372 U.S. 84 (1963), 62, Northern Natural Gas Co. v. State

Docket Nº:No. 62
Citation:372 U.S. 84, 83 S.Ct. 646, 9 L.Ed.2d 601
Party Name:Northern Natural Gas Co. v. State
Case Date:February 18, 1963
Court:United States Supreme Court
 
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372 U.S. 84 (1963)

83 S.Ct. 646, 9 L.Ed.2d 601

Northern Natural Gas Co.

v.

State

No. 62

United States Supreme Court

Feb. 18, 1963

Corporation Commission of Kansas

Argued December 13, 1962

APPEAL FROM THE SUPREME COURT OF KANSAS

Syllabus

Orders of the Kansas State Corporation Commission which require appellant, an interstate pipeline company, to purchase natural gas ratably from all wells connecting with its pipeline system in each gas field in the State held invalid, because they invade the exclusive jurisdiction which the Natural Gas Act has conferred upon the Federal Power Commission over the sale and transportation of natural gas in interstate commerce for resale. Pp. 85-98.

(a) Since appellant is not a producer of gas, but a purchaser of gas from producers, it cannot be said that the orders here involved constitute only state regulation of the "production or gathering" of natural gas, which is exempted from the federal regulatory domain by § 1(b) of the Natural Gas Act. Pp. 89-90.

(b) Since these orders are directed at wholesale purchasers of natural gas in Kansas and, subject to criminal sanctions for noncompliance, require them to balance the output of all wells within the State from which they take, they necessarily threaten the ability of the Federal Power Commission to regulate comprehensively and uniformly the intricate relationship between the purchasers' cost structures and eventual costs to wholesale customers in other States. Pp. 90-93.

(c) These orders cannot be sustained on the ground that they merely conserve scarce natural resources. Although conservation is a legitimate objective of state regulation, it cannot be effectuated by means such as these which encroach upon a federally preempted regulatory domain. Pp. 93-96.

(d) This Court rejects a suggestion that the case should be remanded to the Kansas Supreme Court in order that that Court might construe the orders as relieving the appellant of a contractual obligation which caused it to purchase unratably, since, among other reasons, no such accommodation on remand could avoid or postpone the federal question presented by this appeal. Pp. 96-98.

188 Kan. 351, 355, 362 P.2d 599, 609, reversed.

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BRENNAN, J., lead opinion

MR. JUSTICE BRENNAN delivered the opinion of the Court.

The question in this case is whether orders of the Kansas State Corporation Commission which require the

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appellant, an interstate pipeline company, to purchase gas ratably from all wells connecting with its pipeline system in each gas field within the State1 invalidly encroach upon the exclusive regulatory jurisdiction of the Federal Power Commission conferred [83 S.Ct. 648] by the Natural Gas Act, 15 U.S.C. §§ 717-717w.

The appellant's pipeline system is connected to some 1,100 natural gas wells in the Kansas Hugoton Field2 under about 125 purchase contracts between the appellant and various producers. The contracts have been duly filed with the Federal Power Commission. Under the

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oldest contract, known as the Republic "A" contract, which was made in 1945 with Republic Natural Gas Company, and is still in force as modified in 1953, appellant was obligated to purchase gas from Republic up to the maximum production allowables for Republic's Kansas wells connected to appellant's system.3 Appellant's contracts with its other producers provide that appellant's purchase commitments thereunder are expressly subject to the agreement with Republic. Thus, appellant was bound to purchase from its other producers only so much of its requirements as were not satisfied by the quantities which the Republic contract required to be taken from Republic wells.

Appellant's requirements until 1958 were such that its purchases from its various producers were nevertheless roughly ratable, that is, in like proportion to the legally fixed allowables for each of the 1,100 wells in the Hugoton Field. However, after 1958, appellant's requirements aggregated substantially less than the total allowables for the Hugoton wells.4 Thus the balance of the total

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requirements, after the contractually required purchases from Republic of the maximum allowables for the Republic wells, resulted in appellant's purchases from appellant's other producers of proportions substantially below the allowables for those producers' wells. This imbalance brought about the orders of the State Commission of which appellant complains.

A Kansas statute5 empowers the State Commission so to

regulate the taking of natural gas from any and all . . . common sources of supply within this state as to prevent the inequitable or unfair taking from such common source of supply . . . and to prevent unreasonable discrimination . . . in favor of or against any producer in any such common source of supply.

