2015 Court Opinion Case Summaries
- ONEOK, Inc., et al. v. Learjet, Inc. et al., No. 13-271, 575 U.S. ___ (Apr. 21, 2015)
- Central Hudson Gas & Electric v. FERC (April 2, 2015)
- Perez v. Mortgage Bankers Association, Nos. 13-1041, et al (U.S. Sup. Ct. March 9, 2015)
- Tesoro Alaska Company v. FERC, No. 13-1248, et al (D.C. Cir. February 20, 2015)
- Smith Lake Improvement and Stakeholders Association v. FERC, No. 13-1074, (D.C. Cir. Sept. 26, 2014), reissued, (D.C. Cir. Jan. 30, 2015)
The U.S. Supreme Court (“Court”) held that the doctrine of field pre-emption does not prohibit state law antitrust lawsuits alleging that buyers were forced to overpay for natural gas due to manipulation of natural-gas price indices. Accordingly, the Court affirmed the decision of the Ninth Circuit reversing the District Court’s grant of summary judgment in favor of the sellers.
The suits were originally filed in state and federal court alleging state-law antitrust violations against sellers/pipelines for manipulation of natural gas price indices through false reporting and wash trades, which are pairs of prearranged trades “involving no economic risk and no net change in beneficial ownership.” (Slip Op. at 7). The sellers removed the state cases to federal court and the proceedings were consolidated. (Id. at 8). The District Court granted summary judgment to the sellers finding that the alleged manipulative conduct “not only affected nonjurisdictional [retail sales,] but also ‘directly affected’ jurisdictional (i.e., wholesale) rates.” (Id. at 9 (citing Order in No. 03-cv-1431 (D. Nev., July 18, 2011), pp. 36-37)). The Ninth Circuit reversed the District Court, holding that the Natural Gas Act (“NGA”) “did not pre-empt state law claims aimed at obtaining damages for excessively high retail natural-gas prices stemming from [sellers’] price manipulation, even if the manipulation raised wholesale rates as well.” (Id. at 9 (emphasis in original)(citing In re Western States Wholesale Natural Gas Antitrust Litigation, 715 F.3d 716, 729-736 (9th Cir. 2013)).
The Court began its analysis by noting that the NGA “was drawn with meticulous regard for the continued exercise of state power, not to handicap or dilute it in any way.” (Id. at 10 (quoting Panhandle Eastern Pipe Line Co. v. Public Serv. Comm’n of Ind., 332 U.S. 507, 517-518 (1947)(internal quotation marks omitted). The Court emphasized the “importance of considering the target at which the state law aims in determining whether that law is pre-empted.” (Id. at 11) (emphasis in original). Thus, the “proper test for purposes of [field] pre-emption in the natural gas context is whether the challenged measures are ‘aimed directly at interstate purchasers and wholesales for resale’ or not.” (Id. at 12 (quoting Northern Natural Gas Co. v. State Corporation Comm’n of Kan., 372 U.S. 84 (1963)). Because antitrust laws, like blue sky laws (designed to protect investors against fraud in the sale of securities), “are not aimed at natural-gas companies in particular, but rather all business in the marketplace[,]” they are not subject to field pre-emption under the NGA. (Id. at 13).
The Court distinguished its holding regarding field pre-emption from prior cases based on conflict pre-emption. Id. at 14-15. “Mississippi Power, however, is best read as a conflict pre-emption case, not a field pre-emption case.” Id. at 14 (citing Mississippi Power & Light Co. v. Mississippi ex rel. Moore, 487 U.S. 354 (1988)). “The Court’s finding of pre-emption in Louisiana Power rested on its belief that the state laws in question conflicted with federal law.” (Id. at 15 (citing FPC v. Louisiana Power & Light Co., 406 U.S. 621 (1972))). The Court also observed that conflict pre-emption “may, of course, invalidate a state law even though field pre-emption does not.” (Id. at 15).
