Transcontinental Gas Pipe Line Corp. v. State Oil & Gas Board

474 U.S. 409, 106 S. Ct. 709, 88 L. Ed. 2d 732, 1986 U.S. LEXIS 47
Supreme Court of the United States·Decided March 24, 1986·No. 84-1076·Published·Cited by 98 cases

Opinions

[411]*411Justice 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 (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 (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 [412]*412that 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, [413]*413while 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.

[414]*414I — I h — I

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 hereafter engaged in the business of purchasing oil or gas from owners, operators, or producers shall purchase without discrimination in favor of one owner, operator, or producer against another in the same common source of supply.”

Rule 48 never before had been employed to require a pipeline actually to purchase noncontract gas; rather, its sole purpose appears to have been to prevent drainage, that is, to prevent a buyer from contracting with one seller and then draining a common pool of all its gas. See 457 So. 2d, at 1306. The Gas Board conducted a 3-day evidentiary proceeding. It found Transco in violation of Rule 48, and, by its Order No. 409-82, filed Oct. 13, 1982,1 ordered Transco to start taking gas “ratably” (i. e., in proportion to the various owners’ shares) from the Harper Sand pool, and to purchase the gas under nondiscriminatory price and take-or-pay conditions.

Transco appealed the Gas Board’s ruling to the Circuit Court of the First Judicial District of Hinds County, Miss.

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Transcontinental Gas Pipe Line Corp. v. State Oil & Gas Board, 474 U.S. 409, 106 S. Ct. 709, 88 L. Ed. 2d 732, 1986 U.S. LEXIS 47 (1986).

474 U.S. 409 (Transcontinental Gas Pipe Line Corp. v. State Oil & Gas Board) — published by Counsel Stack Legal Research, free access to 12M+ legal documents.

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