Transcontinental Gas Pipe Line Corporation v. State Oil and Gas Board of Mississippi

• Decision Date: 22 January 1986
• Docket Number: No. 84-1076,84-1076
• Citation: 474 U.S. 409,88 L.Ed.2d 732,106 S.Ct. 709
• Parties: TRANSCONTINENTAL GAS PIPE LINE CORPORATION, Appellant v. STATE OIL AND GAS BOARD OF MISSISSIPPI and Coastal Exploration, Inc., et al
• Court: U.S. Supreme Court

474 U.S. 409

106 S.Ct. 709

88 L.Ed.2d 732

TRANSCONTINENTAL GAS PIPE LINE CORPORATION, Appellant

v STATE OIL AND GAS BOARD OF MISSISSIPPI and Coastal Exploration, Inc., et al.

No. 84-1076.

Argued Oct. 8, 1985.

Decided Jan. 22, 1986.

Rehearing Denied March 24, 1986.

See 475 U.S. 1099, 106 S.Ct. 1485.

Syllabus

In 1978, during a period of natural gas shortage, appellant interstate pipeline entered into long-term contracts with appellee Getty Oil Co. and others to purchase natural gas from a common gas pool in Mississippi. The contract with Getty obligated appellant to buy only Getty's shares of the gas produced by the wells Getty operated. Demand was sufficiently high that appellant also purchased, on a noncontract basis, the production shares of smaller owners, such as appellee Coastal Exploration, Inc., in the Getty wells. But in 1982, consumer demand dropped significantly, and appellant began to have difficulty in selling its gas. It therefore announced that it would no longer purchase gas from owners with whom it had not contracted. Getty cut back production so that its wells produced only that amount of gas equal to its ownership interest in the maximum flow. This deprived Coastal of revenue, because none of its share of the common pool gas was being produced. Coastal then filed a petition with appellee Mississippi State Oil and Gas Board (Board), asking it to enforce statewide Rule 48 requiring gas purchasers to purchase gas without discrimination in favor of one producer against another in the same source of supply. The Board found appellant in violation of Rule 48 and ordered it to start taking gas "ratably" (i.e., in proportion to the various owners' shares) from the gas pool, and to purchase the gas under nondiscriminatory price and take-or-pay conditions. On appeal, the Mississippi Circuit Court held that the Board's authority was not pre-empted by the Natural Gas Act of 1938 (NGA) or the Natural Gas Policy Act of 1978 (NGPA), and that the NGPA effectively overruled Northern Natural Gas Co. v. State Corporation Comm'n of Kansas, 372 U.S. 84, 83 S.Ct. 646, 9 L.Ed.2d 601, which struck down, on pre-emption grounds, a state regulation virtually identical to the Board's order. The Mississippi Supreme Court affirmed.

Held: The Board's ratable-take order is pre-empted by the NGA and NGPA. Pp. 417-425.

(a) Congress, in enacting the NGPA, did not alter the characteristics of the comprehensive regulatory scheme that provided the basis in Northern Natural for the finding of pre-emption. The Board's order directly undermines Congress' determination in enacting the NGPA that the supply, demand, and price of high-cost gas be determined by market forces. To the extent that Congress in the NGPA denied the Federal Energy Regulatory Commission (FERC) the power to regulate directly the prices at which pipelines purchase high-cost gas, it did so because it wanted to leave determination of supply and first-sale price to the market. In light of Congress' intent to move toward a less regulated national natural gas market, its decision to remove jurisdiction from FERC cannot be interpreted as an invitation to the States to impose additional regulations. Pp. 417-423

(b) The Board's order disturbs the uniformity of the federal scheme, since interstate pipelines will be forced to comply with varied state regulations of their purchasing practices. The order would also have the effect of increasing the ultimate price to consumers, thus frustrating the federal goal of ensuring low prices most effectively. Pp. 423-425.

457 So.2d 1298, reversed.

BLACKMUN, J., delivered the opinion of the Court, in which BURGER, C.J., and BRENNAN, WHITE, and MARSHALL, JJ., joined. REHNQUIST, J., filed a dissenting opinion, in which POWELL, STEVENS, and O'CONNOR, JJ., joined, post, p. 425.

John Marshall Grower, Jackson, Miss., for appellant.

Jerome M. Feit, Washington, D.C., for F.E.R.C. as amicus curiae, in support of the appellant, by special leave of Court.

Glenn Gates Taylor, Jackson, Miss., for appellee.

Ed Davis Noble, Jr., Jackson, Miss., for appellee State Oil and Gas Bd Justice BLACKMUN delivered the opinion of the Court.

We are confronted again with the issue of a state regulation requiring an interstate pipeline to purchase gas from all the parties owning interests in a common gas pool. The purchases would be in proportion to the owners' respective interests in the pool, and would be compelled even though the pipeline has pre-existing contracts with less than all of the pool's owners.

