NORTHWEST CENTRAL PIPELINE CORPORATION, APPELLANT V. STATE CORPORATION COMMISSION OF KANSAS, ET AL. No. 86-1856 In the Supreme Court of the United States October Term, 1987 On Appeal from the Supreme Court of Kansas Brief for the United States and the Federal Energy Regulatory Commission as Amici Curiae This brief is filed in response to the Court's order inviting the Solicitor General to express the views of the United States. TABLE OF CONTENTS Question Presented Statement Discussion Conclusion QUESTION PRESENTED Whether an order of the Kansas Corporation Commission, which regulates the quantity of natural gas that may be produced from Kansas gas wells, impermissibly interferes with the federal regulatory scheme established under the Natural Gas Act, 15 U.S.C. 717 et seq., and the Natural Gas Policy Act of 1978, 15 U.S.C. 3301 et seq., or exceeds the State's power under the Commerce Clause of the United States Constitution. STATEMENT 1. a. Natural gas within a "field" can migrate underground from underproduced areas to producing areas. It is possible to extract from a single well or group of wells an indefinitely high percentage of the recoverable natural gas in the field, exhausting not only the producing wells but also nonproducing or underproducing wells (J.S. App. 17a-18a). This phenomenon creates problems not only of equity between owners but of waste induced by a race to capture gas ahead of other wells in the same field. In addition, for physical reasons, a gas reservoir may be wastefully depleted by either over- or underproduction so that otherwise recoverable reserves are lost. Champlin Refining Co. v. Corporation Comm'n, 286 U.S. 210, 228 (1932). Kansas, like other gas producing states, has laws "to prevent the inequitable or unfair taking of natural gas" (Kan. Stat. Ann. Section 55-703 (1983); J.S. App. 111a-112a), and to prevent "economic waste, underground waste and surface waste" in its production (Kan. Stat. Ann. Sections 55-701, 55-702 (1983); J.S. App. 110a-111a). Pursuant to these statutes, the Kansas Corporation Commission has since 1944 regulated the production of gas in the Hugoton field /1/ so that each well may "ultimately produce approximately the amount of gas underlying the lease upon which it is located." Basic Proration Order for the Hugoton Gas Field 12-13 (13 R. 37-38). This is done by fixing maximum monthly gas production rates -- called "allowables" -- for all wells in the field. The Kansas Commission first sets a monthly gas production ceiling (pegged to an estimate of market demand) for the field as a whole. /2/ The regulatory scheme then assigns to the various producers and their wells maximum gas production rates set to spread the estimated market demand over all producing wells in proportion to their individual production capabilities. In actual practice, however, the wells cannot be operated to meet their monthly allowables precisely. A well may be "shut in" and thus underproduce because of mechanical problems or the lack of a willing buyer of the well's gas production; at other times, a well may be be overproduced by error or design. To account for under- or overproduction, the Kansas scheme incorporates a system of tolerances. If a well produces less than its allowable level, it accrues an "underage"; an overproducing well accrues an "overage." Overages are offset against future monthly allowables; underages entitle a producer to overproduce his well (i.e., produce in excess of the well's monthly allowable to make up the underage) if there is a purchaser for the extra gas and the well can physically produce it. J.S. App. 17a-20a. The overall result is a regulatory scheme that seeks to "balance() various factors in an effort to regulate production so that the amount produced over time from any well is equal to the amount of gas originally in the developed lease" (J.S. App. 17a). The formula, with allowables, underages and overages, relies on the concept of "compensating drainage" so that, while wells may produce different amounts and produce at various times, they are "in balance in the long pull" (id. at 18a). b. In February 1983, the Kansas Commission changed the underage rules to create "an incentive for operators to produce" (J.S. App. 74a). Before the change, accrued underages were subject to cancellation but also to reinstatement under rules whose net effect was that underages could be accrued indefinitely and used at any time. Over time underages accumulated, and by 1983 a huge amount of underages had been built up. /3/ The 1983 changes provided, for the