FEDERAL ENERGY REGULATORY COMMISSION, PETITIONER V. MARTIN
EXPLORATION MANAGEMENT COMPANY, ET AL.

   No. 87-363

   In the Supreme Court of the United States

   October Term, 1987

   The Solicitor General, on behalf of the Federal Energy Regulatory
Commission (Commission or FERC), petitions for a writ of certiorari to
review the judgment of the United States Court of Appeals for the
Tenth Circuit in this case.

   Petition for a Writ of Certiorari to the United States Court of
Appeals for the Tenth Circuit

                      PARTIES TO THE PROCEEDINGS

   The petitioner is the Federal Energy Regulatory Commission.  The
respondents are Martin Exploration Management Company;  Colorado
Energy Corporation;  Phillips Petroleum Company;  Phillips Oil
Company;  Exxon Corporation;  Shell Off-Shore, Inc.; Shell Western E &
P, Inc.; Independent Oil & Gas Association of West Virginia;  Amoco
Production Company;  Arco Oil & Gas Company;  Ohio Oil and Gas
Association;  Independent Oil and Gas Association of West Virginia;
Gulf Oil Corporation, successor to Chevron, U.S.A., Inc.; Union Oil
Company of California;  Champlin Petroleum Company;  Pennzoil Company;
 Pennzoil Oil & Gas, Inc.; Pennzoil Producing Company;  Placid Oil
Company;  Tennessee Gas Pipeline Company, a division of Tenneco, Inc.;
Pacific Gas & Electric Company;  Amoco Production Company;  Transok,
Inc.; Oklahoma Natural Gas Company, a division of Oneok, Inc.;
Associated Gas Distributors;  Public Service Commission of the State
of New York;  Pacific Lighting Gas Supply Company;  Southern
California Gas Company:  Consolidated Gas Transmission Corporation;
Panhandle Eastern Pipe Line Company;  Cities Service Oil and Gas
Corporation;  Grace Petroleum Corporation;  Valero Transmission
Company;  BHP Petroleum Company, Inc., successor to Monsanto Oil
Company;  Texas Eastern Transmission Corporation;  Transwestern
Pipeline Company;  United Gas Pipe Line Company;  United Texas
Transmission Company;  and Texas Gas Transmission Corporation.

               TABLE OF CONTENTS
   Questions Presented
   Parties to the Proceedings
   Opinions below
   Jurisdiction
   Statutes and regulations involved
   Statement
      A. Statutory background
      B. The Commission's rule
      C. The court of appeals decision
   Reasons for granting the petition
   Conclusion

                            OPINIONS BELOW

   The opinion of the court of appeals (App., infra, 1a-28a) is
reported, as modified, at 813 F.2d 1059.  The order of the court of
appeals modifying the original opinion (App., infra, 29a-31a) is not
separately reported.  The notice of proposed rulemaking of FERC (App.,
infra, 34a-60a) is reported at 49 Fed. Reg. 36399.  The opinion
accompanying issuance of the final rule by FERC (App., infra,
61a-103a) is reported at 49 Fed. Reg. 46874 and F.E.R.C. Stats. and
Regs. para. 30,613.  The FERC opinion denying rehearing in relevant
part (App., infra, 104a-126a) is reported at 49 Fed. Reg. 50637 and
F.E.R.C. Stats. and Regs. para. 30,622.

                             JURISDICTION

   The judgment of the court of appeals (App., infra, 32a-33a) was
entered on March 9, 1987.  Petitions for rehearing were denied, with
modifications of the original decision, on May 1, 1987 (App., infra,
29a-31a).  On July 22, 1987, Justice White extended the time for
filing a petition for a writ of certiorari to and including August 3l,
1987.  The jurisdiction of this Court is invoked under 28 U.S.C.
1254(1).

                   STATUTES AND REGULATIONS INVOLVED

   Sections 101(b)(5), 107(c)(5), 121, and 122 of the Natural Gas
Policy Act of 1978 (NGPA), 15 U.S.C. 3311(b)(5);  3317(c) (5), 3331,
3332, are set out in the appendix to this petition (App., infra,
127a-131a).

   Section 270.208 of 18 C.F.R. provides:

      First sales of natural gas that is deregulated natural gas as
      defined in Section 272.103(a) is price deregulated and not
      subject to the maximum lawful prices of the NGPA, regardless of
      whether the gas also meets the criteria for some other category
      of gas subject to a maximum lawful price under Subtitle A of
      Title I of the NGPA.

                          QUESTIONS PRESENTED

   1. Whether, as the Federal Energy Regulatory Commission determined,
natural gas that is covered by two provisions of the Natural Gas
Policy Act of 1978 (NGPA), 15 U.S.C. 3301 et seq. -- one of which sets
ceiling on prices, the other of which declares prices deregulated --
must be treated as deregulated gas under the NGPA;  or whether,
instead, producers may choose, perhaps daily, the classification that,
under current market conditions and their contracts, affords them the
highest price.

   2. Whether the Commission's ruling that most "new tight formation
gas" under Section 107(c)(5) of the NGPA is automatically new gas
under Section 102 or 103 of the Act is consistent with the
Commission's authority under the NGPA.

                               STATEMENT

   The Commission construed the NGPA to require, in accordance with
the Act's overall scheme of phased-in deregulation, that natural gas
that is qualified for both price-deregulated and price-regulated
status under the Act be treated as deregulated.  The court of appeals
rejected the Commission's construction (App., infra, 10a).  The court
held that producers of natural gas could choose whatever statutory
category afforded them the highest price under their contracts and
market conditions at any particular moment, even if the choice meant
returning deregulated gas to regulated status (id. at 17a, 30a).

