NORTHWEST CENTRAL PIPELINE CORPORATION, APPELLANT V. STATE
CORPORATION COMMISSION OF KANSAS, ET AL.

   No. 86-1856

   In the Supreme Court of the United States

   October Term, 1987

   On Appeal from the Supreme Court of Kansas

   Brief for the United States and the Federal Energy Regulatory
Commission as Amici Curiae

   This brief is filed in response to the Court's order inviting the
Solicitor General to express the views of the United States.

            TABLE OF CONTENTS
   Question Presented
   Statement
   Discussion
   Conclusion

                          QUESTION PRESENTED

   Whether an order of the Kansas Corporation Commission, which
regulates the quantity of natural gas that may be produced from Kansas
gas wells, impermissibly interferes with the federal regulatory scheme
established under the Natural Gas Act, 15 U.S.C. 717 et seq., and the
Natural Gas Policy Act of 1978, 15 U.S.C. 3301 et seq., or exceeds the
State's power under the Commerce Clause of the United States
Constitution.

                               STATEMENT

   1. a. Natural gas within a "field" can migrate underground from
underproduced areas to producing areas.  It is possible to extract
from a single well or group of wells an indefinitely high percentage
of the recoverable natural gas in the field, exhausting not only the
producing wells but also nonproducing or underproducing wells (J.S.
App. 17a-18a).  This phenomenon creates problems not only of equity
between owners but of waste induced by a race to capture gas ahead of
other wells in the same field.  In addition, for physical reasons, a
gas reservoir may be wastefully depleted by either over- or
underproduction so that otherwise recoverable reserves are lost.
Champlin Refining Co. v. Corporation Comm'n, 286 U.S. 210, 228 (1932).

   Kansas, like other gas producing states, has laws "to prevent the
inequitable or unfair taking of natural gas" (Kan. Stat. Ann. Section
55-703 (1983);  J.S. App. 111a-112a), and to prevent "economic waste,
underground waste and surface waste" in its production (Kan. Stat.
Ann. Sections 55-701, 55-702 (1983);  J.S. App. 110a-111a).  Pursuant
to these statutes, the Kansas Corporation Commission has since 1944
regulated the production of gas in the Hugoton field /1/ so that each
well may "ultimately produce approximately the amount of gas
underlying the lease upon which it is located." Basic Proration Order
for the Hugoton Gas Field 12-13 (13 R. 37-38).  This is done by fixing
maximum monthly gas production rates -- called "allowables" -- for all
wells in the field.  The Kansas Commission first sets a monthly gas
production ceiling (pegged to an estimate of market demand) for the
field as a whole.  /2/ The regulatory scheme then assigns to the
various producers and their wells maximum gas production rates set to
spread the estimated market demand over all producing wells in
proportion to their individual production capabilities.

   In actual practice, however, the wells cannot be operated to meet
their monthly allowables precisely.  A well may be "shut in" and thus
underproduce because of mechanical problems or the lack of a willing
buyer of the well's gas production;  at other times, a well may be be
overproduced by error or design.  To account for under- or
overproduction, the Kansas scheme incorporates a system of tolerances.
 If a well produces less than its allowable level, it accrues an
"underage";  an overproducing well accrues an "overage." Overages are
offset against future monthly allowables;  underages entitle a
producer to overproduce his well (i.e., produce in excess of the
well's monthly allowable to make up the underage) if there is a
purchaser for the extra gas and the well can physically produce it.
J.S. App. 17a-20a.

   The overall result is a regulatory scheme that seeks to "balance()
various factors in an effort to regulate production so that the amount
produced over time from any well is equal to the amount of gas
originally in the developed lease" (J.S. App. 17a).  The formula, with
allowables, underages and overages, relies on the concept of
"compensating drainage" so that, while wells may produce different
amounts and produce at various times, they are "in balance in the long
pull" (id. at 18a).

   b. In February 1983, the Kansas Commission changed the underage
rules to create "an incentive for operators to produce" (J.S. App.
74a).  Before the change, accrued underages were subject to
cancellation but also to reinstatement under rules whose net effect
was that underages could be accrued indefinitely and used at any time.
 Over time underages accumulated, and by 1983 a huge amount of
underages had been built up.  /3/ The 1983 changes provided, for the
first time, a set of rules under which underages are permanently
cancelled if not reinstated and produced within specified periods of
years (J.S. App. 20a-21a).  By its terms, the rule change was
"directed to and affects only those who drill for and produce gas from
the Hugoton Field.  * * * (It) does not require pipeline() purchasers
to do anything or refrain from doing anything" (id. at 87a).

