Argument preview: Preemption and the Natural Gas Act

On January 12, 2015, the Supreme Court will hold one hour of oral argument on whether the Natural Gas Act preempts state-law claims challenging industry practices that directly affect the wholesale natural gas market when those claims are asserted by litigants who purchased gas in retail transactions.

Background

ONEOK, Inc. v. Learjet, Inc., addresses an important issue involving the preemptive effect of the Natural Gas Act and the scope of the Federal Energy Regulatory Commission’s enforcement authority vis-à-vis state regulators. Lower courts have been struggling to determine whether FERC has exclusive jurisdiction over the activities of energy firms and whether state regulation of activities of energy firms presents a conflict with federal law. The approach that the Court ultimately takes in addressing this issue will have potential implications for similar statutes, such as the Federal Power Act.

In this case, Learjet and other retail purchasers of natural gas (the respondents before the Supreme Court) brought state antitrust law claims against ONEOK and other natural gas traders, alleging false reporting of price index information to trade publications and manipulation of sales transactions during the 2000-02 energy crisis. These claims involved price data and transactions concerning retail gas purchased by Learjet and the other plaintiffs. In 2011, a federal district court in Nevada considering the consolidated cases entered summary judgment against Learject in most of these cases, reasoning that the state law claims are preempted by the NGA.

A panel of the U.S. Court of Appeals for the Ninth Circuit reversed the district court, allowing these claims to potentially go forward to trial. The Ninth Circuit’s decision emphasized the narrow scope of FERC’s potential jurisdiction over the claims under the NGA, which does not authorize FERC to regulate retail gas prices.

Section 1(b) of the NGA gives FERC jurisdiction to regulate: (1) transportation of natural gas in interstate commerce; (2) natural gas sales in interstate commerce for resale (i.e., wholesale sales); and (3) natural gas companies engaged in such transportation or sale. This grant of authority appears very broad and has on occasion been described as “exclusive” in its scope. However, longstanding interpretations of the NGA by the Supreme Court emphasize that the statute distinguishes “sharply and cleanly” between “sales for resale and direct sales for consumptive uses.” The language of Section 1(b) expressly states that the NGA does not extend to “any other transportation or sale of natural gas,” “local distribution,” or “the production or gathering of natural gas.” Indeed, federal jurisdiction over sales under the NGA has, over time, been further limited by Congress, which exempted so-called “first sales” from FERC regulation.

As the district court opinion highlights, however, another provision of the NGA potentially triggers federal jurisdiction over state antitrust claims concerning retail pricing data. Section 5(a) of the NGA gives FERC authority over any “rule, regulation, practice or contract affecting” (FERC) jurisdictional rates. The district court read this provision expansively, finding preemption of the state antitrust law claims even though they involved prices for gas sales that are not within agency’s jurisdiction under Section 1(b).

By contrast, the Ninth Circuit reasoned that FERC’s Section 5 authority over “practices” does not extend to non-jurisdictional contacts under Section 1(b). In construing the NGA to favor a narrow (rather than expansive) interpretation of Section 5(a), the Ninth Circuit emphasized two primary arguments.

First, the Ninth Circuit reasoned that the district court’s decision to impliedly preempt the application of state laws to the same transactions (both wholesale and retail sales) runs afoul of “the canon of statutory construction that statutory provisions should not be read in isolation.” Unless it contains some limit, such an interpretation could potentially even allow FERC to regulate retail gas rates. According to the Ninth Circuit, interpreting Section 5(a) to apply only to Section 1(b) jurisdictional transactions best gives meaning to both provisions of the statute.

Second, the Ninth Circuit applied a presumption against preemption, acknowledging recent Supreme Court cases that advise courts to “start with the assumption that the historic police powers of the States were not to be superseded by the Federal Act unless that was the clear and manifest purpose of Congress.” The Ninth Circuit observed that “the presumption against preemption applies with particular force in light of Congress’s deliberate efforts to preserve traditional areas of state regulation of the natural gas industry.”

Briefs on the merits

Throughout its brief on the merits, ONEOK, Inc. emphasizes Congress’s purpose in the NGA to favor uniform and consistent regulation of the natural gas industry.

ONEOK’s brief begins by reasoning that Congress intended to “occupy the field” when it passed the NGA. As ONEOK notes, Learjet’s “suits seek to impose liability under state law based on index-reporting practices that the NGA places under exclusive federal control.” This is not, ONEOK maintains, an unlimited grant of federal power that would allow FERC to regulate retail rates; instead, Section 5(a) only extends FERC jurisdiction to pricing practices that “directly affect” jurisdictional transactions.

ONEOK’s brief also highlights that, by taking multiple regulatory actions following the 2000-02 energy crisis, FERC began to regulate gas price reporting. Most prominent among these actions was a 2003 guidance document that established standards for reporting price data, extending these to all market-based gas prices. FERC also terminated some blanket marketing certificates for jurisdictional companies (such as Enron) based on their pricing practices during the 2000-02 energy crisis. Moreover, following Congress’s expansion of FERC’s jurisdiction over price reporting data in 2005, the agency took additional steps to regulate price index manipulation.

Drawing an analogy to state regulation of securities law, ONEOK reasons that the state antitrust claims here clearly fall within the scope of FERC’s authority. But even if field preemption is not found in this context, ONEOK further argues, allowing the Ninth Circuit decision to stand would present a conflict or obstacle to federal regulation under the NGA. Imposing liability under different state laws would, according to ONEOK, result in inconsistent results and potentially conflict with a uniform federal regulatory approach for price reporting practices. For example, what FERC deems to be a legitimate means of reporting price data to the trade press, a state court might find deceptive.

The United States weighs in as an amicus in support of ONEOK, underscoring many the company’s arguments. In addition, the federal government maintains that FERC’s 2003 guidance document is entitled to deference.

Learjet’s brief on the merits concedes that the NGA gives FERC exclusive authority under the NGA. However, Learjet maintains that the Ninth Circuit’s decision is correct because the statute – as it existed before 2005 – does not preempt state antitrust claims.

To begin, according to Learjet, the express “savings” clause in Section 1(b) preserves for states authority over retail transactions, including reporting indices. According to Learjet, state antitrust enforcement does not present any conflict with FERC’s regulation of the natural gas industry. Instead, all that is at issue is the potential for a conflict – given that FERC did not regulate the specific misconduct at issue in the state antitrust claims — and a hypothetical conflict alone is not sufficient for a preemption finding.

Learjet also highlights how nothing in the NGA indicates congressional intent to displace or override antitrust law. Federal antitrust law claims are arguably permitted, a point the federal government also acknowledges in its brief. According to Learjet, if anything the NGA complements rather than usurps state antitrust authority.

Learjet’s brief notes that, when FERC instituted market pricing for natural gas in 1992, it indicated that it was not claiming authority over the non-jurisdictional aspects of marketers’ business. Further, in 2005 Congress expanded FERC’s authority over non-jurisdictional sales that are used to manipulate wholesale gas rates; Learjet’s brief highlights that if FERC had this authority in 2000-02, there would have been no need for Congress to enact this statute.

Learjet’s brief finally maintains that the “direct effects” limitation ONEOK crafts for Section 5(a) “practices” in effect allows natural gas companies to exempt themselves from almost any area of state law. To the extent the 2003 FERC guidance document on this topic is entitled to any deference, the respondents maintain that it is not subject to Chevron deference.

[Disclosure: Goldstein & Russell, P.C., whose attorneys contribute to this blog in various capacities, serves as counsel on an amicus brief in support of the petitioners in this case. However, the author of this post is not affiliated with the firm.]