Public Service Commission of State of New York v. Gas Company Arizona Electric Power Cooperative, Inc v. Gas Company Michigan v. Gas Company Federal Energy Regulatory Commission v. Gas Company

• Decision Date: 28 June 1983
• Docket Number: 81-1958,MID-LOUISIANA,81-2042 and 82-19,Nos. 81-1889,s. 81-1889
• Citation: 77 L.Ed.2d 668,463 U.S. 319,103 S.Ct. 3024
• Parties: PUBLIC SERVICE COMMISSION OF the STATE OF NEW YORK, Petitioner, v. GAS COMPANY et al. ARIZONA ELECTRIC POWER COOPERATIVE, INC., Petitioner, v.GAS COMPANY et al. MICHIGAN, Petitioner, v.GAS COMPANY et al. FEDERAL ENERGY REGULATORY COMMISSION, Petitioner, v.GAS COMPANY et al
• Court: U.S. Supreme Court

463 U.S. 319

103 S.Ct. 3024

77 L.Ed.2d 668

PUBLIC SERVICE COMMISSION OF the STATE OF NEW YORK, Petitioner,

v MID-LOUISIANA GAS COMPANY et al.

ARIZONA ELECTRIC POWER COOPERATIVE, INC., Petitioner,

v. MID-LOUISIANA GAS COMPANY et al.

MICHIGAN, Petitioner,

v. MID-LOUISIANA GAS COMPANY et al.

FEDERAL ENERGY REGULATORY COMMISSION, Petitioner,

v. MID-LOUISIANA GAS COMPANY et al.

Nos. 81-1889, 81-1958, 81-2042 and 82-19.

Argued March 22, 1983.

Decided June 28, 1983.

Syllabus

Title I of the Natural Gas Policy Act of 1978 (NGPA) defines eight categories of natural gas production, specifies the maximum lawful price that may be charged for "first sales" in each category, and prescribes rules for increasing "first sale" prices each month and passing them on to downstream purchasers. Section 2(21) of the Act defines "first sale" as including, as a general rule, "any sale" of natural gas to any interstate or intrastate pipeline or to any local distribution company, but as not including such sales by the enumerated sellers or any affiliate thereof, unless the sale "is attributable to" volumes of natural gas produced by such sellers or any affiliate thereof. In 1979, the Federal Energy Regulatory Commission (FERC) issued Order No. 58, promulgating regulations implementing the statutory definition of "first sale." Independent producers and pipeline affiliates were assigned a "first sale" for all natural gas transferred to interstate pipelines. But pipelines themselves were not automatically assigned a "first sale" for their production. A pipeline enjoys a "first sale" for gas sold at a wellhead; for gas sold downstream that consists solely of its own production; for downstream sales of commingled independent-producer and pipeline-producer gas, as long as it dedicated an equivalent volume of its production to that purchaser by contract; and for downstream sales of commingled gas in an otherwise unregulated intrastate market. But if a pipeline sells commingled gas in an interstate market without dedicating a particular volume of its production to that particular sale, it does not enjoy "first sale" treatment. In 1980, the FERC issued Order No. 98, promulgating regulations under the Natural Gas Act (NGA) providing that the NGPA's "first sale" pricing should apply to all pipeline production on leases acquired after October 8, 1969, and from wells drilled after January 1, 1973, regardless of when the underlying lease had been acquired. All other pipeline production would be priced for ratemaking purposes just as it had before the NGPA was enacted. Respondents (interstate pipeline companies that transport natural gas from the wellhead to their customers) petitioned the Court of Appeals for review of both FERC orders, contending that Order No. 58 was based on a misreading of the NGPA and that in Order No. 98 the FERC had acted arbitrarily in refusing to authorize NGPA pricing for all pipeline production. The Court of Appeals held that the NGPA was intended to provide the same incentives to pipeline production as to independent production, that there were no practical obstacles to treating the transfer of gas from a pipeline's production division to its transportation division as a first sale, and that the FERC's reading of the NGPA was inconsistent with Congress' goal. The Court held Order No. 58 invalid and therefore did not review Order No. 98 separately.

Held: The FERC's exclusion of pipeline production from the NGPA's pricing scheme is inconsistent with the statutory mandate and would frustrate the regulatory policy that Congress sought to implement; the FERC, however, has discretion in deciding which transfer—intracorporate or downstream—should receive the "first sale" treatment. Pp. 325-343.