   The Kansas Commission's reasons for the rule change were not
explained with perfect clarity and are a matter of some dispute.  The
Kansas Commission stated that the prior rule "does not provide
operators sufficient incentive to produce gas" (J.S. App. 74a) and
that one purpose of the change was to "encourage" production generally
(id. at 73a).  The Kansas Supreme Court also understood the Kansas
Commission to have concluded that permitting indefinite accumulation
of underages had led "Hugoton Field production (to fall) below good
recovery practices and upset the dynamics of the Hugoton Field,
affecting both proration and correlative rights" (id. at 4a;  see id.
at 11a-12a, 17a-18a).  /4/ The Kansas Supreme Court did recognize that
while directed to gas producers, the rule change was intended to
affect pipeline purchasing practices (id. at 40a-41a).

   2. Together with other interstate pipelines, appellant opposed the
rule change before the Kansas Commission in the rulemaking proceeding.
 It alleged, inter alia, that the proposed rule change would
unlawfully encroach upon the federal government's exclusive regulatory
jurisdiction under the Natural Gas Act (NGA), 15 U.S.C. 717 et seq.
/5/ More particularly, relying on this Court's decision in Northern
Natural Gas Co. v. State Corporation Comm'n, 372 U.S. 84 (1963),
appellant argued that the threat to cancel underages if they were not
used within a specified period of years would force it to purchase
more Kansas gas at a time when it did not need the gas (or else risk
permanently losing gas from a well whose production was contractually
committed to it), and therefore that the state was in effect directing
interstate pipeline purchasing practices, a matter exclusively within
the concern of the Federal Energy Regulatory Commission.

   After the Kansas Commission rejected these contentions, appellant
sought judicial review of the new rule.  A Kansas district court
upheld the rule change (J.S. App. 53a-60a) on the ground that it
involved the "production or gathering" of gas, activities specifically
excluded from the reach of federal regulation by Section 1(b) of the
NGA, 15 U.S.C. 717(b).  /6/

   A divided Kansas Supreme Court affirmed (J.S. App. 13a-44a).  While
recognizing that the new rule was an "indirect effort to influence
purchasers" and acknowledging that "purchasers are indirectly caught
in the backwash," the court upheld the rule against the challenge
based on Northern Natural because the "rules on underages are a part
of production regulation" over which the state has exclusive
jurisdiction (J.S. App. 40a-41a).  In dissent, Chief Judge Schroeder
took the view that the rule is invalid, either on the ground that the
Kansas Commission had exceeded its "statutory authority in fixing
allowables far in excess of demand" (id. at 45a) or, alternatively,
because the state regulation violated Northern Natural:  while
"directed at producers not purchasers, its real purpose is to create
an impact on purchasers' business decisions concerning the makeup of
their interstate gas mix" and therefore its effect is to impair the
regulatory authority of the Commission under the NGA (J.S. App.
46a-48a).

   Appellant appealed that decision to this Court.  On February 24,
1986, after deciding Transcontinental Gas Pipe Line Corp. v. State Oil
& Gas Bd. (Transco), 474 U.S. 409, the Court vacated the Kansas
Supreme Court judgment and remanded the matter for further
consideration in light of that case.  /7/ 475 U.S. 1002 (1986).

