Court Opinion

ID: 9548138
Source: CourtListenerOpinion
Date Created: 2023-08-07 17:58:04.194444+00
Date Added: 2024-06-11T15:18:30.644651
License: Public Domain

Schroeder, C.J.,
dissenting: As applied to this case, the KCC’s duty under K.S.A. 55-703 is to prevent waste and protect correlative rights in the production of natural gas from the Hugoton Field, located in Kansas. The KCC is obligated by legislative mandate, where regulation is required, as here, to permit production of gas from the common source of supply of “only that portion of all the natural gas that may be currently produced without waste and to satisfy the market demands, as will permit each developed lease to ultimately produce approximately the amount of gas underlying the developed lease and currently produce proportionately with other developed leases in the common source of supply without uncompensated cognizable drainage, between separately-owned, developed leases or parts thereof.” K.S.A. 55-703. (Emphasis added.)
The pipeline companies that purchase natural gas in Kansas and other states for transportation in interstate commerce for resale have a right to purchase gas from their contracted dedicated reserves. Natural gas cannot be produced unless a purchaser is ready to buy it; it cannot be stored in a tank on the lease. Northern Natural Gas Co. v. State Corporation Commission, 188 Kan. 355, 360, 362 P.2d 599 (1961), revd 372 U.S. 84 (1963). *270Thus it is the purchasers who supply the market to the field, which according to the basic order is supposed to be prorated among the wells in the field.
In this case the KCC continuously fixed allowables, for some time, far in excess of requirements to supply the demand for natural gas, which resulted in a huge underage of production in the Hugoton Field. This underage has been accruing since January 1, 1967. Since 1975 alone, the KCC has granted a 275 BCF allowable in excess of actual production.
In my opinion, the KCC has exceeded its statutory authority in fixing allowables far in excess of demand. This is clearly indicated by the huge underage existing in the Hugoton Field. This in turn has had its impact on drainage in the field illustrated by the fact that Mesa has no underage, but is in a state of over-production. The statutory obligation of KCC to protect correlative rights has, therefore, been ignored.
I would reverse and hold the KCC order amending the basic proration order by changing paragraph (p) to be invalid because it exceeds legislative authority. The fact that some expert may venture an opinion that this action is the solution to an existing problem in the field is wholly immaterial.
Even assuming arguendo that this infirmity is ignored, as the court in its opinion has done, the KCC has no jurisdiction to proceed on the theory it has adopted to amend the basic proration order. Federal preemption exercised through FERC’s interstate regulatory authority nullifies the KCC order.
Many of the pipeline systems which transport natural gas from the Kansas Hugoton Field are integrated with pipeline systems connecting other gas fields, and natural gas from the Kansas field is thereby commingled with gas from other fields, including the Oklahoma and Texas portions of the Hugoton Gas Field. Colorado Interstate Gas Co. v. State Corporation Comm., 192 Kan. 1, 5, 386 P.2d 266 (1963), cert. denied 379 U.S. 131 (1964). The connected reserves of the interstate purchasers in the field are a significant part of their total system-wide reserves. Any increase or decrease in the volumes of gas purchased within the state of Kansas changes the volumes of gas purchased outside the state (change in the “mix”) and will change the average cost of gas to the purchasers. FERC’s exclusive jurisdiction extends to the regulation of the intricate relationship between the purchasers’ *271cost structures and the eventual cost to distributors who sell to consumers in other states. Northern Gas Co. v. Kansas Comm’n, 372 U.S. 84, 9 L.Ed.2d 601, 83 S.Ct. 646 (1963).
Although the commission contends that its order is directed at producers not purchasers, its real purpose is to create an impact on purchasers’ business decisions concerning the makeup of their interstate gas mix, with an eye toward making it economically prohibitive for such purchasers not to purchase increased substantial volumes of gas from the Kansas Hugoton Field even at the expense of their purchases from other states. The commission has not been correlating allowables with demand, ever seeking to compel purchasers to purchase more Kansas gas. Faced with mounting underages, increasing the imbalance in the field, the commission now attempts to use its ultimate weapon, the power to cancel forever the right to purchase connected reserves of a pipeline, insofar as it fails to purchase those volumes within the arbitrary period allotted by the commission.
