SUPREME COURT UPHOLDS FERC ORDER 451

The U.S. Supreme Court has upheld Order 451, the keystone of the Federal Energy Regulatory Commission's rules aimed at reforming the U.S. natural gas market. In an 8-0 opinion, the justices overturned a Fifth Circuit Court of Appeals ruling that had vacated the June 1986 FERC order (OGJ, Sept. 25, 1989, p. 35). The order was designed to encourage producers and pipelines to renegotiate old gas contracts, eliminating price caps for old gas and allowing a higher price set through a "good faith

Jan. 14, 1991

5 min read

The U.S. Supreme Court has upheld Order 451, the keystone of the Federal Energy Regulatory Commission's rules aimed at reforming the U.S. natural gas market.

In an 8-0 opinion, the justices overturned a Fifth Circuit Court of Appeals ruling that had vacated the June 1986 FERC order (OGJ, Sept. 25, 1989, p. 35).

The order was designed to encourage producers and pipelines to renegotiate old gas contracts, eliminating price caps for old gas and allowing a higher price set through a "good faith negotiation" procedure.

If producers and pipelines could not agree on a price, the rule allowed automatic abandonment and required the pipeline to transport the gas for the producer and another buyer.

The appeals court in New Orleans had ruled FERC, through the order, exceeded its authority under the Natural Gas Policy Act, Natural Gas Act, and Administrative Procedures Act.

The order had remained in effect while the case, Mobil Oil Exploration & Producing Southeast Inc. vs. United Distribution Cos., was appealed to the Supreme Court.

If the lower court ruling had not been overturned, gas producers and pipelines could have been liable for more than $100 million in refunds, even though little gas had been sold at Order 451's maximum allowed price. A surplus of gas has kept the price in check.

ORDER UPHELD

Associate Justice Byron White, in writing the court's opinion, said NGPA Section 104 clearly gives FERC authority to change the regulatory scheme applicable to old gas and "nothing in these provisions prevents the commission from either increasing the ceiling price for multiple old gas vintages or from setting the ceiling price applicable to each vintage at the same level."

The opinion rejected arguments that the single old gas ceiling price was not just and reasonable and that the action amounted to administrative decontrol.

"The agency's orders do not deregulate in any legally relevant sense," the high court said. "The commission adopted an approved pricing formula, set a maximum price, and expressly rejected proposals that it truly deregulate by eliminating any ceiling for old gas whatsoever.

"We further hold that Order 451's abandonment procedures fully comport with requirements set forth in the NGA. In particular, we reject the suggestion that this provision mandates individualized proceedings involving interested parties before a specific abandonment can take place."

The court said FERC had authority to give advance approval of abandonment and made the necessary findings that "preauthorized abandonment under the good faith negotiation regime would generally protect purchasers by allowing them to buy at market rates elsewhere if contracting producers insisted on the new ceiling price, safeguard producers by allowing them to abandon service if the contracting purchaser fails to come to terms, and serve the market by releasing previously unused reserves of old gas."

The court also found FERC met the requirement for hearings and comment period, but even then "the agency may rely on its rulemaking authority to determine issues that do not require case by case consideration."

The appeals court had ruled FERC erred in not covering the take or pay issue in Order 451, but the Supreme Court said the appeals court "clearly overshot the mark."

It said, "We are satisfied that the commission has taken steps to alleviate take or pay problems.

"An agency need not solve every problem before it in the same proceeding. This applies even where the initial solution to one problem has adverse consequences for another area the agency was addressing."

It added, FERC "reasoned that the good faith negotiation procedures would encourage renegotiation of take or pay provisions in contracts involving the sale of old gas or old gas and new gas together.

"The agency further noted that the release of old gas would reduce the market price for new gas and thus reduce the pipelines' aggregate liability. We are neither inclined nor prepared to second guess the agency's reasoned determination in this complex area." Justice Anthony Kennedy did not participate in the decision.

REACTIONS

FERC Chairman Martin Allday called the decision "a watershed event" that will allow FERC to proceed with greater legal and regulatory certainty.

He said, "The commission can now turn its resources to issues such as promoting efficient pipeline rate design and expediting the pipeline certification process rather than spending the enormous amount of time and effort it would have taken to unscramble the proverbial egg.

"But, above all else, sustaining the commission here will play a major role in allowing the public and industry to focus its attention and resources on the most important challenge it now confronts: planning and developing our domestic gas industry in order to provide for the country's long term energy future."

The Natural Gas Supply Association said, "We are jubilant. The Supreme Court is to be congratulated for its ruling and for its wisdom in deferring to the reasoned decision making that went into the formulation of Order 451. This decision promises to give consumers the most competitive price possible for the natural gas covered by Order 451.

"The order has been instrumental in facilitating the transition from a highly regulated to a more competitive natural gas marketplace. The Supreme Court's judgment will allow this progression to continue in an orderly fashion and should serve as an alarm to those seeking to derail or stall the reformative forces at work in the natural gas industry. The Supreme Court has truly signaled that a new era is in progress."

The American Gas Association said, "The court's ruling removes some lingering concerns and uncertainties regarding the status of certain natural gas contracts and will have the effect of adding further stability to the natural gas market."