Psc v. Mid-Louisiana Gas Co., 463 U.S. 319 (1983)

JUSTICE WHITE, with whom JUSTICE BRENNAN, JUSTICE MARSHALL, and JUSTICE BLACKMUN join, dissenting.

Our task in these cases is not to interpret the Natural Gas Policy Act (NGPA) as we think best, but rather the narrower inquiry into whether the Commission’s construction was sufficiently reasonable to be accepted by a reviewing court. FEC v. Democratic Senatorial Campaign Committee, 454 U.S. 27, 39 (1981); Train v. Natural Resources DefenseCouncil, Inc., 421 U.S. 60, 75 (1975); Zenith Radio Corp. v. United States, 437 U.S. 443, 450 (1978).

To satisfy this standard it is not necessary for a court to find that the agency’s construction was the only reasonable one or even the reading the court would have reached if the question initially had arisen in a judicial proceeding.

FEC v. Democratic Senatorial Campaign Committee, supra, at 39; Udall v. Tallman, 380 U.S. 1, 16 (1965). The Court today rejects the agency’s interpretation and substitutes its own reading of this highly complex law. In doing so, the Court imposes a construction not set forth in the statute itself, not addressed in the legislative history, not selected by the agency, and different even from that of the Court of Appeals. Notwithstanding its novelty, perhaps the Court’s construction that pipeline production must be given "first sale" treatment either as an intracorporate transfer or at the point of a downstream sale is a reasonable interpretation of the Act. But its reasonability does not establish the unreasonability of the Commission’s interpretation, and that, of course, is the question before us.

I

The relevant statutory provisions of the NGPA clearly will bear the Commission’s construction. Order No. 58 of the Commission, the interpretive regulation at issue, delineates the circumstances under which a sale of production by an interstate or intrastate pipeline, local distribution company, or affiliate of one of these entities, will be regulated as a first sale under the NGPA. Section 2(21)(B) of the NGPA provides that a sale of natural gas by a pipeline or affiliate thereof is not a first sale unless the sale is "attributable" to volumes of natural gas produced by such pipeline, distributor, or affiliate thereof.{1} The Court’s interpretation of the provision was considered but rejected by the Commission.

Although many comments have recommended otherwise, the Commission will not interpret the term "attributable" so as to confer first sale treatment on pipeline sales if only a portion of the gas involved was produced by the pipeline. The language of section 2(21)(B) requires that a sale be "attributable" to the pipeline’s own production. We believe that Congress did not intend for pipeline or distributor sales from general system supply to qualify as "first sales" merely because some portion of that supply, no matter how small, consists of its own production. Rather, we believe that these sales were precisely the type of sales which were intended to qualify for general exclusion from first sale regulation for pipeline or distributor sales in section 2(21)(B) of the NGPA. The attribution rule accomplishes that result.

Order No. 58, 44 Fed.Reg. 66578 (1979). Unlike the majority of this Court, the Court of Appeals did not reject this interpretation, which limits the downstream sales of pipeline produced gas eligible for first sale prices, see ante at 323. Even the Court stops short of suggesting that the Commission’s interpretation is not a plausible construction of the statutory language.{2}

The Court notes only that it would be "at least as consistent with the ordinary understanding of the words to interpret them as meaning `measurably attributable to,’" thus including downstream sales of commingled gas. Ante at 327. I doubt that the Court’s meaning is equally plausible, given other usages of similar language throughout the NGPA,{3} but, accepting the Court’s alternative definition as a reasonable possibility, one still does not reach the conclusion that the Commission’s own interpretation is unreasonable.

The Commission also refused to accord first sale treatment to pipeline production by imputing a sale at the point where the pipeline takes its gas into its transmission system.

[I]mputing a sale at the wellhead would extend the first sale concept to intracorporate transactions. As a result, Title I prices would be applied to bookkeeping and accounting entries of a corporation, rather than to actual sales.

44 Fed.Reg. 66579 (1979).{4} The Court of Appeals, and now this Court, reject this interpretation by the Commission, again notwithstanding that it is a perfectly reasonable interpretation of the statutory language. The issue turns on whether intracorporate transfers must be deemed "sales." The NGPA defines a "sale" as a "sale, exchange or other transfer for value." § 2(20), 15 U.S.C. § 3301(2)(20) (1976 ed., Supp. V). The ordinary meaning of the term supports the Commission’s view that a "sale" should be an actual exchange of value and title, rather than a paper transaction. The Conference Report’s indication that the Commission may establish rules applicable to intracorporate transactions under the first sale definition, H.R.Conf.Rep. No. 95-1752, p. 116 (1978), allows, but does not compel, the agency to treat intracorporate transfers as first sales. Indeed, if the statute required the Commission to give first sale treatment to such transfers, the Conference Report’s point would be superfluous. Moreover, the Conference Report discusses the question in the context of the Commission’s authority to include intracorporate transfers as first sales in order to prevent circumvention of maximum price requirements. To use that language to require transfers to be given first sale prices is to turn the Conference Report on its head. In sum, neither the statute nor the legislative history compels the agency to define intracorporate transfers as first sales -- a definition that would depart from 40 years of administration of the Natural Gas Act (NGA), during which time an intracorporate transfer had never been considered a sale of natural gas.

The Court concedes that

there is a substantial difference between holding that the Commission had the authority to treat either transfer as a first sale and holding that the Commission was required so to treat one or the other.

Ante at 327. Since there is no legislative history which supports its position, the Court turns to the structure and purposes of the NGPA. Concededly, the purpose of the NGPA was to replace traditional historical cost methods with an incentive pricing scheme that would create sufficient financial incentive to spur the exploration and development of natural gas. See H.R.Rep. No. 95-496 (1978); Note, Legislative History of the Natural Gas Policy Act, 59 Texas L.Rev. 101 (1980). If the Commission’s interpretation undermined the Act’s ability to fulfill that goal, the Court would have a stronger case. But there is nothing in the legislative hearings, Reports, or debates which expresses any congressional dissatisfaction with the existing pricing of pipeline production or which suggests that the Commission’s pricing of the oldest and lowest cost pipeline production on a cost-of-service basis, under which the pipelines recover all of their prudent investments regardless of the success of their efforts, inhibited optimum production efforts by the pipelines. One can easily agree with the Court that "there is no reason to believe that any one group of producers is less likely to respond to incentives than any other," ante at 336-337, while finding that the cost-of-service basis provides sufficient incentives for pipeline companies to increase production. Thus, Order No. 58 is in no sense inconsistent with the primary purpose of the NGPA.{5}

Unable to demonstrate that the Commission’s interpretation is counter to the primary purpose of the NGPA,{6} the Court attempts to portray the Commission’s regulation as inconsistent with "several features" of the regulatory scheme. The effort is unsuccessful. First, the Act’s treatment of old gas in § 104 of the NGPA supports, rather than undermines, the Commission’s position. By incorporating part of the vintaging pattern that previously existed under the NGA, § 104 indicates that the NGPA did not intend to eliminate all vestiges of the Commission’s earlier pricing authority or to ensure that all gas, including old gas, would be entitled to higher "first sale" prices. Only that old gas which qualified for first sale treatment would receive the higher price. § 101(b)(5).

Second, the Court makes much of the fact that categories of gas entitled to first sale treatment are defined on the basis of the type of well, and not on who owns the well. This is true of the general "first sale" rule, but not of the exception to that rule provided in § 2(21)(B) which governs these cases and which unmistakably is directed at the treatment to be given pipeline production vis-a-vis natural gas obtained from independent producers. Moreover, since the Act does not direct or contemplate that all natural gas will receive higher prices, the Court’s discussion of Title II of the Act, which deals with who is to shoulder the higher prices, hardly bears on what gas is entitled to first sale treatment under Title I. The fact that consumers would shoulder the "bulk of the price increases," ante at 336, is no argument for enlarging the amount of gas for which price increases would be provided.

Finally, the limitation on affiliate pricing in § 601(b)(1)(E), does not, either singly or in combination with other sections, ante at 337-338, require that all pipeline production be entitled to "first sale" treatment.{7} As the Court observes later in its opinion, the purpose of § 601(b)(1)(E) is to insure that, if first sale prices are afforded to pipeline affiliates, such affiliate pricing would be subject to market control. Ante at 340. This section, which assures that the lack of arm’s length bargaining where first sales are to affiliates does not result in excessive prices, hardly reflects a congressional intent that all pipeline production be entitled to first sale prices. Thus, § 203 of the Act, which defines the acquisition costs subject to passthrough requirements, offers no support for the Court’s position. The section defines how first sale costs shall be determined, but does not determine the volumes of gas eligible to receive first sale prices; in addition, the provision, by its terms, covers only wells owned by pipeline affiliates.

II

Since neither the plain language of the Act nor its legislative history forbids the agency’s interpretation, and the purpose of the Act is not undermined by the Commission’s approach, considerable deference should be afforded the agency’s interpretation. Blum v. Bacon, 457 U.S. 132, 141-142 (1982).{8} Indeed, the very fact that NGPA prices are not necessary to spur natural gas production by the pipeline companies -- as they are for independent producers -- is a sufficient basis upon which to uphold the Commission’s interpretation. The Commission, however, has gone further and offered additional reasons for the order.

The Commission’s justification for rejecting the Court’s intracorporate transfer and downstream "first sales" approaches are not implausible. Adoption of the "downstream sale" approach would override the existing division between state and federal regulation of pipeline sales of natural gas. As the Commission pointed out, adoption of this theory

would result in the uniform application of first sale maximum lawful prices to all mixed volume retail sales made by pipelines and distributors. . . . The Commission finds no evidence in [§] 2(21)(B) or in any other provision of the statute that suggests that Congress intended to require the Commission to expand the field of federal ratemaking authority to include all mixed volume sales by intrastate pipelines or local distribution companies, the regulation of which has been the historic preserve of the states.

Order No. 102, 45 Fed.Reg. 67086 (1980). The Court rejects this argument as "exaggerated" because certain downstream pipeline sales, such as those of gas which has not been commingled with purchased gas, receive an NGPA rate. Ante at 340. But for this type of gas, Congress has made the judgment in § 2(21)(B) that the NGPA rate should govern. Applying the same principle to commingled gas, and most pipeline production falls within this category, would vastly expand the role of federal rates in what hitherto has been a sector regulated by the States. While § 602(a) of the NGPA allows the States to compete with the federal scheme by establishing price ceilings for the intrastate market that are lower than the federal NGPA ceiling, the Commission is fully justified in believing that it should not unnecessarily intrude into this sphere any further than actually required by the Act.

There is a second reasonable basis for the Commission’s order that is submitted in this Court. The Commission argues that pipeline producers would enjoy an unintended windfall if they received first sale pricing. Since present cost-of-service pricing permits pipelines to recover costs needed to stimulate production, first sale prices are unnecessary to increase natural gas production by pipelines. Supra at 347-348. Even if the windfall that would have been given for new gas were debatable, there can be no question that, for gas already dedicated to interstate commerce on the date of enactment of the NGPA and subject to cost-of-service pricing, the affording of an NGPA price is nothing more than a gift. Accordingly, a number of state public service commissions, and municipal and other publicly owned energy systems which provide natural gas service to citizens, and would foot the bill for the windfall have filed briefs as amici curiae in support of the Commission’s position. In precluding this windfall, the Commission is fulfilling the purpose of the NGA "to protect consumers against exploitation at the hands of natural gas companies," FPC v. Hope Natural Gas Co., 320 U.S. 591, 610 (1944); FPC v. Transcontinental Gas Pipe Line Corp., 365 U.S. 1, 19 (1961), and "to afford consumers a complete, permanent and effective bond of protection from excessive rates and charges," Atlantic Refining Co. v. Public Service Comm’n of New York, 360 U.S. 378, 388 (1959). Nothing in the NGPA suggests an abandonment of the consumer protection rationale -- the basis for regulating the industry in the first place. Thus, the Commission’s order does not discourage pipeline production activity, but only wisely minimizes the size of the price increases to that necessary to meet the NGPA’s objectives. The Court’s rejection of this position is based on the fact that "the Commission does not pursue its windfall argument to its logical conclusion," ante at 342, by denying NGPA prices to pipeline production sold at the wellhead. But when a pipeline sells gas at the wellhead, it is acting much like an independent producer, and it is reasonable for the Commission to have distinguished such sales from intracorporate transfers and downstream sales of intermingled gas. Similarly, the judgment that gas dedicated to a downstream contract was sufficiently similar to a wellhead sale to deserve first sale treatment does not undermine the Commission’s decision not to give "first sale" treatment to gas which cannot be attributed solely to the pipelines’ own production. In any event, the need to provide a partial windfall to comply with the Act hardly compels the agency to multiply the burden on consumers and industry which rely on natural gas for their energy needs.

III

Today the Court upsets the Commission’s interpretation notwithstanding that it is undeniably supportable under the plain language of the statute, not contrary to the legislative history, and consistent with the Act’s purpose to increase the supply of natural gas. In doing so, it rejects out of hand the Commission’s laudable objectives in not unduly intruding into the sphere of state regulation and not granting the regulated industry an unwarranted windfall profit. I can recall no similar case in which we have overturned an agency’s interpretation, and I respectfully dissent from this first and unfortunate instance.

