Amicus Curiae Brief — Oklahoma Corp. Commission v. ANR Pipeline Co.

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QUESTIONS PRESENTED

1. In light of this Court’s recent holding in

Northwest Central Pipeline Corp. v. State Corporation

Commission of Kansas, 57 U.S.L.W. 4302 (U.S. Mar. 6,

1989), is the State of Oklahoma preempted under the

Natural Gas Act and the Natural Gas Policy Act of

1978 from exercising regulatery authority pursuant to

Oklahoma Statute title 52, section 240 when such

regulation necessarily envisions some —incidental

impact on the purchasing patterns and practices of

interstate natural gas pipelines?

2. Similarily, is the State of Oklahoma

preempted under the Natural Gas Act and the Natural

Gas Policy Act of 1978 from establishing a priority of

production schedule pursuant to the State’s strong

interest to prevent waste and protect correlative

rights?

ii

TABLE OF CONTENTS

I. INTEREST OF AMICICURIAE............. 1

II. SUMMARY OF ARGUMENT............... 2

EES. REPUTE 9 bbe 6 66 Rh Ss AER ERO OEM 3

A.

Traditionally, Courts have Recognized

States’ Power to Regulate in Order to

Prevent Waste of Limited Natural

Resources and Protect Correlative

State Conservation Rules, Including

Rules Establishing a Priority Schedule,

Are an Integral Part of State-

Administered Systems for Defining and

Enforcing Property Rights............. 4

The Congressional Intent Behind the

NGA and NGPA Recognizes the Strong

State Interests to Prevent Waste and to

Define and Protect Correlative Property

RE heen A 5

The Oklahoma Regulatory Scheme

Neither Intrudes in an Occupied Field of

Congressional Governance Nor Obstructs

the Accomplishment of Congressional _

Purposes and Objectives.............. 10

The Oklahoma Regulatory Scheme,

Establishing a Priority of Production

Schedule, is Consistent with Prior

Opinions and Congressional Intent...... 13

iii

1. Okliahoma’s priority of production

schedule is a necessary and

legitimate exercise of its police

power to prevent waste

2. Oklahoma’s priority of production

schedule furthers the congressional

intent to ensure optimum supplies

ESN i ee a 16

F. Oklahoma’s Ratable-Take Regulations,

Including Priority Schedules, Fall

Within the NGA’s "Production and

Gathering" Exemption............... 18

IV. CONCLUSION........ Terres Oe. 19

iv

TABLE OF AUTHORITIES

CASES PAGE

ANR Pipeline Co. v. Corporation Comm’n of

Oklahoma, 860 F.2d 1571 (lOth Cir. 1988)....... 2

Bandini Petroleum Co. v. Superior Ct. of

California, 284 U.S. 8(1931)................ 3

California Coastal Comm’n v. Granite Rock Co.,

480 U.S. 572, 107 S.Ct. 1419 (1987). .......... 12

Champlin Ref. Co. v. Corporation Comm’n of

Oklahoma, 286 U.S. 210 (1932).......... passim

Cities Service Gas Co. v. Peerless Oil & Gas Co.,

ne ae 4,11

Colorado Interstate Gas Co. v. FPC,

een 18

FPC v. Transcontinental Gas Pipeline Corp.,

a are ae ee ere 12

Florida Lime & Avocado Growers, Inc. v. Paul,

ee A kd oo aig hawk ond oe il

Hillsborough County v. Automated Medical

Laboraties, Inc., 471 U.S. 707 (1985). ......... 12

Hines v. Davidowitz, 312 U.S. 52 (1941)......... 11

Interstate Natural Gas Co. v. FPC,

ee Se oe caw a ban 11

Northern Natural Gas Co. v. State Corp.

Comm’n of Kansas, 372 U.S. 84

GG Ww oe Pea ee ck aks pea Ni passim

Northwest Central Pipeline Corp. v. State Corp.

