Northwest Central Pipeline Corporation v. State Corporation Commission of Kansas

PETITIONER:Northwest Central Pipeline Corporation
RESPONDENT:State Corporation Commission of Kansas
LOCATION:Texas State Comptroller

DOCKET NO.: 86-1856
DECIDED BY: Rehnquist Court (1988-1990)
LOWER COURT: Kansas Supreme Court

CITATION: 489 US 493 (1989)
ARGUED: Nov 29, 1988
DECIDED: Mar 06, 1989

ADVOCATES:
Frank A. Caro, Jr. – on behalf of the Appellees
Harold L. Talisman – on behalf of the Appellant
Michael R. Lazerwitz – as Amici Curiae supporting Appellees

Facts of the case

Question

Audio Transcription for Oral Argument – November 29, 1988 in Northwest Central Pipeline Corporation v. State Corporation Commission of Kansas

William H. Rehnquist:

We’ll hear argument first this morning in No. 86-1856, Northwest Central Pipeline Corporation v. The State Corporation Commission of Kansas.

Now, Mr. Talisman, you may proceed whenever you’re ready.

Harold L. Talisman:

Mr. Chief Justice, may it please the Court:

This is another case involving a regulation of the Kansas Corporation Commission which is designed to alter the purchasing practices of interstate natural gas pipelines that are regulated under the Natural Gas Act.

I say it’s another case because on two prior occasions, in 1958 in Cities Service Gas Company versus The Kansas Corporation Commission and in 1963 in Northern Natural Gas Company versus The Kansas Corporation Commission, this Court held invalid Kansas Corporation Commission regulations which intruded on federal regulation under the Natural Gas Act.

There as here the Kansas Corporation Commission contended that those regulations were necessary for it to carry out its functions in the regulation of production from Kansas fields.

In Northern Natural Gas Company, this Court squarely held that the Kansas Corporation Commission could not either directly or indirectly intrude on federal regulation of purchasing practices of interstate pipeline companies.

And it therefore held that a Kansas regulation which had directed a pipeline company to take gas in a certain manner in that field to be invalid under the supremacy clause.

More recently, in 1986 in Transcontinental, this Court upheld and it reaffirmed the Northern Natural decision although the gas in that case was federally deregulated.

Since the gas in this case is old gas, gas that remains subject to federal regulation, it’s our view that this case falls squarely within the confines of the Northern Natural decision and a fortiori, Transcontinental.

Now, the Kansas Commission contends they have… that they have circumvented this Court’s prohibitions in Northern Natural and in the Transco case because the regulation in this case is nominally addressed to producers.

But the record shows clearly that the purpose and effect of the regulation is to alter the purchasing practices of interstate pipelines.

Indeed, it was justified on the basis that it would cause interstate pipelines to buy more Kansas gas at the expense of gas from other sources outside of Kansas on pain of suffering an economic penalty.

It’s for this reason that we contend that the regulation in this case is the same type of case that we had in Northern Natural, but it’s in sheep’s clothing.

With that brief introduction, let me outline the facts.

The regulation that we’re talking about in this case applies to the Kansas Hugoton Field.

It is one of the largest, if not the largest, gas field and one of the old gas fields in the United States.

Northwest Central is one of several interstate pipeline companies that purchased gas from the Kansas Hugoton Field under long-term contracts.

The natural gas pipeline companies that purchase gas in this field have invested hundreds of millions of collars in pipeline facilities to take gas in the field.

And those facilities were authorized by the Federal Energy Regulatory Commission upon a showing that there would be sufficient reserves to support the investments that were made.

The gas which Northwest Central and other pipelines take in this field is commingled with gas which they take from other sources in other states.

This gas is transported and sold in interstate commerce to retail… to distributors that resell the gas for ultimate consumption for residential, commercial and industrial use.

The rates that are charged by Northwest Central and other pipelines are regulated by the Federal Energy Regulatory Commission under the Natural Gas Act on a cost-of-service basis.

And the cost to purchase gas is probably the… no doubt the largest item in the cost of service, and the mix of gas affects that cost.

And, therefore, the cost to purchase gas is subject to very, very close scrutiny by the Federal Energy Regulatory Commission including prudency reviews as to the mix of gas being used.

Now, the Kansas Commission has authority to regulate production in Kansas.

Under Kansas law, the objective is for the regulation to provide that each owner in a common pool will get its fair share of the gas in place.

So, the purpose of the law is not to promote Kansas gas, but rather to provide a basis upon… in which each producer will get his share of the gas.

In doing that, Kansas establishes allowables for each well on a monthly basis.

The allowables are basically a limit on how much well… how much each well can produce.

Harold L. Talisman:

And because wells in the Kansas Hugoton Field do not produce uniformly because the purchaser’s requirements are for different or for other reasons, wells can either over-produce or under-produce.

And where there is an accumulated underage, the underage is cancelled.

But it is–

Mr. Talisman, excuse me.

Could I ask a question at this point?

Harold L. Talisman:

–Yes.

You say the purpose is to give each producer his fair share of the–

Harold L. Talisman:

Yes.

–of the common pool of gas.

Harold L. Talisman:

Yes.

Well, why couldn’t fairness be decided on a… on a first-take/first… first win rule, whoever captures the gas is entitled to it, which is the way some other natural resources are by some states treated?

why can’t Kansas say the fair rule is if you’re all tapped into the same pool of gas, whoever takes it out gets it?

Harold L. Talisman:

The… the entire purpose at the… of the Kansas statute was to amend the rule of capture.

That is, the Kansas statute provide… basically it was to amend that provision and to… to obtain a method of allocation and production which would enable each party to take that out.

I understand that.

Harold L. Talisman:

And the reason for that was… was that the view that the rule of capture would lead to… to waste.

Well, they’ve changed their mind, and they’re going closer back to a rule of capture.

Would the rule of capture violate in and of itself the Natural Gas Act?

Harold L. Talisman:

Well, if… if there was a rule of capture under the… if you were to, say, repeal the Act and go back to the rule of capture… just take that as an illustration… in that event there wouldn’t be any restriction on our producers in producing later on.

There would be no limits on what they could produce in order to catch up.

But Kansas hasn’t repealed the statute.

