Earl Warren: Number 245, Waterman Steamship Corporation, Petitioner, versus United States. Mr. Solicitor General?
Archibald Cox, Jr.: Mr. Chief Justice, may it please the Court. I move the admission of Paul Bender, Esquire, one of the assistants in my office for the purpose of arguing the next case.
Earl Warren: The motion is granted.
Archibald Cox, Jr.: Thank you.
Earl Warren: Mr. McConnell?
John W. McConnell, Jr.: Mr. Chief Justice, may it please the Court. As one of the counsel of record for the petitioner here, Waterman Steamship Corporation, we feel that we have a case with a very limited yet clear issue and result. We ought to emphasize the issue because if the issue is kept in proper perspective, we believe then that the result will fall as contended by the petitioner. This is a tax case and we maintain that it concerns the application of the usual rules on the Internal Revenue Code and the 1939 code is the one that controls this case by determining the cost or the tax basis of property, the original price of which property was adjusted downward in pursuant to a statute passed by Congress, which had a limited purpose and which did not have anything in the statute specifying the tax effect which is the issue before this Court. It is not concerned with a tax statute per se, but rather with a general statute with rather limited applications, but with no specified tax effects. However, like any other general statute, it may have tax effects and did have tax effects, but again, it's concerned as we see it, not having specific or specified tax effects in the statute that it is then to be determined and controlled by the usual rules of determining cost under the 1939 code. We do not think that it is concerned with statutory construction. We think the statute is rather clear and explicit. It does not, we think, involve or need a study of the legislative history or legislative environment again because of the face of the statute the meaning and effect is clear. There are two statutes involved in general. One, the Merchant Ship Sales Act of 1946 which was enacted or came into effect on March 8, 1946, after a study over about a 2-year period in Congress. The statute in general related to the disposition after the war, of the vessels that had been constructed and most of them owned by the government during the war. Now a subsidiary question arose and that was, what would be done to those persons or those corporations that had purchased vessels during the war at the war time cost and that these vessels that were going to be sold after the war were going to be sold at less than war time cost, what adjustment would be made to those individuals who had purchased during the war at a higher price?
Earl Warren: To accomplish what purpose?
John W. McConnell, Jr.: To accomplish the purpose Your Honor was to get private shipping or to get shipping back into the private industry in a sense that the conclusion of war most of it would have been owned and in the hands of the government. Now the question was, what would be the price at which these vessels would be sold to any prospective purchaser? Keeping in mind in our case Your Honor, Waterman had purchased 18 of these vessels from the Government during the war and purchased them at their cost during the war.
Earl Warren: Yes.
John W. McConnell, Jr.: After the war, the so-called statutory sales price as set out in the act, would be a lower price than the cost of construction during the war. Now --
Earl Warren: But was it -- my point was this, was it to equate the price of those ships that were purchased during the war with those that were purchased after wards?
John W. McConnell, Jr.: It was taken to consideration, Your Honor, the fact that the ones purchased in the war had been purchased at a higher price.
Earl Warren: Yes.
John W. McConnell, Jr.: Now, it did not specify that it would be changed, adjusted to the price at which they would be sold after the war, but rather the statute set out in one section on the Section 9 which pertain to prior sales, section 9B set out the formula to be followed in adjusting the price of those purchased previously during war time. Now, we say here that the statute is clear. I don't think there's any arguing with the Government as to how to apply. The issue facing the Court here is the effect of that adjustment provided under the statute on the cost or tax basis of these vessels whose prices were adjusted down.
Earl Warren: But does the question of whether the price of these ships that were purchased during the war and those after the war were the same after the formula was applied or not?
John W. McConnell, Jr.: We maintain that they're not the same Your Honor.
Earl Warren: They're not the same?
John W. McConnell, Jr.: That's right.
Earl Warren: Alright.
John W. McConnell, Jr.: We can show that and we feel that that's the heart of this issue, is that we can show that under the normal code rules, the basis of property for depreciation purpose, and that's the question here, is the cost of that property to the taxpayer, the taxpayer's economic investment. Now, that's the normal code rule. Now, there's nothing specific in the statute that says that that normal code rule will not apply here. There's nothing specific in the statute that says, the price after the adjustment is the statutory sales price. The statute simply sets out a formula for determining an adjustment in price. There's no argument about this adjustment. Now, we say that thereafter it's a simple matter of mathematics. It was stipulated here and agreed what the basis of the property was prior to the adjustment. It is stipulated and agreed here what the adjustment was. It's stipulated and agreed here what is the basis after the judgment except on the tax basis. Now, we say though applying the normal 1939 Internal Revenue Code Rule that you will come up here with a basis of approximately $26 million as contended by petitioner as against the approximately $17 to $18 million contended by the Government.
Earl Warren: Then we can approach the case as far you're concerned on the basis that the relative cost of the ships that were purchased during the war and those that were purchased after wards is immaterial?
John W. McConnell, Jr.: We -- that's right sir. We maintain that the statute does not provide though the prices of the vessels purchased during the war and whose prices are adjusted are adjusted to the statutory sales price, that's correct sir. Our contention is they are not adjusted to the statutory sales price.
Byron R. White: Mr. McConnell, do you agree that this transaction has to be unwind?
John W. McConnell, Jr.: No, sir. We do not believe that this is an unwinding transaction. We believe that's an adjustment transaction that an unwinding --
Byron R. White: How much depreciation did you take on all -- the total depreciation that you take on these 18 vessels up until the time of the price adjusted? It is about $10 million or $11 million somewhere in --
John W. McConnell, Jr.: I think the figures that were quoted in the Government's brief are correct because they're taken except for the final from the record here which indicated some $11 million at one time. That -- that we do not contend that we had not taken that amount of appreciation prior to the adjustment. However, we say this that the adjustment under 9(b) is one adjustment.
Byron R. White: Well, do you think you should have gotten the income taxes back that you paid before this, before the adjustment or not?
John W. McConnell, Jr.: We don't think that we got them back Your Honor.
Byron R. White: Well, do you think you should have?
John W. McConnell, Jr.: Well, we think this that we had to follow the conditions as outlined in the act in order to get the adjustment --
Byron R. White: Which requires you to get them back, get the tax back, isn't it?
John W. McConnell, Jr.: No, sir. We do not interpret Your Honor that it requires us to get the tax back or that we got the tax back. It is simply --
Byron R. White: Do you think it requires you to get the return of charter hire?
John W. McConnell, Jr.: No, sir. We don't think that.
Byron R. White: Do you think it requires you to be paid for your -- what you would have earned on all these vessels if you --
John W. McConnell, Jr.: That is a part of the credits and --
Byron R. White: You don't think you are entitled any credits before the Act went into effect?
John W. McConnell, Jr.: Entitled any credits before that or you mean for transaction?
Byron R. White: Up to the period of the time you bought the vessels up to the price adjustment statute, are you entitled to any credits at all --?
John W. McConnell, Jr.: Yes, sir. We entitled to all the credits that the Section 9(b) gives us.
Byron R. White: What are they?
John W. McConnell, Jr.: Alright. The first credit is the one for the excess cash payments over 25% that's sub paragraph one. Another credit is for 3 1/2% interests on that excess cash payments from the date of payments.
Byron R. White: Why is that Mr. McConnell?
John W. McConnell, Jr.: That's the statutory formula which the --
Byron R. White: Yeah, but why is it? Why -- why do you suppose that is the formula?
John W. McConnell, Jr.: Well, I think now undoubtedly Mr. Justice White that the original legislation intended that this go down to the statutory sales price. In fact, the Senate Bill, the amendment of this would have adjusted this down and any taxpayer taken an adjustment would have received the difference between the purchase price before the Act and the statutory sales price. He would have gotten that completely without giving any credits, tax or otherwise, although he would have it returned to the government everything over 15% of the statutory sales price as far as charter had, but that was not the act that was passed. Now, this was amended and they set up this morning.
Byron R. White: So the Act -- the Act expressly requires that the party goes through some adjustment procedures with regard to the period prior to the price of yesterday?
John W. McConnell, Jr.: One adjustment Your Honor, it requires an adjustment in price, that's what all of the Section 9 (b) speaks off is an adjustment in price. Now, we say that any sale or any purchase, who purchases property by certain price, he gets an adjustment. Now, that adjustment maybe based on a thousand different computations, but he ends up with an adjustment in price which he applies to the original price and then he gets his adjusted price. Now that's what we say here. You start out with the original price. You have an adjustment in price.
Byron R. White: What's the statutory, is the statutory sales price under the new Act you were supposed to pay something like how much?
John W. McConnell, Jr.: Well, these vessels statutory sales price of the 18 vessels would have been slightly less than $18 million.
Byron R. White: $18 million.
John W. McConnell, Jr.: Yes.
Byron R. White: That's a statutory price.
John W. McConnell, Jr.: That's a statutory price.
Byron R. White: And prior to the time of the establishment of this price you would have taken approximately $11 million worth of depreciation?
John W. McConnell, Jr.: That's right sir. We had also paid approximately $16 million in cash and still that -- oh, after the adjustment.
Byron R. White: Just a minute, you say you took $11 million for depreciation prior to the establishment of this price and you want your basis to remain at 26, so that in the long run you want to say that you could take $26 million plus $11, the $38 million in depreciation against vessels which cost you $18 million.
John W. McConnell, Jr.: Your Honor, we think that --
Byron R. White: Is that right or not?
John W. McConnell, Jr.: Well of course, the $11 million is actual depreciation as I recall and the $26 million would still be whatever the tax rate of that amount.
