Northern Natural Gas Co. v. State Corp. Commission

372 U.S. 84, 83 S. Ct. 646, 9 L. Ed. 2d 601, 1963 U.S. LEXIS 2426

• Court: Supreme Court of the United States
• Decided: April 1, 1963
• Docket: 62
• Status: Published

Opinions

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 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 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 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 Hugo-ton 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 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 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 599, 609; 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. Federal Power Comm’n, 324 U. S. 681, 598, and Interstate Natural Gas Co. v. Federal Power Comm’n, 331 U. S. 682, 689-693, it has been consistently held that “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, 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 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 682; 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 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 which was an objective of the Natural Gas Act. They therefore invalidly invade the federal agency’s exclusive domain.

The danger of interference with the federal regulatory scheme arises because these orders are unmistakably and unambiguously directed at purchasers who take gas in Kansas for resale after transportation in interstate commerce. In effect, these orders shift to the shoulders of interstate purchasers the burden of performing the complex task of balancing the output of thousands of natural gas wells within the State, cf. Miller Bros. Co. v. Maryland, 347 U. S. 340 — a task which would otherwise presumably be the State Commission’s. Moreover, any readjustment of purchasing patterns which such orders might require of purchasers who previously took unratably could seriously impair the Federal Commission’s authority to regulate the intricate relationship between the purchasers’ cost structures and eventual costs to wholesale customers who sell to consumers in other States. This relationship is a matter with respect to which Congress has given the Federal Power Commission paramount and exclusive authority. See Federal Power Comm’n v. Hope Natural Gas Co., 320 U. S. 591, 610. The prospect of interference with the federal regulatory power in this area is made even more acute by the fact that criminal sanctions imposed by state statute for noncompliance fall upon such purchasers and not upon the local producers. Therefore, although collision between the state and federal regulation may not be an inevitable consequence, there lurks such imminent possibility of collision in orders purposely directed at interstate wholesale purchasers that the orders must be declared a nullity in order to assure the effectuation of the comprehensive federal regulation ordained by Congress.

It may be true, as the State Commission urges, that accommodation on the part of the Federal Power Commission could avoid direct collision — but this argument misses the point. Not the federal but the state regulation must be subordinated, when Congress has so plainly-occupied the regulatory field. Cf. San Diego Building Trades Council v. Garmon, 359 U. S. 236. We have already said that the question to be asked under this statute is “whether state authority can practicably regulate a given area and, if we find that it cannot, then we are impelled to decide that federal authority governs.” Federal Power Comm’n v. Transcontinental Gas Pipe Line Corp., 365 U. S. 1, 19-20.

III.

Appellee’s principal contention, sustained by the Kansas Supreme Court, is that ratable taking is essential for the conservation of natural gas, and that conservation is traditionally a function of state power. There is no doubt that the States do possess power to allocate and conserve scarce natural resources upon and beneath their lands. We have recognized such power with particular respect to natural gas. Patterson v. Stanolind Oil & Gas Co., 305 U. S. 376; Bandini Petroleum Co. v. Superior Court, 284 U. S. 8; Walls v. Midland Carbon Co., 254 U. S. 300. But the problem of this case is not as to the existence or even the scope of a State’s power to conserve its natural resources; the problem is only whether the Constitution sanctions the particular means chosen by Kansas to exercise the conceded power if those means threaten effectuation of the federal regulatory scheme.