What Kansas is doing is continuing the process of having allowables, but what it’s saying is that the reinstatement provision, the provision that has existed previously in the law, that permits a producer who was underproduced an opportunity to get the allowables that were cancelled reinstated so it could catch up and get Its fair share of the gas, that that no longer will exist.

And the purpose of that, the clear purpose as shown by the… by the record in this case… the clear purpose of their doing that was basically to confront the interstate pipeline companies with a Hobson’s choice.

Either they had to start taking more gas out of the Kansas Hugoton Field under the timetable that Kansas wanted us to take it out of the field, or else they would forego their contractual opportunities to take that gas at a… at a… at a later time.

I understand that, but before we get to whether the purpose invalidates it, I’m trying to… trying to establish whether you assert that the mere fact of the rule that they have, regardless of its purpose, invalidates it.

I don’t see how their rule is any worse than a rule of capture.

You acknowledge a rule of capture would be all right, in and of itself–

Harold L. Talisman:

Well–

–not… not looking to its purpose.

Harold L. Talisman:

–Well, I… I don’t know that… and I think you have to look at its purpose.

Harold L. Talisman:

But–

Let’s leave that for the moment.

Harold L. Talisman:

–if there was a–

Would a rule of capture be all right?

Harold L. Talisman:

–Not it it–

Apart from purpose.

Harold L. Talisman:

–A rule of… I assume that a state is not required to impose a law which regulates taking of gas from a field.

All right.

Now… now, is this any worse than a rule of capture?

Surely it’s no worse.

Harold L. Talisman:

In some ways, yes, I think it is.

How is it worse?

It seems to me that–

Harold L. Talisman:

Well, because–

–all this rule says is that whatever you take out… if somebody else takes out more this year than you do–

Harold L. Talisman:

–Yes.

–you won’t be able to make up that next year.

That’s all.

That’s all it says, isn’t it?

Harold L. Talisman:

Justice Scalla, here’s why I think it’s worse.

If you had a rule of capture, there would be no limit, for example, on the producers connected to our pipeline and producing gas in the future in order to try to recapture their share of the gas.

But under the… under the regulation–

There would be if somebody took out the entire… the entire pool this year, wouldn’t there?

There would be nothing left.

Harold L. Talisman:

–Well, certainly it that were the case in that extreme situation, there would be… would be nothing left.

Whereas in this case, they can’t take everything out.

There is some limit set, and the only difference is if you don’t take out that amount this year, you won’t have a right to make it up next year.

I don’t see how that’s any worse than a rule of capture.

Harold L. Talisman:

Well, because… because the intent of the statute is that you be permitted to take your fair share of the gas.

And once they’re regulating, the way in which they regulate has to be a way which is not intended to interfere with the purchasing mix regulation under the Natural Gas Act.

xxx.

Harold L. Talisman:

Once they assume the job of regulating–

Mr. Talisman?

Harold L. Talisman:

–they have to do it in a way which does not interfere with federal regulation.

Mr. Talisman, don’t all state regulations such as numbers and spacing of wells and otter safety regulations also affect in a sense the interstate mix of gas?

Harold L. Talisman:

Justice O’Connor, they probably have some incidental effect, and that was considered–

Well, there’s no doubt they do.

Harold L. Talisman:

–that was considered in the Northern decision.

In fact, that was discussed in the dissent in the Northern–

It just seems to me allowables are… are more on the order of that kind of traditional state regulation.

Harold L. Talisman:

–Well, I agree that allowables are under traditional state regulation, but you have to lock at the central purpose of the regulation that’s being adopted.

It’s the same kind of test that the Court adopted in the Schneidewind case, and that is you have to lock at the central purpose of what they’re doing.

And here the record is absolutely clear… no question… that the purpose of this regulation, its central purpose, was to cause Interstate pipelines to take gas out at a faster rate on the timetable prescribed by the state because–

Well, don’t you think–

Harold L. Talisman:

–because they–

–we have to look at what Congress intended?

Harold L. Talisman:

–You have to look at what Congress–

Don’t we have to–

Harold L. Talisman:

–Yes.

–determine–

Harold L. Talisman:

Yes.

–whether Congress intended to allow the states to take this role?

Harold L. Talisman:

Yes.

And… and… and that was–

And under Silkwood, pervasive regulation alone doesn’t tell us that.

Harold L. Talisman:

–Yes.

And we do have some indications that Congress did, indeed, intend states to have some role in regulating the production of gas.

Harold L. Talisman:

Yes, and we don’t contend otherwise.

What we do contend, however, that in conducting that… in that sphere of regulation, which is within their jurisdiction, they cannot do it in a way which interferes with–

Do other states have–

Harold L. Talisman:

–federal regulation.

–similar regulations that require gas to be taken or lost?

Harold L. Talisman:

Other states–

xxx.

Harold L. Talisman:

–Other… other… other states have cancellation provisions.

Right.

Harold L. Talisman:

But… but they… but one big difference between the way in which they have regulated and the way Kansas has regulated is they have fixed allowables from a very close relationship to the actual market demand from the field.

What Kansas has done for a great many years is to fix allowables far above what is the actual demand for the field, and what that has done… that… and that was done to try to induce pipelines to take more gas out of the field because they were dissatisfied with what pipelines… the amount they were taking.

They wanted them to take more from Kansas.

Now, what that did is that led to a disparity, a substantial disparity, between those wells which were underproduced and those wells which were overproduced.

And the overproduced wells were generally tied to the intrastate Kansas buyer, whereas the underproduced wells were tied to interstate pipelines.

Now, having created this great disparity, they then came in and said, well, that didn’t work.

We didn’t get… we didn’t induce more takes that way.

Now we’re coming up with what Chief Justice Schroeder of the Kansas Supreme Court said in his dissent, Now we’re coming up with the ultimate weapon, and that is, now we’re going to say if you don’t take these underages which have accumulated based on their allowances which are too… were too high, you’re going to lose the right to obtain these in the future.

And so, he basically was giving the pipelines… they have beer basically giving the pipelines a… a… a Hobson’s choice: either they start taking gas out on the timetable prescribed by Kansas or… and which means we can’t take gas from other states… we’d have to cut back there on the basis we’re doing it… or else we lose the right to buy this gas in the future.

Now, the order, as I say, was nominally addressed to the producer.

Well, you don’t argue for a rule of capture.

Harold L. Talisman:

No.

And you don’t argue against the old allowable system.

Harold L. Talisman:

No.

You argue against the new allowable system because in part it’s inconsistent with your take-or-pay provisions in other states.

Harold L. Talisman:

Well, it’s… it’s… what it does is it interferes with the purchasing mix under regulation by the Commission.

Let me give you an example.

You don’t… you don’t say it has no relation to conservation purposes, do you?

Harold L. Talisman:

We feel it does not.

It has no relation to conservation–

Harold L. Talisman:

No.

–purposes at all.

Harold L. Talisman:

No.

Cannot… cannot–

Harold L. Talisman:

It doesn’t… it doesn’t make sense to us to… to say to people who are underproduced that we’re going to cancel the underages and not permit you to catch up.

Now–

–That’s… that’s given this market.

Harold L. Talisman:

–In… in the… in this situation.

Now, I think–

I take it… I take it if the price of gas radically escalated, that the case would be different, wouldn’t it?

Harold L. Talisman:

–Well, if the markets improved.

It would be a much different case.

Harold L. Talisman:

We… we would… we would be able to take perhaps this gas.

In fact, that’s what we’re saying.

In the 1970s when there were very strong markets, the interstate pipeline companies were able to take greater volumes of gas, and many of the underages that had accumulated before that time were taken.

And… and so, the natural flow of the market was permitted to operate, and we did.

The producers connected to us were able to basically produce the underages, a great many of their underages.

So, then Kansas… so, then Kansas has to change its scheme every time the interstate market changes.

Harold L. Talisman:

No, it doesn’t have to change its scheme.

I’m saying simply that what they… what they should have done was let the thing alone, but they should not basically introduce regulations that are intended to mix into the purchase mix for pipelines.

And I–

I don’t quite understand your overriding principle.

If you said that Kansas simply has no Jurisdiction to do this and it has to be a law of capture and the federal government has to regulate it, fine.

But you want a very precise kind of regulation that benefits you.

Harold L. Talisman:

–No.

What we’re saying in effect is that if the central purpose of the regulation is to change the purchasing mix of pipelines, that is a… a area which is preempted under the Natural Gas Act.

Well, I… I would think that you would make the same argument if a state which has the rule of capture, if any of them does, suddenly changed to a… a proration, an allowable system, because then you are… you are just invalidating the rule of captured.

And surely your so-called mix would change when you shifted from capture to proration.

I don’t see how you can possibly–

Harold L. Talisman:

I would–

–accept just an ordinary proration order then.

Harold L. Talisman:

–I would… I would say that if a state adopted a… a… went from a rule of capture to a proration plan, that it would be our… and if the central purpose of that was to prevent waste and to assure that people got their fair share of the gas, we would consider that to be a legitimate function of the state within–

Well, I know but–

Harold L. Talisman:

–within the producing–

–Well, I know but… but you could make the same argument there that the purpose of the state was to… was to prevent the producers from producing from Oklahoma in the Hugoton Field instead of Kansas.

Harold L. Talisman:

–Yes.

And if there’s… if the… if the intent was to interfere with the purchasing mix of pipelines, I would say that that would be a–

And I don’t see–

Harold L. Talisman:

–that would be preempted.

–And I would… I would… I would think that Kansas wouldn’t be prevented from having a proration system from the outset where no underages would accumulate.

They just… if you didn’t produce your… your allowable, that’s just too bad.

Harold L. Talisman:

Yes, but the… but the–

Isn’t that right?

Harold L. Talisman:

–Well, there are other states that have that system, and in… in–

Well, you don’t say that’s unconstitutional, do you?

Harold L. Talisman:

–Well, if… if the way they use it is the way to Influence the purchasing mix, yes.

But if… but where you have a situation like you have in Kansas where they have had fixed market… demand allowables far in excess of the actual market to create this sort of excess amount of allowables, and then say now if you don’t take all of this within a certain period of time, you’re going to be… you’re going to lose all that, that opportunity to take that, that is attempting to interfere with the purchasing mix.

And it was clear from the record.

The witness who sponsored the exhibit said and testified unequivocally that… that the purpose of the regulation was to induce pipelines to take greater volumes from the Kansas Hugoton Field given the limited market.

And the… the Kansas District Court in its decision said that this regulation will cause a loss… permanent loss of underages and change the mix of pipelines which are transporting gas miles away, And the Supreme Court of Kansas in its majority decision said that this order gives us pause.

It’s obviously intended for the pipelines.

And… and it’s for this reason we say this case falls within Northern Natural.

But it was still–

Harold L. Talisman:

We don’t believe the mere fact–

–It was still a regulation of production.

It has just had this consequence on–

Harold L. Talisman:

–Yes, well, you’re not… but you cannot use… you cannot regulate in production in a way which interferes with federal regulation.

In Mississippi Power–

–No.

Anytime you regulate production, you’re going to have an impact on–

Harold L. Talisman:

–Well, but it’s the question of… and I… I go back to the question of what is the central objective of the regulation.

If the central objective… and that is clear on the record here.

If the central objective of the regulation is to basically change the mix for pipelines, that’s a precluded area.

–Well, what is your preemption?

Is it that it interferes with the jurisdiction of the Energy Commission?

Harold L. Talisman:

Yes.

Or is it just that there’s such a pervasive federal regulation that the states just can’t do anything that has an effect on the price of gas or that… or the… or the purchasing practices of the pipelines?

Harold L. Talisman:

What I’m saying… what I’m saying is is that they cannot regulate in an area which its intended purpose is to change the mix of pipelines.

In Northern, this Court held squarely that that was a field occupied under the Natural Gas Act.

xxx.

Harold L. Talisman:

And that applies… and that applies to this case as well.

Under your view what’s left of the reservation of the authority in the Act that says the states can regulate the production in gathering?

Harold L. Talisman:

Well, we think a great deal is left.

We have indicated in our… in our briefs that there are actions which they could take to bring the field into balance.

They could, for example, fix allowables which are more nearly in line with what’s going on in the market.

But anything… anything directed by its terms to regulate production or gathering is bad if there’s an attempt to… to influence the purchasers?

Harold L. Talisman:

If… if… if what they’re doing is trying to regulate the takes from the field of the purchasers in terms of trying to change their mix, yes.

We contend that that’s preempted under the Natural Gas Act–

So, then you–

Harold L. Talisman:

–for the same reasons this Court held to in Northern.

–So, then you take the position that the state must take interstate commerce and interstate markets into account.

Harold L. Talisman:

Well–

Which is precisely the opposite of what I thought our Commerce Clause cases–

Harold L. Talisman:

–No.

I don’t say that it must take that into account.

I… I say that it cannot issue a regulation which is intended to change the mix.

Let me show you the conflict here.

While this… after our notice of appeal was filed in this case, in fact, after our initial brief was filed, the Federal Energy Regulatory Commission issued a order concluding a long proceeding relating to the purchase mix of Northwest Central Pipeline Corporation.

The Kansas Corporation Commission was an intervenor in that case.

And a number of parties presented their views as to what the purchase mix of the company should be, including some parties saying that they thought that we should be taking greater amounts of gas from the Kansas Hugoton Field.

And… and the Commission heard these various claims.

There was a pretty extensive hearing, administrative law judge’s decision.

And the Commission concluded that it rejected the proposals of parties that more gas should be taken from the Kansas Hugoton Field and it approved as prudent the purchasing mix being used by the company.

And the… the mix being used by the company was to take a mix of low-priced and high-priced gas and to blend it together and to try to arrive at a target market price which would enable it to compete against alternative fuels.

Harold L. Talisman:

And by not taking all of the Kansas Hugoton gas, which was lower priced, and reserving that for mixing with some of the higher priced gas for future use, the company was-able to be able to reserve some to be competitive in the future.

And it was able also to avoid incurring payments for gas not taken in other areas.

Now, the record in that case showed that had we taken the volumes of gas from the Kansas Hugoton Field that the parties wanted us to take, we would have incurred some $77 million of take-or-pay payments in just a period of eight months.

And the Commission found this… found what we were doing to be prudent.

Now, we see this as–

–Well, has that got any impact on this case?

Harold L. Talisman:

–Yes, because what… what we have, therefore, is a sort of a… what as I see as a… an obstacle between the program that Kansas wants and the program that the Corporation Commission–

Well, you mean… but is… is that company that you mentioned… is that a party here?

Harold L. Talisman:

–That’s our company.

That’s your company.

Harold L. Talisman:

Yes.

But then is it your argument now simply that this… this Kansas system is invalid as applied?

Harold L. Talisman:

No.

I’m saying that–

You’re saying… your argument–

Harold L. Talisman:

–We’re saying… I’m… I’m–

–is that it’s just plain invalid.

Harold L. Talisman:

–I’m just giving you an illustration of how you have a conflict.

The conflict is that we can’t obviously comply with both programs.

We can’t take gas out in the mix which has been approved.

Well, that’s quite a different argument.

You’re saying now that it’s inconsistent with a Energy Commission order.

Harold L. Talisman:

I’m saying that… that… that it shows that there is an obstacle, that it presents an obstacle to following the mixes that are approved by the Commission.

And the Kansas Commission intervened in that case so that it seems to me that if… if Kansas can do this, so can other states which would try to issue regulations which will favor them in terms of your taking gas.

And if you have that, then what you’re going to have is a situation where the kind of uniformity of regulation that was–

Well–

Harold L. Talisman:

–intended under the Natural Gas Act–

–The Commission doesn’t–

Harold L. Talisman:

–would be destroyed.

–The Commission doesn’t seem to think that… that this system is inconsistent with any orders of it.

Harold L. Talisman:

Well, the–

Does it?

Does It?

Harold L. Talisman:

–The Commission is now supporting the Kansas position.

Earlier it filed a brief in which it contended that the Kansas order was preempted.

Well, yes, but… but I would–

Harold L. Talisman:

Now.

the–

–I would think they know… they would know better than we would whether… whether the order… the prudent… the order that you mentioned as being prudent that says your practices were prudent… they would know whether that is inconsistent with the Kansas system.

They say it isn’t.

Harold L. Talisman:

–Well, I don’t… I don’t believe that if you… that you can square their position with that order.

The… the order disapproved proposals to take more gas from the Kansas Hugoton Field, and basically approved as prudent the purchase mix obtained by the companies.

I don’t believe you can square their position in this case that there’s no–

That order… that order was entered after you filed your initial brief?

Harold L. Talisman:

–After the initial brief, but we refer to it in our reply brief.

In your reply brief.

Harold L. Talisman:

Yes.

If there are no further questions, I’ll close at this point.

Very well, Mr. Talisman.

Mr. Caro, we’ll hear from you now.

Frank A. Caro, Jr.:

Mr. Chief Justice, may it please the Court:

The purpose of my argument is to show that the Kansas Corporation Commission’s order amending paragraph P of the basic proration order for the Kansas Hugoton Field was an exercise of the state’s legitimate interest to conserve its natural resources by preventing waste from occurring in the field and in protecting correlative rights of adjoining leaseholders in that field.

Second, the action of the Kansas Commission… the action the Kansas Commission took fits squarely within the production and gathering exemption of the Natural Gas Act.

And finally, the effect of the Kansas Commission’s order does not interfere with the comprehensive federal regulatory scheme, nor does it unconstitutionally burden interstate commerce.

The problem in the field, in the Kansas Hugoton Field, was that the field was out of balance.

Pressures in the Kansas Hugoton Field indicated that gas was draining from a non-producing well to the producing well.

The reason for that is that when a well is not producing or is shut in, pressures accumulate in that well.

Gas migrates in the field… in a common source of supply in this field, in the Kansas Hugoton Field, from a high pressure zone to a low pressure zone, the low pressure zone being the area in which the well is timely producing its allowables.

That’s what was happening here in the Kansas… in the Kansas Hugoton Field.

The field was being used as a storage facility.

Frank A. Caro, Jr.:

Some producers were not timely producing their production allowable, and by not timely producing that production allowable, it was causing the drainage of that gas from the high pressure area, from the shut-in well area, to the low pressure area which was violating correlative rights and causing waste to occur in the field.

The Commission–

I don’t understand that.

Why isn’t that its own punishment?

If you don’t produced, the gas goes away from your well, why does the state have to… I mean, that’s its own punishment.

Why isn’t that alone enough to induce somebody to produce?

Frank A. Caro, Jr.:

–Because… because of the Commission’s decisions or the Commission’s action prior to the amendment of paragraph P, it gave these producers the right to bank these allowables or to bank these non… these non-procuced allowables or these underages indefinitely.

These… the producers in the field thought that they could accumulate these unproduced allowables and at a later date come in and produce them.

What if I don’t believe all that, Mr. Caro?

What if I think Kansas really did this just to get more gas produced in Kansas–

Frank A. Caro, Jr.:

Justice–

–and make more money for Kansans?

Suppose I think that was the whole purpose of this?

Do you lose?

You concede that you lose?

Frank A. Caro, Jr.:

–No.

No, we don’t.

I think… I think It’s important to understand that what the Kansas Commission did was encourage the timely production of those allowables because only through timely producing those allowables… producing those allowables pursuant to the proration order… in other words, making sure that each well produces its fair snare of the gas in conjunction with other wells that are producing in the field.

And it’s only… when you… when you let them do that, when those wells produce in a timely manner, when… when you encourage the timely production of those allowables does the field become back… get back into balance.

And when the field is back into–

Well, suppose… suppose your statute said in order to ensure that Kansas has a greater share of the interstate market, the following rule is enacted.

It’s the same as Justice Scalla’s question.

Suppose we find that the purpose is to favor Kansas producers and Kansas consumers.

Then what?

Frank A. Caro, Jr.:

–Well–

Do you automatically lose?

Frank A. Caro, Jr.:

–That’s not… that’s… I know I’m not answering your question.

I know it’s not that case.

Frank A. Caro, Jr.:

This is not–

But it tests the legal proposition which is what we’re here for.

Do you lose in that case?

Frank A. Caro, Jr.:

–I think we lose in that case.

The problem is that that’s not what happened here.

Even though the–

Frank A. Caro, Jr.:

We have to look–

–Even though the statute says that you can regulate production?

Frank A. Caro, Jr.:

–What we need to look at is the reason why Kansas is… is doing what it’s doing.

What you’re saying is that that’s not the purpose.

Frank A. Caro, Jr.:

The purpose… we need to look at why–

Why… why do you need to look at the purpose when the statute says you can regulate production and gathering?

Frank A. Caro, Jr.:

–Mr. Chief Justice, because I think if… we’re not forcing more Kansas gas on… on the interstate markets.

That… we’re encouraging the production, the timely production, of those allowables.

Yes, more gas is going… may go to the interstate markets.

More gas may be produced in Kansas.

And it may go into the interstate markets as a result of the Kansas Commission’s order.

But this order does not force the pipelines to take more gas.

It does not force the Appellants to take more gas out of the field.

It merely encourages the timely production.

And that… and it only does that to bring the field back into balance.

We saw that waste was occurring.

Waste was occurring in the field, that… that uncompensated drainage from the non-producing wells to the producing wells was occurring.

And by giving them an incentive… by giving a producer an incentive to timely produce that gas, to timely produce the allowable that’s assigned to them do we… do we bring the field back into balance in the long run.

And that’s the… that’s the purpose of the Commission’s order.

Do we look to the legislative history?

I mean it you say purpose is crucial, I suppose we have to look to the legislative history.

And it really comes down to whether we believe Mr. Talisman or whether we believe you as to what the purpose was.

Right?

Frank A. Caro, Jr.:

The purpose of the Kansas Commission’s order?

Right, right.

We sort of sit as a jury to decide what the purpose was, and if we… if we agree with Mr. Talisman, then you lose.

Frank A. Caro, Jr.:

No.

I think if you look at what Mr…. what the Appellant is saying is that It’s not… it’s not true.

We’re not forcing… we’re not… the reason we’re forcing more Kansas gas to be produced, the reason we’re encouraging timely production of that allowable is to bring the field back into balance, to conserve the natural resources in the field, to protect correlative rights and prevent waste from occurring.

That’s what the problem was.

The Commission in its expertise found that to be the problem that was occurring in the field.

As I said–

One… one more point.

Do you agree with the characterization of the petitioners of the Appellants that the Kansas Supreme Court held that the purpose of this regulation was to increase Kansas’ share of interstate gas?

Frank A. Caro, Jr.:

–I don’t believe they said it was to increase Kansas’ share of interstate gas.

What they said is that… to increase the production of gas from the Kansas Hugoton Field, and that it was the purpose to encourage the timely production of that gas because by… by these producers not producing, by the pipelines not taking the gas in the field, it was causing a problem.

And the Commission had to address that problem.

If we didn’t address the problem, the field would become out of balance, waste would occur and, therefore, we wouldn’t be conserving our… the natural resources in the field.

The second thing to look at is this order is no different that any… than what any other state does.

The two largest states in the… the two largest natural gas producing states in the country–

Is Northwest a producer?

Frank A. Caro, Jr.:

–Northwest Central is a interstate pipeline.

And it… it just buys from producers.

Frank A. Caro, Jr.:

It buys from producers in the… in the field.

And… and so it complains because this rule has an effect on it.

Frank A. Caro, Jr.:

It complains because it… it says that this rule is going to have an effect on them.

It’s going to affect the price that they ultimately charge for their gas because they believe that they’re going to have to take less from… take less of these high take-or-pay contracts, these private contractual agreements that they’ve entered into that the state… that they believe the state ought to consider when it… when it wants to adjust the allowable formula in the field.

What is your… if you’d tell me.

Do you think that this… this order of the Commission that was entered after the filing of the initial brief here… do you think that order has any impact on this case?

Frank A. Caro, Jr.:

The order of the FERC?

No, no, of the Federal… the Energy Commission.

Frank A. Caro, Jr.:

The order of the Federal Energy Regulatory Commission has no impact on this case.

What… what FERC does is to look at whether the purchasing practices of… of the Appellant were prudent in light of the… in light of the state regulatory scheme, in light of… in light of all of the situations faced… facing that pipeline.

I think that if this Court upholds this decision, it’s not going to affect what… how FERC looks at it.

FERC’s own brief indicates that.

Well, the purchasing practice, though, that FERC said was… was prudent… can it any longer be followed in light of the Kansas scheme?

Frank A. Caro, Jr.:

Yes, it can, Justice.

I believe that order came out in late 1988.

The Commission’s… the Kansas Commission’s order took effect in 1983.

I know.

Frank A. Caro, Jr.:

So, I believe it may have even… it may even consider the… the state regulatory scheme in effect in Kansas just like it also considers the state regulatory schemes in effect in Oklahoma, in Texas and other states–

So, the producers have had to comply with… with this 1983 order all these years?

Frank A. Caro, Jr.:

–They have… they have had to comply.

Or was it… or was it stayed?

Frank A. Caro, Jr.:

No, This order has not been stayed.

It has been moved back… the implementation of it.

What the order did… it said that–

Moved back to when?

Frank A. Caro, Jr.:

–To I believe 1986.

The… the… the producers in the field had different periods of time in which unproduced allowables were cancelled off, permanently cancelled.

One period of time was pre-1975.

Well, those unproduced allowables, if not reinstated, are… have been cancelled.

The period of time from 1975 through 1986 is still in place, and the… and the producers have until December 31, 1989 to… to petition the Commission to reinstate those cancelled underages, those past 11 years of cancelled underages, and then have… and then once reinstated, they have 60 months to produce it.

The Commission in its order is not permanently cancelling underages.

What we’re doing is tightening the production tolerances in the field.

Do we… do we know what the standard is for the Commission’s agreeing to reinstate them?

Frank A. Caro, Jr.:

I don’t understand the question.

Well, I mean, I… I asked the Commission to reinstate them.

What are the criteria on the basis of which the Commission determines that?

whether what?

It’s a Tuesday?

Or what is… is there any standard at all?

Frank A. Caro, Jr.:

That’s all that… that’s all you have to do to reinstate… to reinstate is show that you have an accumulation of cancelled underage–

Right.

Frank A. Caro, Jr.:

–that you want to have it reinstated, and–

And that’s it.

Frank A. Caro, Jr.:

–And that’s It.

Well, then there is really no prohibition at all you’re saying.

Is that the commitment Kansas is going to make here now, that there–

Frank A. Caro, Jr.:

You mean there’s no prohibition… you mean what–

–So long as you want to get your cancelled underages, you can get them.

Frank A. Caro, Jr.:

–That’s correct.

You have an entitlement to get them even though they’ve been cancelled.

Frank A. Caro, Jr.:

No.

Underages can be accumulated.

Cancelled underages under the… under the Commission’s order can be accumulated for three years.

Once they’ve been accumulated to that three-year period, they have three years to reinstate those cancelled underages.

Once reinstated, for whatever reasons, because they say that they can… because the producer thinks that they can produce them, they have 60 months to produce those.

So, you have an eight-year period here.

Clearly reasonable to contemplate any market trends that may be in effect.

What the Commission’s order did prior to the amendment–

Well, I must say I didn’t understand that reinstatement was a matter of right.

You’re saying you have a right to get them reinstated so long as you say I want them reinstated.

Frank A. Caro, Jr.:

–The Commission will reinstate those underages as long as–

Automatically.

Frank A. Caro, Jr.:

–Automatically as long as they have not been… as long as it’s not longer than a three-year period under the Commission’s amendment.

So, you can carry those cancelled underages for three years.

If you don’t reinstate them–

I understand that.

Frank A. Caro, Jr.:

–they’re permanently cancelled.

Now, once they’re cancelled, once they’re permanently cancelled, doesn’t… doesn’t… I don’t fact you to be… I don’t want you to misunderstand that they don’t have a right to produce further reserves in the field.

They’re assigned… they’re constantly assigned a new allowable formula, a new allowable that they can produce in the field.

That allowable takes into consideration the fact that they may not have been producing because of the allowable… because the allowable formula is made up of three factors.

It’s made up of acreage, which is the spacing unit, which in the Hugoton Field is 640 acres equals one unit.

It takes into the second factor which is well pressure or deliverability.

And if you recall, well pressure is going to be higher if your well has not been producing.

Frank A. Caro, Jr.:

Therefore, you’re going to get a higher allowable assignment in the field.

And the third factor is market demand which is set by the Commission based on the nominations of the producers and purchasers of what they… what they anticipate to use in the… in the upcoming six-month period.

So, they’re not being… they’re not being they’re not… they are… they do have a chance to produce that… that… those reserves in the field.

what we’re doing is… is merely asking them to… we’re encouraging the producer to timely produce those reserves in the field to prevent the waste that the Commission found in its expertise was occurring in the field, to balance off the field, to balance off the pressures in the field.

This case is distinguishable from Northern.

The reason this case is distinguishable from Northern is because in Northern, the Northern decision or the action the Commission took or the orders taken in Northern were directed at purchasers.

It ordered the pipelines to take gas rateably in the field.

In our decision the Commission is not ordering the pipelines to do anything.

The pipeline doesn’t have to… doesn’t have to buy more Kansas gas if the pipeline doesn’t want to.

If in the pipeline’s discretion it decides that it doesn’t… that it wants to take that… that high take-or-pay those high take-or-pay gas that it has contracted on its own to take, it can take it.

And if it does, does it lose its rights to the reserves in the field?

Clearly not because a new allowable, even if their… even if their underages are cancelled, a new allowable is assigned.

The Commission’s order is reasonable in light of Northern.

The effect of the order is reasonable.

It’s not going… you know, the effect of this order is incidental on the pipeline’s purchasing practices.

It becomes merely a consideration to have to take, merely a consideration that the pipeline has to make when it’s purchasing gas, just like it makes a consideration on whether to buy gas from Wyoming, Oklahoma, Texas or any other state, just like it makes a decision to buy more take-or-pay gas or less take-or-pay gas.

It becomes merely a consideration and the effect is incidental.

The effect of this decision could impact… as the amicus brief filed by the Council on State and Local Government indicates, 17 states across the country have similar law, have laws similar to Kansas that regulate the proration in the field.

Proration in the field means that gas… that each well is producing its fair share in proportion to other wells’ production in the field.

So, the impact of this decision means a lot to about 17 states that produce natural gas in the field.

Every state has some form of proration, some form of an assignment of an allowable to the field to assure that that state conserves its natural resources by the orderly production of natural gas in the field.

Therefore, I ask this Court to affirm the Kansas Supreme Court’s decision upholding the Kansas Commission order.

This would conclude my argument.

I’d like to entertain any questions if there are any.

Thank your, Mr. Caro.

Frank A. Caro, Jr.:

Thank you.

We’ll hear now from you, Mr. Lazerwitz.

Michael R. Lazerwitz:

Thank you, Mr. Chief Justice, and may it please the Court:

At bottom the pipeline here is complaining about the state’s decision to rescind its unrestrictive policy towards the reinstatement of production credits.

The pipeline does not and cannot challenge the state’s authority to impose a system for controlling the production of natural gas in a common field.

Mr. Lazerwitz, does the purpose of Kansas regulation make any difference in our analysis?

Michael R. Lazerwitz:

For the preemption question, which is the main focus of our position, no.

The preemption question calls for two separate inquiries.

First, is the state regulating in an area where federal law occupies the field and therefore leaves no room for state action?

And the second preemption question is whether the state rule conflicts with federal law, in other words, whether it interferes with the federal regulatory scheme.

The Natural Gas Act itself essentially answers the first preemption inquiry.

The state has the right to control the production of natural gas.

Federal law simply doesn’t occupy the entire regulatory field at the production end.

Now, that was not… the SG has taken a different position now than when the case was here before.

Is that right?

Michael R. Lazerwitz:

Yes, Justice O’Connor.

When we filed our first brief, we were focusing more on the question whether this… the Kansas judgment… how it should be treated in the light of Transco.

And the focus of our brief was that it should be held and then sent back in light of the decision in Transco.

On further reflection, as our… the most recent brief shows, we have now focused precisely on what the Kansas rule raises and how it might or might not conflict with the federal regulatory scheme.

Well, do you think the Court went a little too far in Transco in some of its language?

Michael R. Lazerwitz:

If it’s taker out of context, there is language in Transco that seems to be problematic.

But the context is in that case we were talking about field preemption where federal regulations cover the entire field, that is, regulating interstate pipeline purchasers.

Well, that system like Northern Natural was directed at pipelines.

Michael R. Lazerwitz:

Yes, direct regulation.

Directly,–

Michael R. Lazerwitz:

And this… and this Kansas rule is far different.

It’s controlling production, and therefore that’s why the first preemption question is relatively easy.

The second preemption question, whether the Kansas order conflicts with the federal regulatory scheme, is somewhat more difficult.

But in our judgment there is no conflict.

First of all, the Kansas rule tells producers that in a certain situation you might not be able to bark your production credits.

It doesn’t tell the pipeline that it has to buy anything.

If the pipeline is risk-averse and worried that this gas might not be there ten years down the road, it can choose to buy the gas now.

But it’s not forcing them to buy the gas, and that’s a critical distinction between this case and the cases in Northern Natural and Transco and that is because the Kansas rule by itself isn’t going to change anything.

The pipeline… first of all, the producer is going to have to decide whether to produce more gas and we recognize that the producer… that that decision whether to produce more gas is obviously tied to a pipeline’s decision whether to purchase more gas.

But the pipeline’s decision is going to be based on Kansas’ rules, other states’ rules, available sources of other natural gas, its take-or-pay liability.

–Well, given take-or-pay liability that exists and the price of new gas versus old gas, it’s fairly obvious that the pipeline is not going to purchase any more gas, isn’t it, in the existing market?

Michael R. Lazerwitz:

The pipeline is fighting this case.

We assume that the pipeline is not… does not want to purchase more gas, but that doesn’t mean it will note–

And more importantly, the producers… the Federal Energy Regulatory Commission’s policy is trying to free up more gas and not to have it simply sold from the producers to the big interstate pipeline.

For example, the Federal Commission has an order allowing the producers to try to get out of their contracts with the… contracts where gas is dedicated to interstate commerce to sell It to someone else who is willing to buy it if the pipeline with whom it has a contract doesn’t want to pay a certain price.

Mr. Lazerwitz, I don’t understand what you’re… what you’re describing to me.

As I understand these pipeline contracts, they are long-term contracts like… it almost amounts to the pipeline purchasing the pool of gas, doesn’t it?

I mean, it has a right to take a certain amount from the… from the well over… over the next 12 years or whatever.

Michael R. Lazerwitz:

The contracts that are at issue in this case or that are involved in this case, these long-term contracts with the Hugoton Field, are those where the pipeline essentially… they’re great contracts to the pipeline.

They can buy whatever is produced.

On the other hand, under the Federal Energy–

And the… and the producer, if he takes it out, has to give it to the pipeline.

He can’t give it to somebody else, can he?

Michael R. Lazerwitz:

–Yes, he can.

Can he?

Michael R. Lazerwitz:

He can seek Commission authority to abandon, in the sense to find another purchaser, if he doesn’t want to sell it to… for example, the pipelines are now not buying a lot of the cheap Hugoton gas.

If a producer wants to get that gas out of the ground, perhaps in response to the Commission rule, the State Commission rule, he can seek out new purchasers and not be stuck with the major interstate pipeline that is… that years ago was controlling the flow of gas from the field.

And the Federal Commission’s policy is to try to foster that.

On the other hand, the pipelines themselves–

Breaking his contract.

He would be breaking his contract with the pipelines, right, even though–

Michael R. Lazerwitz:

–Yes, in the sense that’s what abandonment is, asking the Commission authority to change the contract, and the Commission will take a look at that.

On the other hand, the pipeline has an out too under the Commission’s rule and that is that the pipeline, instead of buying the gas, can act as a transporter and sell the gas to a local distributor.

And in that situation, the Federal Commission will give credits to an interstate pipeline who is willing to do that.

The federal policy, the regulatory policy today is to free up the gas, to get more of this cheap gas into the market, and everyone will be better off.

On the point mentioned before about the Federal Commission’s approval of the purchasing practices, there’s no doubt that the Federal Commission did last… over the summer approve Northwest Pipeline’s purchasing practices for 1984 and in doing so, held… concluded that it was prudent to bank some of this gas, not to buy it.

But that doesn’t become a federal policy approving the long-term banking of production credits.

That was a narrow proceeding saying that this was prudent at the time.

Prudent under the Federal Energy Regulatory Commission’s rules means a rational businessman would have done this facing the situations that he faced.

But that doesn’t at all mean that it would have been imprudent to buy more cheap gas.

–At the very outset Justice O’Connor asked you if purpose were relevent, and you said not the preemption prong of the argument.

Is it relevant to the claim that interstate commerce is being regulated in an impermissible manner?

Michael R. Lazerwitz:

Yes.

In that sense the purpose and for purposes of the argument we’ll concede… let’s assume there’s a bad purpose.

But the bad purpose would have to be encouraging more production of Kansas gas at the expense of another state’s gas.

How strong is a negative Commerce Clause argument here where Congress has said the state shall have authority to regulate production and gathering?

Michael R. Lazerwitz:

It’s not very strong, but there is something in the sense that the Natural Gas Act didn’t give the states anything and the idea that the states have this power to begin with.

And under the Natural Gas Act, Congress reserved that power to the states.

So, there is… and we do recognize that there… there could be a case where the state, for example, changed the production rules to say only producers for intrastate purchasers can produce a certain amount and those for interstate cannot.

That would pose a problem under the Commerce Clause potentially.

But that’s not the case here.

Kansas–

Do you read the Kansas Supreme Court opinion as holding that there is a purpose to regulate interstate commerce that’s impermissible?

Michael R. Lazerwitz:

–No, not at all.

The Kansas Supreme Court and the District Court and the Commission… the point of the rule is to remedy a problem, and in remedying the problem, part of the remedy is to encourage production but not at the expense of any other state.

Mr. Lazerwitz, I really think you’re… you’re drawing a line that doesn’t exist when you say if their purpose was only to increase production of Kansas gas at the expense of gas from other states.

I mean, we’re in the real world here.

Every time you produce more gas from Kansas, you’re going to produce less gas.

Is there an infinitely expandable market for gas?

Michael R. Lazerwitz:

Well, if the price–

There’s not a limited market up… cut there?

Michael R. Lazerwitz:

–The market changes.

It’s not… it’s not to say that Kansas by encouraging production from its field is necessarily going to hurt any other field.

The market will change depending on price and the demand.

lt’s not–

Well, I think the people in the business would be surprised to learn that, that the more gas you produce from Kansas, the less gas you won’t be producing from somewhere else.

I find that rather surprising.

Michael R. Lazerwitz:

–Well, from a federal standpoint, the Kansas gas that’s now sitting in the ground… we would like that gas out of the ground.

It’s the cheapest gas around.

Fine,–

–Mr. Lazerwitz, is there any practical means to store natural gas once it’s taken out of the ground?

Michael R. Lazerwitz:

No.

As I understand the… the field, it’s too expensive.

Thank you.

Thank you, Mr. Lazerwitz.

Mr. Tallsman, you have three minutes remaining.

Harold L. Talisman:

Yes.

Justice Scalla, it is just net correct in the real world that if… if we were to take more Kansas gas, we wouldn’t be taking less gas elsewhere.

And that was–

You don’t have to spend a whole lot of time to persuade me or that.

Harold L. Talisman:

–I’m not going to spend much time on that.

[Laughter]

And I think there… and I don’t think that they can really say there’s no conflict between the purchasing mix case approved by the Commission.

When he says the Commission would have approved more low priced gas coming out of Kansas, that’s not correct.

That was proposed in that case.

The proposal in that case… one of the proposals was we should take more of that gas, and the Commission said no.

They didn’t think that was… they found that there were reasons the company had given as to why it shouldn’t be taken that were… that were reasonable.

Now, with respect to the… the… the Solicitor takes the position that Northern is different than this case because in Northern the order was directed to Northern and because there were certain criminal penalties involved whereas here they say that the… what we’re faced with are certain economic consequences.

And therefore, we are simply going to have to take that into consideration in deciding whether or not we want to buy more Kansas gas or suffer the possibility of not being able to buy it in the future.

Now, we submit that the modest kinds of criminal penalties that were involved in the Northern Natural case are far less significant than the sanctions of losing the supply.

The gas supply is the lifeblood of interstate pipeline companies.

And if we lose supply, we shorten the economic life of the pipeline system.

Well, it sounds like there’s a lot of flexibility in the Kansas plan that you don’t really lose it, and even if you supposedly lose it, you can have it reinstated and so on.

Harold L. Talisman:

That… Justice O’Connor, that is… that is incorrect.

The purpose of this rule was to permanently cancel.

So, you do lose it.

You do lose it.

Now, you had a certain time period.

Well, do you disagree with the state’s representation about the possibility of reinstatement, and that it’s automatically granted and so forth?

Harold L. Talisman:

Yes.

Harold L. Talisman:

The rule specifically provides for permanent cancellation.

So, he is just wrong about that.

Now, the… and he’s also wrong about the fact–

In less than eight years?

Harold L. Talisman:

–No.

You have a certain period of time to get… to ask for reinstatement–

Well, he told us there was eight… be–

Harold L. Talisman:

–but once that’s over with, that’s a permanent cancellation.

You have to ask–

–But he–

Harold L. Talisman:

–I’m sorry.

–The counsel for the state was correct insofar as he described the scheme within the eight-year period.

Harold L. Talisman:

It… if you… you have three years to ask for reinstatement, five years to produce it once you did.

He’s correct about that.

But after that, it’s permanently… permanently gone.

Now, I think it’s important to note that the producers in this field who are underproduced were against this rule.

And those producers are the ones who they say are going to get gas drained away permanently and that’s why they’re passing this rule to protect them.

But they were against this rule.

The people who were in favor of it were the people who were overproduced.

And why?

Because what this rule is going to do is–

Your time is expired, Mr. Talisman.

Harold L. Talisman:

–Thank you.

William H. Rehnquist:

The case is submitted.