The Court also rejected arguments from the sellers and the Solicitor General that the Federal Energy Regulatory Commission’s (“Commission”) promulgation of detailed rules governing manipulation of price manipulation constituted a determination by the Commission that field pre-emption bars the buyers’ antitrust claims. (Slip Op. at 16).
In a dissent, Justice Scalia, writing for himself and Chief Justice Roberts, argued that the Court should “stand by the principle that if the Commission has authority over a subject, the States lack authority over that subject.” (Slip Op. Dissent at 8).
On April 2, 2015, a unanimous panel of the United States Court of Appeals for the Second Circuit (“Court”) affirmed, in all respects, orders of the Federal Energy Regulatory Commission (“Commission” or “FERC”) approving the New York Independent System Operator’s (“NYISO”) proposal to create a new capacity zone, the Lower Hudson Valley Zone, and establish a demand curve for that zone. The Court rejected appeals from two groups of petitioners: Utility Petitioners (Central Hudson Gas and Electric Corp., New York Power Authority, New York State Electric & Gas Corp., and Rochester Gas and Electric Corp.); and New York Petitioners (People of the State of New York and the New York Public Service Commission). There were also several entities that intervened in the docket.
As the Court explained, the two sets of the Commission orders under review “represent the culmination of a multi-year process during which NYISO, at FERC’s direction, sought to identify areas of New York in which customers received power from suppliers located on the other side of a ‘transmission constraint’ in the electric grid.” Slip op. at 4. Studies conducted during that process determined that “the financial incentives for capacity resources in the transmission-constrained area that became the Lower Hudson Valley Zone were inadequate, jeopardizing the reliability of the grid for customers there.” Id. at 4. With approval of the NYISO’s proposed new zone, FERC aimed to “address this potential reliability problem by providing more accurate price signals to in-zone resources . . . .” Id. at 5. “[H]owever, the creation of the new zone was expected to result in higher prices.” Id.
Before turning to the merits of the petitioners’ claims, the Court addressed certain intervenors’ threshold jurisdictional objections. First, the Court rejected intervenors’ claim that the petitioners sought to collaterally attack prior Commission orders, explaining that “the fact that FERC approved a general process does not suggest an advance determination that applying that process to all potential factual situations would necessarily fulfill its statutory obligation to ensure just and reasonable rates.” Id. at 26. Second, the Court eliminated one issue from consideration entirely, by finding that the New York Petitioners did not adequately preserve, on agency rehearing, their argument that FERC failed to quantify consumer price impacts. Id. at 29.
Noting that the Court’s review of “whether a particular rate design is just and reasonable is highly deferential,” the Court affirmed the merits of the Commission’s orders in all respects. Slip op. at 36 (citing Sithe/Independent Power Partners, LP v. FERC, 165 F.3d 944, 948 (D.C. Cir. 1999)). First, the Court rejected petitioners’ claim that FERC did not adequately justify its conclusion that consumers would benefit from the creation of the zone. FERC appropriately relied on “sound economic principles supporting the creation of the Lower Hudson Valley Zone and satisfactorily explained how those principles justified its conclusion.” Id. at 39. The Court held that FERC may rely on generic factual predictions derived from economic research and theory and that it satisfactorily considered the new zone’s impact on consumer rates. Id. at 40-41. Notwithstanding the fact that prices would increase in the short term, the Court “[was] not persuaded that there is anything unreasonable in FERC’s conclusion that higher prices were necessary to ensure reliability by generating accurate price signals in the long run.” Id. at 42.
Next, the Court affirmed FERC’s decision to reject a phase-in of the implementation of the zone and demand curve. The Court accepted FERC’s finding that accurate price signals were necessary not only for long-term incentives to build new capacity resources, but also for shorter-term supply resources (demand response and repowering options) and to maintain existing generation resources (discouraging early retirement). Slip op. at 43-44. The Court pointed to record evidence showing that there had been considerable delay, resulting in a decline of needed capacity resources. Id. at 46. Together with evidence showing immediate reliability concerns (id. at 47-48), this was sufficient for the Court to affirm FERC’s decision to immediately implement the new zone and demand curve. Id. at 50.
