Natural Gas Pipeline Co. of America v. Corporation Commission , 272 P.2d 425 ( 1954 )

ARNOLD, Justice.

Certain mineral owners in Texas County, Oklahoma, filed an application before the Corporation Commission for an order determining the minimum price at which gas produced from the Guymon-Hugoton field may be first purchased or sold. Certain producers and purchasers of gas from said field filed their protests and responses. From the Commission’s order fixing minimum price at which such gas may be sold Natural Gas Pipeline Company, Michigan-Wisconsin Pipe Line Company and Panhandle Eastern Pipeline Company have filed their separate appeals, here consolidated.

On behalf of the applicant mineral owners the evidence reasonably tends to show that the Corporation Commission by its order No. 19514 issued effective February 1, 1947, fixed tha minimum price at which gas may be produced and taken from the structure in this field at 70 per thousand cubic feet; that since that date the price of all other industrial fuels has substantially increased; that comparing the other industrial fuels in most common use, such as coal, residual, crude oil, kerosene, and gasoline with gas on an energy content basis the fuel source cost of natural gas is about one third that of coal (the lowest in price per energy content unit of all the other industrial fuels) and the other fuels increase in cost per energy content unit to the highest, gasoline, which is almost fourteen times greater; that natural gas since 1938 has been lower in price in comparison to its heat energy content than any other fuel because gas has not been on a competitive market while the other fuels are and have been; that in 1950 natural gas supplied 20.94% of the total of mineral energy supplied, produced, and used as fuel in the United States and received only 5.16% of the total dollar income for all energies at their source; that in order to have the same price differential between gas and other fuels as existed in 1947 when the former order of the Commission was entered the price of natural gas would have to be set at 12.640 per thousand cubic feet that to compare favorably with other industrial fuels the price should be 25 or 30 cents per 1000 m. c. f.; that increasing the price of gas as taken from the structure would tend to conserve gas and prevent physical waste in that the higher price would allow wells in fringe areas of the field to be drilled and operate at a profit whereas if a price increase is not given such wells cannot economically and will not be drilled resulting in non-development of the field, loss to the owners in such fringe areas and damage to their rights in the common source of supply; that better and more expensive methods of production would be economically feasible which would tend to conserve gas and eliminate the necessity of blowing out the wells to clean them; that the entire Hugotofi field is a single reservoir extending from the Texas panhandle across Texas County and into Kansas; that if the fringe wells are not drilled the gas will migrate to existing wells, causing loss to the fringe owners; that the higher price is necessary while marketing facilities are available and if fringe wells were not drilled until the rest of the field was abandoned very little gas would be left in the reservoir and there would be no marketing facilities available therefor; that about 99% of the gas produced in the Guymon-Hugoton field is transported out of the state of Oklahoma; that the land owner who owns a quarter section of land gets approximately $1 per day on the average well royalty; that the field as a whole is producing more gas than it did five years ago but the individual wells are producing less; that gas of the same quality is sold by different producers in this field at prices varying from the 70 minimum now in effect to 9.957810; that none of the mineral owners were consulted as to the price they would receive for their gas and that they are dissatisfied with the prices they are receiving and want a uniform price throughout the field; that since 1946 there has been a tremendous increase in the demand for natural gas as a fuel and the costs of production have likewise materially increased; that since the 70 minimum was fixed several contracts for gas have been negotiated at a price of 9.80 per thousand cubic feet; that to protect the interest of the State of Oklahoma a price for gas in Oklahoma should be fixed which would produce the maximum revenue consistent with the policy of maintaining the markets; that a price of 9.82620 would not affect the market, would allow thin acreage to be developed and produced preventing migration and allowing full development of the field, thus protecting the correlative rights of the owners.

