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

   PUBLIC SERVICE COMMISSION OF NEW YORK, ET AL., PETITIONERS V.
MARTIN EXPLORATION MANAGEMENT COMPANY, ET AL.

   No. 87-363, 87-364

   In the Supreme Court of the United States

   October Term, 1987

   On Writs of Certiorari to the United States Court of Appeals for
the Tenth Circuit

   Reply Brief for the Federal Energy Regulatory Commission

   In our opening brief, we argued that the Commission correctly
construed NGPA Section 101(b)(5), 15 U.S.C. 3311(b)(5), to provide
that, when gas is qualified under more than one NGPA pricing
provision, the applicable provision is the one that establishes the
highest ceiling price -- so that, in particular, if one provision
declares that there is no legal ceiling, that provision applies and
the gas is price-deregulated.  We showed that this construction is
required by the language of Section 101(b)(5) and by the NGPA'S
general approach to price regulation, both of which focus on legal
ceilings and not on particular producers' contract prices, and is the
only construction consistent with the overall congressional plan of
phased-in deregulation and with the terms of the debate that led to
enactment of the NGPA.  We also showed that the court of appeals' and
the producer respondents' contrary construction, which grants each
producer of dual-qualified gas the right to avail itself at any
particular time of whichever provision results in the highest price
under its particular contracts, is incompatible with the statutory
text, structure, and history.  Nothing in the producer respondents'
brief, which ignores large parts of our analysis, casts any doubt on
the correctness of the Commission's conclusion, and only a few of
respondents' arguments warrant a reply.  /1/

   1. Respondents attempt a plain-language argument (Br. 21-26), but
instead of carefully examining the words of Section 101(b)(5), they
offer only general rules of statutory construction and repetition of
the statutory text.  The section states that, when a quantity of gas
qualifies under more than one provision, "the provision which could
result in the highest price shall be applicable." Respondents make no
plausible effort to account for the fact that Section 101(b)(5)
selects the provision that "could result" in the highest price, an
expression that on its face refers to a legal ceiling, not the
provision that "results" or "actually results" or "will result" in the
highest price under a particular contract at a particular time.
Respondents ignore the fact (see Gov't Br. 23-24) that nothing in the
language makes any reference to particular producers or their
contracts or suggests that two producers whose gas falls within the
same overlap of pricing provisions could receive different treatment
for that gas depending on what prices each agreed to in its contracts.
 And respondents make no attempt to show how a reading of Section
101(b)(5) under which the applicable ceiling is determined by first
examining particular contract prices would accord with the overall
approach taken by the NGPA'S wellhead pricing provisions, which focus
on ceiling prices only and otherwise leave contract prices wholly to
private decision (see Gov't Br. 25-27).

   Respondents make, at bottom, only two arguments on the statutory
language.  First, they appear to suggest (Br. 23) that the reason
Congress used "could result" rather than "results" or "actually
results" or "will result" is that, since NGPA provisions do not
dictate prices, it would be improper usage to employ one of those
alternative locutions.  But respondents' own brief in opposition, at
the petition stage in this case, repeatedly used those very locutions
(Br. in Opp. 8, 11, 14, 16) when they wanted to convey the idea of
comparing provisions to see which leads to the highest price at a
particular time under particular contracts.  Congress could have done
the same thing, but it chose the words "could result" because it
wanted a comparison of NGPA provisions, not of the prices called for
by particular contracts.

   Respondents also argue that Congress would not have chosen the
language it did "if it wished to reach the same result --
price-deregulation -- in every case" (Br. 23).  But respondents
mysteriously ignore the fact that Section 101(b)(5) also governs the
choice between two or more regulated categories in which a particular
quantity of gas qualifies.  See Gov't Br. 23-25.  The language
Congress used in Section 101(b)(5) is an economical and altogether
natural way to cover all category comparisons in a single sentence;
indeed, it is not easy to think of a more compact (or clearer) way to
accomplish the task.  /2/

