Cities Service Co. v. Peerless Co.
340 U.S. 179 (1950)

Annotate this Case

U.S. Supreme Court

Cities Service Co. v. Peerless Co., 340 U.S. 179 (1950)

Cities Service Co. v. Peerless Co.

No. 153

Argued November 9-10, 1950

Decided December 11, 1950

340 U.S. 179

APPEAL FROM THE SUPREME COURT OF OKLAHOMA

Syllabus

The Oklahoma Corporation Commission, after hearings and on findings made in proceedings before it, issued an order fixing a minimum wellhead price on all gas taken from a natural gas field located within the State. A second order directed appellant, a producer in this field and operator of an interstate gas pipeline system, to take gas ratably from another producer in the field at the price fixed in the first order. A large percentage of the production of the field was sold in interstate commerce.

Held: the orders of the Commission were valid under the Due Process and Equal Protection Clauses of the Fourteenth Amendment and the Commerce Clause of the Federal Constitution. Pp. 340 U. S. 180-183, 340 U. S. 185-189.

1. A state may adopt reasonable regulations to prevent economic and physical waste of natural gas. P. 340 U. S. 185.

2. Prevention of waste of natural resources, protection of the correlative rights of owners through ratable taking, and protection of the economy of the state may justify legislative control over production even though the uses to which property may profitably be put are restricted. Pp. 340 U. S. 185-186.

3. A price-fixing order, like any other regulation, is lawful if substantially related to a legitimate end sought to be attained. P. 340 U. S. 186.

4. There was ample evidence in the proceedings before the Commission to sustain its finding that existing low field prices for gas were resulting in economic waste and were conducive to physical waste, and that was a sufficient basis for the orders issued. Pp. 340 U. S. 180-183, 340 U. S. 186.

5. It is no concern of this Court that other regulatory devices might be more appropriate, or that less extensive measures might suffice. P. 340 U. S. 186.

6. In a field of this complexity with such diverse interests involved, this Court cannot say that there is a clear national interest so harmed that the state price-fixing orders here employed fall within the ban of the Commerce Clause. Pp. 340 U. S. 186-188.

7. It is not for this Court to consider whether the State's unilateral efforts to conserve gas will be fully effective. P. 340 U. S. 188.

Page 340 U. S. 180

8. Hood & Sons v. Du Mond,336 U. S. 525, distinguished. P. 340 U. S. 188.

9. There is before this Court no question of conflict between the orders of the State Commission and federal authority under the Natural Gas Act. Pp. 340 U. S. 188-189.

203 Okla. 35, 220 P.2d 279, affirmed.

Two orders of the Oklahoma Corporation Commission, challenged as violative of the Federal Constitution, were sustained by the State Supreme Court. 203 Okla. 35, 220 P.2d 279. On appeal to this Court, affirmed, p. 340 U. S. 189.

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 pipeline 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 Oklahoma

Page 340 U. S. 181

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. 203 Okl. 35, 220 P.2d 279 (1950). 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).

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 pipeline 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 pipeline 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.

Page 340 U. S. 182

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 pipeline 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

Page 340 U. S. 183

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 pipeline owners were able to dictate the prices paid to producers without pipeline 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

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