   3. On remand, the Kansas Supreme Court, with Chief Judge Schroeder
again dissenting, reaffirmed its earlier decision (J.S. App. 1a-12a).
In doing so, the majority read Transco as requiring a determination
whether the state's order "falls within the limits of a comprehensive
federal regulatory scheme rather than within the category of
regulatory questions reserved for the states;  and, if so, whether the
effect of the order will be to impair market forces" (id. at 8a-9a).
Although finding that "any change in rates of production," such as
that contemplated by the state's action in tightening the underage
rules "has an effect on the interstate market" (id. at 11a), the
Kansas court found this alone was not sufficient to preempt the state
action.  Rather, it concluded that the key test must be "whether the
regulation is primarily directed at the marketing of gas rather than
production thereof" (ibid.).  On this basis, the Court upheld the
Kansas Commission's rule change (J.S. App. 11a-12a):

         Here, the Commission found the amendment * * * was necessary
      for the prevention of waste and protection of correlative
      rights.  Though controverted, there is evidence in the record to
      support that finding.  Further, any effect on the interstate
      sale of gas is merely incidental rather than the objective of
      the order.

   The Kansas court consequently held that the order "does not
transgress federal regulation of natural gas in interstate commerce"
and affirmed the state commission (id. at 12a).

                              DISCUSSION

   We believe that the Supreme Court of Kansas reached the correct
result:  the state commission order at issue in this case is not
preempted by the Natural Gas Act (NGA), 15 U.S.C. 717 et seq., or the
Natural Gas Policy Act (NGPA), 15 U.S.C. 3301 et seq.  While the
issues are complex, and we are not able to endorse all of the state
court's reasoning, we do not believe that appellant's contentions
warrant this Court's plenary consideration.

   Unlike the state orders at issue in Northern Natural and Transco,
the state order at issue here was, on its face, directed at producers,
not at purchasers of gas from producers for resale in interstate
commerce.  Compare Northern Natural, 372 U.S. at 90;  Transco, 474
U.S. at 411.  While a state order nominally directed at gas producers
may conflict with the comprehensive scheme of federal regulation of
gas purchasers, the Kansas proration order does not conflict with the
federal scheme merely because, like many other state regulations of
in-state production activities, it has a forseeable effect on the
economic choices made by gas purchasers and hence on the flow of the
product into interstate commerce.  Purchasers are not, by the order,
compelled even indirectly to act contrary to federal regulation, nor
is the federal scheme required to give way before the state's rule
change.

   1. In Northern Natural Gas Co. v. State Corporation Comm'n, 372
U.S. 84 (1963), the Court ruled that a Kansas "ratable-take" order,
requiring an interstate pipeline to purchase gas ratably from all
wells connected to its pipeline system in each gas field within the
state, was preempted by the NGA because the order encroached on the
exclusive regulatory jurisdiction conferred on the Federal Power
Commission by that statute.  In reaching that conclusion, the Court
stressed two points.

   First, the Court stressed that the state order at issue in Northern
Natural was "unmistakably and unambiguously directed at purchasers who
take gas in Kansas for resale after transportation in interstate
commerce" (372 U.S. at 92 (emphasis in original)).  The fact that the
order imposed direct obligations on gas purchasers was noted first
(id. at 90) as the reason why the "production or gathering" exemption
set forth in Section 1(b) of the NGA, 15 U.S.C. 717(b), did not render
that Act inapplicable and hence clear the way for state regulation.
/8/ The Court emphasized the point again in explaining the nature of
the "danger of interference with the federal regulatory scheme" (372
U.S. at 92) and yet again in explaining (id. at 93-94) why the state
order was not an acceptable means of achieving the concededly
legitimate state objective of conserving natural resources.  /9/

   Second, the Court stressed that "collision between the state and
federal regulation" was an "imminent possibility" and that the orders
must therefore "be declared a nullity in order to assure the
effectuation of the comprehensive federal regulation ordained by
Congress" (372 U.S. at 92).  As the Court explained (id. at 89;  see
also id. at 98 (Harlan, J., dissenting)), the ratable-take requirement
threatened the pipelines with criminal penalties if they did not
either reduce their takes from wells with which they had contracts,
thus incurring liability to those producers, or increase their takes
from other wells, and thus take more gas than they could currently
use.  Any such "readjustment of purchasing patterns * * * could
seriously impair the Federal Commission's authority to regulate the
intricate relationship between the purchasers' cost structures and
eventual costs to wholesale customers who sell to consumers in other
States" (id. at 92).