Byron R. White: That's right, well I know, but you still want to be able to take $26 million of depreciation, that's what this fight is all about.
John W. McConnell, Jr.: We would take depreciation on a basis after the adjustment of $26 million, that's right.
Byron R. White: And you've already had 11.
John W. McConnell, Jr.: We had taken approximately 11 prior to the adjustment that's right, but as -- along that line, I would like to emphasize this fact as to what we think the cost of these vessels and what we think the record indicates clearly is the cost of these vessels to this tax player and the economic investment of this taxpayer in these vessels. Now, prior to the enactment of the act, prior to the adjustment, it is stipulated that the basis of these 18 vessels, the cost to this taxpayer was slightly in excess of $47 million dollars and I believe that there has been distributed to Your Honors two computations here, single sheets, asked the clerk to, to indicating this breakdown. First, it shows that total cash payment and the trade in allowances on these 18 vessels up to the day before the Act, the day preceding that. Now, the adjustment was made many years later, but as other day to the Act. This taxpayer had paid in cash or trade in for these vessels $16,411,000. Now, the remaining mortgage and indebtedness on date, this is before the adjustment, was $30,737,000. Now, we applied to the commissioner for an adjustment in price, an adjustment in price on 18 vessels. Now, the adjustment was branded under Section 9 (b), an adjustment price. This adjustment reduced that mortgage indebtedness from $30 million to $10 million, a $20 million reduction and price all in the mortgage indebtedness. Now we say that you subtract that $20 million from the $47 million basis prior to the adjustment and the cost of this taxpayer is the $16 million odd paid prior to the adjustment, the $10 million odd mortgage indebtedness remaining after the adjustment or as I said, taking the original cost subtracting the adjustment, leaves a basis of $26 million. Now we say that that follows not because we necessarily want it that way, but because that's the way the statute prescribes, that's all the statute prescribes. The statute did not prescribe that the basis would be the statutory sales price. The statute simply prescribes an adjustment in price. This taxpayer received that adjustment. We maintain then that you look back to the usual 1939 Code Provisions to then see what is the cost of the property.
Byron R. White: Arriving after the adjustment, however, would you apply this $20,468 million in arriving at that adjustment, that's the result -- that's the net result of a computation, isn't it?
John W. McConnell, Jr.: The formula has several computations.
Byron R. White: Do you take exception to the figures on page 7 of the Government's brief.
John W. McConnell, Jr.: Very much so. We think that there is no basis in the language or the structure.
Byron R. White: Well, how do you arrive at the $20,468 million? You just don't pick it out of the air, you must calculate it somehow?
John W. McConnell, Jr.: Yes, sir. It's calculated.
Byron R. White: Where is that calculation in your brief?
John W. McConnell, Jr.: In our brief -- it's not in the brief, it's in the appendices and in records though Your Honor.
Byron R. White: Well where?
John W. McConnell, Jr.: If Your Honor will turn in the appendices to appendix E, the computations that are there and if you look on E2 under number 6, total mortgage adjustments which is taken as indicated there from the page 48 of the record, which is a stipulation between the parties.
Byron R. White: Yes, but what I want to know is that adjustment in mortgage indebtedness that 24.68, where does that 24.68 come from?
John W. McConnell, Jr.: Alright, if you'll look there Your Honor at E2 at Computation 6, it gives a balance of the original mortgage indebtedness as of March 7, 1946, that's the day before the act. This is stipulated in the record page 41.
Byron R. White: We understand that, but now how about -- where do you get the 17 up there?
John W. McConnell, Jr.: Alright sir. That is taken right out of sub paragraph 2 of the act on the adjustment which reads as follows. The applicant's indebtedness under any mortgage of the United States with respect to the vessel shall be adjusted. And the next sub paragraph says, the adjusted mortgage indebtedness shall be an amount equal to the excess of the statutory sales price of the vessel as of the day of enactment of this act over the sum of the cash payment retained by the United States under paragraph one. Now paragraph one says, you'll pay 25% statutory sales price. So if you didn't have any trade in, the mortgage would be 75%. Now if you -- then we get to $17 million by the fact of looking at what the -- let me just turn to the record here, Justice White if you'll turn to page 68 in the record. This is a schedule which was attached to the agreement between the government and the petitioner. Actually if you look at page 67 that's a double page there, if you'll notice at the top, original purchase price, line one last column is total all vessels, it has $49 million. Then the next line, less there is no trade in allowance, then, the next line reads less balance of original mortgages up to 03/08/46, that's the day before that shows that the mortgage balance on that day was $30 million. Now, when you take -- then next, you notice, it says less 25% of adjusted statutory sales price, that's the cash you're supposed to pay, then that next line three leaves the excess cash payments. Now if you turn over on 68, it gives the mortgage adjustment, starting with line 13 at the top. Adjusted statutory sales price so forth less 25, then line 16 adjusted mortgages as of 03/08/46. Then line 20 says reduction in mortgage indebtedness $20 million. Now that's where we get, if you take the $13 million adjusted mortgage in line 16, subtract it from your mortgage indebtedness over on the third line on the preceding page of $30 million, that's where you get to $17 million and it's in accordance with a statutory point.
Byron R. White: Well, this involves then on page 67, the United States returning income taxes and the applicants are the returning charter hire. This is all figured in?
John W. McConnell, Jr.: We do not -- there's no return of charter hire, Your Honor, it's a credit.
Byron R. White: I understand that, it's an offset.
John W. McConnell, Jr.: It's a credit. That's the language of the statute.
Byron R. White: That's right.
John W. McConnell, Jr.: And that's what in other words in Section 9 (b) you have several credits which must be netted together. Now that's a reason we disagree with --
Byron R. White: I understand that and you think that the United States in the whole process shouldn't demand back the new depreciation [Inaudible]
John W. McConnell, Jr.: Mr. Justice White, we stand that on this premise that the statute allowed us these credits and Section 9(c)(1), which has limited effect said that you would take that adjustment from the original purchase price and the result would be the adjusted purchase price and we say the tax basis. Now, we're not arguing with the philosophy of the act. We just say we take the act as passed by Congress and you apply the act, and we don't' argue about the adjustment between us. It's simply on the effect and we say that the act does not specify the basics. And therefore, you go to the 1939 Code Provision and there's a sheet before your justices will indicate, this taxpayer paid $26 million for these vessels after the adjustment and this taxpayer is seeking no more than every other taxpayer and that is to be allowed to depreciate those vessels on the remaining life on that cost and that economic investment.
Arthur J. Goldberg: [Inaudible]
John W. McConnell, Jr.: Well, as we pointed out, Your Honor, if they give them an adjustment that's up to Congress. Congress gave us the adjustment and we say that Congress left to the normal rule how the basis would be computing and the normal rule say that it's $26 million.
Arthur J. Goldberg: [Inaudible]
John W. McConnell, Jr.: Well, we pointed out in one of the footnotes, a case similar to that, although actually as it turned out that they didn't adjust it, they wrote a new contract. Now, we say that then the net effect of that adjustment would be determined under the normal rules and that would be the basis. In other words, if you bought it for $100 and it gave a price adjustment of $20 and the new cost would be $80. And it wouldn't matter, and this is what we think is a key to Mr. Justice White, it wouldn't matter, how you arrived with the $20. You might say now, you earned income of $10, you paid taxes of $2, you had a -- you paid property taxes or something else, or you say I will give you $1 for every child you have. That's part of the computation and you end up with $20. It doesn't matter what the factor that you use to measure the adjustment. The key thing is the amount of adjustment you apply that to the price and the result is your basis, regardless of how it was computed. Now that's our contingent. We say you take Section 9 (b) which has a point made up of several factors of several computations, but it doesn't' matter what they are measured by. You take them and as a result of the adjustment, one single adjustment. You simply either subtract that from the original purchase price to give you a new price or you can do it in a reverse as we we did on this sheet show how much had been paid before, what was the adjusted mortgage indebtedness, the sum of the two would be the basis of property for depreciation. Now, we do not think that it has any unwinding involved, that was a statute that was rejected. An adjustments is not an unwinding. An adjustment confirms the original purchase. In fact in the contract itself, this is recognized and in the regulations issued by maritime that they would have to execute an addendum to the original contracts of purchase. This adjustment was an addendum to the original contracts of purchase and as we point out in our brief, the original contracts of purchase said that we would have the benefit of any legislation that might be passed after the purchase that allowed the same vessels to be sold as subsequent purchases at lower prices. Now, that was an original contract, but we say that there is not unwinding and we say particular that the table as contained in the brief of the government on page 7 has no basis whatsoever in the statute. There's no place to determining a gross price adjustment and as we point out in our reply brief, if they want to use the term gross price adjustment as they've done on line 3 on page 7, then they should call the last line the net price adjustment. That's exactly the -- that's the price adjustment that we receive as indicated in their own schedule one $20 million. That's exactly the price adjustment that we receive, you subtract that from the original price and that gives you the adjusted purchase price and the basis here for depreciation purposes thereafter. No new mortgages were executed. No new notes were executed. The same mortgages were simply adjusted. The same notes were simply adjusted as the payment in the future, so that there is not either a rescission nor is there an unwinding. Now, we also maintain that Section and I might touch on it here, the Section 9 (c) (1) this goes back to Justice White's question, that 9 (c) (1) explicitly provides that this adjustment will be applied against the original purchase price. This is in the condition section. The credits that I was discussing with Mr. Justice White are in the adjustment Section, but the condition Section says that you will for federal tax purposes treat as if certain things had not been done. That carried us back to the original purchase price. You then apply the adjustment on the 9 (b) and you come up with a net result of approximately $26 million. The government would contend that the statute says you must come down to the statutory sales price, but that is not in the statute. The statute simply contains a formula. The result of which is one adjustment in price, and the result of that to this taxpayer is work it either way. Original cost $47 million adjustment and mortgage indebtedness or in price $20 million a little more, the result a basis or a cost or an economic investment of $26 million or I will look at the other way. This taxpayer had paid $16 million the day before this act was passed. The statutory sales price was only $17 million. Now, it's still old $10 million more after the adjustment. Yet the government says you're going to have a basis slightly in excess of the cash already paid without looking at the remaining obligation. So that we say that anyway you look at it on dollars and cents as Judge Patton said in the Court of Claims in Sekone case, Government is saying it's not a dollars and cents, real actual economic cost, but a hypothetical. And we say that the statute does not require that and that the normal code rule justified the basis in fact is the only result of the basis as contended by the taxpayer. Your Honor, there's nothing in the legislative history at all on tax basis, nothing on tax basis and I don't think the government haven't come up with any, we haven't found any. We think too that pulling out a context just one phrase in 9(b) about treating the vessel as if it was sold on the date of the enactment of the act and not before. The government read that in allowing them to do anything to equalize the price depreciation of what not. We simply say no. The formula was Congress' idea of exactly how that was being done by treating the vessel as if it was sold on the date of enactment act and not before and the formula carried that out and it's not for the government now to try to change the formula to come back to what they call the Congressional intent or legislative intent. But to answer your question Mr. Justice Harlan on this age Mr. Justice Harlan, we do not think there's anything in the legislative history on tax basis, but if there's a resort to legislative history and we do not think it's necessary. We think that statute is clear and unambiguous. There's no necessity to legislative history, but if it is, it supports petitioner, both legislative history prior to that and the legislative history subsequent to the act supports the position of the petitioner here. And I would like to reserve the remaining time if I may unless there's some other questions at this time for rebuttal after the government's argument. Thank you.
