Opinion ID: 1129782
Heading Depth: 1
Heading Rank: 6

Heading: The Board's Lack of Authority To Regulate Prices or Proscribe Price Discrimination

Text: Order No. 409-82 does not in clear and unequivocal language prohibit Transco's price discrimination. The order does not specifically order Transco to pay all non-contract owners in the common pool the same $7.907 per mmbtu as Transco is paying Getty. The order merely provides that Transco is ordered (a) to comply with Statewide Rule 48, (b) if it takes natural gas from the Harper Sand Gas Pool, to ratably take from the wells producing from the common pool, (c) to ratably take and purchase gas without discrimination in favor of one owner, operator or producer against another in the said common source or pool, and (d) if it elects to take from the pool, to ratably take and purchase without discrimination in favor of the operators Getty and Tomlinson against Coastal, the Fairchilds, and Inexco. It is tempting to speculate regarding the reason the Board stuck so close to the exact language of Rule 48 and, by way of contrast, eschewed use of any language expressly proscribing price discrimination and requiring that Transco pay one and all the $7.907 per mmbtu price. Such a proscriptive order would hardly wash when Transco is paying Tomlinson $6.511 per mmbtu, and Florida Exploration $8.4066, and Sabine $5.00; and so forth  all in the same common source of supply. More fundamentally, the Board's choice of wording in Order No. 409-82 telegraphs its own uneasiness about its authority to regulate prices or prohibit price discrimination. Notwithstanding the arguable vagueness of the order, everybody has construed it to proscribe Transco from further discrimination in price paid producers in the common pool. For example, Coastal's brief before this Court states At the trial, we all knew that the issue was price... The record is literally replete with statements by Transco's counsel and witnesses that the only issue was price.  (Brief of Coastal Exploration, Inc., served November 29, 1983, at 66) Our review of the record and the course of proceedings before the Board, and subsequently the Circuit Court, together with our study of the briefs of the parties, convinces us that price is and from the outset has been a major issue in this controversy. It is in this context that we turn to Transco's next argument, to-wit: Assuming arguendo that the Oil and Gas Board has lawfully required ratable taking, the Board has no authority to regulate or proscribe differences in price. In large part, we agree. Our approach is the same as before. The Board has only that authority which the Legislature has constitutionally and lawfully vested in it. Our question becomes, has the Legislature vested the Board with authority to fix wellhead or first sale prices purchasers such as Transco must pay for the gas they take? Before it may be sustained, the price regulation feature of Order No. 409-82 must find its undergirding authority in the enactments of the Legislature. Masonite Corporation v. State Oil and Gas Board, 240 So.2d 446, 449 (Miss. 1970). Order No. 409-82 may not be validated solely by reference to the language of Rule 48 for the obvious reason that the Board may not give one of its rules a construction beyond the scope of the enabling authority emanating from the Legislature. Our point of inquiry is not whether the State of Mississippi acting through its duly constituted Legislature has the authority to engage in price regulation. This authority lies well within what is commonly referred to as the police power of the state. Nebbia v. New York, 291 U.S. 502, 54 S.Ct. 505, 78 L.Ed. 940 (1934); Mississippi Milk Commission v. Vance, 240 Miss. 814, 855, 129 So.2d 642, 660 (1961). We are concerned with the narrower question whether the Legislature has vested the Board with authority to make or enforce price regulation measures such as those found in Order No. 409-82. In search of the answer we again consult the Mississippi Oil and Gas Conservation Act of 1948, as amended, and that source only. Keep well in mind the general policy of this state and this nation: that prices for the sale of goods or services ought to be the product of an arms-length bargain in particular and of the market place in general. Price regulation measures remain the exception. Because they are the exception and because they do violence to the generally valid values and economic realities represented by such catch phrases as freedom of contract and supply and demand, price regulation measures must be authorized in clear and unmistakeable language. The authority to regulate prices is a drastic departure from the norm. It may never be left to implication. If it has not been expressed, it does not exist. This state today regulates the price paid by the consumer for electricity, natural gas and telephone service. Insurance premiums are also the subject of state regulation. In each of these instances the authority to regulate is delegated to the administrative agency in clear and unmistakable language. A familiar example of this from the not too distant past is the