This is clear from the commission’s own findings. It found in the order that the correlative rights of a producer is the right to participate in a given market for a given period of time. (This does not compare with the definition of correlative rights in the commission’s own Rule 82-3-101[15]). It found that the problem with correlative rights violation does not result from the assignment of the allo'wables, but rather from the failure of producers and pipelines to take production from the field. It found that its previous flexible reinstatement provision induced a lack of incentive to produce resulting in depriving some operators of the opportunity to participate in a given market, and that this resulted in discrimination. “It is the purpose of this Order not to restrict production of gas but to encourage it.” Its interest was to provide sufficient incentive to “produce allowables,” to encourage “production of current allowables,” and create an incentive to produce “by tightening the provisions of the basic order with regard to the cancellation of underage.”
Thus, the net purpose of the commission order is to require the production and purchase of the “assigned allowable” by making prohibitive the economic consequences facing the pipeline purchasers for not doing so, viz., the permanent cancellation of their right to purchase from their connected reserves in the Kansas *272Hugoton Field for which assigned allowables had previously been assigned.
The district court, looking at the same facts as were presented to the commission, specifically found that the order would induce increased production from the field, and found that “[a]s a practical matter, the change in ‘(p)’ will . . . cause a change in the ‘mix’ of natural gas which pipelines transport for sale many miles away.”
Thus, the district court made the basic finding of invalidity, but tried to avoid it by concluding that since the KCC order deals with the producers of natural gas, it falls within the specific exemption of the Natural Gas Act. This coincides with the commission’s position that the obligations imposed to file applications for reinstatement are on the producers not the purchasers, and that the order deals solely with conservation matters.
But under the cloak of the “producing or gathering” exemption in the Natural Gas Act, under the pretense of promulgating a conservation regulation under reserved police powers, the Kansas Corporation Commission has in reality promulgated a regulation the indirect result of which, and the precise purpose of which, is to invade and infringe upon the exclusive jurisdiction of FERC to regulate comprehensively and effectively the transportation and sale of natural gas, and to achieve the uniformity of regulation which was an objective of the Natural Gas Act. Northern Gas Co. v. Kansas Comm’n, 372 U.S. 84.
The Northern case is a landmark decision. It arose out of “ratable take” orders by the Kansas Corporation Commission requiring a pipeline purchaser to purchase gas from a producer in no higher proportion to the allowables than from the wells of other producers. The U.S. Supreme Court held that the orders invaded the exclusive jurisdiction which the Natural Gas Act had conferred upon the Federal Power Commission over the sale and transportation of natural gas in interstate commerce for resale. The court specifically held:
“Moreover, any readjustment of purchasing patterns which such orders might require of purchasers who previously took unratably could seriously impair the Federal Commission’s authority to regulate the intricate relationship between the purchasers’ cost structures and eventual costs to wholesale customers who sell to consumers in other States. This relationship is a matter with respect to which Congress has given the Federal Power Commission paramount and exclusive authority. See Federal Power Comm’n v. Hope Natural Gas Co., 320 *273U.S. 591, 610 [, 88 L.Ed. 333, 64 S.Ct. 281 (1944)]. The prospect of interference with the federal regulatory power in this area is made even more acute by the fact that criminal sanctions imposed by state statute for noncompliance fall upon such purchasers and not upon the local producers. Therefore, although collision between the state and federal regulation may not be an inevitable consequence, there lurks such imminent possibility of collision in orders purposely directed at interstate wholesale purchasers that the orders must be declared a nullity in order to assure the effectuation of the comprehensive federal regulation ordained by Congress.” 372 U.S. at 92.
But the commission says that since this is a conservation matter reserved to the states under the production or gathering exemption (15 U.S.C. § 717[b][1982]), and because it is not directed to pipeline purchasers, but rather only to producers, Northern does not apply. The answers to these contentions are (a) this is not really a conservation matter because the only viable testimony in the record shows clearly that waste will be caused, not prevented, by the orders, and that correlative rights will be violated not protected by the order; (b) even if the foregoing were not true, and irrespective of whether there is a reasonable state purpose to be served by the order, it is invalid because the Natural Gas Act and FERC jurisdiction thereunder is comprehensive, and the Act’s application from state to state will not depend upon kaleidoscopic variations in state law; (c) even if the order be not directed at purchasers, its indirect effect is to cause a modification in the interstate mix of gas on the Northwest Central System (as the district court found), and this is enough to tip it into constitutional invalidity.