The Commission adopted in 1944, avowedly as a conservation measure, a basic proration order designed to effect ratable production and to protect correlative rights in the Hugoton Field.6 In 1959, in order to require appellant to take gas from Republic wells in no higher proportion to the allowables than from the wells of the other producers, the Commission entered the order specifically directing appellant to

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purchase gas ratably from all 1,100 Hugoton wells. That order was superseded in February, 1960, by the general order, directed at all natural gas purchasers taking Kansas gas. These orders presented the appellant with the alternatives of complying with the obligations of the Republic contract and increasing its takes from the other producers' wells -- thus taking more gas from Kansas than it could currently use -- or of risking liability for a breach of the Republic contract by decreasing its takes from the Republic wells below the allowables.7

Appellant challenged the two orders in the Kansas courts on the ground, among others, that they unconstitutionally invaded the exclusive jurisdiction of the Federal Power Commission under the Natural Gas Act. The Kansas Supreme Court sustained the orders, 188 Kan. 351, 355, 362 P.2d 609, 599; on rehearing, 188 Kan. 624, 364 P.2d 668. We noted probable jurisdiction of an appeal to this Court, 370 U.S. 901. We disagree with the Kansas Supreme Court, for we hold that the State Commission's orders did invade the exclusive jurisdiction which the Natural Gas Act has conferred upon the Federal Power Commission over the sale and transportation of natural gas in interstate commerce for resale.

I

We consider first the ground relied upon by the Kansas Supreme Court, that the orders constitute only state regulation of the "production or gathering" of natural gas, which is exempted from the federal regulatory domain by the terms of § 1(b) of the Natural Gas Act, 15 U.S.C. § 717(b). These orders do not regulate "production or gathering" within that exemption. In a line of decisions beginning with Colorado Interstate Gas Co. v.

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Federal Power Comm'n, 324 U.S. 581, 598, and Interstate Natural Gas Co. v. Federal Power Comm'n, 331 U.S. 682, 689-693, it has been consistently held that [83 S.Ct. 650] "production" and "gathering" are terms narrowly confined to the physical acts of drawing the gas from the earth and preparing it for the first stages of distribution. See Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672, 680-681; Continental Oil Co. v. Federal Power Comm'n, 266 F.2d 208; Huber Corp. v. Federal Power Comm'n, 236 F.2d 550. Appellant is not a producer, but a purchaser of gas from producers, and none of its activities in Kansas shown upon this record involves "production and gathering, in the sense that those terms are used in § 1(b). . . ."8 Phillips Petroleum Co. v. Wisconsin, supra, 347 U.S. at 678.

II

The Kansas Supreme Court also sustained the orders on the ground that neither order threatened any actual invasion of the regulatory domain of the Federal Power Commission, since it "in no way involves the price of gas." 188 Kan. at 624, 364 P.2d at 668. It is true that it was settled even before the passage of the Natural Gas Act that direct regulation of the prices of wholesales of natural gas in interstate commerce is beyond the constitutional power of the States -- whether or not framed to achieve ends, such as conservation, ordinarily within the ambit of state power. See Missouri v. Kansas Natural Gas Co., 265 U.S. 298; cf. Public Utilities Comm'n v. Attleboro Steam & Electric Co., 273 U.S. 83. But our inquiry is not at an end because the orders do not

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deal in terms with prices or volumes of purchases, cf. Dayton-Goose Creek R. Co. v. United States, 263 U.S. 456, 478. The Natural Gas Act precludes not merely direct regulation by the States of such contractual matters. See Illinois Natural Gas Co. v. Central Illinois Public Service Co., 314 U.S. 498, 506-509. The Congress enacted a comprehensive scheme of federal regulation of

all wholesales of natural gas in interstate commerce, whether by a pipeline company or not and whether occurring before, during, or after transmission by an interstate pipeline company.9

Phillips Petroleum Co. v. Wisconsin, supra, at ; see H.R.Rep. No. 709, 75th Cong., 1st Sess. 2.

The federal regulatory scheme leaves no room either for direct state regulation of the prices of interstate wholesales of natural gas, Natural Gas Pipeline Co. v. Panoma Corp., 349 U.S. 44, or for state regulations which would indirectly achieve the same result.10 These state orders necessarily deal with matters which directly [83 S.Ct. 651] affect the ability of the Federal Power Commission to regulate comprehensively and effectively the transportation and sale of natural gas, and to achieve the uniformity of regulation

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which was an objective of the Natural Gas Act. They...

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