                        A. Statutory Background

   1. Prior to 1978, producer (wellhead) natural gas sales, if made in
interstate commerce, were governed by the Natural Gas Act, 15 U.S.C.
717 et seq.  Following this Court's decision in Phillips Petroleum Co.
v. Wisconsin, 347 U.S. 672 (1954), the Federal Energy Regulatory
Commission (and its predecessor, the Federal Power Commission)
established just-and-reasonable ceiling rates for such sales.  Those
rates were generally lower than what producers could command selling
gas in the unregulated, intrastate market.  See Public Service Comm'n
v. Mid-Louisiana Gas Co., 463 U.S. 319, 327-331 (1983).  "By the
1970's, however, it became clear that the existing regulatory
structure was inadequate" (App., infra, 3a).  The combination of price
ceilings applicable to interstate sales and no constraints on
intrastate sales artificially reduced supply and inflated demand in
the interstate market.  Ibid.; Breyer & MacAvoy, The Natural Gas
Shortage and the Regulation of Natural Gas Producers, 86 Harv. L. Rev.
941 (1973);  Note, Legislative History of the Natural Gas Policy Act:
Title I, 59 Tex. L. Rev. 101, 106-112 (1980).

   In 1977, the House and Senate each passed bills designed to address
the problem.  The House, as part of a broader National Energy Act,
passed a bill that would have extended regulatory controls by imposing
uniform price regulation, at levels aimed at encouraging production,
on all natural gas, interstate or intrastate (H.R. 8444, 95th Cong.,
1st Sess. (1977)).  The Senate took a radically different approach.
It passed a bill (S. 2104, 95th Cong., 1st Sess. (1977)) that provided
for deregulation of all natural-gas prices by 1982, with certain price
controls in the interim.  See Public Service Comm'n v. Mid-Louisiana
Gas Co., 463 U.S. at 331-332;  Note, supra, 59 Tex. L. Rev. at
113-115.

   The conflict between the houses went to a Conference Committee,
which proposed an entirely new bill roughly one year later (H.R. 5289,
95th Cong., 2d Sess. (1978);  H.R. Conf. Rep. 95-1752, 95th Cong., 2d
Sess. (1978)).  The conference bill struck a compromise between the
House's proposed increased regulation and the Senate's proposed rapid
deregulation (see H.R. Conf. Rep. 95-1752, supra, at 67-68;  124 Cong.
Rec. 38361 (1978) (remarks of Rep. Dingell);  Public Service Comm'n v.
Mid-Louisiana Gas Co., 463 U.S. at 331)).  The bill brought interstate
and intrastate gas under a single "'national market price regulatory
scheme'" (Transcontinental Gas Pipe Line Corp. v. State Oil & Gas Bd.
(Transco), No. 84-1076 (Jan. 22, 1986), slip op. 11, quoting Haase,
The Federal Role in Implementing the Natural Gas Policy Act of 1978,
16 Hous. L. Rev. 1067, 1079 (1979));  replaced Commission-set ceilings
(at "just and reasonable" rates) with price ceilings generally set
directly by statute, many designed to provide incentives for new
production;  and mandated "deregulation of most categories of natural
gas" (H.R. Conf. Rep. 95-1752, supra, at 68) after a transition period
of up to nine years.  See Note, supra, 59 Tex. L. Rev. at 116.
Enacted as the NGPA, the bill thus "comprehensively and dramatically
changed the method of pricing natural gas produced in the United
States" (Public Service Comm'n v. Mid-Louisiana Gas Co., 463 U.S. at
322).

   2. Title I of the NGPA creates the scheme of "phased deregulation"
(124 Cong. Rec. 38361 (1978) (remarks of Rep. Dingell)) in two stages.
 Subtitle A (NGPA Sections 101-110, 15 U.S.C. 3311-3320) defines
numerous categories of natural gas and establishes (or, in a few
exceptional cases, permits the Commission to set) "maximum lawful
price(s)" for wellhead "first sale(s)" of gas in each category.  /1/
Subtitle B (NGPA Sections 121-123 (15 U.S.C. 3331-3333)) then provides
for the removal of certain of those ceilings after periods ranging
from several months to nine years.

   More particularly, Subtitle A defines numerous categories of
natural gas, /2/ which, aside from a catch-all residual category (NGPA
Section 109 (15 U.S.C. 3319)), fall roughly into three groups.  (1)
Four provisions set prices (or authorize the Commission to do so) that
are designed to furnish incentives for new production:  Sections 102
and 103 (15 U.S.C. 3312, 3313) cover certain new natural gas;  /3/
Section 107 (15 U.S.C. 3317) covers certain "high-cost" natural gas;
/4/ Section 108 (15 U.S.C. 3318) covers gas from certain low-producing
"stripper" wells.  /5/ (2) Two provisions (Sections 104 and 106(a), 15
U.S.C. 3314, 3316(a)) cover "old" interstate gas -- gas dedicated to
interstate commerce prior to the NGPA's effective date or sold under
"rollover" interstate contracts -- and set non-incentive,
consumer-protection price ceilings based on the Natural Gas Act.  (3)
Two provisions (Sections 105 and 106(b), 15 U.S.C. 3315, 3316(b))
cover "old" intrastate gas -- defined analogously to "old" interstate
gas -- and set price ceilings tied to those for "new" Section 102 gas.

