California v. Lo-Vaca Gathering Company Southern California Gas Company/Opinion of the Court

by William O. Douglas

United States Supreme Court

379 U.S. 366

California  v.  Lo-Vaca Gathering Company Southern California Gas Company

 Argued: Nov. 17, 18, 1964. --- Decided: Jan 18, 1965

El Paso Natural Gas Co. is an interstate natural gas pipeline company that delivers gas at the Arizona-California border to three California distribution companies. The present controversy concerns gas to be purchased by it in Texas from Lo-Baca Gathering Co. and Houston Pipe Line Co. Under Lo-Vaca's contract gas produced in Texas is to be delivered to a subsidiary of El Paso's at a Texas point for delivery into its pipeline. The contract contains the following two clauses:

'All of the gas to be purchased by El Paso from Gatherer (Lo-Vaca) under this agreement shall be used by El Paso solely as fuel in El Paso's compressors, treating plants, boilers, camps and other facilities located outside of the State of Texas. It is understood, however, that said gas will be commingled with other gas being transported in El Paso's pipe line system.'

'It is the intent and understanding of the parties hereto that the sale of natural gas hereof is not subject to the jurisdiction of the Federal Power Commission because this sale is not for resale.'

This 'restricted use' agreement provides for a separate metering of the contract volumes prior to their delivery into El Paso's system. El Paso will meter the gas used for fuel purposes in its New Mexico and Arizona facilities to make certain this amount invariably exceeds the volumes of gas taken from Lo-Vaca under this agreement.

El Paso and Houston made a similar contract containing a similar 'restricted use' provision by which El Paso covenants that this Houston gas will be consumed by El Paso solely as fuel in its Texas operations or in another Texas plant. This contract, like the other one, also provides for metering the volume of gas delivered in Texas; and it includes a covenant by El Paso that the Texas uses will at all times exceed the amounts supplied by Houston.

In spite of these 'restricted use' covenants it is conceded that the gas sold by Lo-Vaca and Houston to El Paso will flow in a commingled stream with gas from other sources and that at least a portion of the gas will in fact be resold out of Texas.

The Federal Power Commission asserted jurisdiction over these sales as sales in interstate commerce 'for resale,' as that term is used is § 1(b) of the Natural Gas Act, 52 Stat. 821, 15 U.S.C. § 717 (1958 ed.). ^[1] 26 F.P.C. 606, rehearing denied, id., at 840. The Court of Appeals reversed, one judge dissenting. 323 F.2d 190. The case is here on a writ of certiorari. 377 U.S. 951, 84 S.Ct. 1627, 12 L.Ed.2d 496.

We said in Connecticut Light & Power Co. v. Federal Power Comm., 324 U.S. 515, 529, 65 S.Ct. 749, 755, 89 L.Ed. 1150, 'Federal jurisdiction was to follow the flow of electric energy, an engineering and scientific, rather than a legalistic or governmental, test.' And that is the test we have followed under both the Federal Power Act and the Natural Gas Act, except as Congress itself has substituted a so-called legal standard for the technological one. Id., at 530-531, 65 S.Ct., at 756. In Interstate Natural Gas Co. v. Federal Power Comm., 331 U.S. 682, 687, 67 S.Ct. 1482, 1485, 91 L.Ed. 1742, we considered the anatomy of the pipeline system to discover the channel of the constant flow; again in Federal Power Comm. v. East Ohio Gas Co., 338 U.S. 464, 467, 70 S.Ct. 266, 268, 94 L.Ed. 268; and most recently in Federal Power Comm. v. Southern Cal. Edison Co., 376 U.S. 205, 209, n. 5, 84 S.Ct. 644, 647, 11 L.Ed.2d 638. The result of our decisions is to make the sale of gas which crosses a state line at any stage of its movement from wellhead to ultimate consumption 'in interstate commerce' within the meaning of the Act.

Attempts have been made by one convention or another to convert a local transaction into one of interstate commerce (Sprout v. City of South Bend, 277 U.S. 163, 48 S.Ct. 502, 72 L.Ed. 833; Superior Oil Co. v. Mississippi ex rel. Knox, 280 U.S. 390, 50 S.Ct. 169, 74 L.Ed. 504) or to make a segment of interstate commerce appear to be only intrastate (Baltimore & Ohio S.W.R.R. Co. v. Settle, 260 U.S. 166, 43 S.Ct. 28, 67 L.Ed. 189). But those attempts have failed. Similarly, we conclude that when it comes to the question what gas is for 'resale' the present contracts should not be able to change the jurisdictional result.

The fact that a substantial part of the gas will be resold, in our view, invokes federal jurisdiction at the outset over the entire transaction. Were suppliers of gas and pipeline companies free to allocate by contract gas from a particular source to a particular use, havoc would be raised with the federal regulatory scheme, as it was construed and applied in Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672, 74 S.Ct. 794, 98 L.Ed. 1035. A pipeline would then be able to discriminate in favor of its 'nonjurisdictional' customers. Moreover, a pipeline company by a contract clause could immunize a particular supplier from the reach of federal regulation ^[2] as defined by Phillips Petroleum Co. v. Wisconsin, supra. There would be created in those and in other ways an 'attractive gap' in the federal regulatory scheme (Federal Power Comm. v. Transcontinental Gas Pipe Line Corp., 365 U.S. 1, 28, 81 S.Ct. 435, 449, 5 L.Ed.2d 377) which the producing States might have little incentive to close, since the gap would often involve either lower costs to intrastate customers or else merely higher pipeline costs which ultimately would be reflected in rates paid by consumers in other States. Whether cases could be conjured up where in spite of original commingling there might be a separate so-called nonjurisdictional transaction ^[3] of a precise amount of gas not-for-resale ^[4] within the meaning of the Act is a question we need not reach.

Finally it is said that the Commission should draw the appropriate lines between 'jurisdiction' and 'nonjurisdictional' sales through the use of its rule-making power. But we cannot say that the adjudicatory process is not an appropriate method for drawing the line case-by-case (United States v. Public Utilities Comm., 345 U.S. 295, 73 S.Ct. 706, 97 L.Ed. 1020) as in a host of other administrative determinations. The Commission has acted responsibly in this situation and its decision must be upheld.

Reversed.

Mr. Justice WHITE took no part in the consideration or decision of these cases.

Mr. Justice HARLAN, dissenting.

Notes

1. Section 1(b) of the Act provides:
2. The Commission's Report, Statistics of Natural Gas Companies-1962, shows that the 40 major natural gas pipeline companies consumed more than $85,000,000 worth of gas in operating their facilities (principally compressor stations), p. xviii. This represents almost 4% of the total gas-purchase-costs of those companies. The Commission therefore points out in its brief that pipeline companies, merely by using 'restricted use' controls, could without changing their actual operations create a substantial unregulated market for the benefit of particular producers.
3. Our reference in Federal Power Comm. v. Transcontinental Gas Pipe Line Corp., 365 U.S. 1, 4, 81 S.Ct. 435, 437, to 'direct' sales of gas to industrial users as nonjurisdictional sales is not dispositive of the present issue. For the Commission had refused a certificate for transportation of the gas because from the standpoint of conservation it considered the end use as boiler fuel to be inferior. Whether the Commission had authority to assert jurisdiction over the so-called 'direct' sale because it was 'for resale' as a result of its commingling with other gas was not in issue.
4. Cf. United States v. Public Utilities Comm., 345 U.S. 295, 317-318, 73 S.Ct. 706, 718-719; City of Hastings v. Federal Power Comm., 95 U.S.App.D.C. 158, 221 F.2d 31.