Comm’n of Kansas, 57 U.S.L.W. 4302

(AF es IS cv cab h awa bdisvecs passim

Ohio Oil Co. v. Indiana, 177 U.S. 190 (1900)...... 3,5

Pacific Gas & Elec. Co. v. State Energy

Resources Conservation & Dev. Comm’n,

EE Ge ST os hw kkk 6b ne eee 10

Patterson v. Stanolind Oil & Gas Co.,

305 U.S. 376 (1939). ....... gy re oe ee ere eT 3

Pike v. Bruce Church, 397 U.S. 187 (1970). ....... 17

Puerto Rico Dep’t of Consumer Affairs v. Isla

Petroleum Corp., 108 S.Ct. 1350 (1988)........ 12

Railroad Comm’n of Texas v. Rowan & Nichols

COREG, GR Pn wi cc ce ee 5

Schneidewind v. ANR Pipeline,

RO er IG oo vc ccc ees wnn 12

Thompson v. Consolidated Gas Utilities Corp.,

AA i os EKER Seah a es 4

Transcontinental Gas Pipeline Corp. v. State Oil

& Gas Bd, 474 U.S. 409 (1986)........... passim

STATUTES and RULES

Sp Se sk oc ck 6 he ee 2

ERLE eT e eRe eer ree e 2

w» La. Rev. Stat. Ann. §30.1 (West 1975)............ 1

Kan. Stat. Ann. §§55-701 et seg. (1983 and

I ks ws kw a ae FAR 8 6. © 48 RS 1

N.D. Cent. Code §38-08-06 (1987).............. 1

N.M.S.A. §70-2-16 (Supp. 1986)................ 1

Okla. Stat. Ann. tit. 52, §240 (1981)............. 2

Okla. Comm'n Rule 1-305 (1983)............... 2

Tex. Nat. Res. Code Ann. §§85.055, 86.081 et seq.

(Vernon 1978 and Supp. 1989)............... 1

MISCELLANEOUS

H.R. Rep. No. 709, 75th Cong., Ist Sess. 1-2 (1937)

(Report of the House Committee on Interstate

and Foreign Commerce on H.R. 6586).......... 6

“426 Comm: Bee. SE DOR GTO). icc cc cee ccs 7

Martin, State Regulation of Natural Gas

Production: Is There Life After Transco?, 38th

Southwestern Legal Foundation Institute on

Oil and Gas Law and Taxation (1987)........ 8,14

P.S. Dasgupta & G.M. Heal, Economic Theory

and Exhaustible Resources 48 (1979).......... 10

Summers, Oil and Gas 76 at 233 (Perm. ed. 1954). . 14

U.S. Department of Energy, 1 Natural Gas

SE hn hk ee ee ee es 1

I. Interest of Amici Curiae

The Railroad Commission of Texas, the New

Mexico Oil Conservation Commission, the Louisiana

Office of Conservation of the Department of Natural

Resources, the Corporation Commission of Kansas and

the North Dakota Industrial Commission are the oil

and gas regulatory agencies for their respective states.1

These states and their agencies have enacted indivi-

dualizéd regulatory programs to establish a property

rights system in common gas reservoirs to ensure the

orderly, nonwasteful and equitable development of

natural resources located within their boundaries.2 The

amici state agencies have a vital interest in the

outcome of this case, and together urge the Court to

issue a writ of certiorari to review the final judgment

and opinion of the United States Court of Appeals for

the Tenth Circuit. In the alternative, the Court is

urged to vacate the judgment of the lower court and

remand the case for further consideration in light of

the Court’s recent decision in Northwest Central

Pipeline Corp. v. State Corporation Commission of

Kansas, 57 U.S.L.W. 4302 (U.S. Mar. 6, 1989)

("Northwest Central Pipeline”).

1Together, Oklahoma, Texas, Louisiana, North Dakcta,

Kansas and New Mexico produce approximately 84 percent of the

nation’s onshore natural gas supplies annually. U.S. Department

of Energy, 1 Natural Gas Annual 1987 at 9.

2Tex. Nat. Res. Code Ann. §§85.055; 86.081 et seq.

111.081 et seg. (Vernon 1978 and Supp. 1989); N.M.S.A. §70-2-16

(1986 Supp.); La. Rev. Stat. Ann. §30.1 (West 1975); N.D. Cent.

Code §38-08-06 (1987); Kan. Stat. Ann. §§55-701 et seq. (1983 and

Supp. 1988).

II. Summary of Argument

In ANR Pipeline Co. v. Corporation Commission

of Oklahoma, 860 F.2d 1571 (lOth Cir. 1988) ("ANR"),

the decision from which Oklahoma petitions for a writ

of certiorari, the Tenth Circuit held Oklahoma’s

"ratable-take" statute (Okla. Stat. Ann. tit. 52, §240

(1981)), and Oklahoma Corporation Commission Rule

1-305 (1983) unconstitutional, stating that they are

preempted by the Natural Gas Act, 15 U.S.C. §§717 et

seq. ("NGA"), and Natural Gas Policy Act of 1978, 15

U.S.C. §§3301 et seg. ("NGPA"), and, therefore,

violative of the Supremacy Clause.

This Court’s recent holding in Northwest Central

Pipeline acknowledges a more pragmatic jurisdictional

interplay between state and federal regulation of the

natural gas industry. The ANR holding, when

construed in the context of Northwest Central Pipeline,

is too broad and unduly intrusive into an area

recognized to be within the authority and jurisdictional

ambit of the states: the regulation of production and

gathering, prevention of waste of limited natural

resources and protection of correlative rights. For

these reasons, Oklahoma’s ratable-take regulations do

not stand as an obstacle to the accomplishment of the

purposes and objectives of Congress and are not in

conflict with Northern Natural Gas Co. v. Corporation

Commission of Kansas, 372 U.S. 84 (1963) ("Northern

Natural") or Transcontinental Gas Pipeline Corp. v.

