FERC v. Martin Exploration Management Company – Oral Argument – March 28, 1988

Media for FERC v. Martin Exploration Management Company

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William H. Rehnquist:

We will hear argument first this morning in Number 87-363, Federal Eenergy Regulatory Commission versus Martin Exploration Management, Number 87-364, Public Service Commission of New York versus Martin Exploration Management Company.

Mr. Taranto, you may proceed whenever you are ready.

Richard G. Taranto:

Mr. Chief Justice, and may it please the Court, this case concerns the process of deregulation under the Natural Gas Policy Act of 1978.

That Act divides natural gas into a number of categories.

Those categories overlap.

Some of the categories are subject to price ceilings.

Some are now deregulated.

Producers have gone to the agencies that handle the qualification of gas for sale in particular categories, and have obtained qualifications for some gas in both the regulated and deregulated category.

The principal question in this case is how such gas should be treated for purposes of determining the price at which it may lawfully be sold.

The Commission concluded that such so-called dual qualified gas should be treated as deregulated.

We are here asking this Court to uphold the Commission’s view of the statute, and to uphold a second Commission ruling which gave rise to the second question in this case and which I plan to discuss at the end.

In considering how this case arose it is useful to have in mind one very common type of gas sale contract that producers entered into in the mid to late 1970s and early 1980s.

Those contracts were for long terms, 20 years or more, and they expressly anticipated the coming deregulation in 1985 and 1987 of the most important of the categories of natural gas under the NGPA.

The contracts provided that until deregulation occurred the gas would be sold at the highest applicable ceiling price set by law or Commission order, and when deregulation occurred, either the price would be renegotiated or it would be determined by reference to some market price.

To ensure the highest possible ceiling price during regulation while providing in advance for a change in pricing upon deregulation, producers obtained qualifications for particular quantities of gas in several different categories under the NGPA, some of which would be deregulated in a few years.

Gas at the time was in very short supply.

Market prices were high, and it looked like prices were going to continue to rise into the indefinite future.

Producers included the deregulation clause in their contracts in the expectation that when deregulation occurred they would obtain higher prices under those clauses.

As the May 1985 deregulation date approached, market prices had dropped drastically and were now well below ceiling prices in some of the alternative categories for which producers have qualified their gas.

Many producers therefore sought to escape deregulation clauses in their contracts by trying to prevent their gas from becoming deregulated and having it treated under one of the still regulated categories for which it had been qualified.

The Commission in late 1984 proposed and issued a rule that rejected this effort.

The rule stated, when gas has been qualified in the deregulated category, it must be treated as deregulated, even if it also happened to be qualified for a still regulated category.

On review, the Court of Appeals concluded that the Commission had misconstrued the NGPA.

It declared a different rule for how to treat gas that falls into a regulated-deregulated overlap.

The Court of Appeals rule says look at individual producers’ contract prices and let the producers choose the category under the contracts that actually results in the highest price.

This means that two producers with precisely the same overlap of pricing categories can be subject to different legal treatment depending on what prices they happen to include in their contracts.

What is more, the producers can make the change of status daily.

Depending on market conditions, they can move the gas back and forth between regulated and deregulated status whenever the deregulated price exceeds the regulated price.

We think the Commission’s view is much the better reading of the NGPA.

It is a better interpretation of the relevant statutory language and more in accord with the overall NGPA scheme of phased-in deregulation.

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Richard G. Taranto:

First, Section 101(b)(5) of the Act, which addresses the general question of how to treat gas that is qualified in two categories, says that if more than one of the NGPA pricing provisions applies,

“the provision which could result in the highest price shall be applicable. “

That language does not, as the Court of Appeals thought, refer to particular producers or to their contract prices.

It requires a determination of which of several statutory ceiling prices is the highest.

The provision with the highest ceiling price is the one that “could result” in the highest price, and of course if one provision says that there is no ceiling price, that is the provision that could result in the highest price, and so the gas must be treated under that provision, that is, it is deregulated.

That Section 101(b)(5) should be read as concerned only with ceiling prices and not with particular contract prices is also supported by the approach taken to price regulation by the NGPA as a whole.

The NGPA only sets ceilings, and in fact it expressly provides that the Act is concerned with producers’ contract prices only to the extent of ensuring that they are below any statutory ceiling.

In addition, the contracts like the ones I described at the outset show that it is the law that was meant to determine when gas is deregulated under produers’ contracts, not the other way around.

It is not the contracts that determine when the gas is deregulated under the law.

One clause of those contracts says, if the gas is regulated, a specified price, often the legal maximum, will apply.

Another clause says, if the gas is deregulated the price is determined by renegotiation or some market reference.

The contracts look to some external action by law or regulation to determine which of those clauses applies.