   Section 121 (15 U.S.C. 3331), the central provision of Subtitle B,
mandates the elimination of price ceilings for certain of the
categories of natural gas specified in Subtitle A.  /6/ Most
important, on January 1, 1985, price ceilings were eliminated from
certain of the incentive-priced gas qualifying under Sections 102 and
103 ("new" gas) and under Sections 105 and 106(b) ("old" intrastate
gas) (15 U.S.C. 3312, 3313, 3315, 3316(b)).  /7/ See NGPA Section
121(a), 15 U.S.C. 3331(a).  /8/ Some gas, however -- notably, certain
"high-cost" gas (Subsection 107(c)(5)) and "stripper well" gas
(Section 108, 15 U.S.C. 3318) -- remains subject to price ceilings.
Section 122 (15 U.S.C. 3332) completes the deregulation scheme by
giving the President and Congress an option for a one-time 18-month
reimposition of price controls, an option that expired on June 30,
1987, without having been invoked.

   3. The categories defined by the provisions of Subtitle A overlap:
substantial quantities of natural gas can qualify simultaneously under
more than one provision.  /9/ In addition to the overlap of several
regulated categories, there is overlap between categories that remain
subject to price ceilings (regulated gas) and categories that are free
from any maximum lawful price (deregulated gas).  For example, the
categories defined by Sections 107(c)(5) and 108 (15 U.S.C.
3317(c)(5), 3318) (certain high-cost natural gas and stripper-well
gas), which remain subject to price ceilings, overlap significantly
with the new-gas categories defined by Sections 102 and 103 (15 U.S.C.
3312, 3313), which are now deregulated.  See App., infra, 43a, 73a.

   The NGPA contains a provision addressed to the general question of
such "dual-qualified" gas.  In Section 101(b) (15 U.S.C. 3311(b)),
which sets forth "Rules of general application," Subsection (b)(5)
states:

      (5) Sales qualifying under more than one provision. -- If any
      natural gas qualifies under more than one provision of this
      title providing for any maximum lawful price or for any
      exemption from such a price with respect to any first sale of
      such natural gas, the provision which could result in the
      highest price shall be applicable.  /10/

                       B. The Commission's Rules

   As the principal deregulation date (January 1, 1985) approached,
the Commission found it necessary to consider the proper treatment of
gas that qualified for both regulated and deregulated treatment.  At
the time the NGPA was enacted in 1978, it appears to have been
universally assumed that market prices would be higher than the
statutory ceilings, so that producers would prefer deregulated
treatment.  By the end of 1984, this situation had been reversed.  See
App., infra, 22a-23a.  Consequently, many producers preferred their
dual-qualified regulated-deregulated gas to be treated as still
subject to a regulated price.  /11/ See App., infra, 73a-78a.

   In September 1984 the Commission proposed a regulation to determine
the legal treatment of gas that is qualified for both deregulated and
regulated treatment.  /12/ App., infra, 43a-45a.  After receipt of
comments, the Commission, in November 1984, issued a final rule
establishing that, as of January 1, 1985, gas that is qualified for a
category not subject to any price ceiling would be treated as
deregulated and could be sold at any price the market would bear, even
if the gas also is qualified for one of the categories still subject
to statutory price ceilings.  App., infra, 73a-82a;  see page 2, supra
(quoting rule, 18 C.F.R. 270.208).  Noting that market prices were
then below statutory ceiling prices, that "Congress may not have
anticipated such a situation" (App., infra, 75a), and that many
producers would therefore prefer to remain subject to price
regulation, the Commission construed the NGPA to mandate deregulation.
 /13/

   The Commission based this conclusion, first, on Section 121 of the
NGPA (15 U.S.C. 3331), which by its terms mandates the removal of
Subtitle A's price ceilings for the specified categories of natural
gas.  The Commission read the provision to embody Congress's mandate
to "phase from regulated ceiling prices in the short term to market
clearing prices in the long term" (App., infra, 76a).  See App.,
infra, 75a-77a.  The Commission pointed out (App., infra, 74a;  see
also App., infra, 43a) that "the overall scheme envisioned by Congress
when it enacted the NGPA (was) to provide incentive prices to
encourage exploration and development of new reserves in the
short-term, and to gradually substitute market forces for regulated
prices by phasing in deregulation in 1985 and 1987."

   The Commission likewise construed Section 101(b)(5) (15 U.S.C.
3311(b)(5)) to require deregulated treatment of gas that falls under
both a provision setting a ceiling price and one eliminating any legal
ceiling price (App., infra, 78a-79a).  /14/ The Commission concluded
that Section 101(b)(5), in declaring applicable whichever of the
competing provisions "could result in the highest price," means that
"the deregulated price, which always could result in a price higher
than a regulated price, prevails" because "there always exists at
least the potential for the parties to negotiate a contract above the
old regulated ceiling price" (App., infra, 79a (emphasis in
original)).  The Commission further explained on rehearing (App.,
infra, 111a (footnote omitted;  emphasis in original)):  "Without
question, a deregulated price could always result in a price higher
than a regulated price which is subject to a ceiling price;  whether
the contract allows the producer to collect a price higher than a
regulated price is a contractual issue, not an issue raised by the
deregulation scheme of the NGPA." /15/

                   C. The Court of Appeals Decision

   On petitions for review filed by numerous producers under Section
506 of the NGPA (15 U.S.C. 3416), the court of appeals rejected the
Commission's interpretation of Sections 101(b)(5) and 121 (15 U.S.C.
3311(b)(5), 3331) of the NGPA.  App., infra, 1a-24a.  The court first
concluded that Section 121 is ambiguous, because, although it commands
the elimination of price ceilings for the listed categories of natural
gas, it does not explicitly address the subject of deregulated gas
that simultaneously qualifies for a regulated category (App., infra,
10a-11a).  The court then stated that, despite the ambiguity, it could
not defer to the Commission's interpretations, because "Congress
anticipated precisely this question in Section 101(b)(5)" (App.,
infra, 11a) and the Commission's ruling was contrary to the
"unambiguous language" of that provision (App., infra, 13a).

