United States: ONEOK, Inc. v. Learjet Inc.: Testing The Boundaries Of State And Federal Regulatory Authority In The Natural Gas Industry

Last Updated: March 5 2015
Article by Paula G. Lin

Keywords: ONEOK, Inc. v. Learjet Inc., Natural Gas, antitrust, pricing conduct,

On January 12, 2015, the Supreme Court heard arguments in ONEOK, Inc. v. Learjet Inc., a case concerning the jurisdictional line between federal and state regulation of pricing conduct in the natural gas industry. In ONEOK, the Court will determine whether the Natural Gas Act, 15 USC. § 717 et seq. ("NGA")—which gives the Federal Energy Regulatory Commission ("FERC") exclusive authority to regulate wholesale rates for natural gas transactions—preempts state antitrust claims based on price manipulation, where those claims were brought by purchasers of natural gas in transactions falling outside of FERC's authority, but where the conduct at issue also affected wholesale gas prices within FERC's jurisdiction.

The case arises out of the energy crisis of 2000-2002. The respondents, retail purchasers of natural gas, allege that the petitioners, natural gas traders, manipulated the price of natural gas in violation of state antitrust laws by reporting false information to published price indices and by engaging in wash sales. In 2011, the district court found that Section 5(a) of the NGA— which confers FERC with jurisdiction over "practices" affecting wholesale rates—preempted state law antitrust claims, and entered judgment against the respondents. On appeal, the Ninth Circuit reversed and reinstated the lawsuits, holding that the district court's reading of Section 5(a) was too broad and conflicted with the express limitations on federal jurisdiction set forth in Section 1(b). Learjet, Inc. v. ONEOK, Inc., 715 F.3d 716, 729 (9th Cir. 2013). The Supreme Court granted certiorari on July 1, 2014.

Section 1(b) of the NGA, 15 USC. § 717(b), grants FERC the authority to regulate rates charged by natural gas companies in wholesale transactions, but the Act is explicit that FERC's regulatory power does not extend to retail sales or to so-called "first sales," or sales of natural gas that are not preceded by a sale to a pipeline, local distribution company or retail customer.1 FERC is charged with ensuring that rates in transactions falling within its jurisdiction, known as "jurisdictional transactions," are just, reasonable and not unduly discriminatory or preferential; Section 5(a) of the NGA also gives FERC the authority to regulate practices and contracts affecting jurisdictional transactions.2 Since 1992, FERC has issued blanket marketing certificates that authorize natural gas companies transacting within FERC's jurisdiction to sell at market-based rates upon a showing that the company lacks market power.3 These blanket certificates permitted natural gas companies subject to FERC's jurisdiction to charge market-based rates, rather than rates filed with and approved by FERC.4 In the wake of FERC's use of these certificates, the industry used published indices as reference points for setting prices in natural gas transactions, both in wholesale transactions within FERC's jurisdiction, and in retail and first sales falling outside FERC's jurisdiction.5

On summary judgment, the district court held that because the same price indices are used to set prices in transactions falling within and outside FERC's jurisdiction, any manipulation of these indices fell within FERC's exclusive jurisdiction under Section 5(a) of the NGA.6 Section 5(a) provides, in pertinent part:

Whenever the Commission . . . shall find that any rate, charge, or classification . . . 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.7

The district court determined that the NGA preempted the respondents' state law antitrust claims because the petitioners were jurisdictional sellers under the NGA, and their alleged pricing practices directly affected FERC jurisdictional rates, since industry participants set wholesale rates by reference to the same indices that the respondents accused petitioners of manipulating.8

On appeal, the Ninth Circuit disagreed, and held that FERC's jurisdiction over practices affecting wholesale rates did not preempt state antitrust claims when the complained-of price manipulation was associated with transactions falling outside of FERC's jurisdiction.9 It determined that the district court's reading of Section 5(a) conflicted with the Congressional intent regarding the reach of the jurisdictional provisions of Section 1(b), which expressly gives states authority over natural gas transactions not subject to FERC jurisdiction.10 Based on a review of the statutory language as well as case law from the Supreme Court and from other circuits, the Ninth Circuit determined that the district court erred in reading the word "practices" in Section 5(a) of the NGA to impliedly preempt the application of state laws to the same transactions, and found that Section 5(a) only comes into play after FERC has made a determination that a rate in a jurisdictional transaction is unjust or unreasonable.11

The Ninth Circuit also rejected the petitioners' argument that the fact that FERC promulgated a Code of Conduct in 2003 addressing market manipulation by jurisdictional sellers was evidence that FERC had regulatory authority over the conduct at issue.12 It found, first, that Congress's enactment of the Energy Policy Act of 2005, which prohibits market manipulation and authorizes FERC to promulgate rules and regulations to protect natural gas purchasers, necessarily suggested FERC did not have the regulatory authority over the conduct at issue in this case prior to 2005.13 But more importantly, said the Ninth Circuit, the code of conduct itself limited its reach to sales within its jurisdiction.14

