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

2 | uitlea - Supreme Court, U.S.

FILED

0

MAY 30 1985

No. 84-1076

ALEXANDER L. STEVAS.

* Mes

IN THE

Supreme Court of the United States

OCTOBER TERM, 1984

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

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

May 30, 1985

WILSON Sets 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.

Energy North, 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

Page

e ——— ii

INTEREST OF AMICUS CURIHAE we... 1

CONSENT OF THE PARTIES 2

SUMMARY OF ARGUMENT 3

EES 4

I. THE REGULATION OF INTERSTATE GAS

PIPELINE PURCHASING PRACTICES HAS

BEEN PREEMPTED BY FEDERAL LAY ...... 4

A. The Federal Energy Regulatory Commis-

sion’s Responsibility To Regulate Interstate

Pipelines, Mandated By The Natural Gas

Act, Remains Unaffected By Passage Of The

e /’7T . 4

B. Enforcement Of The Mississippi Ratable

Take Order Will Collide With The FERC's

Exercise Of Its Pipeline Regulatory Respon-

VS 10

II. THE REGULATION OF INTERSTATE PIPE-

LINES IS PARTICULARLY LIKELY TO AF-

FECT NATIONAL ENERGY INTERESTS,

AND THEREFORE REQUIRES A UNIFORM,

COMPREHENSIVE SCHEME OF FEDERAL

r 7 TT 16

A. State By State Regulation Of Pipeline Pur-

chasing Practices Will Impose Substantial

Burdens Upon The Interstate Gas Market.... 16

B. The Growth Of Divergent State Regulation

Of Pipeline Purchasing Practices Will Have

Unjust And Oppressive Consequences For

The Nation’s Gas Consumers ........................... 18

r ’ ..... 20

ii

TABLE OF AUTHORITIES

Cases: Page

Arkansas Electric Cooperative Corp. v. Arkansas

Public Service Commissicn, 461 U.S. 375

/ A debian tesa 9, 20

Atlantic Refining Co. v. Public Service Commission

of New York, 360 U.S. 378 (1959) ....................... 6, 18

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

— 18

Exxon Corp. v. Eagerton, 462 U.S. 176 (1983) 5, 10

FPC v. Hope Natural Gas Co., 320 U.S. 591

(ES ATRL ( A CS 19

FPC v. Louisiana Power & Light Co., 406 U.S.

I ie eeleicemenimenes 19

Florida Lime & Avocado Growers, Inc. v. Paul, 373

... iainiiabenioe 15

Hines v. Davidowitz, 312 U.S. 52 (19417. 16

Maryland v. Louisiana, 451 U.S. 725 (1981) 9, 10, 15, 18

Maryland People’s Counsel v. FERC, No. 84-1090

r eee 13, 20

Missouri ex rel. Barrett v. Kansas Natural Gas

oH 2° 5 3g ee 5

Northern Natural Gas Co. v. State Corporation

Commission, 372 U.S. 84 (1963))))) : passim

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

sources Conservation and Development Commis-

DNIe ee oe 15

Pennsylvania v. West Virginia, 262 U.S. 553

/ AAA nema ne Le HUN See ee Tee 19

Public Service Commission of Kentucky v. FERC,

610 F. ad 489 (6th Cir. 1979) 19

Transcontinental Gas Pipe Line Corporation v. The

State Oil & Gas Board of Mississippi and Coastal

Exploration, Inc., et al., 457 So.2d 1298 (Miss.

c daieaiiesieilentiaianammaiaeaall 4, 8, 16, 19

iii

TABLE OF AUTHORITIES—Continued

Decisions and Orders of the Page

Federal Energy Regulatory Commission:

Columbia Gas Transmission Corporation, Docket

No. TA81-1-21, et al., Opinion Nos. 204 and

204-A, 26 FERC 7 61,034 (January 16, 1984)

and 26 FERC 7 61,334 (March 16, 1985), appeal

docketed, Office of the Consumers’ Counsel, State

of Ohio v. FERC, No. 84-1099 et al. (D.C. Cir.).. 6, 11,

12, 15

El Paso Natural Gas Company, Docket Nos. RP82-

33, et al., Order on Rehearing Modifying Prior

Orders, Consolidating Cases, and Setting Hear-

ing, 26 FERC J 61,366 (March 21, 1984) 12

MIGC, Inc., Docket Nos. RP84-15-000, et al., Order

Accepting Filing, Consolidating Proceedings,

and Setting Matters for Hearing, 26 FERC

i. ° gf > FRESE oeen 12

Panhandle Eastern Pipe Line Company, Docket

No. TA84-1-28-002, Order Establishing Hearing

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

rr 12

Southern Natural Gas Company, Docket Nos.