   After concluding that Section 101(b)(5) applies to all
dual-qualified gas, even if one of the overlapping categories is
deregulated, /16/ the court held that the "could result" language of
Section 101(b)(5) expressly and unambiguously gives producers the
right to choose, at any particular moment, whatever category,
regulated or deregulated, provides the highest price under their
contracts.  App., infra, 16a-17a;  id. at 30a (modification on
petitions for rehearing).  While recognizing that "the price of
deregulated natural gas in an open market 'could' theoretically reach
infinity" (App., infra, 15a), the court reasoned that at least certain
price ceilings for regulated gas "could" also rise indefinitely.  /17/
The court stated that the Commission's reading of Section 101(b)(5)
"considers only the theoretical possibilities (and) renders Section
101(b)(5) meaningless" (App., infra, 16a).  The court concluded that
Section 101(b)(5) "requires a comparison of the applicable price for
each category at a particular moment" based on producers' actual
contracts (App., infra, 16a), with the higher price governing (id. at
16a-17a).

   In support of that conclusion, the court indicated that it read the
NGPA, informed by several congressional floor statements, as granting
a producer the right to "select the category or categories for which
he or she desires to qualify particular gas" (App., infra, 19a).  See
App., infra, 18a-19a (citing 124 Cong. Rec. 29109 (1978) (remarks of
Sen. Jackson);  id. at 38363-38364 (remarks of Rep. Dingell)).  /18/
The court also criticized the Commission's reliance on phased
deregulation as the overall plan of the NGPA.  Phased deregulation is
only one means of achieving the ultimate statutory aim of ensuring
adequate supplies at fair prices, the court stated (App., infra, 20a).
 Briefly mentioning a few statements from the NGPA's legislative
history (App., infra, 21a-22a n.15), the court noted that the cited
passages had "somewhat contradictory" implications (id. at 21a n.15).
Indeed, the court recognized that "Congress did not expect that
natural gas prices would fall" and hence did not anticipate the
situation presented to the Commission in 1984 and today -- that of
producers wishing to remain under regulation (id. at 22a-23a).  The
court of appeals also recognized that, under its view, Section
101(b)(5) "can have the unanticipated effect of operating as a price
floor for producers" (App., infra, 23a).  Nevertheless, the court felt
itself bound by "the intent of Congress as evidenced in the
unambiguous language of (the NGPA)" (App., infra, 24a).

                   REASONS FOR GRANTING THE PETITION

   The Tenth Circuit decision is clearly incorrect.  The Commission
properly concluded, in construing a statute it is charged with
administering, that Section 101(b)(5) of the NGPA requires price
deregulation for gas that is qualified for both a regulated and a
deregulated category.  /19/ The decision of the court of appeals, if
permitted to stand, would impose enormous additional costs on
purchasers of natural gas.

   1. To begin with the statutory language, the most natural reading
of Section 101(b)(5) is that, if natural gas is subject to two or more
provisions of the NGPA, the "provision which could result in the
highest price" is the provision that, solely with reference to limits
imposed under the NGPA, permits the highest price.  See also H.R.
Conf. Rep. 95-1752, supra, at 74 (emphasis added) ("the provisions
that permit the seller to obtain the highest price").  Section
101(b)(5) thus calls for a comparison of existing legal limits on the
prices producers may charge (in most cases set directly by the NGPA,
in some cases set by the Commission pursuant to statutorily delegated
authority).  Where one provision sets a maximum lawful price and
another declares that there is no such ceiling, the latter provision
governs because it leaves the producers free to charge the higher
price -- namely, any price, as far as the NGPA is concerned.

   Contrary to the court of appeals' view, the statutory language
contains no hint that it calls for comparison of producers' contracts.
 Section 101(b)(5) refers only to comparing "provision(s)," not to
comparing contracts.  Moreover, the use of the statutory phrase "could
result" is inconsistent with a focus on actual contract prices.  To
achieve the court of appeals' result, it would have been more natural
for Congress to have declared applicable the provision that "results"
or that "would result" in the highest price.  Congress instead used
the word "could," referring to the range of legally permitted
possibilities.

   The court of appeals appears to have misunderstood the Commission's
construction, and was plainly mistaken in concluding that the
Commission's view rendered Section 101(b)(5) meaningless (App., infra,
15a-16a).  A provision that eliminates price ceilings always permits
the seller to obtain, i.e., always "could result" in, a higher price
than a provision that, directly or through statutorily delegated
Commission action, sets an upper cap on producers' prices.  The
Commission's interpretation leaves no doubt about which provision
governs under Section 101(b)(5).  The court of appeals' reference to
the Commission's power to set certain "just and reasonable" rates and
to the raising of ceiling prices by inflation adjustments over time
(see note 17, supra) was simply irrelevant.  Section 101(b)(5) is not
concerned with "theoretical" possibilities at a particular moment or
over an indefinite period.  It is concerned only with what the law
permits, not with what market conditions or imagination permit.  A
provision that removes upper caps permits a higher price than one that
sets an upper cap (even if that cap is adjustable), and the former
provision therefore governs under Section 101(b)(5).

