Cities Service Gas Co v. Peerless Oil Gas Co v. 8212 10, 1950

Decision Date11 December 1950
Docket NumberNo. 153,153
Citation340 U.S. 179,71 S.Ct. 215,95 L.Ed. 190
PartiesCITIES SERVICE GAS CO. v. PEERLESS OIL & GAS CO. et al. Argued Nov. 9—10, 1950
CourtU.S. Supreme Court

Mr. Glenn W. Clark, Oklahoma City, Okl., for appellant.

Mr. D. A. Richardson, Oklahoma City, for appellee Peerless Oil & Gas Co.

Mr. Floyd Green, Oklahoma City, Okl., for appellee Corporation Commission of State of Oklahoma.

Mr. Justice CLARK delivered the opinion of the Court.

The issue in this case is the power of a state to fix prices at the wellhead on natural gas produced within its borders and sold interstate. It originates from proceedings before the Oklahoma Corporation Commission which terminated with the promulgation of two orders. The first order set a minimum wellhead price on all gas taken from the Guymon-Hugoton Field, located in Texas County, Oklahoma. The second directed Cities Service, a producer in this field and operator of an interstate gas pipe-line system, to take gas ratably from Peerless, another producer in the same field, at the price incorporated in the first order. The Supreme Court of Okla- homa upheld both orders against contentions that they contravened the constitution and statutes of Oklahoma and the Fourteenth Amendment and Commerce Clause, art. 1, § 8, cl. 3, of the Constitution of the United States. 1950, 203 Okl. 35, 220 P.2d 279. From this judgment Cities Service appealed to this Court. A substantial federal claim having been duly raised and necessarily denied by the highest state court, we noted probable jurisdiction. 28 U.S.C. § 1257(2), 28 U.S.C.A. § 1257(2).

I.

The case may be summarized as follows. The Hugoton Gas Field, 120 miles long and 40 miles wide, lies in the States of Texas, Oklahoma and Kansas. The Oklahoma portion, known as the Guymon-Hugoton Field, has approximately 1,062,000 proven acres with some 300 wells, of which 240 are producing. About 90 percent of Guymon-Hugoton's production is ultimately consumed outside the State. Cities Service, operator of a pipe line connected with the field, owns about 300,000 acres and 123 wells. In addition, it has 94 wells dedicated to it by lease for the life of the field and some 19 wells under term lease, giving it control over 236 of the 300 wells. Aside from the holdings of a few small tract owners and the acreages held in trust by the Oklahoma Land Office—some 49,600 acres—the only services in the field not owned by or affiliated with a pipe line are those of Harrington-Marsh with some 75,000 acres and Peerless with about 100,000 acres. Under prevailing market conditions, wellhead prices range from 3.6 to 5 cents per thousand cubic feet, varying prices being paid to different producers at the same time. In contrast, there is evidence that the 'commercial heat value' of natural gas, in terms of competitive fuel equivalents, is in excess of 10 cents per thousand cubic feet at the wellhead.

While the Guymon-Hugoton Field has three principal production horizons, they are so interconnected as to make in effect one large reservoir of gas. Cities' wells are located in an area in which the gas pressure is considerably lower than that found beneath the wells of Peerless. As a result, production from Cities' wells was causing drainage from the Peerless section of the field, and Peerless was losing gas even though its wells were not producing.

Having no pipe-line outlet of its own, Peerless offered to sell the potential output of its wells to Cities Service. Cities refused except on the condition that Peerless dedicate all gas from its acreage, at a price of 4 cents per thousand cubic feet, for the life of the leases. Dissatisfied with the price and the other terms, Peerless requested the Oklahoma Corporation Commission (a) to order Cities to make a connection with a Peerless well and purchase the output of that well ratably at a price fixed by the Commission, and (b) to fix the price to be paid by all purchasers of natural gas in the Guymon-Hugoton Field. Shortly thereafter, the Oklahoma Land Office intervened as owner in trust of large acreages in the field. The Land Office alleged that no fair, adequate price for natural gas existed in the field; that existing prices were discriminatory, unjust and arbitrary and if continued would deplete, destroy and exhaust the field within a few years. It joined Peerless' prayer for relief. The Commission thereupon, by written notice, invited all producers and purchasers of gas in the field to appear and participate in the proceedings.

The Commission heard testimony to the effect that the field price of gas has a direct bearing on conservation. Witnesses testified that low prices make enforcement of conservation more difficult, retard exploration and development, and result in abandonment of wells long before all recoverable gas has been extracted. They also testified that low prices contribute to an uneconomic rate of depletion and economic waste of gas by promoting 'inferior' uses.

