Opinion ID: 721438
Heading Depth: 3
Heading Rank: 4

Heading: Jurisdiction over buy/sell arrangements

Text: 149 The final jurisdictional challenge to the capacity release mechanism involves buy/sell transactions, which FERC professed to bar 68 in Order No. 636 and the companion El Paso Natural Gas Co. proceedings, 59 F.E.R.C. p 61,031, reh'g denied, 60 F.E.R.C. p 61,117 (1992). Buy/sells occur in three stages. First, an end-user of gas either purchases or identifies certain natural gas at the [319 U.S.App.D.C. 92] point of production. The LDC that services the end-user then purchases the gas and transports it first under its own transportation rights on an interstate pipeline and later across its local distribution facilities. 69 The end-user then receives the gas from the LDC. The buy/sells reviewed by the Commission in the El Paso proceedings were conducted under the authority and oversight of the California Public Utility Commission. 150 FERC acknowledges that buy/sell transactions implicate legitimate state regulatory interests. El Paso Natural Gas Co., 60 F.E.R.C. p 61,117, at 61,383-84. That said, given the transactions' intermediate stage--in which the end-user expressly arranges for the interstate transportation of specifically identified gas--the Commission contends that it has authority to preempt such state regulation. We therefore begin by setting forth settled principles of federal preemption. 151
152 The Constitution provides that the laws of the federal government shall be the supreme Law of the Land; ... any Thing in the Constitution or Laws of any state to the Contrary notwithstanding. U.S. CONST. art. VI. That principle of supremacy is implemented through the doctrine of federal preemption, 70 under which state and local law may be stripped of its effect. Federal preemption may occur in a variety of circumstances: 153 It is well established that within constitutional limits Congress may pre-empt state authority by so stating in express terms. Absent explicit pre-emptive language, Congress' intent to supersede state law altogether may be found from a scheme of federal regulation so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it, because [ (a) ] the Act of Congress may touch a field in which the federal interest is so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject, or [ (b) ] because the object sought to be obtained by the federal law and the character of obligations imposed by it may reveal the same purpose. Even where Congress has not entirely displaced state regulation in a specific area, state law is pre-empted to the extent that it actually conflicts with federal law. Such a conflict arises when compliance with both federal and state regulations is [ (a) ] a physical impossibility, or [ (b) ] where state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. 154 Pacific Gas & Elec. Co. v. State Energy Resources Conserv. & Devel. Comm'n, 461 U.S. 190, 203-04, 103 S.Ct. 1713, 1722, 75 L.Ed.2d 752 (1983) (internal citations, quotation marks, and ellipses omitted). 155 Moreover, federal preemptive authority may be exercised not only through federal statutes but also regulations issued by administrative agencies. 71 When an agency announces its intent to pre-empt state authority in a particular area, 156 the correct focus is on the federal agency that seeks to displace state law and on the proper bounds of its lawful authority to [319 U.S.App.D.C. 93] undertake such action. The statutorily authorized regulations of an agency will pre-empt any state or local law that conflicts with such regulations or frustrates the purposes thereof. Beyond that, however, in proper circumstances the agency may determine that its authority is exclusive and pre-empts any state efforts to regulate in the forbidden area. It has long been recognized that many of the responsibilities conferred on federal agencies involve a broad grant of authority to reconcile conflicting policies. Where this is true, the Court has cautioned that even in the area of pre-emption, if the agency's choice to pre-empt represents a reasonable accommodation of conflicting policies that were committed to the agency's care by the statute, we should not disturb it unless it appears from the statute or its legislative history that the accommodation is not one that Congress would have sanctioned. 157 City of New York v. FCC, 486 U.S. 57, 64, 108 S.Ct. 1637, 1642, 100 L.Ed.2d 48 (1988) (citations and quotation marks omitted) (emphasis added). 158
159 We consider petitioners' arguments regarding buy/sell transactions under the branch of pre-emption doctrine that concerns conflicts between state and federal law, and particularly state law that stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress, Hines v. Davidowitz, 312 U.S. 52, 67, 61 S.Ct. 399, 404, 85 L.Ed. 581 (1941). The Commission's goal in preempting buy/sell transactions was to preserve the integrity of its uniform capacity release program. See El Paso Natural Gas, 60 F.E.R.C. p 61,117, at 61,385. Specifically, the Commission concluded that buy/sells offer a ready means of circumventing the open, nondiscriminatory bidding process central to capacity release. Under Order No. 636, an end-user seeking firm interstate transportation for gas that it has identified or acquired at the point of production must attempt to purchase capacity by contracting on the open market. In a buy/sell transaction, in contrast, the end-user can contract with an LDC without being forced to compete with other shippers that value the capacity. FERC reasoned that because buy/sells occur without open bidding, and result in the tying-up of interstate pipeline capacity, they circumvent and distort the transportation market envisioned by Order No. 636. 