Phillips Petroleum Company v. Wisconsin/Dissent Clark

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United States Supreme Court

347 U.S. 672

Phillips Petroleum Company  v.  Wisconsin

 Argued: April 6, 7, 1954. --- Decided: June 7, 1954

Mr. Justice CLARK, with whom Mr. Justice BURTON concurs, dissenting.

Perhaps Congress should have included control over the production and gathering of natural gas among the powers it gave the Federal Power Commission in the Natural Gas Act, but this Congress did not do. On the contrary, Congress provided that the Act 'shall not apply * * * to the production or gathering of natural gas.' Language could not express a clearer command, but the majority renders this language almost entirely nugatory by holding that the rates charged by a wholly independent producer and gatherer may be regulated by the Federal Power Commission. Nor does the Court stop there, for in the sweep of the opinion 'the rates 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' are covered under the Act. 347 U.S. 682, 74 S.Ct. 799, supra. (Emphasis supplied.) On its face, this language brings every gas operator, from the smallest producer to the largest pipeline, under federal regulatory control. In so doing, the Court acts contrary to the intention of the Congress, the understanding of the states, and that of the Federal Power Commission itself. The Federal Power Commission is thereby thrust into the regulatory domain traditionally reserved to the states.

The natural gas industry, like ancient Gaul, is divided into three parts. These parts are production and gathering, interstate transmission by pipeline, and distribution to consumers by local distribution companies. A business unit may perform more than one of these functions-typically, production and gathering in addition to interstate transmission. But Phillips' natural gas operations are confined exclusively to the first part-production and gathering. It has no interstate transmission or highpressure trunk lines and does not sell to distribution companies; and it does not, of course, distribute to the ultimate consumer. Its nine gathering systems merely bring the gas from its own and other producers' wells to its central plants in the producing fields so it can be rendered usable as fuel. Since there are no facilities for storage, the amount of gas, other than casinghead, #fn-s-s [1] produced and gathered each day depends on the day-to-day demands of the interstate pipelines, which in turn depend on weather and other conditions in consuming areas. Gas wells are cut on and off as the market demand for the gas requires. Gathering takes place by well pressure forcing the gas through numerous small pipes connecting each well with the central gathering plant or processing station. It is there that the gas first comes to a common 'header' and is processed for use as fuel. The processing of the gas at this central gathering plant is necessary to remove hydrocarbons, hydrogen sulphide and other foreign elements in order to permit its use as fuel. The plant operates only while the wells are producing. All of Phillips' operations, including the acreage from which the wells produce the gas, the wells themselves, the lines that connect with each of them and run to the central plant, form a closely knit unit that is entirely local to the field involved. After processing, the gas is immediately delivered to the interstate pipelines under long-term sales contracts.

The Commission found that '(t)hough technically consummated in interstate commerce, these sales (by Phillips to the pipelines) are made 'during the course of production and gathering," and that the sales 'are so closely connected with the local incidents of (production and gathering) as to render rate regulation by this Commission inconsistent or a substantial interference with the exercise by the affected States of their regulatory functions.' We believe that this finding is correct and that it should be approved by the Court.

If there be any doubt that Congress thought the 'production and gathering' exemption saved Phillips' sales from Federal Power Commission regulation, the Act's legislative history removes it. The Solicitor of the Commission, Mr. Dozier DeVane, at hearings in connection with a predecessor of the bill that finally became the Natural Gas Act, testified that the Federal Power Commission would have no jurisdiction over the rates for natural gas 'that are paid in the gathering field.' Hearings before Subcommittee of Committee on Interstate and Foreign Commerce on H.R. 11662, 74th Cong., 2d Sess., p. 28 (1937). The bill, he said, 'does not attempt to regulate the gathering rates or the gathering business.' Id., 34. See also, id., 42-43. The bill about which Mr. DeVane testified has been described as 'substantially similar to the Natural Gas Act,' and his views have been treated as authoritative by this Court. Federal Power Commission v. Panhandle Eastern Pipe Line Co., 1949, 337 U.S. 498, 505, 69 S.Ct. 1251, 1256, note 7, 93 L.Ed. 1499. See also Federal Power Commission v. East Ohio Gas Co., 1950, 338 U.S. 464, 472, 70 S.Ct. 266, 271, note 12, 94 L.Ed. 268. In the face of this as well as the Federal Power Commission's adherence to the DeVane views ever since its first cases on the subject, Columbian Fuel Corp., 2 F.P.C. 200 (1940), Billings Gas Co., 2 F.P.C. 288 (1940), and in the absence of any specific matter in the Act's legislative history refuting the DeVane views, the Court today erroneously finds that DeVane's 'testimony had little relevance here.' 347 U.S. 682, 74 S.Ct. 799, note 9, supra.