   In Transcontinental Gas Pipe Line Corp. v. State Oil & Gas Bd., 474
U.S. 409 (1986), the Court was confronted with a ratable-take order
"virtually identical" (id. at 411) to the order struck down in
Northern Natural.  In the interim, however, Congress had enacted the
NGPA, which restructured the comprehensive NGA regulatory scheme,
sharply reducing FERC authority to set wellhead prices and to dedicate
natural gas production to the interstate market and circumscribing its
review of interstate pipeline purchasing behavior.  See generally
Transco, 474 U.S. at 422-423.  The question in Transco, therefore, was
whether the rule of Northern Natural survived the enactment of the
NGPA.  The Court answered that question in the affirmative.  It did
so, as we read the Court's opinion, in essence because it found that
the NGPA had not eliminated the NGA's comprehensive federal regulatory
scheme but had incorporated into that scheme a new element -- a
federal decision "to leave determination of supply and first-sale
price to the market" (Transco, 474 U.S. at 422);  the state order at
issue in Transco, by requiring pipeline purchasers to take gas
ratably, conflicted with the NGPA policy that there should be no
regulation of the pipeline wellhead purchases at issue there, and
hence was invalid.  /10/

   2. The present case, unlike both Northern Natural and Transco,
involves a regulation that is, in terms, directed at producers of
natural gas, not at pipelines.  To be sure, the Kansas regulation, as
the Kansas Supreme Court itself recognized, is "intended for
purchasers (even though) directed to producers" (J.S. App. 40a).  It
is intended to increase production from the Hugoton field;  as the
court recognized, that result depends in large part on pipelines being
persuaded to take additional gas rather than to allow the cancellation
of underages (J.S. App. 37a):

         The weight and logic of the evidence raises serious questions
      of the producers' ability to persuade the purchasers to take
      enough additional gas to acquire an overproduced state in time
      to avoid permanent cancellation of underages.  However, there is
      substantial competent evidence in the record indicating
      otherwise under ideal circumstances.

   But any impact on pipelines is a result not of a state order
applicable directly to them, but of economic considerations.

   This is a crucial distinction for the preemption analysis.  As the
Court summarized most recently in Schneidewind v. ANR Pipeline Co.,
No. 86-986 (Mar. 22, 1988), slip op. 6, a state regulation that is not
explicitly barred by federal law may nevertheless be preempted if
Congress has "indicate(d) an intent to occupy a given field to the
exclusion of state law" and the state regulation lies within that
field.  And state regulation that lies outside any field where
Congress has entirely displaced state regulation may be preempted
"'when it is impossible to comply with both state and federal law,
Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-143
(1963), or where the state law stands as an obstacle to the
accomplishment of the full purposes and objectives of Congress, Hines
v. Davidowitz, 312 U.S. 52, 67 (1941).'" Schneidewind, slip op. 6
(quoting California Coastal Comm'n v. Granite Rock Co., No. 85-1200
(Mar. 24, 1987), slip op. 7).

   The significance, for preemption analysis, of the fact that the
Kansas order at issue here (unlike the state regulations at issue in
Northern Natural, Transco, and Schneidewind) by its terms regulates
producers, and gas production, not pipelines and their activities, is
that the "field occupation" sort of preemption is not applicable.  Cf.
Schneidewind, slip op. 1-2 & n. 1.  The Kansas order directly
regulates the quantities of natural gas that may be produced from a
given well in particular periods, and the NGA has since the beginning
exempted from the federal regulatory domain the regulation of
"production or gathering" of natural gas.  See Northern Natural, 372
U.S. at 89;  Interstate Natural Gas Co. v. FPC, 331 U.S. 682, 690
(1947).  The Kansas order cannot, therefore, be said to have intruded
on a domain occupied by federal law to the exlusion of state law.

   Unlike the state court, however, we do not think the matter ends
there.  /11/ The Kansas order would also be preempted if it could be
shown to conflict with the federal scheme, either in the Paul sense or
in the Davidowitz sense, and the fact that the Kansas order is
nominally aimed at producers does not eliminate the possibility of
such a conflict.  See Arkansas Louisiana Gas Co. v. Hall, 453 U.S.
571, 583-584 (1981).  A pipeline claiming "conflict" preemption,
however, has the burden of showing the conflict.  It is this burden
that in our view appellant has not met.