1.

(B) Certain sales not included. -- Clauses (i), (ii), (iii), or (iv) of subparagraph (A) shall not include the sale of any volume of natural gas by any interstate pipeline, intrastate pipeline, or local distribution company, or any affiliate thereof, unless such sale is attributable to volumes of natural gas produced by such interstate pipeline, intrastate pipeline, or local distribution company, or any affiliate thereof.

92 Stat. 3355, 15 U.S.C. § 3301(21)(B) (1976 ed., Supp. V).

2. The Commission’s interpretation that downstream pipeline sales need not be considered first sales within the meaning of the Act is supported by the House Report on the proposed legislation which states that "the first sale price is essentially a wellhead price." H.R.Rep. No. 95-496, pt. 4, P. 103 (1977). In addition, Title I of the NGPA itself is entitled "wellhead pricing."

3. When Congress meant to limit the applicability of certain sections, it used "attributable" in conjunction with qualifying language. See, e.g., § 110(a)(1), 15 U.S.C. § 3320(a)(1) (1976 ed., Supp. V), which provides that a first sale price may exceed the maximum lawful price if the excess is necessary to recover

State severance taxes attributable to the production of such natural gas and borne by the seller, but only to the extent the amount of such taxes does not exceed the limitation of subsection (b);

see also § 503(e)(2)(B), 15 U.S.C. § 3413(e)(2)(B) (1976 ed., Supp. V). Congress’ failure to similarly modify "attributable" in § 2(21)(B) suggests that "attributable" means, as the Commission held, "exclusively comprised of."

4.

In addition, such a rule would extend NGPA first sale jurisdiction to all corporations which produce their own natural gas. Comments filed by industrial corporations which consume their own natural gas production indicate that this would produce undesirable results, and that no valid regulatory purpose would be served by extending the Commission’s jurisdiction to cover such production.

44 Fed.Reg. 66579 (1979).

5. This is even more true after Order No. 98, which grants new pipeline production parity pricing with first sale prices for independent producers. Only old gas is now limited to the NGA prices. The added revenues derived by pipelines from production of gas from pre-1973 wells cannot possibly operate as an incentive for the drilling of new wells.

6. The Court does suggest that the Commission’s view serves to perpetuate the dual system of natural gas regulation. While the House bill had a more ambitious objective of completely replacing the existing regulatory structure, the Senate disagreed, and the compromise enacted into law did not totally supplant the NGA. Section 104 of the Act directly incorporates the NGA "vintaging" pattern. As the Court recognizes, most old gas continues to receive the price it received under the NGA, increased over time in accordance with the inflation formula found in § 101. Ante at 334-336. The Act provides incentive pricing for new gas to insure adequate supplies in the interstate market, but maintains NGA price controls on old gas to prevent unnecessary price increases.

7. The Commission plausibly distinguishes affiliate sales, governed by sales contracts, from the purely internal transfers of gas between production and transportation divisions of a single corporation. See Order No. 102, 45 Fed.Reg. 67084 (1980). In a footnote, the Court denigrates the Commission’s analysis by observing that § 601(b)(1)(E) "reveals that Congress expressly refused to rely on affiliate sales contracts as reflecting the realities of the marketplace." Ante at 338, n. 16. But it is precisely because § 601(b)(1)(E) safeguards the consumer from unduly priced sales involving affiliates but not intracorporate transfers that it is reasonable that the former, but not the latter, may receive first sale treatment.

8. The Court suggests that it is not disregarding the agency’s expertise, because the Commission subsequently granted NGPA incentive prices to new pipeline produced gas in Order No. 98. Ante at 338-339, n. 17. The Commission concluded, however, that the policies of the NGPA would be better served by granting NGPA prices only to pipelines previously subject to area or nationwide rate treatment while retaining NGA pricing for gas produced under cost-of-service pricing.

[T]he Commission found that such incentive prices should not be available for production from leases previously subject to cost-of-service treatment, reasoning that such pipelines have already enjoyed the benefits of a certain recovery of and return on the costs of production, and that their customers, who have borne the risks of this investment in the early years of exploration and development, should have an opportunity to receive the price benefits of cost-of-service treatment for gas produced as a result of the expenditures.

Order No. 102, 45 Fed.Reg. 67084 (1980).