   2. a. Respondents' analysis of congressional intent (Br. 26-33)
makes no attempt to respond to our showing (Gov't Br. 28-31) that
their proposed construction of Section 101(b)(5), which would allow a
producer to opt back into regulation whenever it could obtain a
regulated price higher than the price it would obtain if the gas were
deregulated, is incompatible with the compromise plan for the future
of natural gas pricing that Congress put into effect in the NGPA.  As
the statute's structure and legislative history make clear, the NGPA
creates a scheme of "phased deregulation," and there is no indication
that Congress contemplated a return of deregulated gas to regulated
status except through the carefully limited mechanism of Section 122,
15 U.S.C. 3332 (now-expired authority for one-time, temporary
presidential or congressional reimposition of price controls).
Respondents do not merely ignore that plan in construing Section
101(b)(5).  They suggest (Resp. Br. 6-9, 20-21 & n.11) that the NGPA's
provisions may be neatly divided into those which are pro-producer and
those which are pro-consumer, and that Section 101(b)(5) must be read
as clearly in the former group, thus allowing its construction in
isolation from the structure and aims of the NGPA as a whole.

   Respondents also offer no answer at all to our argument (Gov't Br.
31-35) that their construction of Section 101(b)(5) would treat
producers in a manner wholly outside the terms of the debate that led
to the NGPA's enactment and far more favorably than anyone in Congress
contemplated.  The NGPA reflects the "Conference Committee's careful
reconciliation of two strong, but divergent, responses to the natural
gas shortage" (Public Service Comm'n v. Mid-Louisiana Gas Co., 463
U.S. 319, 331 (1983)), one favoring rapid deregulation, the other the
extension of regulatory controls into intrastate markets.  It would be
inconsistent with both of those responses to give producers a legal
tool for securing higher prices for gas eligible for deregulation than
they could obtain in the unregulated market.  As Senator Jackson, the
Senate floor manager, made clear (124 Cong, Rec. 28633 (1978)),
deregulation was the "maximum economic incentive" that anyone in
Congress contemplated.  /3/

   b. Ignoring the import of the statutory structure and of the
legislative history taken as a whole, respondents focus (Br. 26-28) on
two particular statements in the legislative history.  As we explained
in our opening brief (at 36-38), however, even aside from the
existence of statements in the legislative history that point in the
opposite direction (see Pet. App. 21a n.15), the statements
respondents rely on cannot possibly overcome the arguments supporting
the Commission's construction of Section 101(b)(5).

   The first statement -- by key House conferees led by Representative
Dingell (124 Cong. Rec. 38363-38364 (1978)), who was in what
respondents would term the "pro-consumer" group of legislators (Resp.
Br. 21 n.11) -- was indeed offered in explanation of Section
101(b)(5).  But, as we have explained (Gov't Br. 37-38), the statement
was addressed to a different problem from that presented in these
cases:  the process by which producers qualify gas in particular
categories, not (as here) the selection among multiple categories in
which gas has already been qualified.  The statement simply assured
other legislators that the process of obtaining category --
qualifications from state and federal jurisdictional agencies under
Section 503, 15 U.S.C. 3413, which relies at least in general on
producer initiative, would not be displaced by Section 101(b)(5) --
that is, that Section 101(b)(5) did not mean that the jurisdictional
agencies would have the substantial burden of determining sua sponte
all of the provisions under which particular gas might be qualified.

   The second statement relied on by respondents, which appears in the
Conference Report (H.R. Conf. Rep. 95-1752, 95th Cong., 2d Sess. 83
(1978)), was not made as an explanation of Section 101(b)(5) at all,
so it could be of little weight in determining the proper construction
of that provision.  As we explained in our opening brief (at 38 n.32),
the statement is an explanation of the singular and complex pricing
requirements of Sections 105(b)(3) and 121(e), 15 U.S.C. 3315(b)(3),
3331(e), covering certain gas sold under existing (or successor)
intrastate contracts subject to "indefinite price escalator clauses."
/4/ Properly understood, the conference committee statement does not
offer respondents any support.

