used for heat, cooking, hot water and a clothes dryer. The furnace had not been replaced since the free gas users commenced occupancy of the premises in A new hot water heater was installed in approximately The free gas users' average consumption was 395 Mcf per year. (79) The Commission's Initial Decision concluded that the Commission possessed jurisdiction to determine the circumstances under which a public utility may apply its tariff rate for rendering service and the lawfulness and reasonableness of a utility's rates. (80) At the hearing, the free gas users asserted that there should be no limitation on the quantity of the free gas consumed. In their brief, the free gas users did not assert that position, but admitted that they were contractually limited from using free gas in a wasteful manner. (81) Arguably, the outcome of some of the points of the Initial Decision may have been decided differently if the oil and gas lease had not contained a written prohibition against waste. The evidence showed that the lessee derived its proposed limit of 225 Mcf per year by the following procedures: (1) reviewing the statistical average usage of its residential customers; (2) selecting a ceiling amount, which was almost double the average annual residential customer's consumption; (3) considering the fact that 200 Mcf per year was the predominant figure mentioned in those oil and gas leases which set a limit on free gas; (4) selecting a ceiling, which was considered high enough to allow a reasonable degree of flexibility; and (5) following legal precedent in the Appalachian Basin which utilized 225 Mcf per year as a limit. (82) The Initial Decision acknowledged the lessee's efforts, but still concluded that it came up short of what was required by legal precedent:

11 Apollo asserts its analysis considered dwellings of all sizes, ages and conditions. This analysis necessarily encompassed a variety of appliances as well. Since Apollo's service territory includes a large portion of rural customers, Apollo asserts it considered the quantity of gas customarily consumed in similar locations and under like conditions as Sanford, 15 A.2d at 498, requires. The weakness in Apollo's argument begins with the fact that in each of the cases it cites, Sanford, Casebolt, Small and Jude, supra, there was some indication the lessor was in direct violation of the terms of the lease and/or the gas company had proven a certain quantity of gas consumption was reasonable under the circumstances of that case. In Sanford, 15 A.2d at 498, testimony showed the amount of gas the lessor consumed was not excessive for the character of the dwellings. The same type of evidence was presented in Small, 138 S.W.2d at 490, and Jude, 87 S.W.2d at 109, and Casebolt, 168 S.W.2d at 777 to successfully prove wasteful use. In none of these cases does a lessee rely upon a system average to establish wasteful consumption as does Apollo here. On the contrary, each decision turns upon the particular circumstances of that case. (Emphasis in original). (83) The Initial Decision found it particularly damaging to the lessee's case that it never evaluated the free gas users' home to determine the reasonable amount of free gas consumption. The only evidence that the lessee produced to prove waste was that the free gas users' house was not insulated. (84) According to the Initial Decision, non-insulated houses were the norm when the house was built in 1865 and when the oil and gas lease was executed in Conclusion. As the above discussion indicates, limiting a free gas user's free gas when the oil and gas lease does not contain a numeric limitation or other restrictions, is not a remedy available to every lessee. Waste must be proven. Fortunately, case law does provide some guidance as to what factors will be relevant in proving waste: (1) What is the consumption history of the free gas user? Variations in consumption levels may be attributable to a variety of factors which may not constitute waste, i.e., change in the number of household members, change in the appliances using gas. The consumption should be reviewed in conjunction with a review of the free gas user's specific circumstances to determine what amount of free gas is to be provided to meet the reasonable needs of the free gas user. (2) What are other consumers in the area using? This factor is only valuable if the free gas user's consumption is compared to like conditions. A question which needs to be resolved by the courts is whether the free gas user's consumption is to be compared to other free gas consumers, or to paying consumers. The answer could substantially affect the level of consumption of free gas permitted. (3) What is the age, size and condition of the dwelling supplied with free gas and what is the age and condition of the appliances in the dwelling? None of the decisions established a bright line rule providing that certain conditions are de facto wasteful. However, many of the cases prohibit the use of defective appliances. (4) Has notice of the excessive consumption been provided to the free gas user? This point was brought out in Warfield (85) and Kepple. (86) Notice should be provided, because as the Kepple case pointed out, the free gas user would not normally inquire into his or her level of free gas consumption.

12 1. 1 William Roy Rice, "Operation of the Free Gas Clause in the Oil and Gas Lease" 4 Eastern Min. L. Inst., ch. 16 (1983) Eugene O. Kuntz, The Law of Oil and Gas, Section Kemmis v. McGoldrick, 767 F.2d 594 (9th Cir. 1985); Compass Coal Co. v. Pennsylvania Game Comm'n, 454 A.2d 1167 (Pa. Int. App. Ct. 1983) Graves v. Key City Gas Co., 50 N.W. 283 (Iowa 1891), appeal after remand, 61 N.W. 937 (Iowa 1895) Graves, 50 N.W. at Graves, 61 N.W. at Graves, 50 N.W. at Id. at Graves, 61 N.W. at Id. at Id. at Id. at 939.

13 Hall v. Philadelphia Co., 78 S.E. 755 (W. Va. 1913) Id. at Id. at Id. at Id. at Id. at Pittsburgh & West Virginia Gas Co. v. Richardson, 100 S.E. 220 (W. Va. 1919) Id. at Id. at Id. at Id. at Id. at

14 Id. at Id. at Id. at Warfield Natural Gas Co. v. Jude, 87 S.W.2d 108 (Ky. 1935) Id. at Id. at Id. at Id. at Id. at Id. at Sanford v. Witherspoon, 15 A.2d 496 (Pa. Int. App. Ct. 1940) Id. at Id. at

15 38 Id. at Id. at Id. at Id. at Id. at Richardson, 100 S.E Jude, 98 S.W.2d Sanford, 15 A.2d at Warfield Natural Gas Co. v. Small, 138 S.W.2d 488 (Ky. 1940) Id. at Id. at Id. at Id. at 490.

16 Id. at Id. at Casebolt v. Kentucky West Virginia Gas Co., 168 S.W.2d 773 (Ky. 1943) Id. at Id. at Id. at Id. at Id. at Id. at Id. at Id. at Id. at

17 64. Kepple v. Apollo Gas Co., PA PUC Docket No. C (1993). 64 Ludolph v. Tuel and Thoenen, Inc., 214 N.E.2d 696 (Ohio tr. ct. 1965) S.E Ludolph, 214 N.E.2d at Apollo Gas Co. v. Heilman, PA PUC Docket No. C , (1993) Direct Testimony and Exhibits of Thomas F. Myslinski, at Id. Two further actions have been filed, both of which are in the discovery stage. Moore v. Apollo Gas Co. PA PUC Docket No. C (complaint filed May 23, 1994); Rowe v. Apollo Gas Co., Docket No of 1994, Common Pleas of Westmoreland County, Pennsylvania (complaint filed August 23, 1994) Id. Complaint at Id. Initial Decision at Id. Initial Decision at Id. Initial Decision at Id. Opinion and Order entered March 14, Pa. C.S.A

18 75 Id. Opinion and Order at Id. Opinion and Order, Statement of Commissioner John Hanger, March 9, As of the writing of this article, this action has not been finally resolved Kepple v. Apollo Gas Co., PA PUC Docket No. C (1993) Id. Initial Decision at Id. Initial Decision at Id. Initial Decision at Id. Initial Decision at Id. Initial Decision at Id. Initial Decision at Id. Initial Decision at Warfield Natural Gas Co. v. Jude, 87 S.W.2d 108 (Ky. 1935) Kepple v. Apollo Gas Co., PA PUC Docket No. C (1993).