TA84-1-7-000, et al., Urder Consolidating Pro-

ceedings and Setting Matters for Hearing, 26

FERC J 61,371 (March 21, 1984) 20. 12

Transcontinental Gas Pipe Line Corporation,

Docket Nos. TA83-2-29-001, et al., Order Estab-

lishing Hearing Procedures on Deferred Pur-

chasing Practices Issues, 26 FERC { 61,361

I . 12

Transcontinental Gas Pipe Line Corporation,

Docket Nos. TA85-1-29-000 and TA85-1-29-001,

Order Accepting and Suspending Proposed

Tariff Sheets Subject to Refund and Conditions,

29 FERC { 61,148 (October 31, 1984) 14

Order Accepting and Suspending Proposed

Tariff Sheets Subject to Refund and Conditions,

Setting Matters for Hearing, and Consolidating

Dockets, 31 FERC { 61,129 (April 20, 1985) 14

iv

TABLE OF CONTENTS—Continued

Page

Trunkline Gas Company, Docket Nos. TA83-1-30-

002, et al., Order Setting Matter for Hearing

and Consolidating Proceedings, 26 FERC

1 61,868 (March 21, 1984) 12

United States Constitution:

Article I, Section 8, clause 3 (“Commerce

. / v.. 5, 19

Article VI, Section 2 (“Supremacy Clause“) 15, 20

United States Statutes:

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

, ES a “ESRD RES a 3, 5

r i NB DN os et 3, 5

D ei nT OO = a Se OP 3, 6

FETE, SEER eres sore ws Ae mene aa Mor 3,13

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

Te passim

TT LATA TALES HART 8

r TALE AOAC TOO 11

State Statutes:

LA. REV. STAT. ANN. § 30:42 (West 1975) 17

OKLA. STAT. ANN. tit. 52, § 823 (West 19699 17

TEX. NAT. RES. CODE ANN. 5 111.083 (Vernon

D rr 17

TEX. NAT. RES. CODE ANN. 5 111.086 (Vernon

1c 17

— —

IN THE

Supreme Court of the United States

OCTOBER TERM, 1984

No. 84-1076

TRANSCONTINENTAL GAS PIPE LINE CORPORATION,

Appellant,

V.

THE STATE OIL AND GAS BOARD OF MISSISSIPPI AND

COASTAL EXPLORATION, INC., et al.,

Appeliees.

On Appeal from the Supreme Court of Mississippi

BRIEF AMICUS CURIAE OF

ASSOCIATED GAS DISTRIBUTORS

IN SUPPORT OF APPELLANT

INTEREST OF AMICUS CURIAE

Associated Gas Distributors (AGD) is an unincorpo-

rated group 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 forty companies

known as AGD serve over eleven million customers; their

annual sales comprise approximately 25 percent of the

gas sold through the nation’s interstate gas supply net-

work.

Each AGD company purchases its natural gas for re-

sale from one or more of the major, regulated interstate

2

gas pipeline companies, including the Transcontinental

Gas Pipe Line Corporation (Transco), Appellant in this

proceeding. A number of AGD members purchase a sub-

stantial portion of their gas supply from Transco; these

AGD companies are directly affected by any increase in

Transco’s rates.

The purpose of the present brief amicus curiae is two-

fold. First, AGD seeks to underscore the historical and

continuous federal preemption of the regulation of inter-

state gas pipeline companies. In particular, we note that

at this moment there exists an imminent possibility of

collision between the Mississippi ratable take rule en-

forced against Appellant, Transco, and a ruling sought

in a proceeding at the Federal Energy Regulatory Com-

mission (FERC or Commission), which is investigating

Transco’s purchasing practices.

Second, AGD writes to apprise the Court of the critical

nature of this issue for consumers of natural gas nation-

wide who depend upon a comprehensive federal system

of regulation of our nation’s interstate gas pipeline net-

work. As other states, particularly the larger gas-

producing states, begin to enact and/or enforce “ratable

take” schemes against interstate pipelines, the conse-

quences for the ultimate consumers, who absorb the in-

creased costs and uncertainties resulting therefrom, may

be severe. As public utilities, the members of AGD have

an obligation to protect their customers against the pay-

ment 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 sub-

mits this brief amicus curiae in support of the Appellant.

CONSENT OF THE PARTIES

AGD has obtained the written consent of 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.

3

SUMMARY OF ARGUMENT

I. Pursuant to the Natural Gas Act (NGA), specifi-

cally Sections 1(b), 4, 5, and 7, the FERC has compre-

hensive authority to oversee and regulate the purchasing

practices of the nation’s interstate gas pipelines. In

Northern Natural, this Court found that that authority

preempted state attempts to regulate interstate pipelines

by means of “ratable take” laws, such as tl. Mississippi

law at issue here. The subsequent passage of the NGPA,

with its gradual scheme of wellhead price deregulation,

did not affect the FERC’s pipeline regulatory authority.