In their brief to the Supreme Court, the ONEOK petitioners argue that the Court has long interpreted the NGA to occupy the field with respect to both jurisdictional gas rates and practices by jurisdictional sellers that directly affect those rates.15 They contend that the respondents may not maintain state-law suits that will have the effect of regulating any practices that are subject to the NGA's field of authority.16 In the petitioners' view, the Ninth Circuit's preemption analysis was fundamentally flawed, in that it ignored Supreme Court precedent holding that FERC may regulate practices that directly affect jurisdictional rates, but may not regulate practices that only indirectly do so.17 The petitioners also argue that the Ninth Circuit's concern that FERC might attempt to regulate non-jurisdictional sales as a "practice" affecting jurisdictional rates is misplaced, because the "direct affect" requirement would prevent such overreaching, and also because Section 1(b) of the NGA is clear in prohibiting federal regulation of anything but "the sale in interstate commerce of natural gas for resale."18

The respondents' primary argument is that their suits seek to apply state law only in the context of retail transactions, which the NGA expressly reserves to the states.19 They refute the argument that the Court has adopted a rule requiring preemption where practices directly affect jurisdictional rates, and assert that NGA field preemption exists only when (i) a state attempts to regulate wholesale transactions, and (ii) state law is directed at the natural gas industry and is capable of affecting FERC's ability to comprehensively regulate the transportation and sale of natural gas.20 They argue that the NGA does not preempt their claims because the respondents seek to apply state antitrust law only in the context of retail transactions firmly outside the scope of the NGA, and their claims, which are grounded in traditional state antitrust law, do not run afoul of FERC's authority.21 Separately, they contend that even accepting the petitioners' views on the scope of preemption, the Court must affirm, because the alleged collusion does not "directly affect" wholesale rates since there is no rule or regulation requiring sellers to price wholesale transactions in the same manner as retail transactions.22

How the Supreme Court resolves this issue remains to be seen, but the outcome—in particular, a ruling that goes as far as recognizing state regulatory authority over conduct affecting transactions within FERC's jurisdiction—potentially could lead to changes in the regulatory landscape that US natural gas industry participants must navigate. The forthcoming decision is all the more notable in that it will come at a time of increased domestic supply and industry expansion,23 and in the midst of newly-announced federal environmental regulations of the oil and gas industry.24

Originally published 2 March 2015


1. Section 1(b) of the NGA states:

The provisions of this chapter 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.

15 USC. § 717(b). See also 15 USC. § 3301(21) (defining "first sale"); E. & J. Gallo Winery v. Encana Corp., 503 F.3d 1027, 1037 (9th Cir. 2007) (discussing definition of "first sale").

2. See 15 USC. § 717d(a) ("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.") See also 15 USC. § 717c(a) ("All rates and charges made, demanded, or received by any natural-gas company for or in connection with the transportation or sale of natural gas subject to the jurisdiction of the Commission, and all rules and regulations affecting or pertaining to such rates or charges, shall be just and reasonable, and any such rate or charge that is not just and reasonable is declared to be unlawful."); 15 USC. § 717c(b) (prohibiting undue preferences and unreasonable rates and charges).

3. See ONEOK, 715 F.3d at 726-27 (discussing FERC's use of blanket certificates).

4. See id.

5. See ONEOK, Inc. v. Learjet, Inc., No. 13-271 (S. Ct.) Brief for United States as Amicus Curiae Supporting Petitioners ("US Br."), at 4.

6. See generally In re Western States Wholesale Natural Gas Antitrust Litigation, 2011 WL 2912910, *17-*21 (D. Nev. July 18, 2011).

7. 15 USC. § 717d(a).

8. See In re Western States Wholesale Natural Gas Antitrust Litigation, 2011 WL 2912910, at *17-*21.

9. ONEOK, 715 F.3d at 733.

10. Id. at 729-31.

11. Id. at 729-35.

12. Id. at 736.

13. Id. at 735.

14. ONEOK, 715 F.3d at 735-36.

15. See ONEOK, Inc. v. Learjet, Inc., No. 13-271 (S. Ct.) Brief for Petitioners ("Pet. Br."), 19-20.

16. Id. at 23-29.

17. Id. at 35-37.

18. Id. at 38.

19. See generally ONEOK, Inc. v. Learjet, Inc., No. 13-271 (S. Ct.) Brief for Respondents Learjet Inc. et al. ("Resp. Br."), 16-35.

20. Id. at 17-27.

21. Id. at 28-32

22. Id. at 36-38.

23. See, e.g., Amy Harder, Oil and Gas Regulatory Push Coming from Obama Administration, Wall St. J., Dec. 30, 2014, available at http://www.wsj.com/articles/oil-and-gas-regulatory-push-coming-from-obama-administration-1419890081 (noting that the US is now the world's largest producer of natural gas, and on track to become the world's largest oil producer in 2015).

24. See generally id. (discussing the Obama administration's plans to regulate, inter alia, methane emissions and hydraulic fracturing, among other environmental regulations).

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