   Here, contrary to appellant's argument (J.S. 21-22), there is no
possibility of actual "collision" between state and federal law in the
Paul sense.  As the cases make clear, federal authority extends to
regulating the sale and transportation of natural gas in interstate
commerce;  while the Commission's abandonment authority extends to
insuring that gas that is produced from committed or dedicated leases
and wells moves in interstate commerce (see, e.g., United Gas Pipe
Line Co. v. McCombs, 442 U.S. 529 (1979)), the Commission has no
authority to compel gas production (see Shell Oil Co. v. FERC, 566
F.2d 536 (5th Cir. 1978), aff'd by an equally divided Court, 440 U.S.
192 (1979)), and a pipeline and its customers therefore have no
federally enforceable right to require that gas be produced or that it
be protected for future purchase.

   3. Contrary to appellant's argument (J.S. 17, 20-21), otherwise
valid state regulation does not pose an "obstacle," in the Davidowitz
sense, to the accomplishment of the purposes of federal law simply
because it foreseeably -- even intentionally -- affects pipeline
purchasing practices.  Those practices are not themselves sacrosanct,
and nothing in this Court's prior cases indicates that the federal
regulatory scheme preempts every state law rule that influences
pipeline purchasing decisions;  to the contrary, the federal
regulatory scheme presupposes state-fixed production and gathering
regulations just as it presupposes other property and contract rights
and other conditions dependent on state law.  See pages 16-17, infra.

   All agree that the rights of well owners to the gas in a common
field are determined by state law (see, e.g., Thompson v. Consolidated
Gas Utilities Corp., 300 U.S. 55, 69-70 (1937);  Champlin Refining Co.
v. Corporation Comm'n, 286 U.S. 210 (1932);  see also Northern
Natural, 372 U.S. at 94-95 & n. 12);  this determination presents "as
thorny a problem as has challenged the ingenuity and wisdom of
legislatures." Railroad Comm'n v. Rowan & Nichols Oil Co., 310 U.S.
573, 579 (1940)).  Different possible state rules bear different
relationships to the market forces that determine the price of gas.
The "rule of capture," under which gas belongs to the well owner who
extracts it, spurs each well owner to take gas quickly (as long as the
price covers the cost of extraction).  See generally 1 W. L. Summers,
The Law of Oil and Gas Sections 61-63 (perm. ed. 1954);  Hardwicke,
The Rule of Capture and Its Implications as Applied to Oil and Gas, 13
Tex. L. Rev. 391 (1935).  As appellant itself noted (J.S. 4-5), in
order to prevent resulting waste and protect correlative rights,
Kansas, like other states, has modified the rule of capture by
enacting its system of allowables.  If the result of a system of
allowables were to fix, in advance and permanently, a quantity of gas
that each well owner may take from the pool over as long a period of
he wishes, then the fact that his well is drilled into a common pool
would give the owner no incentive to extract gas any faster than the
market otherwise warrants.  /12/

   Appellant's argument, as we understand it, is that the combined
result of the NGA, the NGPA and Transco is to require Kansas to adopt,
or at least approximate, such a fixed-entitlement system of
allowables, eliminating as far as possible any common-pool incentive
for producers to take gas faster than they otherwise would.  As we
read appellant's contentions, any state scheme of allowables that has
the intended effect of giving a well connected to an interstate
pipeline a use-it-or-lose-it incentive to extract gas should be deemed
an impermissible "obstacle" to accomplishment of the purposes of
federal regulation.