Further, the Court dismissed New York Petitioners’ claim that FERC ignored evidence that New York’s transmission upgrade initiative might eliminate the transmission constraints. “Because FERC explained that potential future transmission upgrades that might alter those conditions were speculative, it rationally explained its decision to act according to existing market conditions rather than speculative future conditions.” Id. at 52.
In dismissing the last two challenges to agency orders, the Court relied on the well-settled principle that FERC “enjoys broad discretion in determining how best to handle related, yet discrete, issues in terms of procedures.” Slip op. at 53 (citing Mobil Oil Exploration & Producing Se., Inc. v. United Distrib. Cos., 498 U.S. 211, 230 (1991)). Petitioners argued that FERC failed to set forth criteria for the potential elimination of the zone once the transmission constraints are alleviated. The Court held that FERC reasonably deferred this issue to a broader proceeding involving all interested parties (slip op. at 53) and noted that FERC has instructed NYISO to work with stakeholders to address zone elimination. Id. at 54.
Finally, the Court held that it was appropriate for the Commission to find that Utility Petitioners’ cost causation arguments were beyond the scope of the zone proceeding. Slip op. at 57. Because Utility Petitioners had adequate notice of their ability to raise the issue in the demand curve proceeding, but failed to do so, the Commission did not improperly “slice and dice” the proceedings and the Court was statutorily barred from addressing the issue. Id. at 60.
In a unanimous decision, the United States Supreme Court (Court) reversed a decision from the United States Court of Appeals for the District of Columbia (D.C. Circuit) which held that the Department of Labor (Department) failed to comply with the Administrative Procedure Act (APA) when it modified one of its interpretative rules without providing opportunity for notice and comment. (Slip op. at 1). The Court specifically found that the lower court’s reliance on Paralyzed Veterans of American v. D.C. Arena L.P., 117 F.3d 579 (D.C. Cir. 1997) was in error as Paralyzed Veterans is directly contrary to the language found in the APA. (Slip op. at 6-8).
This case involves “efforts by the Department of Labor to determine whether mortgage-loan officers are covered by the Fair Labor Standards Act of 1938 (FLSA).” (Slip op. at 3). The FLSA sets the minimum wage and overtime compensation for many employees; however, certain employees are deemed to be exempt from this standard. (Id.). In 1999 and 2001, the Department opined that mortgage-loan officers did not qualify for the exemption, and thus, FLSA applied to them. (Slip op. at 4). Then, in 2006 at the request of Mortgage Bankers Association (MBA), the respondent, the Department changed its conclusions and issued an opinion that mortgage-loan officers did fall under the exemption. (Id.). Finally, in 2010, the Department again changed its conclusion and found that mortgage-loan officers did not fall within the exemption. (Slip op. at 5). There was no notice or opportunity for comment on any of the Department’s opinions letters. (Id.). MBA challenged the 2010 letter in Federal district court. (Id.). The district court found in favor of the Department. (Slip op. at 6). MBA appealed to the D.C. Circuit, which reversed relying on Paralyzed Veterans as precedent. (Id.).
The APA requires that agencies follow certain procedures when promulgating, amending, and repealing rules. (Slip op. at 2). Section 4 of the APA provides that there must be notice and comment on proposed rules. (Id.). Rules that require notice and comment are “referred to as ‘legislative rules’ because they have the ‘force and effect of law.’” (Id., citing Chrysler Corp. v. Brown, 441 U.S. 281, 302-303 (1979)). Despite the requirement for notice and comment on proposed legislative rules, the APA does not require notice and comment on “‘interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice.’” (Id., citing to 5 U.S.C. § 553(b)(A)). In Paralyzed Veterans, the D.C. Circuit relied on Section 1 of the APA to find that notice and comment is necessary if an agency “‘make[s] a fundamental change in its interpretation of a substantive regulation.’” (Slip op. at 7, citing Paralyzed Veterans, 117 P.3d at 586).