State Oil and Gas Board, 474 U.S. 409 (1986)

("Transco"). At the very least, Oklahoma’s regulatory

scheme of maintaining a priority system requiring

production from various categories of producing wells

in priority order when supply exceeds demand is the

type of regulation protected by the states’ authority to

prevent waste and protect correlative rights.

Champlin Ref. Co. vu. Corporation Comm’n of

Oklahoma, 286 U.S. 210, 233-34 (1932) ("Champlin").

In this term, the Court has unanimously

recognized that state regulation of production practices

may necessarily impact purchasing decisions and

thence costs of interstate pipelines without resulting in

conflict-preemption. Thus, this Court’s review of the

ANR decision demands a sensitive application of

preemption analysis. Northwest Central Pipeline, 57

U.S.L.W. at 4308. The Tenth Circuit threatens to

disrupt the highly sensitive state-federal system of

natural gas regulation by restraining Oklahoma from

enforcing its regulatory powers justly reserved to it by

the NGA and NGPA. The requested writ of certiorari

should be granted in order for this Court to address

these important questions of state and federal law.

lil. Argument

A. Traditionally, Courts Have Recognized

States’ Power to Regulate in Order to

Prevent Waste of Limited Natural

Resources and Protect Correlative

Rights.

It has long been recognized that there exists a

legitimate exercise of state power to conserve limited

natural resources and to protect the correlative rights

of mineral owners. Patterson v. Stanolind Oil & Gas

Co., 305 U.S. 376, 379 (1939) (upholding the validity of

well-spacing regulations); Champlin, 286 U.S. at 233-

34 (upholding the common state practice of placing

"allowable" ceilings on the amount of gas that a

particular well or pool may produce during a given

period of time); Bandini Petroleum Co. v. Superior Ct.

of California, 284 U.S. 8, 18-20 (1931) (upholding regu-

lations preventing the wasteful practice of blowing,

release or escape of gas); Ohio Oil Co. v. Indiana, 177

U.S. 190, 211-12 (1900) (upholding statute prohibiting

the wasteful practice of venting gas into the open air

under the state’s authority to prevent waste and

protect correlative property rights). Indeed, in the

words of this Court, "[i]t is now undeniable that a state

may adopt reasonable regulations to prevent economic

and physical waste of natural gas." Cities Service Gas

Co. v. Peerless Oil & Gas Co., 340 U.S. 179, 185 (1950).

Regulation aimed at the prohibition of waste, "whether

primarily on behalf of other owners of gas in the

common reservoir, or because of the public interests

involved," passes constitutional muster. Thompson v.

Consolidated Gas Utilities Corp., 300 U.S. 55, 76

(1937).

B. State Conservation Rules, Including

Rules Establishing a Priority Sche-

dule, Are an Integral Part of State-

Administered Systems for Defining

and Enforcing Property Rights.

In Oklahoma, as well as the amici states,

property rights in oil and gas resources are defined and

enforced so as to create a reconciliation between two

different property systems: (1) a pure common property

system, epitomized by the rule of capture, whereby an

individual’s property interest consists of a right not to

be excluded from the oil or gas in a common reservoir,

and (2) a pure private property system, where the

property interest consists of a right to exclude others

from a defined portion of the oil and gas in a common

reservoir. The producing states have historically

steered a middle course because experience has shown

that neither extreme is satisfactory. State regulation

of production rates and priority schedules, as well as

spacing regulations, allocation of demand and other

such matters, constitutes an administrative system

that implements a property rights regime falling

between the common property and private property

paradigms.

The Supreme Court has long recognized that

state production regulations are integral to the

existence and enforcement of property rights:

[rJegulations of natural deposits of oil and

gas and the right of the owner to take them

as an incident of title in fee to the surface of

the earth .. . is ultimately but a regulation

of real property, and they must hence be

treated as relating to the preservation

and protection of rights of an essentially

local character.

Ohio Oil Co. v. Indiana, 177 U.S. 190, 212 (1900). The

Court also has recognized that the property regimes

administered by states with respect to petroleum

resources are a middle-ground between common

property and private property concepts. Railroad

Comm’n of Texas v. Rowan & Nichols Oil Co., 310 U.S.

573, 579 (1940).

C. The Congressional Intent Behind the

NGA and NGPA Recognizes the Strong

State Interests to Prevent Waste and to

Define and Protect Correlative Prop-

erty Rights.

The legislative history of the NGA clearly

establishes that Congress did not intend to preempt or

interfere with the states’ role in waste prevention and

the protection of correlative rights:

[t]here is no intention in enacting the

present legislation to disturb the states in

their exercise of such jurisdiction. How-

ever, in the case of sales for resale, or so-

called wholesale sales, in _ interstate

commerce. . . the legal situation is different.