first time, a set of rules under which underages are permanently cancelled if not reinstated and produced within specified periods of years (J.S. App. 20a-21a). By its terms, the rule change was "directed to and affects only those who drill for and produce gas from the Hugoton Field. * * * (It) does not require pipeline() purchasers to do anything or refrain from doing anything" (id. at 87a). The Kansas Commission's reasons for the rule change were not explained with perfect clarity and are a matter of some dispute. The Kansas Commission stated that the prior rule "does not provide operators sufficient incentive to produce gas" (J.S. App. 74a) and that one purpose of the change was to "encourage" production generally (id. at 73a). The Kansas Supreme Court also understood the Kansas Commission to have concluded that permitting indefinite accumulation of underages had led "Hugoton Field production (to fall) below good recovery practices and upset the dynamics of the Hugoton Field, affecting both proration and correlative rights" (id. at 4a; see id. at 11a-12a, 17a-18a). /4/ The Kansas Supreme Court did recognize that while directed to gas producers, the rule change was intended to affect pipeline purchasing practices (id. at 40a-41a). 2. Together with other interstate pipelines, appellant opposed the rule change before the Kansas Commission in the rulemaking proceeding. It alleged, inter alia, that the proposed rule change would unlawfully encroach upon the federal government's exclusive regulatory jurisdiction under the Natural Gas Act (NGA), 15 U.S.C. 717 et seq. /5/ More particularly, relying on this Court's decision in Northern Natural Gas Co. v. State Corporation Comm'n, 372 U.S. 84 (1963), appellant argued that the threat to cancel underages if they were not used within a specified period of years would force it to purchase more Kansas gas at a time when it did not need the gas (or else risk permanently losing gas from a well whose production was contractually committed to it), and therefore that the state was in effect directing interstate pipeline purchasing practices, a matter exclusively within the concern of the Federal Energy Regulatory Commission. After the Kansas Commission rejected these contentions, appellant sought judicial review of the new rule. A Kansas district court upheld the rule change (J.S. App. 53a-60a) on the ground that it involved the "production or gathering" of gas, activities specifically excluded from the reach of federal regulation by Section 1(b) of the NGA, 15 U.S.C. 717(b). /6/ A divided Kansas Supreme Court affirmed (J.S. App. 13a-44a). While recognizing that the new rule was an "indirect effort to influence purchasers" and acknowledging that "purchasers are indirectly caught in the backwash," the court upheld the rule against the challenge based on Northern Natural because the "rules on underages are a part of production regulation" over which the state has exclusive jurisdiction (J.S. App. 40a-41a). In dissent, Chief Judge Schroeder took the view that the rule is invalid, either on the ground that the Kansas Commission had exceeded its "statutory authority in fixing allowables far in excess of demand" (id. at 45a) or, alternatively, because the state regulation violated Northern Natural: while "directed at producers not purchasers, its real purpose is to create an impact on purchasers' business decisions concerning the makeup of their interstate gas mix" and therefore its effect is to impair the regulatory authority of the Commission under the NGA (J.S. App. 46a-48a). Appellant appealed that decision to this Court. On February 24, 1986, after deciding Transcontinental Gas Pipe Line Corp. v. State Oil & Gas Bd. (Transco), 474 U.S. 409, the Court vacated the Kansas Supreme Court judgment and remanded the matter for further consideration in light of that case. /7/ 475 U.S. 1002 (1986). 3. On remand, the Kansas Supreme Court, with Chief Judge Schroeder again dissenting, reaffirmed its earlier decision (J.S. App. 1a-12a). In doing so, the majority read Transco as requiring a determination whether the state's order "falls within the limits of a comprehensive federal regulatory scheme rather than within the category of regulatory questions reserved for the states; and, if so, whether the effect of the order will be to impair market forces" (id. at 8a-9a). Although finding that "any change in rates of production," such as that contemplated by the state's action in tightening the underage rules "has an effect on the interstate market" (id. at 11a), the Kansas court found this