Mississippi Milk Commission Act, Senate Bill No. 1757, chapter 155, Laws of 1960. Mississippi Milk Commission v. Vance, 240 Miss. 814, 860, 129 So.2d 642, 662-663 (1961). Against this backdrop we regard the stark contrast presented by the Mississippi Oil and Gas Conservation Act of 1948. First, we find no mention of a need to regulate wellhead sales prices in the declaration of policy in Section 53-1-1. Beyond that, there is no such authority provided in Section 53-1-17, the statute enumerating the lawful powers of the Board. Not even the newly enacted Section 53-1-17(f) [14] provides any such authorization. Indeed, the word price is not used, nor any of its synonyms. The only mention of the term price in any legislative language empowering the Board appears in Section 53-1-17(c)(17), to wit: To make such determinations of oil and/or natural gas maximum lawful ceiling prices as allowed by federal or state law. The price regulation feature of Order No. 409-82 obviously is not a determination of maximum lawful ceiling prices within Section 53-1-17(c)(17). As indicated at the outset, we are concerned here with deregulated gas. Turning to the history of the Conservation Act and the Board's experience with it, we again find no hint that the Board has heretofore considered that it had price fixing authority. In part this might be explained by the pre-1978 federal preemption of the pricing of wellhead first sales. Northern Natural Gas Co. v. State Corporation Commission of Kansas, 372 U.S. 84, 91-92, 83 S.Ct. 646, 650-51, 9 L.Ed.2d 601, 607 (1963); Phillips Petroleum Company v. Wisconsin, 347 U.S. 672, 682-84, 74 S.Ct. 794, 799-800, 98 L.Ed. 1035, 1047-48 (1954). Whatever the reason  because Natural Gas Act of 1938 had preemptive effect, because such price regulation is not needed to give owners adequate and reasonable protections against the perceived evils of drainage, or because collectively the Legislature never thought of the matter, the outcome determinative fact is that the Legislature simply has not vested the Board with authority to fix wellhead first sale prices of natural gas. This is so whether the price fixing be done directly or under the ruse of prohibiting discrimination. Rule 48 has been promulgated for over thirty years. We are aware of no evidence prior to Order No. 409-82 that the Board has heretofore considered Rule 48 to proscribe price discrimination. The primary prior Board proceeding discussed in the briefs is In re Petition of Cenard Oil and Gas Co., Docket No. 60-64-92, Order No. 81-64, dated April 16, 1964. In that case the Board correctly found Southern Natural Gas Co.'s refusal to purchase gas from Cenard's two wells completed into a common reservoir at the same rate as it purchased from another to be a violation of Rule 48. The Board's order directing Southern Natural to take ratably and otherwise comply with Rule 48 makes no mention of price. We are loathe to tell an administrative agency how to construe its own rule. In this case the Board has determined to enforce an order in part at least unathorized by the enabling legislation. In this context it becomes our responsibility to advise the Board that the only lawful interpretation of the rule is that Transco, if it desires to take at all from a common source of supply, must take ratably. With respect to price, that is a matter of private negotiation between the parties. Any owner who wishes to enter into a contract with respect to the sale of his interest is free to do so. If for whatever reason, the owner wishes to play the market, he is entitled both to the benefits of a high demand market and the burdens of a market glut such as we have now. Any other interpretation of the rule is arbitrary, capricious and unlawful. All of this is particularly true when it is remembered that the statute has not authorized the Board to engage in price regulation and when it is likewise remembered that the dominant legislative concern was protecting producers and owners from the geological phenomenon of drainage, a far different matter from the economic phenomenon of price discrimination. Mississippi is not the only natural gas producing state which has determined that requiring ratable taking without any regulation of or prohibition on discrimination in price is a rational state policy. The Louisiana Supreme Court has interpreted language similar to Rule 48 in its common purchaser statute as applying only to quantity and not price. In State v. Arkansas Louisiana Gas Co., 227 La. 179, 78 So.2d 825 (La. 1955), Arkla was brought to trial for offering only five cents per one thousand cubic feet of gas (mcf) [15] to some when it was paying others 11¢/mcf for gas produced from the same pool. As in this case, the issue was price only. Louisiana's attorneys contended that the term purchase ... without discrimination in the statute must include price differences or else the statute would be meaningless. The court responded: ... We cannot find or discern any prohibition against `price' discrimination, and we cannot read such a prohibition into the statute... . It is manifest that the statute was obviously drawn to prohibit discrimination solely in the matter of quantity, to prevent unfair, discriminatory and inequitable abuses in the distribution of natural gas, not as to prices to be paid, but solely to give security to producers in that they would all stand on an equal footing insofar as access to a market through pipeline facilities would be made available. The statute sought to alleviate and prevent the abuses whereby some producers were favored as against others, some afforded markets, others ignored, and, by the process of prorating among producers, assured them that no one would sell more than the other in a... [common source of supply]. 