Such transactions have been considered not

to be local in character and, even in the

absence of congressional action, not subject

to state regulation . . . . The basic purpose

of the present legislation is to occupy this

field in which the Supreme Court has held

that the states may not act... . The bill

takes no authority from state commissions,

and is so drawn as to complement and in no

manner usurp. state provisions for

cooperative action with state regulatory

bodies.

H.R. Rep. No. 709, 75th Cong., Ist Sess. 1-2 (1937)

(Report of the House Committee on Interstate and

Foreign Commerce on H.R. 6586). The historical

record is replete with affirmations that the NGA was

necessary solely to fill a discrete regulatory gap,

(protection of gas consumers from overcharges for

interstate gas transportation and certain interstate

sales of natural gas), and was not intended either to be

a conservation measure or to disturb state power over

conservation.

Nor was the NGPA intended to lessen such state

power:

[t]he legislation [NGPA] does _ not

contemplate that FERC will intrude into

the traditional conservation functions ~

performed by the states. This is a matter

reserved to the state agencies who, in the

exercise of their historical powers, will

continue to regulate such matters as

drillings, locations, completion techniques,

production rates, etc. Of course, the

Secretary of Energy is authorized under

—e

T

Section 505 to intervene as a matter of

right in state proration proceedings. This

intervention authority, however, does not

grant the Secretary any substantive powers

or displace any state authority.

124 Cong. Rec. 38,366 (1978({Comments of House

Energy Committee Chairman John Dingell).3 The

legislative history of the NGPA fully supports the view

that Congress did not intend to abolish rules of

property regarding natural gas or to create a federal

law of property and contract to govern in this area.

Although the Court has properly characterized

the Transco decision as a case which simply "declared

the post-NGPA validity of Northern Natural’s holding,"

(Northwest Central Pipeline, 57 U.S.L.W. at 4306), the

Transco opinion is relevant to the present case for its

description of Congressional purposes and objectives

regarding federal and state natural gas regulation in

two respects: (1) both _the majority and the dissent

were in essential agreement that the Congressional

objective in enacting the NGPA was to provide a "more

significant role" for undistorted4 market forces in the

determination of wellhead prices; and (2) the majority

opinion is not inconsistent with the dissent’s view that

an efficiently functioning market depends on the

3Indeed, the FERC acknowledges the importance of this

point and assured the court that the federal regulatory program

can and will take into account interstate pipeline purchasing

practices, as impacted by state regulation, as part of the overall

environment in which interstate pipelines conduct their business.

Northwest Central Pipeline, 57 U.S.L.W. at 4308.

4The Court in Transco seems to be divided as to whether,

as a factual matter, the Mississippi order "distort{ed] the market"

or “promote[d] the efficient operation of the market." Compare

Transco, 106 S.Ct. at 718 with id., 106 S.Ct. at 723 (Rehnquist, J.,

dissenting).

existence of property rights and rules of contract and

that such rights and rules have not been promulgated

under federal law. The Court recognized that

Congress, through the NGA and NGPA, has not

preempted state regulation of conservation or the

prevention of waste of natural gas, because the

applicable federal statutes are silent as to the grant of

any such jurisdiction in FERC. Indeed, Mr. Patrick

Martin, Professor of Mineral Law at Louisiana State

University and former Commissioner of Conservation

of the State of Louisiana, has clearly pointed out the

consistency in this type of analysis:

there is not the slightest indication

anywhere that Congress had any intention

whatsoever of preempting the states from

protecting the correlative rights of owners

in a common source of supply or from

preventing waste .... But where is the

preemption? Congress has undertaken no

program that regulates the property rights

within a common source of supply. The

FERC has no such program. Congress

cannot really be said to have occupied the

field.

Martin, State Regulation of Natural Gas Production:

Is There Life After Transco?, 38th Southwestern Legal

Foundation Institute on Oil and Gas Law and

Taxation, at 10-30 (1987).

With regard to Congressional purposes and

objectives, the Transco majority and dissent express

very similar views.5 The majority perceives a "new

5While the Court in Transco seems to be divided on only

two particulars regarding Congressional purposes and objectives,

these apparent divisions are not significant. First, the dissent

(Footnote continued on next page)

federal role" of overseeing "a national market price

regulatory scheme" and characterizes this as a

Congressional intention "to give market forces a more

significant role in determining the supply, the demand,

and the price of natural gas" and "to move toward a

less regulated national natural gas market." Transco,

106 S.Ct. at 716-17. Similarly, the dissent states the

NGPA was intended "to decontrol the wellhead price of

natural gas sold to interstate pipelines, allowing prices

to rise according to market conditions and causing

shortages to vanish.” Jd. at 722 (Rehnquist, J.,

dissenting).