alone was not sufficient to preempt the state action. Rather, it concluded that the key test must be "whether the regulation is primarily directed at the marketing of gas rather than production thereof" (ibid.). On this basis, the Court upheld the Kansas Commission's rule change (J.S. App. 11a-12a): Here, the Commission found the amendment * * * was necessary for the prevention of waste and protection of correlative rights. Though controverted, there is evidence in the record to support that finding. Further, any effect on the interstate sale of gas is merely incidental rather than the objective of the order. The Kansas court consequently held that the order "does not transgress federal regulation of natural gas in interstate commerce" and affirmed the state commission (id. at 12a). DISCUSSION We believe that the Supreme Court of Kansas reached the correct result: the state commission order at issue in this case is not preempted by the Natural Gas Act (NGA), 15 U.S.C. 717 et seq., or the Natural Gas Policy Act (NGPA), 15 U.S.C. 3301 et seq. While the issues are complex, and we are not able to endorse all of the state court's reasoning, we do not believe that appellant's contentions warrant this Court's plenary consideration. Unlike the state orders at issue in Northern Natural and Transco, the state order at issue here was, on its face, directed at producers, not at purchasers of gas from producers for resale in interstate commerce. Compare Northern Natural, 372 U.S. at 90; Transco, 474 U.S. at 411. While a state order nominally directed at gas producers may conflict with the comprehensive scheme of federal regulation of gas purchasers, the Kansas proration order does not conflict with the federal scheme merely because, like many other state regulations of in-state production activities, it has a forseeable effect on the economic choices made by gas purchasers and hence on the flow of the product into interstate commerce. Purchasers are not, by the order, compelled even indirectly to act contrary to federal regulation, nor is the federal scheme required to give way before the state's rule change. 1. In Northern Natural Gas Co. v. State Corporation Comm'n, 372 U.S. 84 (1963), the Court ruled that a Kansas "ratable-take" order, requiring an interstate pipeline to purchase gas ratably from all wells connected to its pipeline system in each gas field within the state, was preempted by the NGA because the order encroached on the exclusive regulatory jurisdiction conferred on the Federal Power Commission by that statute. In reaching that conclusion, the Court stressed two points. First, the Court stressed that the state order at issue in Northern Natural was "unmistakably and unambiguously directed at purchasers who take gas in Kansas for resale after transportation in interstate commerce" (372 U.S. at 92 (emphasis in original)). The fact that the order imposed direct obligations on gas purchasers was noted first (id. at 90) as the reason why the "production or gathering" exemption set forth in Section 1(b) of the NGA, 15 U.S.C. 717(b), did not render that Act inapplicable and hence clear the way for state regulation. /8/ The Court emphasized the point again in explaining the nature of the "danger of interference with the federal regulatory scheme" (372 U.S. at 92) and yet again in explaining (id. at 93-94) why the state order was not an acceptable means of achieving the concededly legitimate state objective of conserving natural resources. /9/ Second, the Court stressed that "collision between the state and federal regulation" was an "imminent possibility" and that the orders must therefore "be declared a nullity in order to assure the effectuation of the comprehensive federal regulation ordained by Congress" (372 U.S. at 92). As the Court explained (id. at 89; see also id. at 98 (Harlan, J., dissenting)), the ratable-take requirement threatened the pipelines with criminal penalties if they did not either reduce their takes from wells with which they had contracts, thus incurring liability to those producers, or increase their takes from other wells, and thus take more gas than they could currently use. Any such "readjustment of purchasing patterns * * * could seriously impair the Federal Commission's authority to regulate the intricate relationship between the purchasers' cost structures and eventual costs to wholesale customers who sell to consumers in other States" (id. at 92). In Transcontinental Gas Pipe Line Corp. v. State Oil & Gas Bd., 474 U.S. 409 (1986), the Court was confronted with a ratable-take order "virtually identical" (id. at 411) to the order struck down in Northern Natural. In the interim, however, Congress had enacted the NGPA, which restructured the comprehensive NGA regulatory scheme, sharply reducing FERC authority to set wellhead prices and to dedicate natural gas production to the interstate market and circumscribing its review of interstate pipeline purchasing behavior. See generally Transco, 474 U.S. at 422-423. The question in Transco, therefore, was whether the rule of Northern Natural survived the enactment of the NGPA. The Court answered that question in the affirmative. It did so, as we read the Court's opinion, in essence because it found that the NGPA had not eliminated the NGA's comprehensive federal regulatory scheme but had incorporated into that scheme a new element -- a federal decision "to leave determination of supply and first-sale price to the market" (Transco, 474 U.S. at 422); the state order at issue in Transco, by requiring pipeline purchasers to take gas ratably, conflicted with the NGPA policy that there should be no regulation of the pipeline wellhead purchases at issue there, and hence was invalid. /10/ 2. The present case, unlike both Northern Natural and Transco, involves a regulation that is, in terms, directed at producers of natural gas, not at pipelines. To be sure, the Kansas regulation, as the Kansas Supreme Court itself recognized, is "intended for purchasers (even though) directed to producers" (J.S. App. 40a). It is intended to increase production from the Hugoton field; as the court recognized, that result depends in large part on pipelines being persuaded to take additional gas rather than to allow the cancellation of underages (J.S. App. 37a): The weight and logic of the evidence raises serious questions of the producers' ability to persuade the purchasers to take enough additional gas to acquire an overproduced state in time to avoid permanent cancellation of underages. However, there is substantial competent evidence in the record indicating otherwise under ideal circumstances. But any impact on pipelines is a result not of a state order applicable directly to them, but of economic considerations. This is a crucial distinction for the preemption analysis. As the Court summarized most recently in Schneidewind v. ANR Pipeline Co., No. 86-986 (Mar. 22, 1988), slip op. 6, a state regulation that is not explicitly barred by federal law may nevertheless be preempted if Congress has "indicate(d) an intent to occupy a given field to the exclusion of state law" and the state regulation lies within that field. And state regulation that lies outside any field where Congress has entirely displaced state regulation may be preempted "'when it is impossible to comply with both state and federal law, Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-143 (1963), or where the state law stands as an obstacle to the accomplishment of the full purposes and objectives of Congress, Hines v. Davidowitz, 312 U.S. 52, 67 (1941).'" Schneidewind, slip op. 6 (quoting California Coastal Comm'n v. Granite Rock Co., No. 85-1200 (Mar. 24, 1987), slip op. 7). The significance, for preemption analysis, of the fact that the Kansas order at issue here (unlike the state regulations at issue in Northern Natural, Transco, and Schneidewind) by its terms regulates producers, and gas production, not pipelines and their activities, is that the "field occupation" sort of preemption is not applicable. Cf. Schneidewind, slip op. 1-2 & n. 1. The Kansas order directly regulates the quantities of natural gas that may be produced from a given well in particular periods, and the NGA has since the beginning exempted from the federal regulatory domain the regulation of "production or gathering" of natural gas. See Northern Natural, 372 U.S. at 89; Interstate Natural Gas Co. v. FPC, 331 U.S. 682, 690 (1947). The Kansas order cannot, therefore, be said to have intruded on a domain occupied by federal law to the exlusion of state law. Unlike the state court, however, we do not think the matter ends there. /11/ The Kansas order would also be preempted if it could be shown to conflict with the federal scheme, either in the Paul sense or in the Davidowitz sense, and the fact that the Kansas order is nominally aimed at producers does not eliminate the possibility of such a conflict. See Arkansas Louisiana Gas Co. v. Hall, 453 U.S. 571, 583-584 (1981). A pipeline claiming "conflict" preemption, however, has the burden of showing the conflict. It is this burden that in our view appellant has not met. Here, contrary to appellant's argument (J.S. 21-22), there is no possibility of actual "collision" between state and federal law in the Paul sense. As the cases make clear, federal authority extends to regulating the sale and transportation of natural gas in interstate commerce; while the Commission's abandonment authority extends to insuring that gas that is produced from committed or dedicated leases and wells moves in interstate commerce (see, e.g., United Gas Pipe Line Co. v. McCombs, 442 U.S. 529 (1979)), the Commission has no authority to compel gas production (see Shell Oil Co. v. FERC, 566 F.2d 536 (5th Cir. 1978), aff'd by an equally divided Court, 440 U.S. 192 (1979)), and a pipeline and its customers therefore have no federally enforceable right to require that gas be produced or that it be protected for future purchase. 3. Contrary to appellant's argument (J.S. 17, 20-21), otherwise valid state regulation does not pose an "obstacle," in the Davidowitz sense, to the accomplishment of the purposes of federal law simply because it foreseeably -- even intentionally -- affects pipeline purchasing practices. Those practices are not themselves sacrosanct, and nothing in this Court's prior cases indicates that the federal regulatory scheme preempts every state law rule that influences pipeline purchasing decisions; to the contrary, the federal regulatory scheme presupposes state-fixed production and gathering regulations just as it presupposes other property and contract rights and other conditions dependent on state law. See pages 16-17, infra. All agree that the rights of well owners to the gas in a common field are determined by state law (see, e.g., Thompson v. Consolidated Gas Utilities Corp., 300 U.S. 55, 69-70 (1937); Champlin Refining Co. v. Corporation Comm'n, 286 U.S. 210 (1932); see also Northern Natural, 372 U.S. at 94-95 & n. 12); this determination presents "as thorny a problem as has challenged the ingenuity and wisdom of legislatures." Railroad Comm'n v. Rowan & Nichols Oil Co., 310 U.S. 573, 579 (1940)). Different possible state rules bear different relationships to the market forces that determine the price of gas. The "rule of capture," under which gas belongs to the well owner who extracts it, spurs each well owner to take gas quickly (as long as the price covers the cost of extraction). See generally 1 W. L. Summers, The Law of Oil and Gas Sections 61-63 (perm. ed. 1954); Hardwicke, The Rule of Capture and Its Implications as Applied to Oil and Gas, 13 Tex. L. Rev. 391 (1935). As appellant itself noted (J.S. 4-5), in order to prevent resulting waste and protect correlative rights, Kansas, like other states, has modified the rule of capture by enacting its system of allowables. If the result of a system of allowables were to fix, in advance and permanently, a quantity of gas that each well owner may take from the pool over as long a period of he wishes, then the fact that his well is drilled into a common pool would give the owner no incentive to extract gas any faster than the market otherwise warrants. /12/ Appellant's argument, as we understand it, is that the combined result of the NGA, the NGPA and Transco is to require Kansas to adopt, or at least approximate, such a fixed-entitlement system of allowables, eliminating as far as possible any common-pool incentive for producers to take gas faster than they otherwise would. As we read appellant's contentions, any state scheme of allowables that has the intended effect of giving a well connected to an interstate pipeline a use-it-or-lose-it incentive to extract gas should be deemed an impermissible "obstacle" to accomplishment of the purposes of federal regulation. We disagree. As the "production or gathering" exemption of Section 1(b) of the NGA, 15 U.S.C. 717(b) makes clear, the federal scheme recognizes not only that federal jurisdiction does not extend to the regulation of gas production, but that state authority does. Appellant offers no evidence of a congressional intent to intrude on traditional, otherwise valid state regulation of production merely because it may affect pipelines' economic choices among purchasing alternatives all of which are permitted by their contracts and the federal regulatory scheme. See 124 Cong. Rec. 38366 (1978) (remarks of Rep. Dingell, House Manager of the NGPA, explaining that state authority to prorate production is unaffected by NGPA). There is no intrusion upon the "comprehensive * * * federal regulatory authority over interstate gas transactions" (Schneidewind, slip op. 7 n.6), unless