   2. The court of appeals' focus on producers' actual contract prices
(and their fluctuation) is inconsistent not only with the language of
Section 101(b)(5) but with the approach to price regulation taken by
Title I of the NGPA as a whole.  As reflected in the Commission's
view, the NGPA regulates only legal upper limits, not producers'
actual prices.  Thus, the price-regulation provisions of Subtitle A do
not establish the prices that producers must charge;  rather, they are
concerned solely with setting "maximum lawful price(s)" or "ceiling
prices." Section 504(a) (15 U.S.C. 341(a)) enforces the ceilings by
declaring it unlawful "to sell natural gas at a first sale price in
excess of any applicable maximum lawful price." Moreover, to
underscore the exclusive concern with upper limits, Section 101(b)(9)
(15 U.S.C. 3311(b)(9)) expressly declares that contract prices are
enforceable as long as they are lower than any applicable statutory
ceiling, and are always lawful if a price-deregulation provision
applies.  Congress clearly sought to set only maximum prices and
otherwise to leave the establishment of the prices producers would
actually charge to private decision.

   The court of appeals read Section 101(b)(5) to require comparison
of producers' actual contract prices, rather than of upper caps on the
range of legally permitted prices.  That reading would erroneously
treat Section 101(b)(5) as specifying the actual prices producers must
charge -- namely, the highest of the applicable contract prices.  It
would do so, moreover, even when the two overlapping categories at
issue both set ceiling prices (i.e., in the case of dual-qualified
regulated-regulated gas), requiring comparison not of the ceilings but
of the actual contract prices.  Nothing in the statute or in the court
of appeals' opinion supports such a result.  Indeed, it is squarely
contrary to the fact that Section 101(b)(5) does not establish the
governing price but only declares what "provision" governs, and that
the provisions of Title I, in turn, establish only ranges of legally
permitted prices.  See also 124 Cong. Rec. 38363 (1978) (emphasis
added) (Section 101(b)(5) "is intended to facilitate resolution of
which ceiling price may apply if more than one ceiling price rule
appears applicable.  Whichever ceiling price could result in the
highest price is the applicable maximum lawful price.") In short, the
court of appeals' reading of Section 101(b)(5) would render the
provision a glaring anomaly in a statute otherwise pervasively
concerned only with ceiling prices.

   3. The court of appeals' ruling is also inconsistent with the
fundamental policy underlying the NGPA.  The clear overall scheme of
the NGPA is one of "phased deregulation" (124 Cong. Rec. 38361 (1978)
(remarks of Rep. Dingell);  see also id. at 29659 (remarks of Sen.
Percy) ("the phased deregulation schedule * * * really is at the heart
of this bill").  The Conference Report describes Title I of the NGPA
as providing for the eventual "deregulation of most categories of
natural gas" (H.R. Conf. Rep. 95-1752, supra, at 68).  That policy
reflected Congress's belief, as this Court recognized in Transco, slip
op. 14 (footnote omitted), that "direct federal price control
exacerbated supply and demand problems by preventing the market from
making long-term adjustments." Congress decided to phase in
deregulation over a nine-year period as a compromise between "two
strong, but divergent, responses to the natural gas shortage" (Public
Service Comm'n v. Mid-Louisiana Gas Co., 463 U.S. at 331), one seeking
to extend price controls (the House bill), the other seeking full
decontrol as quickly as possible (by 1982, under the Senate bill).
See Lovett, Incentive and Conservation Effects:  Natural Gas Policy
Act of 1978, 16 Hous. L. Rev. 1129, 1145 (1979).  /20/ To the extent
that Congress deregulated "particular aspects of the first sale of
gas, it did so because (after the specified phase-in periods) it
wanted to leave determination of supply and first-sale price to the
market" (Transco, slip op. 12).

   Contrary to the court of appeals' view, it was proper for the
Commission to support its ruling by observing that treating
dual-qualified regulated-deregulated gas as deregulated is in keeping
with Congress' overall phased-deregulation objective of the NGPA.  The
court of appeals' interpretation of Section 101(b)(5) by contrast is
incompatible with the congressional scheme.  The court's decision
establishes a uniform and permanent producer-assistance policy.  But
while the temporary incentive-price provisions of the NGPA were indeed
intended to spur production, the deregulation policy that has now been
phased in for most categories of gas is not intended to favor
producers or production.  Rather, deregulation is designed to let
market forces determine prices and supply (see Transco, slip op. 12),
and lower prices and lower production are one possible natural
consequence of such a system.

   The court of appeals' reading of Section 101(b)(5) is incompatible
with the scheme of phased deregulation in another way as well.  The
court's reading would permit a producer to switch back and forth
between deregulated and regulated status, with no apparent limitation,
as market prices rose or fell.  The potential for return of
deregulated gas to regulated status is a continuing one, because
deregulated "new" gas (under Sections 102 and 103 (15 U.S.C. 3312,
3313)) will always become regulated "stripper well" gas (under Section
108 (15 U.S.C. 3318)) as the well diminishes in production.  There is
certainly no indication that the NGPA contemplates such a peculiar
result.  Indeed, the congressional aim to make a transition to a
market system for most natural gas strongly suggests the contrary.
The intended transition is reflected in Section 122 (15 U.S.C. 3332),
which establishes only one method to call off deregulation (action by
the President or Congress), and then only temporarily and only once.