   Gas sold under existing (or successor or rollover) intrastate
contracts at a price in excess of $1 (per million British thermal
units) is generally deregulated by Section 121(a)(3), 15 U.S.C.
3331(a)(3), effective January 1, 1985.  Section 121(e), however, calls
off that price deregulation for a subcategory of such gas:  if the
price is established by an indefinite price escalator clause, and if
the gas would not in any event be deregulated under a subsection of
Section 121 other than subsection (a)(3), then Section 105(b)(3)
applies.  Subsection (A) of that provision, in turn, places a ceiling
on price escalation for such gas, and subsection (D) then states that
that ceiling does not apply to gas (as Section 121(e) already makes
clear) that falls into other categories deregulated by Section 121
(gas under Sections 102, 103, 107(c)(1)-(4), 15 U.S.C. 3312, 3313,
3317(c)(1)-(4) or to gas that falls into the still-regulated
categories of high-cost and stripper-well gas defined by Sections
107(c)(5) and 108, 15 U.S.C. 3317(c)(5), 3318, and that is therefore
subject to other (in fact, higher) ceilings.  In short, a portion of
the intrastate gas that would be deregulated by Section 121(a)(3) is
brought back under regulation to limit the effect of indefinite price
escalator clauses.

   The Conference Report (H.R. Conf. Rep. 95-1752, supra, at 83)
explains the workings of those complex pricing provisions, stating:

         (N)atural gas which is deregulated as a result of being new
      gas under sec. 121(a)(1), gas from deregulated new, onshore
      production wells under sec. 121(a)(2) or 121(c), or high cost
      natural gas under sec. 121(b), would not be subject to this
      limitation (Section 105(b)(3)), even if it were sold under an
      existing intrastate contract.  Furthermore, natural gas
      qualifying as gas produced from a natural gas stripper well
      would not be so limited, if such gas were sold subject to the
      provisions of sec. 108, rather than taking deregulated treatment
      as an existing intrastate contract.

   Respondents seize on the last sentence of that explanation,
concerning Section 108 gas, and, without reference to the context or
the underlying statutory provisions it explains, claim, that Congress
here stated that dual-qualified regulated-deregulated gas could take
regulated treatment at the producer's option (Resp. Br. 27-28).  But
even aside from whether Congress's understanding of Section 101(b)(5)
can be inferred from this single statement, which is buried in a long
explanation of complex, interrelated provisions other than Section
101(b)(5) itself, the statement does not indicate what respondents
suggest.

   First, the statement is not in fact addressed to gas that falls
into two categories, one with a price cap, the other not.  The
statement concerns the overlap of gas covered by Section 108 and gas
covered by Section 105(b)(3)(A) -- both of which are subject to
statutory ceilings.  The conference committee admittedly referred to
gas taking "deregulated treatment, "but that usage cannot change the
fact that the statement applies only to gas that falls under two
provisions that impose price ceilings.  Even respondents recognize the
peculiarity of the committee's usage:  they properly use quotation
marks in their own reference to 'the deregulation' of the overlapping
intrastate category" (Br. 28).  The committee's usage, which the
Commission (Pet. App. 117a) and the court of appeals (id. at 25a)
followed, is due to the complex structure of Section 121, under which
the intrastate gas at issue is "deregulated" by Section 121(a)(3),
only to be brought back under a price control in certain circumstances
by Sections 121(e) and 105(b)(3).

   Second, although the particular sentence relied on by respondents
does not address gas qualified for both a category subject to price
caps and a category that is not, the provisions that are explained in
the cited portions of the Conference Report do.  And what those
provisions say confirms the Commission's view that
regulated-deregulated gas should be treated as deregulated.  In each
case of the overlap of a category of gas subject to a price ceiling
(i.e., the Section 105(b)(3)(A) price ceiling) with a category in
which all price ceilings are removed, Sections 105(b)(3)(D) and 121(e)
specifically provide that the latter category governs.

   3. On the second question presented in these cases, respondents
argue (Br. 38-42) that the Commission has overstepped its authority
and interfered with the process of qualifying gas in particular
categories.  But the Commission has not issued any determinations of
the qualification of particular gas or provided for the bypassing of
the Section 503 procedures.  Compare Williston Basin Interstate
Pipeline Co. v. FERC, 816 F.2d 777, 781-782 (D.C. Cir. 1987), cert.
denied, No. 87-502 (Jan. 19, 1988).  Rather, as we explained in our
opening brief at (at40-43), the Commission has merely insisted by rule
that jurisdictional agencies implement the concededly valid definition
of a certain category of "new tight formation" gas under Section
107(c)(5) that it is unquestionably within the Commission's power to
define:  since such gas "is" Section 102 or 103 gas, by definition, it
must be given that label when it is given the Section 107(c)(5) label.
 /5/