The regulation of interstate pipeline purchasing practices

remains preempted by federal law. Thus, the Mississippi

Supreme Court’s holding that a state may regulate an

interstate pipeline’s purchases of NGPA-deregulated gas

is erroneous.

The FERC’s continuous assertion of regulatory author-

ity over pipeline purchasing practices demonstrates that

the NGPA did not affect a withdrawal of federal pipe-

line regulation. Indeed, the FERC is currently conduct-

ing an investigation of the purchasing practices of Ap-

pellant Transco—including its purchases of Mississippi

gas pursuant to the Oil & Gas Board’s order. The out-

come of this investigation could be a federal ruling which

directly ecnflicts with the Mississippi law. The enforce-

ment of state ratable take laws, therefore, runs a colli-

sion course with federal action.

II. The need for a comprehensive federal system of

pipeline regulation is clear given the oppressive conse-

quences which would inevitably result from diverse, con-

flicting state regulation. These consequences would af-

fect the entire gas industry, as well as the gas-consuming

public.

The pipelines would suffer enormous and costly ad-

ministrative burdens by having to juggle their gas sup-

plies from all producers operating in a common source,

4

and in some cases from the whole state. Importantly,

various producing states have different ratable take

schemes. Compliance with several different states’ laws

at one time may well be impossible.

Finally, given a complex and conflicting web of state

regulations, the FERC would be unable to carry out its

most fundamental responsibility—the protection of the

nation’s gas consumers against excessive rates and

charges. Unlike the federal agency, state regulatory

bodies are charged with promoting the state, not federal,

interests. Thus, the interests of out-of-state gas con-

sumers would be ignored by producing state regulators.

The federal government’s interest in comprehensive,

nationwide pipeline regulation, therefore, is continuous

and compelling.

ARGUMENT

I. THE REGULATION OF INTERSTATE GAS PIPE-

LINE PURCHASING PRACTICES HAS BEEN PRE-

EMPTED BY FEDERAL LAW.

A. The Federal Energy Regulatory Commission’s Re-

sponsibility To Regulate Interstate Pipelines, Man-

dated By The Natural Gas Act, Remains Unaffected

By Passage Of The NGPA.

In Transcontinental Gas Pipe Line Corporation v. The

State Oil & Gas Board of Mississippi and Coastal Ex-

ploration, Inc., et al., 457 So.2d 1298 (Miss. 1984), the

Mississippi Supreme Court recognized, correctly, that

“Tuy jntil 1978 the federal sovereign indisputably had pre-

empted all state regulation of wellhead sales of natural

gas.“ Id. at 1304. The court below erred, however, in

holding that Congress’ passage of the Natural Gas Policy

Act of 1978, 15 U.S.C. § 3301 et seg. (1982) (NGPA),

lessened the preemptive authority of the federal govern-

ment, acting through the Federal Energy Regulatory

Commission (FERC or Commission), to regulate the pur-

chasing practices of interstate gas pipelines. The

NGPA’s gradual scheme of deregulation of first sale or

“wellhead” prices of gas limited the FERC’s jurisdiction

over gas producers, but does not provide an entree to the

states to begin regulating interstate pipelines through

so-called “ratable take” laws such as the State of Missis-

sippi’s Statewide Rule 48.

The FERC derives its comprehensive authority to over-

see and regulate the purchasing practices of the nation’s

interstate gas pipelines from several sources in the Natu-

ral Gas Act of 1938 (NGA), 15 U.S.C. § 717 (1982).

The broadest basis of FERC jurisdiction over interstate

pipelines is found in NGA Section 1(b). 15 U.S.C. § 717.

There, the Commission is given general authority over

(a) the transportation of natural gas in interstate com-

merce, (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. In this type

1 Importantly, prior to any federal regulation—or deregulation—

of sales for resale, or “wholesale sales,” of natural gas in inter-

state commerce, this Court refused to permit state regulation of

interstate pipelines on the ground that it imposed a direct burden

on interstate commerce in violation of the Commerce Clause of

the Constitution. See, e.g., Missouri ex rel. Barrett v. Kansas

Natural Gas Co., 265 U.S. 298 (1924). In enacting the Natural

Gas Act of 1938, 15 U.S.C. § 717 (1982), the Congressional com-

mittee reports noted that wholesale sales to interstate pipelines

„. . . have been considered to be not 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.” H.R. Rep. No. 709, 75th Cong., Ist Sess.

1-2 (1937); S. Rep. No. 1162, 75th Cong., Ist Sess., 2 (1937)

(citations omitted) (emphasis added).