Earl Warren: Mr. Bender.
Paul Bender: Mr. Chief Justice May it Please the Court. In the course of my argument, I'm inescapably going to have to refer the figures. All of them I think are set out on the chart on page 7 of the Government's brief except for the depreciation figure which Mr. Justice White mentioned in his question earlier. I think it will be easier to follow the argument if you have those figures before you. I'll try to make them as simple as possible and round them out. I may have to give some other examples involving different figures in an attempt to make it simple. I shall do my best. Well, let me start this way in the few minutes remaining, I would like to try to demonstrate to you why the petitioner's argument as he stated today is absolutely untenable and I would like to do so this way. Referring again to the chart on page 7, petitioner argues and he said it several times in the brief and he says it in his argument that the statute should be read as having no tax effect. Any mention of taxes in the statute just for the purposes of computing the adjustment, but it has no tax effects and he says that no taxes were returned to him as a consequence of the statute. Well, we think that's wrong and I shall try to demonstrate in the bulk of my argument tomorrow, why the statute does have tax effects and why the fact that the statute has tax effects leads you to the government's results? Well, I should like to take the case first on the assumption that he's right and that the statute has no tax effects. Listen to what his argument is. He said he paid and he did pay about $47 million with each ships, that's on line 1 on page 7. He got back in one way or another, either by cash credit or reduction of his mortgage about $20 million, $20,400,000, that's the net payment on line 10 on the brief. He paid $47 million. He says he got back $20 million, he says his economic investment, then his $26 million, that's the last line of the sheet that he gives you here, remember your graph sheet. Let's assume that's true. His economic investment would be $26 million, but he also concedes that he has already taken depreciation on these ships of about $11 million. He's deducted $11 million from his income for income tax purposes in calculating his taxable income, yes.
William J. Brennan, Jr.: How much [Inaudible]
Paul Bender: Well, we say he is allowed for future depreciation of about $17 million, which if you add it to the $11 million would mean that he'd get a total depreciation of $26 million, which he says is just as economic investments. $11 plus oh, excuse me about 28, right, which would be more. We are not being that general because I'm simply -- I'm trying to follow it on his argument. I'm trying to demonstrate why his is wrong. We don't agree with --
William J. Brennan, Jr.: I don't [Inaudible]
Paul Bender: In the future, about $17 million.
William J. Brennan, Jr.: [Inaudible]
Paul Bender: Because the $11 million has been disallowed Mr. Justice Brennan and his taxes for all those years have been recomputed, so that $11 million dollars was not allowable, that's in Section --
William J. Brennan, Jr.: [Inaudible]
Paul Bender: Well, he once got it, but it was all taken away from him. It can actually --
Byron R. White: [Inaudible] why did you take it back?
Paul Bender: Exactly, but he said that that never happens. So, what I'm trying to demonstrate is why his is absolutely wrong and why his gives him a terribly unjustifiable tax benefit. Coming back to what I said, he says his economic investment is $26 million, but he says his basis now is $26 million, which would mean that in the future he can depreciate $26 million. And he also admits that he's a ready depreciated $11 million and he says that depreciation has never been taken away. That would mean that in the future he gets $26 million depreciation, he has already had $11 million depreciation, he gets $37 million -- $37 million depreciation on a total economic investment by his own admission of $26 million, now that can't be.
William J. Brennan, Jr.: How much do you think [Inaudible]
Paul Bender: In the future?
William J. Brennan, Jr.: Aggregate.
Paul Bender: Aggregate depreciation.
William J. Brennan, Jr.: [Inaudible]
Paul Bender: Well, he's only entitled to aggregate depreciation after you recompute his past taxes, that's about $17 million. The price he would have paid had he bought the ship under the act, right.
Byron R. White: [Inaudible] then the problem isn't about the $26 million that this economic investment. The problem is I suppose that if he has an economic investment of $26 million, how can you say he is entitled to $26 million depreciation? Isn't the fact however, that reason that he only get $17 million from now on in your view rather than $26 million if you thought of the only way you can get the depreciation back on your inner -- on your mutual debits and credits is by doing it this way. I mean, this is the only way the depreciation is returned to you is he took?
Paul Bender: Right. The way he has -- the fallacy of what he does is that he has made all his computations on the basis that his basis was at the time of the act $47 million, the amount that he paid for the ships. That isn't true because at that time he has taken $11 million in depreciation and his adjustment basis was not $47 million, it was $47 million minus depreciation he took. Now the statute as we point out in the brief and as I shall try to explain more fully tomorrow, the statute in the course of the adjustments makes it quite explicit that he must sign an agreement agreeing to certain tax effects, this is in 9(c)(1) of the statute, One of these tax effects is the dis-allowance of all past depreciation reductions. Now when we disallow those deductions and recompute his taxes, as though they hadn't been allowable, that escalates his basis back up to the amount it was before he took it, that's why you start [Inaudible] then we say you take from the basis the amount of the purchase price differential which is line 3 on page 7, $29 million and you come out with -- and they come out and I would like to emphasize this now, you come out with under our submission, the basis which the taxpayer would have had, had he purchased the ship under the act. Now, there's a very simple way to decide this despite concentrating on that point. The act quite clearly says in the beginning of Section 9, which is the only section which is intimately involved with this case, that the adjustment -- this is on page 11 of our brief, the adjustment shall be made as here and after provided by treating the vessel as if it were being sold to the applicant on the date of the enactment of this Act and not before that time. Now if you apply that alone, you would come out with a government's answer. If you treat this vessel and if it would be sold to the applicant on the date of the enactment to the act and not before, this basis would be the basis he would have in the vessel if he bought the vessel on the date of enactment and the enactment not before, and that basis would have to be the statutory sales rate minus certain minor adjustments. For example, for the trading of ships which aren't important.
Arthur J. Goldberg: $30 million [Inaudible]
Paul Bender: Approximately sir.
William J. Brennan, Jr.: You start all over after washing it all out on previous computations to start depreciation with now the statutory [Inaudible], is that it?
Paul Bender: Right, that's the only depreciation he gets Mr. Justice Brennan, because the past depreciation has been wiped out.
William J. Brennan, Jr.: And you can't — and somewhere I don't see it but I suppose there is somewhere between your items 4 and 9 I guess, is that where you find [Inaudible]
Paul Bender: 4 and 9 of where?
William J. Brennan, Jr.: There was [Inaudible] in line 1 and 46.
Paul Bender: What do you refer to? The depreciation is washed out by the application of Section 9(c)(1), 9(c)(1) is on 14 and it says in so many words, depreciation and amortization allowed or allowable up to the date of the enactment of this act for Federal tax purposes shall be treated as not having been allowable, that takes care of that and in return for that, his taxes are recomputed and so he hasn't taken it.
Byron R. White: We're on page 7 -- where on page 7 in the unwinding operations as the government takes back depreciation?
Paul Bender: Oh, it's hidden.
Byron R. White: That's it. Isn't it hidden in one?
Paul Bender: No, it's hidden in A, refund of taxes on return sure to hire [Inaudible] less taxes--
Byron R. White: Unless we want the taxes paid.
Paul Bender: Well, you see if you're going to the unwinding operation Mr. Justice White, is to have him return to the United States the $13 million in charter hire and that's line 4.
Byron R. White: I understand that.
Paul Bender: Alright. Now in connection with the return of that, we can't -- and we recompute his taxes for those years as though that amount wasn't an income, that comes 9 (b) (a). Well, we couldn't just do that in enacting the statute because then he might have a loss for that. He would have taken this enormous depreciation. We're going to take a large item out of income, he would have a loss which you could carry over to other years?