   This was an entirely reasonable exercise of the Commission's
regulatory powers under Sections 501 and 503(a)(2), 15 U.S.C. 3411,
3413(a)(2), and of the special power to develop the Section 107(c)(5)
pricing scheme, which Congress expressly committed "to the expertise
and judgment of FERC" (Pennzoil Co. v. FERC, 671 F.2d 119, 123 (5th
Cir. 1982)).  Indeed, in providing for deregulated treatment under
Section 102 or 103 of certain new tight formation gas, the Commission
has furthered Congress's intent to reserve Section 107(c)(5) incentive
pricing for those situations where it is "needed in order to make
high-cost gas worth exploiting" (Williston Basin Interstate Pipeline
Co., 816 F.2d at 779).  In any event, the court of appeals on
rehearing (Pet. App. 30a) recognized "FERC's continuing authority to
modify the criteria that establish which types of gas qualify under
Section 107(c)(5)." What the Commission has done is no different from
such a modification (Gov't Br. 42).

   For the foregoing reasons, and those stated in our opening brief,
the judgment of the court of appeals should be reversed.

   Respectfully submitted.

   DONALD B. AYER /6/

      Acting Solicitor General

   CATHERINE C. COOK

      General Counsel Federal Energy Regulatory Commission

   MARCH 1988

   /1/ We hereafter refer simply to "respondents" in speaking of the
producer respondents, Martin Exploration Management Co., et al.

   /2/ Respondents suggest (Br. 22 n.12) a rewriting of Section
101(b)(5) that they believe reflects the Commission's reading of the
provision, but that rewriting betrays respondents' misunderstanding
both of Section 101(b)(5) and of the Commission's reading.  Under
respondents' rewriting, regulated-regulated gas would "'be treated
under the provision which sets the highest price'" (Resp. Br. 22
n.12).  But the pricing provisions of the NGPA do not "set()" prices;
they establish only upper limits, if any, on the prices that producers
and their customers may set by contract.  Accordingly, a "competent
draftsman" (id. at 23) who wished, as we think Congress did, to
provide for a comparison of "maximum lawful prices" would not make
applicable "'the provision which sets the highest price'" (id. at 22
n.12).  Such a draftsman, we think, would make applicable the
provision that "could result in the highest price."

   /3/ Contrary to respondents' misinterpretation (Br. 30-33), we do
not suggest that there is some single "market price" applicable to all
producers, about which the NGPA forbids producers to sell.  A "market
price," of course, is the price a particular producer can obtain in
the market from a particular purchaser at a particular moment, and
there could conceivably be as many market prices as there are
producer-purchaser transactions.  The point is that Congress did not
intend to give producers a mechanism for obtaining a higher price than
they could obtain in the market, once the dates set by the NGPA for
deregulation arrived.

   /4/ An indefinite price escalator clause is defined in Section
105(b)(3)(b), 15 U.S.C. 3315(b)(3)(B), as any provision of any
contract --

         (i) which provides for the establishment or adjustment of the
      price for natural gas delivered under such contract by reference
      to other prices for natural gas, for crude oil, or for refined
      petroleum products;  or

         (ii) which allows for the establishment or adjustment of the
      price of natural gas delivered under such contract by
      negotiation between the parties.

   /5/ Indeed, in order to be new natural gas ("as defined in section
102(c)"), and hence come within the definition of new tight formation
gas under Section 107(c)(5) (see 18 C.F.R. 271.703(b)), the gas must,
by virtue of Section 102(c) itself, be "determined in accordance with
section 503" to meet Section 102(c)'s requirements.  For such gas, the
statute thus expressly states what the Commission here reaffirmed by
rule:  a new tight formation determination cannot be issued without
issuance of the implicit Section 102(c) determination.  Section 103
contains the same "determined in accordance with section 503"
language, but it does not appear in the definitional subsection (c)
referred to in the Commission's regulation defining new tight
formation gas.  So trivial a difference, however, cannot render the
Commission's Section 107(c)(5) ruling valid for Section 102 gas and
not valid for Section 103 gas.

   /6/ The Solicitor General is disqualified in these cases.