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Tuesday, June 25, 2024 | Back issues
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Battle Over Natural Gas Prices Hits Supreme Court

(CN) - The U.S. Supreme Court heard oral arguments Monday in an antitrust complaint that natural gas traders manipulated prices, causing huge electric price increases and damaging retail gas buyers.

After the early 2000s natural gas crisis, Learjet, Sinclair Oil and other purchasers sued Oneok, American Electric Power Co., Duke Energy Corp., CMS Energy Corp., Reliant Energy, Xcel Energy and dozens more, in Federal Court.

The buyers claimed the defendants submitted false information to trade publications to manipulate gas prices, which a Federal Energy Regulatory Commission report said led to an "unprecedented price increase in the electricity market."

"There was nothing to stop a trader from changing the numbers someone else had entered," the buyers claimed. "In other cases, traders took an oral 'survey' to get a sense of where the market was trading. Sometimes they represented it to the trade press as an actual survey, but in other cases they made up trades to average out to a number that was consistent with this 'survey.'"

A federal judge threw out plaintiffs' state-law antitrust claims on preemption grounds, but the 9th Circuit reinstated them, holding that FERC's jurisdiction does not include certain sales, such as "first sales at the wellhead or from sellers in Canada and Mexico."

On Monday the defense tried to stay out of state court by arguing for a broader reading of FERC jurisdiction.

Justice Sonia Sotomayor began with that topic: "Could the consumers have come and complained to FERC?"

"Absolutely," plaintiffs' attorney Neil Katyal replied. The remedy for states or retailers is to complain to FERC and ask them to regulate, he said. "But what can't happen is what happened here, which is the state coming in, and through these state causes of action, directly regulating practices that are common to both the retail and wholesale markets."

Justice Stephen Breyer wondered to whom a customer can complain when a "jurisdictional seller in a direct sale sells the gas at a price that is unreasonably high."

Katyal said that in such cases the buyer could complain to the state, as this would amount to retail sales. However, he said that the defense case was different.

"Crucial to our theory is the idea that if this is either transportation or production or regulation of the sale of the rate, which Louisiana Power is what - says that's what that proviso is, the states can undoubtedly regulate that."

But Justice Elena Kagan said that FERC jurisdiction did not necessarily make that jurisdiction exclusive, so long as there was no state law conflict.

Kagan said: "I don't really see a reason in this kind of case why you would exclude the state entirely, even if nothing the state was doing was conflicting with federal regulation or federal policy."

Katyal was not deterred: "Congress has drawn a bright line between state and federal authority in the setting of wholesale rates and in the regulation of agreements that affect wholesale rates. States may not regulate in areas where FERC has properly exercised its jurisdiction."

He continued: "Once we're in the field, once Congress has said to a federal agency, as it is here, FERC is regulating the very practice that they are seeking to regulate three different ways, then you can't tolerate states in the area."

The federal government predictably threw its hat in the ring in favor of expanded jurisdiction for FERC.

Assistant to the Solicitor General Anthony Yang was allowed to give a lengthy speech without interruption, in contrast to his private counterpart.

Yang said: "When we're talking about longer-term contracts, the market participants end up often pegging their sale price based on the floating price reported in these indices. And where you have both, the input is going into the index, wholesale and retail, and the outputs that are both wholesale and retail. And FERC has jurisdiction over the jurisdictional entities that are playing in both fields."

Kagan again wondered why the states should be left out: "They are regulating a transaction with a retailer. It's not a price thing. They are regulating a transaction in the way that they are in this case."

But Yang insisted that Congress granted FERC exclusive authority to deal with "partial merging of the wholesale and retail rates - the retail markets here."

Plaintiffs' attorney Jeffrey Fisher laid out his case: "FERC has no power over antitrust," he began. He said that the state regulation in question deals with retail prices, which are excepted from the Natural Gas Act's coverage.

Justice Antonin Scalia cut him off: "No, I'm not sure. It may be an exaggeration to say it - it falls squarely within the exception given to the states."

This led to a tortuous discussion on the definition of "sales."

"We wholeheartedly agree the state could not regulate retail sales in a way that conflicted with FERC's authority," Fisher said. He said that defendants are not "jurisdictional sellers" under the Act: "Congress hasn't given antitrust regulation to FERC. It's very odd to say the Natural Gas Act field preempts a claim that the agency has zero power over. But that is the claim they are making today."

The State of Kansas weighed in on plaintiffs' side, with amicus attorney Stephen McAllister emphasizing the states' strong interest in the case.

"States have long been leaders in the development and enforcement of antitrust law," he began. "Over the past century, state attorneys general have invoked state antitrust laws on a number of occasions to challenge anticompetitive practices in the natural gas industry."

He added: "The second interest the states have is maintaining the longstanding historical division of authority between the federal and the state governments in this area."

The court seemed to wonder what authority FERC might have left, but McAllister continued: "The states have no problem with FERC having authority to address manipulation in the wholesale market. We are absolutely comfortable with that. But what we do have a problem with is saying we can't use more than century-­old traditional antitrust laws that are not targeting the natural gas industry to protect consumers and businesses in our states that are paying way too much at retail because of a price-­fixing conspiracy."

Perhaps exhausted from a long day of regulation-parsing, the court said little during the rest of McAllister's speech on states' antitrust regulatory rights.

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