Cities Service Gas Co. v. Peerless Oil & Gas Co.

Citations: 95 L. Ed. 2d 190; 71 S. Ct. 215; 340 U.S. 179; 1950 U.S. LEXIS 2475; 95 L. Ed. 190Docket: 153

Court: Supreme Court of the United States; December 11, 1950; Federal Supreme Court; Federal Appellate Court

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The case addresses the authority of a state to regulate wellhead prices for natural gas produced and sold interstate. Originating from actions by the Oklahoma Corporation Commission, two key orders were issued: one establishing a minimum wellhead price for gas from the Guymon-Hugoton Field and another requiring Cities Service, a gas producer and operator of an interstate pipeline, to acquire gas from Peerless at that set price. The Oklahoma Supreme Court upheld these orders against claims of constitutional violations under both state and federal law, including the Fourteenth Amendment and the Commerce Clause. Cities Service subsequently appealed to the U.S. Supreme Court, which recognized the federal issues raised.

The Guymon-Hugoton Field spans Texas, Oklahoma, and Kansas, with the Oklahoma segment covering approximately 1,062,000 acres and hosting around 300 wells, mostly operational. Cities Service controls a significant portion of the field with 123 wells and extensive acreage. The prevailing wellhead prices are between 3.6 to 5 cents per thousand cubic feet, while the competitive market value exceeds 10 cents. Interconnected production horizons in the field mean that Cities' lower-pressure wells were draining gas from Peerless' section, despite its wells being non-productive at the time.

Peerless, lacking its own pipeline outlet, sought to sell its gas output to Cities Service, which refused unless Peerless dedicated all gas from its acreage at a price of 4 cents per thousand cubic feet for the lease duration. Peerless, dissatisfied, petitioned the Oklahoma Corporation Commission for two orders: to compel Cities to connect with a Peerless well and purchase gas output at a price set by the Commission, and to establish a price for all natural gas purchasers in the Guymon-Hugoton Field. The Oklahoma Land Office, as a large acreage owner, intervened, claiming that existing gas prices were unfair and discriminatory, which would lead to field depletion.

The Commission held hearings, during which testimony indicated that low gas prices hindered conservation efforts, discouraged exploration, and caused premature well abandonment, resulting in economic waste. Ultimately, the Commission determined that there was no competitive market for gas in the field, allowing integrated well and pipeline owners to set artificially low prices, leading to economic and physical waste, losses for producers and the state, and discrimination against certain producers.

In response, the Commission issued two orders: one prohibiting the extraction of gas at prices below 7 cents per thousand cubic feet at the wellhead, and the other requiring Cities Service to purchase gas from Peerless under specified conditions. Cities Service appealed these orders, arguing that the Commission exceeded its authority regarding price-fixing, violated the state constitution and the Fourteenth Amendment's Due Process and Equal Protection clauses, lacked adequate standards for price-setting, and discriminated against both Cities Service and other market participants. Additionally, it claimed the orders imposed an undue burden on interstate commerce.

The Supreme Court of Oklahoma upheld the authority of the Corporation Commission to regulate gas production under state statutes dating back to 1913, which establish that gas beneath land belongs to the landowner or lessee, and mandate proportional extraction from a common source. The 1915 legislation enhanced these regulations, allowing the Commission to limit gas production to prevent waste and protect public interests. The court affirmed that the Commission's orders setting minimum gas prices were consistent with the Oklahoma Constitution and did not violate the federal Constitution. Claims regarding Due Process and Equal Protection were dismissed as lacking substance, reinforcing the state's right to implement reasonable regulations to prevent economic and physical waste of natural resources. The court noted that evidence of low field prices leading to economic waste justified the Commission's actions, and any alternative regulatory measures were deemed to be within the legislature's purview. Other arguments related to constitutional protections were also found to be without merit.

The Commerce Clause grants Congress extensive authority over interstate commerce, but this power is not absolute, allowing states to regulate local matters that do not conflict with federal authority. States can enact regulations impacting interstate commerce as long as they do not discriminate against it, serve a legitimate state interest, and the local interest outweighs any national interest in preventing state restrictions. In this case, the state’s interest in conserving natural resources is significant, and while there is a national interest in natural gas issues, it is unclear whether the state regulations negatively impact that interest. The price of gas at the wellhead is minimal compared to what consumers pay, and while some industrial consumers may be adversely affected, preserving natural gas for essential uses aligns with both state and national interests. Therefore, the state price-fixing orders do not violate the Commerce Clause, as the balance of interests does not indicate a clear national interest being harmed. The effectiveness of Oklahoma's conservation efforts is not subject to the court's examination.

The case of H. P. Hood & Sons v. Du Mond does not contradict the current findings, as it did not address whether price-fixing constitutes an undue burden on interstate commerce. The Court differentiated this matter from Eisenberg, which permitted price regulations for producers whose milk sales were purely interstate. In Hood, the regulation was invalidated because it unfairly restricted a company's access to facilities necessary for interstate commerce, citing potential negative impacts on local consumer supply. However, the current price regulation applies uniformly to all gas extracted, regardless of whether it is for interstate or intrastate consumption, thus avoiding the discrimination issue present in Hood. The appellant does not argue that the orders are inconsistent with the Natural Gas Act, and the Federal Power Commission has not engaged in these proceedings. The question of whether the Gas Act permits the Commission to regulate field prices by independent producers or delegates that authority to the states is not under consideration. The Oklahoma Corporation Commission's orders are upheld as valid, and the lower court's decision is affirmed. Justice Black considers the federal constitutional claims to be meritless and recommends dismissing the appeal.