Over the objection of other producer re-, spondents in the hearing Phillips Petroleum ¡Company .■ was allowed to introduce evidence which reasonably tends to show that ,in the Guymon--Hugoton. field it is pri-•ma'rily a producer of gas from its own wells and leases; that it does not sell its .gas at the wellhead but, under - commitment of. long-term, contracts with Michigan-Wisponsin Pipeline Company ,and .Panhandle Eastern -Pipeline Company it ■ gathers the gas which it produces in its Own gathering lines, moves the gas to its two processing plants,- one in Hansford County and the other in Sherman County, .Texas, about a mile and a quarter south of the Oklahoma. line, and there removes liquid .hydrocarbons and delivers the dry or residue gas to said companies; that in addition to the gas which it produces Phil- . lips has contracts with certain other producers by which it purchases gas at their .wellheads which gas. it gathers, processes, and sells in the same manner as the gas from its. own wells and leases; that the .production from its own leases is 14% of the total production of the field and the , gas it purchases is 4.4% of the field total, .making, a total of gas which it produces or purchases of 18.4% of the field total; that the geographical location of the processing plants across the state line is • a mere incident, they being so located because the site is more centrally located in respect to- Phillips’ gathering operations in. both Texas and Oklahoma; that the -value of the liquid hydrocarbons extracted from the raw. gas by Phillips in these •plants varies with market conditions as .does the cost of gathering the gas; that ,in .the process of -gathering and extraction ;some of the gas is used for fuel purposes and some, is’lost through shrinkage; that .after allowing -depreciation to date Phil- - lips-has invested in the Hansford and Sherman plants and the gathering systems serving them’ in excess of 19' million dollars; that all of the’ gas produced and purchased by Phillips in this field is sold after the extraction of liquid hydrocarbons as residue gas elsewhere than at the 'wellhead; that the acreage from which it produces and purchases gás is dedicated for the -life of- the production to the performance of its contracts with Panhandle and Michigan-Wisconsin; • that after processing at these plants at Hans-ford and Sherman the residue gas is delivered into the interstate pipelines of these two companies; that the contracts with both Panhandle and Michigan-Wisconsin provide in great detail as to how the gas shall be processed and the constituents and heat energy content of the residue gas delivered to them; that besides Phillips only Panoma and Plains Natural Gas Company produce, gather, and -process their own gas in this field and sell it in interstate commerce; that Phillips is the only company in the field that both buys gas at the wellhead for processing in addition to processing its own gas; that the gathering and processing of the gas produced in Oklahoma is part of one continuous overall production; that the value of the products extracted from the gas in Oklahoma from this field, although a fluctuating figure, about equal's the cost of gathering and the cost of processing; that in order for Phillips to obtain the equivalent of 9.8262 cents per thousand cubic feet at the wellhead for the gas which it produces it must receive 9.8262 cents for the residue gas after processing; that if Phillips does not obtain such price for residue gas but is forced to sell it at the price called for by its contracts with Panhandle arid Michigan-Wisconsin such a loss would result that Phillips would be forced to close down its producing, gathering, and processing operations,; that there is no other market for this gas; that if Phillips were forced to construct another processing plant inside the borders of Oklahoma .the unit cost would be much higher than it is under the present arrangement whereby the same plants can process both Oklahoma, and Texas gas; that the total cost of gathering and processing when deducted from the value received for the liquid hydrocarbons extracted leaves only a minute fraction of a cent for earning rate on the investment; that out of 1000 wells currently producing in this’field gas is sold at the wellhead from only 141 of them and the remaining gas produced in this ■field by all’ companies- is • sold at points •elsewhere than at the wellhead.

■ Cities- Service Gas Company, Northern Natural Gas Company, and Natural Gas Company introduced stipulations outlining their, respective operations and showing that they purchased both raw gas at the wellhead and processed gas and sold most of such gas in interstate commerce. The various contracts and amendments or modifications thereof between Phillips, Panhandle Eastern, and Michigan-Wisconsin were introduced in evidence.