Byron R. White: What line is that? Line 8, a brief of the tax if actually paid [Inaudible]
Paul Bender: Well, the refund is the end result of the re-computation. Perhaps the language in that line could be more explicit. What I mean by it now and what I would like you to treat it as meaning is the refund after the re-computation.
Byron R. White: The basis is returned in line 1, otherwise we start with the lower basis?
Paul Bender: Line one is just the original purchase.
Byron R. White: Exactly, but as of the time you started the computation the basis is actually lower than that.
Paul Bender: Yes, that's true.
Byron R. White: And so, you're taking the basis back.
Paul Bender: Right and we take the basis back.
Byron R. White: On line one.
Paul Bender: Wherever you like.
William J. Brennan, Jr.: [Inaudible][Laughter]
Paul Bender: Coming back to the argument, I was making on the basis of the injunction in the act to treat the taxpayer as though he had bought the vessel after the enactment of the act, if you take that literally and if you apply it and if you apply to tax purposes, obviously the basis you would have is the basis you would have had if he bought the ship under the act and the basis would be essentially the statutory sales price. Now that's very important, because if his basis is higher than that in the years after the statute and he has a competitive advantage over people who bought the ships under the act. They would have bought a ship at the statutory price and they would only get depreciation based on the statutory price. Petitioner argues that he bought the ship beforehand would be in the same kind of ship would be entitled to depreciation on a much higher basis, in this case about $9 million higher. That would mean that if he earned a certain amount of gross income each year, he would have a lower amount of taxable income because he takes the larger depreciation and that would mean comparing him with his competitors on the same amount of gross income, he would have larger after tax then which would be an unfair competitive advantage and it's quite clear that the general purpose of the statute is inconsistent with that. The legislative history which we cite and which petitioner relies on, it says over and over again that the purpose is to put him in the same boat as other people who bought these ships. Now under the petitioner's argument, you can't do that. Well, what I would like to argue in a constructive fashion rather than the destructive fashion tomorrow is that petitioner -- the reason why the basis in this case is different from the original purchase price of $47 million minus the net return $20 million, is that it isn't like the case Mr. Justice Goldberg gave during petitioner's argument. If you bought something for $100 and got $20 back ordinarily your basis would be $80, but in that situation no tax effects are connected with the return of the $20. What I should like to demonstrate to you tomorrow is that there's an entirely different result if tax effect, income tax effects are connected with the return of the $20. It's possible if all that $20 for example was taken into income by the buyer that it wouldn't have any effect on this basis. On the other hand, certain income tax deductions are associated whether you would have a different effect. Therefore, our argument our constructive argument rests on the premise if there are taxes effects connected with the statute and that by applying the tax effects, you come out with the statutory sales price. I think it would be better if I start with that tomorrow fresh from our show, if I may, I will stop now.


Warren E. Burger: Mr. Grower, I think you may proceed whenever you are ready.
John Marshall Grower: Mr. Chief Justice, and may it please the Court: Transcontinental Gas Pipe Line Corporation, which I will call Transco, is an interstate pipe line company regulated by the Federal Energy Regulatory Commission. It purchases gas in the States of Mississippi, Louisiana, Texas and off-shore. It transports that gas for resale in markets stretching from Alabama to New York. For many years prior to the spring of 1982, this interstate company, along with many other interstate purchasers, were purchasing gas at a period of time when there was a severe shortage. They were able to take all of the gas that their contract producers could deliver to them. Their contracts provided that they could do so. The contracts did not obligate them to take all of that gas, it only obligated them to take a certain minimum. These long-term contracts were part of the regulatory scheme. These contracts provided for minimum-take obligations and take or pay obligations if those minimum takes were not made. However, in the spring, particularly May of 1982, it became apparent to the gas industry as a whole particularly that there was becoming a surplus of deliverability of gas. There was a loss of market for a number of reasons that I will not take my time here, the drop in the price of oil, surplus oil, for many reasons. But, there was an unprecedented, an unforeseeable loss in the markets for natural gas. That created a problem whereby the interstate pipe line companies, and Transco in this case, could not then purchase all of the gas that was required to be purchased under its contracts.
Byron R. White: In other words, they couldn't sell it.
John Marshall Grower: That is exactly right, Your Honor. They could not sell it.
Byron R. White: They could buy it. They could buy it if they had the money.
John Marshall Grower: The pipe line is not the market. The pipe line is the conduit to the market and if the market can't take it, they can't buy it. It is that simple. Now, when they were unable to buy all of their contracted gas, they had to cease buying gas from owners that they had no obligation to purchase the gas from. Now, these owners in East Morgantown and Greens Creek field areas of Mississippi, Coastal and others, had chosen not to commit their gas to contract. In 1978, '79 and '80, when the long-term contracts in this field were made with Getty, Harkins, Florida Gas, and others by Transco, of course, there was a shortage and these particular producers chose not to commit their gas to contract. All indications were that for the foreseeable future prices were going to continue increasing, oil prices were going up, the market was going to expand, everything look rosy. There was no need to commit their gas they thought. I assume they thought that. They didn't. So, in essence, when the axe dropped and they were no longer able to sell their gas to Transco at the high prices being received by the contract producers under those 1979 and '80 contracts, they sought relief from the Mississippi Oil & Gas Board pursuant to Rule 48 of the Board which required the ratable taking of gas from the State of Mississippi. It was a state-wide rule. The Board enforced that rule. The Board required Transco to take the non-contract gas and to take it without discrimination. The impact, the consequence of that order was to displace contract purchasers, because, as we said in the beginning, the market is limited, they cannot take any more than the market could take, so if they are required to take non-contract gas, they have got to cut back on taking some contract gas, the effect of the order.
Sandra Day O'Connor: What is the effect of that state order, because I am not sure I understand it. Did it require Transco to take more gas or simply to spread the payments around for the gas that it did take?
John Marshall Grower: The effect of the order, Justice O'Connor, was to increase... take or pay payment for one thing. I will explain that. In that the contracts required a certain minimum take.
Sandra Day O'Connor: Well, if you could answer my question it would help me understand your response. Did the state order require Transco to take more gas or simply to spread the payments out to a broader group of people for the gas it did take?
John Marshall Grower: The effect of it was to ultimately require the taking of more gas. That was the practical effect. Because of the take or pay requirement... this is complicated and difficult for me to explain. I know it is not difficult for you to understand, but these contracts require take or pay which in essence the cost of making take or pay payments are a flow through to the consumer. It increases the cost. But, that take or pay may be recouped in a five-year period. And, if that gas can be recouped, it is only recouped out of the excess above the minimum take. So, we are either going to pay for the gas twice if we can't recoup it or when we are catching up and producing above the minimum we are going to have to produce more gas from that contract while at the same time producing the non-contract gas that the state requires us to take.
Sandra Day O'Connor: Well, right now, I suppose, the court below remanded for a determination of what price ultimately would have to be paid for these other pool owners, so we don't even know what it would cost ultimately, I gather.
John Marshall Grower: Your Honor, we know what it would cost from this standpoint. The take or pay payments under the high-cost contracts... Those contracts at this time were $7.90. So, when you have to pay for gas you can't take at $7.90, that increased cost increases substantially.
Sandra Day O'Connor: Well, maybe I misunderstand the order, but I thought that to the extent that the state interfered with your arrangement, it was on behalf of the other owners of the common pool and that the amount to be paid then was not the amount to be paid Getty under the contract--
John Marshall Grower: That is right, Your Honor.
Sandra Day O'Connor: --but some reasonable rate based on present or then current market.
John Marshall Grower: That is right, Your Honor. But, Transco did not want to take this gas at all. Its market could not take this gas without increasing its obligations under its contract. That is the main problem.
William H. Rehnquist: Mr. Grower, what is a take or pay?
John Marshall Grower: Take or pay obligation is... For instance, in these contracts that were made after the NGPA when there was a severe shortage in the pipe lines needed gas supply, under their contract made in that context, they were required to purchase from 85 to 90 percent of the deliverability of those wells and if they did not purchase 85 or 90 percent, whichever the figure was in the contract, they would then have to pay... in a particular year, they would then have to pay for the gas not taken in addition to the gas taken. Now, that take or pay gas, it is paid for, then may be recouped within the next five years, but it can only be recouped out of the 10 or 15 percent excess above the 85 or 90 percent that is available to recoupment, because you still have the minimum requirement to take 90 percent.
William H. Rehnquist: So, it can be recouped only by taking more than 85 percent?
John Marshall Grower: Only by taking more than 85 percent. Now, the problem now is that under today's market conditions, where the market cannot take that gas, they are incurring additional take or pay problems that are so severe that there is no way that they can catch up out of that 10 or 15 percent.
Sandra Day O'Connor: Well, what are today's market conditions compared to what they were when this problem arose?
John Marshall Grower: Well, it has gotten worse, it has gotten worse. The take or pay problems today are much greater than they were then. They were just starting then. Today... In this case, we are talking about $50 million to $70 million incurred at that time, a short period of time. Today it is in the billions.
Sandra Day O'Connor: Incurred. What do you mean? I don't even know what you are talking about when you say $50 million incurred.
John Marshall Grower: All right. The pipe lines are incurring these take or pay obligations to producers for gas it cannot take.
Speaker: I see.
John Marshall Grower: Because of the unprecedented and unforeseeable drop in the market.
Sandra Day O'Connor: Well, it is a drop in demand for the gas?
John Marshall Grower: That is correct. A serious drop in demand, I might say. The problem is exacerbated by the fact that the more the market drops under the regulatory scheme and the take or pay obligation is incurred and if those costs are added, you are increasing the cost, you are losing more market and you just have the--
Byron R. White: Well, I guess you are going to tell us probably after lunch what is wrong with the order. The order may hurt you, but are you going to tell us why it is beyond the state's power?
