Opinion analysis: Scaling back federal preemption in energy markets

Good fences make good neighbors – but the boundaries between federal and state regulation of energy markets have begun to blur.

In ONEOK v. Learjet, decided yesterday with little fanfare, the Court held that field preemption under the Natural Gas Act (NGA) does not extend to state antitrust suits aimed at pipelines’ price manipulation.

This case presented a thorny question under energy law statutes and longstanding precedents because the alleged market manipulation affected both wholesale sales, the traditional purview of federal regulators, and retail sales, which the NGA reserves for state regulation. Although the opinion was not unanimous, the case signals a willingness by most of the Justices to tolerate some degree of concurrent federal/state jurisdiction under federal statutes concerning the regulation of energy markets.

The core issue before the Court in the case was whether, in adopting the NGA, Congress intended to “occupy the field” of antitrust remedies concerning pipelines’ pricing behavior in natural gas markets. In reversing a district court opinion dismissing state antitrust claims against the pipelines, the Ninth Circuit construed the preemptive effect of the NGA narrowly.

With the support of the U.S. Solicitor General, the pipelines sought certiorari, arguing that the NGA preempts state antitrust law challenges by retail customers to practices that also affect wholesale gas rates regulated by the Federal Energy Regulatory Commission (FERC). The Court granted certiorari and heard oral arguments on this case in January.

According to the majority opinion, written by Justice Stephen Breyer and joined by five other Justices, the NGA “was drawn with meticulous regard for the continued exercise of state power, not to handicap it or dilute it in any way.” Under Section 1(b) of the NGA, wholesale transactions fall squarely – and even exclusively — within the jurisdiction of federal regulators. For nearly seventy years, the Court has acknowledged the sharp clarity of this federal-state division of authority over wholesale and retail sales, sometimes even calling it a jurisdictional “bright line.”

Despite the “forceful” argument of the pipelines that this exclusive jurisdiction should control, the majority emphasized a need to tread cautiously when assessing the preemptive effect of those transactions that are not purely wholesale. Section 5(a) of the NGA authorizes FERC to also address “practices” affecting wholesale rates. As noted above, retail sales remain in the purview of the states under the NGA. The difficult question this case presented was what to do when a practice affects both types of sales. When, as in the particular antitrust claims at issue in this case, state regulation is aimed at practices “affecting” retail rates, the majority reasoned, this is “firmly on the States’ side of that dividing line.”

The majority distinguished a number of previous cases finding field preemption under the NGA, repeatedly emphasizing that Congress did not intend to dilute altogether state regulatory power. As the majority reasoned, Congress has consistently favored competitive natural gas markets, and states also have a long history of providing “common law and statutory remedies against monopolies and unfair business practices” that reinforce these markets.

Notwithstanding (somewhat confusing) language in the opinion that purports to place this matter on the state “side” of any dividing line, the majority questioned whether the NGA contains any sharp dividing line at all: “Petitioners and the dissent argue that there is, or should be, a clear division between areas of state and federal authority in natural gas regulation. But that Platonic ideal does not describe the natural gas regulatory world.”

Notably, the majority emphasized, FERC had not made any determination itself that field preemption would bar the antitrust claims. Accordingly no deference to the agency was due. However, the majority also explicitly left to be resolved by lower courts any questions regarding conflict preemption of state antitrust regulation.

Justice Clarence Thomas joined most of the majority opinion, especially its analysis of precedents under the NGA. He wrote separately, however, to underscore his longstanding view that implied preemption doctrine wanders from constitutional text and history.

Justice Antonin Scalia filed a dissenting opinion, which was joined by Chief Justice John Roberts. According to Justice Scalia, the NGA and the Court’s longstanding precedents “draw a firm line between national and local authority,” and the majority “smudges the line.” Justice Scalia would favor an interpretation of the NGA as providing for field preemption of the state antitrust law claims, in contrast to what he characterized as the majority’s “make-it-up-as-you-go” approach to preemption.

Justice Scalia also found “unworkable” any effort to invite antitrust enforcement in gas markets from multiple state regulators. “From now on,” Justice Scalia wrote, “pipelines will have to ensure that their behavior conforms to the discordant regulations of 50 states – or more accurately to the discordant verdicts of untold state antitrust regulators.”

It may be somewhat surprising to see Justice Scalia supporting more federal regulatory power here – especially given his strident dissent in 2012 from the Court’s opinion striking down (on preemption grounds) portions of Arizona’s immigration law in Arizona v. United States – but he also seems squarely committed to uniform national regulation of competitive markets under federal statutes.

Justice Scalia’s concerns about non-uniform regulation of gas markets echo his dissent in Wyeth v. Levine (2009), in which he favored a finding of field preemption by the Food and Drug Administration of state tort cases based on drug warning labels.

One might be tempted to dismiss yesterday’s opinion with a yawn — as an isolated, somewhat technical jurisdictional dispute under a specialized statute governing only the natural gas industry. However, the case has broader implications for energy regulation and, with time, could also prove significant as a federal preemption case.

In the energy regulation area, at least two other significant federalism matters are currently pending on the Supreme Court’s certiorari docket. Although these cases involve the Federal Power Act (FPA) rather than the NGA, it is a well-established principle that these statutes are read in pari materia.

The federal government has already weighed in on one pending matter (involving FERC’s jurisdiction over demand response in wholesale electric power markets), and the Court has invited the Solicitor General’s opinion on another set of petitions (involving the preemption of state incentives for new power generation). These cases could prove to be of significant national importance to the Justices. However, regardless whether the Court grants cert. in those cases, yesterday’s opinion signals clearly that that most Justices recognize that federal-state jurisdiction over many aspects of energy markets can be concurrent and need not always be exclusive.

Beyond energy jurisdictional disputes, only time will tell whether yesterday’s opinion will have a broader significance. The clear lines of field preemption have had some appeal among the Justices in recent terms, even beyond rule-bound formalists such as Justice Scalia. Still, it bears noting that Justice Breyer’s majority opinion, which eschews a rule-bound approach, was joined by a somewhat unusual line-up that also includes Justices Anthony Kennedy, Ruth Bader Ginsburg, Samuel Alito, Sonia Sotomayor and Elena Kagan.

The decision calls into question whether field preemption doctrine and the idea of exclusive jurisdiction under federal statutes are necessary or desirable in approaching implied preemption. A conflict preemption analysis, which is premised on some concurrent jurisdiction between federal and state regulators, can just as readily resolve a jurisdictional dispute under the Supremacy Clause. Perhaps this blurs some jurisdictional borders, but it also can allow state and federal regulators to share some space in coordinating their regulatory approaches.

Plain language: In this case, the Court allowed state antitrust law claims to proceed against gas pipelines for alleged manipulation of market price indices, notwithstanding federal regulation of pipelines under the Natural Gas Act. Congress did not “occupy the field” to such a degree that states are per se forbidden from taking action to remedy market misconduct against pipelines; however, lower courts still may find that there is a conflict between state antitrust law proceedings and the federal rate-setting process.

[Disclosure: Goldstein & Russell, P.C., whose attorneys contribute to this blog in various capacities, serves as counsel on an amicus brief in support of the petitioners in this case. The author of this post is not affiliated with the law firm.]