state regulation does more than influence the choices pipelines make among lawfully available actions. /13/ The situation might be different if there were no valid state reasons for the Kansas order, but appellant does not, as we understand its position, argue in this Court that the Kansas order has been "'shown to bear no reasonable relation either to the prevention of waste or the protection of correlative rights.'" Thompson v. Consolidated Gas Utilities Corp., 300 U.S. 55, 69 (1937) (quoted in Northern Natural, 372 U.S. at 95 n.12). The Kansas commission concluded here (albeit not with exceptional clarity) that permitting each well owner to accumulate underages indefinitely will cause waste and be unfair to the wells that do produce their monthly allowables. See J.S. App. 73a. The Kansas Supreme Court affirmed that finding (id. at 11a-12a): Here, the Commission found that the amendment to paragraph (p) of the basic proration order was necessary for the prevention of waste and protection of correlative rights. Though controverted, there is evidence in the record to support that finding. The ratable-take orders at issue in Northern Natural and Transco were of course also defended on grounds of conservation and fairness among well owners in a common pool (372 U.S. at 93; 474 U.S. at 416), and this Court in both cases, without disputing the state's proffered justification, held the orders nevertheless preempted by federal law. But in those cases the state justification was proffered as a reason for overriding federal regulation. It is one thing to say that the federal scheme precludes direct state regulation of pipeline takes even if the state proffers an otherwise valid justification; it is a different thing entirely to say that the federal scheme precludes a state from adjusting its system of producer allowables, in a manner it deems appropriate to prevent waste and protect correlative rights, because of the effect on the pipelines' purchasing choices through the operation of market forces. In sum, our view is as follows. Transco establishes that state regulation of pipeline takes, as such, continues to be barred under the NGPA, as it was under the NGA. State regulation of producers is, however, a different matter. Such regulation may be invalid if it is "'shown to bear no reasonable relation either to the prevention of waste or the protection of correlative rights'" (Northern Natural, 372 U.S. at 95 n.12 (quoting Thompson v. Consolidated Gas Utilities Corp., 300 U.S. at 69)), and it is possible that even state regulation serving such purposes might be shown to conflict with the aims of the federal scheme. But such a showing would require more than a demonstration that the state regulation foreseeably affects the choices pipelines in fact make: otherwise valid state regulation of production does not inherently conflict with the federal regulation of pipeline activities; it is instead one of the conditions under which those activities operate. 4. Appellant's Commerce Clause argument, to the extent that it differs from appellant's argument based on preemption, is based on a misconception. The argument is that the "effect of the (Kansas) order will be to withdraw a large volume of low-cost natural gas from the established stream of interstate commerce to benefit preferentially the customers of the local intrastate gas companies" (J.S. 24-25). But as we have noted, see page 14 a particular quantity of gas is not in the stream of interstate commerce until it is sold or produced, and an interstate pipeline that has contracted to purchase the production of a particular well does not have a right, under the Commerce Clause or otherwise, to be protected against otherwise valid state rules that reduce that well's production. Cf. Cities Service Co. v. Peerless Oil & Gas Co., 340 U.S. 179, 186-189 (1950). CONCLUSION The appeal should be dismissed for lack of a substantial federal question. Respectfully submitted. CHARLES FRIED Solicitor General CATHERINE C. COOK General Counsel JEROME M. FEIT Solicitor JOHN H. CONWAY Attorney Federal Energy Regulatory Commission APRIL 1988 /1/ The Hugoton Field extends across portions of Kansas, Oklahoma and Texas. About two thirds of the field is located in Kansas; in 1983, that portion of the field contained more than 4,000 wells (J.S. 3). /2/ In determining market demand, the Kansas Commission must "consider the reasonable current requirements for current consumption and use within and without the state, and such other factors, conditions, or circumstances that would aid in