Exzon Corp. v. Eagerton, 462 U.S. 176, 185 (1983).

6

of case, “interested” parties (gas producers supplying

the pipeline, pipeline customers, and consumer repre-

sentatives) may raise questions concerning the “justness

and reasonableness” 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

Commission may then respond to these complaints by

making appropriate adjustments in the pipeline’s ap-

proved 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 is refiected

in the rates and charges of that pipeline. If any such

practice is found to be unjust, unreasonable or unduly

discriminatory, the Commission is required by Section

5 to “fix” the practice “to be thereafter observed.” This

section provides a basis for Commission action which

could well affect a pipeline’s gas purchasing practice in

a manner inconsistent * with state ratable take schemes.

In 1963, this Court was presented with the question

whether the State of Kansas had the power to force an

interstate pipeline company to take ratably from all

Kansas producers connected to its system. Northern

Natural Gas Co. v. State Corporation Commission, 372

U.S. 84 (1963). The Court first rejected 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

then held the Kansas ratable take order invalid on the

ground that it “invade{d] the exclusive jurisdiction

2 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).

3 Whereas the FERC’s primary obligation is to protect gas con-

sumers against “excessive rates and charges,” Atlantic Refining

Co. v. Public Service Comm’n, 360 U.S. 378, 388 (1959), the en-

forcement of state ratable take legislation has no such purpose.

7

which the Natural Gas Act has conferred upon the Fed-

eral Power Commission over the sale and transportation

of natural gas in interstate commerce for resale.” Id.

at 89. The federal regulatory scheme was found to leave

no room for either direct or indirect state regulation of

the prices of interstate wholesale sales of gas. Id. at 91.

More importantly, for the purpose of these proceedings,

this Court stated that

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

latory scheme arises because these orders are un-

mistakably 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 tas’: 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 readjustment

of purchasing patterns which such orders might re-

quire 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

Federal Power Comm’n v. Hope Natural Gas Co.,

320 U.S. 591, 610.

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

the Court’s basis for finding that the federal regulatory

scheme preempted the state order. That basis was

grounded in federal regulation not simply of wellhead

prices but of interstate pipeline-purchasers and their pur-

chasing patterns, the readjustment of which could “seri-

ously impair” the Commission’s ability to regulate the

pipelines’ cost structures and sales to wholesale customers,

i. e., distributors.

8

The Mississippi Supreme Court’s basis for divergence

from this Court’s clear statement in Northern Natural

was the 1978 passage of the NGPA. As described in the

opinion below, this legislation combined an extension of

federal regulation into the intrastate market for gas

with a “comprehensive plan of deregulation” of federal

rate-setting for wellhead prices of gas, “in order to pro-

vide producers, operators, and pipeline purchasers with

the degree of freedom from regulation and the price in-

centives necessary to encourage discovery and production

of more gas and thus alleviate the theretofor seemingly

perpetual natural gas shortage.” Transcontinental Gas

Pipe Line, 457 So.2d at 1314-15. The crux of the lower

court’s holding was that the Northern Natural decision

was effectively overruled when Congress withdrew the

FERC’s authority to regulate wellhead prices. It con-

cluded, therefore, that the states may now impose ratable

take obligations on the interstate pipelines which pur-

chase gas within their borders.

The Mississippi court’s restriction of its holding to gas

which was “deregulated” by the NGPA is essentially ir-

relevant to the question of federal preemption. It also

reflects the court’s misunderstanding of the effect of the

NGPA, for its statement that “the Natural Gas Act of

1938 (NGA) and FERC’s jurisdiction under the act

never apply to deregulated gas,” 457 So.2d at 1316, is

simply not accurate. The section of the Act cited in sup-

port of this broad assertion, Section 601(a) (1), 15 U.S.C.

§ 3431(a) (1), entitled “Coordination with the Natural

Gas Act,” states:

(A) NATURAL GAS NOT COMMITTED OR

DEDICATED * * * the provisions of the Natural

Gas Act and the jurisdiction of the Commission un-

der such shall not apply to natural gas which was not

committed or dedicated to interstate commerce as of

the day before the date of the enactment of this Act

solely by reason of any first sale of such natural gas.

9

(B) COMMITTED OR DEDICATED NATURAL

GAS * * * for purposes of Section 1(b) of the

Natural Gas Act, the provisions of such Act and the

jurisdiction of the Commission under such Act shall

not apply solely by reason of any first sale of natural

gas which is committed or dedicated to interstate

commerce as of the day before the date of the enact-

ment of this Act and which is—

(i) High cost natural gas * * *

(Emphasis added.) The qualifying phrase “solely by rea-

son of any first sale” indicates that the Commission does

not have jurisdiction to regulate the price at which cer-

tain gas is sold into interstate commerce. It has no ef-

fect on the Commission’s jurisdiction to regulate the

transportation of natural gas in interstate commerce,

i. e., its duty to regulate the pipelines’ purchasing pat-

terns and practices. Thus, the Mississippi court’s find-

ing that federal deregulation of certain types of gas

left room for state regulation of interstate pipelines is

erroneous.