The Commission entered its findings to the effect that since the date of its last order in 1947 fixing the minimum price of gas at the wellhead at 7 cents commodity prices in general and the use value of gas had so increased that the sale of gas from said field at any price less than 9.8262 cents measured at the wellhead at a pressure base of 14.65 pounds absolute per square inch causes both physical and economic waste; that the taking of gas at the price now prevalent causes a less return to royalty owners and the State of Oklahoma, results in inequitable taking from the common source of supply and in discrimination against various producers in the field; that only a small portion of the gas produced in the field is actually sold at" the wellhead; that much of the gas is gathered and liquid hydrocarbons extracted, the residue being sold at the conclusion of processing; that the value received by the processor for the liquid hydrocarbons extracted does not exceed the 'cost of gathering and processing the gas and represents a valuable service to the purchaser; that' to realize a price equivalent to and not less than 9.8262 cents per thousand cubic feet at the wellhead such producer and processor must receive for such residue gas a price of not less than 9.8262 cents; that to prevent waste, to protect correlative rights, and insure the greatest ultimate recovery of gas from the common reservoir gas should not be permitted to be taken from the structures of said field at a price less than 9.8262 cents; that a minimum price order cannot be made fully effective un"less- the 'manner -in which- producers '.of processed gas shall: obtain süch price .is provided; and entered -its order that- no gas shall be produced from, said field at a price less than 9.8262 cents per thousand ■cubic feet if sold at the wellhead or on the lease or drilling unit or a price equivalent to 9.8262 cents if sold-off thé lease or drilling unit or- otherwise" utilized; that the minimum price of gas sold' at the conclusion of gathering but' without extraction of hydrocarbons shall be -9.8262 cents plus the reasonable cost 'of gathering; and that processed or residue gas shall be sold at a price of not less than 9.8262 cents. ' .

The contentions of the various plaintiffs in error may be broadly grouped under three general propositions, each with several subheads and arguments which will be discussed in their proper place. These three propositions are: (1) that the order of the Commission is not predicated upon adequate findings and is not supported by the evidence; (2) that the order purports to regulate interstate commerce and imposes an unlawful embargo and restriction thereon; (3) the Commission ■ has no power or authority, : express or implied, to fix the minimum price at which residue gas, only one of the constituents of raw gas, shall be sold. . •

Under the first general- proposition plaintiffs in error allege that the findings of the Commission are inadequate as basic findings of fact to support the conclusions expressed in the order as findings in that the Commission’s finding as to the existence of physical waste is a final conclusion, not a basic fact finding; "that the finding of physical waste is not supported "by the evidence; that the finding of. economic waste is not supported.- by the evidence; that the Commission cannot fix the price of commodity sold in interstáte commerce merely to increase the profits of the sellers of such'■ commodity; that the findings that under existing price there is loss to the royalty owners- and the State do not justify the order; the order goes beyond the necessities of the case; the finding that the price now prevalent results in ■inequitable taking from the common source of supply is without support of adequate finding's and evidence; the finding that the prevalent price results in discrimination against various producers is unsupported by findings of basic facts and the evidence; the finding that the production of gas is in excess of market demand is without foundation in findings of basic facts or the evidence; a mere finding that the order is for the prevention of waste, the protection of correlative rights, and in the interest of the state is not sufficient basis for the exercise of jurisdiction; the order purports to fix the earnings of gatherers and processors of gas which is beyond the scope of the Commission’s jurisdiction; the order is a special order; there is no substantial evidence to sustain the finding that the minimum price for residue ges should be identical with the wellhead price for raw natural gas.

A review of the evidence outlined above demonstrates that none of these contentions are well founded. There is substantial evidence to the effect that the prevalent price of raw gas in this field (seven cents per thousand cubic feet as fixed by previous order) will not, under present economic conditions prevailing, such as cost of labor and materials, permit the drilling of wells in fringe areas, resulting in non-development of the field, migration of gas to wells in production to the loss of landowners in fringe areas, and incomplete exhaustion of the gas-bearing structures, all to the loss of landowners, producers, and the State of Oklahoma generally. Such facts constitute both physical and economic waste and amply justify the Commission’s order on that factor. Certainly such facts clearly show inequitable taking from the common source of supply, irreparable harm to correlative rights of owners, loss to royalty owners, and loss to the state and are sufficient to sustain the interest of the state in correcting such abuses. This is a regulatory order based upon the interest of the State in conserving its natural resources; it is not an order designed merely to increase the earning of producers and processors. Such an order is a proper exercise of the state’s police power. Cities Service Gas Co. v. Peerless Oil & Gas Co., 203 Okl. 35, 220 P.2d 279, affirmed 340 U.S. 179, 71 S.Ct. 215, 95 L.Ed. 190. That it may have such effect is a mere incident.