   We disagree.  As the "production or gathering" exemption of Section
1(b) of the NGA, 15 U.S.C. 717(b) makes clear, the federal scheme
recognizes not only that federal jurisdiction does not extend to the
regulation of gas production, but that state authority does.
Appellant offers no evidence of a congressional intent to intrude on
traditional, otherwise valid state regulation of production merely
because it may affect pipelines' economic choices among purchasing
alternatives all of which are permitted by their contracts and the
federal regulatory scheme.  See 124 Cong. Rec. 38366 (1978) (remarks
of Rep. Dingell, House Manager of the NGPA, explaining that state
authority to prorate production is unaffected by NGPA).  There is no
intrusion upon the "comprehensive * * * federal regulatory authority
over interstate gas transactions" (Schneidewind, slip op. 7 n.6),
unless state regulation does more than influence the choices pipelines
make among lawfully available actions.  /13/

   The situation might be different if there were no valid state
reasons for the Kansas order, but appellant does not, as we understand
its position, argue in this Court that the Kansas order has been
"'shown to bear no reasonable relation either to the prevention of
waste or the protection of correlative rights.'" Thompson v.
Consolidated Gas Utilities Corp., 300 U.S. 55, 69 (1937) (quoted in
Northern Natural, 372 U.S. at 95 n.12).  The Kansas commission
concluded here (albeit not with exceptional clarity) that permitting
each well owner to accumulate underages indefinitely will cause waste
and be unfair to the wells that do produce their monthly allowables.
See J.S. App. 73a.  The Kansas Supreme Court affirmed that finding
(id. at 11a-12a):

         Here, the Commission found that the amendment to paragraph
      (p) of the basic proration order was necessary for the
      prevention of waste and protection of correlative rights.
      Though controverted, there is evidence in the record to support
      that finding.

   The ratable-take orders at issue in Northern Natural and Transco
were of course also defended on grounds of conservation and fairness
among well owners in a common pool (372 U.S. at 93;  474 U.S. at 416),
and this Court in both cases, without disputing the state's proffered
justification, held the orders nevertheless preempted by federal law.
But in those cases the state justification was proffered as a reason
for overriding federal regulation.  It is one thing to say that the
federal scheme precludes direct state regulation of pipeline takes
even if the state proffers an otherwise valid justification;  it is a
different thing entirely to say that the federal scheme precludes a
state from adjusting its system of producer allowables, in a manner it
deems appropriate to prevent waste and protect correlative rights,
because of the effect on the pipelines' purchasing choices through the
operation of market forces.

   In sum, our view is as follows.  Transco establishes that state
regulation of pipeline takes, as such, continues to be barred under
the NGPA, as it was under the NGA.  State regulation of producers is,
however, a different matter.  Such regulation may be invalid if it is
"'shown to bear no reasonable relation either to the prevention of
waste or the protection of correlative rights'" (Northern Natural, 372
U.S. at 95 n.12 (quoting Thompson v. Consolidated Gas Utilities Corp.,
300 U.S. at 69)), and it is possible that even state regulation
serving such purposes might be shown to conflict with the aims of the
federal scheme.  But such a showing would require more than a
demonstration that the state regulation foreseeably affects the
choices pipelines in fact make:  otherwise valid state regulation of
production does not inherently conflict with the federal regulation of
pipeline activities;  it is instead one of the conditions under which
those activities operate.

   4. Appellant's Commerce Clause argument, to the extent that it
differs from appellant's argument based on preemption, is based on a
misconception.  The argument is that the "effect of the (Kansas) order
will be to withdraw a large volume of low-cost natural gas from the
established stream of interstate commerce to benefit preferentially
the customers of the local intrastate gas companies" (J.S. 24-25).
But as we have noted, see page 14 a particular quantity of gas is not
in the stream of interstate commerce until it is sold or produced, and
an interstate pipeline that has contracted to purchase the production
of a particular well does not have a right, under the Commerce Clause
or otherwise, to be protected against otherwise valid state rules that
reduce that well's production.  Cf. Cities Service Co. v. Peerless Oil
& Gas Co., 340 U.S. 179, 186-189 (1950).

                              CONCLUSION

   The appeal should be dismissed for lack of a substantial federal
question.

   Respectfully submitted.

   CHARLES FRIED

      Solicitor General

   CATHERINE C. COOK

      General Counsel

   JEROME M. FEIT

      Solicitor

   JOHN H. CONWAY

      Attorney Federal Energy Regulatory Commission

   APRIL 1988

   /1/ The Hugoton Field extends across portions of Kansas, Oklahoma
and Texas.  About two thirds of the field is located in Kansas;  in
1983, that portion of the field contained more than 4,000 wells (J.S.
3).