Ironically, the Mississippi Supreme Court itself recog-

nized that Congress’ withdrawal of federal regulation of

wellhead pricing did not end the inquiry. It quoted this

Court’s recent statement in Arkansas Electric Coopera-

tive Corp. v. Arkansas Public Service Commission that

a federal decision to forgo regulation in a given area

may imply an authoritative federal determination

that the area is best left wnregulated, and in that

event would have as much pre-emptive force as a

decision to regulate.

461 U.S. 375, 384 (1983) (emphasis in original). De-

spite this acknowledgment, the court could cite no sup-

port whatsoever for its determination that Congress in-

tended to allow the states to exercise authority in an

area where it recognized that a federal preemption prob-

lem existed.

Nor did the court acknowledge that in Maryland v.

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

10

sage of the NGPA, this Court relied specifically on

Northern Natural. 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 imposed upon pipelines and eventually

passed through to the ultimate consumer, “like the State

Commission’s order in Northern Natural,” was “incon-

sistent with the federal scheme and must give way.” Id.

at 751. The Court relied heavily on Northern Natural

for this determination, quoting the passage (excerpted

above) which described the detrimental impact of the

state requirement upon FERC’s “authority to regulate the

intricate relationship between the purchaser’s cost struc-

tures and eventual costs to wholesale customers .. .” Id.

at 750, quoting Northern Natural, 372 U.S. at 92.“

In short, the Mississippi Supreme Court erred in find-

ing either that the federal government has withdrawn its

comprehensive regulation of interstate pipelines’ pur-

chasing practices or that, to the extent it has deregulated

the setting of natural gas prices, it permitted the states

to enter the field of interstate pipeline regulation.

B. Enforcement Of The Mississippi Ratable Take Order

Will Collide With The FERC’s Exercise Of Its

Pipeline Regulatory Responsibilities.

Recent proceedings at the FERC to investigate the

purchasing patterns of various pipelines—under the au-

thority of both the NGA and the NGPA—demonstrate

See also Exxon Corp. v. Eagerton, 462 U.S. 176 (1983), in which

the Court held that an Alabama statute prohibiting passthrough

of a state severance tax imposed upon gas producers was preempted

by federal law, stating

Here, as in Maryland v. Louisiana, the state statute “inter-

fere{[d] with the FERC’s authority to regulate the determina-

tion of the proper allocation of costs associated with the sale of

natural gas to consumers.” 451 U.S. at 749.

462 U.S. at 185.

11

vividly that the Commission continues to exereise its statu-

tory responsibilities of pipeline regulation. These pro-

ceedings, most notably the Commission’s pending investi-

gation of the purchasing practices of Appellant, Transco,

are likely to conflict directly with state ratable take

orders.

In Opinion Nos. 204 and 204-A, Columbia Gas Trans-

mission Corporation, Docket Nos. TA81-1-21, et al., 26

FERC {61,034 (January 16, 1984) and 26 FERC

7 61,334 (March 16, 1984), appeal docketed, Office of the

Consumers’ Counsel, State of Ohio v. FERC, No. 84-1099

et al. (D.C. Cir.), the Commission recently reaffirmed its

commitment to regulating interstate gas pipelines. These

proceedings involved an investigation of the purchasing

practices of Columbia Gas Transmission Corporation (Co-

lumbia) under both the NGPA Section 601 (e) (2) “fraud

or abuse” standard and the more expansive NGA Sections

4 and 5 “just and reasonable” standard, commonly re-

ferred to as a standard of prudence. As a preliminary

issue, the Commission affirmed the determination of the

Administrative Law Judge (ALJ) that the NGPA “ ‘does

not remove the Commission’s authority to examine con-

tracts and practices and provide for appropriate relief

when such contracts or practices are found to be un-

just, unreasonable, unduly discriminatory or prefer-

ential.’” 26 FERC at 61,096. The Commission then

concluded, inter alia, that “Columbia’s gas acquisition

5 Prior to the NGPA’s passage, a pipeline’s ability to pass through

the cost of gas to its distributor-customers was a function of the

Commission’s determination of the justness and reasonableness of

the proposed rates. Because the NGPA replaced the Commission’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

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

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

The other aspects of a pipeline’s purchasing practices remain sub-

ject to the prudence standard.

