U.S. Supreme Court Hears Natural Gas Case in which 21 State AGs File Brief

On Monday, January 12, the U.S. Supreme Court will hear oral argument in the preemption case, Oneok v. Learjet. In reliance on state law private action remedies, Learjet sued Oneok over market manipulation in natural gas prices to large volume purchasers. 21 bipartisan state Attorneys General filed an amicus brief defending their state regulatory authority on the natural gas industry while several national energy associations filed a brief promoting federal jurisdiction in the case.

The energy associations’ brief, led by the Interstate Natural Gas Association, describes how the industry is making a massive investment toward the nation’s expected growth in natural gas reliance. The brief asserts that hundreds of billions of dollars will be spent to replace coal-based facilities as projections estimate natural gas supplying over 40% of our country’s electricity generation within 25 years.

The issue before the Court is to what extent the federal Natural Gas Act (NGA) preempts state regulatory schemes considering that the NGA explicitly exempts retail transactions. The NGA provides authority to the Federal Energy Regulatory Commission (FERC) to govern the wholesale market while leaving retail sale and price regulation to the states. Specifically, the issue involves whether a practice that would fall under FERC’s wholesale sales jurisdiction requires a “conflict” preemption standard, rather than “field” preemption, to allow state regulation of the practice’s effect on retail sales.

Led by Kansas Attorney General Derek Schmidt, the states argue, as a matter of statutory interpretation, that the NGA does not apply to retail sales. Further, the states assert that the NGA does not preempt state antitrust laws which have general applicability to all industries. As long as state regulation is directed at retail sales, the states argue that conflict preemption is the correct standard for the implications the practice at issue has on retail prices.

The energy associations assert that the NGA establishes exclusive federal regulation of wholesale practices and thus field preemption applies when those practices are regulated. If instead conflict preemption is held to be the standard where a practice may have any associated effect on retail prices, then even when FERC approves a wholesale practice, that practice could still be challenged as violating state law. This would run counter to the NGA’s intent to provide regulatory uniformity for the natural gas industry.

As the Court hears oral arguments, a critical issue is whether states retain authority to regulate only in the area left untouched by the NGA which is actual retail sales of natural gas, or instead whether states may regulate any impact on retail sales regardless of the wholesale practice. As the energy association brief concludes, a ruling in favor of Learjet could subject the industry to conflicting federal and state law regulation, and worse, provide for plaintiffs’ actions under state law any time one can draw an association between an industry wholesale practice and an attenuated retail price impact.