Amicus Curiae Brief — Transcontinental Pipe Line Corp. v. State Oil & Gas Bd.

)

No. 84-1076 | FEB a 1985

Ce 3TEVAS.

CLERK

IN THE

Supreme Court of the United States

OCTOBER TERM, 1984

rte “Su y me + US. |

TRANSCONTINENTAL GAS PIPE LINE CORPORATION,

Appellant,

V.

THE STATE OIL AND GAS BOARD OF MISSISSIPPI AND

COASTAL EXPLORATION, INC., et al.,

Appellees.

On Appeal from the Supreme Court of Mississippi

BRIEF AMICUS CURIAE OF

ASSOCIATED GAS DISTRIBUTORS IN SUPPORT

OF APPELLANT’S JURISDICTIONAL STATEMENT

FREDERICK MORING

Counsel of Record

M. LISANNE CROWLEY

CROWELL & MORING

1100 Connecticut Ave., N.W.

Washington, D.C. 20036

(202) 452-5800

Attorneys for Amicus Curiae

Associated Gas Distribut: rs

February 1, 1985

WILSON - EPES PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

ASSOCIATED GAS DISTRIBUTORS

MEMBER COMPANIES

Atlanta Gas Light Co.

Baltimore Gas & Electric Co.

Bay State Gas Co.

The Berkshire Gas Co.

Boston Gas Co.

The Brooklyn Union Gas Co.

Central Hudson Gas & Electric Corp.

Chesapeake Utilities Corp.

City of Holyoke, Mass., Gas & Electric Dept.

City of Norwich, Dept. of Public Utilities

City of Westfield Gas & Electric Light Dept.

Colonial Gas Co.

Commonwealth Gas Co.

Concord Natural Gas Corp.

Consolidated Edison Company of New York, Inc.

Delmarva Power & Light Co.

Elizabethtown Gas Co.

EnergyNorth, Inc.

Essex County Gas Co.

Fitchburg Gas & Electric Light Co.

Lynchburg Gas Co.

New Jersey Natural Gas Co.

New York State Electric & Gas Corp.

North Carolina Natural Gas Corp.

Northeast Georgia Municipal Gas Utilities

Northeast Utilities

Northern Utilities, Inc.

Pennsylvania Gas & Water Co.

Pequot Gas Co.

Philadelphia Electric Co.

Philadelphia Gas Works

Providence Gas Co.

Public Service Company of North Carolina, Inc.

Public Service Electric & Gas Co.

South County Gas Co.

South Jersey Gas Co.

The Southern Connecticut Gas Co.

UGI Corporation

Valley Gas Co.

Washington Gas Light Co.

TABLE OF CONTENTS

TABLE OF AUTHORITIES ..........................--..-------0--00+-

INTEREST OF AMICUS CURIAE .........................--.--

CONSENT OF THE PARTIES ...............-----.----0--00-20---+

SUMMARY OF ARGUMENT ...................-.----------------

a cccsseIDRIONONENOS eenesenncenmonets

I.

Il.

Ill.

IV.

THE QUESTION OF WHETHER THIS

COURT’S DECISION IN THE NORTHERN

NATURAL CASE WAS OVERRULED BY

THE NATURAL GAS POLICY ACT OF 1978

S| yg FS SEE NEEE

REGULATION OF INTERSTATE GAS PIPE-

LINES, AS MANDATED BY THE NATURAL

GAS ACT, CONTINUES TO BE THE RE-

SPONSIBILITY OF THE FEDERAL GOV-

IIIT seniansinisnsssnannndeinsistectnsniasastmnemmecnenennsessaceanes

PROCEEDINGS CURRENTLY PENDING IN

THE FEDERAL ENERGY REGULATORY

COMMISSION ARE ON A_ COLLISION

COURSE WITH THE MISSISSIPPI RATA-

Fe Ss BE | + ee

THE GROWTH OF DIVERGENT STATE

REGULATION OF INTERSTATE PIPELINE

PURCHASING PRACTICES STANDS AS A

SIGNIFICANT THREAT TO THE INTER-

ESTS OF THE NATION’S GAS CONSUM-

tiene dessansehindaninignttiningninneneemesmesesmmnemmatesenmssamneatanes

11

ii

TABLE OF AUTHORITIES

Cases:

Arkansas Electric Cooperative Corp. v. Arkansas

Public Service Commission, US. , 103

2 Se Ff) |

Atlantic Refining Co. v. Public Service Commission

of New York, 360 U.S. 378 (1959) ..........--.--------

Burbank v. Lockheed Air Terminal, 411 U.S. 624

CITT ccctanensecsiscctnsceneesassnconenanitansnninnnteinnenmnnmestitiiont

Exxon Corp. v. Eagerton,

GE CRG) nnn eannn snes nen nn nn nvnsesenennsensceoscesnosnere

Federal Power Commission v. Hope Natural Gas

Co., 820 U.S. 591 (1944) 2222.2......--..-.----000----cneecneee

Federal Power Commission v. Texaco, Inc., 417

ie SS ) | Ranssnrnseeereene

Federal Power Commission v. Transcontinental

Gas Pipe Line Corporation, 365 U.S. 1 (1961) ..

