The U.S. Supreme Court recently held in ONEOK Inc. v. Learjet, Inc., that the Natural Gas Act (NGA) does not pre-empt state-law antitrust suits over manipulation of natural gas indices.  The court’s decision has important ramifications for natural gas regulation and the regulation of the energy industry more broadly.

In ONEOK, a group of direct-sales natural gas customers sued gas pipelines, alleging that the pipelines violated state antitrust laws by reporting false information to privately published market-based price indices, which are used as a tool to determine prices in contracting.  The pipelines, in response, argued that the NGA subjected the conduct to federal oversight that pre-empted the lawsuits.  The justices resolved the issue 7-2 in favor of the direct-sales customers, over a spirited dissent from Justice Scalia in which the Chief Justice joined.

The majority based their reasoning upon Congressional intent in regulating the natural gas industry.  Traditionally, the industry has been regulated in three distinct segments: (1) the production and gathering of gas in the field; (2) the pipelines’ interstate transportation and sale at wholesale of gas to local distributors; and (3) the distributors’ local sale at retail of gas to business and residential customers.  The NGA divides the regulation of the three segments into federal and state domains:  Generally, the Federal Energy Regulatory Commission (FERC) has jurisdiction over the second segment, and the states have jurisdiction over the first and third segments.

In this context, the question of responsibility over regulation of conduct affecting natural gas price indices arises (these indices list the prices at which natural gas has been sold across the country).  Here, the group of direct-sales customers alleged that the pipelines manipulated the market price indices, resulting in excessively high retail prices.  The alleged manipulation of the price indices by the pipelines, however, necessarily affected the wholesale prices for natural gas.  The question for the court, therefore, was whether federal regulation pre-empts state regulation of conduct that affects both retail and wholesale prices for natural gas.

The majority opinion, delivered by Justice Breyer, relied upon U.S. Congress’s “meticulous regard for the continued exercise of state power” through its express designation in the NGA of state authority in regulation of local retail sales.  After distinguishing previous case law relied upon by the dissent, the majority ultimately held that the doctrine of field pre-emption does not bar state antitrust regulation of price indices manipulation in this context, even if such conduct affects wholesale prices.

In dissent, Justice Scalia argued for a “straightforward” application of pre-emption regarding the NGA, relying on precedents suggesting that the test for determining a field pre-empted is simply whether FERC has the exclusive authority over a field of conduct.  Here, the dissent reasoned, FERC has exclusive authority to regulate conduct affecting interstate wholesale gas sales.  Therefore, the state regulation of this conduct, even if it is solely aimed at regulation of intrastate retail gas sales, is pre-empted by the NGA.

This case has several important ramifications for the natural gas industry and energy regulation more broadly.  First, the court has shown that it may tolerate overlapping spheres of regulatory jurisdiction.  Prior to this case, the court had classified the NGA as “a harmonious, dual system of regulation of the natural gas industry—federal and state regulatory bodies operating side by side, each active in its own sphere.”  ONEOK challenges this long-held conceptualization of the NGA, calling into question whether there are other areas of the natural gas industry which may answer to joint federal and state regulation.  Second, this case leaves room for states to regulate conduct that affects interstate gas sales, risking the formation of—as the dissent opined—“discrepancies among differing state regulations” to which the industry may be subjected.