The Court disagreed with the D.C. Circuit’s application of the APA in Paralyzed Veterans. (Slip op. at 8). The Court found that the D.C. Circuit “correctly read § 1 of the APA” but that “the court went wrong [ ] in failing to apply that accurate understanding of § 1 to the exemption for interpretive rules contained in § 4.” (Id.). The Court went on to hold that “[b]ecause an agency is not required to use notice-and-comment procedures to issue an initial interpretive rule, it is also not required to use those procedures when it amends or repeals that interpretive rule.” (Id.). The Court reasoned that the policy of requiring an agency to provide notice and comment when it changes an interpretive rule is not for the courts to decide, but is the responsibility of Congress or the administrative agencies. (Slip op. at 9).
The Court found MBA’s arguments to apply the holdings in Paralyzed Veterans to the Department’s opinion letters regarding the status of mortgage-loan officers unpersuasive. (Id.). MBA argued that the APA requires notice and comment when an agency “amends” its prior regulation. (Slip op. at 10). The Court disagreed that changing an interpretation of a regulation is amending such regulation. (Id.). The Court also rejected MBA’s argument that Paralyzed Veterans “is more consistent with this Court’s ‘functional’ approach to interpreting the APA” since the cases MBA cited to did not support its argument. (Slip op. at 11). Additionally, the Court rejected MBA’s argument that Paralyzed Veterans “reinforces the APA’s goal of ‘procedural fairness’ by preventing agencies from unilaterally and unexpectedly altering their interpretation of important regulations.” (Slip op. at 12). The Court stated that in fact the APA and Congress provide certain “safe harbors...[to] protect parties from liability when an agency adopts an interpretation that conflicts with its previous position.” (Slip op. at 13). Finally, the Court refused to address MBA’s argument that the 2010 Department opinion letter should “be classified as a legislative rule” as it was not raised in the lower courts. (Slip op. at 14).
Justice Samuel Alito wrote a separate opinion concurring in part and concurring in judgment. Justice Alito disagrees with the majority with respect to the safe harbors that protect parties from agencies that might exploit the board power received from Congress. (Alito, J., concurring, slip op. at 1). He believes that the doctrine set forth in Bowles v. Seminole Rock & Sand Co., 325 U.S. 410 (1945) may be incorrect. (Id.). Justice Antonin Scalia also wrote a concurring opinion agreeing with the judgment and the reasoning of the majority with the exception of “the Court’s portrayal of the result it produces as a vindication of balance Congress struck when it ‘weighed the costs and benefits of placing more rigorous...restrictions on the issuance of interpretive rules.’” (Scalia, J., concurring, slip op. at 1). He asserts that the Seminole Rock decision provides that “agencies may authoritatively resolve ambiguities in regulations” and thus, given a court’s deference to agency decisions, “[i]nterpretive rules that command deference do have the force of law.” (Id. at 3) (emphasis in original). He believes that an agency should be “free to interpret its own regulations with or without notice and comment; but courts will decide – with no deference to the agency – whether that interpretation is correct.” (Id. at 5).
Justice Clarence Thomas also wrote a concurring opinion agreeing with the majority’s decision to reject Paralyzed Veterans as inconsistent with the APA, but writes a separate opinion to discuss “the legitimacy of our precedents requiring deference to administrative interpretations of regulations.” (Thomas, J., concurring, slip op. at 1). He asserts that “the entire line of precedent beginning with Seminole Rock raises serious constitutional questions and should be reconsidered in an appropriate case.” (Id. at 23).