(Footnote continued from previous page)

takes issue with the majority opinion for mentioning "supply" and

"demand" (as opposed to "“price") as economic variables that

Congress intended to decontrol. Transco, 106 S.Ct. at 722 n.5

(Rehnquist, J., dissenting). But, the majority clarifies in a

footnote that its point is simply that "Congress clearly intended to

eliminate the distortive effects that NGA price control had had on

supply and demand.” Id. at 718 n.6. This clarification is perfectly

consistent with the dissent’s view that the Congressional purpose

and objective was to bring about a more efficiently operating

commodity market by decontrolling wellhead prices. Id. at 722

(Rehnquist, J., dissenting). The NGPA was concerned with supply

only to the extent that price ceilings create shortages.

The other area where the Transco Court seems to be

divided concerns the "alleged" (in the dissent’s view)

Congressional purposes of national uniformity and protection of

consumers. Although the dissent does not categorically deny the

existence of these "alleged" objectives, the dissent does place these

matters in a perspective that is consistent with the theory of

Congressional purpose shared by both the majority and the

dissent. The dissent in Transco recognized that “[wJhile the

congressional desire to decontrol prices uniformly throughout the

nation includes an intent to prevent States from enacting

regulation to recontrol them, it does not imply an intent either to

create an anarchistic regulatory gap free from property rights and

contract rules, or to create a national law of contracts to govern

natural gas relationships." Jd. at 723 n.6 (emphasis in original)

(Rehnquist, J., dissenting).

10

It is axiomatic that "a precondition for the

establishment of a market is the existence and

enforcement of property rights." P.S. Dasgupta & G.M.

Heal, Economic Theory and Exhaustible Resources 48

(1979). The dissent in Transco recognized that

“markets depend upon such rules [of property rights] to

function efficiently." Transco, 106 S.Ct. at 772

(Rehnquist, J., dissenting). Therefore, for the natural

gas market to operate without “distortion,” the states

must be responsible for creating and administering

property rights regarding the commodity for which that

market operates.

The Court has always acknowledged that con-

servation of the supply of natural gas is traditionally a

function of state power. Northern Natural, 372 U.S. at

93. In this regard, it has upheld the common state

practice of placing ceilings, called "allowables," on the

amount of gas that a particular well or pool may

produce during a given period. Champlin, 286 U.S. at

233-34. While such absolute restrictions on output

have the potential of raising wellhead prices above

competitive equilibrium, ratable-take rules’ by

themselves, do not. Transco, 106 S.Ct. at 722 n.5.

(Rehnquist J., dissenting).

D. The Oklahoma Regulatory Scheme

Neither Intrudes in an Occupied Field

of Congressional Governance Nor Ob-

structs the Accomplishment of Con-

gressional Purposes and Objectives.

When Congress evidences a clear intent to

occupy a given field, any state law falling within that

field is preempted. Pacific Gas & Elec. Co. v. State

Energy Resources Conservation & Dev. Comm'n, 461

U.S. 190, 203-04 (1983). Preemption can also occur if

the state law conflicts with the federal law to such an

11

extent that it is impossible to comply with both

regulatory schemes, Florida Lime & Avocado Growers,

Inc. v. Paul, 373 U.S. 132, 142-43 (1963), or if the state

law is a complete obstacle to the Congressional

objectives, Hines v. Davidowitz, 312 U.S. 52, 67 (1941).

This Court invalidated orders directed at interstate gas

purchasers in Northern Natural because it was

believed that the burden those orders placed on

purchasers impermissibly encroached into an area

chosen by Congress to be occupied by exclusive federal

regulatory control; in Transco, the Court declared post-

NGPA vitality of Northern Natural while holding that

the challenged Mississippi order stood as an obstacle to

the full accomplishment of the federal purpose.

Transco, 474 U.S. at 422-23. This Court, however, has

recognized that a very sensitive analysis must be

employed when determining whether a state regulatory

scheme is preempted under the supremacy clause, in

an area where dual regulation is obviously intended.

Northwest Central Pipeline, 57 U.S.L.W. at 4308.

The Oklahoma statute and rule at issue herein

neither intrude in an occupied field of federal

governance nor do they constitute a complete obstacle

to Congressional objectives.6 Congressional intent to

6Indeed, the express legislative intent of the NGA, NGPA

and this Court’s prior holdings in Champlin, 286 U.S. at 233-37

and Cities Service Gas Co. v. Peerless, 340 U.S. 179, 184-85 (1980),

and more recently in Northwest Central Pipeline, indicate that

Congress has left to the states the continued authority to promote

conservation and protect correlative property rights. This Court

has stated:

[c]learly, among the powers thus reserved to the

states is the power to regulate the physical

production and gathering of natural gas in the

interests of conservation or of any other

consideration of legitimate local concern. It was

the intention of Congress to give the states full

freedom in these matters.

Interstate Natural Gas Co. v. FPC, 331 U.S. 682, 690 (1947).