John Marshall Grower: --Yes, sir, I hope to and I think the main trouble with the order is--
Warren E. Burger: We will take that up right after lunch.
John Marshall Grower: --Thank you.
Warren E. Burger: Mr. Grower, you may resume your argument.
John Marshall Grower: Mr. Chief Justice, and may it please the Court: The order in this case by the State Oil and Gas Board of Mississippi requiring the purchase of non-contract gas at any cost directly impacts on the cost of service of the pipe line. Also, the order which requires additional take or pay increases the cost of the gas to the consumer which is a direct impact on the cost of service also. These matters have been condemned by this Court, particularly in Northern Natural versus the State Corporation Commission of Kansas in 1963. It is almost an identical case. The question today is--
William H. Rehnquist: Wasn't that a price regulation in Northern Natural?
John Marshall Grower: --No, sir.
William H. Rehnquist: What was the regulation?
John Marshall Grower: It was a ratable take order exactly like this one, Northern Natural versus State Corporation Commission of Kansas.
William H. Rehnquist: Well, the Supreme Court of Mississippi thought it was different though.
John Marshall Grower: The difference, Your Honor, today is and the issue raised today is whether or not the Natural Gas Policy Act has changed the jurisdiction so that the state may now enter this field and regulate the interstate pipe line.
Byron R. White: Northern Natural said that that regulation was bad because what?
John Marshall Grower: Well, it interfered with the cost of service of the pipe line.
Byron R. White: And, therefore, what?
John Marshall Grower: It pre-empted the--
Byron R. White: All right. That is the bottom line, isn't it?
John Marshall Grower: --Right. The pervasive and comprehensive regulation under the Natural Gas Act and the Natural Gas Policy Act today simply sweeps the field clean. There is no room left for state regulations. The Natural Gas Policy Act didn't change that.
Sandra Day O'Connor: Well, didn't the Natural Gas Policy Act deregulate for this type of gas that is involved here?
John Marshall Grower: Justice O'Connor, it deregulated--
Sandra Day O'Connor: What action specifically could the Federal Energy Regulatory Commission take that would conflict with the state's order here?
John Marshall Grower: --Well, in the first place, it conflicts with... the state order here conflicts with the jurisdiction of the Federal Energy Regulatory Commission to regulate the cost structures of the pipe line company which--
Sandra Day O'Connor: Well, this particular gas was taken out of their regulatory jurisdiction, wasn't it?
John Marshall Grower: --The price of the gas at the well head was deregulated, but my point, Your Honor, is that any price that the company is required to purchase this gas affects its cost structures which has been held by this Court on several occasions, and recently in Maryland versus Louisiana and Exxon versus Eagerton, that that regulation of the cost structures of the interstate pipe line is the exclusive domain of the FERC.
Sandra Day O'Connor: But, if you are right about that, I would assume that the state's order, even just as applied to intrastate gas purchases, would have the same kind of effect and subject the state to the same argument.
John Marshall Grower: Well, intrastate gas is not sold in interstate commerce. It does not impact on the interstate price.
Sandra Day O'Connor: Well, we are talking about the pre-emption argument, I guess.
John Marshall Grower: Well, the NGPA has given the states the right to establish lesser prices for intrastate gas than the maximum price allowed by the NGA. That is the only jurisdiction that has been given and very well state regulations of intrastate that would conflict with that might be pre-empted. Of course, that is not the issue here, if the Court please, and I have not looked at that point.
John Paul Stevens: May I ask one question, Mr. Grower. You have talked a great deal about the take or pay contract. Had your client not entered in any take or pay contract, but had foreseen the economic situation that later developed, would you still contend that the Missouri rule was unconstitutional?
John Marshall Grower: The-- --Mississippi rule, I am sorry. Mississippi rule. Your Honor, yes, because, as I say, the regulation which requires the company to purchase non-contract gas at any cost impacts directly on the cost of service of this pipe line. The price of the gas is a direct cost of service that flows through subject to the FERC regulations.
John Paul Stevens: So that then the discussion of the take or pay contract is not really critical to your constitutional argument?
John Marshall Grower: It is not critical, but it is the point that was the focus in the Northern Natural case, because in the Northern Natural case take or pay was indicated to be one of the problems of conflict that could occur where it increased the price to the consumer and affected the cost of service. I would like to take some additional time for rebuttal, if the Court please.
Warren E. Burger: Very well. Mr. Feit?
Jerome M. Feit: Mr. Chief Justice, and may it please the Court: This case very squarely raises the pre-emption question as the continuing vitality of Northern Natural. The facts, as Mr. Grower stated, are essentially the same statutory scheme, either comply with the state ratable take order and take more gas than it was able to need for its customers or take less gas under its take or pay provisions and incur costs with the ultimate result being, as Northern Natural said, that that could seriously impair the Federal Commission's authority to regulate the intricate relationship between the purchasers' cost structures and eventual cost to wholesale customers. The question, and the state courts quite clearly recognized, that the decision would go in favor of Transco in that case if Northern Natural was still good law. The divergence, the difference was that Northern Natural, the courts found, was not good law by virtue of their reading of the Natural Gas Policy Act and the Natural Gas Act. Our reading, on the contrary, is totally to the opposite. We believe that both under the Natural Gas Policy Act and the Natural Gas Act that the Northern Natural case has continuing validity. Let me turn to the Natural Gas Policy Act. There are two kinds of things under that statute which I think indicate the continuing nature of non-state intervention and effective federal control. As you know, this was... The Act was to set up a nation-wide market in gas because of the problems that had arisen. And, what Congress did under the Natural Gas Policy Act in Title I was statutorily fix the prices, statutorily fix... detail the prices for gas. FERC no longer had any authority under that to fix those prices. But, in addition to that kind of scheme... In addition to that, FERC did have specific authority under Title VI of the Natural Gas Policy Act to prohibit the pass through of such gas costs which is found to be the product of fraud, abuse, or similar grounds. So, what you had was just the opposite of a commission of state intervention. You had a free market under Title I which FERC could not interfere with as you pointed out in the Mid-Louisiana opinion. And, on the other hand, you had FERC's control to assure that gas costs... that pricing practices of pipe lines are not fraud, abusive, or invalid on similar grounds from passing through. That is the Natural--
Sandra Day O'Connor: Would you fit this under the fraud or abuse section?
Jerome M. Feit: --I don't know if... My point is the power exists. I don't know whether in fact this amounts to fraud or abuse or similar grounds. It seems to me--
Sandra Day O'Connor: The power only exists if it does amount to that.
Jerome M. Feit: --Well, the power to impose denial to pass through exists.
Speaker: Right.
Jerome M. Feit: I might add that this very case is presently pending not under the Natural Gas Policy Act, but my next point, under the Natural Gas Act prudent standing in which the staff of FERC is arguing to the Commission that the fact that Transco complied with the state order, complied with the state order, in fact, made those purchasing practices subject to Natural Gas Act prudence regulation. And, this, I think, pinpoints the concern in Maryland v. Louisiana. The concern is that we regulate interstate pipe lines under the Natural Gas Act and in Mid-Louisiana it was made crystal clear that while FERC has no continuing regulatory control on the prices under Title I, it has continuing control, as it always had, under the relationship of the pipe line to its downstream customers. So that rather than Northern Natural in our view losing vitality by virtue of the Natural Gas Policy Act, the Natural Gas Policy Act has established a free market, no state interference with whatever authority exists, exists in FERC under Title VI. To the extent there is additional authority, it exists under the prudent standard of the Natural Gas Act. So, it seems... Without even reaching the question of the commerce clause issue, it seems to us that this is a clear case of federal pre-emption by statute and--
Sandra Day O'Connor: Well, Mr. Feit, what do you think that a state can properly do within its regulatory powers that remain to protect common pool owners?
Jerome M. Feit: --I was going to turn to that exactly. I think, one, Northern Natural makes plain at that time that states can affect the producers; that is the statute shall be directed... The device in Northern Natural was the problem of affecting the interstate pipe line. I realize that that may not be a complete answer. There is another case coming before this Court.
Sandra Day O'Connor: I don't understand your answer. What is it that you think the states can properly do within their regulatory authority?
Jerome M. Feit: I think at the bottom line is the states can set up a scheme which is regulated by market demand situations. Let me just... The reason I mentioned what Northern Natural said, because that was the rule of Northern Natural. Northern Natural said you cannot deal with the interstate pipe line, you can only regulate the producer. I am suggesting now that there may be other more sophisticated efforts. Many states have adopted market demand where denominations are made by the pipe lines and it is based on... Even Texas has monthly kinds of crude. That may pass constitutional muster because what the state is doing then, it seems to me, is taking care of its own mining interest, protection of waste, protection of the owners of the pool, which clearly, Your Honor, the states have. We have never taken the position, and I don't take it now, that the states do not have significant rights over their minerals within the state and natural gas is such a mineral. The problem is that to the extent the state action intrudes upon the federal structure the state action must fail. That this Court has said repeatedly in Arkla v. Hall, Maryland v. Louisiana. And, the reason I am not answering--
Sandra Day O'Connor: Well, if there were no take or pay contract, do you think the state regulation would be valid here?
Jerome M. Feit: --If there were no take or pay contracts... It is hard to answer the question. I think it would turn on whether the pipe line is being required to change its purchasing practices in a way that makes it take more gas than it wants, because it affects... It is not only Mississippi that is involved here, pipe lines have sources of supply throughout the producing state. And, the concern of FERC is not that one state provision fails, the concern of FERC is how the entire scheme operates. It seems to us that it may well be a case where a state directing... more than produces may have a valid statute. Our position here is simply that this order is not a valid statute.
Sandra Day O'Connor: You think if there were no take or pay contract it might be valid. Is that what I--
Jerome M. Feit: I think if there were no take or pay contracts and the pipe line was taking no more gas than it needed for its customers or it was required to take, that would be a different... might be a different case because there was more... You see, the vice that we find in it is that somehow by the state requiring the pipe line to take more gas than it wants... It is not the pipe line that is the essence of our concern. The essence of our concern is the downstream customer. It then kind of intrudes upon that relationship and that is where the difficulty arises. So, while I think there can be valid state laws, as Northern Natural pointed out, and market demand may be another way to deal with the problem. These are a myriad of concerns. Northern Natural said that FERC cannot kind of deal with each little state statute and have the state accommodate to the federal concern... I am sorry, the state must accommodate the federal concern and not the federal on the states' concern. Unless there are any further questions, I think my time is up. Thank you.
Warren E. Burger: Very well. Mr. Taylor?
Glenn Gates Taylor: Mr. Chief Justice, and may it please the Court: Before coming to my submission, I would like to address the question that Your Honor raised about take or pay payments. Take or pay payments are refundable pre-payments for gas. A fundamental assumption is that during the period of a 20-year contract that there will be significant periods of time during which a purchaser will not need all of the gas that the producer can deliver, but at the same time the producer needs some sort of cash flow. So, if and where and the parties agree, they agree to include a take or pay provision which provides that if you get to the end of a contract year and the pipe line has not taken all of the minimum quantity that it agreed to, it will pre-pay for the balance and it will recover it either in kind or in cash under cash balance. If, at the time the take or pay obligation is called for, they cannot make up the gas, if they are being called to pre-pay for, then they have a contractual defense. Now, as interesting as all that is, it has nothing to do with what the state has required in this case. Forget the exaggerations that have been made about what the State of Mississippi has required and look at pages 14 and 15 of our brief and how our Mississippi Supreme Court has construed this requirement. The requirement is not that a pipe line has to take the first MCF of gas. It is that the pipe line when and if... this is on 14 and 15 of our brief... when and if a pipe line decides to take gas from a pool, then whatever quantity it wants to take, it must offer to take those quantities ratably as among the different wells in the pool so they are not taking 100 percent out of one well and 10 percent out of another one, which is virtually the example we had in this case, and they must offer to pay a market price unless the parties agree otherwise. The parties are free to agree to two cents, two dollars, or twenty dollars. But, in the absence of that agreement, if somebody wants their gas taken so that no drainage occurs, the state is not going to allow drainage to occur simply because somebody is being obstinate about the price that ought to be paid. They called for a market-responsive price. And, as we point out in our brief, Transco has been complying with this by offering a market-out clause price since December of 1982. Now, let me get to the issue which is pre-emption. We submit that Under Section 601(a) of the NGPA Congress clearly eliminated FERC's Section 1(b) jurisdiction over wholesales of deregulated natural gas in interstate commerce. Consequently, the states are once again free to attach a reasonable ratable take requirement to any purchaser's takes of deregulated gas. I want to explain why Mississippi's requirement is not pre-empted. I want to explain the inconsistency of FERC's position in this case and why producers need this simple protection. It is a question of implied pre-emption. No one claims that this state power, ratable take power, is pre-empted by Congress. FERC... it is briefed on page 15... concedes that point. It is a question of implied pre-emption; that is in passing the NGPA did Congress intend to prohibit the state from attaching reasonable conservation requirements to takes of deregulated gas or did Congress intend to create a gap into which the states could not step with their conservation powers. We submit that Congress didn't either. First, look at the legislative history and look at the Act itself. Congress intended that the states would play a major role in what was the overriding objective of Congress to increase the supply of natural gas available to the interstate commerce and end the perpetual shortages of gas in that market. Congress vested the states with broad powers under Section 503 to make these fundamental determinations that would determine what price you got if it was regulated gas or whether it was going to be deregulated gas. As importantly, the legislative history reflects that the <NGPA> [= NGPA] was not to intrude on the states' historical conservation powers or their traditional conservation functions.
John Paul Stevens: But, Mr. Taylor, as I understand this case, the conservation power is not implicated. The Mississippi Supreme Court expressly disclaimed that as I understood.
Glenn Gates Taylor: No, Your Honor.
John Paul Stevens: They just relied on fairness, didn't they?
Glenn Gates Taylor: The unfairness was that because of these discriminatory takes drainage would result. The concept of drainage is a concept of fair share; that the owners in a pool must have an opportunity to get their fair share of gas.
John Paul Stevens: And, they expressly disclaimed, did they not, reliance on conservation as the motivating force for the regulation?
Glenn Gates Taylor: No, Your Honor, they did not. They explained that the overriding purpose is fairness. They cited Shell Oil versus James, which is a drainage case. I mean, drainage is wrapped up in the fairness issue. In order to breathe life into an owner's opportunity to recover his fair share, he must have the mere opportunity to get into the market at the well head. I was going to point out that in the legislative history Congressman Dingell in submitting the NGPA to the House made this statement on October 14, 1978. He said that the legislation does not contemplate that FERC will intrude into the traditional conservation functions performed by the states. This is a matter reserved to the state agencies. During the exercise of their historical power will continue to regulate such matters and he goes on to say such as drilling locations, completion techniques, production rates, etcetera. He could have just as easily said such as ratable take orders which this Court in the Phillips case, in the Northern Natural case pointed out. Ratable take orders have always been part of the states' historical powers.
William H. Rehnquist: Mr. Taylor, Justice Stevens asked you a couple of moments ago whether the Supreme Court of Mississippi hadn't disclaimed reliance upon the conservation element. And, if you look at page 34a of the jurisdiction statement which the Appellant... I am looking at the opinion of the Supreme Court of Mississippi. It says in the middle paragraph beginning "Coastal, Getty and the other producers argue that conservation of an important natural resource and the prevention of waste are implicated. " "Without doubt, if this were so, such would be a legitimate local interest. " It is difficult, however, for us to see how there is a waste of natural resources when an interstate pipe line company refuses to take ratably or otherwise. And, in the paragraph after that they go on and say that "the true and entirely legitimate local interest here implicated is fairness. "
Glenn Gates Taylor: Yes, sir. And, if you go on--
William H. Rehnquist: Is there some place else where they say that it is conservation?
Glenn Gates Taylor: --Yes, sir. If you go to the last four pages of the Supreme Court's opinion... I am referring to the Southern citation... if you go to those last four pages in which they are construing the purpose and objective and power of the Oil and Gas Board under Rule 48, it is designed to prevent drainage and to insure fairness of correlative rights because it is fundamentally unfair for ratable takes to occur and a purchaser to take indirectly what he will not take directly.
Byron R. White: Is that a conservation concern?
Glenn Gates Taylor: Absolutely it is a conservation concern for this reason.
Byron R. White: We are just not talking about the same thing, I guess.
Glenn Gates Taylor: Your Honor, we are. As we explain at pages six through ten of our brief, the legitimate state interest involved, drainage is a phenomenon of life. Judge Robertson in the Supreme Court's opinion pointed that out. In order to breathe meaning into the opportunity of someone to recover their fair share of production, they cannot bag it, they cannot store it, they cannot wait to get their one percent until 99 percent has been produced. They must have an opportunity to take when others take and to sell when others sell. So, I respectfully would have to disagree that the purpose of this rule is to insure fairness in the sense that it is unfair to deny and deprive owners possessed of correlative rights the opportunity to recover their fair share. Secondly, no gap was intended by Congress in passing the NGPA.
Harry A. Blackmun: Mr. Taylor, it seems to me that you are arguing fair share, not conservation at all.
Glenn Gates Taylor: They are part and parcel of the same thing. Fair share is conservation. If you look at Mississippi Code, Section 5311 which is the Preamble to the Conservation Act, it says that it is the purpose and intent of this Act to insure and afford the opportunity of each owner in a common source of supply the opportunity to recover his fair share.
Harry A. Blackmun: You may deem that conservation, but it doesn't sound like the Mississippi Supreme Court thought that, what conservation was.
Glenn Gates Taylor: Your Honor, they did. Conservation is... Part and parcel of conservation is preventing drainage, preventing unratable takes, preventing reservoir damage. The purpose of this rule is to allow each owner the mere opportunity to recover his fair share so this is not--
John Paul Stevens: Mr. Taylor, your definition is quite different from the Mississippi Supreme Court. They seem to think that conservation is avoidance of waste and they say that it is difficult for us to see how there is a waste of natural resources when an interstate pipe line company refuses to take ratably or otherwise. Waste would seem to follow from taking too much, not too little.
Glenn Gates Taylor: --But, if you don't--
John Paul Stevens: Do you disagree with that?
Glenn Gates Taylor: --I don't disagree with that but you have got to read the tail end of the opinion in which... First, they consider the constitutional questions, then they move to the legitimate state interest in connection with the commerce clause and there is no way to separate... Waste is defined under Mississippi law as the non-ratable or disproportionate taking of gas so as to cause drainage. If you get down to the point in the opinion in which Judge Robertson says we regard fairness as one of the more noble attributes of this rule. He cites Shell Oil Company versus James which is a drainage case and he says drainage is a phenomenon of life in the gas pool. It must be prevented. In other words, the purpose of the Conservation Act, one of the fundamental purposes, is to prevent drainage which gets me back to my gap argument.
Harry A. Blackmun: That is only drainage as among owners, not drainage which would result in waste.