The United States Court of Appeals for the District of Columbia (D.C. Circuit or Court) rejected the consolidated petitions of Tesoro Alaska and Anadarko Petroleum, each intrastate shippers on the Trans Alaska Pipeline System (TAPS), to a decision by the Federal Energy Regulatory Commission (FERC or Commission) approving a settlement implementing a cost-pooling agreement among the pipeline’s three owners. The Court held, under Chevron step one, that the Commission acted within the scope of its statutory authority under the Interstate Commerce Act (ICA) when it approved the cost-pooling agreement, even though the agreement allocates fixed costs among the owners on the basis of each owner’s share of both interstate and intrastate utilization of TAPS. (Slip op. at 9). Under Chevron step two, the Court held that FERC articulated a sufficient rationale for its decision’s incidental effect on intrastate transportation on the pipeline because the cost-pooling agreement was required to enable the use of uniform rates and support the future, long-term operation of TAPS. (Slip op. at 13). Lastly, the Court rejected various challenges by Petitioners under the Administrative Procedure Act (APA) concerning FERC’s application of the ICA when it approved the cost-pooling agreement. (Slip op. at 13-16).
TAPS is an 800 mile pipeline stretching from Prudhoe Bay on Alaska’s North Slope to its southern terminus at the Port of Valdez, and is owned by BP Pipelines (Alaska) Inc., ConocoPhillips Transportation Alaska, Inc., and ExxonMobil Pipeline Company (Carriers). The pipeline carries a comingled stream of oil destined for refineries in Alaska, the transportation of which is subject to economic regulation by the Regulatory Commission of Alaska (RCA), and oil destined for refineries in the lower 48 via the Valdez Marine Terminal, the transportation of which is subject to economic regulation by FERC under the ICA. In 2012, following several years of disputes, the Carriers filed a settlement at FERC featuring a pooling agreement that allocates the majority of fixed costs of the pipeline’s operation to each Carrier based on total traffic, including both interstate and intrastate traffic. (Slip op. at 3). Petitioners objected to the pooling agreement because allocating costs based on usage would not incent any particular Carrier to discount its rates for third-party shippers in hope of increasing usage. (Slip op. at 5-6). FERC nevertheless approved the contested settlement over Petitioners’ objections in an order that was the subject of the instant appeal.
On appeal to the D.C. Circuit, Petitioners argued first that FERC exceeded its statutory authority under the ICA by impermissibly approving the pooling of intrastate costs by the TAPS carriers. Section 5(1) of the ICA provides:
Except upon specific approval by order of the Commission as in this section provided … it shall be unlawful for any common carrier subject to this chapter ... to enter into any contract, agreement, or combination with any other such common carrier or carriers for the pooling or division of traffic, or of service, or of gross or net earnings, or of any portion thereof; …. Provided, That whenever the Commission is of opinion, after hearing upon application of any such carrier or carriers or upon its own initiative, that the pooling or division, to the extent indicated by the Commission, of their traffic, service, or gross or net earnings, or any portion thereof, will be in the interest of better service to the public or of economy in operation, and will not unduly restrain competition, the Commission shall by order approve and authorize, if assented to by all the carriers involved, such pooling or division, under such rules and regulations, and for such consideration as between such carriers and upon such terms and conditions, as shall be found by the Commission to be just and reasonable in the premises …. (Slip op. at 8, citing ICA § 5(1) (emphasis in original)).
In evaluating FERC’s statutory authority under this and related provisions of the ICA, Judge Wilkins writing for the unanimous three-judge panel of the Court, focused on FERC’s “power to regulate the common carrier (rather than, for example, and interstate service offering).” (Slip op. at 9). Since each of the TAPS Carriers is a common carrier within the meaning of the statute, the Court was able to “find under Chevron step one that the ICA gives FERC authority over intrastate traffic – at least, where FERC has found it a necessary incident to regulation of interstate traffic.” Id.