There is no dispute that Congress intended the Natural Gas Act to close the 'gap' created by decisions of this Court barring state regulation of certain interstate gas sales. The legislative history of the Act refers to two decisions: State of Missouri ex rel. Barrett v. Kansas Natural Gas Co., 1924, 265 U.S. 298, 44 S.Ct. 544, 68 L.Ed. 1027; Public Utilities Commission v. Attleboro Steam & Electric Co., 1927, 273 U.S. 83, 47 S.Ct. 294, 71 L.Ed. 549. See H.R.Rep.No. 709, 75th Cong., 1st Sess., pp. 1-2 (1937). But these cases had nothing to do with sales to interstate pipelines by wholly independent, unintegrated, and unaffiliated producers and gatherers, such as Phillips. Neither of the companies involved in those cases was engaged exclusively in production and gathering; both were producing and transportation companies, Kansas of natural gas, Attleboro of electricity; both Kansas and Attleboro sold to distributing companies in the course of interstate transmission. Thus, when the House Report, id., 1-2, expressed the Act's alim to regulate wholesales such as 'sales by producing companies to distributing companies,' and immediately thereafter cited the Kansas and Attleboro cases, the Report's unmistakable reference was to sales by an integrated 'producer-pipeline' to the local distributor. It could not refer to an independent producer and gatherer because, first, such an independent never sells to local distributors and, secondly, the two cited cases do not support a reference to such independents. That Congress aimed at abuses resulting in the 'gap' at the end of the transmission process by integrated and unintegrated pipelines and not at abuses prior to transmission is clear from the final report of the Federal Trade Commission to the Senate on malpractices in the natural gas industry. S.Doc. No. 92, 70th Cong., 1st Sess. (1935). This report was the stimulus for federal intervention in the industry. The Federal Trade Commission outlined the abuses in the industry which the 'gap' made the states powerless to prevent; the abuses were by monopolistically situated pipelines which gouged the consumer by charging local distribution companies unreasonable rates. The Federal Trade Commission did not find abusive pricing by independent producers and gatherers; if anything, the independents at the producing end of the pipelines were likewise the victims of monopolistic practices by the pipelines.

And our decisions have certainly indicated that the 'gap' was at the distribution end of the transmission process. Thus, in Federal Power Commission v. Hope Natural Gas Co., 1944, 320 U.S. 591, 64 S.Ct. 281, 291, 88 L.Ed. 333, the Court observed that 'the Federal Power Commission was given no authority over the 'production or gathering of natural gas" and that the producing states had the power 'to protect the interests of those who sell their gas to the interstate operator.' Id., 320 U.S. 612-613, 614, 64 S.Ct. 291, 292, 293. (Emphasis supplied.) Five years later, in Federal Power Commission v. Panhandle Eastern Pipe Line Co., supra, the Court said its approval of the Commission's inclusion of the cost of production and gathering facilities of an interstate pipeline in the latter's rate base 'is not a precedent for regulation of any part of production or marketing.' 337 U.S. at page 506, 69 S.Ct. at page 1257.