Glenn Gates Taylor: No, Your Honor. Waste is defined as some owners recovering... Under Mississippi law some owners recovering more than their fair share because of non-ratable disproportionate takes of gas. And, it is this. You have several wells in a pool. In this case, you had Transco taking 100 percent from the Florida Gas wells and taking 40 percent from the Getty wells and it was undisputed in the record that drainage was occurring. Transco was taking indirectly by way of drainage what they refused to take directly. That is exactly what these ratable take requirements in all of the oil and gas producing states... and there is not a nickel's worth of difference between that fundamental requirement, whether it is in Colorado, whether it is in New Mexico, whether it is in Texas or whether it is in Louisiana. The purpose is to give the owners in the pool the opportunity to recover their fair share, which gets me back to the no-gap intended argument and you have to cross the Attleboro decision in covering the pre-emption question and the commerce clause. In 1938, Congress wrote into law this Court's decision in the Attleboro line of cases which was that because of the commerce clause the states can't regulate these wholesales. Congress came along and passed the Natural Gas Act, saying because the states can't do it because of the commerce clause, we are going to allow the Federal Power Commission to do it. Ironically, after the Natural Gas Act was passed in 1938, this Court went off and abandoned that line of cases. And, the decision from a couple of terms ago in the Arkansas Electric Cooperative case makes it very clear that the Attleboro test has for all practical purposes been abandoned, the Pike test has been applied. Now, we take that back to the NGPA. In other words, even in Phillips, this Court acknowledged that after Attleboro and after the Natural Gas Act was passed, the constitutional restrictions on the ability of the states to regulate activities that impacted interstate commerce had been loosened. It was recognized in Phillips and a perfect example is the Peerless case in which this Court upheld the ratable take minimum price order. There the State Conservation Commission fixed the price. This Court upheld that type order against a commerce clause challenge. Now, bring it all into focus. The only barrier before was the commerce clause, so we had the Natural Gas Act, Section 1(b) jurisdiction. The Court goes off and adopts the new Pike test. We then come down the NGPA in which Congress eliminates the very Section 1(b) jurisdiction that was applied in Phillips which leaves us only with the commerce--
John Paul Stevens: I am a little slower, I think, perhaps than you are, but I think you are arguing just commerce now and not pre-emption at all.
Glenn Gates Taylor: --That is what I am bringing it all down to. You--
John Paul Stevens: Do you think the two arguments merge or are quite the same? Peerless has nothing to do with pre-emption as I understand it.
Glenn Gates Taylor: --Peerless had nothing to do with it. Peerless is an example of a court having abandoned the Attleboro test and applied the Pike test. In Peerless the Court cited South Carolina versus Barnwell and that line of cases as representing the more modern approach. And, if you look at Pike, that is the same test that the Court has applied under the commerce clause and that is exactly my point; that since the NGPA eliminated Section 1(b) jurisdiction which was a codification of Attleboro, since they eliminated that, there is no statutory pre-emption question. It is a question of the commerce clause. If you apply the commerce clause test to Pike, which, under another name it was applied in Peerless, this simple state requirement passes that test, because there are strong interests in the state and it is consistent with the policy of Congress in encouraging more producers to get involved in the process of drilling more wells, discovering new gas, and offering that gas and making it available for sale in interstate commerce. That is all this rule does. It goes no further. Let me turn to FERC's conflict claim with this perspective in mind. At the time of the Northern Natural decision, we had a pervasive scheme of federal regulations. Producers could not sell into interstate commerce without FERC authority. Pipe lines could not bid for gas, there were no deregulated sales. It was truly regulated from the well head to the burner tip. It was because of that... The Court in Northern Natural cites Attleboro and they rely on Section 1(b). They rely on Phillips. They say because of that pervasive scheme there is a likelihood or an imminent possibility of collision. If you go back to Northern Natural, the Court did not require an actual conflict be shown. The recent decisions of this Court have made it clear that the Court is no longer content to settle for these speculative, hypothetical possibilities of collision which brings me to FERC's position. All they have been able to offer in the way of an alleged conflict is that this state requirement might in some way conflict with their Section 601(c) powers which is the power not to prevent somebody from buying gas, but the power to deny a pass-through of a payment for fraud or abuse. There is nothing about this requirement that prevents the exercise of that power. If they can, with a straight face, stand up here and claim that the payment of a market price is the result of fraud or abuse, then they have still got the power to deny the pass-through. The same holds true for the take or pay payments. If they claim that a take or pay payment that somebody makes and then tries to pass-through as the result of fraud or abuse, they can deny that pass-through which brings me to this closing point. Without the protection of this simple rule... producers are not dumb. For the same considerations that they sought the protection of the intrastate market before the NGPA was passed, where they could get a better deal, they will seek the protection of an intrastate market in which they are not treated like this, in which the Coastals of the world, the one percent owners, whether they are professionals, whether they are farmers who have leased, will not be treated like this, or the state will resort to more disruptive measures. In other words, the state could come in and completely shut in the field until every owner had a contract signed up. It would be disruptive, but it would clearly be within the conservation powers to prevent waste. It will discourage producers from competing against one another. Independents... All the world of oil and gas is divided into independents and majors and if the independents end up with the contracts and the majors... the majors end up with the contracts and the independents are left to scramble for themselves, they don't compete. More fundamentally though, this practical observation: If because of the NGPA a producer and a pipe line can agree like they did in the case of the Florida Gas contract, that we will take all owners' gas regardless of whether they are signed up and we will take their gas ratably, and there is nothing FERC can do to prevent that. If they can contract for that protection, which they can, and nobody denies it... They did it in the Harkins contracts in the states, they did it in the Florida Gas contract, then there is nothing to prevent the state in the exercise of its conservation powers from stepping in and providing that minimal protection where the parties fail to agree. One question has come up about, well, is there a better way that the states can handle this, the so-called market demand allocation system. That is a gimmick and a game which Mississippi decided in 1948 that we are not going to play. It serves only one or two purposes, allowing the pipe lines to run the state allowable system or getting the state involved in a socio-economic decision that you pipe lines tell us how much gas you want to buy and we will dole it out among the different pools in the state. That is not a conservation function. The purpose of that rule is not to protect owners in a given pool from drainage and it is not to give owners in a pool an opportunity to sell. It gets the state intruding even more so into contractual affairs. Mississippi has a pure allowable system and to the claims that the market demand allocation system is the best way to go, I refer the Court to the Texas Law Journal article which cites that the blue ribbon panel appointed by the Texas Railroad Commission to investigate the question of unratable takes found that under their own system of market demand allocations that unratable takes were still occurring. While some people might think that that is the best way to go, Mississippi has chosen a pure allowable system in which, based on maximum efficient rate of flow of wells, they set the ceiling and the pipe lines are free to come in and take 100 percent, one percent, 50 percent, they can vary their takes at noon and at midnight. They have the complete freedom on what their takes are going to be. The state is not involved in some game of manipulating and gerrymandering allowables. Thank you, Your Honor. If there are no questions, the Attorney General would like to talk.
Warren E. Burger: Mr. Noble?
Ed Davis Noble, Jr.: Mr. Chief Justice, and may it please the Court: My purpose is to explain what the legitimate state interest of the State of Mississippi is with its Rule 48. We believe that it encourages the development of its natural gas by protecting the correlative interest of each owner, operator, and producer in a particular pool, but more importantly, Rule 48 also satisfies the statutory requirement that the Oil and Gas Board at least attempt to conserve the natural gas in the State of Mississippi; that is to prevent drainage as it has been defined by co-counsel, waste and reservoir damage caused by unratable and disproportionate withdrawals of gas. The requirements of Rule 48, in effect, are practical and consistent with the congressional goals of the NGPA. And, in response to Justice O'Connor's question, it encourages the participation of all the owners, operators, or producers in a particular field and encourages them to develop the state's natural resources by permitting just compensation for their efforts in the development at a fair and current price. Now, if the primary objective of the NGPA is to increase the supply of natural gas in intrastate, then we say that 48 is consistent with the federal program. That is because it corrects what could be a potential market failure in the sales of gas at the well head in Mississippi. That can occur when you see a situation which we have and that is very few purchasers in a field where there are multiple owners, operators, and producers, thereby creating a market situation of perhaps less production and lower prices offered than would be in a perfectly competitive market. Further, the producer would be without a purchaser and, therefore, would suffer a risk under the rule of capture which exists in oil and gas and that is he would see his property extracted without compensation, and, therefore, it would conflict with the rule and the law of correlative rights. As this Court is aware, NGPA makes no provision for the protection of the small, independent, non-contracting owners. Well, Rule 48 provides for that such protection. It does so merely because it provides that if you participate and if you do purchase the Rule only says that you must at least offer, no more than offer, to purchase the gas at a reasonable or current price. Now, if--
William H. Rehnquist: That is even though there is no contract?
Ed Davis Noble, Jr.: --That is if there is no contract, that is correct, Justice Rehnquist. Let us assume that that particular owner, operator, or producer refuses, what can he do? Then he merely runs the risk of being able to recover his property; that is his oil or natural gas that he owns at a later date. Rule 48 merely gives him the opportunity or protection of being able to recover during the purchase time at a fair rate. If the producer is not permitted to purchase and to sell and to get his fair market price at the time in which the pipe line does, in fact, purchase, then there is a possibility that since he will not be compensated, then he would seek other markets in intrastate, thereby defeating the purpose of NGPA by reducing by whatever means the particular oil and gas which might flow into intrastate. The State of Mississippi does not mandate taking by strict allowables or production. It is that the Oil and Gas Board sets maximum allowables for a specific period of time which means that if you do produce in the State of Mississippi you can take anywhere from the well being shut in, that is zero, to the maximum allowable with would be 100 percent. We would suggest to the Court that in doing so we have, in effect, a market. The producer is ready to surrender his gas to the pipe line. The pipe line determines what it wishes to take and if it takes within the allowables according to state law in a particular field, it may take from zero to 100 during that period of time. So, we suggest--
John Paul Stevens: May I ask you one question? I just want to be sure I understand correctly. Under the Mississippi rule, must the pipe line pay the non-contract purchaser the same price that it pays the contract purchaser?