227 La. at 188-89, 78 So.2d at 828 [Emphasis added] The construction Louisiana's Supreme Court has placed on its ratable take statute, of course, is not controlling here. In determining that the Mississippi Legislature has not decided that a regime of price regulation or a prohibition on discrimination in wellhead sales prices are necessary parts of the state's important policy of protecting the the co-equal and correlative rights of owners in a common source of supply, although it may well have the authority to so provide, we take comfort from the fact our present law and policy are consistent with what at least one sister natural gas producing state has done. There is a final reason why we have refused to imply Board authority to regulate wellhead sales prices. For the moment we have difficulty understanding how the sort of price regulation attempted in Order No. 409-82 serves legitimate public interest as distinguished from private self-interests. Price differentials emanating from arms-length contract negotiations are surely not contrary to the public interest. Many legitimate economic factors may produce such differentials, not the least of which would be the length of the contract, whether the price was fixed or subject to variation, supply and demand and other prevailing and reasonably foreseeable market conditions. The record before this Court reflects 35 contracts ranging from $5.00 to $9.054 per mmbtu. The record also suggests that these differentials are the proximate result of different dates of contracting and rapidly changing market conditions, both of which will ordinarily be considered rational bases for differences in price interference with which is beyond the Board's authority. Transco, required to take ratably by Rule 48, is free to offer owners having no contract a price reasonable in the context of the then existing market conditions. If the owner thinks the price is too low and wishes to risk drainage, he does not have to sell. But he has no legal redress simply because he failed to lock in a price via contract at a time when the market was more favorable. The owners of interests in a common source of supply are perfectly free to contract for the sale of their share of production on whatever terms they can negotiate. If owners such as Coastal desire to operate without a contract, for whatever reason, this is their privilege. If there should be an overall market shortage and increased demand amongst consumers, parties such as Coastal certainly stand to benefit. On the other hand, where a market glut and decreased demand occur, Coastal and others no doubt suffer. Why in an era of deregulation freedom of contract is perceived to be bad as a matter of policy escapes us. The national policy, to be sure not a preemptive one, is that the price of natural gas at the wellhead shall be regulated by market and geological forces, not judicial or administrative fiat. Regulation as heretofore practiced has failed. Whatever bugs may remain in the deregulation system and whatever fine tuning may be needed in our laws, the efficacy of regulation remains questionable and its substantial costs demonstrable. Pierce, Reconsidering The Roles of Regulation And Competition In The Natural Gas Industry, 97 Harv.L.Rev. 345, 371-372 (1983). The ultimate regulator of the price of such gas, at least for the moment, is what the consumer is willing to pay, with FERC interjecting itself into the picture only where wellhead prices have been set by fraud or collusion. A caveat need be added: we do not hold that a pipeline purchaser may offer any terms, take-it-or-leave-it, and meet its Rule 48 obligations. Offering a working interest owner a choice between a substantially below market price or otherwise wholly unreasonable terms, on the one hand, and drainage, on the other, is simply not a ratable taking and is a violation of Rule 48. To comply with its Rule 48 obligations the pipeline must offer in good faith reasonable terms, including a reasonable price, determined by reference to prevailing market conditions and other appropriate economic considerations. Of course, nothing in Rule 48 requires that Transco take any gas from a given source of supply. If it takes at all, however, it must take, or in good faith offer to take, ratably. So much of Order No. 409-82 as may be construed to require that Transco, in the course of performing its lawful duty to take ratably, pay Coastal and others not under contract $7.907 per mmbtu is reversed.