On July 1, 2014, the U.S. Supreme Court granted a petition to hear an appeal by several companies contending that state-law antitrust claims were precluded by the federal Natural Gas Act and, therefore, fell under the exclusive jurisdiction of the federal government, including the Federal Energy Regulatory Commission.1  These state-law claims alleged manipulation of gas prices, as provided on published indices, during the western energy crisis from 2000 to 2002.  The underlying Ninth Circuit decision was said to conflict with settled law, and the Supreme Court heard oral arguments on Monday, January 12, 2015.  This case raises an intriguing question about what the Justices aim to achieve given the intervening expansion of FERC’s anti-manipulation authority in the 2005 Energy Policy Act – a point stressed by FERC and the Solicitor General in their brief opposing cert.

I.              Introduction

The parties, in both their briefs and oral arguments, addressed:  (1) what constitutes a wholesale natural gas transaction, as opposed to a retail natural gas transaction; and (2) whether field preemption or conflict preemption existed.  The oral argument notably omitted any discussion of the correct standard to be used in making a preemption determination, a point emphasized in Respondent Learjet’s brief.2  The final outcome of the case is difficult to predict, but during oral arguments the Justices were engaged, inquisitive, and at times contentious, challenging the parties on the facts and the underlying legal precedents.

II.             Retail vs. Wholesale Transactions

Wholesale transactions fall squarely within the jurisdiction of the federal government, while retail transactions are within the exclusive power of the states.  As clearly articulated as this principle of federalism may sound, it ironically creates a gray area in which competing arguments regarding preemption run rampant.  Yet, both parties admitted that the alleged manipulation of the published prices affected both retail and wholesale rates, begging the question:  Who has jurisdiction?

The relevant statutory provision that creates the retail versus wholesale dichotomy, and raises the question presented here, is Section 1(b) of the Natural Gas Act.  Respondents, arguing for the state-law claims to be permitted, contended that such claims fall squarely within the exemption in Section 1(b), which provides:

The provisions of this Act shall apply to the transportation of natural gas in interstate commerce, to the sale in interstate commerce of natural gas for resale for ultimate public consumption for domestic, commercial, industrial, or any other use, and to natural-gas companies engaged in such transportation or sale, and to the importation or exportation of natural gas in foreign commerce and to persons engaged in such importation or exportation, but shall not apply to any other transportation or sale of natural gas or to the local distribution of natural gas or to the facilities used for such distribution or to the production or gathering of natural gas.3

Making a statutory construction argument, respondents claimed that Section 1(b) is the authority-granting provision of the Natural Gas Act.  They argued that all other sections function to assist in interpreting, but do not expand Section 1(b).  This is in sharp contrast to petitioners’ assertion that Section 1(b) is limited to only the setting of rates, and their emphasis on Section 5(a) of the Natural Gas Act as illuminating congressional intent with regards to the retail versus wholesale distinction.  Section 5 reads:

Whenever the Commission, after a hearing had upon its own motion or upon complaint of any State, municipality, State commission, or gas distributing company, shall find that any rate, charge, or classification demanded, observed, charged, or collected by any natural-gas company in connection with any transportation or sale of natural gas, subject to the jurisdiction of the Commission, or that any rule, regulation, practice, or contract affecting such rate, charge, or classification is unjust, unreasonable, unduly discriminatory, or preferential, the Commission shall determine the just and reasonable rate, charge, classification, rule, regulation, practice, or contract to be thereafter observed and in force, and shall fix the same by order . . . .4

Petitioners asserted that once you have engaged in wholesale transactions sufficient to be considered a jurisdictional seller, you retain the role of jurisdictional seller – a “hat” they contend cannot be taken off. 

Justices Sotomayor, Kagan, and Breyer, representing the liberal side of the Court, were among those who highlighted the murky nature of this distinction created by Congress.  They appeared to doubt whether sellers could indeed play only one role when they were, admittedly, affecting both retail and wholesale rates. 

III.           Field vs. Conflict Preemption

Field preemption is “inferred where the scheme of federal regulation is sufficiently comprehensive to make reasonable the inference that Congress ‘left no room’ for supplementary state regulation . . . [or] where the field is one in which ‘the federal interest is so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject.’”5  Conflict preemption exists where a federal law can displace a state law when the state law serves as an impediment to the execution and management of the congressional objectives, as enacted.6

Petitioners argued that field preemption applies and cited Mississippi Power & Light Co. v. Mississippi, where the Court reasoned: “We have long rejected this sort of case-by-case analysis of the impact of state regulation upon the national interest in power regulation cases.  Congress has drawn a bright line between state and federal authority in the setting of wholesale rates and in the regulation of agreements that affect wholesale rates.”7  Justice Ginsburg challenged the idea that regulation of the issues at bar fell solely within FERC’s jurisdiction.  Counsel for petitioners agreed that there could be antitrust claims, but reasoned that a distinction must be drawn between displacement of federal statutes and field preemption.  Federal statutes, he noted, could be harmonized.  When Justice Kennedy asked whether, assuming no field preemption, there could be conflict preemption in this scenario, counsel replied that the argument could be considered on remand. 

Respondents fired back, asserting the following reasons for precluding preemption in this matter:  (1) Section 1(b) of the Natural Gas Act serves as a reservation of power to the states; and (2) the issues at hand were outside the field that FERC could regulate and, as previously was conceded by petitioners during oral argument, FERC does not have antitrust authority.  While Justice Scalia questioned whether the issue was as cut-and-dry as counsel represented, the respondents bolstered their argument, citing Northwest Central Pipeline Corp. v. State Corp. as authority for the principle that the Court should harmonize and give meaning to both the state and federal law.8

This preemption issue, much like retail versus wholesale transactions, is far from clear despite counsels’ best efforts to argue to the contrary.  Petitioners assert that their argument has the support of longstanding precedent.  Given the Court’s goal to issue consistent guidance and set clear analytical frameworks to resolve future disputes, petitioners’ emphasis on prior precedent may win the day. 

IV.           Conclusion

The states’ interest in this matter was described as two-fold:  (1) their continued, long-time leadership in the antitrust field;9 and (2) the maintenance of the longstanding, historical division of authority between the state and federal government.  In reality, as recognized by Justice Ginsburg, echoing the point of FERC and the Solicitor General:  This issue is unlikely to give rise to litigation in the future due to the Energy Policy Act of 2005, now in effect, which seemingly tips the preemption analysis to federal supremacy.  Odd though the grant of cert. here may be, it seems unlikely that the Court intends this case to be a vehicle to alter these long-standing principles of federalism. 

So, the decision here may well add to the line of cases that articulate strong federal interests in the energy markets and their alleged manipulation.  Per their normal routine, the Justices will vote on the outcome at their conference on Wednesday, January 14, 2015.  From there, one Justice will be assigned the task of writing the opinion.  We expect a final opinion to be published on or before the last day of session for 2015, at the end of June or early July.