In fact, there would be a serious circularity if the statute required reference to the contracts, which then required reference back to the statute, and so on.

The Court of Appeals’ view would also transform the statute from one that set ceilings to one that established price floors.

Ceiling prices set for a regulated category could always be charged by producers, even if market prices were lower.

That turns the statute upside down.

There is not the slightest indication that Congress believed that the problem with the market was that deregulated prices were too low.

Indeed, the very nature of a price ceiling is that it is intended to hold prices down.

That view is confirmed by Congress’s overall plan in the NGPA for phased-in deregulation.

Congress did not intend to create a scheme of ever-increasing producer price subsidies, with the producers always having the option to select a higher regulated price even when market conditions did not justify such a price.

Rather, Congress intended that a market mechanism with all of its natural consequences would be introduced for the determination of prices and levels of production of the designated kinds of gas.

Again, the NGPA as a ceiling price statute is not a producer subsidy statute.

The Commission’s view is further confirmed by evidence that Congress intended–

William H. Rehnquist:

Mr. Taranto, perhaps I am naive, but if some of this gas is deregulated and some isn’t, and the deregulated price is lower, who buys, the stuff at the higher price?

Richard G. Taranto:

–The answer to that question turns on when the contracts were made.

In the current market, gas is sufficiently plentiful that new contracts are indeed being written so that purchasers never pay more than the deregulated price.

What is principally at issue in this case is a whole series of contracts written from the mid-seventies until the early eighties, very long-term contracts in which producers and purchasers locked themselves into… into contracts that did not provide for a maximum deregulated price, so the purchasers here under these contracts if the regulated category applies would be stuck at that regulated ceiling.

William H. Rehnquist:

But it is not a question just of contract interpretation then.

Richard G. Taranto:

No, the contracts themselves look to the statutory regulatory interpretation in order to determine which clause of the contracts applies.

Ultimately the price that a producer can obtain from a purchaser does turn on the contract, but again, those contracts look back to the regulatory status to determine which clause is applicable.

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Antonin Scalia:

Mr. Taranto, would you explain how the circularity problem arises with the Court of Appeals’ interpretation?

Richard G. Taranto:

Well, the contracts as I describe as written say in one clause if the gas is regulated then a certain price applies, or the maximum legal price applies.

If the gas is deregulated, then some other mechanism for determining price is triggered, either reference to some market or what is quite common, a renegotiation.

Those contracts are written on the assumption that some external action, that one would have to look to what the statute says or what the Commission has done in order to determine which of the contract clauses applies.

The circularity that I referred to would arise if the statute itself required a reference to the particular contracts to determine which of the clauses applies, and the clauses of the contracts themselves then required a reference back to the statute to determine which applied.

Antonin Scalia:

They wouldn’t.

I mean, you’d be able to… I don’t see how you end up in any circularity.

It may be a strange situation, but you would still be able to know from looking at the contract whether the… either… if it’s a renegotiated price it obviously could be higher than the ceiling price, and if it is a fixed price in absence of regulation you can look at what that fixed price would be.

It seems to me you would be able to tell from looking at the contract whether it could be higher or not.

There is no impossibility as there is in some circularity problems where you can’t get off the… can’t get off the merry-go-round.

You can get off here, can’t you?

Richard G. Taranto:

That’s right, I think one can get off, and with a renegotiation clause, as the Court of Appeals pointed out, typically where one would get off is at the regulated price, because the producer would have no incentive to renegotiate below the regulated price.

My reference to the circularity was to reflect the assumptions of all the contracting parties of the time as to which of the two places, the contract or the law, would determine the applicable category.

Anthony M. Kennedy:

Counsel, you have really already addressed the argument in part by saying that you think there’s nothing in the overall scheme of the Act that indicates Congress wanted the highest price at ail times, but that means, though, that the last clause of the sentence that we’re… the section we are looking at is a little bit out of step with the scheme of the Act, doesn’t it, because it does say the provision which could result in the highest price shall be applicable, and when one first looks at this case, it looks like there’s a policy for the Congress to allow the maximum price.

Richard G. Taranto:

I think the policy here is to allow the maximum permissible price set by law with parties free to negotiate under that ceiling according to their bargaining power and market conditions.

That’s why we stress so much the words

To read the “could result” language here as referring to the highest price set in a particular producer’s contract would really make this provision an anomaly in a statute that otherwise is not concerned at all with contract prices but simply says you may charge no more than a certain level.

We think the language

“could result in the highest price. “

is an explicit reference to a ceiling price.

Congress, as I had suggested, had no intent to allow producers to opt out of deregulation and return gas to regulated status.

when market conditions did not prop up prices to the level set in the statute for particular categories.

Congress intended a one-way transition to deregulation.