   4. The court of appeals also erred in finding that its ruling was
supported by a congressional commitment to the principle of producer
choice.  The language of Section 101(b)(5) itself refutes the
suggestion that the statute embodies such a principle for
dual-qualified gas.  The provision declares what price provisions
govern;  it does not give producers any choice in the matter.  The
court of appeals' reference to producers' right to choose which among
several available qualifications to apply for, whatever its
correctness, is simply irrelevant.  The Commission's rule here at
issue applies, among gas that is required to be administratively
qualified, only to gas that has in fact been dually qualified in both
regulated and deregulated categories.  See note 12, supra.  Whether
producers have an indefeasible right to select one or more applicable
categories in qualifying their gas under Section 503 (15 U.S.C. 3413)
/21/ is entirely distinct from the question presented in this
proceeding -- which of several already-selected categories applies
after deregulation.  The former question is also of little remaining
practical importance, in comparison with the question presented here.
/22/

   The two congressional floor statements cited by the court of
appeals (App., infra, 18a-19a), even aside from questions about their
power to modify the statute's command, do not establish a relevant
statutory principle of producer choice.  First, they are addressed not
to the question at issue here but to the distinct question of
producers' ability to select what qualifications to seek.  Second,
both statements, responding to concerns about the potential
administrative burdens on the agencies that determine the
classification of natural gas, merely affirm that the agencies have no
statutory obligation to search through all possible classifications,
demand all potentially relevant information from producers, and
independently determine the proper category (see App., infra, 19a
(quoting statements)).  Neither statement suggests that the
classification task itself may not be simplified, in comformity with
the NGPA, by requiring permanent deregulated treatment of gas that
falls into both a regulated and a deregulated category.  /23/

   In any event, as even the court of appeals recognized (App., infra,
21a-22a n.15), specific statements in the legislative history on
dual-qualified gas must be given little weight.  Not only are the
implications contradictory, but all statements were made on the
factual assumption, which has turned out to be false for the past
several years, that market prices would be higher than the price
ceilings set in the statute.  The 1978 Congress, because of that
assumption, simply had no occasion to consider the possibility that
the deregulated price might not in fact be the price chosen by
producers.  There is, accordingly, no relevant evidence that Congress
intended a principle of producer choice to override the command to
deregulate.  /24/

   5. For all of the above reasons, the court of appeals' decision is
erroneous:  it creates a bizarre system of natural gas regulation
(permitting repeated transfers of natural gas in and out of
regulation) that is contrary to the language, structure, and overall
aims of the NGPA.  That conclusion is warranted independent of any
deference to the Commission.  But even if the statutory meaning is
less than crystal clear, "a court may not substitute its own
construction of a statutory provision for a reasonable interpretation
by the * * * agency" entrusted with administration of the statute.
Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467
U.S. 837, 844 (1984) (footnote omitted).  See also Clarke v.
Securities Indus. Ass'n, No. 85-971 (Jan 14, 1987), slip op. 14-15;
Japan Whaling Ass'n v. American Cetacean Soc'y, No. 85-954 (June 30,
1986), slip op. 11;  Young v. Community Nutrition Inst., No. 85-664
(June 17, 1986), slip op. 5-7.  The Commission's interpretation is
unquestionably reasonable /25/ and should have been upheld by the
court of appeals.  Mid-Louisiana Gas Co., 463 U.S. at 339.

   6. The decision of the court of appeals should be reversed.  This
Court should not await development of a conflict among the circuits.
So many gas producers were party to this challenge to the regulation
that, for that reason alone, a conflict is unlikely to develop, at
least in the near term.  Meanwhile, the problem is of considerable
practical importance.  The Commission estimates that the 1985-1987
cost of the court of appeals' decision in higher natural-gas prices is
approximately $300 million, and the costs continue to mount.

                              CONCLUSION

   The petition for a writ of certiorari should be granted.

   Respectfully submitted.

   DONALD B. AYER

      Acting Solicitor General*

   RICHARD G. TARANTO

      Assistant to the Solicitor General

   CATHERINE C. COOK

      General Counsel

   JEROME M. FEIT

      Solicitor

   JOEL M. COCKRELL

   JOHN H. CONWAY

      Attorneys Federal Energy Regulatory Commission

   *The Solicitor General is disqualified in this case.

   AUGUST 1987

   /1/ A "first sale" is most often, but not exclusively, a sale by
the producer of the natural gas (NGPA Section 2(21), 15 U.S.C.
3301(21)).

   /2/ The category-defining sections are Sections 102-109 (15 U.S.C.
3312-3319).  Section 101 (15 U.S.C. 3311) defines the annual inflation
adjustment factor and other "(r)ules of general application" relevant
to the remainder of the Act.  Section 110 (15 U.S.C. 3320) concerns
the treatment of state severance taxes and certain production-related
costs.

   /3/ Section 102 (15 U.S.C. 3312) covers gas from a new reservoir,
from certain new Outer Continental Shelf leases, or from a new well
drilled sufficiently far from certain existing "marker" wells.
Section 103 (15 U.S.C. 3313) covers certain new onshore production
wells.

   /4/ Section 107 (15 U.S.C. 3317) defines four categories of
high-cost gas (Subsections (c)(1) through (4)) and allows the
Commission to designate other gas that is especially costly or risky
to produce (Subsection (c)(5)).

   /5/ A "stripper" well is one that produces 60 Mcf or less per day.
See NGPA Section 108(b), 15 U.S.C. 3318(b);  NGPA Section 2(29) (15
U.S.C. 3301(29)) (defining "Mcf").

   /6/ Specifically, Section 121(a) states:  "Subject to the
reimposition of price controls as provided in section 122, the
provisions of subtitle A respecting the maximum lawful price for the
first sale of each of the following categories of natural gas shall,
except as provided in subsections (d) and (e), cease to apply
effective January 1, 1985 * * * ."

   Subsection (d) is not relevant to this case.  Subsection (e) limits
the deregulation of one category (Section 105(b)(3), 15 U.S.C.
3315(b)(3)) of gas.  See note 24, infra.

   /7/ Certain "old" intrastate gas covered by Section 105 continues
to be subject to price ceilings.  See NGPA Section 121(e) (15 U.S.C.
3331(e)).