12

preempt state regulation should be inferred only where

the comprehensiveness and pervasiveness of the fed-

eral regulation preclude supplementary state regu-

lation, where the federal interest is sufficiently

dominant, or where the goal of the federal law and the

character of the obligations imposed by it reveal the

same purpose.? Schneidewind v. ANR Pipeline, 108

S.Ct. 1145, 1150 (1988).

The Congressional objective in passing the NGA

and NGPA was not to deny states the right to regulate

the production of natural gas or to prohibit state

regulation. in the interests of conservation and

protection of correlative rights. Furthermore, Congress

did not intend to prohibit all actions that might affect

the price of gas but rather to assure that market forces,

operating without regulatory distortion, play a more

significant role in determining wellhead prices. Free,

"undistorted" markets depend on rules of property and

contract to function efficiently. Transco, 106 S.Ct. at

722 (Rehnquist, J., dissenting). Congress has neither

created such rules on its own motion nor abolished

state-administered systems that define and enforce

7In a borderline case where Congressional authority is not

explicit the Court must determine whether state authority can

practicably regulate a given area and, if the Court cannot so find,

then and only then, is the Court compelled to decide whether

federal authority governs. FPC v. Transcontinental Gas Pipeline

Corp., 365 U.S. 1, 19-20 (1961). Complexity and comprehen-

siveness of federal regulations alone is an insufficient basis for

inferring preemptive intent. California Coastal Comm’n v. Granite

Rock Co., 480 U.S. 572, 107 S.Ct. 1419, 1426 (1987); Hillsborough

County v. Automated Medical Laboratories, Inc., 471 U.S. 707, 717

(1985) (comprehensiveness of federal regulations alone, does not

necessarily determine federal preemption). Rather, this Court

requires a “clear and manifest purpose” of Congressional intent to

preempt before invalidating state action. Puerto Rico Dep't of

Consumer Affairs v. Isla Petroleum Corp., 108 S.Ct. 1350, 1355

(1988).

13

such rules. Since the Oklahoma regulatory scheme,

including its priority of production schedule, is an

integral part of such a legitimate state-administered

system, the Oklahoma statute and rule do not stand as

obstacles to the accomplishment of the full purposes

and objectives of Congress.®

E. The Oklahoma Regulatory Scheme,

Establishing a Priority of Production

Schedule, is Consistent with Prior

Opinions and Congressional Intent.

1, Oklahoma’s priority of produc-

tion schedule is a necessary and

legitimate exercise of its police

power to prevent waste.

Oklahoma maintains a priority of production

schedule for the primary purpose of preventing waste

of natural resources. The priority system generally

guarantees continued production from the most fragile

wells and does as much as possible to ensure maximum

recovery of existing reserves. A_ state’s priority

production scheme generally determines the sequential

order of production by the category of gas, with gas to

be taken ratably in each category, without

discrimination. Loss of otherwise recoverable reserves

8Indeed, the Court in Northern Natural indicates that,

while the troublesome category of state regulation is orders

"directed" at interstate purchasers and wholesalers for resale, not

all such orders would be preempted. "The former [conservation

measures directed at interstate purchasers and wholesalers for

resale} cannot be sustained when they threaten, as here, the

achievements of the comprehensive scheme of federal regulation."

Northern Natural, 372 U.S. at 94 (emphasis added). Presumably,

such conservation measures would be acceptable as long as they

did not threaten the federal scheme.

14

will occur if production is non-uniformly curtailed in

the wells in the higher priority categories. Martin,

State Regulation of Natural Gas Production: Is There

Life After Transco?, 38th Southwestern Legal

Foundation Institute on Oil and Gas Law and

Taxation, at 10-7 (1987) (priority schedule utilized by

states as "a further measure for the prevention of

physical waste").

Oklahoma’s Rule 1-305 is a regulatory program

providing for priority production of hardship and

distressed wells, enhanced recovery wells, and wells

producing casinghead gas and associated gas with all

remaining gas wells being assigned the lowest

priority. The Oklahoma rule reflects the state’s

concern for the potential impact special priority wells

might have on the ultimate recovery of the state’s

natural resources. With regard to priority wells, waste

of recoverable natural resources. will generally occur

unless continuous, steady production is maintained

. from distressed wells and secondary or tertiary

recovery project wells. It is conceded to be an

“established scientific fact that to secure the greatest

ultimate recovery of oil and gas .. . , the maintenance

of consistent reservoir pressure is essential." Summers,

Oil and Gas §76 at 233 (Perm. ed. 1954).

2The Oklahoma priority of production schedule differs

from the amici states’ priority schemes. Texas, for example, gives

first priority to casinghead gas from secondary and tertiary oil

recovery projects, which accounted for 10.8 percent of all Texas

gas produced in 1988. These injection projects are engineered to

maximize recovery at steady state flow rates, and their oil

recovery percentages decline if they are operated intermittently or

must be shut-in for lack of a market. Fifty-two percent of Texas’

1988 oil production came from secondary and tertiary recovery

projects. The fundamental basis of all the states’ priority of

production schemes is prevention of waste of natural resources.