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

A yyy

Maryland v. Louisiana, 451 U.S. 725 (1981).........

Missouri ex. rel. Barrett v. Kansas Nutural Gas

Co., 265 U.S. 298 (192A) .........-......-...---ecceeceeeceeeses

Mobil Oil Corp. v. Federal Power Commission, 417

of 8 er Seen

Northern Natural Gas Co. v. State Corporation

Commission, 372 U.S. 84 (1963) ........-.....----------

Pacific Gas and Electric Co. v. State Energy Re-

sources Conservation and Development Com-

mission, —— U.S. ——, 103 S.Ct. 1713 (1983)...

Decisions and Orders of the Federal Energy Regula-

tory Commission:

Columbia Gas Transmission Corporation, Docket

No. TA81-1-21, et al., Opinion No. 204, 26

FERC {61,034 (January 16, 1984), appeal

8, 16

13

docketed, No. 84-1099, et al. (D.C. Cir.) -......... 9,10, 13

El Paso Natural Gas Company, Docket No. RP82-

38, et al., Order on Rehearing Modifying Prior

Orders, Consolidating Cases, and Setiing Hear-

ing, 26 FERC { 61,8366 (March 21, 1984) .......

iii

TABLE OF AUTHORITIES—Continued

Page

MIGC, Inc., Docket No. RP84-15-000, et al., Or-

der Accepting Filing, Consolidating Proceedings

and Setting Matters for Hearing, 26 FERC

61,369 (March 21, 1984) .........----------------------- 10

Panhandle Eastern Pipe Line Company, Docket

No. TA84-1-23-002, Order Establishing Hearing

Procedures, 26 FERC { 61,339 (March 16,

TODA) occa enecnn noe -eanecncsiseenesevemnenaresvecnenasinoemenesnerucsecees 10

Southern Natural Gas Company, Docket No.

TA&4-1-7-000, et al., Order Consolidating Pro-

ceedings and Setting Matters for Hearing, 26

FERC { 61,371 (March 21, 1984) .............------------ 10

Transcontinental Gas Pipe Line Corp., Docket No.

TA83-2-29-001, et al., Order Establishing Hear-

ing Procedures on Deferred Purchasing Prac-

tices Issues, 26 FERC { 61,361 (March 21,

BODE) -..0----n.2neev-eveceeneenesanocvenenesnvsesenamvenctenenesossesoonees 10

Transcontinental Gas Pipe Line Corp., Docket Nos.

TA&5-1-27-000 and TA85-1-29-001, Order Ac-

cepting and Suspending Proposed Tariff Sheets

Subject to Refund and Conditions (October 31,

| oo 12

Trunkline Gas Company, Docket No. TA83-1-30-

002, et al., Order Setting Matter for Hearing

and Consolidating Proceedings, 26 FERC

§ 61,363 (March 21, 1984) .............--------------------- 10

United States Constitution:

Article I, Section 8, clause 3 (“Commerce

Cm) nnaene—n.2nneon-neoe-snasacsraoanonsecoesoeennnsenesnacensosoes 5,8

United States Statutes:

Natural Gas Act of 1938, 15 U.S.C. § 717 (1982) ..passim

Section 1(b), 15 U.S.C. § 717 ........-.--.--------------- 9

Section 4, 15 U.S.C. § 717(c) ......-.-.---------------- 9, 11,13

Section 5, 15 U.S.C. § 717 (d) ..........-.-------------- 9,11, 13

Natural Gas Policy Act of 1978, 15 U.S.C. § 3301

et Seq. (1982) ........-...--------ce-neeecerenennsenesene saneesnesnees passim

Section 601(c), 15 U.S.C. § 3431 (c) -..........---- 1l

IN THE

Supreme Court of the United States

OCTOBER TERM, 1984

No. 84-1076

TRANSCONTINENTAL GAS PIPE LINE CORPORATION,

Appellant,

Vv.

THE STATE OIL AND GAS BOARD OF MISSISSIPPI AND

COASTAL EXPLORATION, INC., et al.,

Appellees.