   /2/ In determining market demand, the Kansas Commission must
"consider the reasonable current requirements for current consumption
and use within and without the state, and such other factors,
conditions, or circumstances that would aid in establishing the market
demand" (Kan. Stat. Ann. Section 55-703 (1983);  J.S. App. 112a-113a).
 The market demand levels are determined twice a year after public
hearings.  In determining the market demand levels the state
commission solicits from pipelines and producers estimates of upcoming
gas production needs.  While not bound by these estimates, the Kansas
Commission uses them as supporting evidence for its analysis.

   /3/ For most wells in the Hugoton field, underages have risen
dramatically in recent years, reaching a total of over 204 billion
cubic feet of gas by 1982 (J.S. App. 74a);  the total natural gas
production for all of Kansas that year was a little over 430 billion
cubic feet (American Gas Association, Gas Facts:  1984 Data 28, 29
(1985)).  Because of relatively liberal production and sales
contracting terms and the higher tolerances for underproduction in the
Kansas Hugoton field, pipelines were apparently using the field for
"storage" and filling their immediate gas needs elsewhere (J.S. App.
34a).  This happened even though the Hugoton field gas is, relatively
speaking, low priced gas.  (Most of the Hugoton field gas production
is committed or dedicated, when produced, to interstate commerce (see
note 5, infra) and thus commands comparatively low prices under
Section 104 of the Natural Gas Policy Act of 1978, 15 U.S.C. 3314.)
Appellant is among the pipelines that have chosen to purchase
higher-priced gas from other areas and preserve the lower priced
Hugoton field gas for later use.  See Northwest Central Pipeline
Corp., 33 F.E.R.C. Paragraph 63,067, at 65,277-65,278 (1985), a case
still before FERC involving the prudence of appellant's 1984 gas
purchasing practices.

   /4/ One correlative rights problem was apparently as follows.  The
formula for monthly allowables for particular wells depends on factors
that include pressure of the well (J.S. App. 17a-18a).  Operating a
well reduces its pressure, so that "operators producing their
allowable may (thereafter) * * * receive a smaller allowable than
those operators not producing their allowables" (id. at 73a).  In
other words, operators not producing their allowables would not only
accumulate underages but would also receive disproportionately high
future allowables.  One of the Kansas Commission's stated concerns was
to adopt provisions that would "induce the production necessary to
balance the field and protect correlative rights" (id. at 75a).

   /5/ Most of the natural gas produced from the Kansas-Hugoton gas
field is sold to interstate gas pipelines under certificates of public
convenience and necessity issued by the Federal Energy Regulatory
Commission under Section 7 of the NGA, 15 U.S.C. 717f (J.S. 3-4).
This means that the gas, when produced, is dedicated to interstate
commerce and producers have a legal duty to sell any gas that they
produce to the interstate market until relieved of that obligation by
the Commission.  Passage of the Natural Gas Policy Act of 1978 (NGPA),
15 U.S.C. 3301 et seq., did not relieve producers of that obligation,
because that Act provides that gas dedicated to interstate commerce
before the NGPA was enacted generally remains under the Commission's
NGA certification authority (15 U.S.C. 3431(a)(1)(A) and (B)).

   /6/ That section provides in pertinent part:

         The provisions of this chapter shall apply to the
      transportation of natural gas in interstate commerce, to the
      sale in interstate commerce of natural gas * * * and to
      natural-gas companies engaged in such transportation or sale,
      but shall not apply to any other transportation or sale of
      natural gas * * * or to the production or gathering of natural
      gas.

   /7/ Transco dealt with the question whether Congress, in enacting
the NGPA, had so altered the federal regulatory scheme that state
regulations preempted under Northern Natural could now be permitted.
The Court held it had not:  "(A)lthough FERC may now possess less
regulatory jurisdiction over the 'intricate relationship between the
purchasers' cost structures and eventual costs to wholesale customers
who sell to consumers in other States,' Northern Natural, 372 U.S. at
92, than it did under the old (pre-NGPA) regime, that relationship is
still a subject of deep federal concern" (474 U.S. at 422).  The Court
in Transco went on to find that a state's attempt to regulate the
wellhead purchasing practices of interstate pipelines directly was no
more valid in the post-NGPA environment than under Northern Natural
before the NGPA was passed (id. at 422-424).