   /8/ In addition, pursuant to Section 121(b) (15 U.S.C. 3331(b)), on
November 1, 1979, price ceilings were removed from some "high-cost"
gas under Section 107(c) -- namely, gas under Subsections (c)(1)-(4)
(15 U.S.C. 3317(c)(1)-(4)).  (Gas under Subsection (c)(5) (15 U.S.C.
3317(c)(5)) remains subject to price ceilings.) Also, on July 1, 1987,
price ceilings were removed from "new" Section 103 gas produced from
shallow wells never previously dedicated to interstate commerce.  See
NGPA Section 121(c), 15 U.S.C. 3331(c).

   /9/ Pursuant to NGPA Section 503, 15 U.S.C. 3413, producers obtain
rulings on the proper classification or classifications of "new,"
high-cost and stripper-well gas from certain state or federal
agencies, subject to Commission review.  Dual qualification is
permitted.  See 124 Cong. Rec. 38364 (1978) (explanatory statement on
conference bill by Reps. Dingell, Staggers, Ashley, Eckhardt, and
Wilson).

   /10/ The Conference Report explains (H.R. Conf. Rep. 95-1752,
supra, at 74):

         The conference agreement provides that if natural gas
      qualifies under more than one price category, the provisions
      that permit the seller to obtain the highest price applies
      (sic).  If a seller wishes to change the category under which
      production from a given well qualifies, he must apply to the
      appropriate State or Federal agency with authority to make
      determinations under section 503.

   /11/ Many producers have contracts that fix the price of their gas
far into the future, often providing alternative prices depending on
the regulatory classification of the gas and leaving it up to
government action (statute, regulation, order) to determine the
classification of the gas.  The price fixed for regulated gas is
commonly at or near the maximum lawful price.  By contrast, the price
for gas treated as not subject to a price ceiling is typically based
on market prices.  As a result, when market prices are below the
statutory ceilings, many producers wish to have their gas treated as
falling within one of the still-regulated categories, so that they can
collect a higher price.

   /12/ The Commission addressed only gas that actually is qualified
in two categories by the relevant state or federal agency (insofar as
qualification is needed for sale in a category), not all gas that
could conceivably be so qualified.  See 18 C.F.R. 270.208, referring
to 18 C.F.R. 272.103(a), which defines deregulated gas to include only
gas actually qualified by the relevant agency (and certain "old"
intrastate gas, which need not be so qualified).

   Certain other issues were addressed in the rulemaking proceeding
and in the court of appeals.  We discuss only the dual-qualification
questions.

   /13/ The Commission also noted that, in 1979 and 1980, when market
conditions were different, several producers, including some of
respondents here, specifically argued in favor of the construction of
the NGPA adopted by the Commission in the proceedings at issue in this
petition.  App., infra, 74a & n.10.

   /14/ The Commission stated that the provision was "helpful, but not
dispositive" of the issue (App., infra, 78a).

   /15/ In the course of explaining its rule for the treatment of
dual-qualified regulated-deregulated gas, the Commission also ruled
(App., infra, 81a-82a;  see also App., infra, 114a-116a) that any
qualification of gas as "new tight formation" gas under Section
107(c)(5) and the implementing regulations (e.g., 18 C.F.R.
271.703(b)) automatically qualifies the gas (except for certain
"recompletion tight formation gas," App., infra, 82a n.18)) as new gas
under Section 102 or 103, hence placing it under deregulation.

   /16/ The court reasoned that Section 101(b)(5), in using the word
"exemption" when referring to provisions "providing for any maximum
lawful price or for any exemption from such a price," applies to
statutory provisions declaring gas prices deregulated.  The court
rejected the suggestion that the term "exemption" applies only to the
provisions (Sections 104(b)(2), 106(c), 109(b)(2), 15 U.S.C.
3314(b)(2), 3316(c), 3319(b)(2)) that grant the Commission authority
to set special "just and reasonable" ceilings higher than statutory
ceilings for particular categories.  The court pointed out that
another of the "Rules of general application" -- namely, Section
101(b)(9) (15 U.S.C. 3311(b)(9)) -- uses "exempted" and "exemption" to
refer to provisions that deregulate gas prices (App., infra, 14a-15a).

   /17/ The court noted that the Commission could set price ceilings
at "just and reasonable" rates under certain regulated-price
provisions (Sections 104(b)(2), 106(c), 109(b)(2), 15 U.S.C.
3314(b)(2), 3316(c), 3319(b)(2)) and that the Subtitle A ceiling
prices generally rise with inflation.  "The price of regulated gas is
therefore certain to rise, and is capable of reaching an indefinite
'just and reasonable' rate." App., infra, 15a-16a.

   /18/ The court expressed this view in rejecting the Commission's
ruling that most Section 107(c)(5) "new tight formation" gas (15
U.S.C. 3317(c)(5)) is automatically also gas under Section 102 or 103
(15 U.S.C. 3312, 3313), a ruling that both the Commission and the
court treated as part of the broader dual-qualification ruling (App.,
infra, 18a-19a;  see note 15, supra).  The court agreed that, with the
"recompletion" exception acknowledged by the Commission (see note 15,
supra), new tight formation gas in fact always meets the definitions
under Section 102 or 103.  But the court held that Congress had given
producers the right to choose what categories to apply for, so that
they could avoid qualification as deregulated gas if they wished.

   /19/ We do not renew the argument we made in the court of appeals
that Section 101(b)(5) does not apply to dual-qualified
regulated-deregulated gas.