On Appeal from the Supreme Court of Mississippi

BRIEF AMICUS CURIAE OF

ASSOCIATED GAS DISTRIBUTORS IN SUPPORT

OF APPELLANT’S JURISDICTIONAL STATEMENT

INTEREST OF AMICUS CURIAE

Associated Gas Distributors (AGD) is an unincorpo-

rated association whose members (listed on the inside

cover of this brief) are gas distribution companies located

along the eastern seaboard of the United States from

New England through Georgia. Together, the AGD com-

panies serve over eleven million customers, and their an-

nual sales comprise approximately 25 percent of the gas

sold through the nation’s interstate gas supply network.

2

Each AGD member purchases its natural gas for resale

from one or more of the major, regulated interstate gas

pipeline companies, including the Transcontinental Gas

Pipe Line Corporation (Transco), Appellant in this pro-

ceeding. A number of AGD members purchase a substan-

tial portion of their gas supply from Transco; these AGD

companies are directly affected by any increase in Trans-

co’s rates.

The purpose of the present brief amicus curiae is two-

fold. First, AGD seeks to emphasize the substantiality of

the constitutional questions raised in this appeal by de-

scribing the historical and continuous federal preemption

of the regulation of interstate gas pipeline companies. In

particular, we note that at this very point in time, there

exists an imminent possibility of collision between the

Mississippi “ratable take” order, as affirmed by the Mis-

sissippi Supreme Court in its enforcement against Appel-

lant, Transco, and a proceeding pending in the Federal

Energy Regulatory Commission (FERC or Commission)

to investigate that pipeline’s purchasing practices.

The second purpose of AGD in submitting the present

brief is to apprise the Court of the critical nature of this

issue for consumers of natural gas nationwide who de-

pend upon a comprehensive federal system of regulation

of our nation’s interstate gas pipeline network. As other

states, including the larger, gas-producing states, begin to

enforce “ratable-take” schemes against pipelines as does

the Mississippi order challenged here, the consequences

for the ultimate consumers, who absorb the increased

costs and uncertainties that result therefrom, will be

severe.

As public utilities, the members of AGD have an obli-

gation to protect their customers agains® she peyment of

excessive and unlawful natural gas prices. Therefore,

AGD has a substantial and direct interest in the outcome

of this appeal. For this reason, AGD submits this brief

amicus curiae in support of the Appellant.

3

CONSENT OF THE PARTIES

AGD has obtained the written consent of all the parties

to this appeal for its filing of the present brief amicus

curiae. The consent statements are attached to the origi-

nal signed copy hereof filed with the Court.

SUMMARY OF ARGUMENT

I. In upholding the Mississippi Oil & Gas Board’s or-

der directing Transco to take gas ratably, the Mississippi

Supreme Court held, in effect, that this Court’s decision in

Northern Natural is no longer good law as to purchases

by interstate pipelines of gas whose price at the wellhead

was deregulated by the Natural Gas Policy Act of 1978

(NGPA). Given that this Court rejected state regulation

in this area even before the enactment of federal legisla-

tion governing interstate sales of natural gas, and that

this Court relied specifically on the precedential value of

Northern Natural in a case decided after the passage of

the NGPA, the question of whether the court below mis-

interpreted the rationale of Northern Natural, in other

words, whether state regulation of purchasing practices

of interstate gas pipelines remains preempted by federal

law, is substantial.

Il. Under the Natural Gas Act of 1938 (NGA), the

Federal Energy Regulatory Commission (FERC or Com-

mission) (formerly the Federal Power Commission) was

given the responsibility to regulate the purchasing prac-

tices of interstate pipeline companies. The Commission’s

exclusive jurisdiction over interstate p.pelines was unaf-

fected by passage of the NGPA. Proceedings to investi-

gate the purchasing practices of pipelines which cur-

rently pend at the FERC demonstrate that the Commis-

sion is continuing to regulate in this area and, therefore,

the intrusion of state regulatory agencies would be un-

lawful.

III. An illustration of the conflict, and potential for

inconsistency, that would result from state regulation of

4

interstate pipeline purchasing practices is the pendency of

a proceeding at the FERC to investigate the purchasing

practices of Transco. It is conceivable that the Commis-

sion, pursuant to its NGA authority, will find Transco’s

compliance with the Mississippi ratable take order to be

an unlawful purchasing practice under federal law.

There exists the imminent possibility of collision between

federal and state law; therefore, under this Court’s inter-

pretation of the doctrine of federal preemption, the state

law must fall.

IV. In enacting the NGA and the NGPA, Congress

charged the FERC with the fundamental responsibility

of protecting the interests of the nation’s gas consumers.