   /8/ The Court expressly declined to consider "the effect of the
'production or gathering' exemption upon ratable-take orders directed
exclusively at independent producers of natural gas" (372 U.S. at 90
n.8).

   /9/ The state court in Northern Natural had sustained the state
orders because they did not involve direct regulation of the prices of
wholesales of natural gas.  This Court rejected that argument (see 372
U.S. at 90-91), saying that the "federal regulatory scheme leaves no
room either for direct state regulation of the prices of interstate
wholesales of natural gas * * * or for state regulations which would
indirectly achieve the same result" (id. at 91 (footnote omitted)).
The effect of the ratable-take orders at issue in Northern Natural was
"indirect," however, only in the sense that the orders purported to
regulate quantity and not price, not in the sense that they purported
to regulate a person other than the purchaser-wholesaler of gas.

   /10/ In contrast to the gas involved in Transco, the current case
involves gas committed to the interstate market under the NGA, which
remains subject to ceiling prices set by Congress (15 U.S.C. 3314).
See note 5, supra.

   /11/ Both in its initial opinion (J.S. App. 40a-41a) and after
remand from this Court (id. at 11a), the state court saw essentially a
bright line between a state regulation addressed to gas producers and
a regulation addressed to gas purchasers.  Finding (id. at 11a-12a)
that the Kansas order here was not "primarily directed at the
marketing of gas (but at the) production thereof," it ruled that the
state order was not barred by the federal scheme.

   As we said in Northwest Central Pipeline I (85-182 Br. 8), we do
not think the purposes underlying preemption in this area permit such
a simple, "bright-line" analysis.  As Justice Harlan pointed out in
his dissent in Northern Natural, "(t)he production of natural gas and
its movement into interstate channels constitute one and the same
physical operation" (372 U.S. at 100).  Particularly since the
relationship between producers and pipelines has been characterized by
long-term contracts covering the entire production of given wells,
conflict with the federal regulatory scheme is not necessarily avoided
by making the nominal target of state regulation the producer rather
than the pipeline.  The fact that a rule applies directly to producers
rather than purchasers does not automatically eliminate the
possibility that it "could seriously impair the Federal Commission's
authority to regulate the intricate relationship between the
purchasers' cost structures and eventual costs to wholesale customers
who sell to consumers in other States" (Northern Natural, 372 U.S. at
92;  see Transco, 474 U.S. at 420, 422).

   But we have concluded that we spoke too quickly when we suggested
in Northwest Central Pipeline I (85-182 Br. 9-10) that if pipelines
would be induced by the threat of losing gas to increase their takes
from Kansas gas fields, and if the rule of Northern Natural were held
in Transco to have survived the enactment of the NGPA, then the Kansas
order could not stand.  As Schneidewind makes clear, it remains
necessary to examine the federal scheme to determine whether there is
an actual conflict between federal and state law.

   /12/ Because of inherent uncertainties about the quantity of
recoverable gas in the ground, no system of allowables can exactly fix
total entitlements for all time.

   /13/ The Court in Transco noted (474 U.S. at 420) that Northern
Natural held ratale-take provisions preempted in part because they
eliminated the pipeline's ability to "choose a different * * *
purchasing pattern." The state regulation at issue here does not
preclude pipeline choices.  Although it attempts to influence them,
neither Northern Natural nor Transco suggest that this is an
impermissible state objective.

   Nor does the Kansas order trespass upon Congress's decision "to
leave determination of supply and first-sale price to the market"
(Transco, 474 U.S. at 422).  The dissent in Transco noted (id. at 435
n.6):  "While the congressional desire to decontrol prices uniformly
throughout the Nation includes an intent to prevent States from
enacting regulation to recontrol them, it does not imply an intent
either to create an anarchistic regulatory gap free from property
rights and contract rules, or to create a national law of contracts to
govern natural gas relationships." The majority did not disagree with
this overall view;  it simply found that the NGPA had not
significantly altered the comprehensive federal regulatory scheme that
led to the "field occupation" preemption analysis in Northern Natural.