12

practises are imprudent and unjust and unreasonable un-

der NGA Section 5.” 26 FERC at 61,112. Specifically

with regard to the take or pay provisions in Columbia’s

gas supply contracts, the Commission found that, “while

the take or pay provisions were not unreasonable when

entered into, the effect of these provisions under present

conditions is unjust, unreasonable, unduly discriminatory

and preferential.” Jd. at 61,120. The Commission ex-

plained that the pipeline’s take or pay situation

is harmful to Columbia’s customers who stand to lose

markets because of fuel switching and unfair to con-

sumers who must bear the cost. It is discriminatory

to low-cost producers whose production is cut back.

It is potentially harmful to Columbia itself.

Id. It is evident, from this example of the FERC’s ex-

ercise of its NGA authority, that a pipeline’s purchases

in conformity with state ratable take schemes—poten-

tially resulting in increased costs for the pipeline and its

customers—could very well be deemed imprudent under

federal standards and, therefore, unlawful.

While the FERC is currently conducting a series of

inquiries into the purchasing practices of various inter-

state pipelines,“ the most obvious—and imminent—possi-

® See Panhandle Eastern Pipe Line Company, Docket No. TA84-1-

28-002, Order Establishing Hearing Procedures, 26 FERC { 61,339

(March 16, 1984); EI Paso Natural Gas Company, Docket No.

RP82-33 et al., Order on Rehearing Modifying Prior Orders, Con-

solidating Cases, and Setting Hearing, 26 FERC { 61,366 (March

21, 1984); MIGC, Inc., Docket No. RP84-15-000, Order Accepting

Filing, Consolidating Proceedings and Setting Matters for Hearing,

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

Docket No. TA83-1-30-002 et al., Order Setting Matter for Hearing

and Consolidating Proceedings, 26 FERC I 61,363 (March 21,

1984); Southern Natural Gas Company, Docket No. TA84-1-7-000

et al., Order Consolidating Proceedings and Setting Matters for

Hearing, 26 FERC { 61,371 (March 21, 1984); Transcontinental

Gas Pipe Line Corp., Docket No. TA83-2-29-001 et al., Order Estab-

13

bility of collision with Mississippi’s enforcement of its

ratable take order involves the pending FERC investiga-

tion into the purchasing practices of Appellant, Transco.

On September 28, 1984, Transco initiated a Purchased

Gas Adjustment proceeding at the Commission seeking,

among other things, an increase in rates filed in its FERC

Gas Tariff. Transcontinental Gas Pipe Line Corporation,

Docket Nos. TA85-1-29-000 and TA85-1-29-001. On Oc-

tober 12, 1984, AGD filed a Motion to Intervene and Pro-

test in this proceeding, asserting that Transco has not

demonstrated the justness and reasonableness of its pro-

posed rate increase. AGD also raised several 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-

visions substantially identical to those contracts found

„unjust and unreasonable” by the Commission’s Opin-

ion No. 204. AGD is particularly interested in the

manner in which higher-priced contracts with high

percentage take-or-pay provisions have affected, and

will continue to affect, Transco’s purchasing prac-

tices 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 Missis-

sippi Oil & Gas Board in which Transco is required

lishing Hearing Procedures on Deferred Purchasing Practices

Issues, 26 FERC f 61,361 (March 21, 1984).

While no pending case has been found to illustrate the point,

it is also possible that FERC action pursuant to Section 7 of the

NGA could create a collision with a state ratable take statute such

as the one at bar. FERC’s general jurisdiction to regulate the

transportation of natural gas in interstate commerce (NGA Sec-

tion 1) is accompanied by the power to condition certificates (issued

under NGA Section 7) authorizing interstate pipelines to con-

struct and operate gas transportation facilities. See Maryland

People’s Counsel v. FERC, No. 84-1090, slip op. at 20 n.19 (D.C.

Cir. May 10, 1985).

14

to accept deliveries on a “ratable take” basis from

certain Mississippi supply sources. It is not clear

that this pattern of Mississippi purchases satisfies

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 decontrolled 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 PGA proceeding, 29 FERC {61,148 (October

31, 1984), the Commission responded to AGD’s concerns

by ordering a public hearing “concerning the lawfulness

of Transco’s proposed rates, including purchasing prac-

tices issues.” Id. at 61,321-22 (emphasis added). This

order was clarified in its “Order Accepting and Suspend-

ing Proposed Tariff Sheets Subject to Refund and Con-

ditions, Setting Matters for Hearing, and Consolidating

Dockets,” 31 FERC I 61,129 (April 30, 1984), where the

Commission explicitly acknowledged AGD’s arguments.