Diverse, perhaps conflicting state regulation of the inter-

state pipeline network will ignure nationwide energy con-

cerns, and will inhibit the ability of the FERC to fulfill

its federal regulatory role.

ARGUMENT

I. THE QUESTION OF WHETHER THIS COURT'S

DECISION IN THE NORTHERN NATURAL CASE

WAS OVERRULED BY THE NATURAL GAS POL-

ICY ACT OF 1978 IS SUBSTANTIAL.

In Transcontinental Gas Pipe Line Corporation v. The

State Oil & Gas Board of Mississippi and Coastal Explo-

ration, Inc., et al., Brief for Appellant at Appendix A, the

Mississippi Supreme Court was faced with the same issue

that was decided by this Court in Northern Natural Gas

Co. v. State Corporation Commission, 372 U.S. 84 (1963).

Yet, in upholding the validity of the Mississippi Oil &

Gas Board’s “ratable take” order, the Mississippi court

made the opposite decision. Whether the Mississippi Su-

preme Court’s holding flouted a Supreme Court decision

that continues to be good law after passage of the Nat-

ural Gas Policy Act of 1978, 15 U.S.C. § 3301 et seg.

(1982) is a substantial question which requires a deter-

mination by this Court.

5

Prior to any federal regulation of sales for resale, or

“wholesale sales,” of natural gas in interstate commerce,

this Court refused to permit state regulation in the field

on the ground that it imposed a direct burden on inter-

state commerce in violation of the Commerce Clause of

the Constitution. See, i.e., Missouri ex rel. Barrett v.

Kansas Natural Gas Co., 265 U.S. 298 (1924). In enact-

ing the Natural Gas Act, 15 U.S.C. § 717 (1982), the

Congressional committee reports noted that such sales

. . . have been considered to be not local in character

and, even in the absence of Congressional action, not

subject to State regulation. The basic nurpose of the

present legislation is to occupy this field in which the

Supreme Court has held that the States may not

act.” H.R. Rep. No. 709, 75th Cong., Ist Sess. 1-2;

S. Rep. No. 1162, 75th Cong., 1st Sess. 1-2 (citations

omitted) (emphasis added).

Quoted in Exxon Corp. v. Eagerton, US. ——, 103

S. Ct. 2296, 2302-03 (1983). Thus, prior to any federal

regulation—or deregulation—of the field, state regulation

was considered inappropriate with regard to interstate

sales of natural gas. The Natural Gas Act then was en-

acted to explicitly authorize federal regulation of the rates

which a producer and a pipeline could charge their inter-

state customers on a standard of justness and reason-

ableness.

In 1963, this Court was presented with the question

whether the State of Kansas was entitled to force an

interstate pipeline company which purchased gas within

the State to take ratably from all Kansas producers con-

nected to its system. After first rejecting the State’s

argument that its ratable take order was directed to the

“production and gathering” of natural gas, which is ex-

empt from federal regulation under the NGA, the Court

held the Kansas ratable take order invalid on the ground

that it “invade[d] the exclusive jurisdiction which the

Natural Gas Act has conferred upon the Federal Power

Commission over the sale and transportation of natural

gas in interstate commerce for resale.” Northern Natu-

6

ral, 372 U.S. at 89. The Court stated that the federal

regulatory scheme left no room for either direct or in-

direct state regulation of the prices of interstate whole-

sale sales of gas, id. at 91, and, more importantly for

the purpose of these proceedings, that

[t]he danger of interference with the federal regu-

latory scheme arises because these orders are unmis-

takably and unambiguously directed at purchasers

who take gas in Kansas for resale after transporta-

tion in interstate commerce. In effect, these orders

shift to the shoulders of interstate purchasers the

burden of performing the complex task of balancing

the output of thousands of natural gas wells within

the State, cf. Miller Bros. Co. v. Maryland, 347 U.S.

340—a task which would otherwise presumably be

the State Commission’s. Moreover, any readjust-

ment of purchasing patterns which such orders might

require of purchasers who previously took unratably

could seriously impair the Federal Commission’s au-

thority 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 Com-

mission paramount and exclusive authority. See Fed-

eral Power Comm’n v. Hope Natural Gas Co., 320

U.S. 591, 610.

Id. at 92. The language of this passage clearly indicates

that the Court’s basis for finding a federal regulatory

scheme which preempted the state order was the federal

regulation not simply of wellhead prices but of interstate

pipeline-purchasers and their purchasing patterns, the

readjustment of which could “seriously impair” the Com-

mission’s ability to regulate the pipelines’ cost structures

and sales to wholesale customers, i.e., distributors.

