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Supreme Court Affirms State Power in Natural Gas Market Manipulation Case

The U.S. Supreme Court has upheld a Ninth Circuit ruling that took a narrow view of the jurisdiction of FERC under the Natural Gas Act (NGA), affirming state jurisdiction over retail natural gas sales.

The decision issued Tuesday went against energy companies which had been defending themselves against antitrust claims, arguing that federal law preempts consideration of the cases at the state level.

The case deals with the false reporting of wholesale natural gas price data to price index publishers and dates back to the early 2000s. Oneok Inc. v. Learjet Inc. deals with the preemptive effect of the NGA and the scope of the Federal Energy Regulatory Commission's enforcement authority relative to the states. The companies already had been prosecuted by FERC for the violations and paid billions of dollars in settlements.

Learjet and other natural gas retail buyers then filed antitrust lawsuits against Oneok and other gas sellers in multiple states for damages they suffered from the market manipulation during the 2000-2002 energy crisis. The cases were consolidated and in 2011 a federal district court in Nevada sided with gas sellers, reasoning that the NGA preempted claims under state law.

A panel of the U.S. Court of Appeals for the Ninth Circuit in California reversed the district court, allowing the claims to potentially go to trial (see Daily GPI, Sept. 6, 2013). The U.S. Supreme Court on Tuesday upheld the Ninth Circuit's decision.

"Petitioners' arguments are forceful, but we cannot accept their conclusion," the justices wrote in their opinion. "As we have repeatedly stressed, the Natural Gas Act 'was drawn with meticulous regard for the continued exercise of state power, not to handicap or dilute it in any way,'" the court said.

The justices voted 7-2 to allow the antitrust lawsuits to proceed. Dissenting justices were John Roberts and Antonin Scalia. Justice Stephen Breyer wrote the majority opinion.

The opinion said the parties have argued the case “almost exclusively in terms of field preemption” and said that is the the only question the Court considered.

The Ninth Circuit “...emphasized that the price-manipulation of which respondents complained affected not only jurisdictional (i.e., wholesale) sales, but also nonjurisdictional (i.e., retail) sales,” the opinion said. “The court construed the Natural Gas Act’s preemptive scope narrowly in light of Congress’ intent...to preserve for the States the authority to regulate nonjurisdictional sales.”

The lower court held that the NGA did not preempt state law claims for damages due to excessively high retail natural gas prices even if the market manipulation raised wholesale prices also.

The energy companies appealing to the Court argued that allowing the actions against them to proceed would permit state antitrust courts to reach conclusions that contradict those that FERC might reach or has already reached.

According to the opinion, both sides argued that there should be a clear division between state and federal authority in natural gas regulation.

“But that Platonic ideal does not describe the natural gas regulatory world,” the justices wrote. “Suppose FERC, when setting wholesale rates in the former cost-of-service rate-making days, had denied cost recovery for pipelines’ failure to recycle. Would that fact deny States the power to enact and apply recycling laws? These state laws might well raise pipelines’ operating costs, and thus the costs of wholesale natural gas transportation.” The majority cited Northwest Central Pipeline Corp. v. State Corporation Comm’n of Kan., 489 U. S. 493 and wrote that finding field preemption of state regulation just because purchaser costs, and hence rates, increased was not sufficient.

"The Ninth Circuit's decision emphasized the narrow scope of FERC's potential jurisdiction over the claims under the NGA, which does not authorize FERC to regulate retail gas prices," wrote Vanderbilt University law professor Jim Rossi wrote in a  SCOTUSblogwebsite post earlier this year that previewed the Supreme Court action (see Daily GPI, Jan. 9). The Court heard oral arguments in January.

Companies in the wholesale market for natural gas already have paid billions of dollars in settlements in cases under federal jurisdiction for the Enron-era market manipulation. El Paso Corp., for instance, paid out an estimated $1.7 billion in penalties to agencies in the states of California, Oregon, Washington and Nevada (see Daily GPI, Nov. 3, 2003).

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