Lone Star Gas Co. v. Texas

Background

The Railroad Commission of Texas set a new maximum wholesale rate of 32 cents per thousand cubic feet of natural gas, down from 40 cents. Lone Star Gas Company, which operates about 4,000 miles of pipeline serving roughly 300 Texas and Oklahoma towns and sells to mostly affiliated local distributors, fought the order. A Texas trial jury found the rate confiscatory and blocked enforcement; the Texas Court of Civil Appeals reversed, saying the company failed to segregate interstate and intrastate operations. The case reached this Court on appeal.

Reasoning

The key question was whether Texas exceeded its power by treating the company’s Texas and Oklahoma operations as one integrated system and whether the 32¢ rate was so low as to be confiscatory. The Court held the Commission did not regulate interstate commerce improperly and could consider the integrated system when calculating a fair Texas rate. The Court ruled that the company was entitled to challenge the Commission’s findings using the same integrated-system evidence the Commission used, and that the state appellate court erred in throwing out the company’s case simply because its later segregation evidence was imperfect. The Court reversed the state appellate judgment and sent the case back for further proceedings consistent with these principles.

Real world impact

The decision lets a utility use system-wide evidence to attack a state rate order when the regulator properly relied on the integrated system. It limits state courts from requiring a rigid segregation of interstate and intrastate operations where the regulator reasonably treated the properties as one system. The ruling sends the dispute back to the lower courts for further fact-finding on value, expenses, and return, so the outcome on the final rates is not yet the last word.

Dissents or concurrances

One Justice (Black) dissented; another Justice (Cardozo) did not participate. The opinion does not record the dissenting reasoning in detail.