In 1978, Congress passed the Natural Gas Policy Act,

15 U.S.C. § 3301 et seg. (1982) (NGPA). The NGPA

removed from FERC jurisdiction the regulation of well-

7

head prices of certain categories of gas, and restructured

wellhead price regulation for the remaining categories.

The NGPA did not affect the ongoing regulation of pipe-

lines under the Natural Gas Act’s just and reasonable

standard.

In the present case, the Mississippi Supreme Court

upheld the order of its State Oil & Gas Board directing

Transco to take gas ratably from all producers in a com-

mon source of supply. The court acknowledged that if

this case had been brought prior to 1978, it would have

been bound by this Court’s decision in Northern Natural,

but that the key distinction between the two cases was

the passage of the NGPA and the fact that the state

ratable take order affected “deregulated gas.” That its

order was directed against an interstate pipeline which

was not deregulated by the NGPA was not discussed.

Neither did the court acknowledge that in Maryland

v. Louisiana, 451 U.S. 725 (1981), decided after the pas-

sage of the NGPA, this Court indicated that Northern

Natural was still considered good law. In Maryland, the

Court determined that a Louisiana “First Use” Tax on

natural gas brought into the state, primarily, from the

Outer Continental Shelf, which was borne by pipelines

and then passed through to the ultimate consumer, “like

the state Commission’s order in Northern Natural,” was

“inconsistent with the federal scheme and must give

way.” Id. at 751. The Court relied heavily on Northern

Natural for this determination, quoting the passage that

described the state requirement as liable to “ ‘seriously

impair the Federal Commission’s authority to regulate

the intricate relationship between the purchaser’s cost

structures and eventual costs to wholesale customers who

sell to consumers in other states.’” Jd. at 750, quoting

Northern Natural, 372 U.S. at 92.

Ironically, the Mississippi Supreme Court itself recog-

nized that the fact that Congress had withdrawn federal

regulation of wellhead pricing control did not end the

8

inquiry, for it quoted this Court’s statement in Arkansas

Electric Cooperative Corp. v. Arkansas Public Service

Commission that

a federal decision to forego regulation in a given

area may imply an authoritative federal determina-

tion that the area is best left unregulated, and in

that event would have as much preemptive force as

a decision to regulate.

U.S. ——, 103 S. Ct. 1905, 1912 (1983) (emphasis

in original). Despite this statement, the court below

gave no explanation, nor did it cite to a single specific

authority or indicate that the legislative history was even

consulted, for its conclusion that “what, and all, the Con-

gress has done insofar as we are concerned is strip away

federal regulatory authority thus leaving in effect and

wholly exercisable such state regulatory authority as

otherwise exists.” Brief for Appellant, Appendix A at

29a. Neither did the court, in rejecting the argument

that the ratable-take order violated the Commerce Clause,

address the fact that this type of state regulation had

been invalidated by the Supreme Court prior to any

federal regulation in the area.

State authority to regulate interstate pipeline purchas-

ing practices through measures such as ratable take or-

ders has never existed, was specifically rejected by the

Court in Northern Natural on grounds independent from

those aspects of federal jurisdiction which were removed

by the NGPA, and cannot exist today given the FERC’s

pervasive regulatory authority over the purchasing prac-

tices of interstate pipelines.

II. REGULATION OF INTERSTATE GAS PIPELINES,

AS MANDATED BY THE NATURAL GAS ACT,

CONTINUES TO BE THE RESPONSIBILITY OF

THE FEDERAL GOVERNMENT.

The Federal Energy Regulatory Commission derives

its authority to oversee and regulate the purchasing prac-

tices of the nation’s interstate gas pipelines from several

9

sources in the Natural Gas Act of 1938 (NGA), 15

U.S.C. $717 (1982). Furthermore, the Commission’s

responsibilities in this area were unaffected by passage

of the NGPA in 1978.

The broadest basis of FERC jurisdiction over interstate

pipelines is found in Section 1(b) of the NGA. 15 U.S.C.

§ 717. There, the Commission is given general authority

over (a) the transportation of natural gas in interstate

commerce, (b) the sale in interstate commerce of natural

gas for resale, and (c) companies engaged in such trans-

portation or sale.

Several substantive provisions of the NGA specifically

authorize the federal regulation of pipeline purchasing

practices. Section 4 of the NGA, 15 U.S.C. § 717(c),

governs pipeline rate increase proceedings, during which

“interested” parties (gas producers supplying the pipe-

line, pipeline customers and consumer representatives)

may raise questions concerning the “justness and reason-

ableness” of the purchasing pattern under which that

pipeline either acquired its gas supply in a past period

or proposes to acquire gas in the future. The Commis-

sion may then respond to these complaints by making

appropriate adjustments in the pipeline’s approved cost

of service.’

