Cities Service Gas Co. v. Peerless Oil & Gas Co.
Headline: Oklahoma power to set minimum wellhead gas prices upheld, allowing state regulators to raise field prices and force a pipeline to buy from smaller producers to prevent waste and discrimination.
Holding: The Court affirmed that Oklahoma may lawfully set a minimum wellhead price and order an interstate pipeline to buy gas ratably from another producer to prevent economic and physical waste.
- Allows states to set minimum wellhead prices for gas.
- Permits pipelines to be ordered to take gas ratably from other producers.
- Protects producers without pipeline outlets from low, discriminatory prices.
Summary
Background
Cities Service, a pipeline operator that owned many wells in the Guymon-Hugoton gas field, appealed orders from the Oklahoma Corporation Commission. Peerless, a nearby producer without a pipeline outlet, asked the Commission to require Cities Service to connect and buy its gas or to set a field-wide price. The Oklahoma Land Office also intervened, saying low prices threatened the field’s future and produced unfair results. After hearings with producers and purchasers, the Commission found there was no competitive market, that integrated owners could dictate prices, and that low prices caused both economic and physical waste. It set a minimum wellhead price of 7.5 cents per thousand cubic feet and ordered Cities Service to take gas ratably from Peerless at that price.
Reasoning
The Court considered whether Oklahoma statutes and the Constitution allowed the Commission’s action. It relied on state laws dating from 1913 and 1915 that authorize ratable taking, price setting after notice and hearing, and conservation to prevent waste. The Court found ample evidence that low field prices harmed conservation and that the orders were substantially related to legitimate state interests. The Court also rejected Cities Service’s claims under federal due process and equal protection principles and concluded the orders did not unlawfully burden or discriminate against interstate commerce on this record.
Real world impact
The decision permits a state regulator to set minimum wellhead prices and compel a pipeline to buy from another producer to protect a common gas source. Producers without pipeline outlets can gain protection against low, discriminatory prices. The opinion notes that wellhead price is only part of delivered cost, so consumer prices may be little affected, while some industrial buyers of cheap gas could face higher costs. The Federal Power Commission did not participate, and whether federal law might authorize different regulation was not decided.
Dissents or concurrances
Justice Black wrote separately, stating the federal constitutional questions were frivolous and that the appeal should be dismissed.
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