Under Chevron step two, the Court observed that FERC had based its approval of the pooling agreement in part on a prior order wherein FERC concluded that “uniform rates were in the public interest because they would minimize annual filings and result in a single calculation of a ‘just and reasonable’ rate for identical service provided by the same operator.” (Slip op. at 12, citing Opinion No. 502, 123 FERC ¶ 61,287 at PP 1-2). In light of FERC’s prior precedent in favor of uniform rates, and the reality that a cost pooling agreement based on total usage would be the only way to ensure uniform rates on TAPS, the Court held that “this was sufficient articulation of a rationale justifying the incidental effect on intrastate commerce challenged here.” (Slip op. at 13).
Finally, the Court addressed Petitioners’ various challenges under the Administrative Procedure Act arguing that FERC improperly applied ICA § 5(1) in approving the settlement, including assertions that FERC misapplied its contested settlement standard, misapplied the “just and reasonable” standard, failed to support its decision with substantial evidence, failed to respond to Petitioners’ arguments and evidence, improperly relied on an Administrative Law Judge’s decision as a benchmark, improperly relied on its intestate uniform rate ruling, improperly relied on extra-record evidence, and misallocated the burden of proof in its proceedings. (Slip op. at 13-14). While the Court did not expressly address its rationale for rejecting each of these arguments in its opinion, it did offer its analysis as to why FERC’s approval of the pooling agreement was not arbitrary or capricious or unsupported by substantial evidence. Petitioners’ primary economic concern was that the existence of the pooling agreement would dissuade the Carriers from discounting off the maximum allowable rate since the allocation among the carriers was usage based. However, 25.1% of costs under the agreement were not actually pooled; the Court seized on this fact as justification for FERC’s conclusion that competition would not be “unduly restrained” under ICA § 5(1). (Slip op. at 15 (emphasis in original)).
The United States Court of Appeals for the District of Columbia (D.C. Circuit or Court) clarified and reissued its decision, maintaining its central holding that a second request for rehearing does not toll the sixty-day period for initiating judicial review unless the initial rehearing order modified the final order in a “significant way.” (Slip Op. at 4). The Court also held that a party may not simultaneously seek an optional petition for rehearing before the Federal Energy Regulatory Commission (FERC or Commission) and a petition for review to the D.C. Circuit. (Slip Op. at 6).
In the original ruling, the Court rejected FERC’s argument that Court’s decisions are inconsistent and suggest that whether a second petition for rehearing was “vexatious” should determine when the statutory sixty day period for seeking appellate review under Section 313(b) of the Federal Power Act begins. (Slip Op. at 5). The Court relied on Western Area Power Admin v. FERC, which held that the court lacked jurisdiction to hear a petitioner’s case when sixty days had lapsed after the first rehearing order and a second petition for rehearing was found to be unnecessary because it was not “based on any change in result in the first rehearing order.” (Slip Op. at 4-5, citing 525 F.3d 40, 52-53 (D.C. Cir. 2008)).
In its reissued ruling, the D.C. Circuit deleted language suggesting that a petitioner unsure of whether a change was “significant” could file a late rehearing petition after a premature appeal to the Court of Appeals was dismissed. The Court instead stated that the safer course for a petitioner unsure of whether changes in a rehearing order would be thought “significant” or not is to file a petition in the D.C. Circuit, relying upon the “reasonable grounds” exception in Section 313(b) to respond to any issues or reasoning raised for the first time by the rehearing order. (Slip Op. at 7).
Accompanying its reissued ruling, Judges Brown, Wilkins, and Silberman provided a statement admonishing the reliance on dicta by the Petitioners and warning FERC that language used in some of its orders may be misleading. Specifically, the court noted that even after the Commission found the Petitioner’s second hearing to be unnecessary, “[i]t declared that its notice constituted ‘final agency action’ and advised that ‘[r]equests for rehearing by the Commission of this rejection must be filed within 30 days of the state of issuance of this notice.’” (Statement at 2). The court continued that “[i]t would help interested parties to its decisions if FERC took greater care with this type of guidance.” (Id).