Under NGA Section 5, 15 U.S.C. § 717(d), the Com-

mission has authority to adjudicate the justness and rea-

sonableness of any pipeline “practice” which reflects the

rates and charges of that pipeline. If any such practice

is found to be unjust, unreasonable or unduly discrimina-

tory, the Commission is required by Section 5 to “fix”

the practice “to be thereafter observed.” Presumably,

this section could provide the basis for Commission action

affecting a pipeline’s gas purchasing practice in a man-

ner inconsistent with state ratable take schemes.

1 See, e.g., Columbia Gas Transmission Corp., Docket Nos. TA81-

1-21, et al., Opinion No. 204, 26 FERC { 61,034 at 61,096 (January

16, 1984), appeal docketed, No. 84-1099 et al. (D.C. Cir.).

10

The continued vitality of the Commission’s regulatory

authority over the purchasing practices of interstate pipe-

lines is evident in a series of cases currently pending at

FERC which involve inquiries into the past purchasing

practices of interstate pipelines. See Panhandle Eastern

Pipe Line Company, Docket No. TA84-1-28-002, Order

Establishing Hearing Procedures, 26 FERC { 61,339

(March 16, 1984); El Paso Natural Gas Company,

Docket No. RP82-33 et al., Order on Rehearing Modify-

ing Prior Orders, Consolidating Cases, and Setting Hear-

ing, 26 FERC { 61,366 (March 21, 1984); MIGC, Ine.,

Docket No. RP84-15-000, Order Accepting Filing, Con-

solidating Proceedings and Setting Matters for Hearing,

26 FERC { 61,369 (March 21, 1984); Trunkline Gas

Company, Docket No. TA83-1-30-002 et al., Order Set-

ting Matter for Hearing and Consolidating Proceedings,

26 FERC { 61,363 (March 21, 1984); Southern Natural

Gas Company, Docket No. TA84-1-7-000 et al., Order

Consolidating Proceedings and Setting Matters for Hear-

ing, 26 FERC {61,371 (March 21, 1984); Transcon-

tinental Gas Pipe Line Corp., Docket No. TA83-2-29-001

et al., Order Establishing Hearing Procedures on De-

ferred Purchasing Practices Issues, 26 FERC { 61,361

(March 21, 1984). Under the Commission’s new hear-

ing procedures for rate proceedings established in Opin-

ion Nos. 204 and 204-A, Columbia Gas Transmission Cor-

poration, Docket Nos. TA81-i-21, et al., 26 FERC

7 61,034 (January 16, 1984), appeal docketed, No. 84-

1099 et al. (D.C. Cir.), not only will the lawfulness of

a pipeline’s charged rates be judged by the NGPA con-

siderations of fraud and abuse,? but parties will also be

2 Prior to the NGPA’s passage, the pipelines’ ability to pass

through costs of gas to the distributors was a function of the

Commission’s determination as to the justness and reasonableness

of the proposed rates. Because the NGPA replaced the Commis-

sion’s authority to determine wellhead prices as to certain gas with

statutory “maximum lawful prices,” the Commission was directed

to deny passthrough of the wellhead cost of gas only where it

11

permitted to raise issues of “prudence,” the traditional

NGA Sections 4 and 5 measure of lawfulness, with re-

gard to a pipeline’s proposed rate increase. This opens

up the possibility for a pipeline’s purchase in conformity

with a state ratable take scheme, and its resulting in-

creased price of gas, to be deemed imprudent under fed-

eral standards and, therefore, unlawful.*

III. PROCEEDINGS CURRENTLY PENDING IN THE

FEDERAL ENERGY REGULATORY COMMISSION

ARE ON A COLLISION COURSE WITH THE MIS-

SISSIPPI RATABLE-TAKE RULING.

The Federal Energy Regulatory Commission is cur-

rently conducting an investigation of the purchasing pat-

terns and practices of Transco, the disposition of which

could be directly contrary to, or inconsistent with

Transco’s obligation under the Mississippi ratable-take

mandate.

On September 28, 1984, Transco tendered for filing its

tariff sheets with the Commission seeking, among other

things, a revision of the Purchased Gas Adjustment

Clause contained in its FERC Gas Tariff. Transcon-

tinental Gas Pipe Line Corporation, Docket Nos. TA85-

1-27-000 and TA85-1-29-001. On October 12, 1984, AGD

filed a Motion to Intervene and Protest in this proceed-

ing, asserting that Transco had not demonstrated the

justness and reasonableness of its proposed rate in-

crease. AGD also raised several other important issues

with regard to the purchasing practices of Transco.