By today's decision, the Court restricts the phrase 'production and gathering' to 'the physical activities, facilities, and properties' used in production and gathering. Such a gloss strips the words of their substance. If the Congress so intended, then it left for state regulation only a mass of empty pipe, vacant processing plants and thousands of hollow wells with scarecrow derricks, monuments to this new extension of federal power. It was not so understood. The states have been for over 35 years and are now enforcing regulatory laws covering production and gathering, including pricing, proration of gas, ratable taking, unitization of fields, processing of casinghead gas including priority over other gases, well spacing, repressuring, abandonment of wells, marginal area development, and other devices. Everyone is fully aware of the direct relationship of price and conservation. Federal Power Commission v. Panhandle Eastern Pipe Line Co., supra, 337 U.S. at page 507, 69 S.Ct. at page 1257. And the power of the states to regulate the producer's and gatherer's prices has been upheld in this Court. Cities Service Gas Co. v. Peerless Oil & Gas Co., 1950, 340 U.S. 179, 71 S.Ct. 215, 95 L.Ed. 190; Phillips Petroleum Co. v. State of Oklahoma, 1950, 340 U.S. 190, 71 S.Ct. 221, 95 L.Ed. 204. There can be no doubt, as the Commission has found, that federal regulation of production and gathering will collide and substantially interfere with and hinder the enforcement of these state regulatory measures. We cannot square this result with the House Report on this Act which states that the subsequently enacted bill 'is so drawn as to complement and in no manner usurp State regulatory authority.' H.R.Rep.No.709, supra, 74 S.Ct. 801.

The majority rely heavily on Interstate Natural Gas Co. v. Federal Power Commission, 1947, 331 U.S. 682, 67 S.Ct. 1482, 91 L.Ed. 1742, to support their position. To be sure, there is language in that case which on its face seesm to govern the present case. Id., 331 U.S. 692-693, 67 S.Ct. 1488. But that case involved a materially different fact situation. The Interstate Gas Company was already subject to Federal Power Commission jurisdiction because of its interstate pipeline operations; and the company was affiliated with one of the pipelines to which it sold. In addition, the Court emphasized the fact that in Interstate no claim to state regulatory authority was made. Indeed, the Interstate Company had successfully resisted state attempts to regulate. Hence there was no possibility of conflict in that case; either the Federal Power Commission moved in or Interstate would have remained unregulated. But perhaps a more significant factual distinction in terms of the Court's reasoning in that case rests in the fact that of the total volume of gas Interstate sold, roughly 42% had been purchased from others who had produced and gathered it. This 42% was almost enough to supply all the needs of the three interstate pipelines to which Interstate sold. And the 42%, already gathered and processed, moved into and through Interstate's branch, trunk, and main trunk lines. In short, Interstate was the equivalent of a middleman between gatherers and the pipelines for almost all the gas it sold to the pipelines and performed the function of transporting the gas it purchased from other gatherers through its branch, trunk, and main trunk lines. Phillips performs no such middleman or transmission function. In addition, the late Chief Justice Vinson in that case specifically stated that: 'We express no opinion as to the validity of the jurisdictional tests employed by the Commission in these cases (Columbian and Billings, supra).' 331 U.S., at pages 690-691, 67 S.Ct. 1487, note 18. Since it was in those cases that the Federal Power Commission established the policy of declining jurisdiction over the rates charged by wholly independent producers and gatherers, it is difficult to see how Interstate can control the present case.

If we look to Interstate for guidance, we would do better to focus on the following words of the late Chief Justice:

'Clearly, among the powers thus reserved to the States is the power to regulate the physical production and gathering of natural gas in the terests of conservation or of any other consideration of legitimate local concern. It was the intention of Congress to give the States full freedom in these matters. Thus, where sales, though technically consummated in interstate commerce, are made during the course of production and gathering and are so closely connected with the local incidents of that process as to render rate regulation by the Federal Power Commission inconsistent or a substantial interference with the exercise by the State of its regulatory functions, the jurisdiction of the Federal Power Commission does not attach.' 331 U.S., at page 690, 67 S.Ct. at page 1487.

Even a cursory examination of Phillips' operations reveals how completely local they are and how incidental to them are its sales to the pipelines. Moreover, federal regulation of these sales means an inevitable clash with a complex of state regulatory action, including minimum pricing. These were matters found by the Federal Power Commission in language obviously patterned after the above quotation. The clear import of the cited words is that Federal Power Commission jurisdiction 'does not attach' in such a situation.

In the words of Mr. Justice Jackson, we believe 'that observance of good faith with the states requires that we interpret this Act as it was represented at the time they urged its enactment, as its terms read, and as we have, until today, declared it, viz. to supplement but not to supplant state regulation.' Federal Power Commission v. East Ohio Gas Co., supra, 338 U.S. at page 490, 70 S.Ct. at page 280.


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