15

This Court has recognized this principle and the

inevitably unfortunate physical waste of otherwise

recoverable natural resources where, absent effective

regulation, improvident dissipation of underground

pressure is permitted to occur through the competitive

incentives of common ownership of a common source of

supply. Effective state conservation regulations em-

ploying an even-handed ratable-take rule would elimi-

nate this danger. Champlin, 286 U.S. at 233. A state

ratable-take rule is a necessary complement to a

ratable-production rule and is essential to protect

correlative rights and ensure maximum recovery of

hydrocarbon reserves. Northern Natural, 372 U.S. at

655 (White, J., dissenting). Without the corresponding

ratable-take rule, a ratable-production rule forces a

producer to act in concert with other producers, over

whose production activities he has no control or

familiarity. In other words, ratable production

regulations standing alone are difficult to enforce in

practice because a well cannot produce without the gas

production being purchased or taken; the two rules

establish the necessary check and balance system

crucial to effective state conservation regulations.

A state’s priority of production schedule is the

very type of valid constitutional state regulation which,

when enacted under the traditionally recognized police

power of a state to prevent waste, may have some effect

on the practices or costs of interstate pipelines’

purchases, though such effect will be purely incidental

to the states’ overriding objective of promoting

conservation through maximization of the extraction of

recoverable reserves from its marginally-producing

wells.

In Northwest Central Pipeline, the Court found

that a Kansas statute limiting the carry-forward of

underage in order to encourage increased production

from the Kansas-Hugoton Field was a valid exercise of

16

the state’s police power, even though the state action

would necessarily have an incidental effect on

interstate pipeline purchasers’ costs and ultimately,

the interstates’ consumers. In reconciling this seeming

conflict, the Court specifically recognized that:

[ijn the integrated gas supply system, these

jurisdictional tensions will frequently

appear in the form of state regulation of

producers and their production rates that

has some effect on the practices or costs of

interstate pipelines subject to federal

regulation. Were each such effect treated

as triggering conflict pre-emption, this

would thoroughly undermine precisely the

division of the regulatory field that

Congress went to so much trouble to

establish in section l(b), and would render

Congress’ specific grant of power to the

States to regulate production virtually

meaningless.

Northwest Central Pipeline, 57 U.S.L.W. at 4308

(emphasis added).

2. Oklahoma’s priority of produc-

tion schedule furthers the Con-

gressional intent to ensure

optimum supplies of natural gas.

A priority of production schedule working in

concert with state ratable-take provisions is the least

intrusive and one of the most effective methods of

preventing waste and ensuring the equitable protection

of property interests. In the fragile wells addressed by

a state’s priority schedule, reserves not produced are

likely lost forever. Clearly, Congressional intent in

passage of the NGA and NGPA was to ensure long-

17

term supplies of natural gas. Northwest Central

Pipeline, 57 U.S.L.W. at 4307.

The aim of federal regulation remains to assure

adequate, long-term supplies of natural gas at fair and

stable market prices. This country’s energy indepen-

dence demands such assurance. Any incidental impact

which state regulation designed to prevent waste or

protect correlative rights might have on the purchasing

practices of interstate pipelines or upon their ultimate

consumers would clearly pass the balancing test of Pike

v. Bruce Church,1© and constitute permissible state

regulation. Where production of a priority status well’s

gas is dedicated to interstate commerce, the resultant

and intended effect of state regulation would be the

achievement of maximum recovery and availability of

natural gas reserves to the interstate market.

The state’s power to prevent waste necessarily

includes the power to prevent the wasteful depletion of

a common source of supply. Champlin, 286 U.S. at

234. Priority schedules ensure on-line maintenance of

production from even the most difficult to produce

reserves and thereby guarantee the continuation of the

maximum supply of natural gas reserves to serve the

nation’s needs. The preservation of gas reserves is a

complex regulatory task, best accomplished by state

governments through the expertise of their respective

state agencies.

10397 U.S. 137, 142-43 (1970). Under the Court’s bal-

ancing test as set forth in Pike, a state statute which has

incidental effects on interstate commerce is constitutional as long

as the statute "regulates even-handedly to effectuate a legitimate

local public interest." The Oklahoma regulatory scheme at issue

herein meets this test: it regulates both purchasers and producers

to the same extent and effects the state’s strong interest to

prevent waste.

18

F. Oklahoma’s Ratable-Take Regulations,

Including Priority Schedules, Fall

Within the NGA’s "Production and

Gathering" Exemption.

"Production" and "gathering" are terms referring

to the physical acts of drawing the gas from the earth

and preparing it for the first stages of distribution.