Specifically, AGD’s motion stated that:

AGD is aware that certain of Transco’s gas supply

agreements contain high percentage take-or-pay pro-

“determines that the amount paid [by the pipeline] was excessive

due to fraud, abuse or similar grounds.” 15 U.S.C. § 3431(c) (2).

3 The responsibility of the FERC to determine the legality of

pipeline purchasing practices after passage of the NGPA was

explained by FERC Chairman Raymond J. O’Connor in his letter

of December 13, 1984 to Senator John Heinz.

12

visions substantially identical to those contracts

found “unjust and unreasonable” by the Commis-

sion’s Opinion No. 204. AGD is particularly inter-

ested in the manner in which higher-priced contracts

with high percentage take-or-pay provisions have af-

fected, and will continue to affect, Transco’s purchas-

ing practices and cost of gas supply. Similarly, AGD

is aware that Transco’s November 1984-April 1985

purchase pattern will be influenced by a ruling of

the Mississippi Oil & Gas Board in which Transco is

required to accept deliveries on a “ratable take”

basis from certain Mississippi supply sources. It is

not clear that this pattern of Mississippi purchases

satisfied the just and reasonable standard applicable

to Transco’s purchase pattern under Sections 4 and

5 of the Natural Gas Act nor is it clear that pro

rata purchases of uncontrolled wellhead purchases are

consistent with the lowest reasonable cost standard.

Motion of AGD to Intervene and Protest at 7.

In its Order Accepting and Suspending Proposed Tariff

Sheets Subject to Refund and Conditions, issued in the

Transco rate proceeding on October 31, 1984, the Com-

mission responded to AGD’s concerns by ordering a pub-

lic hearing “concerning the lawfulness of Transco’s pro-

posed rates, including purchasing practices issues.”

(Emphasis added.) Although the Commission did not

specify, it is reasonable to infer that the “purchasing

practices issues” to be explored in the public hearing will

include, inter alia, the justness and reasonableness of

Transco’s purchasing practices as they have been directed

by the Mississippi Oil & Gas Board’s ratable take order.

The Commission stated that it was entitled to make this

inquiry pursuant to its authority under the Natura! Gas

Act, “particularly sections 4, 5, 8 and 15 thereof... .”

Id.

If, after the public hearing and investigation, the Com-

mission finds that Transco’s compliance with the Missis-

13

sippi ratable-take order is unjust and unreasonable,‘

the pipeline will be in the position of necessarily violat-

ing either state or federal law. The FERC would have

authority, furthermore, under the Natural Gas Act Sec-

tions 4 and 5 to order Transco to adhere in the future

to a particular purchasing pattern which is inconsistent

with the state ratable take scheme. As this Court reiter-

ated in the post-NGPA Maryland v. Louisiana case,

“(t]he FERC need not adjust its ruling to accommodate”

the state statute. 451 U.S. at 725. The case law clearly

directs that in such a situation of actual federal-state

conflict, where “compliance with both federal and state

regulations is a physical impossibility,” the Supremacy

Clause requires the state law to fall to the federal law.

Pacific Gas and Electric Company v. State Energy Re-

sources Conservation and Development Commission, ——

U.S. ——, 103 S. Ct. 1713, 1722 (1983), citing Florida

Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 1382,

142-43 (1963).

Importantly, the doctrine of federal preemption does

not apply only in cases of actual conflict between state

and federal law. The attempted state regulation must

fall in a situation where, “[a]t the very least, there is

an imminent possibility of collision.” Maryland v. Lou-

isiana, 451 U.S. at 725, citing Northern Natural, 372

U.S. at 92. Therefore, given the “imminent possibility”

of a FERC order directing Transco to change its pur-

chasing pattern in a manner inconsistent with the Mis-

sissippi ratable-take scheme, this state regulation is

preempted.

*It is conceivable that the FERC will rule that Transco’s pur-

chases of Mississippi gas were “imprudent,” i.e. that such pur-

chases were inconsistent with Transco’s duty to acquire gas at the

lowest reasonable cost and that its purchase pattern should be

adjusted to exclude some portion of the Mississippi production

required to be taken under that state’s Oil & Gas Board’s order.

See Columbia Gas Transmission Corp., supra, 26 FERC at 61,112.

14

IV. THE GROWTH OF DIVERGENT STATE REGU-

LATION OF INTERSTATE PIPELINE PURCHAS-

ING PRACTICES STANDS AS A SIGNIFICANT

THREAT TO THE INTERESTS OF THE NATION’S

GAS CONSUMERS.