Ed Davis Noble, Jr.: --No, sir.
John Paul Stevens: You can have a price discrimination and there is no state problem with--
Ed Davis Noble, Jr.: That is right. As a matter of fact, so long as the state is assured that that person will receive his fair market price, we do not... The State of Mississippi does not interfere in negotiations for what the price may be.
John Paul Stevens: --Well, does it at least insist that the price paid to the non-contract purchaser be the fair market price?
Ed Davis Noble, Jr.: If there is no contract, there is no take or pay.
John Paul Stevens: I understand, but could they... Say the market price is $1.00 a thousand cubic feet or whatever it might be, could they just pay a nickel and would that satisfy the--
Ed Davis Noble, Jr.: No, sir. As the Supreme Court of the State of Mississippi said, at least that person should be assured of a fair market price for his gas. In other words, at least, if the fair market price will not interfere with commerce or will not interfere with FERC... Will not come into play with FERC, because all we are addressing is either market price or fair market price or below.
William H. Rehnquist: --Well, the Supreme Court of Mississippi remanded the case to the trial court for determination of that issue, didn't it?
Ed Davis Noble, Jr.: It did, Mr. Justice Rehnquist.
William H. Rehnquist: So, we really don't know what price will finally be determined by the Mississippi State Court.
Ed Davis Noble, Jr.: That is correct, sir. In allowing for a fair market price and creating a market in interstate commerce, we would also suggest that Rule 48 protects the consumer. That is all it says is that the owner, operator, or producer will have its opportunity to be compensated and that there is no incidental hinderance to the market place because if, in fact, the end result of more production, more gas, will, in essence, create a market where there is by supply a lesser price at the well head to be paid by the consumer. I would like to address another question posed by Justice O'Connor and that is what, if anything, would be the standard which might be or could be applied by the State of Mississippi or what should be applied? We would suggest that the rule of the State of Mississippi is a fair one and is constitutional. The import of NGPA is that there at least be a competitive market at the well head and it suggests that the Mississippi ratable take is a policy which is carefully calculated to reflect competitive markets. I would suggest to the Court that this rule or any other rule would be a minimum interference with the participants at the market and particularly so that it would not injure the consumer or the public interest. If there are no questions from the Court, thank you very much.
Warren E. Burger: Do you have anything further, Mr. Grower?
John Marshall Grower: Yes, Mr. Chief Justice, I am afraid I do. There are a number of matters that I would like to address, but I will try to address a few of them. Let's first take the statement that Mississippi has not required Transco to purchase any gas. What kind of choice is that? We have got contracts that require to take a minimum quantity of gas pursuant to the regulatory scheme under the NGA and the NGPA. We have got that gas to purchase to supply our customers' needs. That is part of the federal regulatory scheme. All right. We don't have to buy that gas because of the State of Mississippi.
Sandra Day O'Connor: Why should the validity of the state's ratable take policy turn on the fortuity of whether your company enters into a take or pay contract?
John Marshall Grower: Justice O'Connor, the take or pay contract has been a part of the regulatory scheme for almost 50 years, since 1938 when the NGA came into effect. The contractual relationship between the producer and the pipe line's customer have been a part of this regulatory scheme. The pipe line must contract for supplies of gas. They are required by federal regulation to enter these contracts.
Sandra Day O'Connor: But, you are not required today, are you, to enter into a take or pay contract for this kind of gas by any federal requirement that you do so?
John Marshall Grower: Your Honor, that is correct, but at the time these contracts were entered into it was still part of the regulatory scheme recognized by the FERC and they had regulations dealing with the manner in which take or pay, the costs were passed on to the consumer.
William H. Rehnquist: Well, would the question be different here if these contracts, these take or pay contracts had been entered after the time that the FERC ceased to require them?
John Marshall Grower: Well, if these contracts had no take or pay obligation, then there would be nothing to prevent the pipe line, if they had no minimum take requirements... You also may have minimum take requirements which require you to buy a certain amount of gas or pay for it, period, with no right to ever recoup it. But, if there are no minimum take requirements, there is nothing to prevent the pipe lines from purchasing all of the gas because they don't have to take it.
William H. Rehnquist: What if they had take or pay contracts and there were clauses that were voluntarily entered into by the pipe line without any requirement that it do so from the federal government.
John Marshall Grower: Well, if the Court please, the take or pay problem today has been made a serious problem because of the extreme prices we have in the market.
William H. Rehnquist: Are you trying to answer my question?
John Marshall Grower: Yes, sir, I am. And, the fact that there could have been contracts without take or pay, I just can't answer that directly, because there are contracts for take or pay and they were a part of the regulatory scheme and if there were no contracts with take or pay, then there would be nothing to prevent the pipe lines from purchasing this, because it would not increase their cost.
William H. Rehnquist: My question to you was if there were take or pay contracts voluntarily entered into by the pipe line company without any requirement they do so from the federal government.
John Marshall Grower: Well, yes. There is not a requirement under the federal government, but it has been part of the regulatory scheme because--
William H. Rehnquist: What do you mean, part of the regulatory scheme if it is not a requirement?
John Marshall Grower: --It has been recognized as part of the regulatory scheme because the producers wanted to be assured that they would have a share of the market.
William H. Rehnquist: So, all you are saying is it was permitted?
John Marshall Grower: It was permitted because the producers wanted a share of the market and there would be no reason for a producer to enter into a contract without some minimum take obligations because they would never have any assurance that the gas would ever be produced. It was a necessary part of the contractual process and because it was necessary it was recognized in the federal scheme.
Warren E. Burger: Your time has expired.
Lewis F. Powell, Jr.: Mr. Chief Justice, may I ask a question?
Warren E. Burger: Yes. Justice Powell has one more question.
John Marshall Grower: Yes, sir.
Lewis F. Powell, Jr.: I think you undoubtedly, counsel, have answered this, but I am not entirely clear about it. It is agreed, I assume, that Section 601 of the 1978 Act removes well head sales, deep wells, 15,000 feet or under, from federal commission regulations.
John Marshall Grower: It removes the price regulations.
Lewis F. Powell, Jr.: Well--
John Marshall Grower: It removes the price regulation, but it does not remove the regulation over the pipe line concerning the transportation and resale of that gas in interstate commerce and this was made clear, if the Court please, in Mid-Louisiana by Justice Stevens.
Lewis F. Powell, Jr.: --The Solicitor General's brief says the NGPA makes clear that Congress, in removing certain well head sales from the Commission's regulatory jurisdiction, intended that they be deregulated.
John Marshall Grower: As to price. I agree with that as to price.
Lewis F. Powell, Jr.: Well, it doesn't say anything at this point in the brief about the price.
John Marshall Grower: It changed--
Lewis F. Powell, Jr.: Let me follow up with another question.
John Marshall Grower: --Yes, sir.
Lewis F. Powell, Jr.: If it is deregulated, is it your position the state has no authority whatever to regulate this gas?
John Marshall Grower: Yes, sir, and that has been so held.
Lewis F. Powell, Jr.: Well, will that result in Transco being able to drain gas--
John Marshall Grower: No, sir.
Lewis F. Powell, Jr.: --as it has been done in the past?
John Marshall Grower: No, sir.
Lewis F. Powell, Jr.: Who will control that?
John Marshall Grower: The state still controls that because they control what can be produced by these wells. It is only being drained because the state is permitting the producers to produce the gas.
Lewis F. Powell, Jr.: If the ratable take rule doesn't apply, what will keep Transco from taking gas only from parties with whom it had contracts?
John Marshall Grower: Transco does not determine how much gas is delivered to it. It limits how much it can take. But, as to the amount, that is regulated by the state as to what can legally be produced. Now, the regulation... ratable take also implies and includes ratable production. The state can have jurisdiction and regulate production from the wells over the producer and this is what was said in Northern Natural; that you can require the producers to produce ratably and to share the market. This is the concept, if the Court please, of the market demand allocation. You are requiring the producers with the market to share their market and you are limiting their production to their share of the market. Thereby, you are eliminating the take or pay problem. By requiring the producer to share the market and to produce only their share of the market, you are taking care of the problems. Pipe line doesn't regulate how much can be produced by the state.
Lewis F. Powell, Jr.: May I repeat it once more?
John Marshall Grower: Yes. I am sorry.
Lewis F. Powell, Jr.: Is there any federal regulation that prevents Transco from doing what it was doing when the ratable take rule is applied here, that is drain gas from other producers, from other owners? Is there any regulation anywhere that prevents that?
John Marshall Grower: No, sir, because there is no regulation that deals with that, because, in the first place, I take issue with the premise that Transco is draining, because the producer is draining. The producer gets the gas, the producer gets the money. Transco is merely purchasing it. They could take the same gas and the state could require that producer to share that market and to pay those proceeds to these other producers. I mean, that is a state function. That is regulation over the production and gathering of gas that has been traditional regulation that nobody contests the state has a right to.
Speaker: I don't have any further questions. Thank you very much.
John Marshall Grower: Thank you.
Warren E. Burger: Thank you, gentlemen. The case is submitted.