The evidence that the value of the liquid liyctrocarbons extracted just about balances the cost of gathering and processing the raw gas is uncontradicted. Certainly such processing constitutes a valuable service to the purchaser. The contracts introduced in evidence are very precise as to exactly what constituents shall remain in the residue gas contracted for. To have any regulation at all, to insure that all gas produced from the structures in this field shall be sold at the same minimum price it was necessary to fix the price of residue gas and the evidence is substantial to show that such price must be the same as that of raw gas to attain this end. See Phillips Petroleum Co. v. Oklahoma, 340 U.S. 190, 71 S.Ct. 221, 95 L.Ed. 204.

The findings of the Commission are supported by basic facts and the order of the Commission is based on substantial evidence.

Under the second and third broad groups of contentions plaintiffs in error claim that the order fixing the price of residue gas places a burden upon interstate commerce; that such residue gas is dedicated and destined for interstate movement even before the production of the natural gas of which such residue gas is a constituent; that there is a steady, uninterrupted flow from the wells to the gathering system through the processing plant into the pipeline systems and ending at markets in states outside Oklahoma; that such order was not made in any economic interest but for the interest of those producers who also process gas before delivery, and thus imposes an embargo and unlawful regulation on interstate commerce, is arbitrary and discriminatory; the order constitutes an unwarranted and unnecessary invasion of property rights under the guise of the exercise of the police power and deprives plaintiffs in error of their property without due process of law; the order impairs the obligation of contracts, takes plaintiffs in error’s property for private use; there is no local interest which outweighs the national interest in burdening gas sold interstate with state price-fixing regulations; the Commission seeks by this order to exercise extraterritorial jurisdiction; the price fixed for residue gas is not supported by substantial evidence.

The order of the Commission fixing a price of 7 cents per thousand cubic feet at the wellhead in the Guymon-Hugo-ton field was involved in the cases of Cities Service Gas Co. v. Peerless Oil & Gas Co., supra; Phillips Petroleum Co. v. Oklahoma, supra, and Natural Gas Pipe Line Co. of America v. Panoma Corporation, Okl. Sup., 271 P.2d 354. The same field and the same parties as here were involved and the same arguments were made and the same authorities cited in support thereof as here. These cases are decisive of the point that the Commission under its regulatory power for conservation purposes has the power to fix a minimum price as a condition precedent to the taking of natural gas from the structures; that such minimum price does not place an embargo or unlawful restriction upon interstate commerce, unlawfully impair the obligations of contracts, or violate due process. And as said in the Phillips Petroleum Co. case, supra, by the United States Supreme Court, the Commission may order a producer such as Phillips who does not sell raw gas at the wellhead to obtain the equivalent of the fixed minimum price when the gas is sold after processing, because the Commission must be able to regulate the operations of all producers or there is little point in regulating any.

The only new question presented here is: may the Commission establish a method or formula by which it can be ascertained whether a producer who does not sell raw gas at the wellhead obtains the equivalent of the fixed minimum price of raw gas as taken from the structures? and if so and to implement the obtaining of such equivalent price can the Commission add to the cost of raw gas which is not processed before sale but is sold off the lease the reasonable cost of gathering, or in case the raw gas is processed for the removal of liquid hydrocarbons -before actual delivery to the purchaser, fix the price of the residue gas being only one constituent of the raw gas, so delivered?