We have already held that a purpose, however legitimate, to conserve natural resources, does not warrant direct interference by the States with the prices of natural gas wholesales in interstate commerce, Cities Service Gas Co. v. State Corporation Comm’n, 355 U. S. 391; Michigan Wisconsin Pipe Line Co. v. Corporation Comm’n, 355 U. S. 425. It has been suggested that those decisions are at variance with Champlin Refining Co. v. Corporation Comm’n, 286 U. S. 210, in which we sustained a state proration order designed to further conservation, against a challenge under the Commerce Clause.¹¹ We reject that suggestion. The Court in Champlin carefully limited that holding to regulations which, the Court observed precisely, “apply only to production and not to sales or transportation of crude oil or its products.” (Italics supplied.) The Court further noted, “[s]uch production is essentially a mining operation and therefore is not a part of interstate commerce . . . .” 286 U. S., at 235. (Italics supplied.) And, after enactment of the Natural Gas Act, in confirming state power to achieve conservation objectives, the Court took care to say, “[t]hese ends have been held to justify control over production even though the uses to which property may profitably be put are restricted.” Cities Service Gas Co. v. Peerless Oil <& Gas Co., supra, at 185-186. (Italics supplied.) Thus our cases have consistently recognized a significant distinction, which bears directly upon the constitutional consequences, between conservation measures aimed directly at interstate purchasers and wholesales for resale, and those aimed at producers and production. The former cannot be sustained when they threaten, as here, the achievement of the comprehensive scheme of federal regulation.

Of course, the Kansas method before us would fail, for the reasons given, even if it were Kansas’ only means of attaining these ends. The State does not, however, appear to be without alternative means of checking waste and disproportionate or discriminatory taking.¹² Moreover, the invalidation of this particular form of state regulation does not result in a regulatory “gap” of the sort which the Act was designed to prevent. Phillips Petroleum Co. v. Wisconsin, supra, at 682-683. For example, we have very recently recognized that the Commission can and should take appropriate account of certain conservation factors in certification proceedings. Federal Power Comm’n v. Transcontinental Gas Pipe Line Corp., supra, at 20-22. See also McGrath, Federal Regulation of Producers in Relation to Conservation of Natural Gas, 44 Geo. L. J. 676 (1956).

IV.

Although what we have said answers the question for decision, it is appropriate that we comment upon a suggestion advanced both by appellant and by the Federal Power Commission as amicus curiae. That suggestion was that if we should hold, as we do hold, that the orders in validly invade the federal regulatory jurisdiction, the judgment should not be reversed but the case should rather be remanded to the Kansas Supreme Court. The theory is that the Kansas Supreme Court might, in light of our holding, now hold that the orders effected a modification of the Republic “A” contract such as to permit performance of the contract through takings from the Republic wells in such lower amounts as may be necessary to achieve ratability with the takings from the wells of appellant’s other producers. In short, the suggestion is that the state court, if afforded the opportunity, might now so harmonize the Republic contract with the Commission’s order that there would result no measurable effect upon interstate transmissions or sales.

We reject this suggestion for several reasons. First, both opinions of the Kansas Supreme Court show that the court clearly recognized the substantiality of the federal question in the asserted encroachment of the orders upon the federal regulatory scheme. The court squarely decided the federal question in favor of the validity of the orders. Neither opinion rests this holding on an independent nonfederal ground of decision, and the appellant and the Commission, by suggesting a remand, in effect concede as much. Nor is there any undecided aspect of the case upon which the Kansas Supreme Court might still sustain the orders upon a nonfederal ground. Cf. Indiana ex rel. Anderson v. Brand, 303 U. S. 95. We and the Kansas Supreme Court are therefore in complete agreement that the federal question as to the validity of the orders cannot be avoided. It would hardly be seemly for us to ask the Kansas Supreme Court to reconsider its holding because we have reached a different conclusion on that question.

Furthermore we have difficulty perceiving how we could properly invite the Kansas Supreme Court to interpret the Republic “A” contract in light of the orders with a view to possible abatement of the federal question. That contract was not in any respect made an issue in this lawsuit — indeed, Republic is not a party; the controversy is solely between the appellant and the State and concerns only the validity of the orders. To invite consideration by the Kansas Supreme Court of the possible accommodation of the contract with the orders so as to avoid the asserted invalid trespass on the federal regulatory area, is necessarily to ask the Kansas court to do one of two things: (1) to determine whether the orders can be accommodated with a contract which is in no sense before the court and in the absence of one of the contracting parties; or (2) to vacate its holding that the orders are not invalid for encroachment on the federal domain, and abstain from deciding that question pending the decision of some action which may squarely pit the contract against the orders. In the circumstances, to follow the suggestion to remand would on our part be highly irregular.