establishing the market demand" (Kan. Stat. Ann. Section 55-703 (1983); J.S. App. 112a-113a). The market demand levels are determined twice a year after public hearings. In determining the market demand levels the state commission solicits from pipelines and producers estimates of upcoming gas production needs. While not bound by these estimates, the Kansas Commission uses them as supporting evidence for its analysis. /3/ For most wells in the Hugoton field, underages have risen dramatically in recent years, reaching a total of over 204 billion cubic feet of gas by 1982 (J.S. App. 74a); the total natural gas production for all of Kansas that year was a little over 430 billion cubic feet (American Gas Association, Gas Facts: 1984 Data 28, 29 (1985)). Because of relatively liberal production and sales contracting terms and the higher tolerances for underproduction in the Kansas Hugoton field, pipelines were apparently using the field for "storage" and filling their immediate gas needs elsewhere (J.S. App. 34a). This happened even though the Hugoton field gas is, relatively speaking, low priced gas. (Most of the Hugoton field gas production is committed or dedicated, when produced, to interstate commerce (see note 5, infra) and thus commands comparatively low prices under Section 104 of the Natural Gas Policy Act of 1978, 15 U.S.C. 3314.) Appellant is among the pipelines that have chosen to purchase higher-priced gas from other areas and preserve the lower priced Hugoton field gas for later use. See Northwest Central Pipeline Corp., 33 F.E.R.C. Paragraph 63,067, at 65,277-65,278 (1985), a case still before FERC involving the prudence of appellant's 1984 gas purchasing practices. /4/ One correlative rights problem was apparently as follows. The formula for monthly allowables for particular wells depends on factors that include pressure of the well (J.S. App. 17a-18a). Operating a well reduces its pressure, so that "operators producing their allowable may (thereafter) * * * receive a smaller allowable than those operators not producing their allowables" (id. at 73a). In other words, operators not producing their allowables would not only accumulate underages but would also receive disproportionately high future allowables. One of the Kansas Commission's stated concerns was to adopt provisions that would "induce the production necessary to balance the field and protect correlative rights" (id. at 75a). /5/ Most of the natural gas produced from the Kansas-Hugoton gas field is sold to interstate gas pipelines under certificates of public convenience and necessity issued by the Federal Energy Regulatory Commission under Section 7 of the NGA, 15 U.S.C. 717f (J.S. 3-4). This means that the gas, when produced, is dedicated to interstate commerce and producers have a legal duty to sell any gas that they produce to the interstate market until relieved of that obligation by the Commission. Passage of the Natural Gas Policy Act of 1978 (NGPA), 15 U.S.C. 3301 et seq., did not relieve producers of that obligation, because that Act provides that gas dedicated to interstate commerce before the NGPA was enacted generally remains under the Commission's NGA certification authority (15 U.S.C. 3431(a)(1)(A) and (B)). /6/ That section provides in pertinent part: The provisions of this chapter shall apply to the transportation of natural gas in interstate commerce, to the sale in interstate commerce of natural gas * * * and to natural-gas companies engaged in such transportation or sale, but shall not apply to any other transportation or sale of natural gas * * * or to the production or gathering of natural gas. /7/ Transco dealt with the question whether Congress, in enacting the NGPA, had so altered the federal regulatory scheme that state regulations preempted under Northern Natural could now be permitted. The Court held it had not: "(A)lthough FERC may now possess less regulatory jurisdiction over the 'intricate relationship between the purchasers' cost structures and eventual costs to wholesale customers who sell to consumers in other States,' Northern Natural, 372 U.S. at 92, than it did under the old (pre-NGPA) regime, that relationship is still a subject of deep federal concern" (474 U.S. at 422). The Court in Transco went on to find that a state's attempt to regulate the wellhead purchasing practices of interstate pipelines directly was no more valid in the post-NGPA environment than under Northern Natural before the NGPA was passed (id. at 422-424). /8/ The Court expressly declined to consider "the effect of the 'production or