(a) As respondents contend, the FERC has the authority to treat as a first sale either the intracorporate transfer of natur l gas from a pipeline-owned production system to the pipeline or the downstream transfer of commingled gas from the pipeline to a customer, in which case respondents would be able to include an NGPA rate for production among their costs of service, just as they do when they acquire natural gas from independent producers. The downstream transfer plainly satisfies § 2(21)'s "general rule" definition, and the legislative history clearly demonstrates that this statute was not intended to prohibit the FERC from deeming the intracorporate transfer a "sale." The statutory exception to the "general rule" definition does not diminish the FERC's authority to treat an intracorporate or downstream transfer as a first sale. Pp. 325-327.

(b) The purposes of the NGPA to preserve the FERC's authority under the NGA to regulate natural gas sales from pipelines to their customers and to supplant the FERC's authority to establish rates for the wholesale market, the market consisting of so-called "first sales" of natural gas, the legislative history, and the overall structure of the NGPA, all show that Congress intended pipeline production to receive "first sale" pricing and did not intend the FERC to be able to exclude pipeline production from the NGPA's coverage completely. Pp. 327-338.

(c) The FERC's argument that it would be wrong to assign intracorporate transfers a "first sale" price "automatically" because not even independent producers receive such treatment, refutes a position that no one advocates, since it is agreed that such a transfer should not "automatically" receive the NGPA ceiling price. There is no merit to the FERC's argument that giving "first sale" treatment to downstream sales would result in the application of "first sale" maximum lawful prices to all mixed volume retail sales by interstate and intrastate pipelines and local distributors, thereby supplanting traditional state regulatory authority over the costs of intrastate pipeline transportation service. Nor is there any merit to the FERC's argument that pipeline producers would enjoy an unintended windfall if they receive "first sale" pricing. Pp. 339-342.

664 F.2d 530 (5 Cir.1981), vacated and remanded.

Jerome M. Feit, Washington, D.C., for petitioners.

James D. McKinney, Jr., Washington, D.C., for respondents.

Justice STEVENS delivered the opinion of the Court.

By enacting the Natural Gas Policy Act of 1978 (NGPA), 92 Stat. 3350, 3368, 15 U.S.C. (and Supp. V) § 3301 et seq., Congress comprehensively and dramatically changed the method of pricing natural gas produced in the United States. In Title I of that Act, Congress defined eight categories of natural gas production, specified the maximum lawful price that may be charged for "first sales" in each category, and prescribed rules for increasing first sale prices each month and passing them on to downstream purchasers. The question presented in this case is whether the Federal Energy Regulatory Commission has the authority to exclude from this scheme most of the gas produced from wells owned by interstate pipelines and to prescribe a different method of setting prices for that gas. The answer is provided by the Act's definition of a "first sale" and by the scheme of the entire NGPA.

Respondents are interstate pipeline companies that transport natural gas from the wellhead to consumers. They purchase most of their gas from independent producers. In addition, they acquire a significant amount of gas from wells that they own themselves or that their affiliates own. Gas from all three sources is usually commingled in the pipelines before being delivered to their customers downstream. Thus, at the time of delivery it is often impossible to identify the producer of a particular volume of gas.

On November 14, 1979, the Commission ¹ entered Order No. 58, promulgating final regulations to implement the defi- nition of "first sale" under the NGPA.² The first category of producers—independent producers—is assigned a "first sale" for all natural gas transferred to interstate pipelines. The second category of producers—pipeline affiliates that are not themselves pipelines or distributors—is also assigned a "first sale" for all natural gas transferred to interstate pipelines, unless the Commission specifically rules to the contrary. In contrast, the third category of producers—pipelines themselves—is not automatically assigned a "first sale" for its production. A pipeline does enjoy a "first sale" for any gas it sells at the wellhead. Similarly, it enjoys a "first sale" for any gas it sells downstream that consists solely of its own production. It also enjoys a "first sale" for any downstream sales of commingled independent-producer and pipeline-producer gas, as long as it dedicated an equivalent volume of its own production to that purchaser by contract. Finally, it enjoys a "first sale" for any downstream sales of commingled gas in an otherwise unregulated intrastate market. However, if a pipeline producer sells commingled gas in an interstate market without having dedicated a particular volume of its production to that particular sale, it does not enjoy first sale treatment.

On August 4, 1980, the Commission entered Order No. 98.³ The Commission noted that its construction of the NGPA in Order No. 58 had left most interstate pipeline production outside the Act's coverage, since so much of it is commingled with purchased gas. It announced that such production and its downstream sale remain subject to the Commission's regulatory jurisdiction under the Natural Gas Act (NGA), 52 Stat. 821, 15 U.S.C. § 717 et seq. In order to provide pipelines with an incentive to compete with independent producers in acquiring new leases and drill- ing new wells, the Commission decided that pipeline production should receive treatment under the NGA that is comparable to the treatment given independent production under the NGPA. It therefore promulgated regulations under the NGA providing that the NGPA's first sale pricing should apply to all pipeline production on leases acquired after October 8, 1969, and to all...