That basic design of the statute which generally deregulates new gas indicates that Congress intended market forces to apply to an ever-increasing proportion of the market as old gas was generally depleted and a higher and higher proportion of the gas available in the market became new gas.

And finally, the possibility that deregulated gas would come back under regulation is one that Congress did address in Section 122 of the Act, and it provided there precisely one mechanism for a return of regulated status, action by Congress or the President one time, and only temporarily.

Congress did not envision daily returns of regulated status… to regulate status at producers’ option into the indefinite future.

Finally, let me say a word about the second question in this case.

Section 107(c)(5) of the Natural Gas Policy Act allows the Commission to define categories of gas that would get special production incentive pricing.

The Commission defined a category called new type formation gas, and said that in order to be qualified in that category gas must first be determined to meet the qualifications under Section 102 or 103.

That definition is not challenged.

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Richard G. Taranto:

What is challenged is the Commission’s subsequent declaration that state and federal agencies when they granted a qualification as new type formation gas must be treated as simultaneously having granted the qualification under Sections 102 or 103, which they had to determine to be applicable in order to grant the new type formation status.

This ruling, which means deregulation of the gas is a reasonable exercise of the Commission’s power, including most notably its power of definition under Section 107(c)(5).

It imposes no additional burden on the state and federal agencies that handle the qualification process.

It merely implements the unchallenged definition, and it sensibly declares that the special production incentive pricing should not be available for a category of gas whose production levels can be set by the market.

John Paul Stevens:

May I ask you one question about the first issue in the case rather than the one you just addressed?

Have you abandoned reliance on Section 121?

Richard G. Taranto:

No, we rely on Section 121, but in court we rely on it as additional evidence of how 101(b)(5) should be interpreted.

We have not in this Court pressed the argument that 101(b)(5) is inapplicable and 121 by itself in isolation answers the question.

John Paul Stevens:

Thank you.

You have not, however, as respondent’s brief asserts, conceded that their interpretation is correct?

Richard G. Taranto:

No, we haven’t.

We have simply omitted one of the arguments we made in the Court of Appeals from our petition in this case.

Antonin Scalia:

You tell me, on the second issue, the one thing that concerns me about it is, there does seem to be a requirement… well, there is a requirement for determination.

The determination has to be made by the state authority, not by FERC, but it is the scheme that you don’t get a determination unless you apply for the determination, and it sort of gives the producer the option to pick the category that would be most advantageous for that producer.

Doesn’t the way FERC is managing this deprive the producer of that option?

Richard G. Taranto:

Well, we think that the option of producer choice of qualification can’t be stated quite so broadly as the Court of Appeals did.

Given the Commission’s power, several powers, including its power to define Section 107(c)(5) gas in the first place, it could have, for example, here simply said, gas qualifies as new type formation gas if it meets the following qualifications but not if it also falls into Section 102 or 103.

Antonin Scalia:

I see.

Richard G. Taranto:

And thereby just diminished the definition so as to exclude precisely the cases that it has provided for deregulation in this manner, but in addition the Commission does have a role in the qualification process.

It has given general regulatory power.

It has given the power to establish what information must be supplied to the state agencies in the producer filings, and it is given a review process… a role in the review process.

We think the Commission’s general regulatory power is sufficient given its role in the review process to require this departure from the otherwise general rule of producer selection of the qualifications that they apply for in this category of Section 107(c)(5) where it has the power to exclude this class of cases from the definition in the first place.

I would like to reserve the remainder of my time for rebuttal.

William H. Rehnquist:

Thank you, Mr. Taranto.

We will hear now from you, Mr. Solomon.

Richard A. Solomon:

May it please the Chief Justice, Members of the Court, the petitioners in 364, the Public Service Commission of the State of New York, the Associated Gas Distributors, the Panhandle Eastern Pipeline, and the Tennessee Gas Pipeline, have joined together in their petition here because what we believe the lower court’s opinion erroneously has done is to prevent pipelines from the benefits of their bargains as to how gas should be priced under deregulation while at the same time allowing producers to have the benefits of those bargains, and unfairly rasing prices.

Now, we agree completely with the position taken by Mr. Taranto as to the construction of 101(b)(5).

We would point out that for the court’s opinion below to be upheld, it is not sufficient for my friends over here to demonstrate that their construction of 101(b)(5) is a possible one.

They have to show that the Commission’s construction of 101(b)(5) is an impossible one, because if 101(b)(5) is subject to two interpretations we think it’s clear for reasons detailed in the Commission’s brief and our brief that of the two possible interpretations under such circumstances the Commission’s interpretation is much more in accord with the structure and intent of the Act than the Court of Appeals.

Let me interrupt myself and answer your question, Chief Justice Rehnquist.