In any event the suggestion misconceives the true nature of the question which the Kansas Supreme Court and this Court were called upon to decide. The federal question does not arise from an asserted actual and immediate conflict between the federal and state regulations. The question is whether the state orders may stand in the face of the pervasive scope of federal occupation of the field. Cf. San Diego Building Trades Council v. Garmon, supra, at 241-244. Indeed, even if the issue of the accommodation of the Republic “A” contract with the orders had been actually framed in the lawsuit, the mere fact that the Kansas court might make the suggested accommodation would not necessarily permit the Kansas court or this Court to avoid decisions of the federal question, since even then it would have to be determined whether the orders invalidly jeopardize the Natural Gas Act’s objective of uniformity. See Federal Power Comm’n v. Transcontinental Gas Pipe Line Corp., supra, at 28. For, if the federal question could be avoided or postponed just short of actual collision, by ad hoc accommodation on the part of every State, then the scope of federal regulatory power would vary in accordance with the kaleidoscopic variations of local contract law.

The judgments are reversed and the causes are remanded for further proceedings not inconsistent with this opinion.

Reversed and remanded.

Mr. Justice White took no part in the consideration or decision of this case.

1 The general order of the Commission, which was embodied in Rule 82-2-219, provided:

Ratable ProductioN of Gas from CommoN Source of Supply

“In each common source of supply under proration by this Commission, each purchaser shall take gas in proportion to the allowables from all the wells to which it is connected and shall maintain all such wells in substantially the same proportionate status as to overproduction or underproduction; provided, however, this rule shall not apply when a difference in proportionate status results from the inability of a well to produce proportionately with other wells connected to the purchaser (Authorized by G. S. 1959, Supp. 55-703; Effective February 8, I960).”

This order, directed generally at all purchasers within the Commission’s jurisdiction, superseded an order of October 7, 1959, which specifically required appellant “to take gas ratably from all wells to which it is connected in the Kansas Hugoton Gas Field.” When the general order was promulgated, the specific order was rescinded. The Kansas Supreme Court, however, considered the validity of both orders as though both were still in force. For purposes of our jurisdiction and consideration of the merits, it makes no difference whether the specific order survived, for the superseding general order was no less clearly directed at the appellant.

2 For a history of the discovery and development of the Hugoton Field, and the Kansas Commission’s earlier efforts to insure correlative rights in, and to regulate the taking of gas from, that field, see generally American Bar Association Section of Mineral Law, Conservation of Oil and Gas — A Legal History, 1948 (1949), 165-183.

3 The original Republic “A” contract, as amended, fixed the minimum-take requirements in terms of a percentage of appellant’s natural gas needs for a particular district which it served from the Hugoton Field. A decision of the Kansas Supreme Court in 1952 modified that term of the contract by holding that appellant’s takes from particular Republic wells could not exceed the production allowables set by the Commission for those wells, regardless of whether the total allowables might be lower than the percentage stipulated by the contract. Northern Natural Gas Co. v. Republic Natural Gas Co., 172 Kan. 450, 241 P. 2d 708.

4 The substantial underages in appellant’s purchases were attributed to two factors: First, the rate of increase in the allowables for the wells from which appellant was taking had exceeded the increases in appellant’s requirements from the Hugoton Field; and second, appellant’s projected expansion of its system had been delayed unexpectedly by failure to secure the requisite certificates of convenience and necessity from the Federal Power Commission. Neither factor is material to the questions presented by this appeal.

5 The statute, as amended in 1959, is Kan. Gen. Stat., 1949 (Supp. 1959), §55-703, captioned “Production regulations; rules and formulas.” The terms of the statute speak of “taking” rather than “purchasing” of natural gas; the Commission has decreed that the two terms are synonymous. It was the view of the dissenting judge in the court below, however, that the “taking” comprehended by the statute, nowhere defined in the statute itself, referred only to production so that the Commission lacked authority under state law to regulate purchasing in the manner of the present orders. See 188 Kan. 355, 365, 362 P. 2d 599, 606.

6 The operative clause of this order designated the order as the basic guide for “the production of natural gas” from the Hugoton Field. No provisions of the order imposed enforceable obligations or sanctions upon purchasers, although one section admonished, “. . . purchasers . . . from any well, shall endeavor to limit their takes of gas to the quantities fixed in the schedule as the allowable production for such well . . . .”