First, the order will cause waste, not prevent it. “The dominant purpose of the Gas Conservation Statute is to prevent waste,” Colorado Interstate Gas Co., 192 Kan. at 25. But the undisputed testimony of Lester Wilkonson, the reputed expert on the Hugoton Field, is that the order may cause waste by inviting damaging water incursion as a result of a severe pressure drop, which might result in waste in the ground because of loss of communication with the gas reservoir.
Moreover, the commission practices of setting allowables in excess of the actual market demand have created rampant discrimination between the wells in the field. Thus, some wells, such as Mesa’s wells connected to KP&L, with a higher proportionate intrastate market demand, have been permitted to produce a higher proportionate part of their reserves than the *274majority of wells in the field connected to the interstate pipelines, such as Northwest Central and others, which have a plummeting market and no place to put the gas. The Mesa acreage adjoins that from which Northwest Central purchases. Therefore, the result of cancellation under this order will be to cement for all time that discrimination, and this will no longer permit the corrective or compensatory drainage which was the hallmark of the prior commission order for years. KP&L’s intrastate customers will benefit, and Northwest Central interstate customers will be prejudiced. Compare Penna. v. West Virginia, 262 U.S. 553, 67 L.Ed. 1117, 43 S.Ct. 658 (1923), where the attempt to withdraw a large volume of gas from an established interstate commerce current so as to preferentially benefit local consumers in the state where the gas was produced was an unconstitutional interference with interstate commerce.
The commission tries to contend that there is a viable conservation purpose served by this order, but simply calling the order a conservation order does not make it one. The fact remains that the purpose of the order and its effect, indirect or otherwise, is to change the interstate gas mix by inducing more Kansas gas to be taken.
“. • . ‘Acts generally lawful may become unlawful when done to accomplish an unlawful end, United States v. Reading Co., 226 U.S. 324, 357, and a constitutional power cannot be used by way of condition to attain an unconstitutional result.’ Western Union Telegraph Co. v. Foster, 247 U.S. 105, 114.” Gomillion v. Lightfoot, 364 U.S. 339, 347-48, 5 L.Ed.2d 110, 81 S.Ct. 125 (1960).
The Natural Gas Act is a comprehensive scheme of federal regulation 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.” Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672, 682, 98 L.Ed. 1035, 74 S.Ct. 794 (1954); Northern Gas Co. v. Kansas Comm’n, 372 U.S. at 91.
The Kansas Supreme Court has sustained the ratable take order, although recognizing that it applied to purchasers, because the object of the Kansas conservation statute (K.S.A. 55-703) could not be accomplished “unless the taker or purchaser can be controlled.” Northern Natural Gas Co. v. State Corporation Commission, 188 Kan. at 360. But the U.S. Supreme Court had no trouble with this. Merely because some of the incidences *275of the order relate to production and gathering does not bring the order into the ambit of the exemption where other incidences of the order impact directly or indirectly upon transportation and wholesales of natural gas in interstate commerce.
Since the power of Congress under the Supremacy Clause is supreme, it is up to the State of Kansas to mold its policy of regulation of production and gathering so as not to impinge upon the exclusive jurisdiction of FERC over interstate transportation and wholesales.
The U.S. Supreme Court in Northern said:
“The Natural Gas Act precludes not merely direct regulation by the states of such contractual matters. . . .
“The federal regulatory scheme leaves no room either for direct state regulation of the prices of interstate wholesales of natural gas, [citation omitted] or for state regulations which would indirectly achieve the same result.” 372 U.S. at 91.
Since the Northern case, there have been a number of additional holdings in an unbroken line of cases saying the same thing. Public Service Com’n v. Federal Energy Reg., 610 F.2d 439 (6th Cir. 1979).
It is respectfully submitted the order of the KCC under attack is invalid.