It stated that the “purchasing practices” issues set for

hearing included the allegations that “Transco’s prospec-

tive purchasing patterns may be adversely influenced by

‘ratable take’ orders of the Mississippi Oil and Gas

Board” and that “certain court orders pertaining to the

rights of producers may be thwarting a least cost pur-

chasing strategy and are in violation of [the FERC’s]

‘exclusive jurisdiction’ over purchases of gas by Transco.”

Id. at , mimeo at 8-9.

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

mission finds that Transco’s compliance with the Missis-

sippi ratable take order is unjust and unreasonable,’ the

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

chases of Mississippi gas were inconsistent with its duty to acquire

gas at the lowest reasonable cost and that its purchase pattern

should be adjusted to exclude some portion of the Mississippi pro-

15

pipeline will be in the position of necessarily violating

either state or federal law. The FERC would have au-

thority, furthermore, under NGA Sections 4 and 5 to

order Transco to adhere in the future to a pattern of gas

acquisition which is inconsistent with the state ratable

take scheme. As this Court reiterated 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. Moreover, the case law clearly directs that

in a situation of actual federal-state conflict, where “com-

pliance with both federal and state regulations is a physi-

cal impossibility,” the Supremacy Clause requires the

state law to fall to the federal law. Pacific Gas and

Electric Company v. State Energy Resources Conserva-

tion and Development Commission, 461 U.S. 190, 204

(1983), citing Florida Lime & Avocado Growers, Inc. v.

Paul, 373 U.S. 132, 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. Louisiana,

451 U.S. at 725, citing Northern Natural, 372 U.S. at 92.

Given the “imminent possibility” of a FERC order di-

recting Transco to correct its purchasing practices in a

manner inconsistent with the Mississippi ratable take

scheme, this state regulation is preempted.

duction required to be taken under that State’s Oil & Gas Board’s

order. See Columbia Gas Transmission Corp., supra, where the

Commission resolved to “take action to ensure that Columbia cor-

rects its gas acquisition practices.” 26 FERC at 61,112.

16

II. THE REGULATION OF INTERSTATE PIPELINES

IS PARTICULARLY LIKELY TO AFFECT NA-

TIONAL ENERGY INTERESTS, AND THEREFORE

REQUIRES A UNIFORM, COMPREHENSIVE

SCHEME OF FEDERAL REGULATION.

A. State By State Regulation Of Pipeline Purchasing

Practices Will Impose Substantial Burdens Upon

The Interstate Gas Market.

A system of divergent, perhaps conflicting state regu-

lations of pipeline purchasing practices would place

enormous burdens on all segments of the interstate gas

market. State “ratable take” regulation, therefore, stands

“as an obstacle to the accomplishment and execution of

the full purposes and objectives of Congress,” Hines v.

Davidowitz, 312 U.S. 52, 67 (1941), evidenced in its en-

actment of a comprehensive federal statutory scheme,

under both the NGA and the NGPA, for the regulation of

interstate gas pipelines.

The Mississippi Supreme Court’s statement that the

“only burden” created by Statewide Rule 48 is a burden

upon Transco and not pipelines generally, as well as the

entire interstate market for natural gas, 457 So.2d at

1323, is a gross understatement. Even discounting the in-

creased gas costs incurred through take or pay exposure

in Transco’s contracts, the fact remains that Transco and

all other interstate pipelines which purchase gas in Mis-

sippi are burdened with the responsibility of altering

their purchasing patterns to comply with the ratable take

order. These pipelines henceforth must take their gas

supplies ratably from every producer who owns an in-

terest in a “common source of supply.” In some cases,

this could result in forced purchases from large numbers

of non-contracting parties.

8 The Mississippi court itself admitted concern about the fact

that it did not know exactly how many wells (in addition to the

six named) were producing from the Harper Sand Gas Pool. Lack-

ing this information, the court stated that [Cs] hould there be other

17

This administrative burden is one of potentially enor-

mous proportions. Quite apart from Mississippi, major

gas producing states such as Louisiana and Texas have

ratable take statutes which could become enforceable

against interstate pipeline companies. If the Missis-

sippi law is upheld here, compliance with several state

ratable take statutes—each having important differences

—may in fact be an impossibility. For example, the

Texas ratable take statute provides that a pipeline

“common purchaser” must take gas “without discrimi-

nation in favor of one producer or person against another

producer or person in the same field and without unjust

or unreasonable discrimination between fields in this

state.” TEX. NAT. RES. CoDE ANN. §§ 111.083, 111.086

(Vernon 1978). (Emphasis added)“ Under the Missis-

sippi court’s rationale, even the Kansas ratable take

statute invalidated by this Court in Northern Natural

would have to be upheld today as applied to first sales of

NGPA deregulated gas. That statute forced pipelines

to take ratably on a statewide basis.“ As the Court

producers or owners. . they will have to make that fact known

to the appropriate tribunal before they may be afforded any re-

lief.“ 457 So.2d at 1327 n. 13.