7 Pending in a Kansas trial court are two suits by Republic against appellant to recover damages for appellant’s failure to purchase gas in the quantities required by the contracts.

8 Thus we have no need to consider the effect of the “production or gathering” exemption upon ratable-tahe orders directed exclusively at independent producers of natural gas. For contrasting views on that question, compare Kelly, Gas Proration and Ratable Taking in Texas, 19 Tex. Bar J. 763, 797 (1956), with Comment, Ratable Taking of Natural Gas, 11 S. W. L. J. 358, 360-361 (1957).

9 Persistent efforts to narrow the scope of the broader exclusive federal jurisdiction conferred by the statute have been unavailing. See, inter alia, H. R. 4051, 80th Cong., 1st Sess.; H. R. 4099, 80th Cong., 1st Sess.; H. R. 1758, 81st Cong., 1st Sess.; and S. 1498, 81st Cong., 1st Sess. “Attempts to weaken this protection [of consumers against exploitation at the hands of natural-gas companies] by amend-atory legislation exempting independent natural-gas producers from federal regulation have repeatedly failed, and we refuse to achieve the same result by a strained interpretation of the existing statutory language.” Phillips Petroleum Co. v. Wisconsin, supra, at 685.

10 Our decisions in Cities Service Gas Co. v. Peerless Oil & Gas Co., 340 U. S. 179, and Phillips Petroleum Co. v. Oklahoma, 340 U. S. 190, are not contrary. “In those cases we were dealing with constitutional questions and not the construction of the Natural Gas Act.” Natural Gas Pipeline Co. v. Panoma Corp., supra, at 45.

11 See American Bar Association Section of Mineral and Natural Resources Law, Conservation of Oil and Gas — A Legal History, 1958 (I960), 342.

12 See, e. g., Colorado Interstate Gas Co. v. Federal Power Comm’n, supra, at 602-603; cf. Patterson v. Stanolind Oil & Gas Co., supra. The availability of regulatory alternatives, particularly in the form of proration and similar orders directed at producers, has been much discussed. See the view of a member of the Kansas Corporation Commission, Byrd, Contractual and Property Rights as Affected by Conservation Laws and Regulations, Tenth Annual Institute on Oil and Gas Law and Taxation, 1, 6-7 (1959); see also American Bar Association Section of Mineral Law, Conservation of Oil and Gas — A Legal History, 1948 (1949), 170-171; Kulp, Oil and Gas Rights (1954), § 10.100; 1 Kuntz, Treatise on the Law of Oil and Gas (1962), §4.7.

It has been urged that as a practical matter restrictions upon purchasers more effectively and easily achieve ratable taking, see 1A Summers, Oil and Gas (1954), 139 and n. 9.30. On the contrary, it has also been argued that the very objectives sought to be achieved here may be achieved through ratable production orders, Comment, Ratable Taking of Natural Gas, 11 S. W. L. J. 358, 359, 362 (1957). We note too the suggestion of a witness in the proceeding below that the result sought by the orders herein might have been achieved by requiring Republic to decrease production from its wells rather than by requiring appellant to increase its purchases from those wells. R. 33. This apparently was also the view of the dissenting judge below, 188 Kan., at 365, 362 P. 2d, at 606. See, as to the obligation of the States to pursue alternatives which avoid interference with federally protected interstate commerce, Dean Milk Co. v. Madison, 340 U. S. 349, 354-356.

There is no occasion to consider appellant’s further argument that the Kansas Commission’s orders were tainted by an improper motive, that is, to require overproduction of Kansas Hugoton wells in order to prevent disadvantageous drainage to Texas and Oklahoma, which share the Hugoton Field with Kansas. The relevancy of motive to the validity of such regulations has been questioned, Stephenson v. Binford, 287 U. S. 251, 276. See, however, Thompson v. Consolidated Gas Utilities Corp., 300 U. S. 55, 69-70, where the Court invalidated a state proration order “shown to bear no reasonable relation either to the prevention of waste or the protection of correlative rights . . . .”