Colorado Interstate Gas Co. v. FPC, 324 U.S. 581, 598

(1945). The Oklahoma ratable-take scheme does not

impose any improper regulatory obligation on

interstate purchasers: it neither distorts price nor

alters the :-volume of gas available to the interstate

market. Rather, the Oklahoma scheme prudently

regulates the physical means by which natural gas is

produced, gathered and made available for distribution

to the intrastate and interstate pipeline systems as

authorized by section 1(b) of the NGA.

In Champlin, this Court sustained the imple-

mentation and use of state "allowable" orders which

imposed ceilings on the volume of gas available for

production from a particular well. These orders

required interstate purchasers to allocate their "take

demands" among many wells. The resultant effect was

precisely the same as that which would h ave been

caused by imposition of ratable-take orders inasmuch

as both orders are designed to prevent detrimentally

disproportionate taking of gas among wells. Champlin,

286 U.S. at 233. Indeed, this Court determined:

[t]he terms "production and gathering" in

§1(b) are sufficient in themselves to reserve

to the States not merely "control over the

drilling and spacing of wells and the like,"

Colorado Interstate Gas Co. v. FPC, 324

U.S. 581, 603 (1945), but also the power to

regulate rates of production over time -- a

poi

19

key element, after all, in efforts to prevent

waste and protect correlative rights.

Northwest Central Pipeline, 57 U.S.L.W. at 4307.

Oklahoma’s and the amici states’ regulatory programs

include comprehensive guidelines which direct the

production and gathering of natural gas in a manner

designed to prevent waste, protect valuable property

rights, and ensure the existence of long-term natural

gas supplies to fuel the nation’s economy. This Court

recently unanimously recognized the importance of the

continued authority of the states to enact and enforce

regulations for waste prevention and protection of

correlative rights. Jd. at 4308.

The statute and rule declared unconstitutional

by the Tenth Circuit are vital parts of Oklahoma’s

"production and gathering" regulatory framework, and

if these portions of its program are selectively

amputated, that state’s regulatory scheme would be

effectively disabled. The result would be an

impairment of Oklahoma’s ability to prevent waste,

protect property rights and ensure the availability of

limited natural resources. This result is directly

contrary to the goals and purposes of the NGA and

NGPA, especially the express reservation of

"production and gathering” regulation to the states.

Congress did not intend this result when it enacted

section l(b) of the NGA.

IV. Conclusion

In this case, the Court has an opportunity to

address an issue never expressly ruled on by this

Court, specifically, whether a priority of production

schedule, designed to prevent waste, passes

constitutional muster. In addition, this case gives the

Court the opportunity to further delineate the roles of

the federal and state agencies in regulating the natural

Hic

20

gas production and transportation industry in the

vitally important areas of conservation and property

rights. The Court should issue the requested writ of

certiorari to settle these crucial issues. In the

alternative, the Court should vacate the judgment of

the lower court and remand for consideration in light of

Northwest Central Pipeline.

Respectfully submitted,

JIM MATTOX

Attorney General of Texas

MARY F. KELLER

First Assistant Attorney General

LARRY J. LAURENT*

Assistant Attorney General

Chief, Energy Division

ANDREW M. TAYLOR DIANE WEIDERT MORRIS

Assistant Director Assistant Attorney General

Legal Division P. 0. Box 12548, Capitol Station

Railroad Commission Austin, Texas 78711-2548

of Texas (512) 463-2003

Attorneys for the Railroad

Commission of Texas

*COUNSEL OF RECORD FOR

iaintecn THE AMICI CURIAE

(Additional counsel listed in Appendix)

A-l

APPENDIX

ADDITIONAL COUNSEL FOR AMICI CURIAE

State of Kansas

FRANK CARO, JR.

General Counsel

4th Floor, Docking State Office Bldg.

Topeka, Kansas 66612

(913) 296-2549

Attorney for the State Corporation

Commission of the State of Kansas

State of Louisiana

WILLIAM J. GUSTE, JR.

Attorney General of Louisiana

MARY ELLEN LEEPER

= Assistant Attorney General

P.O. Box 2827

Baton Rouge, Louisiana 78021-2826

(504) 324-4615

DAVID B. ROBINSON

Patton, Boggs & Blow

2550 M. Street N.W.

Washington, D.C. 20037

(202) 457-6084

Attorneys for the Louisiana Office of

Conservation of the Department of

Natural Resources

A-2

State of New Mexico

HAL STRATTON

Attorney General of New Mexico

ROBERT G. STOVALL

Special Assistant Attorney General

P. 0. Box 2088

Sante Fe, New Mexico 87504

(505) 827-6000

Attorneys for the New Mexico Oil

Conservation Commission

State of North Dakota

NICHOLAS J. SPAETH

Attorney General of North Dakota

State Capitol Building

600 East Boulevard

Bismark, North Dakota 58505

(701) 224-2210

Attorney for the North Dakota Industrial

Commission