This Court, in Northern Natural Gas Co. v. State Corporation Comm'n of Kansas, 372 U.S. 84, 83 S.Ct. 646, 9 L.Ed.2d 601 (1963), struck down, on pre-emption grounds, a virtually identical regulation. In the present case, however, the Supreme Court of Mississippi ruled that the subsequently enacted Natural Gas Policy Act of 1978 (NGPA), 92 Stat. 3351, 15 U.S.C. § 3301 et seq., effectively nullified Northern Natural by vesting regulatory power in the States over the wellhead sale of gas. The Mississippi Supreme Court went on to hold that the Mississippi regulation did not impermissibly burden interstate commerce. Because of the importance of the issues in the functioning of the interstate market in natural gas, we noted probable jurisdiction. 470 U.S. 1083, 105 S.Ct. 1840, 85 L.Ed.2d 140 (1985).

I

The Harper Sand gas pool lies in Marion County in southern Mississippi. Harper gas is classified as "high-cost natural gas" under NGPA's § 107(c)(1), 15 U.S.C. § 3317(c)(1), because it is taken from a depth of more than 15,000 feet. At the time of the proceedings before appellee State Oil and Gas Board of Mississippi, six separate wells drew gas from the pool. A recognized property of a common pool is that, as gas is drawn up through one well, the pressure surrounding that well is reduced and other gas flows towards the area of the producing well. Thus, one well can drain an entire pool, even if the gas in the pool is owned by several different owners. The interests of these other owners often are referred to as "correlative rights." See, e.g., Miss.Code Ann. § 53-1-1 (1972 and Supp.1985).

Some owners of interests in the Harper Sand pool, such as appellee Getty Oil Co., actually drill and operate gas wells. Others, such as appellee Coastal Exploration, Inc., own smaller working interests in various wells. Normally, these lesser owners rely on the well operators to arrange the sales of their shares of the production, see App. 26, although some nonoperator owners contract directly either with the pipeline that purchases the operator's gas or with other customers.

Appellant Transcontinental Gas Pipe Line Corporation (Transco) operates a natural gas pipeline that transports gas from fields in Texas, Louisiana, and Mississippi for resale to customers throughout the Northeast. Beginning in 1978, Transco entered into 35 long-term contracts with Getty and two other operators, Florida Exploration Co. and Tomlinson Interests, Inc., to purchase gas produced from the Harper Sand pool. In line with prevailing industry practice, the contracts contained "take-or-pay" provisions. These essentially required Transco either to accept currently a certain percentage of the gas each well was capable of producing, or to pay the contract price for that gas with a right to take delivery at some later time, usually limited in duration. Take-or-pay provisions enable sellers to avoid fluctuations in cash flow and are therefore thought to encourage investments in well development. See Pierce, Natural Gas Regulation, Deregulation, and Contracts, 68 Va.L.Rev. 63, 77-79 (1982).

Transco entered into these contracts during a period of national gas shortage. Transco's contracts with Getty and Tomlinson obligated it to buy only Getty's and Tomlinson's own shares of the gas produced by the wells they operated while its contracts with Florida Exploration required it to take virtually all the gas Florida Exploration's wells produced, regardless of its ownership. See App. 107. But demand was sufficiently high that Transco also purchased, on a noncontract basis, the production shares of smaller owners, such as Coastal, in the Getty and Tomlinson wells. Id., at 155. In the spring of 1982, however, consumer demand for gas dropped significantly, and Transco began to have difficulty selling its gas. It therefore announced in May 1982 that it would no longer purchase gas from owners with whom it had not actually contracted. See, e.g., id., at 41-42. Transco refused Coastal's request that it be allowed to ratify Getty's contract, and made a counteroffer, which Coastal refused, either to purchase Coastal's gas at a significantly lower price than it was obligated to pay under its existing contracts or to transport Coastal's gas to other customers if Coastal arranged such sales. See id., at 66-69. Fifty-five other noncontract owners of Harper gas, however, did accept such offers from Transco. See 457 So.2d 1298, 1309 (Miss.1984).

Getty and Tomlinson cut back production so that their wells produced only that amount of gas equal to their ownership interests in the maximum flow. The immediate economic effect of the cutback was to deprive Coastal of revenue, because none of its share of the Harper gas was being produced. The ultimate geological effect, however, is that gas will flow from the Getty-Tomlinson areas of the field, which are producing at less than capacity, to the Florida Exploration areas; gas owned by interests that produce through Getty's and Tomlinson's wells thus may be siphoned away. Moreover, because of the decrease in pressure, gas left in the ground, such as Coastal's gas, may become more costly to recover and therefore its value at the wellhead may decline.

II

On July 29, 1982, Coastal filed a petition with appellee State Oil and Gas Board of Mississippi, asking the Board to enforce its Statewide Rule 48, a "ratable-take" requirement. Rule 48 provides:

"Each person now or...