gathering' exemption upon ratable-take orders directed exclusively at independent producers of natural gas" (372 U.S. at 90 n.8). /9/ The state court in Northern Natural had sustained the state orders because they did not involve direct regulation of the prices of wholesales of natural gas. This Court rejected that argument (see 372 U.S. at 90-91), saying that the "federal regulatory scheme leaves no room either for direct state regulation of the prices of interstate wholesales of natural gas * * * or for state regulations which would indirectly achieve the same result" (id. at 91 (footnote omitted)). The effect of the ratable-take orders at issue in Northern Natural was "indirect," however, only in the sense that the orders purported to regulate quantity and not price, not in the sense that they purported to regulate a person other than the purchaser-wholesaler of gas. /10/ In contrast to the gas involved in Transco, the current case involves gas committed to the interstate market under the NGA, which remains subject to ceiling prices set by Congress (15 U.S.C. 3314). See note 5, supra. /11/ Both in its initial opinion (J.S. App. 40a-41a) and after remand from this Court (id. at 11a), the state court saw essentially a bright line between a state regulation addressed to gas producers and a regulation addressed to gas purchasers. Finding (id. at 11a-12a) that the Kansas order here was not "primarily directed at the marketing of gas (but at the) production thereof," it ruled that the state order was not barred by the federal scheme. As we said in Northwest Central Pipeline I (85-182 Br. 8), we do not think the purposes underlying preemption in this area permit such a simple, "bright-line" analysis. As Justice Harlan pointed out in his dissent in Northern Natural, "(t)he production of natural gas and its movement into interstate channels constitute one and the same physical operation" (372 U.S. at 100). Particularly since the relationship between producers and pipelines has been characterized by long-term contracts covering the entire production of given wells, conflict with the federal regulatory scheme is not necessarily avoided by making the nominal target of state regulation the producer rather than the pipeline. The fact that a rule applies directly to producers rather than purchasers does not automatically eliminate the possibility that it "could seriously impair the Federal Commission's authority to regulate the intricate relationship between the purchasers' cost structures and eventual costs to wholesale customers who sell to consumers in other States" (Northern Natural, 372 U.S. at 92; see Transco, 474 U.S. at 420, 422). But we have concluded that we spoke too quickly when we suggested in Northwest Central Pipeline I (85-182 Br. 9-10) that if pipelines would be induced by the threat of losing gas to increase their takes from Kansas gas fields, and if the rule of Northern Natural were held in Transco to have survived the enactment of the NGPA, then the Kansas order could not stand. As Schneidewind makes clear, it remains necessary to examine the federal scheme to determine whether there is an actual conflict between federal and state law. /12/ Because of inherent uncertainties about the quantity of recoverable gas in the ground, no system of allowables can exactly fix total entitlements for all time. /13/ The Court in Transco noted (474 U.S. at 420) that Northern Natural held ratale-take provisions preempted in part because they eliminated the pipeline's ability to "choose a different * * * purchasing pattern." The state regulation at issue here does not preclude pipeline choices. Although it attempts to influence them, neither Northern Natural nor Transco suggest that this is an impermissible state objective. Nor does the Kansas order trespass upon Congress's decision "to leave determination of supply and first-sale price to the market" (Transco, 474 U.S. at 422). The dissent in Transco noted (id. at 435 n.6): "While the congressional desire to decontrol prices uniformly throughout the Nation includes an intent to prevent States from enacting regulation to recontrol them, it does not imply an intent either to create an anarchistic regulatory gap free from property rights and contract rules, or to create a national law of contracts to govern natural gas relationships." The majority did not disagree with this overall view; it simply found that the NGPA had not significantly altered the comprehensive federal regulatory scheme that led to the "field occupation" preemption analysis in Northern Natural.