72 160 The LDCs contend that preemption is inappropriate in this instance because the Commission's prohibition on buy/sells constitutes a regulation of the retail sale of natural gas, which Congress reserved to the jurisdiction of state regulatory bodies. While the Commission emphasizes the intermediate, transportation stage of the transaction, the LDCs focus on the terminal stage, describing buy/sell agreements as a classic instance of an LDC making a retail sale to a retail customer. Cf. AGD I, 824 F.2d at 995 (LDCs purchase gas for resale to end users, large and small. Their services and prices are subject to state regulation but not to that of FERC.). As the LDCs characterize the transaction: 161 A retail customer participating in a buy/sell arrangement with an LDC purchases the same product purchased by other retail gas customers: natural gas, delivered to the point of consumption, at a state-regulated price that includes the cost of (a) the gas; (b) the inter-and intrastate transportation required to move the gas from the market or production area to the point of consumption; and, (c) all other local distribution services, such as balancing and metering costs. 162 LDCs' Reply Br. at 8. Further, given the express terms of NGA § 1(b), the LDCs maintain that the Commission's jurisdiction [319 U.S.App.D.C. 94] cannot arise merely by means of some effect of buy/sell agreements on interstate transportation; such an interpretation of the Act would dramatically expand FERC's jurisdiction because almost all gas travels interstate and therefore almost all retail sales of gas affect interstate transportation. See also Schneidewind v. ANR Pipeline Co., 485 U.S. 293, 308, 108 S.Ct. 1145, 1155, 99 L.Ed.2d 316 (1988) (Of course, every state statute that has some indirect effect on rates and facilities of natural gas companies is not preempted.). Thus, conflict pre-emption analysis must be applied with particular care in those instances in which the Commission seeks to preempt state regulation merely because it has some effect on the interstate transportation of natural gas. Northwest Central Pipeline v. State Corp. Comm'n, 489 U.S. 493, 515-16 & n. 12, 109 S.Ct. 1262, 1276-77 & n. 12, 103 L.Ed.2d 509 (1989). 163 We believe that the LDCs have confused two separate issues. While the Commission's rationale in preempting buy/sells is the transactions' effect on interstate transportation--namely, that buy/sells facilitate circumvention of the capacity release program--the Commission's authority is grounded in the transaction itself. 73 In the intermediate stage of a buy/sell transaction, the LDC carries the gas identified by the end-user on its own firm capacity and under its own title on an interstate pipeline. Contrary to the LDCs' characterization, FERC's jurisdiction arises from the transportation itself; interstate transportation of gas selected by the end-user is a central element of the parties' agreement. As FERC states in its brief, buy/sells are at bottom nothing more than agreements by which firm shippers allocate space on an interstate pipeline to customers who negotiate their own wellhead transactions. Transactions that do not include this transportation element are not buy/sells and are not preempted. 164 In a standard retail sale, by contrast, the end-user purchases gas from an LDC at the local delivery point without regard to aspects of gas transportation at points further upstream. See id. at 97 (Traditional LDC retail sales consisted of sales of gas to local customers from generic system supply through local distribution facilities after the gas had completed its interstate journey.). Order No. 636 does not prohibit or condition such sales. Nor does the Order preempt state regulatory agencies from modifying an LDC's rate structure to accommodate differences in local conditions. Further still, LDCs remain free to sell gas to retail customers under the terms and conditions set by state regulators. Under Order No. 636, an end-user that would previously have engaged in a buy/sell transaction will still purchase the gas from the producer and still receive the gas at its delivery point. The crucial difference is that the end-user must purchase capacity rights from the LDC in the open market through the capacity release mechanism rather than by transferring title to the gas to the LDC and regaining title at the local delivery point. 165 Accordingly, we sustain the Commission's determination to pre-empt state regulation of buy/sell transactions. FERC's effort to avoid circumvention of its capacity release regulations represents a reasonable accommodation of conflicting policies that were committed to [its] care under the Natural Gas Act. City of New York, 486 U.S. at 64, 108 S.Ct. at 1642. Further, given that the regulations do not impinge upon state control over retail gas sales, it appears that the Commission's accommodation is one that Congress would have sanctioned. See id.