The fundamental responsibility of the Federal Energy

Regulatory Commission is to protect the nation’s gas

consuming public against excessive rates and charges and

to set policies which provide natural gas “at the lowest

reasonable rate consistent with the maintenance of ade-

quate service.” Atlantic Refining Co. v. Public Service

Commission of New York, 360 U.S. 378, 388 (1959).

This protection is exactly what would be lost if the states

were permitted to enter individually into the field of

interstate pipeline regulation.

The Mississippi Supreme Court recognized the prob-

lem for consumers and described it thus:

Transco has the right to pass the costs it incurs in

purchasing natural gas through to the consumer. 15

U.S.C. § 3481(c). In this sense, it is not Transco

who experiences a burden, it is the consumer. If

higher purchasing prices at the wellhead lead to

higher prices to the consumer and a loss of markets,

this is simply one inevitable consequence of the free

market policies of the era of dereguiation with re-

spect to which Transco is vested by the negative

Commerce Clause with no right to complain.

Transcontinental Gas Pipe Line Corporation, Brief for

Appellant, Appendix A at 38a. What the court did not

mention, however, is that out-of-state consumers who are

burdened by the additional costs of pipelines’ compliance

with state ratable take orders have no recourse against

the producing state’s regulations. The Mississippi Oil &

Gas Board has neither the interest nor the responsibility

to assess the impact of its ratable take order on the

ultimate consumers in New York and New England of

the gas purchased originally from its state’s producers.

15

In fact, as Appellant noted, the Board expressly refused

to consider evidence submitted on the interstate impact

of its action. Brief for Appellant at 17. This is why

comprehensive federal regulation is important. The ques-

tion, put by this Court, is “whether state authority can

practicably regulate a given area,” Northern Natural,

372 U.S. at 84, citing Federal Power Commission v.

Transcontinental Gas Pipe Line Corporation, 365 U.S. 1,

19-20 (1961). In this situation, the states can not and

will not consider national needs in regulation.

This problem takes on enormous proportions in light

of the fact that other gas-producing states, including

such heavy nationwide gas supply sources as Oklahoma

and Texas, are following the lead of Mississippi and

proposing to enforce ratable take obligations against

interstate pipeline companies.® In addition to the uni-

versal insensitivity to national energy needs that would

inevitably result, such state-by-state regulation over pipe-

line purchasing patterns would put impossible burdens

on the FERC’s ability to carry out its regulatory respon-

sibilities. In a closely analogous case, this Court struck

down a local airport anti-noise ordinance on federal pre-

emption grounds, noting, inter alia, that if other locali-

ties followed with ordinances of their own, “it is obvious

that fractionalized control of the timing of take-offs and

landings would severely limit the flexibility of the FAA

in controlling air flow.” Burbank v. Lockheed Air Ter-

minal, 411 U.S. 624, 639 (1973). Likewise, with con-

flicting state demands on a pipeline’s purchasing pattern,

the Commission would be unable to undertake any mean-

ingful supervision of the pipelines, as it is statutorily

bound to do.

This Court stated recently that

the production and transmission of energy is an ac-

tivity particularly likely to affect more than one

5 See Brief for Appellant at Appendices H, at 130a-135a, and I, at

136a-152a.

16

State, and its effect on interstate commerce is often

significant enough that uncontrolled regulation by

States can patently interfere with broader national

interests.

Arkansas Electric Cooperative Corp. v. Arkansas Public

Commission, —— USS. , 103 S. Ct. 1905, 1908-09

(1983). In deciding for the state regulatory scheme over

the federal regulatory program. the Mississippi Supreme

Court went so far as to assert that “the economic con-

sequences of today’s decision for one or more of the

parties is of no significance, except insofar as the law

has provided otherwise.” Brief for Appellant, Appendix

A at 17a. The law has provided otherwise by recognizing

that as natural monopolies, interstate pipeline companies

must be regulated, and that the Federal Energy Regula-

tory Commission, charged with this responsibility, is al-

ways bound to consider the economic consequences of its

actions. See, e.g., FPC v. Texaco, Inc., 417 U.S. 380, 399

(1974); Mobil Oil Corp. v. FPC, 417 U.S. 283, 318

(1974); FPC v. Hope Natural Gas Co., 320 U.S. 591,

602 (1944).

CONCLUSION

For the foregoing reasons, AGD urges the Court to

note probable jurisdiction in this case.

Respectfully submitted,

FREDERICK MORING

Counsel of Record

M. LISANNE CROWLEY

CROWELL & MORING

1100 Connecticut Ave., N.W.

Washington, D.C. 20036

(202) 452-5800

Attorneys for Amicus Curiae

Associated Gas Distributors

February 1, 1985