At the end of the hearings, the Commission concluded that there was no competitive market for gas in the Guymon-Hugoton Field, that the integrated well and pipe-line owners were able to dictate the prices paid to producers without pipe-line outlets, and that as a result gas was being taken from the field at a price below its economic value. It further concluded that the taking of gas at the prevailing prices resulted in both economic and physical waste of gas, loss to producer and royalty owners, loss to the State in gross production taxes, inequitable taking of gas from the common source of supply, and discrimination against various producers in the field. On the basis of these findings, the Commission issued the two orders challenged here. The first provided 'that no natural gas shall be taken out of the producing structures or formations in the Guymon-Hugoton Field * * * at a price, at the wellhead, of less than 7¢ per thousand cubic feet of natural gas measured at a pressure of 14.65 pounds absolute pressure per square inch.' The second directed Cities Service 'to take natural gas ratably from * * * (Peerless') well * * * in accordance with the formula for ratable taking prescribed in Order No. 17867 of this Commission' (a provision not under attack here), and at the same price and pressure terms indicated in the general field-price order.

On appeal to the Oklahoma Supreme Court, Cities Service attacked the orders on the following grounds: (1) that the Commission acted beyond its authority in that Oklahoma statutes did not permit general price-fixing or specific price-fixing at a figure in excess of the prevailing market price, and in that the statutes did not contemplate the prevention of economic, as distinct from physical, waste; (2) that if construed to permit such price-fixing, the statutes and orders thereunder violated the state constitution; (3) that if so construed, the statutes and orders violated the Due Process and Equal Protection clauses of the Fourteenth Amendment, in that (a) there was no evidence of physical waste in the Guymon-Hugoton Field and the price order cannot be reasonably related to the prevention of waste, (b) the statutes contain no adequate standards governing the Commission's price-fixing powers, (c) the orders are too vague, (d) the proceedings lacked procedural due process, and (e) the specific order discriminates against Cities Service, and the general order, applying only to the Guymon-Hugoton Field, discriminates against those producing or purchasing in that field; (4) that the orders violate the Commerce Clause, Art. I, § 8, in that they cast an undue burden on, and discriminate against, interstate commerce.

The Supreme Court of Oklahoma rejected these claims. It found that the Oklahoma statutes fully empowered the Commission to take the action which it took. The Oklahoma legislature, as early as 1913, declared that gas underlying land is the property of the land owner or his lessee; that gas may be taken from a common source of supply proportionately to the natural flow of the well and that the drilling of a well by an owner or lessee shall be regarded as reducing to possession his share of the gas; that any person taking gas from the field, except in cases not here pertinent, shall take ratably from each owner in proportion to his interest and upon such terms as may be agreed upon; that if no agreement can be reached then the price and terms shall be such as may be fixed by the Corporation Commission after notice and hearing. 52 Okla.Stats. §§ 23—25, 231—233 (1941). These sections explicitly authorize the order requiring Cities to take gas ratably from Peerless and at a specific price. In 1915, Oklahoma strengthened its gas conservation laws by authorizing regulation of production of gas from a common source when production is in excess of market demand. 5i Okla.Stats. §§ 239—240 (1941). The Commission was authorized to limit the gas taken by any producer to 'such proportion of the natural gas that may be marketed without waste' as the natural flow...

To continue reading

Request your trial
92 cases
  • R. E. Spriggs Co. v. Adolph Coors Co.
    • United States
    • California Court of Appeals Court of Appeals
    • 28 Febrero 1974
    ...state action. (Breard v. Alexandria, 341 U.S. 622, 634--635, 71 S.Ct. 920, 95 L.Ed. 1233; Cities Service Co. v. Peerless Oil & Gas Co., 340 U.S. 179, 186--187, 71 S.Ct. 215, 95 L.Ed. 190.) 3 'The fact that Congress has acted to prevent restraints on trade in interstate commerce, of itself, ......
  • Transcontinental Gas Pipeline Corp. v. State Oil and Gas Bd. of Mississippi, 55071
    • United States
    • Mississippi Supreme Court
    • 5 Septiembre 1984
    ...authority emanating from another sovereign, the United States of America. Cities Service Gas Company v. Peerless Oil and Gas Company, 340 U.S. 179, 186-87, 71 S.Ct. 215, 219-20, 95 L.Ed. 190, 202 (1950). All parties agree that prior to 1978 there existed in the Federal Energy Regulatory Com......
  • Phillips Petroleum Co v. State of Wisconsin State of Texas v. State of Wisconsin Federal Power Commission v. State of Wisconsin
    • United States
    • U.S. Supreme Court
    • 7 Junio 1954
    ...at both ends of the interstate transmission systems. Petitioners cite our recent decisions in Cities Service Gas Co. v. Peerless Oil & Gas Co., 340 U.S. 179, 71 S.Ct. 215, 95 L.Ed. 190, and Phillips Petroleum Co. v. State of Oklahoma, 340 U.S. 190, 71 S.Ct. 221, 95 L.Ed. 204, as authority f......
  • Sporhase v. Nebraska Douglas
    • United States
    • U.S. Supreme Court
    • 2 Julio 1982
    ...Report to Congress, Ground Water Overdrafting Must Be Controlled 7-8 (1980). 16 See Cities Service Gas Co. v. Peerless Oil & Gas Co., 340 U.S. 179, 188, 71 S.Ct. 215, 220, 95 L.Ed. 190 (1950) ("Insofar as conservation is concerned, the national interest and the interest of producing states ......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT