Schneidewind v. ANR Pipeline Company

RESPONDENT:ANR Pipeline Company
LOCATION:Dickinson School District Superintendent’s Office

DOCKET NO.: 86-986
DECIDED BY: Rehnquist Court (1988-1990)

CITATION: 485 US 293 (1988)
ARGUED: Nov 02, 1987
DECIDED: Mar 22, 1988

Facts of the case


Audio Transcription for Oral Argument – November 02, 1987 in Schneidewind v. ANR Pipeline Company

William H. Rehnquist:

We’ll hear argument this morning in Case No. 86-986, Eric Schneiderwind versus ANR Pipeline Company.

Mr. Keskey, you may proceed whenever you’re ready.

Don L. Keskey:

Mr. Chief Justice, and may it please the Court.

This case involves a review of two major holdings of the Court of Appeals of the Sixth Circuit.

The first that Michigan Act 144, which regulates the securities of utilities and natural gas companies, is implicitly preempted by the Natural Gas Act because Congress had the purpose to deregulate securities of natural gas companies.

Secondly, for the opposite purpose that FERC was sufficiently regulating securities under its Section 7 certificate powers and thirdly because of what the Court viewed as an imminent possibility of conflict between Michigan Act 144 Securities Regulation and the Natural Gas Act.

In addition, the Court of Appeals found that Michigan Act 144 represented an unconstitutional burden on interstate commerce on all tests, the per se of discrimination test, the balancing test of Pike v. Bruce Church and also on the basis of a need for national uniformity with respect to Securities regulation of natural gas companies.

In reaching these holdings, the Sixth Circuit Court of Appeals failed to follow this Court’s preemption test, and failed to follow Congressional intent in the Natural Gas Act.

Congress, in the Natural Gas Act, did not occupy the whole field of natural gas regulation, it did not speak to Securities regulation whatsoever, it did not preempt the States from regulating securities by its silence in the NGA regarding this subject.

This Court has held extensively in Panhandle Eastern that the purpose of the NGA was to close regulatory gaps brought about by the prior decisions of this Court in a specific area, interstate transportation of gas and sales for resales.

It did not involve the area of Securities regulation of natural gas companies.

Sandra Day O’Connor:

Mr. Keskey, what is the purpose exactly of the Michigan State statutes in this regard?

Don L. Keskey:

The purpose of the Michigan statutes is to protect the public interest, the public health safety and welfare.

Sandra Day O’Connor:

Be a little more specific.

That doesn’t tell me much.

Don L. Keskey:

One of the major purposes is to ensure that the extensive pipeline facilities and storage facilities, the property located within the State does not become over collateralized, the company doesn’t become over capitalized so that the maintenance and the safety and environmental concerns regarding those facilities are not harmed.

Secondly, that there is reliable service to the public.

In large part, these are still monopoly companies, or at least oligopolies.

The service of natural gas the captive markets substantial markets in Michigan are very integral to the livelihood, the existence of the people in Michigan and to the economic development of the State.

Sandra Day O’Connor:

Is it intended at all to make available gas to Michigan consumers at reasonable rates?

Don L. Keskey:

It can protect the rate payers by ensuring that over capitalization does not result, to ensure that there are not abuses in financings.

Sandra Day O’Connor:

Well, is an effect on rates one of the purposes of the legislation?

Don L. Keskey:


It’s not designed to regulate rates or interstate rates.

Sandra Day O’Connor:

Did your State Court ever find that one of the purposes was to ensure reasonable utility rates?

Don L. Keskey:

The State Court indicates that’s one of the purposes.

Sandra Day O’Connor:

But you disavow that as a purpose?

Don L. Keskey:

No, no, not whatsoever.

By protecting against financing abuses, and by protecting against over collateralization, you can ensure that service will be available at reasonable rates, that you will not get financing that will eventually end up being a burden on the company and would eventually harm service to Michigan at reasonable rates.

It’s not an attempt to address rate making because we recognize fully that that is a function of FERC, and we intervene in rate cases at FERC, but it is to ensure that there is not an affect from financing actions which results in damage to the financial viability of both the natural gas assets and to the companies themselves.

Antonin Scalia:

Actually the State does not impose this what you describe as Securities regulation on any companies except rate regulated companies, though, isn’t that right?

I mean, you refer to it as Securities regulation, but it’s not a general Securities law that applies to all companies.

Don L. Keskey:

It applies to public utilities and to natural gas companies, or interstate electric companies.

Under the Federal Power Act 204, Congress expressly recognized that States could continue to engage in this kind of regulation with respect to interstate electric companies.

Antonin Scalia:

So the answer to my question is?

Don L. Keskey:

That this?

Antonin Scalia:

It is imposed only on rate regulated public utilities, certain rate regulated public utilities?

Don L. Keskey:

Essentially public utility type companies upon which there’s a heavy dependence by the public on these companies or a monopoly type companies, strong nexus of public interest to these companies.

Antonin Scalia:

So why don’t we call it public utility regulation instead of security regulation?

Don L. Keskey:

It’s really the same thing, or they’re extremely closely related.

Antonin Scalia:

Does the Securities and Exchange Commission, for example, do anything of this sort–

Don L. Keskey:

The Securities and Exchange Commission has Acts which involve registration and the filing of information.

Antonin Scalia:

–It doesn’t police the dead equity ratio of companies, does it?

Don L. Keskey:

No, it does not.

And it does not look at the Key which Act 144 does, and that is what is the relationship between the capital and the value of the assets on the balance sheet and the good will of the business.

Neither FERC nor the SEC look at that.

Are these securities being issued for a lawful purpose, have they had their board resolutions passed, do they have their stockholders approve this, is it in accordance with the indenturers, are these companies going to engage in something like buy a baseball team or are they going to involve themselves in some illegal securities transactions.

Because if they do, and they try to shift that onto the company it could come back to haunt.

William H. Rehnquist:

Well, there’s constitutional doctrine, isn’t there, that a company is entitled, constitutionally entitled to a reasonable return on its investments, and the State probably has an interest in looking at what those investments are.

Don L. Keskey:

It’s really pretty much dealing with the problem before the fact.

In other words, FERC looks at rates and entirely it’s an after the fact approach.

The obligations of the company are already issued and they’re already binding.

But this is a peek at looking at the obligations before they’re issued, before they become permanently binding on the company to see is this lawful, is this in the public interest, will Michigan be protected.

These companies have such an important relationship to Michigan.

William H. Rehnquist:

Is there any limitation on the companies on which this is applied?

I mean, is it to every public utility that is doing business in Michigan or is there some domicile requirement?

Don L. Keskey:

It is to every public utility that operates in the State of Michigan, including electric, gas, telephone companies.

It also applies to interstate electric companies and the interstate gas companies who have more than five percent of their revenues generated in the State of Michigan.

Although in the facts of this case, this is a facial attack on the Statute.

We did have stipulated facts regarding these particular respondents who have 40 percent of Michigan’s natural gas requirements are provided by these companies, 50 percent of their sales.

Don L. Keskey:

The ANR storage company has all of its property located in Michigan.

William J. Brennan, Jr.:

Mr. Keskey, when the Attleboro doctrine prevailed, who regulated the issuance of securities for companies like these, the State agencies, or?

Don L. Keskey:

The State governments were involved in extensive public utility regulation prior to any Federal Acts.

William J. Brennan, Jr.:

Specifically as to the regulation of the issuance of securities?

Don L. Keskey:


Michigan’s Act was enacted in 1909 and it was applied to natural gas companies in 1929, which predated the NGA.

And numerous other States, even at the time of the–

William J. Brennan, Jr.:

It doesn’t matter as far as the regulation is concerned whether the regulated company by Michigan is a Michigan corporation or of some other State.

Don L. Keskey:

–One of the respondents happens to be a Michigan corporation, but the important thing here is the substance of their relationship to Michigan and the substantial presence and importance to Michigan, not specific–

William J. Brennan, Jr.:

Well, if your answer to me is, it does not matter whether it’s a Michigan Corporation or of some other State?

Don L. Keskey:

–That is an additional item that does matter, but the primary thing we’re looking at here besides the corporation filing requirements and the regulation as a Michigan Corporation is the substantial context and important nexus of these companies to Michigan’s public interest.

And just the fact that they are a Michigan corporation, and one of them’s a Delaware Corporation, but it has no context with Delaware whatsoever.

They’re business is substantially in Michigan and they are the life blood to Michigan, and so on that basis, it’s an additional basis.

Antonin Scalia:

Well, any interstate pipeline that goes into Michigan is the life blood to Michigan, isn’t it?

Don L. Keskey:

To certain segments or portions of Michigan, that’s correct.

Antonin Scalia:

So you’re asserting that that gives Michigan authority to regulate, you certainly wouldn’t assert that gives Michigan the authority to regulate all interstate pipelines just because they’re essential to Michigan?

Don L. Keskey:

We’re not trying to regulate any Federal area, such as rates, transportation, sales for resale.

We’re looking at the power that Michigan had before the NGA to regulate the securities based upon their presence in the State.

They are collateralizing Michigan’s property whenever they issue long term securities.

Antonin Scalia:

What happens, Mr. Keskey, if the State does not allow a particular issuance of debt securities?

It says that the company would be over leveraged if this particular new facility should be financed by debt, so the company sells new stock on the market.

When it comes around to rate making by FERC, FERC decides that indeed the company has too much equity and should be drawing down more of its capital on the debt market which comes at a lower rate and will give lower rates to consumers.

What does the company do?

And therefore FERC disallows, disallows the return on the equity investment which the State required the company to go into instead of debt.

What happens in the event of that conflict?

How is the company supposed to, which of the two masters does the company obey?

The State says you have to do it by equity, rather than debt, and FERC says, well, we’re sorry, you have too much equity, and we’re not going to allow you any rate of return on this equity, you should have done this by debt.

Don L. Keskey:

Michigan’s review primarily looks at the relationship of the overall capital compared to the overall value of the property and the business.

That’s where over capitalization comes in.

It’s not the capital ratio, which you’re talking about.

Don L. Keskey:

That’s very indirect.

Antonin Scalia:

I don’t care what Michigan looks at.

I’m just saying, this is what happened for whatever reasons, Michigan did it.

Michigan says you cannot issue debt securities for this, you have to do it by stock.

And FERC says we think you should have been in debt equities instead at a lower rate of return, of course, and therefore, we’re not going to allow you the normal rate of return on equity securities?

Don L. Keskey:

I would presume in that situation that the Company would go to the Commission and present the rate decision of FERC which you’re giving me an example of FERC providing a hypothetical requiring a hypothetical capital structure.

Antonin Scalia:

Well, they always do when they make rates.

Don L. Keskey:

Very rarely.

Antonin Scalia:

They only allow return on justifiable equity.

Don L. Keskey:

Hypothetical capital structures in the rate regulation business is very rare.

Most witnesses in rate cases will testify as to what the appropriate ratios are of equity to debt, and most companies, almost all companies that are utilities in the United States are within those reasonable ranges.

Now, if a company has more common equity than debt, the cost of common equity is normally higher, but the business risk is lower, and the economists will testify that the more equity you have, the lower cost you assign to it, because of this reflection of less business risk.

So you’re on a teeter totter in a sense that if you have more and more equity, usually the economists in a rate case will assign lower and lower costs to that common equity so that it approaches debt.

Now, you’ve given me an example which first of all hypothetical capital structure is extremely rare.

Antonin Scalia:

I’ve read a lot of rate cases where the rate making agency has disallowed return on equity because the agency said there shouldn’t be that much equity.

Don L. Keskey:

That’s correct.

It occurs.

Antonin Scalia:

That’s not uncommon at all, is it?

Don L. Keskey:

In terms of percentage of cases, it’s rare.

It does occur.

And in that instance, the company between rate cases, which is usually an extensive period of time, would either not get rate reflection for it, or would make adjustments in its financial structure to accommodate that.

Antonin Scalia:

Well, what would happen here?

Is your position that Michigan would have to yield as to what its decision concerning the proper action of the company should be?

Would Michigan have to yield or would the company simply have to obey Michigan and get a lower rate of return?

Don L. Keskey:

It’s extremely difficult in a hypothetical and we’re dealing here with a hypothetical that hasn’t happened in the 78 years that the Michigan Act has been in effect.

To imagine all of the factual possibilities of how you would get to this, and those are important because there could be any of number of reasons why Michigan would act the way it did, and the way FERC acted the way it did.

Antonin Scalia:

Assume the reasons most favorable to Michigan.

Don L. Keskey:

There is a theoretical possibility that Michigan… and it’s most theoretical… that Michigan could require that no more debt be issued because the company was over capitalized or because it was issuing debts for an unlawful purpose, and FERC would have required them indirectly… not directly, indirectly… by not reflecting full rates for common equity, let’s say, that there is this situation.

Antonin Scalia:

I consider that pretty direct when you’re dealing with a company whose business is to collect rates not to allow you to collect any rates on a particular issuance.

You consider that very indirect?

Antonin Scalia:

I consider that a fairly direct sanction on the company.

Mr. Keskey, can I ask you a little more about the notion of issuing debt for an unlawful purpose, you suggested buying a baseball team or something like that.

What would make it unlawful for one of these companies to buy a baseball team?

Don L. Keskey:

It’s not necessarily that sitting here in this hypothetical and the facts presented it would be unlawful.

But this Statute allows Michigan to obtain information as to what is happening and to determine whether or not it is unlawful, and those would be based upon the arguments in the contested case.

In other words–

John Paul Stevens:

This is sort of a discovery mechanism?

Don L. Keskey:

–In part.

This helps Michigan obtain information.

John Paul Stevens:

In order to get your discovery, I don’t suppose you’d have to be able to say, no, to a prospective investment.

Just get the information, and if you find they’re doing something unlawful, tell them not to do what’s unlawful.

I understand–

Don L. Keskey:

I think the best way to answer it is to give you an example of how Michigan used this statute to protect its local interests without affecting any interests that are national or involve interstate commerce.

And that is not a hypothetical but an actual case.

In 1981, ANR, the parent company, owned Michigan Consolidated Gas, which was a local utility.

The Michigan Public Service Commission, throughout its existence and in more recent years, has promoted in Michigan the development of vast natural gas storage fields which are huge caverns thousands of feet below where the gas can be stored in natural sea beds.

It provided recognition of that in rates and encouraged it through help with the local engineers and so forth, with the property owners, etcetera.

Many of these fields were developed and MichCon had its transmission lines to these wholly-in-State facilities, and MichCon had its lines between one part of its service area in Detroit and another part of its service territory in northern Michigan.

And ANR came up with a proposal to divest MichCon from its system.

But it wasn’t going to just divest MichCon.

It was going to take for itself all of these storage facilities that the Michigan ratepayer had paid for and had developed.

It was going to take all of these transmission lines that connected the company together so that MichCon would be left as an orphan on the doorstep of the Michigan Public Service Commission as only a distribution utility with no ability to transport gas within the State to these storage facilities and to the rest of its service territory.

It would have to pay ANR for that right.

It would have to pay ANR to pay for the ability to transport gas to the rest of its company on facilities that it built itself, and that Michigan encouraged and that Michigan rate payers paid for.

And these storage facilities and these lines were not necessary to ANR’s interstate system.

And if the storage was usable for any interstate purposes, MichCon was ready to lease those facilities its capacity to those interstate companies.

In fact, does so now with ANR.

So we used the statute because people were walking around saying, what’s happening, we can’t get any information.

What’s happening is the fact that the parent company is going to strip our utility of all the assets that are valuable and leave everything that’s not valuable on the backs of the Michigan public.

Now, we used this statute to start a proceeding to get information.

Don L. Keskey:

That was the only way we could get information.

FERC had no jurisdiction whatsoever because this involved no construction.

This involved a situation of financing transactions among ANR and MichCon that had nothing to do with any of FERC’s powers, nothing to do with a Section 7 Certificate which is the only area where even respondents arguably say that Michigan and FERC both look at financing.

Antonin Scalia:

–Did you have to use it against ANR?

Couldn’t you have gotten the same information by using it just against MichCon?

Don L. Keskey:

No, because ANR was the one that had planned the entire transaction, ANR was engaging in these securities, ANR controlled MichCon.

Antonin Scalia:

Weren’t MichCon securities involved?

Don L. Keskey:

MichCon securities were involved, ANR securities were involved, and even a third holding company that–

Antonin Scalia:

I don’t understand why you couldn’t do it through your regulation of MichCon.

Don L. Keskey:

–Well, that’s an actual case which is not here.

We don’t have an actual case.

If we did, we would have the advantage of citing to you the record.

But the situation was, it came down to the fact that this was the Statute that permitted Michigan to get information to find out what was happening to protect the dismemberment of a public utility that serves millions of customers in Michigan and is integral to the very economy of Michigan.

And we did so.

We reached a settlement.

Both sides were accommodated.

The ANR system was not harmed.

There were no national interests involved.

There was no FERC jurisdiction involved in terms of the securities, and there didn’t have to be.

They didn’t have to get approval from FERC to do this.

We preserved the Michigan utility as an entity, and by doing so, we saved costs, we saved rates.

The cost of that company to the customers would be much higher today if they would have been stripped.

Sandra Day O’Connor:

Mr. Keskey, you also assert jurisdiction to regulate the Respondent’s storage company, do you not?

Don L. Keskey:


Sandra Day O’Connor:

And that has no customers at all in Michigan, is that correct?

Don L. Keskey:

All of its other contexts are with Michigan except for the fact that they have chosen to–

Sandra Day O’Connor:

Well, aren’t its suppliers and customers all outside of Michigan?

Don L. Keskey:

–Its customers are all outside of Michigan, that’s correct.

Sandra Day O’Connor:

And suppliers?

All that’s in Michigan is their physical facilities, plant and equipment, is that right?

Don L. Keskey:

That’s correct.


Sandra Day O’Connor:

And what is the interest of Michigan there then do you suppose?

Don L. Keskey:

–The storage company has these vast facilities in Northern Michigan which have to be adequately maintained, they have to be adequately engineered, you can only put a certain amount of gas in these facilities, otherwise you can damage the cap rock, and have tremendously dangerous blowouts.

Or you could destroy the facility as a viable storage facility.

If you become under capitalized or if you over leverage those facilities, and you are not capable of maintaining these facilities properly, it’s very dangerous.

Further, the gas customers that the storage company has are located–

Sandra Day O’Connor:

You mean, you’re talking about some physical accident that might occur and injure people?

Don L. Keskey:


Sandra Day O’Connor:

And you can’t directly require safety standards for employees?

Don L. Keskey:

Well, the Michigan Commission does get involved in safety by assisting FERC as the eyes and ears of FERC with respect to safety requirements.

But we’re looking at a way to prevent over capitalizations or the assets being over collateralized so that they would be neglected.

But there’s another purpose, also, and that is that in the gas business, interstate transportation, when it goes from storage to customers, let’s say in Montana, is done by displacement.

So what occurs is that this gas is stored in the center of Michigan, the storage company transports it to 24 miles to an interstate pipeline which does the transportation.

Storage has no interstate transportation, it doesn’t sell any gas.

It doesn’t have any transportation tariffs to be approved by FERC.

Gas molecules actually are used in Michigan.

They are part of the reliability of supply in Michigan, but the storage company delivers it to Michigan located interstate transportation which sells the molecules in Michigan.

And on the other end of its system in Montana, it gives an accounting credit to that person over there, and gives them the molecules over there.

So theoretically and conceptually, yes, there’s interstate transportation if you go right from the beginning, right to Montana.

But it isn’t done by ANR Storage.

It’s done by an interstate company that FERC does regulate in terms of interstate rates.

Storage company’s wholly in Michigan, the gas properties are in Michigan.

It does have an importance to supply even in Michigan because the displacement is basically an accounting type exchange.

And so if there’s a failure of those facilities, it will affect Michigan not only in the viability of the facilities, but with respect to supply applications in Michigan.

So in conclusion, Your Honors, we have a vast area of regulation over here and over here.

The respondents have said there’s potential conflict, only a possibility of conflict in this narrow area about Section 7 certificates.

We see there isn’t.

But why deregulate securities with respect to all the rest of this area when there has been no actual conflict.

There is nothing in this record about any actual conflict in the 50 years that the NGA and the Act has survived together.

Don L. Keskey:

This is a facial attack, and Congress did not occupy the field of securities regulation it intended the States to continue to do so.

And it’s not a burden on interstate commerce because we are focusing totally on Michigan’s interests.

There is no discriminatory intent or effect in this Statute.

It never was passed for an economic protectionist purpose.

Sandra Day O’Connor:

Does any other State regulate presently the securities issued by natural gas companies, Mr. Keskey?

Don L. Keskey:


Montana does, California has a statute which permits it.

At the time of the 1950 hearings, 33 States were regulating natural gas companies’ securities.

We don’t know how many other than California and Montana are.

But the States are regulating the interstate electric companies, and Congress provided for that in Federal Power Act 204.

Antonin Scalia:

Interstate gas companies, was your answer meant to say 33 States are regulating interstate gas companies?

Don L. Keskey:


In 1950, 33 States, and we have it in a footnote about legislative history in our brief, 33 States were regulating the securities in natural gas companies operating interstate commerce.

Antonin Scalia:

Thank you.

William H. Rehnquist:

Thank you, Mr. Keskey.

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

Howard J. Trienens:

Chief Justice, may it please the Court.

None of those 33 States regulate interstate pipelines.

Those 33 States were local distribution companies they were regulating, the local distribution company that also had some high pressure pipeline.

The concern of the States at the 1950 legislative amendment proposal… might as well straighten this one out the concern of the States was so broad, the FPC proposal was so broad that it brought under proposed FPC preissuance security regulation local distribution companies.

The States came screaming in and said, oh, no, we traditionally regulate the local distribution.

We traditionally do that.

It’s these interstate pipelines like ANR that we don’t regulate.

And as to what FPC does with that, that’s their business, but for heaven’s sakes, don’t touch these local distribution companies.

So the FPC comes along, and it says, well, we’ll amend our proposal, we’ll amend our proposal.

We’ll ask for this preissuance authority, this additional regulatory technique only for those companies and those operations that the States cannot reach.

Now, just to nail that down, let me give you two sentences out of that hearing where Commissioner Smith made it very plain that his proposed amended legislative proposal was not going to impair the State regulation of those gas companies that are essentially local, meaning, do local distribution.

But here’s an example of a company that’s clearly beyond the reach of the States as to securities matters.

The Commonwealth of Massachusetts regulating the securities of a pipeline operating at wholesale within the State of Massachusetts but carrying gas from Texas to Massachusetts.

They can’t do that, and the States right proponents says, if that’s the question, it cannot, we concede that.

Howard J. Trienens:

And of course you have to concede that, because can anybody who… take 1925, when the Missouri v. Kansas Gas was decided.

Can anybody believe that these States could have regulated any aspect, securities or anything else, of these interstate pipelines when this Court held that these lines were “beyond State interference” or beyond the reach of State regulations.

Now, the Attleboro case which was electrics is a very different problem.

Justice Brandeis dissented in that.

It was a more localized problem.

Even there, the Court at that time said the States couldn’t touch it.

That case is different, it’s electric.

Congress in regulating interstate electric power provided expressly provided that States could regulate it.

That’s a delegation of the States that Congress could have made when it broke its silence, it did make in the case of the interstate electrics, because after all, they’re very localized really little grids around a few States, and they sharply distinguished that.

And instead of delegating to the States, they created a comprehensive Federal regulatory system.

And as far as we know, Michigan is the only State that an interstate gas pipeline of this character has any problems.

We serve Wisconsin almost as much as Michigan, and we have no such problem with Wisconsin, although they have a regulatory statute that permits a preissuance approval of securities as to utilities in Wisconsin, but it doesn’t apply to this company.

Now, the premise of this argument of Michigan is that somehow financing and securities are unregulated.

That there’s some big gap that has to be filled here.

And I’d like to show the Court that that gap doesn’t exist.

And it’s a combination of regulatory tools, the first of which is the certification power.

In order to have a project you’re going to finance, you have to go to the FPC, FERC now, get a certificate of public convenience and necessity before you can finance it.

For example, we want to build a pipeline extension in Wisconsin, say a $75 million one, and we have to go to FERC and get a certificate.

And while we’re there, because Congress made it very express that Congress was speaking to securities regulation, in 1942, Congress expressly authorized FERC to condition its approval of certificates and to modify the financing as the public interest might demand.

So we go down to the FERC and we say, all right, its going to not only cost $75 million but we’re going to raise $25 million through equity and we’re going to have a $50 million bond issue.

That’s the way, that’s our financing plan, and we get the certificate, and this certificate power along with the rate power is described by this Court as the heart of the Act.

Antonin Scalia:

Did they ever in fact alter the proposed manner of financing?

Howard J. Trienens:

Yes, sir.

Yes, Justice Scalia, and we have three or four examples in our brief.

The INGA, a trade association has three or four examples where the FPC, now FERC, has done just that, yes.

Sandra Day O’Connor:

Will FERC condition the granting of the certificate on the issuance of certain types and amounts of securities?

Howard J. Trienens:


They say your proposed financing… Congress said you’re supposed to look at the financial set up FERC.

So they look at the financial proposal.

They say, we don’t like it.

Howard J. Trienens:

It ought to be modified this way or that way.

Sandra Day O’Connor:

Would it be concerned only with the construction of facilities for the transportation of gas, rather than some unrelated business that the holding company might be going into?

I mean, FERC wouldn’t get into that in terms of securities?

Howard J. Trienens:

The answer is twofold.

The answer is first as to the certificate power, they would only get into it as to the construction of the project being certificated.

Secondly, as to the baseball teams, Disneyland like parks, and all these other things,–

Sandra Day O’Connor:

Or any other legitimate business activity that the company might be engaged in.

Howard J. Trienens:

–The answer is that as to the certification power, FERC would not.

It would get into its finances in other ways, and the practical answer to that is you would never in the world buy a baseball team through a FERC regulated corporation.

You just would be out of your mind to put a profitable baseball team in a FERC accounting and FERC regulated–

Sandra Day O’Connor:

Well, don’t talk baseball.

There may be some other unrelated business, and it does seem to me the State might have the only regulatory power in terms of securities issuance to finance some other sort of business, other than the immediate project for the gas certificate.

Howard J. Trienens:

–The only business that these two entities before the Court, Pipeline and Storage are in, are the transportation and storage of natural gas.

They do nothing else, they intend to do nothing else.

And our companies have done a lot of diversifying.

We’ve bought coal mines, we’ve bought truck companies.

But we never do it at the FERC regulated corporate level.

We do it through the holding company.

Bear in mind, these two entities are a long way from any company that holds public stock.

The public holds stock in a company called Coastal, a Delaware corporation with offices in Texas, Coastal has a holding company that owns ANR which is a holding company, and only then do you get the ANR Pipelining Corporation and ANR Storage Company.

William H. Rehnquist:

Certainly some of the corporate interrelationships in the days of Samuel Insull and so forth caused concern among lots of people.

It wasn’t just buying a baseball team, but it was the loan structure and debt structure from the parent to the subsidiary.

I don’t think that’s an unreasonable concern on the part of the State.

Howard J. Trienens:

The Public Utility Holding Company Act, when the company is subject to it, did deal with those matters.

It’s true that somebody, either Congress or the States, has a highly legitimate interest in worrying about over leveraging, over capitalization, all the evils, all the financial evils of the Insull era.

And here’s how it works.

As to the certification power, the FERC looks at the initial financing proposal.

As to the rate making power, the debt equity ratio is a crucial part of that.

Now, it is true that it is only rare that the FERC exercises that power to grant rates that impute a different capital structure.

And the reason it’s rate is that FERC has made its standards so widely known that you don’t dare go otherwise.

Howard J. Trienens:

You’re not going to finance it in a way you know is going to get in trouble with FERC so you always keep within a reasonable bounds because FERC makes you.

That takes care of over leveraging.

Now, over capitalization which, if you read the Michigan Supreme Court decisions, you’d think is the principal evil.

Just what is it.

And the Michigan Supreme Court correctly defines over capitalization as did counsel.

It’s a lack of correlation between the debt and equity on the liability side with the amount or value of the property.

That’s the problem, lack of correlation.

Used to call it watered stock, same problem.

That cannot happen under a FERC regulated company, and the reason is, apart from certification, apart from rate making, FERC regulates the accounting, and if there’s anyone in this world it was Charlie Smith, the head of the Bureau of Accounts of the FPC, who was the most vigilant original cost proponent and insisted on original cost accounting.

So the assets all have to be at original cost net and the liabilities debt and equity has to balance and there cannot be over capitalization on a FERC regulated company.

It cannot happen.

Now, there’s one other thing.

They say, what if there were financial ruin.

Well, if there’s financial ruin, there’s something wrong at FERC because one of their duties is not only to protect rate payers but to have a financially healthy entity.

But if something goes wrong and there is financial trouble, you have to go to FERC to get an abandonment order.

You can’t just stop serving people in Michigan.

You have to go to FERC to abandon service no matter what your financial situation is.

So in all elements, FERC regulates these securities.

Here’s where the problem comes in.

The problem comes in after you get a FERC certificate.

And here you are, you’ve told them you’re going to raise $50 million in bonds to finance this FERC certificated project.

Now, what do you do.

You go to your investment banker in New York, and they advise you on timing and placement.

As far as placement’s concerned, it could be domestic, it could be a Eurobond deal.

Our last offering was a $50 million equivalent of Swiss francs, not registered, so nobody in this country could buy it, Michigan or anybody else.

Nobody could buy it here.

And then the other problem whether it’s domestic or foreign is the timing.

The timing is everything in financing.

You go to these investment bankers and they say, oh, wait a minute.

Hold up a month or two.

Howard J. Trienens:

We think interest rates are going up, and you’ll save a couple of basis points.

Or, get it our right away, we think interest rates are going up.

And the timing is everything in this, and that’s exactly where this Michigan statute intrudes on the Federal process.

Because Michigan says, you’ve got to come trotting in with your $50 million proposal to issue securities to finance a FERC certificated project.

William H. Rehnquist:

If you were doing it in the State, you’d be subject to the State Blue Sky Laws in any case, wouldn’t you?

Howard J. Trienens:

Oh, my, yes.

William H. Rehnquist:

So your timing argument, you know, it frustrates the company’s best interest, but that doesn’t mean the State can’t do it.

Howard J. Trienens:

Or the company can go to Europe, or the company can decide not to sell in Michigan, or the company can get a Blue Sky which is a very automatic thing.

But the Michigan investors are clearly protected by the Michigan Blue Sky laws.

They don’t need any protection to the Swiss buying this issue.

They’re protected by that.

They don’t need this statute to protect that interest.

That’s the point.

But no matter where the issue is, and no matter how urgent the timing, the Michigan Commission is here insisting that they have a right to have the securities blocked until there’s an affirmative order by the Commission.

Now, with timing being everything, sure, lots of times, they’ll come in and issue it in three weeks, so you know, so you’ve got some expense.

You’ve got expense of preparing the application, you’ve got a filing fee.

All of that is in our view unconstitutional, but that isn’t the real evil here.

The real evil is they just don’t approve it.

Or they set it for hearing, which is the same thing as not approving it.

And the hearing can go on, or the hearing never gets set.

We had one that I’ll give you in a minute that went on for a year.

Why do they do this?

What interest does Michigan have?

And I can speculate on a lot of local interests that they could try, collateral unrelated local interests that they could try to invoke and try to pressure ANR by just holding the securities hostage.

But let me give you an actual and it’s the same incident, but not quite the same story as you were told about.

It’s the divestiture of Michigan Consolidated by ANR, the parent.

Now, bear in mind, there’s two quite separate sets of securities here.

One set has to do with the divestiture and at record 118 and 123, the Michigan Commission wanted to investigate that, and they got out orders to investigate it.

The orders were directed at MichCon.

That’s the company the regulate.

Howard J. Trienens:

They were directed at MichCon.

They asked ANR to come along and participate, and we did.

But the orders were directed at MichCon and properly so.

Now, over here in a totally unrelated transaction, FERC had issued certificates to enable Storage to expand its storage facilities and pipelines, $105 million, some such amount.

In order to get the underwriter’s counsel to go along with it, they had to either get a Court order saying this Michigan Statute didn’t apply, or go get an order proving these securities.

So we go over to the Commission.

We file a nice routine application, and while this is going on, this wholly unrelated construction approved by FERC, financing approved by FERC, nothing to do with the divestiture fight that’s going on over here about who gets which assets.

So what does the Commission do?

It holds hostage the storage application.

And you’ll find–

William H. Rehnquist:

This is a facial attack, isn’t it, Mr. Trienens.

I mean, it isn’t what might have happened in a particular situation.

You’re saying the statute is just unconstitutional however Michigan applies it?

Howard J. Trienens:

–That’s correct, and I’m also saying that we’re not speculating about it because this club in the closet… to use a phrase in the reply brief… has been taken out of the closet and we still feel the bruises from it.

So this is not a hypothetical case I’m talking about, it is facial.

The statute is wrong on its face as applied to this company.

I’m saying that this example they give of how wonderful it was for Michigan proves the point that they use it for unrelated purposes, they hold hostage these securities necessary to finance a FERC authorized project, and they’ll hold it up until they get what they want.

You’ll find that the record stipulates that the way we got the certificate for storage was by settling the other case.

And November 24, 1981, happens to be the date we made our deal with the State and happens to be the date that they let this security out of hostage and approved it.

It was part of that deal and it was putting leverage on us.

Now, let’s look on the facial part of this Statute to the future.

We have a stipulation in the record of what this statute means to Michigan.

And the stipulation at record page 60 says that, even without regulatory authority that they have all over these other local utilities, the Michigan Commission can still exert influence over pipeline and storage if it has the right to regulate the security issuances.

They can still exert influence.

That’s what this is about.

Now, let me give you an example of what they have in mind for the future.

And in their brief at page 5, note 3, they tell you.

They tell you that what they’re interested in here, and why they want this statute, and bear in mind the club in the closet routine,–

Antonin Scalia:

Mr. Trienens, any legitimate State authority can be abused.

I mean your companies surely have to get construction permits to building buildings or to connect telephone lines or whatever.

Antonin Scalia:

They’re are innumerable ways in which the State can hold up your company if it wants to.

But that isn’t an argument against the validity of those State authorities.

Howard J. Trienens:

–It seems to me it’s an argument when they say, oh, this is facial and you’re speculating and we come and petition this Court because they’re just speculating about things to tell you not only what they did with this Statute, but what they plan to do with it.

And this is what they say in their brief.

They want this Statute because it provides an opportunity for the Michigan Commission to assure that ANR does not violate the divestiture settlements.

Now, the divestiture settlements they’re talking about are the same settlements… and I was going to say, blackjacked out of us… but I’ll honor the nomenclature they now use… these are the same settlements they clubbed out of us before, and how instead of enforcing those settlements which are agreements, actual signed agreements, instead of enforcing those agreements the old fashioned way by going to court to sue on the contract, they want this club to hit us over the head to make sure we honor whatever interpretation they want to place on it.

That’s what this case is about.

It’s the only use they have for it.

But they’ve got so used to using it on us, they want to keep it.

Now, that’s not a legitimate use.

And I agree with everything that’s said that these examples are not necessary.

Maybe we showed the wounds too badly but with or without these examples, past and future, this is a plain flat out violation of the Commerce clause.

Now, we cited not only the 1925 cases but the case last year in Brown-Forman and there’s a two-tiered test and this doesn’t make it past tier one.

Because, as the Court said, it’s a violation, you can’t require a company to seek regulatory approval in one State before undertaking a transaction in another.

You can’t make us go to Michigan to get approval to finance securities to build something in the Gulf.

It’s a violation of the Commerce clause.

And although there’s only one State doing this now, what’s to stop Wisconsin, if this Court says this is grand for Michigan, why shouldn’t Wisconsin do it.

They’ve got as much interest.

Milwaukee’s almost as big as Detroit.

They’ve got almost as much interest.

Why invite them to have a races to vie with each other as to how much they can extract from ANR?

What’s the point of that?

Now, it’s really unnecessary in our view under the Commerce Clause to get to the second balancing test, but if you were to get there and the Court below is correct, what interest do they have?

They cite in their reply brief from the Michigan Supreme Court saying that securities regulation serves the interest of the rate payers in assuring continued service and in receiving that service at reasonable rates.

The rates are just and reasonable as fixed by the FERC.

They can’t discontinue service without going to the FERC.

Storage doesn’t even handle gas that’s burned in Michigan.

William H. Rehnquist:

This is a Commerce Clause argument, not a preemption argument?

Howard J. Trienens:

So far.

Next is.

Howard J. Trienens:

We have raised both points.

The Court below agreed on both points.

But as to the Commerce Clause, we think there’s no interest.

As I said, the over capitalization theme which the Michigan Courts and counsel stress, that cannot happen under FERC regulations, and interests of investors is totally taken care of.

So the Commerce Clause test and the so-called preemption test really somewhat overlap in this area because of the history.

It was so clear from the Missouri v. Kansas Gas and related decisions that in 1938 by the time Congress go around to breaking its silence, it was so clear that the States could not interfere, the power of regulation could not reach these kind of companies, that Congress came in and they occupied the field.

This is not a preemption case like Rice v. Santa Fe Elevator where the States had long been traditionally regulating grain elevators since Mond v. Illinois.

All of a sudden Congress comes in in that case with a non-comprehensive statute, Warehouse Act, and the question is whether they had preempted longstanding State regulation.

This is not what this is about at all.

The purpose of this Statute, as this Court has said a dozen times, is to occupy the field in which the Supreme Court has held the States may not act.

And that’s clearly this company and this field and this activity.

And having occupied the field, having decided to in that comprehensive regulation instead of just delegating it to the States and staying silent, its all occupied by the FERC authority.

Now, this preissuance approval, as I said, is just one regulatory tool of many.

And when the Statute I mentioned earlier, the FPC proposal, had been narrowed down to whether the FERC should be given this added power, the focusing on that issue, the parties came in, the industry came in and said, who needs it.

They don’t need it.

They’ve got plenty.

They’ve got certification, they’ve got regulation of rates, they’ve got the accounting.

Who needs it.

And Congress didn’t act.

It was perfectly obvious they weren’t persuaded that FERC needed this additional power.

But whether they thought they did or not, Congress had occupied the field that this Court had said the States could not enter.

The Court had drawn a bright line as the Court has put it.

Congress occupied the field from a bright line that the States couldn’t occupy and Congress occupied this field and therefore it’s preempted.

Now, bear in mind while this is a facial attack on this Statute, it has no affect, no affect on the application of this Statute to the local distribution companies as to which the States always could act.

This case has nothing to do with that.

It only applies to this one State and applies to ANR which doesn’t to any end user business in Michigan and is about as clear and clean and purely exclusively an interstate company as you’ll ever find.

Byron R. White:

Mr. Trienens, you argue both preemption and the commerce clause.

Which one should we approach first?

Howard J. Trienens:

Well, that’s a difficult question to answer, Justice White, in this sense.

When you start dealing with–

Byron R. White:

Well, we’re going to have to… I suppose we’ll have to make up our mind as to which one to deal with first?

Howard J. Trienens:


I think the way you do it is the way you’ve done it in a dozen cases.

Is you go into the history of the Federal Power Act, the Natural Gas Act, and you say here were the Constitutional decisions that led to that Act, here was the line that was drawn, here’s the field they covered, and that’s the end of it.

Byron R. White:

Is what you call a preemption argument, is that it?

Howard J. Trienens:

Yeah, when they occupied the field.

Byron R. White:

I suppose at bottom that’s a constitutional issue?

Howard J. Trienens:

It’s a Supremacy Clause argument.

Byron R. White:

But sometimes it’s called sort of a statutory?

Howard J. Trienens:

I think the logic is you get to that first, although when you get into the Commerce Clause history to show–

Byron R. White:

Well, what if we agreed with you on that?

Should we deal with the other?

Howard J. Trienens:

–I wouldn’t feel that you’d be obliged to at all, no.

Byron R. White:

Well, which point would you like us to agree with you on?

Howard J. Trienens:

I’m tempted to answer that in a more flip way than I ought to, but I won’t.

Byron R. White:

Either one, I suppose, yeah.

You want to win.

Howard J. Trienens:

That’s correct.

I think the logic is that you deal with the history of this.

You get into the fact that Congress did act, and I think that’s the end of it.

I know there’s a lot of controversy about commerce clause cases, and you don’t have to really decide this as though Congress had not acted, because Congress has acted.

Byron R. White:

So you don’t think there’s any real inconsistency in saying, of course, this is not preempted but it violates the Commerce Clause?

Howard J. Trienens:

All I’m saying is, it violates the Commerce Clause if there’d never been a Natural Gas Act.

Byron R. White:

Well, then suppose we disagree with you on preemption that Congress never intended to preempt this kind of thing, but nevertheless, it violates the Commerce Clause, a dormant Commerce Clause?

Howard J. Trienens:

That’s surely our position.

Byron R. White:

Well, you haven’t answered my question, yet, I guess.

Howard J. Trienens:

Well, if I have to take a choice, I think I’d write the opinion dealing with the legislation first, and that would be the end of it.

Thank you.

William H. Rehnquist:

Thank you, Mr. Trienens.

Mr. Keskey, you have one minute left.

Don L. Keskey:

Your Honor, this is a facial attack.

There has been no problem with Michigan’s Act.

We are at a disadvantage to argue from a record that doesn’t exist with respect to either interstate commerce or preemption.

The burden of proof is on Respondents.

We have no record.

Secondly, look at Rice v. Santa Fe Elevator.

That takes care of Your Honor’s rate question because in that we have an analogous situation where this Court preserved the securities regulation even though the Federal Government took over all other aspects including rates.

And it found the purposes that the State could continue.

Interstate Commerce, there’s no discriminatory affect, no discriminatory purpose.

The Congress itself has recognized that uniformity’s not necessary with securities regulation over interstate utilities.

It has done so in Federal Power Act 204.

How are you going to distinguish in any rational sense interstate natural gas companies from interstate electric companies when those two Acts grew out of the same purpose, the same history.

And this Court has interchangeably interpreted both Acts.

Congress when it passed the Natural Gas Act displayed a willingness to allow the States to regulate securities because it provided for no preemption.

You don’t have preemption by silence.

And Congress recognized that the States could regulate securities, uniformity was not required.

William H. Rehnquist:

Thank you, Mr. Keskey.

The case is submitted.