Appellants concede that under their contracts the residue gas which they purchase is dedicated to the fullfillment of such contracts even before the production of the natural gas of which such residue gas is a constituent is produced and that such gas can be sold to no one else. This, of course, amounts to a sale of the residue gas in place; the sale.is made before any movement of any kind starts and before anything in the nature of interstate commerce occurs, regardless of the acts required to be performed before the residue gas is separated from other constituents of the raw gas and regardless of the point of delivery to the purchaser. As said in Natural Gas Pipe Line Co. of America v. Panoma Corporation, supra, the processing of the raw gas amounts to a manufacturing operation and represents a valuable service to the purchaser. Under their contracts purchasers are able to buy a manufactured product for which they have a ready sale without necessitating large investment in processing equipment to .make the raw product salable.

It seems self-evident and axiomatic that if the Commission has the power to regulate by fixing minimum prices it has the power to establish a formula and method by which it may be ascertained and determined whether all producers in the field are obtaining such minimum price, as it is their inescapable duty to do. It is only necessary that a formula or method so established be reasonable and practically effective to carry out the purpose for which it is made. Under the evidence here it is clearly shown that the market for liquid hydrocarbons is a competitive and fluctuating one. It would seem highly impractical to attempt to fix a price for any one or all of such liquid hydrocarbons. It is also shown that by the very nature of natural gas its market is fixed and stable and amounts almost to a monopoly in a limited way; that because of the great expense and in-vestmept necessary for adequate, distributing lines for moving the gas to the ultimate user a seller of residue gas must have a dedicated and guaranteed source of supply and franchise for more or less exclusive sale. Such requirements, of course, keep the sale of residue natural gas as a fuel off a competitive market to a great extent.

The evidence shows that the average return over a long period from the sale of the liquid hydrocarbons extracted from the raw gas just about balances the cost of gathering and processing; sometimes the sale amounts to more and quite often amounts to less. As a practical matter it seems that the only feasible method to carry out the purpose of the Commission in regulating .the taking of natural gas from the structures by all producers, regardless of their particular mode of operation, would be to fix the price of the residue gas, which is ■the only • fairly stable constituent of raw gas. . " . .

All parties- concede- that under the cases cited above the Commission can fix the price of gas as taken from the structure. Tf it can fix the price of the whole it can fix the price of all of the parts constituting the whole. If it is not practically feasible to fix the price of all the parts' constituting the whole it can fix the price of that constituent which can be controlled, .provided it doe's it in a. reasonable manner and so that the overall purpose is carried out. Under the' evidence it seems that the Commission established the only formula which it could establish that would be workable and not be discriminatory or arbitrary. Under the .formula: established the producer who sells .raw gas without processing off the lease obtains the minimum price plus the reasonable cost of gathering; mere arithmetical. computation shows that- only by adding the cost of gathering to the minimum price can such a producer obtain the equivalent of such minimum price at the wellhead. The same thing is true as to residue gas. As it is shown that the liquid hydrocarbons counterbalance the cost of gáthering and processing (which as above stated represents a valuable service.to the purchaser).the only practical way to ensure that a producer.who processes raw gas .before actual delivery thereof to the purchaser ■will obtain the equivalent price of raw gas at the wellhead is to fix the price of residue gas as the same price of raw gas. As a practical matter this allows the purchaser of residue gas to receive a manufactured and processed product for, which he has a sale at the same price he would have to pay for the raw product. If, for example, a furniture dealer could obtain finished furniture for sale at the same price he could obtain unfinished lumber he would think he had a rare bargain. The point of delivery of the finished product is a mere incident. The sale is made before anything in the nature of interstate commerce occurs. The order thus has no extraterritorial effect.

We think the Commission has the power to fix the price of residue gas as a necessary incident, under the facts shown in this record, to the regulation of the sale of raw gas as taken from the structures, and the formula and method established is both reasonable and practical.

The order of the Commission is based upon basic findings of fact and is supported-by substantial evidence.

Affirmed..

JOHNSON, V. C. J., and WELCH and CORN, JJ., concur. WILLIAMS, J.,. concurs by reason of stare decisis. HALLEY, C. J., and DAVISON, O’NEAL and BLACKBIRD, JJ.,. dissent.