® See also OKLA. STAT. ANN. tit. 52, § 823 (West 1969) :

[every pipeline which is engaged in the business of purchasing

natural gas] shall purchase all the natural gas in the vicinity

of, or which may be reasonably reached by its pipe lines, or

gathering branches, without discrimination in favor of one

producer or one person as against another.

LA. REv. STAT. ANN. § 30:42 (West 1975):

every person engaged in the business of purchasing and selling

natural gas in this state . . shall purchase all of the natural

gas which may be offered for sale which may be brought in

pipes and connecting lines . . without discrimination in favor

of one producer against another, or in favor of any one source

of supply as against another save as authorized by the com-

missioner. ... If a person is unable to purchase all the gas

offered, then he shall purchase natural gas from each producer

ratably ...

10 See 372 U.S. at 88.

18

noted in Northern Natural, these orders “shift to the

shoulders of interstate purchasers the burden of perform-

ing the complex task of balancing the output of thou-

sands of natural gas wells within the state. . a task

which would otherwise presumably be the State Com-

mission’s.” 372 U.S. at 92. The implementation of di-

verse state regulations such as these would impose tre-

mendous administrative burdens on all pipelines forced to

comply with them while at the same time satisfying their

responsibilities under federal regulation. The resultant

costs, of course, would ultimately fall upon consumers.

Complex and conflicting state by state regulation of

pipeline purchasing practices, furthermore, would put im-

possible burdens on the FERC’s ability to carry out its

reguiatory mandate. In a closely analogous case, this

Court struck down a local airport anti-noise ordinance on

federal preemption grounds. The Court noted, inter alia,

that if other localities 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 Terminal, 411 U.S. 624, 639 (1973).

Likewise, with conflicting state demands on a pipeline’s

gas acquisition practices, the Commission would be unable

to undertake any meaningful supervision of pipeline pur-

chasing practices, as it is statutorily bound to do.

B. The Growth Of Divergent State Regulation Of

Pipeline Purchasing Practices Will Have Unjust

And Oppressive Consequences For The Nation’s

Gas Consumers.

As mandated by the Natural Gas Act, the fundamental

responsibility of the FERC 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).

See generally, Maryland v. Louisiana, supra, 451 U.S. at

19

747-48, FPC v. Hope Natural Gas Co., 320 U.S. 591, 610-

12 (1944). 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 itself recognized the

problem 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. § 3431(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 deregulation with re-

spect to which Transco is vested by the negative

Commerce Clause with no right to complain.

Transcontinental Gas Pipe Line Corporation, 457 So.2d at

1322. What the court neglected to address, however, is

the absence of any recourse to out-of-state consumers

burdened with the additional costs resulting from state

ratable take orders. It is well settled that state regu-

latory agencies such as the Mississippi Oil & Gas Board

are “obliged to regulate in the State, not the national in-

terest.” FPC v. Louisiana Power & Light Co., 406 U.S.

621, 633 (1972). As appellant noted in its Jurisdictional

Statement, the Mississippi Oil & Gas Board expressly re-

fused to consider evidence submitted on the interstate

impact of its action. J.S. at 17. Furthermore, this Court

has acknowledged the “unavoidable conflict between pro-

ducing States and consuming States.” Louisiana Power &

Light, 406 U.S. at 633-34. See also Public Service Com-

mission of Kentucky v. FERC, 610 F.2d 489, 443 (6th

Cir. 1979). See generally, Pennsylvania v. West Virginia,

262 U.S. 553 (1922). Thus, the states can not and will

not consider national needs in their regulation of inter-

state gas pipelines.

This Court stated recently that

20

the production and transmission of energy is an ac-

tivity particularly likely to affect more than one

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

Service Commission, 461 U.S. 375, 377 (1983). With the

continued market dominance of interstate pipelines, see

Maryland People’s Counsel v. FERC, No. 84-1090, slip

op. at 13-17 (D.C. Cir. May 10, 1985), and the continued

need for federal protection of consumers against unfair

and excessive rates, the federal interest is clear. It must

be assumed to preclude enforcement of state laws regulat-

ing the same activity that Congress made the subject of

federal regulation.

CONCLUSION

For the foregoing reasons, AGD respectfully requests

this Court to reverse the decision below of the Mississippi

Supreme Court, and find that the State of Mississippi’s

attempt to regulate the purchasing practices of an inter-

state natural gas pipeline is a violation of the doctrine

of federal preemption under the Supremacy Clause of the

Constitution.

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

.

May 30, 1985