Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672 (1954), was a case decided by the Supreme Court of the United States holding that sale of natural gas at the wellhead was subject to regulation under the Natural Gas Act. Prior to this case, independent producers sold natural gas to interstate pipelines at unregulated prices with any subsequent sales for resale being regulated. The State of Wisconsin sought to close this regulatory loophole in order to keep consumer prices low. Natural gas producers argued that wellhead sales were exempt from federal regulation as "production and gathering." Below, the Federal Power Commission compiled an evidentiary record 10,000 pages long before deciding not to regulate wellhead sales. However, the courts reversed, and the case resulted in federal price controls on wellhead gas prices for the next 40 years.
Background
Natural gas is typically produced in association with oil from wells. Wells can also be drilled into geological formations that have mostly gas and very little oil. In the infancy of the oil industry, any natural gas produced from oil wells was burned off. Later, states passed conservation laws which required the gas to be captured and transported in pipelines for useful purposes. In order to prevent any gaps in the natural gas regulation when natural gas flows in interstate commerce, Congress enacted the Natural Gas Act of 1938. That law required that companies must obtain from the Federal Power Commission (FPC) a "certificate of public convenience and necessity" (certificate) before making any sale for resale natural gas in interstate commerce. The FPC set the maximum prices charged for gas sold under a certificate. For example, if gas flowed from a well in Texas through a pipeline to New York where it was sold to a gas distribution company, the sale by the pipeline to the distributor would need a certificate. The final sale to retail customers were exempt from the law. Although the Natural Gas Act regulated both the transportation and sale of gas in interstate commerce, the "production and gathering" of gas was exempt from federal regulation, although potentially subject to state control. Production means bringing the gas out of the ground to a pipe at the top of the wellhead. Gathering refers to the flow of gas through low pressure lines to the center of a gas field where the gas is treated and compressed to bring it up to the high pressures used in long-distance pipelines.
Oil companies claimed that because production and gathering was exempt, any sales between the oil company that owned the well and the pipeline company were also exempt from Natural Gas Act regulation if they took place at the wellhead or along the gathering lines. The producers wanted to charge a wellhead price based on market forces, while consumer groups argued that the Natural Gas Act intended that both producers and pipelines should be limited to cost-based rate regulation, so that the final price paid by consumers would represent only the cost of producing, transporting and distributing the gas, instead of a price based on the cost of competing fuels, such as fuel oil.
From 1938 to 1954, the FPC did not regulate wellhead prices. However, these prices were very low because the amount of available gas supply exceeded the pipeline capacity to move it to national markets. However, after World War II, wellhead gas prices rose even to the point that producers started to drill new gas-only wells in areas that contained little oil. The State of Wisconsin claimed that the absence of federal wellhead price regulation caused the delivered price of gas in Wisconsin to reach unreasonable levels. Wisconsin wanted the FPC to regulate wellhead gas sales.
Proceedings below
The FPC was a five-member regulatory body appointed by the President and confirmed by the Senate. One of the FPC's strongest leaders was Leland Olds. Olds' insistence on enforcing the Natural Gas Act of 1938 raised the ire of the oil industry in Texas and led to the end of his tenure at the FPC. Robert Caro's book Master of the Senate describes how Lyndon B. Johnson defeated Leland's re-appointment by orchestrating a McCarthyism-style smear campaign. The tactics involved having the staff of the House Un-American Activities Committee dig up old writings, which were then taken out of context to falsely paint Olds as a communist. The subcommittee in charge of reappointment was stacked against Leland and coached by Johnson. Following such episodes, the FPC was reluctant to impose price regulation on the producers.