   In addition to the court of appeals' dual-qualification holding, we
also challenge the court's holding concerning the treatment of Section
107(c)(5) gas.  The court did not treat that issue as a distinct one.
We present the question separately (page I, supra), but it is closely
related to the main question and warrants only brief discussion.  See
note 23, infra.

   /20/ The Conference Committee obviously adopted elements of both
bills, bringing intrastate gas under control while "lengthening the
period of time prior to the deregulation of most categories of natural
gas" (H.R. Conf. Rep. 95-1752, supra, at 68).  Representative Dingell,
who was the floor manager of the Conference bill in the House,
explained that, although he had opposed immediate deregulation for
fear of its harsh consequences to consumers and potential for windfall
profits, "(p)hased deregulation as set forth in the conference report
avoids both of these objectionable results" (124 Cong. Rec. 38361
(1978)).  On the compromise nature of the bill, see Allison, Natural
Gas Pricing:  The Eternal Debate, 37 Baylor L. Rev. 1, 37 (1985);
Pierce, Natural Gas Regulation, Deregulation and Contracts, 68 Va. L.
Rev. 63, 89 (1982);  Moody & Garten, The Natural Gas Policy Act of
1978:  Analysis and Overview, 25 Rocky Mtn. Min. L. Inst. 2-1, 2-39,
2-40 (1979);  Lovett, supra, 16 Hous. L. Rev. at 1152.

   /21/ In our view, nothing in Section 503, which provides for
administrative determinations of the proper category of natural gas,
grants producers the indefeasible right to select one of two
applicable categories.  Indeed, the authority of the Commission to
promulgate regulations under Sections 501(a) and (b) and 503(b) (15
U.S.C. 3411(a) and (b), 3413(b)) may well encompass the authority to
implement the NGPA by directing that gas that in fact falls into a
deregulated as well as regulated category be treated as deregulated.
Such an action, moreover, would seem consistent with the concerns
underlying the congressional floor statements quoted by the court of
appeals, as discussed in text infra.

   /22/ If this Court reverses the Tenth Circuit's decision
overturning the Commission's ruling that qualification under Section
107(c)(5) (15 U.S.C. 3317(c)(5)) automatically entails qualification
under Section 102 or 103 (15 U.S.C. 3312, 3313), should be a rare case
where gas that is qualified for regulated status has not also been
qualified for a deregulated status for which it is eligible.  Aside
from Section 107(c)(5) gas, most of which the Commission's rule would
automatically qualify for deregulated status, the only regulated gas
that presents a significant potential problem of overlap with
deregulated gas is stripper-well gas qualified under Section 108, 15
U.S.C. 3318.  Almost all such gas that could qualify under Section 102
or 103, however, will already have been so qualified before the well's
production diminished and the gas became eligible for Section 108
status.

   /23/ The court of appeals was faced with one narrow aspect of the
issue of producer choice of qualification.  The court overturned the
Commission's ruling that "new tight formation" gas under Section
107(c)(5) (15 U.S.C. 3317(c)(5)), with a specified exception, is
automatically qualified under Section 102 or 103 (15 U.S.C. 3312,3313)
and hence deregulated.  The court of appeals reached that decision in
passing in the course of explaining its broader dual-qualification
holding.  This separate holding would have a significant impact on gas
pricing and should be reversed.

   In addition to the Commission's general regulatory authority, which
we think would support restrictions on producer category choice even
in other contexts (see note 21, supra), there is clear authority for
the Commission's ruling with respcet to Section 107(c)(5) gas.  As the
court of appeals appears to have recognized on petitions for rehearing
(App., infra, 30a), the Commission is expressly authorized to
establish the criteria for qualification as Section 107(c)(5) gas.
The court of appeals did not disagree with the Commission's decision
to base Section 107(c)(5) qualification on the same facts as are
required to qualify for Section 102 or 103 status.  It merely rejected
the automatic dual qualification.  The Commission's authority,
however, surely encompasses this effort to simplify the qualification
and regulatory process by ruling that Section 107(c)(5) natural gas
that demonstrably meets all of the Section 102 or 103 criteria, based
solely on the application for Section 107(c)(5) status, must be
automatically so qualified.

   /24/ The court of appeals also cited (App., infra, 22a n.15) a
statement in the Conference Report that "natural gas qualifying as gas
produced from a natural gas stripper well (could be) sold subject to
the provisions of sec. 108, rather than taking deregulated treatment
as an existing intrastate contract" (H.R. Conf. Rep. 95-1752, supra,
at 83).  That statement, however, is not an explanation of Section
101(b)(5), but of a peculiar limitation on deregulation set by Section
121(e) (15 U.S.C. 3331(e)) for certain gas sold under intrastate
contracts (NGPA Section 105, 15 U.S.C. 3315).  Moreover, the statement
is in fact addressed to an overlap of two regulated categories
(Section 108, 15 U.S.C. 3318, and Section 105(b)(3), 15 U.S.C.
3315(b)(3)), not to the overlap of a regulated and a deregulated
category.  Indeed, the provision that the Conference Report statement
explains, Section 121(e), supports the Commission's ruling here.  In
that provision, as in Section 101(b)(5), Congress addressed itself to
dual-category gas;  and Congress specifically provided that whenever
the regulated category (Section 105(b)(3)) overlapped with a
deregulated category (Sections 102, 103, 107(c)(1)-(4), 15 U.S.C.
3312, 3313, 3317(c)(1)-(4)), the deregulated category would be
applicable.

   /25/ Indeed, as the Commission noted (see note 13, supra), several
producers, including some of respondents here, argued in 1979 and 1980
that dual-qualified regulated-deregulated gas should be treated as
deregulated irrespective of which price is higher.

   APPENDIX